It's a beautiful day as summer draws to a close and a fresh new football season is upon us. This is my favorite time of the year, the transition from late summer into fall; weather is perfect, football is back, playoff baseball is starting, and golf season hits its prime. Now if only the markets could be as peaceful as the changing of the seasons...
Couple thoughts/questions
-Brett Farve has tarnished his greatness. The man is a horrible teammate and is the antithesis of a pre-madonna. Would you like someone on your team who skips the entire pre-season, doesn't know the playbook, and has little to no commodore with his teammates? I sure as hell wouldn't. Farve thinks the world revolves around him, which is never a good mindset for someone who goes to war alongside ten others each Sunday.
-Are people beginning to realize that China is the dog that wags the U.S. tail? The Shanghai index is down 21% in the last fifteen calendar days. Why? Like I said before, lending has tightened and taken a good amount of liquidity out of the market. From a structural standpoint, it's better off they tightened their policies, but what kind of ripple effect will it have on global capital markets?...especially as a leading indicator for what's to come in U.S./European markets.
-The Financial Times reports that global bond issuance surpassed the $1 trillion mark for the first time in a single year....and it's only August.
-Oddly enough, a credit analyst at Morgan Stanley issued an alert to investors on corporate bonds after the explosive rally we've seen. The article says...
---September options contracts signal volatility, but corporate bond spreads continue to tighten.
---Credit rallies typically anticipate stocks by about three months, but we're past that stage and the two should be converging now. That means stocks must either rise sharply or spreads must widen to reflect risks.
---Spreads have recovered in just eight months, which it normally takes three years. The credit market is saying the "Great Recession of 2008-2009" was much ado to nothing.
-It's both odd and fitting that those are two of the headlines we see today. Could it be signalling a top for credit markets with speculation of danger ahead?
-Are we churning? Are we basing? Are we working off overbought conditions as a function of time or price?
-What will be the next catalyst to the send market up or down?
-What's up with the huge draw on crude inventories? Are countries, yes countries, not companies, trying to hold it around $70/barrel? If the price falls too much, won't that have a big impact on oil exporting nations...which also seem to have the most political instability? Which will have an effect on social moods....which will have an effect on global capital markets...
-What draft position will I get for next Sunday's fantasy football draft (as the reigning champ)?
-Have the Yankee's peaked too early, leaving room for the Sox to make a run?
-Enough rambling for now. Good luck today!
Wednesday, August 19, 2009
Thursday, August 13, 2009
Complex Outlook
We find ourselves in the midst of major crosscurrents of prices, trends, expectations and psychological effects. On one hand, we have a market which has rallied about 50% since its March lows. Credit spreads have tightened, LIBOR has stabilized, banks have been recapitalized, housing shows signs of bottoming out, cars are flying off the lots, and earnings season was a home run. Sounds like a new bull market to me. But as we look a little deeper into things, every area that has seen improvement has to thank the gov't for propping it up. Credit spreads (gov't guaranteeing debt), banks (TARP, TALF, PPIP, etc), housing (tax credits & mortgage modifications), cars (cash for clunkers), earnings (pent up demand & heavy discounting). Employment is still crumbling. The seasonal adjustments show signs of life, but many people are no longer being counted as a statistic because their unemployment benefits have run dry. This exacerbates delinquencies (credit cards), defaults (all consumer loans), and foreclosures (housing). That doesn't point towards any type of sustained recovery when an economy is 70% leveraged to the consumer.
