Tuesday, April 29, 2008
What I'm Reading
The Fertilizer Commodity Bubble
Silver Prices to Resume Rally in Late 2008, early 2009
And More Here
The Real Impact of De-Leveraging
Is the Credit Crisis Really Over? Minsky Would Say No
Accelerating Housing Declines
The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus
Brazilian Stocks on Fire
Low Spending is Taking Toll on Economy
How Long Can the Rally Run?
Ten Things Everyone Should Know about the VIX
What I'm Reading & Thinking
Fed set for further cut in rates
View of the Day - Ian Scott, Lehman Brothers
Safety dash into bonds brought to abrupt end
Wrigley Mars Deal in Depth - 32 x forward earnings and 20 x ebitda seems darn pricey to me
Soaring Rice Prices Send Asian Nations Scrambling
Is the Work of Fed Bankers Really Done?
DB Chief Energy Economist: Oil to $250, then demand collapse
Barron's Big Money institutional survey - Quite telling. I find myself in disagreement with many of these big time money managers. As one commentator put it, "many of these guys appear to be trading the rally before we've experienced the recession." I agree.
Bill Gross' May Investment Outlook - "Home prices and their real economic fallout are the financial markets – and PIMCO’s – vulnerable flank." I'm glad I'm on similar terms. I have taken a side on this issue and feel that falling home prices will lead to economic fallout in consumer spending and corporate profits. Indeed, these two indicators have already topped out. This is basically the core of my domestic outlook for equities. And to continue, I think that this is our endgame:
"To be brief and blunt, the reason that home prices are so critical, he would claim, is that they are at the forefront of potential asset deflation. Because the U.S. and selected other economies are now substantially asset-based and dependent on stable and upward tilting prices, a deflation of an economy’s primary financial asset can be ruinous. Its deflationary thrust must be countered, wrote Minsky, or else the battle might be lost. If so, the real economy as Mohamed El-Erian suggests, might become so shell-shocked that financial markets once again turn down instead of up."
I don't necessarily think that we will have a long-term deflationary problem like Japan. But I think it's likely declining home prices will lead to slower consumer spending, the great "muddle-through" economy combined with the great unwind in leverage, and lower financial asset prices as a result. My short equity bias remains as long as I view earnings expectations to be overly optimistic. Currently I view Q3-Q4 as wildly optimistic. I'm less inclined to believe Q2 will be greatly below expectations because of the effects of the stimulus checks. Even that argument contains less merit as oil continues to hover around $120 and gas remains around $3.60/gallon.
The chart above is Corporate Profits as a % of GDP. When I mentioned above that corporate profits have topped out this is some of the data that helped me come that decision. And this is one of my strongest arguments for why earnings expectations are too high for the latter half of this year. In the Barron's Big Money institutional poll all the bulls were pointing to low P/E's. 55% thought stocks were undervalued. I come to the conclusion that with normalized corporate profits stocks are overvalued. The chart says it all. We are at the highest level of corporate profits since the 60's. And with consumer spending (and leverage in recent years) being the primary driver of corporate profits, do I think these elevated levels are likely to stabilize and continue?
I find this unlikely. The chart above (via John Mauldin) makes me think that we have probably topped out in consumer spending as well. The negative wealth effect, stagnant wages, and higher commodity costs all add to the consumer's pain. The economy was essentially fueled in 2002 to 2007 by leverage and HEW's as consumer's thought housing prices would increase forever. HEW's have dried up and as BofA noted in the earning's calls, we have seen rising credit card delinquencies (especially in housing bubble areas). As Bud Fox said, "I'm tapped out Marv. American Express has got a hitman looking for me."
I have to be wary here about confusing my economic outlook with my market outlook. While ultimately the economics are the underlying factor, the great bull party may continue for a little while longer. I am prepared and will position the portfolio accordingly. Opportunities abound in this market and I am confident I'll be able to take advantage of them.
