Sunday, September 23, 2007
Saturday, September 22, 2007
Many are claiming there's a new "Bernanke Put", meaning the Fed is ready to step in with interest rate cuts to get the stock market and careless lending institutions out of a jam. It worked well during the past week with a trading range that almost tested the top of the summer's range after the "surprise" half-point rate cut. Many banking and mortgage lending names also popped a bit.
Amazing how that 50 week moving average as been closing support during the volatile days of the last few months... a good lesson there.
Yes, the stock market loved the rate cut, but the foreign exchange and the bond markets suffered damage.
Maybe the dollar is a bit oversold short term, but this latest leg down is an ugly reality of inflation concerns rooted both in our monetary policy and prosperity in far away places that is creating greater demand for products that we once had a demand monopoly on.
It now takes a record $1.41 to get a euro. The European economy is no great shakes yet the euro is being favored in the forex. That speaks volume to me about how the world perceives the buck right now. How long can that Euro strength last? The Wall Street bulls think the best thing the ECB could do for the dollar is to emulate the U.S. with a "Trichet put" that would start a round rate cutting there.
The long end of the bond market also hated this week's rate cut. The significance of a half point (50 basis points) cut in fed funds causing the long end of the bond market to react with a rate increase on the longer end can't be understated. The bond market is worried about more than inflation. It's worried that foreigners will either shun our government paper, or demand higher yields. That's the high price the Treasury will pay (we the taxpayers) for having the Fed run money supply growth at a 13% annual rate, according to private estimates of M3.
And gold? The gold market has smelled these problems and excesses for quite a while.
Video of the Week:
Ron Paul lectures Bernanke about Moral Hazard...
Picture of the week:
The not so great Northern Rock...
What bothers me most is the quote in the Times article of Thomas A. Debrowski, Mattel’s executive vice president, who delivered the apology in Chiner (a little JFK lingo for you).
“[The] vast majority of those products that were recalled were the result of a design flaw in Mattel’s design, not through a manufacturing flaw in China’s manufacturers.”
While it may be true that a "vast majority" of the recalled products involved design flaws, the company's web site shows about 1.8 mln toys and accessories recalled for unsafe levels of lead paint during the summer. Yes, just for fun I tabulated the lead paint recall numbers.
It's astonishing the company would downplay about 2 mln lead tainted recalled items versus the design flaws for which they laid themselves prostrate before the Chinese. Even if Mattel "over-recalled" the lead items, as has been recently claimed, the numbers are still in the hundreds of thousands.
There is also a flap over what the Mattel exec apologized for. The Chinese media claiming one thing, the American ear another: Mattel and China Differ on Apology. The Mattel exec should not have been in China to apologize for anything. He should have chided and lectured the Chinese official for using lead paint on even ONE product.
Millions of Thomas The Tank Engine toys made in China for another U.S. toy company were recalled this year for high lead levels. Lead paint has been banned in the U.S. since 1978. It can cause brain damage in kids. U.S. toy companies need to clue China in to this minor detail and Mattel's exec should have done his part today.
These Mattel execs are the Brittany Spears types of the corporate world with no shame, no sense of values, decency, or morals.
Friday, September 21, 2007
Wow, Harman (HAR) melts down, falling about $30 to $82.70. KKR and and a unit of Goldman Sachs (GS) are leaving the high end audio equipment maker high and dry and will not complete their $8 bln buyout.
The deal was announced back in April.
As I noted more than a month ago -- yes, indeed -- walking away from buyouts would likely occur in spite of what you may have heard on the cable circuit saying no deals would be broken.
It comes down to this. Would KKR and GS prefer go through with an $8 bln deal on what would surely be onerous borrowing terms, or would they prefer to pay the break up fee of $225 mln. $8 bln, or $225 mln?? Which would you choose?
With another $200 bln in deals in the pipeline, what else is about to fall apart? I'm not saying we're about to see a rash of transactions come undone, but many may end up on the cutting room floor unless they are real cash generating machines.
On a different matter, Bill Cara has some thought provoking comments about Ben Bernanke's appearance on Capitol Hill yesterday and the brief Ron Paul vs Bernanke part of the morning. This is also worth a few minutes of your time by clicking here.
The Fed's Irresponsible Move
Vitaliy has been keeping me up to date on his new book, "Active Value Investing": http://activevalueinvesting.com/. A review copy is due to arrive here in a few days. From October to December he'll be doing a book tour. For exact dates click on this link.
Ahead of the open, stock futures are indicating an upward move. As noted a few days back by way of the Goldman Sachs comment on the markets, the bias going into expiration because of the configuration of put and call option open interest was signaling a bullish bias to this quad witch Friday.
Better than expected earnings late yestterday are also helping sentiment this morning.
Nike (NKE) posted an earnings rise of 51% with a per share earnings beat of 5-cents a share.
Oracle (ORCL) profit rose 25 percent, enabling it to beat the street by 1-cent per share.
On the Fed-speak circuit, Fed governor Mishkin has already delivered his chat in Germany: Fed's Mishkin: Downturns always linked to turmoil. Fed Vice Chairman Donald Kohn also gave a talk in Germany where he disputes notion of Greenspan or Bernanke 'put'. Philadelphia Fed President Charles Plosser and Fed Governor Kevin Warsh are also due to speak later today. Likely none of them will offer any specific clues about whether the Fed lowers again in October, or waits until December.