Next, we have the markets biggest conundrum, China. The newly anointed leader of global growth is having its own problems. Can they be the anchor for the global economy? Seems as if our friends in the east are having a tough time shouldering the load. With commodity prices more or less following the lead of Chinese demand, any decrease in demand will have adverse effect on prices. Thanks to the gov't stimulus, Chinese banks have been lending out money as if were 2003 in the U.S.A. While this money was originally meant to be for infrastructure projects (real estate development, building repairs, roads, bridges, etc), a good amount of the money has leaked into the equity and housing markets, therefore sending asset prices up. Sound familiar? Just in the past two weeks we've seen two near 5% corrections (drops) in the Shanghai index...stability? We're also seeing dissension within the Chinese ranks. The vice finance minister said China will create an "internal mechanism" to stabilize the stock market while a deputy governor of the central bank, on the same day, said they won't consider asset prices when adjusting policies. As Ron Burgandy would say, "Agree to disagree". I guess that go in Hollywood, but in global central banking, it simply doesn't cut it. Add to that, the president of China Construction Bank (2nd largest in China) said they plan on cutting new lending by 70%. Maybe they're realizing it's not a great idea to simply lend out money to anyone who asks for it. Also, China's GDP growth has been due to accounting rules, which vary greatly from the ones we use in the U.S. Too much to go into at this time, but trust me on this one.
Next on the list is Europe. As I noted before, the European banking system is on the verge of demise. You'd think that the Euro would weaken against the USD, but this are no time for conventional wisdom. The EUR/USD has been ripping as of late. Eastern European banks are insolvent. Germany seems to be the only Western European nation that has its head on straight. Thank Ms. Merkel for that. The picture is pretty bleak in Europe as well, but they have seemed to fly under the radar as of late. The UK announced further plans to use quantitative easing and the Pound got beat up pretty good thanks to that. As I've said before, no economy can be healthy if the banking system is sick. The European banking system/model is sick...very sick.
This obviously comes off as a bearish outlook right? Well, those are my medium to long-term ideas. As for the current, I expect this rally to extend. We will most likely have a basing at the current levels while market participants digest the great earnings season and the better than expected news inflow on the economic front. There are two factors I'd like to bring into play. First is the large amount of cash still on the sidelines sitting in treasuries and money markets. If this money comes back into the market it could fuel a liquidity driven rally...simple supply/demand. Second is a psychological factor. With many portfolio managers being underweight equities, the fear of under-performance is setting in. Their "risk" lies in a further rise in the market. This completely changes their mindset. They are waiting for a pull back so they can jump back into a more neutral weight position and gain some ground which they lost from being underweight during the recent rally. They are buying the dips which means that any pull back could be minor at best. Between the cash on the sidelines and the portfolio managers waiting to get back into the market on any meaningful pull back, the likelihood of a short term run up to the 1100-1200 range is inscreasing.
I believe a lot of the markets confidence has come from China. I believe this past 5 month rally to be completely based on psychological and technical factors, nothing fundamental. The fundamentals are deteriorating. With China more or less propping up commodity prices, the market has used the basic material sector as a foundation for the rally. The perception that banks are "out of the woods" is also having an effect of investors confidence. This market is hinged on stabilization of commodity prices. China will stay strong until October 1, its 60 year anniversary of its revolution and founding of the People's Republic of China (communism). That is about 6 weeks away.
China has also been in recent talks with U.S. officials. Hillary has said that China is "comfortable" with its lending to the U.S. I'm glad glad we're taking cues from a communist gov't. If they weren't so comfortable, the Chinese could dump the USD reserves and kill the dollar. They'd be screwed because the money we owe them would then be worthless and their biggest export partner would be dead. They don't want this to happen, so they must have made some type of deal to keep funding the U.S. deficit in return for the U.S. to either raise taxes or cut spending.
There is still so much debt in the "system" still, it trumps the amount of capital available in the entire globe. This debt is going to be reduced or deflated. Debt reduction will strengthen the USD. This is going to go on longer than most people think. As I've said before, when the dollar goes up, equities go down. Actually, anything priced in dollars will go down.
The dollar strength will coincide with Chinese weakness (after October 1) pressuring commodities. When commodities drop this will trigger the rest of the market will follow. This is going then put more attention on the balance sheets of the banks and we'll have a deflationary spiral begin. I'm not saying this is going to get out of control, although it could, but we'll see a more than expected drop in asset prices. With investor psychology so fragile at this point, the change of attitudes is going to have a lasting effect on investment decisions (risk averse in the realm of losses).
