Sunday, September 21, 2008

We Remain on the Brink

If anything, the $700 bln rescue package for financial institutions may temporarily reduce market volatility over the next few weeks. That's assuming it quickly passes. We would be surprised if it didn't. Yes, Hank Paulson told the boys and girls on the Capitol Hill leadership squad a scary campfire story, complete with Ben Bernanke going "boo" with a flashlight to his face and we've got the biggest blowout to the federal budget -- really to any government budget in the history of mankind.

Bottom line:

Our expectation for the high risk of an autumn systemic failure remains intact. Paulson and cohorts have actually upped the ante....

Monday, September 15, 2008

On The Brink

An acquaintance by the name of Sue, as in Sue Nami has appeared at the
door of the financial system. Sue is one of those run around Sue
types -- sure to mess with the heads of plenty of ill prepared

AIG is in a heap of trouble and could spark a market tsunami as soon
as tomorrow unless it raises upwards of $75 bln. Why? It has been
downgraded by Fitch, Moody's and S&P with promises of further

The sums of money are vast. We've gone from hearing figures like $40
bln over the weekend for a loan to tide AIG over to numbers today
topping $75 bln with perhaps a consortium of banks providing the money
led by JP Morgan. This would be in addition to NY State's regulatory
move to allow AIG to tap $20 bln in funds trapped in AIG subsidiaries.
But it's the ratings action this evening that shall prompt a do or
die gambit in the next 24 hours, or so. the NY move seemed like a stay
from the financial gallows, but it's largely moot now.

Why would JPM's Dimon and various friends and family in the banking
world wish to loan so much to crazy uncle AIG? The first answer would
be stave off meltdown that could bring everyone down. The debt
downgrades by the credit cos are a default triggering event in the
highly leveraged, multi trillion dollar world of credit default swaps.

The Fed has thus far resisted being the lender of last resort in this
situation. Why not the Fed? A loan of that magnitude would put into
question the so called implied AAA rating of Uncle Sam. Yes indeed,
we kid you not. Swaps on 5 yr treasuries jumped.....

Sunday, September 14, 2008

You Can't Say We Didn't Warn You

We're actually quite surprised by BofA's move to buy Merrill for $44 bln. What kind of back door guarantees ala Countrywide did BofA get for this latest deal, or is it just a clean stock for stock swap.

AIG needing a $40 bln loan from the Fed (U.S. taxpayers)? Yikes.

Lehman going under? Double Yikes.

We did warn of major troubles ahead in the market... subscribers have been kept up to date. We feel systemic seizure and collapse still lie ahead.

In the last post below on Fannie and Freddie, there's a link to subscribe. As we told those folk who weren't interested in paying for proprietary perspective - Good Luck!

Tuesday, August 19, 2008

It;s Getting Dangerous Out There Again

Daily swings in the Dow not withstanding, a few indicators that are again showing credit market distress.

First, the ABX indices have been cliff diving again.

Here's but one of many AAA rated tranches: also points out that Libor is back to two month highs:

The fear bid has made it's way back again, though on sluggish late August volume patterns.

We still see a larger than usual chance for market NYSE circuit breakers to be tripped sometime this fall where trading would be halted due to systemic failure risk. Enjoy the summer month "doldrums". Read the rest by subscribing. Click here, thanks!

Friday, August 8, 2008

A Summer Rally in the Making?

S&P encountering late afternoon resistance at the 50 day moving average. The "box" the we discussed earlier in the week has become a clear pattern of higher lows and higher highs. The 1325 area would be the next area of upward resistance. That indeed would mark a decent summer rally, as the Dow would be over the 12,000 level if.... To Read More Click here

Tuesday, August 5, 2008

08/05/08 Morning Thought

There's no doubt about it – commodities have collapsed. While crude oil steals the headlines, across the commods universe the carnage is quite evident: The CRB index is down -14.8% since July 3rd and is now less than 8pts from its 200-day (394.5) area. We haven't been below the 200-day since Sept. 2007.

Where crude is concerned $120 is a key area of support, should this fail, the next area of support is $110, which is also the 200 day simple moving average. Crude has also not traded below its 200 dma since early 2007.

The curious feature of yesterday's trading was that in spite of... read more by clicking here.

Friday, August 1, 2008

That Boxed in Feeling

Do You Feel Boxed In?
As noted in one of our recent missives, the S&P 500 is stuck in another one of its boxes.
How have boxes and general trends been resolved in this market over the past year? To the
downside. Just as the January lows were ultimately tested in March (and ultimately broken in
June), we anticipate another retesting of S&P 1200. Timing?
To read the full private report, please click here.

Wednesday, July 16, 2008

InflationNation and AutoNation

In today's update: The latest, awful inflation numbers from the gubbamint...

Targets for the S&P 500... a bounce is over due, we're eying 10 and 20 day moving averages;

AutoNation pops up on the Option Scanner.

Click here to get the full *private* report!

