Market Comments for April 2, 2008
1) A $7 dollar rise in crude to $105 from the Monday lows put the stock rally on hold. This despite a near record 7 million barrel weekly increase in crude stocks announced this morning. Go figure. The Fed also hinted that it may pause its interest rate cuts to give time for its existing measures to work.
2) Jumbo lender Thornberg Mortgage was effectively taken over for only $1.1 billion, down 95% in value from a year ago by a consortium of banks and private equity firms. This insures their presence in the market in any future recovery. They say they will resume lending in weeks.
3) RIM (RIMM) announced blockbuster Q4 earnings today. Over 4.4 million Blackberries were sold with 2.2 million new subscriptions. There are now more than 14 million Blackberry users. 50% of new sales paid for by employers. RIM uses 1/100th the bandwidth of I Phone. ??RIM will soon bring out the Pearl 9000, its I Phone killer. Sneak previews have been very favorable. The stock has been a big out performer of Apple this year.
4) One good 'All Clear' signal will flash when the two year Treasury rate exceeds the Fed funds rate, indicating that the flight to safety is over. At the moment the two year is at 1.75%, 50 bp under the 2.25% Fed funds rate.
5) The severity of this recession is nowhere near the 2001-2002 recession. The last time the Fed funds rate was at 2.25% 1.3 million jobs had been lost. This time only 80,000 jobs have been lost. The incredible strength of the multinational, energy, and commodities sectors this time is taking up the slack.
6) Alcohol consumption in the US has been flat for the past ten years, so at least it won't go down in a recession. This makes it a classic defensive, counter cyclical play. The most profitable firms in this arena will be large multinationals benefiting from the rapid growth of alcohol consumption in the emerging economies and have the resources to deal with rising commodity prices. A good example of this is Diageo PLC (DEO) which owns 8 of the world's top 20 brands, including Guinness beer, Smirnoff vodka, Gordon's gin, Jose Cuervo tequila, and the Rosenblum, Chalone, and Sterling vineyards.
7) The U.S. residential real estate market has lost $3 trillion in value in the past 12 months. Foreclosure headlines and horror stories are going to become much worse from here, further scaring off buyers.
THOUGHT OF THE DAY
I drove through Las Vegas on my way back from my trip. The city has dozens of 'ghost town' neighborhoods on the edge of the desert with hundreds of completed but empty homes and condos built by every major listed homebuilder.?? These are cookie cutter homes with 5 feet of spacing between them and no backyards. Tumbleweeds blow down empty streets. Beyond them were thousands of acres of land graded for streets and lots where development has been frozen. The accompanying strip malls, all tastefully done in Mediterranean hues with pleasant, but dusty and windblown outdoor sculptures, are also deserted. ??It all looks like some sort of Rod Serling set. Anyone who believes the housing crisis will end soon hasn't been in the field. Maybe I should go to Stockton for a weekend?
Market Comments for April 1, 2008
1) UBS announced $19 billion in sub prime write offs and a $15 billion equity infusion. Their illiquid toxic waste will be spun off into a separate entity. My old boss, chairman Marcel Ospel, will retire in shame. This is what sparked the 391 point rally on Wall Street. Total sub prime write offs now exceed $200 billion.
2) Lehman's Dick Fuld has asked the SEC to investigate collusion among short sellers of Bear Stearns, who coincidently have also been targeting Lehman. Fuld did the same in 1998 when a major Lehman client, Long Term Capital Management, went under.
3) Centex, the nation's largest homebuilder, sold $900 million worth of land for $161 million to a Dallas partnership. Centex will reap $250 million in tax refunds from the sale.
4) Blackstone raised $10.9 billion for a new real estate fund. This is long term bottom fishing money.
5) Some three billion people are expected to join the middle class over the next ten years, all outside of the US. They will eat more and buy more. This will be the primary driver of commodity prices for the next 5 years. We are probably in the 4th inning of a nine inning game in this boom.
6) Aloha Airlines went under, the source of many fond memories for me and my family. Expect more bankruptcies and consolidation in this area. This is your worst nightmare of a sector.
THOUGHT OF THE DAY
Taiwan is another country that may be worth watching. The country has just had an election which put in place a government far more sympathetic with mainland China. This will lead to a raprochement with the PRC which would greatly benefit Taiwan's economy. Taiwanese companies have better accounting standards, disclosure, and liquidity than Chinese companies, yet trade at a fraction of the mainland multiples. It is a double play in that you can expect the Taiwanese dollar to also appreciate as a result of this. The Chinese yuan is fixed against the dollar. You can participate through the Taiwan exchange traded fund EWT which has fallen 17% from $17.5 to $14.5 since late last year. You can also buy Taiwan Semiconductor directly.