Conclusion: Short-term bullish into September - October. Going into that time frame I'll be looking into going long the dollar, long select consumer non-cyclicals, short commodities, short financials, short retail, short China, short European banks.
Just one man's humble outlooks. Good luck today!
Next, we have the markets biggest conundrum, China. The newly anointed leader of global growth is having its own problems. Can they be the anchor for the global economy? Seems as if our friends in the east are having a tough time shouldering the load. With commodity prices more or less following the lead of Chinese demand, any decrease in demand will have adverse effect on prices. Thanks to the gov't stimulus, Chinese banks have been lending out money as if were 2003 in the U.S.A. While this money was originally meant to be for infrastructure projects (real estate development, building repairs, roads, bridges, etc), a good amount of the money has leaked into the equity and housing markets, therefore sending asset prices up. Sound familiar? Just in the past two weeks we've seen two near 5% corrections (drops) in the Shanghai index...stability? We're also seeing dissension within the Chinese ranks. The vice finance minister said China will create an "internal mechanism" to stabilize the stock market while a deputy governor of the central bank, on the same day, said they won't consider asset prices when adjusting policies. As Ron Burgandy would say, "Agree to disagree". I guess that go in Hollywood, but in global central banking, it simply doesn't cut it. Add to that, the president of China Construction Bank (2nd largest in China) said they plan on cutting new lending by 70%. Maybe they're realizing it's not a great idea to simply lend out money to anyone who asks for it. Also, China's GDP growth has been due to accounting rules, which vary greatly from the ones we use in the U.S. Too much to go into at this time, but trust me on this one.
Next on the list is Europe. As I noted before, the European banking system is on the verge of demise. You'd think that the Euro would weaken against the USD, but this are no time for conventional wisdom. The EUR/USD has been ripping as of late. Eastern European banks are insolvent. Germany seems to be the only Western European nation that has its head on straight. Thank Ms. Merkel for that. The picture is pretty bleak in Europe as well, but they have seemed to fly under the radar as of late. The UK announced further plans to use quantitative easing and the Pound got beat up pretty good thanks to that. As I've said before, no economy can be healthy if the banking system is sick. The European banking system/model is sick...very sick.
This obviously comes off as a bearish outlook right? Well, those are my medium to long-term ideas. As for the current, I expect this rally to extend. We will most likely have a basing at the current levels while market participants digest the great earnings season and the better than expected news inflow on the economic front. There are two factors I'd like to bring into play. First is the large amount of cash still on the sidelines sitting in treasuries and money markets. If this money comes back into the market it could fuel a liquidity driven rally...simple supply/demand. Second is a psychological factor. With many portfolio managers being underweight equities, the fear of under-performance is setting in. Their "risk" lies in a further rise in the market. This completely changes their mindset. They are waiting for a pull back so they can jump back into a more neutral weight position and gain some ground which they lost from being underweight during the recent rally. They are buying the dips which means that any pull back could be minor at best. Between the cash on the sidelines and the portfolio managers waiting to get back into the market on any meaningful pull back, the likelihood of a short term run up to the 1100-1200 range is inscreasing.
I believe a lot of the markets confidence has come from China. I believe this past 5 month rally to be completely based on psychological and technical factors, nothing fundamental. The fundamentals are deteriorating. With China more or less propping up commodity prices, the market has used the basic material sector as a foundation for the rally. The perception that banks are "out of the woods" is also having an effect of investors confidence. This market is hinged on stabilization of commodity prices. China will stay strong until October 1, its 60 year anniversary of its revolution and founding of the People's Republic of China (communism). That is about 6 weeks away.