Monday, April 28, 2008
What I'm Reading
Global Adjustment Will be Long and Painful
The State of Credit
U.S. Home Vacancies Rise to Record on Foreclosures
Tech Tonic
Small Banks Under Threat in US
Steel price nearly doubles in a year - I'm tempted to say that this bull has not yet run its course but I'm entirely uninformed about the market
Jim Rogers is Buying China Again
Morgan Stanley: US Banks Earnings to Fall 26% in '08 and 15% in '09
USD Hits 2-month High Against Yen
Silver fundamentals seen as poor which makes price vulnerable
Rise of Nationalism Frays Global Ties
South Korea's Growth is Likely to Slow More
Japan's Inflation: Bad Timing
The Dollar Rebound: Is It for Real?
No bubbles, Just fundamentals
Sunday, April 27, 2008
What I'm Reading
Massive JGB Selloff
El-Erian: Why this crisis is still far from finished
Japanese Stocks Cheap?
Learning from Amex
Counterparty Risk in the Commodity Market
If Tech Companies Are Beating Earnings, Why Isn't NASDAQ Breadth Improving?
This Bear Growls On
Jeremy Grantham Q1 Letter
Why Haven't Existing Home Sales Fallen Further?
Pimco's European Perspectives: Haven't We Been Here Before?
Friday, April 25, 2008
What I'm Reading
Ukraine had 26% YoY inflation last month
China Price to Drive - As oil has been hovering around 120 I have seen several articles or research reports that talk about the effects of price controls in many oil producing and asian economies. In places like China, Saudi Arabia, Russia, and Venezuela governments subsidize gas prices. This allows fuel consumers in these nations to not pare back consumption, an upward pressure on global market price.
Commercial and Industrial Loans Near Record Levels
US Regulator Fears Wave of Bank Failures
The Good News About the Housing Bust
Expectations for the Fed Meeting
Business Bankruptcies Rose 43% in 2007
Value in the Front End of the Yield Curve?
An Endgame for the Euro?
Goldman: More Pain for Monolines
Odd Numbers
Thursday, April 24, 2008
What I'm Thinking
What I'm Reading
Recession? It Doesn't Add Up
Target March Creit-Card Charge-offs Annualized 8.1% - There is a picture here getting clearer and clearer with each earnings report that credit card delinquences are rising and consumers are getting tapped out. The BofA earnings call detailed how credit card losses were up sharply in areas affected by declining housing prices. It's a consumer-led recession (something we have not seen in 25 years).
Tracking NAR Spin
Anemic Global CDO Issuance in 2008-Q1
Disastrous New Home Sales
U.S. Sector P/E Ratios (High)
The 800 Pound Gorilla on Consumer's Backs
Economic Releases (Not too shabby)
EUR/USD has fallen 3 big figures in the past 2 days (Just in time for my long EUR/USD post)
Tuesday, April 22, 2008
What I'm Thinking
A very topical quote for the current situation. Written over 20 years ago when we had nowhere near the level of sophistication in credit creation. This summary is a good reason why I think the longer-term outlook is deflation. But I'm beginning to think that won't happen until we have our current little run with price inflation.
And since EUR/USD broke through the psychologically significant 1.60 today, I think it's very likely we could see a run-up to 1.63 and eventually 1.65 in the next 3 weeks. The economic situation in the U.S. is deteriorating, price inflation through oil and food remain, but above all long EUR/USD has remained a very profitable trade since November of 2006. This has been a self reinforcing process (here I go with the Soros reflexivity stuff). The longer it remains profitable the more it will attract speculators. And we have recent hawkish commentary from the ECB and China sitting on over $1 Trillion USD to boot. The ECB is dying to raise rates it seems. The updated statements from various officials made it clear that it's not really relative currency values that are concerning them but currency volatility. And it's essential to remember that the ECB is much more of a hawkish organization than the Fed is. The ECB is actually mandated to prick bubbles whereas the Fed claims that bubbles can only be truly known until after they burst. Basically ECB will control asset prices while the U.S. will not. If anything I think the argument can be made that the market considers the Fed as a supporter of asset prices. Soo all and all I really just won't fight this trend. I want to trade this trend. I think 1.65 is very likely, 1.75 a definite possibility. As I've mentioned previously the endgame here is coordinated central bank intervention. We're not there yet.