Former Fed chairman Alan Greenspan continues to do the interview circuit for his top selling book: House prices to drop much lower: Greenspan.
Other quick news and notes in the day ahead...
-Bear Stearns in talks over minority stake sale; Asian interest ...
-Noble chairman, CEO, president resigns. Jeffries says the resignation makes NE a more likely takeover target, with SeaDrill being a highly likely suitor.
-On the Google front: Google: Mortgage Ads Are Down -- Except For Ours. AmTech Research this morning reiterates a buy in reaction to these comments, expecting the stock to "trend higher". One other Google note from thestreet.com: Google Apps Packing a Punch.
-Can you believe this? Northern Rock turned down JP Morgan rescue proposal
-News you don't see often in this part of the world: Shell to begin $7 bln Port Arthur refinery expansion Full Article
-GM, UAW to resume talks later Friday
-Kraft’s Post first-round bids due this week, sources say
-Merrill downgrades both Barrick (ABX) and Agnico (AEM) to Neutral from Buy citing valuation.
Scanning other markets:
-Dollar Heads for Third Weekly Loss Against Euro on Rate Outlook
-10 year Treasury is up 2-ticks following 2 days of slump.
-Gold Climbs to 27-Year High as Investors Seek Inflation Hedge
-UPDATE 3-Oil eases but Gulf of Mexico storm support
Thursday, September 20, 2007
Here's a report from the BBC and one from the Telegraph: Cancer cure 'may be available in two years'. Again, it's the immune system connection, which reminds me of a company called Dendreon (DNDN) and their revolutionary 'vaccine' to battle prostate cancer, now hung up in additional FDA trials.
On to the dollar
Wow, the dollar had its clocked cleaned again today. The dollar index sank over 2%, slumping to $1.40 to get a single euro and the Loonie (Canadian dollar) hit parity with the buck!!
Latest headlines include one money manager stating the a Saudi de-peg from the dollar is "inevitable", while in the same report an advisor to the Oily Kingdom is saying not so fast. Who to believe? 'De-Peg Inevitable'.
As noted earlier today, the dollar's fall to $1.40 for a euro could mean unhappy European exporters and policy makers: Break of key level may stoke political tensions...
Wall Street seemed to hardly care, with just modest declines -- running in place ahead of tomorrow's quadruple witching and ahead of the release of third quarter earnings in October. La dee dee, lah dee dah... business as usual.
Think of it this way, the Fed has now pole-axed the shorts twice -- back in August with the surprise discount rate cut (Thwack!) and then this month with what many perceived as a surprise 1/2 point fed funds cut (double Thwack!). Bulls have got to be feeling good that Bernanke and Co., enjoy this blood sport of seeing Fed-sparked big triple digit up days in the stock market simply pulverize shorts, put option players, or those with leveraged bets against the market in stock index futures. What does Bernanke have hiding in the attic for the shorts next time -- a direct relative of Lizzy Borden (pictured to the left).
And lest we forget, the Greenspan Fed enjoyed putting it to the shorts too. January 3, 2001, 50 bps cut. The Dow rose nearly 600 points that day. Of course, the stock market tumbled about 50% over the following six months or so.
The message is clear from the Fed, at least for as long as its bullets are effective -- the old saw: "Don't Fight the Fed". The other old saw: "The Fed is Your Friend". Considering that the Dow is only a few hundred points from 14,000 - yes, it is undeniable that the Fed has been a friend to the stock market. How long can this last, if I only I knew for sure, but past history has lessons for both the bulls and the bears.
Yabba Dubai Dhabi!
Red Flags Already Seen in Congress over Dubai Purchase of Nasdaq Stake;
Carlyle sells a piece of itself: Dhabi government buys minority stake in CARLYLE GROUP.
The article makes a minor error at the start by wondering if we're headed for an "epic bear market". While we should be concerned about a bear market outlook, the article's real umph comes from the source it uses and a pretty complete exploration of over-the-counter derivatives market. Any how, derivatives unwinding will impact far more than the stock stock market.
So look beyond the bear stock market theme at the start of the article and concentrate on the derivatives aspect of the piece.
To read more click here.
I'd also suggest reading the "talk back" section of the article where readers get to comment. Most have no idea of big this problem is. One commenter thought a $300 bln S&L style bailout would solve the problem. The article didn't disclose that the notional value of the derivatives involved amounts to around $25 TRILLION dollars.
Oil price hits high over 83 dollars on the world market.
Last weekend there was an interesting article in Canada's Globe and Mail that broached the possibility of a reverse Plaza Accord to stabilize the dollar. Plaza dates back to 1985 and is further described in the Globe and Mail article. I would imagine that a reversal of the Plaza Accord would be difficult if not impossible given that 2007 is quite different from '85. Just for starters, reversing the accord would have to involve corralling Russia, China and even the Saudis into such an agreement. You might as well corral cats.
This one is of the dollar/euro pair (EUZ07 futures). Also pretty darned amazing. All time highs here.