Market Comments for April 1, 2008
1) UBS announced $19 billion in sub prime write offs and a $15 billion equity infusion. Their illiquid toxic waste will be spun off into a separate entity. My old boss, chairman Marcel Ospel, will retire in shame. This is what sparked the 391 point rally on Wall Street. Total sub prime write offs now exceed $200 billion.
2) Lehman's Dick Fuld has asked the SEC to investigate collusion among short sellers of Bear Stearns, who coincidently have also been targeting Lehman. Fuld did the same in 1998 when a major Lehman client, Long Term Capital Management, went under.
3) Centex, the nation's largest homebuilder, sold $900 million worth of land for $161 million to a Dallas partnership. Centex will reap $250 million in tax refunds from the sale.
4) Blackstone raised $10.9 billion for a new real estate fund. This is long term bottom fishing money.
5) Some three billion people are expected to join the middle class over the next ten years, all outside of the US. They will eat more and buy more. This will be the primary driver of commodity prices for the next 5 years. We are probably in the 4th inning of a nine inning game in this boom.
6) Aloha Airlines went under, the source of many fond memories for me and my family. Expect more bankruptcies and consolidation in this area. This is your worst nightmare of a sector.
THOUGHT OF THE DAY
Taiwan is another country that may be worth watching. The country has just had an election which put in place a government far more sympathetic with mainland China. This will lead to a raprochement with the PRC which would greatly benefit Taiwan's economy. Taiwanese companies have better accounting standards, disclosure, and liquidity than Chinese companies, yet trade at a fraction of the mainland multiples. It is a double play in that you can expect the Taiwanese dollar to also appreciate as a result of this. The Chinese yuan is fixed against the dollar. You can participate through the Taiwan exchange traded fund EWT which has fallen 17% from $17.5 to $14.5 since late last year. You can also buy Taiwan Semiconductor directly.
Market Comments for March 31, 2008
1) The market staggered to a close for the quarter, bringing in the worst quarterly performance in 5 years. Brokers were down 25%, technology down 16%, and banks were down 9%. Homebuilders, which have been savaged for two years now, were unchanged. Drug stocks, normally a safe haven, were down 13%.
2) A study was published today by the respected New England Journal of Medicine saying that the anti-cholesterol drug Vytorin is useless in life extension. Merck and Shering-Plough were down 20% and 25%. This is why I never touch this sector. Everything always comes out of the blue. Vytorin accounted for 60% of the latter's profits, and with this fall, the stock now has a 10% dividend yield.
3) Builder DR Horton held an 'unauction' in LA where it sold 200 homes down 30% from list. It is cheaper to dump houses at a bottom cycle price now than to wait 5 years for prices to get there.
4) Steel prices are up 60% in a year. When the economy recovers physical shortages of steel may dramatically drive up all types of construction costs and create delays ??due to the long lead times needed to increase production of this commodity.
5) Inflation in the euro block hit 3.5% in March, the highest in the history of the currency, reducing chances that interest rates will be cut there.
6) At the market peak, the US housing stock was worth $21 trillion. It may drop to $14 trillion before the housing collapse ends.?? That is a huge negative wealth effect and means the loss of a lot of purchasing power in the US over the next few years. Good bye home ATM!
7) According to Cal State University, research people who have fun at work are more creative, productive, work better in teams, stay at work longer, and have fewer sick days. Funny bosses are listened to more than unfunny ones. The most fun companies to work for are Nike and Microsoft.
8) 'Girls Gone Wild' offered 'Kristen' $1 million to appear nude in a future video, but then withdrew the offer when they found out that she had already appeared in their 2003 'Girls Gone Wild Spring Break' video. You can't make this stuff up.
THOUGHT OF THE DAY
Russia is a country that bears close watching. It is the largest commodity exporter in the world and is the largest non OPEC oil producer, making an investment hear a great inflation hedge.?? The economy is growing at 8% a year, allowing the rapid emergence of a middle class. This is the same argument you hear for buying China. Their companies are not leveraged and there is no financial crisis. The ways to play this are to buy the Moscow Fund (.RRTS) or just directly buy Gazprom, the world's largest natural gas producer and the largest company in Russia. It?s a great emerging market play as long as oil keeps going up. If it doesn?t, watch out!
Market Comments for March 31, 2008
1) The market staggered to a close for the quarter, bringing in the worst quarterly performance in 5 years. Brokers were down 25%, technology down 16%, and banks were down 9%. Homebuilders, which have been savaged for two years now, were unchanged. Drug stocks, normally a safe haven, were down 13%.