Tuesday, July 1, 2008

Options Scanner - Financial Darkness

We've actually seen bearish rumors pretty much take on a life of their own in this market and morph from rumor to crisis of confidence. This can be a very dangerous situation – Bear Stearns takes the crown thus far. This leads us to again discuss Lehman Brothers.... (Find Out How You Can Read More of This Post By Clicking Here!)

Thursday, June 26, 2008

Blood In The Streets?

Not quite, but the pain is being felt. While the bears run the risk of seeing a sharp intraday
reversal given the growing oversold condition of the market – the market is very much a news
driven animal these days with bad news actually being viewed as 'bad news”. Who knew!
This represents a key shift in sentiment as participants move from denial to using a more
focused and critical approach to assessing the fundamentals. So it's no wonder that the Dow
Jones Industrial average is now just a measly 29 points away from touching a 20% drop from the October highs, which would be defined as a “bear market”....

Our real worries, however, center around the credit markets. The Goldman short
recommendations on Citi and Merrill were an interesting side show, but largely un-noticed in
the media is the pending implosion of a major mortgage lender and a seizing up of a wide
swath of paper in the mortgage market,... (Find Out How to Get The Rest of Today's Report By Clicking Here!)

Monday, June 23, 2008

Brenanke & Co; Monday Options Scanner; Credit Fears; CDS Troubles

Let's look a bit into the future- specifically over the next two days when Fed policy makers will be meeting. On Wednesday at 2:15 (same Bat-Bernanke time, Same Bat-Bernanke channel) the Fed is expected by economists to announce no change in its benchmark overnight lending rate known as the fed funds rate. We also foresee no change in the Fed's discount rate. A token dissent in favor or a rate increase from either Fisher, or Plosser shouldn't be ruled out.

The Fed's statements will likely echo Bernanke's recent comments about diminishing risks of a sharply slower economy... (Please click here to read further by subscribing for only 80-cents a day. Thanks!)

Sunday, June 22, 2008

The Cross of Death

The loss of over 400 points last week for the Dow on the surface appeared to be yet another temper tantrum on the part of the bulls to more bad news: monoline implosion, ugly economic data, earnings from Goldman that weren't enough to lift the market, etc). Going into Monday's session the market faces a test... a real technical and fundamental test. There are some deep seated issues that bulls must confront. And if things don't shape up soon we're talking about the dreaded cross of death appearing once again - not seen in many years.

What do I mean by the cross of death? (To read more, please subscribe by clicking here. Thanks!)

Thursday, June 19, 2008

More Trouble For Regional Banks

The quarterly expiration of futures on stocks, stock options and index options and futures will be upon us on Friday. The options markets have been telegraphing some interesting signals of late with some very specific guidance 0n where the next shoes may be about to drop in the growing regional banking problems. Also, in looking further at OEX puts and calls, an OEX below the....
(To Read Further, please subscribe to the newsletter by clicking here. Thanks!)


The stock market has been feeling the weight of the world in the last month - since it peaked at its 200 day moving average (illustrated nicely by the chart below.

As we all know, the spectacular rise in crude oil in the last month has severely hampered the Wall Street bulls. How does the American consumer survive $4 and possibly $5/gallon gasoline? How will Americans survive winter heating bills should home heating oil not pullback from record highs, or should natural gas reach post Katrina/Rita 2005 high as it is now so close close to doing now? With the housing ATM no longer spitting out dollars..... (To Read More, Please click here to subscribe).

Friday, June 6, 2008

Some Quick Thoughts

Crude Awakenings
Again, our re-tweaking of crude to a higher upper end range of $145 came just at the right time. Our bullish opinion of natural gas remains right on. But did we envision a $10 up day in crude within a week of our increased opinion of crude? No, we weren't thinking specifically about a $10 up day, but have long written about how this has become an "anything can happen" trading environment. So today was a $10 up day for crude and a limit up day for home heating oil futures. Simply amazing. Trader extraordinaire Dennis Gartman commented earlier in the week on morning television about he was avoiding crude futures due to the wild swings. He is a wise man, indeed!

What next? $100 swings in a day for gold? A dollar crisis? A 1,000 point Dow drop? Will we see a massive reversal again in the energy markets? Probably yes to each of those possibilities, but when it all happens is something that we just don't know. Eventually a lower crude oil price shall materialize as demand suffers globally, but that time is not now. We are monitoring global data daily and will present a future post when the situation hits a breaking point.

The operative trend remains up for energy, down for the dollar, equities; up for metals. But that's 'trend' that we speak of - day to day will be fraught with the risk of financial tornadoes that pop from out of nowhere.

$150 is looking to be much more in the cards for crude. If there isn't a meaningful correction in the past two days of huge gains in the energy complex, coming to gas pump near you, average national price of gas at $4.30/gal or more. Will a $5 bill merely become a coupon for a gallon of gas - let's hope not!

With respect to our continuing bullish perspective on crude, why listen to us when a fellow like Jim Rogers had this to say:
"Jim Rogers, chairman of Rogers Holdings, said the increase in the price of
crude oil has "years to go'' as known sources of petroleum are dwindling. "I
know that unless someone discovers a lot of oil, it can go to $150, $200'' a
barrel, Rogers said in a Bloomberg Television interview. "The facts are the
world is running out of known oil reserves.'
We take no delight in the rising price of energy for it empties the wallets of those of us involved in the Buttonwood Speculator too.