China has also been in recent talks with U.S. officials. Hillary has said that China is "comfortable" with its lending to the U.S. I'm glad glad we're taking cues from a communist gov't. If they weren't so comfortable, the Chinese could dump the USD reserves and kill the dollar. They'd be screwed because the money we owe them would then be worthless and their biggest export partner would be dead. They don't want this to happen, so they must have made some type of deal to keep funding the U.S. deficit in return for the U.S. to either raise taxes or cut spending.
There is still so much debt in the "system" still, it trumps the amount of capital available in the entire globe. This debt is going to be reduced or deflated. Debt reduction will strengthen the USD. This is going to go on longer than most people think. As I've said before, when the dollar goes up, equities go down. Actually, anything priced in dollars will go down.
The dollar strength will coincide with Chinese weakness (after October 1) pressuring commodities. When commodities drop this will trigger the rest of the market will follow. This is going then put more attention on the balance sheets of the banks and we'll have a deflationary spiral begin. I'm not saying this is going to get out of control, although it could, but we'll see a more than expected drop in asset prices. With investor psychology so fragile at this point, the change of attitudes is going to have a lasting effect on investment decisions (risk averse in the realm of losses).
Conclusion: Short-term bullish into September - October. Going into that time frame I'll be looking into going long the dollar, long select consumer non-cyclicals, short commodities, short financials, short retail, short China, short European banks.
Just one man's humble outlooks. Good luck today!
Wednesday, August 12, 2009
Heatlh Care Reform
John Mackey, CEO of Whole Foods, seems to be one of the few practical minds in today's corporate America. His comments are very Atlas Shrugged-esque. A breath of fresh air for once.
Many promoters of health-care reform believe that people have an intrinsic ethical right to health care—to equal access to doctors, medicines and hospitals. While all of us empathize with those who are sick, how can we say that all people have more of an intrinsic right to health care than they have to food or shelter?
Health care is a service that we all need, but just like food and shelter it is best provided through voluntary and mutually beneficial market exchanges. A careful reading of both the Declaration of Independence and the Constitution will not reveal any intrinsic right to health care, food or shelter. That's because there isn't any. This "right" has never existed in America.
Even in countries like Canada and the U.K., there is no intrinsic right to health care. Rather, citizens in these countries are told by government bureaucrats what health-care treatments they are eligible to receive and when they can receive them. All countries with socialized medicine ration health care by forcing their citizens to wait in lines to receive scarce treatments.
Although Canada has a population smaller than California, 830,000 Canadians are currently waiting to be admitted to a hospital or to get treatment, according to a report last month in Investor's Business Daily. In England, the waiting list is 1.8 million
Many promoters of health-care reform believe that people have an intrinsic ethical right to health care—to equal access to doctors, medicines and hospitals. While all of us empathize with those who are sick, how can we say that all people have more of an intrinsic right to health care than they have to food or shelter?
Health care is a service that we all need, but just like food and shelter it is best provided through voluntary and mutually beneficial market exchanges. A careful reading of both the Declaration of Independence and the Constitution will not reveal any intrinsic right to health care, food or shelter. That's because there isn't any. This "right" has never existed in America.
Even in countries like Canada and the U.K., there is no intrinsic right to health care. Rather, citizens in these countries are told by government bureaucrats what health-care treatments they are eligible to receive and when they can receive them. All countries with socialized medicine ration health care by forcing their citizens to wait in lines to receive scarce treatments.
Although Canada has a population smaller than California, 830,000 Canadians are currently waiting to be admitted to a hospital or to get treatment, according to a report last month in Investor's Business Daily. In England, the waiting list is 1.8 million
Wednesday, August 5, 2009
The New Wall St Reality
Courtesy of Zero Hedge...