This along with China keeping its currency artificially low is no doubt making the Europeans quite dissatisfied as the strong euro makes European good less attractive in a variety of markets.
There's a great read today in the Wall Street Journal....
On the face of it, Morgan Stanley appears to be suffering more indigestion from its voracious appetite for financing leveraged buyouts than Lehman Brothers. The larger Wall Street firm's third-quarter earnings came in 11% under estimates, while its rival actually beat expectations. What's more, Morgan Stanley took a larger hit from writing down loans and securities. But these numbers are misleading.
For starters, Lehman's overall results benefited from a remarkably low tax rate that was almost a fifth lower than the rolling average of the previous four quarters. Without it, the investment bank would have missed estimates by about five cents -- still less than Morgan Stanley, whose tax rate increased, but a miss nonetheless.
But the real juice stems from how the two accounted for loans to leveraged deals. Both had bulked up after jumping in belatedly. When he returned to Morgan Stanley two years ago, Chief Executive John Mack vowed to expand the firm's stomach for risk. And by the end of the second quarter, the firm's lending commitments to noninvestment-grade companies had jumped more than tenfold to $32 billion. Its leveraged buyout commitments hit $43 billion. Lehman's exposure in the first six months of this year quadrupled to $44 billion. (Read more)
The LEI, according to the conference board fell by 0.6% in August. Only the real money supply component of the index rose, while 9 other measures in the index fell during August.
Back on August 30th, I made this blog entry, quoting Northern Trust economist Paul Kasriel about the LEI's importance in forecasting either good or bad times by using it on a year over year quarterly basis...
"The consensus of economists has never forecast a recession. That doesn’t mean individuals haven’t, but the consensus forecast tells you little," says Paul Kasriel, chief economist of Northern Trust. "The consensus always ends up being surprised."Kasriel uses two indicators that he says are both flashing a "recession signal"."My first indicator is simple and has correctly called recessions since 1970 with no false readings," says Kasriel.His indicator looks at two variables. One is the spread between 10 year treasurys and the Fed Funds rate. The other tracks the Fed's monetary base.The first says, Kasriel is "negative with fed funds above the 10 year treasury, and the quarterly year over year change in the Fed's monetary base is contracting. "When both those conditions exist, it suggests recession is on the way, according to Kasriel. His other indicator is looking at the Index of Leading Economic Indicators, or LEI. Kasriel says the quarterly year over year change in the LEI has been negative. He says that indicator has worked over the nearly 5 decades with the exception of a period in 1967.
The image above comes from this report by the Telegraph of the UK: Fears of dollar collapse as Saudis take fright.
With that said, stock futures are only modestly lower, until S.A. actually breaks the peg, the above is relegated to speculation where the Wall Street bulls are concerned. There is also the chance the Saudis will clarify, or even deny they are going to de-peg and that would certainly reverse the big outflow from dollars we're seeing this morning. For all I know this could be some sort of trial balloon - the sheiks having some fun with a little experimentation, but that starts moving in the realm of conspiracy and I won't go any further with that.
I also have to wonder how the investing arm of the Saudi Royal Family - namely Prince Al-Waleed bin Talal, worth around $20 bln with big holdings in companies like Citigroup (C), would deal with the consquences of Saudi dollar de-peg which would not only pummel the dollar, but also his dollar denominated investments... just a thought and one that has not been well developed as I throw this together on the fly.
The dollar's woe, is gold's gain: Gold Climbs to 27-Year High on Weakening Dollar; Silver Gains.
As we get closer to the all time high of $850/oz (nominal dollars) set back in January of 1980, the sliding dollar's impact is evident in gold as well. Adjusted for inflation, gold would actually need to rise to about $1,800 an oz today to match that 1980 all time high. Again, be wary of a gold whipsaw if the Saudis come up with a strong de-peg denial.
Treasurys are lower pushing yields higher. The 10 year yield is up to 4.6% as what's bad for the dollar is bad for Treasurys. Put another way, since the Fed rate cut, the 10 year yield has moved about 12 basis points higher. That, as has been covered here in the past, is a bad scenario - where the Fed cuts short term rates, but longer term rates rise, known as a steepening yield curve, or waning confidence about the future.
Crude oil is holds on to a modest gain above $82/bbl.
If you have the time, Reuters has a pretty good analysis of the Bernanke rate cut: Bernanke bets the house in rate cut gamble.
There's bound to be some interesting listening later today: Paulson, Bernanke Prepare to Defend Response to Housing Slump.
There are some positives and other negatives this morning...
Goldman Sachs (GS) blew the door of street estimates again: Goldman Sachs' profit rises 79%.
No surprise at Bear Stearns (BSC): Bear Stearns Profit Drops Most in Ten Years on Credit Turmoil
Fedex (FDX) is deep in the trenches of the daily economic battle, so what they say about the economy would be of importance: FedEx Posts Net Increase of 4%, But Company Warns of Slowdown.
Best Buy (BBY) which recently posted strong results, continues to eat Circuit City's (CC) breakfast, lunch, dinner and midnight snack: Circuit City posts quarterly loss. It's a case of you either have it, or you're so far gone that you simply don't.
First time jobless claims fell again: Jobless claims fall to 311,000.