Eventually... I won't try to put a date on it.. but eventually, we'll see the slowdown in the U.S. spill over to the Eurozone in a material way. Spain, the U.K., and Ireland all have/had housing bubbles of their own that are popping. This will cause deflationary pressures and a de-emphasis on the hawkish stance of the ECB. When the slowdown becomes apparent in the eyes of the market, THAT's when we'll see EUR/USD fade. But as I said, I'm not looking for that to happen anytime in the immediate future. Long EUR/USD seems like the best option. But....
If and when the EUR/USD retracement comes, I see the potential to make a boatload. I'd look for a period of low vol where you could get a really nice risk/reward ratio. We're not there yet, but we're certainly getting closer. I'm thinking you'll be able to get a 10/1+ ratio on some bearish EUR/USD options.
On an equities note, I'm adding UNH to my equity value watchlist. They reported earnings today that were not to investors' liking. They're trading at a 3-year low with a trailing of P/E of 10. Won't go into any depth here but I'll keep my eye on them. They join Weyerhaeuser as the second equity on my value watch list.
What I'm Reading
Bonds are Back in the Game
Earnings Beat Rates
A Nice Quick Update on Housing - Peak to trough I think housing prices will fall 25% - 30%
More on March Existing Home Inventory
Japanese Banks Step up their Lending
Banks to Pay Steep Cost in BOE Plan
Economic Recovery Already Underway - I think I may just have to come back to this post in a year or so for humor
Some Thoughts on Earnings & Equities
I think I'm going about my trade in the wrong way, and a lot of this has to do with the fact that my options have been limited as to what I can trade. But shorting indeces outright doesn't seem to be the best play at this time. Financials and consumers are tanking while energy and materials are ripping, so we're seeing some offsetting action here. And this is also why the current bear-market rally isn't all it's cracked up to be. We don't have broad rallying across all sectors, and for me to start changing my mind and thinking about putting on some sort of short-term long index trade I'd have to see broad based support on strong volume.
80% of S&P 500 profits still come from the domestic economy, but the DOW components take much less than that from the U.S. I'm looking for where I can find this data (I don't want to have to go through each individual component of the DOW), but it's safe to say that as far as being tied to the U.S., it would go Russell, S&P, and then DOW. And now is time to bring in a topical chart via MacroMan:
Quite a disparity between domestic and foreign YoY profit growth. Makes a very compelling case for my short Russell trade and less of a case for my short DOW trade. Macro Man recommends a large cap/small cap spread trade. Now that might work for me If I had a big capitalization but I have a pretty small account. I'm more likely to just cut my short DOW trade and keep my Russell 2,000 short on.
I'm feeling pretty comfortable right now with my short equities position. Falling domestic profits, elevated valuations, and what will likely be slower consumer spending all lend support to my trade.
Monday, April 21, 2008
What I'm Reading
Trading Radar for this Upcoming Week
Israel seeks to become finance hub
Q1 Earnings Growth Results With 20% Reported - It appears I am very right so far about worse than expected earnings but I've been wrong on the market's reaction
BofA Fails to Meet Expectations - ``We remain concerned about the health of the consumer given the prolonged housing slump, subprime issues, employment levels and higher fuel and food prices,'' - CEO Ken Lewis
Historical S&P Performance after Strong Breadth - A Study done in Tradestation. I'm curious how people do studies like this. I'd enjoy adding it to my repetoir
Delinquencies Rise on HEL
BofE Announces their version of the TSLF
Saturday, April 19, 2008
Thoughts on U.S. Equities & Earnings
Thursday, April 17, 2008
What I'm Reading
Beige Book: Economy Slowing, Prices Rising - I'm pretty much in the camp now that the Fed's actions to abate the credit crisis were extremely inflationary. My current outlook is inflationary, but my long-term outlook remains that the bursting of the housing buble is a largely deflationary phenomenon.