A word or two about Gold
We remain bullish on gold and have been for longer than was healthy (from mid-1990s) and have been buyers of gold and silver since that time. Warren Buffett once stated that "wealth is transferred from the impatient to the patient"? The metals have been a remarkable investment, especially since 2001 and will continue to out perform paper markets.

We won't be surprised to see the precious metal reach the $1200/oz level THIS YEAR with a low end range to at most the $850 area.

Shame to those who think because gold bounced down from the $1000 level that it's a broken investment -- a theme we've heard many times in the mass media of late. One can look the price movement of gold as if it were a stock that went from about $20 in 2001 to just above $100 in 2008 - now in a consolidation phase in the mid $80's. The pundits constantly hype stocks that have pulled back by 20% or more with poor fundamentals as big "bargains". For 2,000 years gold has been a store of real value so we're just puzzled with the bias against gold in an era when the net worth of our nation is about -$60,000,000,000,000 (that's negative $60 Trillion), to say nothing of the state of the Fed's balance sheet, or the state of the trade and current account deficits. While we're puzzled that so many eyes are blind to gold, we know why: Wall Street has little to gain from investors flocking to metals with intrinsic value; Wall Streeters are peddlers of paper (from mundane common stock to OTC derivatives) and need to bash alternatives with real value.

Stock Market
In very predictable fashion, a well trafficked financial web site has the glaring headline: Stock Selloff Offers Chance to Seek Bargains. Yikes, are you going to take the bait? The buy on the dippers just can't help but to try to lure more into what has become a dangerous 'investing' environment. Investing has been a long time honored work. Never mind the wild commodities markets, but is 'investing' possible in a market where the Dow is up a couple of hundred points one day and then down about 400 the next? That sounds like a casino environment to us. With a very noticeable short term trading range on something like a Berkshire Hathaway, things are indeed quite volatile.

Friday was another one of those 90% down days in the stock market where down volume and down number of issues overwhelmed the gainers. 90% down days can be a setup for a rebound, but let's let the chart below remind us of how the stock market behaved preceding lows in January and March. The chart shows periods of significant selling that have spanned through up to three consecutive days. Many make the assumption that sellers exhaust themselves on days where we see a 3% or more down move. We don't wish to quibble too much with that assertion except to say that a large one day only drop is not a foregone conclusion.

What makes today similar to January and March was that it was a revelation day. The revelation this time comes from the thought that by golly there could be something to the weak economy talk. We won't be surprised to see another retest of the Dow 11,800 range in fairly short order.

One sentiment boosting factor early next week may be Lehman. Various newspapers reported that by early next week Lehman will have raised fresh cash from a U.S. pension fund and could announce that along with an early earning release to try to convincel the world all is jim-dandy.

Another booster could be work of a $65 offer for AB from Inbev. For us, there are a number of reasons why we don't want to see that merger happen, but reports coming out of Europe have indicating that bankers are swooping in to try to get a piece of handling such a deal. $65? That's a pretty decent number for BUD shareholders. That's a mid-40s per euro price that Inbev would have to pay.

A further large negative, could be another downgrade of the biggest monoline insurers, MBIA and Ambac. Anything related to the financials, earnings warnings, etc.

Ultimately to the pundits and their questioners we and many others are asking: How many more times will you call a bottom in the stock market and tell us we're in for a renewed period of strength???

Jobless Numbers
For those that have read this blog over the long haul, we've pointed out the numeric alchemy that has gone into the monthly employment report. Today's numbers, blamed by many on the teeny boppers entering the workforce in May, are still a far sight better than reality. If anything, the BLS is starting to catch up ever so slightly with reality by reporting an unemployment rate of 5.5%. Payrolls actually collapsed by over 130,000 last month if you ex out seasonal adjustments. We'll have more on the employment figures in a later post since many are holding on to hope that the numbers today were an "aberration". We'd also add that the sharp rise in labor market participants was not a teeny bopper only event; there noticeable gains in people looking for jobs across all strata of the age scale. A slightly deeper level of thinking might come up with the suggestion that perhaps as the consumer suffers, some who previously had the good life and didn't have to work, are now searching for jobs. Is that a kooky thought, or is it possible a soccer mom or two, or a guy who trying to build a business at home might be looking for work?

ECB vs the FED
Jean Claude Trichet - the EU Central Bank president, or Ben Bernanke's counterpart in Europe, gave Bernanke quite a lesson in what it really means to be concerned about inflation. While the Fed had been making noises about a rate increase later this year to help the dollar and reduce the rate of inflation, ol' Jean Claude said rates in the EU could be going up as early as next month. Many a tv commentator were outwardly offended and incredulous at the notion that the EU would think about such a drastic, dollar hurtful thing by attempting to contain the very bad inflation monkey.