GM chapter 11 = PRICED IN
125K+ jobs lost from GM chapter 11 = PRICED IN
unemployment @ 9% = BETTER THAN EXPECTED
unemployment @ 10% = DOW SOAR
Sunemployment @ 11% = GREEN SHOOT RALLY
unemployment @ 12% = ALREADY FACTORED IN
unemployment = 35% = DOW DROPS 100 POINTS
housing price =1% = RECESSION ENDING
housing collapses = GREEN SHOOT
Housing falls 20% = STABILIZATION
Government spends 1 trillion of OUR dollars = STIMULUS
North Korea fires nuke = RALLY
Israel bombs Iran = 30 MINUTE END OF DAY RALLY
world explodes = ASIA RALLIES
PMI crashes = HUGE RALLY
No jobs are created = RECESSION ALMOST OVER
U.S. debt overwhelming = TOO BUSY RALLYING TO CARE
Consumer stops spending = RETAIL RALLY
Banks are insolvent = SIGNS OF STABILIZATION
American auto industry BK = GOOD THING
Banks pass scam stress tests = HUUUUUUUUGE RALLY
Banks "only need 75 billion = OUT OF THE WOODS
Banks pass a real stress test = NEVER WOULD HAPPEN
Banks pay back tarp = LATE DAY SURGE
Banks can't pay back TARP = EARLY MORNING SURGE
12% mortgage delinquency = GOOD FOR STOCKS
Hundreds of thousands of mortgages underwater = HOUSING BOTTOMED
Dollar rises = RALLY
Dollar crashes = RALLY
Inflation = BULL MARKET
Deflation = BULL MARKET CONTINUES
REFLATION = MASSIVE SHORT COVERING RALLY
Gold rises = STOCKS RALLY
Gold falls STOCKS RALLY
BIGBanks' fake earnings = SIGNS OF STABILIZATION
CRE stabilizing= 1000 POINT RALLY
CRE CRASHING = STOCKS SHAKE IT OFF TO RALLY
CONSUMER INSOVENT = CONSUMER IS SPENDING
OIL @ 50 = BULL RALLY
OIL @ 60 = GREEN SHOOT
OIL @ 100 = IMPORTANT RECOVERY SIGN
OIL @ 20 = TAX BREAK
And the one we should all interpret correctly:NO ONE IS BUYING STOCKS = BILLIONS ON THE SIDELINES
GM chapter 11 = PRICED IN
125K+ jobs lost from GM chapter 11 = PRICED IN
unemployment @ 9% = BETTER THAN EXPECTED
unemployment @ 10% = DOW SOAR
Sunemployment @ 11% = GREEN SHOOT RALLY
unemployment @ 12% = ALREADY FACTORED IN
unemployment = 35% = DOW DROPS 100 POINTS
housing price =1% = RECESSION ENDING
housing collapses = GREEN SHOOT
Housing falls 20% = STABILIZATION
Government spends 1 trillion of OUR dollars = STIMULUS
North Korea fires nuke = RALLY
Israel bombs Iran = 30 MINUTE END OF DAY RALLY
world explodes = ASIA RALLIES
PMI crashes = HUGE RALLY
No jobs are created = RECESSION ALMOST OVER
U.S. debt overwhelming = TOO BUSY RALLYING TO CARE
Consumer stops spending = RETAIL RALLY
Banks are insolvent = SIGNS OF STABILIZATION
American auto industry BK = GOOD THING
Banks pass scam stress tests = HUUUUUUUUGE RALLY
Banks "only need 75 billion = OUT OF THE WOODS
Banks pass a real stress test = NEVER WOULD HAPPEN
Banks pay back tarp = LATE DAY SURGE
Banks can't pay back TARP = EARLY MORNING SURGE
12% mortgage delinquency = GOOD FOR STOCKS
Hundreds of thousands of mortgages underwater = HOUSING BOTTOMED
Dollar rises = RALLY
Dollar crashes = RALLY
Inflation = BULL MARKET
Deflation = BULL MARKET CONTINUES
REFLATION = MASSIVE SHORT COVERING RALLY
Gold rises = STOCKS RALLY
Gold falls STOCKS RALLY
BIGBanks' fake earnings = SIGNS OF STABILIZATION
CRE stabilizing= 1000 POINT RALLY
CRE CRASHING = STOCKS SHAKE IT OFF TO RALLY
CONSUMER INSOVENT = CONSUMER IS SPENDING
OIL @ 50 = BULL RALLY
OIL @ 60 = GREEN SHOOT
OIL @ 100 = IMPORTANT RECOVERY SIGN
OIL @ 20 = TAX BREAK
And the one we should all interpret correctly:NO ONE IS BUYING STOCKS = BILLIONS ON THE SIDELINES
Monday, August 3, 2009
Walking a thin line