Wednesday, September 19, 2007
Goldman Sachs (GS) is on the earnings docket tomorrow. The Reuters consensus estimate for GS is EPS $4.37 and revenue $9.57 bln. With the stock trading at $205, the combination of a 210 call and a $200 put results in a debit of more than $6. A $200, or 210 straddle is priced at over $10, so a decent move is expected tomorrow.
Parts of the market of running warm today and some cold. The housing data threw cold water on stocks like home builder Hovnanian (HOV), a big winner yesterday, but down 10% today.
While the XLF is up a half-percent with some lingering excitement over the Fed rate cut, lifting names like Countrywide (CFC), Citigroup (C) is down around 1%, Bear Stearns is down 3%.
Even some of the high flyers have come in a bit. The ever amazing Baidu.com (great pick among many by Howard Lindzon) the stock is about $10 below the best levels of the day today.
Nike (NKE) is another that comes to the earnings confessional tomorrow. They will give us a decent indication of worldwide market conditions, at least for their business. Earnings of 87-cents a share are expected.
There's been takeover chatter surrounding Sepracor (SEPR), the Lunesta sleeping pill maker. Johnson and Johnson (JNJ) the rumored suitor. This has led to a pop in SEPR options activity. Ahead of expiration I am always wary of mysterious rumors that conveniently pop up.
The mixed market activity could portend a fade for the market... but then again, maybe not.
American Home Mortgage pushing to seize $27 million in employee retirement savings.
Ok, we all know the system has been rigged for a long time in favor of what blogger Bill Cara has called "HB&B", or Humungous Bank and Brokerage, as well as what he calls "friends and family" of HB&B. That rigging was evidenced in yesterday's bailout Fed rate cut which will only diminish the buying power of the dollar, but do little to enable a painful but needed cleansing of the financial system . But, you'd think that these HB&B creditors would have at least a little deceny not to try to filch retirement money from former American Home employees now without jobs. Of course, I am not so naive and idealistic not to realize that it's a creditor's prerogative to go after every stinkin' cent within the realm of the company's finances, but still... it seems like a travesty that retirement benefits are not shielded.
"Again, we need to pay close attention to price action into Friday's quarterly options/futures expiry. as per recent CFTC data, there's still a major amount of index shorts via futures. with over 1/2 of S&P emini open interest still in Sept - and the market now bid - what's left to expire could drive an up print."
He had a few especially noteworthy comments:
"The Fed's action once again prompted a huge rally. It's always been axiomatic that one shouldn't fight the Fed, and it's DOUBLY true for this Fed. THIS Fed has a real nasty streak -- for shorts. The result is effectively a rigged market. Usually, such artificial means of supporting the market eventually cause some problems down the line, but that doesn't seem likely until the Fed runs out of "bullets" -- and that won't happen soon."
He's sees a very short term "fade the Dow" approach:
A "Fade The Dow" sell signal is in effect. We are not going to officially play this signal today, but if you wish to, then sell a Dec DJ futures contract. Cover it if the Dow closes down on Wednesday; otherwise, cover it on Thrusday's close.
Still, the miss at Morgan Stanley is seen as just a minor bump, with futures sporting a gain of more than 9 points.
The rally that started at about 2:15 yesterday afternoon has circled to globe and appears to have enough staying power for at least a firm Wall Street open. In Europe the DJ Stoxx 50 index is up more than 2%.
The Hang Seng index in Hong Kong was on fire last night, closing above 25,000 for the first time: Hong Kong shares close at record high after Fed rate action sparks .... The Bank of Japan also made investor happy: Bank of Japan keeps rates steady. The Nikkei 225 surged nearly 4 percent.. Japan Nikkei sees biggest one-day gain since 2002.
Further cheering the crowd this morning, Lehman has changed its Fed forecast and now expects 3 more quarter point cuts in the fed funds rate to 4% by next June. They think the Fed pauses in August. and then lowers again in December, March and June.
But the big question remains, what will these rate cuts do to solve deepening systemic problems brought on not only by impossible to value, or zero value derivatives and the continuing collapse in the housing market.
Housing starts, butt ugly: Housing starts, permits at 12-year low. The builders would respond to that headline by saying "tell me something I already don't know"... Builder confidence: Bad and getting worse.
And the rash of foreclosures is far from over: Subprime Borrowers to Lose Homes at Record Pace as Rates Rise. Even with the Fed's rate cut yesterday, it won't be meaningful for folks with resetting mortgages which will go from lower teaser rates to today's reality.
Housing and other market problems are slowing the economy and that will impact municipal coffers. In Chicagoland, Cook county is getting ready to dig deeper into taxpayers' pockets. Cooked in Crook County? Cook County commissioner pitches sales tax hike. You can expect to see more stories like this and more also involving property tax increases, especially in areas where there are clusters of homes sitting empty.
If you're inclined to believe this figures... a net positive this morning: US Consumer Prices Unexpectedly Fall 0.1% in August (Update2) .
Tuesday, September 18, 2007
Yep, even with fed funds down to 1.75 by the end of 2001 and then 1.25 by November of 2002, the market got pole-axed -- not reviving until early 2003.
It will be interesting to see whether history will be repeated. Todays rate cut, if you read between the lines, is an admission by the Fed through its action of a 50 bps cut that it is dealing with both recession and systemic risks.