The pundits and many of their questioners don't get it to begin with and don't know their history. They don't understand the cultural aversion continental Europeans have toward inflation. The U.S. punditry was so comically blindsided this week because they forgot that Bernanke is not the only monetary guy in the room. The punditry was blinded because they have relegated to the back of their minds the teachings that they surely must have learned somewhere along the way of the 1920s Weimar Republic hyper-inflation where folks did literally burn currency in the stove to keep warm and did literally need a wheel barrow full of currency to buy a loaf of bread. The Europeans know all too well that the caustic inflation that emerged in the Weimar didn't casually and slowly come about. It came on quickly and with a vengeance. As a side note, today in Zimbabwe it takes a little more than 15-pounds (weight) of near worthless Zimbabwean currency to exchange for a $100 dollar bill. Trichet and the folks he talks to at places like the Bundesbank have not forgotten about the perils of inflation. Like a game of tennis, Bernanke thought he cleverly spoke and sent his ball hurling to Trichet who whipped it right back with double the force and knocked Bernanke right between the eyes.

Buried in the news of the past week, were comments from Japanese minister of finance Nukaga. To paraphrase: he was sympathetic to Bernanke's effort to support the dollar, but went on to note that Bernanke's comments were U.S. centric. Nukaga broadly hinted that Bernanke's comments came as a surprise to him. With the Fed nearly half emptied of its own holdings of Treasurys in about one fiscal quarter thanks to the scheme to exchange sovereign government debt for bank "assets", we just don't know why Bernanke would not effort some sort of coordinated approach toward a "repairing" the dollar strategy. Well, really we do know, there just is no fix for the dollar at the present time. An honest Uncle Sam accounting approach would need to be taken, Congress would have to enact draconian spending cuts, the Fed would need to do Volker Part II with rate hikes, etc. It's just not going to happen.

Tough Times Even For the Truly Wealthy
This is a quite a write up from the NY Times...

NANCY CHEMTOB, a divorce lawyer in Manhattan, has found that her days have
become crammed seeing clients, all worried about how an economic downturn
will affect their marriages.
They seem to have nothing to fret about: their net worths range from $5 million to $1 billion. A blip in the markets shouldn’t send their chateau-size Park Avenue co-ops to foreclosure or exile them to Payless Shoes.
But Ms. Chemtob’s clients are concerned all the same, she said, because their incomes have shrunk, say, to $2 million a year from $8 million, and they know that their 2008 bonus checks are likely to be much less impressive.
One of her clients recently confessed that his net worth had decreased to $8 million from more than $20 million, and he thinks that his wife will leave him. He has hidden their fall in fortune by taking on debt to pay for her extravagant clothes and vacations.
“I literally had to sit there and tell him that he had to tell his wife that she had to stop spending,” she said. “He was actually scared she would leave him because their
financial situation changed so drastically.” Read the rest at this NYT link

Sunday, June 1, 2008

Tweaking the Crude Range

Our April 14th call for an upper range of $130 for WTI light sweet crude is being adjusted upward to $140/bbl for the same reasons we've outlined before: strong world demand and that the days of easy access to sweet crude are in the rear view mirror. As one example, last week it was reported that output from Mexico's Cantarell oil field plummeted to just over 1 mln barrels per day. True, the Mexicans could tap copious deep sea patches in the Gulf, but constitutional barriers bar the deep pocketed foreign partners from getting involved. Internal political dis-unity has prevented a constitutional change from taking place. So they've blown it to the point where there won't be any deep sea production from Mexico for 20 years. James Polk and Sam Houston are laughing in their graves.

The bottom end of our range remains intact. It's hard to imagine in a correction scenario that crude will dip much below $115. One way or another, we're certain that crude will rebound back to the highs of the year this year.

Saturday, May 17, 2008

Weekly Commentary From the BWS Contributors

There is no denying the stock market remains resilient thanks, we think, to the chorus of the "worst is over" from a crowd of talking heads, Wall Street execs and DC denizens. Senate housing bailout may also provide market support. For the week, Dow rose 1.89 percent, S&P 500 gained 2.67 percent, Nasdaq added 3.41 percent. The S&P 500, Nasdaq at five-month highs.

We remain long term bearish on the stock market and view the rebound from March as a bear market rally. "The worst is over" mantra is nothing new as a quick view of the Dow from 1931 to 1934 shows some strong rallies predicated on the worst being over, but of course the worst was yet to come. The more important debate may well be whether we're in the calm eye of the storm, or if the angst markets have experienced since last summer has only been strong outer bands of the approaching real storm. We think the ladder given signs of growing damage in the HELOC world where real losses as opposed to write downs will have to be booked. Commercial and retail real estate continue to show signs of cracking as commercial net loan charge-offs, just one example of many, are increasing.

We're still keeping an eye on complacent volatility readings relative to moving avgs and increasingly shabby put to call ratios. A low VIX doesn't necessarily mean an automatic slump in the stock markets, but many a times it has been a decent trade (either short SPX, or long VIX). Pundits say its different this time and the big drop in the VIX is too simple a way to look at the market. What? LOL. All we can say is be careful out there. In very recent history, the VIX has been good to help determine major tops and bottoms as well.