2) A study was published today by the respected New England Journal of Medicine saying that the anti-cholesterol drug Vytorin is useless in life extension. Merck and Shering-Plough were down 20% and 25%. This is why I never touch this sector. Everything always comes out of the blue. Vytorin accounted for 60% of the latter's profits, and with this fall, the stock now has a 10% dividend yield.
3) Builder DR Horton held an 'unauction' in LA where it sold 200 homes down 30% from list. It is cheaper to dump houses at a bottom cycle price now than to wait 5 years for prices to get there.
4) Steel prices are up 60% in a year. When the economy recovers physical shortages of steel may dramatically drive up all types of construction costs and create delays ??due to the long lead times needed to increase production of this commodity.
5) Inflation in the euro block hit 3.5% in March, the highest in the history of the currency, reducing chances that interest rates will be cut there.
6) At the market peak, the US housing stock was worth $21 trillion. It may drop to $14 trillion before the housing collapse ends.?? That is a huge negative wealth effect and means the loss of a lot of purchasing power in the US over the next few years. Good bye home ATM!
7) According to Cal State University, research people who have fun at work are more creative, productive, work better in teams, stay at work longer, and have fewer sick days. Funny bosses are listened to more than unfunny ones. The most fun companies to work for are Nike and Microsoft.
8) 'Girls Gone Wild' offered 'Kristen' $1 million to appear nude in a future video, but then withdrew the offer when they found out that she had already appeared in their 2003 'Girls Gone Wild Spring Break' video. You can't make this stuff up.
THOUGHT OF THE DAY
Russia is a country that bears close watching. It is the largest commodity exporter in the world and is the largest non OPEC oil producer, making an investment hear a great inflation hedge.?? The economy is growing at 8% a year, allowing the rapid emergence of a middle class. This is the same argument you hear for buying China. Their companies are not leveraged and there is no financial crisis. The ways to play this are to buy the Moscow Fund (.RRTS) or just directly buy Gazprom, the world's largest natural gas producer and the largest company in Russia. It?s a great emerging market play as long as oil keeps going up. If it doesn?t, watch out!
Market Comments for March 20, 2008
1) The major story today was the continued melt down in the commodities markets triggered by the increase in margin requirements on Sunday night.?? Most commodities are down 10%-20% on the week, with silver down 20% in one day. This was long overdue and is opening up windows for late players. How were gasoline prices going up to record highs with storage at a 15 year high? The euro backing off from $1.59 to $1.54 is part of this. I protect against these kind of moves, which are inevitable in commodities, by keeping tight trailing sell stops.
2) Today was a quadruple witching day with the expiration of monthly stock index options. As I am sure you recall, a month ago I recommended the short sale of the S & P 500 March 1200-1450 strangle for a premium of 5.5%.?? Today the S & P 500 Index closed at 1329, so the short strangle closed out of the money and you would have kept all of the premium. Interestingly, this is only 22 points lower than the expiration a month ago, meaning that you are getting a lot of sturm und drang but very little net movement in the market. That is what this trade is all about. This is the third month in a row that this trade has worked. My logic behind these trades from the beginning has been that with half of the market doing great, and half doing terribly, you will get very little net movement in the broader indexes. Now I suggest you put on the April 1150-1450 short strangle and take in another 5% premium. Trades like this are as good as having a rich uncle who sends you a monthly support check.
3) Bear Stearns' research department staff are still coming into work and sending out reports to clients without a single reference to the fact that they are now out of business. Aside from that Mrs. Lincoln, how was the play? The bottom line message from the government on the whole Bear Sterns affair is 'you threaten the system and we are going to come kill you'. Something to give pause to shareholders when considering how much to leverage future positions. BSC bond holders are now buying up the stock to get the votes to push through the takeover so their holdings can get marked up from 70 to 100.
4) Merrill Lynch put out a survey indicating that fund managers' cash levels are at an all time high. This is usually a deep lagging indicator and is another sign of a market bottom. But don?t bet the ranch on this. I watched cash levels in Tokyo sit at all time highs for 15 years.
5) Morgan Stanley has marked down all of their sub prime securities to zero. This will pave the way for the surprise mark ups in a year. Buy MS!
6) Thanks to Fed's latest action, the rate for 30 year conventional mortgages has dropped from 6.1% to 5.6% since Friday.
Market Comments for March 20, 2008
1) The major story today was the continued melt down in the commodities markets triggered by the increase in margin requirements on Sunday night.?? Most commodities are down 10%-20% on the week, with silver down 20% in one day. This was long overdue and is opening up windows for late players. How were gasoline prices going up to record highs with storage at a 15 year high? The euro backing off from $1.59 to $1.54 is part of this. I protect against these kind of moves, which are inevitable in commodities, by keeping tight trailing sell stops.