That brings me to mention the dollar which swooned today - hitting a record low against the euro at near 1.40 and slumping in the basket of currencies known as the dollar index. When the Fed started cutting rates in '01, the dollar index was perched at 107. Today it finished at 79.22! The forex judged the move by the Fed as a big mistake, at least where the dollar is concerned. Has the Fed set the stage for an insidious sort of arbitrage where money will flee away from the U.S. and into higher yielding assets?
The monthly Treasury International Capital report, known as TIC, showed international investors bought a net $19.2 billion of long-term U.S. securities in July. That's way below the $97.3 billion in June. This will be the key report to eye each month. The implications of weakened inflows of foreign money into long term Treasurys will have a profoundly negative impact for Uncle Sam and for you and me.
A Barclays report summed it up this way: "With foreign investors holding a quarter of all outstanding U.S. government bonds, the possibility that Fed easing will reduce foreign appetite for these securities, resulting in higher risk premium for U.S. assets and a weaker dollar, is very real in our view."
With a weaker dollar, comes reduced spending power, or inflation. The gold bugs loved today's rate cut and sent the October futures up to the $724 level. A weaker dollar also impacts the price of crude oil since it takes more weaker dollars to pay for it. Crude is trading above $82 tonight.
Option open interest has never been higher, the next fun event for the market --quarterly expiration on Friday. More on that tomorrow.
10 year treasurys have remained fairly static while the short end has caught a large bid. So the yield curve has steepened in the aftermath of the 50 bps rate cut. The dollar index, meantime, is down to just about the 79 level.
Also underway, a breath taking move down in the VIX... slumping by more than 20%.
More on that later.
The effective fed funds rate has been averaging 4.96% in recent weeks. 25 bps and it would seem the market will take a spanking. 50 bps cut would likely lead to happier Wall Street campers. But is this all about what makes Wall Street happy? In 1998, the Fed responded to the Russian default crisis with a modest 25 bps cut, but then after the market crumbled 6% in the next few trading sessions, the Fed hastily eased more aggressively. But this isn't 1998, and Alan Greenspan is now peddling his book. Don't forget, the moment the announcement is given this afternoon, attention will immediately shift to the October 31st Fed meeting. So the statement will be examined with an electron microscope for clues on what the Fed is planning going forward. The stock market's insatiable appetite for lower rates will instantly renew this incessant speculation over what Bernanke does next. Gag me with a spoon.
The outcome, to the say the least, is going to be interesting.
Jim Rogers, a guy who knows how to make money has something to say about the Fed: Jim Rogers Says Fed Rate Cuts Will Push Economy Into Recession.
As the Fed weighs systemic risks like the freeze up of the asset backed commercial paper market, there's also main street to worry about: August foreclosures zoom.
Northern Rock shares managed to rebound in London: UPDATE: Northern Rock Rallies After UK Govt Guarantees Deposits. This has turned out to be a potentially career ending situation for Mervyn King: Northern Rock crisis threatens Governor of the Bank of England's ....
Meantime, an ECB governor defends the recent cash injections to banks:ECB's Noyer says bank cash injections no bailout.
Ahead of the 2:15 announcement, all of the following is really just noise ahead of the Fed announcement, though much of the developments are positive for the stock market:
The often volatile August Producer Price index showed inflation at the wholesale level fell a whopping 1.4% August due to a decline in energy prices. The core, which factors out food and energy, was up .2% in August which was either double what was expected, or right in line -- depending upon which economist survey you looked at beforehand.
Lehman Brothers (LEH ) beat estimates with 3rd quarter earnings per share of $1.54 vs. consensus of $1.47. Revenue posted at $4.3 bln, in line with estimates. The firm made more money from equities fees and investment banking, which helped to offset what it called "substantial valuation reductions" on certain investments in the quarter (mortgage related).
Best Buy (BBY) numbers were also stronger than expected: Best Buy posts higher profit, raises year outlook.
Wall Street's bulls are happy this morning with the economic data and the latest batch of earnings. Treasurys remain flat, gold higher and crude oil is off the highs but still above $80. There's talk that if the rise above $80 lasts, it may spur some sort of OPEC action: OPEC to discuss further output hike if $80 oil lasts.
Among earnings out later in the week -- Fedex (FDX). That should be an interesting one from the perspective of how the U.S. economy is doing and what's going on with its overseas markets. This morning JP Morgan lowered FY08 earnings estimates to $7.03 from $7.25, expecting that FDX management will lower guidance when earnings are released Thursday. Still, JP Morgan is not expecting a large downside move in the stock after earnings are released.
Is it the Dreamliner, or a Nightmareliner? Fired engineer calls 787's plastic fuselage unsafe.
Slowly fading to black: UPDATE 1-Accredited Home posts big loss; survival in doubt .
If you've read this blog for a while, you know how I feel about homebuilders and thair fate. Beazer (BZH) looks among the worst: Banks drastically cut Beazer's loan limit.