Dow could see a lift Monday from settlement of American Axle vs UAW which could help GM.

Crude parabolic in the early days of the month, still a locomotive; attempts to slow it down unsuccessful, so no meaningful correction for the time being. Dennis Gartman, famed futures trader and pros pro, has said he is not trading in the crude market because of the huge volatility. That says something about who should and shouldn't be trading energy futures. Just stay away.

Gold back above $900 Friday. We love the frustration this gives to folks who have a vested interest in selling you either their excess stock inventory, or shyster stock related products (stock market pumping newsletters, a variety of hedge funds, etc); they damn gold to be melted in hell, yet with inflation running amok and geopolitical events simmering towards a boil there shall be no such outcome for gold - quite the opposite.

The dollar shall play a key role in how all of the markets will move. What better indicator of what's ahead for the buck then a Fed balance sheet that has deteriorated so rapidly?

The powers-that-be will try to scapegoat many of the present financial ills on a variety of parties. "Shoddy monetary policy" should be at the top of all lists. The Fed, as illustrated by the above chart is public enemy number one for its reckless bailout of its own on Wall Street. We'll all be paying for this for the rest of our lives, and many generations thereafter will also foot this huge bill.

Economic data points last week - Pretty bad stuff.
  • The latest TIC report showed more net outflows of foreign capital
  • Consumer confidence is now cliff diving.
  • Single family homes sales, the lowest in 16 yrs. When population growth (pool of potential home buyers now vs 16 yrs ago) is taken into account, the housing numbers are looking truly dreadful.
  • Toll Bros said there is "pent up demand" for housing, but didn't know when slump would ease. I would imagine there is "pent up" demand for Bentleys, just that most of those who would love to buy a Bentley can't say when they'll ever have the money to afford one.
  • Inflation spiral. Ex the whopping impact of crude rise, YoY import prices up 6% last month.
  • Inflation denial. Gov't CPI data shows a decline gasoline prices for April thanks to seasonal adjustment.
  • Industrial production down more than double expectations
  • Monthly retail sales ex-gasoline, down; Redbook weekly numbers a bit firmer
  • Jobless claims were in line remaining under 400k, a trend likely to continue to employers go from cutting hours to all out cutting of jobs
Week ahead includes Leading Indicators, PPI. Also latest Fed minutes are due.

A few other indicators we continue to watch - yields across the yield curve, also demand by banks for funds from the Fed, European monetary statements, data; deeper level credit indicators. In a moment of clarity and real honesty this week, Ben Bernanke said credit market conditions were far from normal. Paulson, the grand puppet master of financial system propaganda, is probably water boarding Benanke this weekend for having such a loose tongue, but Bernanke's words should be deeply considered.

MMK for the BWS

Friday, May 9, 2008

Our April 14 Range Upgrade for Crude Was Well Timed

... and that begs the question of where to next? Crude cannot sustain this advance indefinitely. With the month only 9 days old -- yes, some like it hot, some like it cold, some like it in the barrel 9 days old -- WTI light sweet is up a stupendous 11% month to date! Thus, the rise has become quite parabolic and the danger of a short and sharp correction should be a part of every trader's thinking. (See our crude trading range upgrade from mid-April a few posts below.)

Lesson learned from this recent leg up? 87 mln is the number to remember. 87 million is about DAILY world consumption of barrels of black gold. 87 MILLION 42-gallon barrels of crude on the wall.. you take one down, pass it around...

Pundits have been puzzled by how the dollar can bounce from its lows, yet crude continues to go higher. They forget that crude is not just about the dollar, or U.S. supply/demand. China demand has doubled in just the last decade, for example. Non OECD demand will continue to dog the crude bears and lend major support to energy prices. The OPECers are only a few million barrels from their peak light sweet crude production capacity and non OPECers have been slow to grow their output.

The numbers say it all
I'm convinced pundits don't study this kind of stuff, but a close examination of the stats gives enlightenment on why this has been a bullish trade. Talk about fund manipulation is blather - it's all in what's going on in the world.

While we have been energy bulls and and agree with Goldman Sachs that a spike to $200 is likely, we're still open minded enough to realize that parabolic markets are bound to correct and even sharply so. Now that articles are starting to pop up in the financial press practically encouraging people to go out to their backyards and drill for a gusher, there are some signs of mania. Ok, I exaggerate obviously about drilling in the backyard, but talk about the virtues of energy ETFs, for example, are sure signs that the trade is getting very crowded. Be careful since in a secular energy bull market, the corrections have tended to be short and sharp (recall the last time we saw the $50/bbl v-shaped bottom). Crude is a market which is driven by fear of supply disruptions in the most unstable of the OPEC nations, worries about overall resource depletion and geopolitical factors like war with Iran, etc. These are factors that won't be arrested just because the price of crude corrects. You can bet that crude shall resume its upward trek once whatever correction runs its course.