Simply.. a MUST Read
Where the Smart Money is
Value Maybe?
And so it goes...
If we see some big upward surprises tomorrow before the market opens for Caterpillar, Citigroup, and Honeywell we could have a pretty big up day for U.S. equities.
On the international front, Iceland's credit rating was cut again by S&P and Israel's rating was raised by Moody's. Now I don't necessarily care too much about what the soon-to-be-defunct-in-current-form rating agencies are doing, but I was planning on taking this weekend to read up on Israel and their market. My initial thoughts were that Israeli equities were pretty darn cheap. Along with Israel, South Korea and Turkey are on my agenda. South Korea is dirt cheap, but they are also closely tied to the fortunes of Samsung. I plan on checking out the macro picture in addition to looking at equities, currencies, etc. etc. for those three countries. I'm hoping to make this a weekend ritual actually.In currencies, Luxembourg Finance Minister Jean-Claude Juncker helped lift USD by saying financial markets misunderstood the recent G-7 statement about currency volatility. I've believed for some time that the endgame for the slide of USD is cooperative action by the world's central banks. This would certainly make that statement by Juncker pretty important. But we're not quite there yet. Macro Man has a good post on the wording of past statements preceding currency interventions. I mentioned this idea to a friend who works in currencies and he brought up an essential point that even if their was collective action to boost USD, China is sitting on over $1 Trillion and will buy EUR/USD out to yazoo. This makes collective action extremely difficult.
So that's the portfolio right now. Won't be doing any other moves in the near future. I am moving the portfolio to MB Trading over the course of the next two weeks. As I've mentioned before, I'm approved for margin trading, futures, options, and international markets over there. This is the initial setup for the portfolio during the ACAT transfer process. As with any shorts, I'll be keeping a close eye to make sure things don't get out of hand. Since these are all long/medium term holdings, my plan is to do a thorough review of a position if I it's at a 10% unrealized loss.And in closing I'll add a few links to what I've been reading. I like posting links so I can go back later and read again.
Lenders examine Libor alternatives
Wednesday, April 16, 2008
What I'm Reading
Single Family Housing Starts Lowest Since Jan '91
CPI Meets Expectations
EUR/USD at Record High
NAHB: Builder Confidence Unchanged at Near Record Lows
The Clock is Ticking
Home Forclosures Jump 57% YoY in March
WSJ MarketBeat Credit Report
Credit Card Charge-Offs & Delinquency Rates
Goldman: Expect Awful Profits (The main reason I've been short)
US vs. Europe EPS Growth Rate Estimates
Housing Woes Around the Globe
Industrial Production Not too Shabby
Oil and the Great Moderation
10 Reasons to Like U.S. Equities
12 Wall Street Classics for 2008
Macro Man: A funny thing happened on the way to the rally
Banks That Misquote Libor will be Banned
JPMorgan: Conference Call Comments
Monday, April 14, 2008
Sunday, April 13, 2008
Friday, April 11, 2008
Bond Spread & The Portfolio
Thursday, April 10, 2008
To Do List
On my list so far are:
* Consumer spending
* Industrial Production
* CPI, PPI, and inflation in all of its forms
* Real hourly earnings
* Debt levels
* Debt to earnings levels
* Savings Rates
* Unemployment
* 10-year Swap spread
* Fed Funds/Discount Rate
* Baa corporate spread
* Junk-bond yield spread
* Consumer Confidence Index
* Jumbo mortgage rate minus conventional 30-year mortgage rate
* 3 month TED spread
That's all I can really think of right now. I'm sure I will add many more to my list as I come across them while reading. I certainly have my work cut out for me but I am in no rush. It's a process for the long haul and I hope to keep the data sets in perpetuity.