Monday, September 17, 2007
A commenter, a few days back, said the he thought I was ignoring a bullish upside down head and shoulders pattern that would eventually enable the market to rocket higher. I just couldn't see it. And now with the passing for more days, it's apparent to me that the right shoulder was a mirage and that we may be dealing with, imho, a bearish pennant formation. Only time will tell and with the compression seen in the chart pattern, that time may be very soon.
The chart above that I threw together with some annotations clearly has the look of trouble, at least to me. Wildcards remain what the Fed does and what the brokers announce this week.
Where Lehman (LEH) is concerned, it appeared that strangle and straddle plays were being made in the September and October puts and calls, while more aggressive directional put speculation, including heavier volumes, were being placed in the January puts, including the Jan50s.
What's behind the move? The modest OPEC output increase is seen as a primary driver in concert with ongoing strong demand worldwide. 500k barrels per day extra from the OPECers just doesn't cut especially in light of disappointing output from the non-OPECer nations. And let's face it, new refineries going up any time soon in this country? That's a situation that won't resolve for a decade or more. No wonder the crude forward curve reverted back to a backwardation condition. COT open interest was up for third straight week as well. The run is amazing, and as mentioned last week, there's a good chance we could see a range up to about $85 near term if the momentum continues. Technical charts show crude is looking overbought, so a short, but sharp correction lurks around some future corner. For now, though, the market continues to bid crude ever higher.
Not everyone's happy:
"Colombia's Justice and Interior Minister Carlos Holguin said last week that the plea agreement in the Chiquita case "is not worthy of U.S. justice, because it gives the idea that impunity can be bought for a few million dollars."
ETFC is down about 10%. E*Trade Cuts Earnings Estimate by 25%, Citing Mortgage Losses
You'd think that GM speculators and investors would press the 'sell' button with these headlines:
GM Workers Return as Talks Sour
UAW and GM: Stuck in Neutral?
GM Talks With Union Said to Be Breaking Down
Instead, GM shares are up more than 1%. More than 125,000 GM options have traded today, with much of the activity on the call side. Amazingly enough, much of the September activity is centered on the 37.5 strike! That's almost $3 above the present level of the stock. Over 30,000 GM September 37.5 calls have traded which is one heck of an aggressive play, unless you're expecting that mirth and harmony will soon abound between GM and the UAW. Seotember options are set to expire on Friday. With less than 5 days before expiration, the trade almost seems nuts.
The company says it bagged 2,100 "gross sales". That includes more than 1,700 contracts and 400 sales deposits.
This is being spun as "phenomenal" by one of the pr flacks at the company. I'm sorry to be a stick in the mud, but 2,100 gross contracts at a company that has experienced cancellations in excess of 30% in past quarters is nothing to be happy about.
The company also claims that it had a 7-fold rise in traffic to its web site. I would love to see independent confirmation of that.
A special message that falls on deaf ears: Northern Rock Homepage CEO Message
Northern Rock's stock is being pummeled: UPDATE 3-Northern Rock shares plunge, customers flee.
Meantime, in the European bourses, banking stocks have been slammed in general: Banking shares tumble on Northern Rock fallout. The Financial Times 100 has traded lower by more than 1.5% today.
As Alan Greenspan does the interview circuit for his new book, he had this warning for UK home owners, which might as well be for US homeowners as well: UK housing market set for a painful correction, Greenspan warns.
Greenspan sure has been speaking his mind (see more stories below) in cathartic like fashion and has thrown some big punches. As I mentioned over the weekend, it will be interesting to see who punches back.
Weakness is stocks is translating to a modest flight to gold: Gold up as investors seek refuge from market.
Meantime, on this side of the "pond", we await the Tuesday Fed decision. Perhaps it takes some outside perspective. The Telegraph of the UK speculates: Bernanke will prove sterner than Wall Street thinks. The bottom line, is that it seems he is damned if does and damned if he doesn't. There's no easy cure when borrowers and lenders aren't interested in dealing with each other.
The dollar continues to wobble and Greenspan had this to say about the buck: Report: Greenspan says euro could replace US dollar as reserve ....
He also has a message for the bond market: UPDATE 1-Greenspan warns of higher inflation-paper.
Greenspan has thus far spilled the beans on the Iraq war, a war for oil says he. Greeny is also telling the truth about coming inflation, deeper housing bust and that the dollar's best days are far behind. What will he do for an encore?
Baidu.com (BIDU) jumped 2% premarket. RBC lifted its price target on BIDU to $333 to $302.
Speaking of high flyers... Iran and Google: Iran blocks access to Google.
Microsoft loses landmark EU antitrust case and will be digging into petty cash.
The world o' crops is being shaken by the weather: Soybeans Rise to 3-Year High as US Crop Faces Frost Damage, or this story: Wheat prices continue amazing market climb.
Sunday, September 16, 2007
There are as many ignorant scoffers today about Peak Oil as there were in 1956 when geophysicist King Hubbert predicted that U.S. oil production would peak in 1970. Hubbert was indeed correct. Who's word are you going to believe? The government? The Saudis? The present chief of Exxon Mobil? I'm inclined to believe someone like a Lord Oxburgh who can freely speak his mind. From the Independent:
"Lord Oxburgh, the former chairman of Shell, has issued a stark warning that the price of oil could hit $150 per barrel, with oil production peaking within the next 20 years.