I would add that gasoline crack spreads being more than 50% below home heating cracks is another factor that is keeping the market guessing over whether gasoline supplies here in the U.S. market will make it to the market's comfort zone going into the summer driving season. There's no scarcity of the crude to make gasoline, or even a scarcity of mo-gas itself, but an incentive exists for refiners to make more HO and other distillates and less RBOB which adds further uncertainty.

In very quiet fashion, natural gas has very meaningfully rallied to pre Katrina/Rita highs. Over $11 per decatherm in May?!? Thank goodness this isn't winter, or we'd be stung by a combo of shock at both the gasoline pump and with the monthly heating bill. I pity the Nat Gas short (fool) if there is any sign in the months ahead of a storm that would threaten Gulf of Mexico energy assets. An unusually hot summer would also stress the supply/demand balance. And i pity all who are being setup for a winter time shock with the heating bill. The heating bill would be the final nail in the coffin for many consumers. Any direct hits to gulf energy -- then we're talking $20+ natty. This adds up to a bullish looking trade for nat gas, though a sharp pullback in crude would temporarily pull the overall energy complex lower (which would mean an even better entry point for nat gas).

So our range for nat gas going into hurricane season is between $8.50 and $25/mmbtu. Sorry for the wide range, but a third straight uneventful hurricane season would send nat gas a bit lower, while another Ivan, Rita, or Katrina would mean game over. We just don't have a magic weather machine that will tell us what will happen between June 1 and September but recognize what's at stake in terms of how the weather behaves this year since nat gas prices are already high. Remember, preliminary winter forecasts that will begin to emerge in the Labor Day time frame will also impact the price of NG before the official end of summer. So, regardless of the unknown of summer weather conditions, we're also bullish on natural gas. For that matter we're bullish on natural gas, crude, gasoline, propane, electicity, wood stove pellets and fire wood over the longer term.

Saturday, April 26, 2008

A Word About Mortgage Resets: Tsunami

The image above shows what Jim would call "max-pain" in the on going storm of mortgage resets. We are now in the midst of a mind numbing peak in resets of subprime mortgages. Gee, could this be why retail sales and consumer confidence have fallen off cliff? And while we're at this grim peak, remember that reset doesn't equate with instant default. Default takes 90 days to happen and then once foreclosure proceedings are started, depending on the state, it can take up to a year before the foreclosure actually happens. So even with a peak in resets now, banks and the courts will be busy for the next year dealing with whatever carnage results from this reset tsunami.

Oh, and before you breathe a sigh of relief that we're at a peak in resets of "subprime" mortgages, notice that another tsunami of option arm adjustables and Alt-A resets will get underway in 2009 and not peak until 2011. Going from interest only to a principle and interest payment will be a killer.

-MMK for the Buttonwood Speculator

Monday, April 14, 2008

Crude: Upping The Range

We're going to a range of $95 as downside support to $130 as resistance this year on light sweet crude. Jim's old range of $85 to $110 has been tested on both ends, though barely so on the bottom end, and so it's time for a revision. Even with the U.S. economy likely to become deeply mired in recession later this year and through 2009, any reduction in output from any player in OPEC, or outside the cartel, will have a very meaningful upside impact on prices. Demand also remains strong enough from countries like China and India to keep the price quite supported.

We're in a paradigm now where U.S. DOE inventory figures should take a back seat to weekly Chinese input/output data, were such data available and reliable. In other words, the price of crude is no longer a proposition of just U.S. demand. The weakening dollar shall also remain a constant millstone around the necks of the crude oil BEARS.

Make no mistake about it, crude does look over bought, but it can remain so, longer than you can remain solvent betting against it. Short and sharp corrections are baked into the cake, but the exact timing is far beyond our expertise. You'll certainly know when they hit.

Will post Memorial Day provide some relief? Stay tuned, because once the anticipation of the summer driving season passes, the next worry will be hurricane season and then the winter heating season.

Wednesday, April 2, 2008

Bernanke and the Recession

IF I were still blogging, I would post a brief missive about Ben Bernanke and how he got as close as any Fed chairman would ever get to calling a recession. While he didn't use the "R" word to characterise the present state of the economy, he did note today in his prepared remarks before the Joint Economic Committee that we could see the economy contract during the 1st half of this year.

Yes, the Fed chairman who told us during the Spring of '07 that housing prices would continue rise for the foreseeable future; yes, the Ben Shalom Bernanke who told us last summer that subprime would be contained; yes, our Gentle Ben who told us earlier this year that the economy would slow but would continue to grow in '08 - conceded, with the President conveniently far away in Eastern Europe and the Treasury Secretary even more conveniently out of town for a visit to China - that we could be in for more than just sluggish growth.

Gross Domestic Product contraction in the 1st half would be the fulfillment of the text book 2 quarters of GDP contraction that so many pseudo-economic experts insist must be met before licenses can be handed out allowing the use of the word "recession". Mind you, the hypocritical two quarters GDP faction are likely mostly made up of relativistic folks where most anything goes on Wall St so long as it has a bullish bent to it, but when it comes to GDP they insist: Two quarters of contraction IS NEEDED, or YOU'RE A FEARING MONGERING BUFFOON from the Susquehanna Hat Company! Bernanke did remind however that the NBER is the official recession calling body and that they use a more subjective and complicated set of factors to call a recession not just two quarters of GDP.