Social mood and the markets seem to walking a thin line right now. You think that's a coincidence? I don't. With the financial media declaring an end to the recession and the beginning of a new bull market, many on "main st" must be scratching their heads. I say give it the eyeball test...do things really seem better? No, but as we all know, the markets are leading indicators for the economy as a whole. Maybe things are getting better; GDP estimates came in better than expected, manufacturing indexes have shown improvement and the SP even made it's way back to 1,000. I believe we may be approaching a statistical recovery, which ties into a couple of my blogs last week about things "appearing" or "convincing" people things are better. Hopefully George Soros' theory of "reflexivity" will play out and perception will become reality and things will go back to normal. Although, it's true that hope is not a viable investment vehicle, so take it all with a grain of salt. The public doesn't know what to believe anymore. They're not convinced things are getting better with a real unemployment rate somewhere around 18%. The dichotomy between the two implies some volatile times ahead for capital markets in my humble opinion.
A couple of scattered thoughts for the first Monday in August of 2009:
-The equity market was strong today mainly in commodities and energy. Why you ask, well because the dollar index moved to a new low for 2009 pushing up anything priced in dollars.
-Being the first trading day of the month, August monthly inflows helped to put a bid under equities. Keep that in mind.
-HSBC caught some heat for not taking enough risk in the second quarter. They didn't acquire any U.S. investment banks unlike its rival Barclays who bought the bankrupt Lehman Brothers. -Read the market message: At bottoms underperforming managers are criticized for taking too much risk. At tops they're criticized for not taking enough.
-Mark-to-market being discussed again? FASB may want to bring it back. Banks say keep it away we want to value our "assets" at what we "think" they're worth, not what they're currently selling at. Makes sense...ehhhh
-Interesting timing for this to hit news stands considering where the tape stands.
-"Cash for clunkers" seems to be a wild success. I was watching yesterday's PGA event on t.v. and it seemed like every commercial was a cash for clunkers ad. Keep it mind it was the Buick Open, but the ad was a bit redundant.
-Initially we bought (not directly) $1 billion worth of cars, that for the most part have little economic value.
-Friday we decided to go long (buy) another $2 billion because the first attempt was so successful.
-This is a one time purchase and doesn't account for long-term savings. (excluding gas)
-To look at it through both lenses: bull - we're (taxpayers) helping the pent up demand in autos. bear - future sales are being diminished because of the incentive to buy now.
-Staying with the automotive theme, Ford's sales were up 2.3% last month. Thanks taxpayers!
-Still feeling the automotive flow...doing the bull dance. Palladium, which is a main component in catalytic converters, has seen a steady rise in price. Thanks to Ford? I doubt it. Tata Motors of India is releasing a car for first time buyers which is priced at $2,053. India's 18 and under population is larger than the entire U.S. population. Do you smell demand?
-Green Mountain Coffee decided to float another 4 million shares to pay back debt. They mustn't have gotten the note from banks that it's a good idea to sell equity to pay old debts. Something bad may be brewing and it's not the coffee so keep your eyes peeled.
-Insider selling is at a 4.16 to 1 ratio meaning that for every 1 share that is bought 4.16 are sold. The last time the ratio was this high...October of 2007 when U.S. equity markets reached their all time highs.
There you have it. A few randoms to hopefully provoke some thought. As a friend of mine always says, think positive because profitability begins within. Good luck tomorrow!
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