He accused the industry of having its head "in the sand" about the depletion of supplies, and warned: "We may be sleepwalking into a problem which is actually going to be very serious and it may be too late to do anything about it by the time we are fully aware."
In an interview with The Independent on Sunday ahead of his address to the Association for the Study of Peak Oil in Ireland this week, Lord Oxburgh, one of the most respected names in the energy industry, said a rapid increase in the price of oil was inevitable as demand continued to outstrip supply. He said: "We can probably go on extracting oil from the ground for a very long time, but it is going to get very expensive indeed. " (Read more...)
Oxburgh is no kook. His comments are well balanced. His message is that the gusher days are coming to a close, and that it will become increasingly expensive to extract what's left.
While crude is due for a near term correction, the long term trend remains up as the dollar loses value and supply diminishes.
The Times of London has focused in on one line in the over 500 page book: “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” That, in turn, has prompted Drudge to put a blaring bid red headline up on his site to link to the story by the Times of London:
Saturday, September 15, 2007
"The Midwest led the biggest-ever drop in the national quarterly commercial real-estate index compiled by the Society of Industrial and Office Realtors. The national index dropped nearly 4.5 points, to 113.7, for the summer of 2007. That is the weakest score since SIOR began compiling the index nearly two years ago. The Midwest index plunged more than 10 points, from 104.6 in the spring to 94.5 in the summer. " Read more: Midwest Commercial Index Tanks.
Yes, there have been excesses in the commercie RE space as well. A friend (from Williamsburg, VA) and I were discussing the quandry that these commercial-RE operators are finding themselves in, especially in the big cities like Chicago. He made this astute observation:
"IT IS EVERY WHERE YOU HAVE SEEN MAJOR NEW DEVELOPMENT, NOT JUST CHICAGO. IN SLEEPY LITTLE WILLIAMSBURG VIRGINIA WE HAVE 40% MORE STORES DEVELOPED, IN JUST 4 YEARS TIME. WILLIAMSBURG HAS BEEN HERE FOR OVER 400 YEARS. WHY DO WE NEED SO MANY NEW BIG BOX STORES IN JUST 4 YEARS TIME?"
Back in July, when the credit mess was really starting to take off, another friend sent me an email about commercial real estate and noted a troublesome situation involving yields of REITs vs ten year treasurys:
"...regarding the credit seize up this past week--commercial reitshave been absolutely hammered BUT...they still trade with a yield lessthan the 10 year Treasury, whereas the ten year historical spread hasbeen 3%.To put this in concrete terms, Simon Property Group, the largestcommercial reit, closed Friday at $84.90 with a yield of 3.80%. If itwere trading at its historical ten year spread to Treasury, the marketprice would be ....$42.50. And once these spreads flip (as this onehas), they have a tendency to overshoot, don't they?"
Remember, that's a snippet from an email that came to me back in early July. Simon (SPG) yields even less now at 3.49%, while the 10 year treasury yield is at about 4.4%.
Expect a lot more news -- negative news - from this part of the real estate market.
Friday, September 14, 2007
A few after the bell developments to note:
-UAW May Call for a Strike Against GM. I wish they would, then both sides could dig in and destroy each other just to finally get it over with. But, of course, we know it's all posturing, though the mainstream media makes it feel as if the UAW has real power for the "big strike"... ohhh.. boooo to GM, scary, scary. With 4 retired union members for every presently employed union member, the UAW would have too much to lose in a protracted strike. Or, has the UAW layed in a big supply of cat food for distribution to its members?
The Wall Street Journal, clever folks that they are, went to a bookstore and bought Alan Greenspan's book ahead of its Monday release and broke a great story: Greenspan Book Criticizes Bush And Republicans.
Bloomberg story: Says Economic Policies Were Driven by Politics...
NY Times story: 'Age of Turbulence: Adventures in a New World'...
We can play the blame game and point the finger at Greenspan for a 1% fed funds rate that fostered the housing bubble (along with lax oversight), but from what I read of Greeny's new tome, we're screwed BIG TIME going forward.
It's the going forward that's important and for me Greenspan's points are well taken that decreased inflationary pressure from globalization is rapidly diminishing. The "virtuous cycle" had to come to an end at some point. Yes, it's not hard to imagine the Fed down the road in a quandry over having to push rates higher a la the Volker years because of high flying inflation, while facing major political pressures.
The dark message from Greenspan is this line about the Bush White House, "Little value was placed on rigorous economic policy debate or the weighing of long-term consequences." That sure isn't hard to imagine since it's been one big give away to every special interest for nearly the last 8 years.
But is a Hillary White House is going to do better?? Yes, we are screwed.
"IT is flat with internet names outperforming and weakness in anything PC related. In Internet, YHOO is up ~3.5% on positive notes from competitors; we have seen some short covering as a result. Also, GOOG is up ~0.75% and we have seen some buying from trading oriented and institutional accounts in EBAY (up ~0.25). PC related names, with the exception of AAPL up ~0.75%, are down on lingering concerns about supply chain cuts (DELL, HPQ, MU, GLW). Other notables, S is down ~2.25% on negative comments from competitors and SNDK is up ~2.75%."