It's sad that I no longer blog, otherwise I would certainly point out how foolish the recession deniers look in the aftermath of the Bernanke remarks! The recession deniers have been more than just wrong but have betrayed their failure to understand the economic data (not an easy task for anyone, I realise), and have failed more miserably in understanding the man who is Bernanke.

As an amateur Fed watcher, I quickly came to the conclusion after Ben took office that our bearded friend is worse than Greenspan in the spoken word department. While Greenspan kept everyone in head scratching mode with the use of $50 words, Bernanke speaks using simpler terms, but does a terrible job of managing expectations. Bernanke is also caught up in having to be on administration-message with Treasury Secretary Paulson (and you thought the Fed was non political and independent? LOL). Bernanke, while trying to get the gentle, sympathetic inner-Bernanke to come out while also keeping his bosses happy, has engaged in a repeated pattern understatements about the risks to the financial system. Any implicit warnings that he may have peeped have flown right over everyone's heads because they've been buried as after thoughts in Bernanke's statements.

I feel Bernanke's pain as I remember doing this type of poor expectations thing to my parents ahead of report card time many years ago. I would tell my folks things were going well, no problems - implying some A grades were on the way, but whoops - no A grades when the academic results arrived; instead a bunch of Bs and perish the thought a few Cs. My parent's wised up to my propensity for poor expectations management; I'm wise to it with my children, and in the Bernanke realm, more are becoming wise to being cautious about what Bernanke says, vs what he means and what the Fed does.

By the way, how odd was it that NY Senator Up-Chuck Schumer patted Bernanke on the head at the end of the hearing and said, "you're getting the hang of this". Ben has approval issues as well and needs a critique from Schumer? Yikes, I won't even go there.

So I take Bernanke's assessment that 1st half GDP could contract as pretty much a guarantee that the economy shall not only contract in the first-half, but shall contract materially so. I take Bernanke's talk about potential 2nd half recovery, as a guarantee that he has no idea when the economy will show true recovery. I take Bernanke's statement that he never wants to deal with another Bear Stearns near death experience as meaning the guy shall develop a twitch worrying about the next sudden blowup.

Ben looks like a pretty in-shape guy, but make no mistake about it, he has had a steady diet consisting of eating his own words.

Is the poor expectations thing premeditated? Is Bernanke purposely downplaying the risks because of something that came out of his studies of the 1930s? Maybe he believes that being upfront about the grave condition of the financial system would spur a further crisis of confidence? Perhaps, but by poorly managing expectations that turn into a worse than expected reality, confidence is further eroded, which is certainly counter productive. Solving the credit crisis is all about restoring confidence. Bernanke should listen to the Elvis Preseley song Confidence, which was on the "Clambake" movie album, co-starring Bill Bixby, to understand this concept of confidence.

At least Bernanke finally stopped being coy and made the pronouncement that could be the only expected and sad outcome of a brutal credit crunch - that in his words, 'recession' is possible. Anyone with a quarter of a clue, a modicum of honesty and smidge of an ability to handle the truth has known the reality of our economic predicament -- anyone that is but those foolish and dumb enough to cheer lead and deny reality. Score another one for those who have kept their eyes open not only to what's going on with the economy, but for also paying attention idiosyncratic habits of our present Fed chairman.

Yes, Ben said it today -- the R word -- and few were surprised. The real surprise shall come in the weeks ahead as earnings are released and as the credit crunch persists bringing on more financial explosions... but since I no longer blog, I'm sorry to say that I'll have to save those thoughts for another time.

Saturday, March 15, 2008

Newsletter Update

We're still in the process of setting up the newsletter ordering system. My apologies for the delay. Some of the delay is attributable to the heavy news flow over the last several weeks. There has just not been enough time for me to devote to the newsletter project given my involvement in a few other projects. But eventually the newsletter will be set up. I thank all the loyal readers of the now defunct blog for their interest in the newsletter.

Saturday, January 5, 2008

Happy New Year!

Happy New Year to all who visited my blog in 2007.

For 2008, I am planning a daily private newsletter to be delivered via user name and password (with some sort of modest subscription fee).

The service will be offered through under the title of The Buttonwood Speculator. I plan to do what I did with the blog -- provide valuable information with a focus on trends impacting the markets (hopefully trends which others have not immediately noticed). From the feedback I received last year, my content alerted many to a variety of very profitable trading opportunities.

The ultimate goal - to continue to stay ahead of the curve!

When I left off last September, I recall stating that the market would retest its previous bear market lows of about 6 years ago in 2008. I still believe we see those lows retested, but certainly with bear trap rallies along the way that shall likely extend the market blood letting into 2009. With 4th quarter earnings/outlook season upon us, the reality is about to set in for many of stock prices being too far above projected earnings growth. And as we move along through 2008, the reality of the depths of counter party risk from derivatives will also be better understood as more disclosures are made thanks to FASB 157.