Wednesday, April 9, 2008
Tuesday, April 8, 2008
The Start of Earnings Season
2007 Q4 Earnings: -25.1%
When you add this factor to the fact that we are overbought (see my previous post), it makes for a pretty enticing reason to be short if you are a longer term investor.
And now let's take a look at global P/E ratios courtesy of Bespoke Investment Group:
Does the U.S., especially the NASDAQ, deserve a higher P/E than China? As far as I am aware China's economy is growing at double digits while our economy has negligible growth. Remember my previous post about market returns YTD. This entire situation doesn't make a lot of sense to me. Yes, a lower dollar is helping exports and U.S. companies are not nearly as tied to the domestic economy as they used to be, but still....
Across the board the street is still expecting higher equity markets by the end of the year. Merrill's Thain recently said that the worst of the credit crisis is behind us, but I think we're probably only about half way through. Housing prices still have not stabilized. Today's pending home sales numbers fell more than expected. This is just one of countless examples of a housing market that is in the early to mid stages of a depression.
I think there will be a string of disappointments over the next 3 quarters. Volatility will come back in the market, risk premiums will increase, and valuations will decrease. Don't be surprised if you see the VIX hit 30 again the next three months. I'd like to setup a trade to take advantage of that but I still don't have that damn margin account.
Monday, April 7, 2008
Go Short?
VIX and Trades
A multi-leg strategy is probably much safer and less piggish.
12:24 PM Update: Apr 25 calls last sale at .50. I would take gains right now from initial 1.00 sale. Also made the following two trades today:
BOT 120 SPY at 138.11 (Stop-loss at 132.58, Target of 139.00, If SPY breaks through 140.00 I think next stop is 143 - 145)
BOT 100 QQQQ at 46.19 (Stop-loss at 44.34, Target of 47.50)
Trying to take advantage of what I believe to be the counter-trend rally that is currently going on. Will take profits very quickly if I feel sentiment gets skiddish when banks report in the upcoming weeks.
Also, I am fully aware that there is not much upside potential relative to where I have placed my stops for these trades. Although I have potential near-term targets I won't necessarily take profits if we reach those levels. That's why I have a relatively large move of 4% for my stop and near-term price targets.
Sunday, April 6, 2008
Off the Top of My Head
* The market shrugged off very recessionary job numbers. Don't fight the market.
* The homebuilders still have a LONG, LONG way to fall when all is said and done. The bounce increases our profit potential.
* We are in a recession as I type this.
* I need to get caught up in my research on currencies and commodities.
* It is still not time to talk my Dad into buying an upscale condo in Florida. We are 1 to 2 years away from that. Eventually, though, the potential is there for a multi million dollar gain by the time it's all said and done with my parents.
* Declining consumer spending will be a buzz topic by the end of 2008
* Earnings will disappoint in Q2 and Q3. 15% earnings projection by S&P analysts for Q3 is madness.
* Is the 1 to 3 year outlook for oil higher or lower? I don't have a definitive answer and cannot make a longer term investment until I have taken a side on this.
* VIX options seem pretty enticing to me, but after doing a little reading and learning that VIX futures options don't track VIX spot very well, I'm determined over the next couple of weeks to learn how to capitalize on what I feel will be another shot up in the VIX to 30 over the next 3 to 6 months. I may have to give a call to my friend to trades options on the street. For the time being, however, as I mentioned in the first bullet I think we are in for a 1 month bounce at the least. So, if I had to put the dough on the line right now! (too bad I can't). I say:
Sell the 08 Apr 25.00 calls at the current ask of 1.00. We will come back to this over the next week. The contract expires on the 16th of April and my prediction is they expire worthless. (This is the first specific investment recommendation I have made so I'm a little interested to how it pans out.)
And that's all for now...