Key take-a-way from the Fed: "Manufacturing retrenchment was broad-based, and extended to both durable and nondurable goods, the Fed said. Production of wood products, machinery, electrical equipment, appliances, motor vehicles, and furniture all fell. Nondurable goods - such as food, textiles, petroleum and plastics - all declined."
Like a Northern Rock?
More like crushed stone this morning. In what sounds like a scene from the Mary Poppins movie where the kid accidentally causes a run on his father's bank, there was a near run on British bank Northern Rock: Northern Rock customers queue for cash as crisis hits high street.
Who were the nitwits who bought shares of cash burning Countrywide (CFC) yesterday? The stock is down 3% on negative comments from Wachovia which reminded that CFC will lose money in its mortgage banking segment for the 3rd quarter. Wachovia did maintain a Market Perform.
-Merrill Lynch lowered Intel (INTC) to Neutral from Buy citing valuation.
-Merrill lowered American Express (AXP) to Neutral from Buy citing sagging consumer spending.
-Punk lowered Key Corp (KEY) to a Sell today saying Key's vulnerability is in local banking where loan losses and revenue growth problems could be developing.
-RBC raised its price target on Research in Motion (RIMM) to $110 from $83.
Thursday, September 13, 2007
Options players are paying a visit to BBW calls today. Over 2,000 October 20s have popped up on my Options Screener vs open interest of just 62 contracts.
BBW has long been mentioned as a takeover target. Throwing fuel on what has in recent weeks been a smoldering situation is word that BBW management cancelled an appearance at an investor conference.
BBW has a market cap of $381 mln, so while the days of deal-mania are over, Build a Bear could be taken out by someone using either old fashioned cash, or even stock. Recall, back at the end of June, BBW hired Lehman to look at strategic alternatives.
So, who would give it another $12 bln to burn through. No names mentioned, but it wouldn't surprise me if Bank America's (BAC) fingerprints were found.
There's no doubt that the Times piece today A Home Loan Trap is well written and skillfully tells woes of people with adjustable mortgages that come with pre-payment penalites -- which they all do. But the story fails to engage in some simple math which would lead to the conclusion that even if pre-payment penalties could be waived, a refi to a 30 year fixed would really fix nothing for these folks.
On a no money down $300,000 mortgage with a teaser rate of 3% the payment may have been around $1,400 a month before property taxes and hazard insurance. Woo Hoo! Change that payment to 30 year fixed with principle and interest, before property taxes, and you're still talking a $2,100 payment (uh oh) which still represents more than 50% of after tax income going for just the mortgage payment once you throw in taxes, insurance, etc for a person with a $60,000 annual income.
In other words $1400/mo was just about right for a $60k income, but it should have been on a $300,000 home purchase with 20% down to get the mortgage to 225,000, or $1500 a month on a 30 year fixecd . It never should have been a little or no money down $300k home purchase with a rate that would reset in 2 years. With impossible payments starting in year two, the pre-payment penalty is a side show.
No, people aren't trapped because of pre-payment penalties (and don't forget those refi costs and mortgage taxes which can add up costing 2% of a new loan) - no, they're trapped because of too little money down to begin with and the present situation of falling house values. Those are two things legislation can't cure.
A National Mortgage News report, citing remarks of Tom LaMalfa, a partner with research and consulting firm Wholesale Access, says 18,000 mortgage brokerage firms will shut down by mid-2008 and 125,000 mortgage representatives will lose their jobs.
LaMalfa believes that the "conforming" purchase money mortgage business is the only place of refuge for brokers, warning that "if someone doesn't want to operate in the agency space, there's no market for their services."
He made the comments to the Illinois Association of Mortgage Brokers earlier in the month.
Those are pretty sobering thoughts in that not only is subprime dead (we've known that), but that the refi business is also on the rocks.
LaMalfa, by the way, blames Wall Street for the mortgage broker woes, but the NMS story didn't elaborate.
Same for platinum: NYMEX To Change Margins For Palladium Futures Contracts.
The changes were effective at the close of business yesterday. I guess they've got to somehow control the freight traind move in gold. It looks like a minor bump in the road to me.
Volume, if it can get any lower than it has been over the last few weeks, could be lighter today and tomorrow. There's the old adage, "sell Rosh Hashanah, buy Yom Kippur". This morning the flow is going the other way with a decent bid in S&P futures.
Key headline this morning: Jobless claims up 4000 last week. That number was 6k below expectations and enough to send futures to the best levels of the morning.
It's a wash on the jobs front at Washington Mutual: WaMu to cut 1000 jobs, add 1000
But not at First Horizon: First Horizon to cut 1500 jobs by mid-2008.
At Countrywide, job cuts are well publicized. But a so-called "hit list" of employees to lose their jobs was sent out accidentally via email. Ooops: Countrywide Layoffs (video report from a So Cal tv station).
GM will be a big Dow driver today: GM shares rise on Citi recommendation. Mickey Dees will also help the Dow: McDonald's Super Sizes Dividend.
On the other side of the spectrum: Alcatel-Lucent warns, again
The dollar index slide is taking a breather, but among individual currencies: Canada's Dollar Rises to 30-Year High on Oil, Rates (Update1).
Crude oil consolidates: Oil price hovers near new record. I will have further analysis later today.