The President's working committee on financial markets (which many have dubbed the PPT) won't go down without a fight and will do it's best the keep a tourniquet on the stock market outflow through their well known modes of operation. Along with that, more rate cuts by the Fed might provide some support for stocks, but what did the last quarter-point give the bulls? Yep, here we are again, encroaching on the previous lows of 2007 with clear evidence a recession is under way (negative December retail sales when adjusted for inflation, contracting manufacturing, rising unemployment, falling leading indicators, contraction of the monetary base, a yield curve largely under Fed Funds, near moribund housing and auto sectors, unraveling LBOs etc).

Incidentally, most folks have a wrong headed notion that a recession is defined as two consecutive quarters of GDP contraction. That is quite incorrect. NBER, the group that officially sets the start and end dates of recession, states that it looks at a variety of factors to determine if the economy has moved into a recession. GDP contraction is but one factor. Put more subjectively, if it looks like a recession and feel like one - then it is. And with all of the weak economic factors listed above, there's no doubt we're in an era of tough economic times. We don't want to be negative doom and gloom, only honest about assessing the negatives and positives out there.

The problem that the Fed is confronting and even the Administration as a whole as it considers a behind the curve"fiscal stimulus" is an insolvency problem that has entangled the entire financial food chain - from the misfits who took out subprime loans with only consideration for the teaser monthly payment to the outright crooks who pushed those loans (from Countrywide to Citigroup, the Fed, etc). The policy makers who live lives that most Americans can only dream of (eg. no money worries and a Platinum, or Black Amex card with no spending limit) clearly do not understand that we're in a situation that requires far more than throwing money (liquidity) at the problems of the over leveraged financial system - let alone the average tapped out consumer whose housing ATM was shutdown last year.

Housing stands as a stark example of the solvency problem. The 30 year fixed mortgage rate is below 7%, yet with these attractive rates, housing was further beaten down at the end of the year. Lenders are leery of lending as housing prices fall and buyers are leery of buying because housing prices are falling.

Even with extraordinary measures like the Term Auction Facilities by way of the Fed, or the half trillion dollars in 2 week loans from the ECB that were quickly soaked up by the Euro banks in mid December, the ABCP market remain locked up with just a modest contraction in Libor rates.

So with the Fed and other central banks way behind the curve, I am sticking to my outlook for a sagging 2008 stock market. Go back to spring 2007 - what a glorious time. Pick a stock, any stock, and just the whiff of buyout rumor would send it flying. Spring 2007, decent non farm payrolls and a seemingly limitless flow of LBOs, was the widespread justification the bulls used to tell everyone to remain fully invested. Spring 2007 - Bernanke and Paulson were singing the "Containment" song, convincing those who could easily be fooled, and that was most everyone, that the economy was sound and all was well except for that pesky little subprime problem. That's all in the past now. The virtuous cycle of low inflation and firm economic growth is dead. With apologies to perma bull Abbey Cohen, I am just not seeing any reason to be bullish on major indices like the Dow, S&P, Nasdaq, or Russell 2000. Sure, there are plenty of opportunities on an individual stock basis, something to be covered in my newsletter.

As of last September I was bearish on the dollar, and bullish on commodities. I remain bearish on the buck and still hold a bullish bias on crude and gold, with a wary eye on correction risk in both crude and gold.

$1000 gold that the pundits are talking about? That's seems like an fairly easy forecast for this year, though not in a straight line up (can you say black box?). Much of how quickly gold progresses to the upside will depend upon how rapidly the dollar falls, and on demand by investors for a "hard asset" should we see larger scale bankruptcy risk emerge among exposed companies within the Fortune 500. Geopolitical troubles remain a wild card to give gold a further push. My preferred non leveraged vehicle for gold is the GLD ETF. The closer gold gets to $1000 the more resistance and volatility with risk of intraday swings of $50 or more.

A deeper foray into $100 territory, like $115 to $120, for crude? Not impossible even after last year's run. It only takes a refinery outage, or further unrest in an OPEC nation to set off a flurry of buying. Consider too, that in the last two recessions, daily demand for gasoline and diesel did not markedly die off. Recession or not, we're a nation of drivers. The run rate continues to hold at over 9 mln barrels per day for gasoline demand and 4 mln-plus for distillate fuel oil products. In an era of tighter world supply/demand from just 6 years ago and a far larger economy, if consumption dropped by 500k bpd for gasoline, or 200k for diesel, we're still talking about fairly pronounced demand in a "average" recession scenario. That in combination with a weaker dollar stands to keep energy prices firm. Doom and gloom world Depression? Then, of course, all bets are off and energy tanks. For now the trend is your friend and that is stronger energy prices with a floor at the extremes, for now, at about $88 per barrel, which would be an ominous signal for the world economy if we pulled back that far.

There's a lot more to the investment puzzle beyond what I've touched on that I look forward to covering in my online newsletter. The targeted start date will be Feburary 1st.

I will update shortly and hope you will subscribe.

All the best for a Happy and Prosperous New Year,

Jim Kingsland

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