2) Today was a quadruple witching day with the expiration of monthly stock index options. As I am sure you recall, a month ago I recommended the short sale of the S & P 500 March 1200-1450 strangle for a premium of 5.5%.?? Today the S & P 500 Index closed at 1329, so the short strangle closed out of the money and you would have kept all of the premium. Interestingly, this is only 22 points lower than the expiration a month ago, meaning that you are getting a lot of sturm und drang but very little net movement in the market. That is what this trade is all about. This is the third month in a row that this trade has worked. My logic behind these trades from the beginning has been that with half of the market doing great, and half doing terribly, you will get very little net movement in the broader indexes. Now I suggest you put on the April 1150-1450 short strangle and take in another 5% premium. Trades like this are as good as having a rich uncle who sends you a monthly support check.
3) Bear Stearns' research department staff are still coming into work and sending out reports to clients without a single reference to the fact that they are now out of business. Aside from that Mrs. Lincoln, how was the play? The bottom line message from the government on the whole Bear Sterns affair is 'you threaten the system and we are going to come kill you'. Something to give pause to shareholders when considering how much to leverage future positions. BSC bond holders are now buying up the stock to get the votes to push through the takeover so their holdings can get marked up from 70 to 100.
4) Merrill Lynch put out a survey indicating that fund managers' cash levels are at an all time high. This is usually a deep lagging indicator and is another sign of a market bottom. But don?t bet the ranch on this. I watched cash levels in Tokyo sit at all time highs for 15 years.
5) Morgan Stanley has marked down all of their sub prime securities to zero. This will pave the way for the surprise mark ups in a year. Buy MS!
6) Thanks to Fed's latest action, the rate for 30 year conventional mortgages has dropped from 6.1% to 5.6% since Friday.
Market Comments for March 19, 2008
1) As I suspected, the first sign of stock buying precipitated a major sell of in commodities. The moves down from the Sunday night highs have been breathtaking. Crude is down from $111 to $103. Natural gas dropped from $10.40 to $9.10. Gold has had its worst day in five years, cratering from $1,020 to $940. Trailing stops would have taken me out of all of these positions.
2) The government announced that it is loosening capital constraints on Fannie Mae and Freddie Mac. This will increase their combined mortgage lending capacity by $200 billion. This is kind of irrelevant since bank lending terms are now so tight that few people can qualify. (LTV's of 60%? Minimum credit scores of 740?). But the Dow popped 100 points on it anyway. With this it appears that the government is throwing in the kitchen sink to stop the crisis. Too bad they aren't buying houses in crappy neighborhoods. Yet.
3) A lot of people are watching Wachovia Bank which now has a 10% dividend.
4) Visa's IPO, at $17.9 billion the largest in history, was a blow out success. The IPO price was $44 and the opening trade was $59.5, making an instant $6.3 billion profit for the new shareholders. Good news for the leads, Morgan and Goldman.
5) My alma mater, Morgan Stanley, reported better than expected earnings. The stock is up 40% from the Monday low. Can't keep a good house down.
THOUGHT OF THE DAY
The Fed has made fundamental changes to the US financial system that will have long lasting effects. In a week they have done nothing less than drag the country's creaking financial structure from 1933 into the 21st century. Investment banks can now access the Fed's discount window directly which was previously only open to commercial banks. It will accept mortgage backed securities as collateral. They have put together a series of agreements with foreign central banks to meet the liquidity demands of overseas banks, making it the real central bank to the world. They are formally recognizing de facto changes that the marketplace has recognized for decades, such as the rise of capital markets and the investment banks. The ultimate effect of all of this will be long term support of global asset prices.
Market Comments for March 19, 2008
1) As I suspected, the first sign of stock buying precipitated a major sell of in commodities. The moves down from the Sunday night highs have been breathtaking. Crude is down from $111 to $103. Natural gas dropped from $10.40 to $9.10. Gold has had its worst day in five years, cratering from $1,020 to $940. Trailing stops would have taken me out of all of these positions.
2) The government announced that it is loosening capital constraints on Fannie Mae and Freddie Mac. This will increase their combined mortgage lending capacity by $200 billion. This is kind of irrelevant since bank lending terms are now so tight that few people can qualify. (LTV's of 60%? Minimum credit scores of 740?). But the Dow popped 100 points on it anyway. With this it appears that the government is throwing in the kitchen sink to stop the crisis. Too bad they aren't buying houses in crappy neighborhoods. Yet.
3) A lot of people are watching Wachovia Bank which now has a 10% dividend.
4) Visa's IPO, at $17.9 billion the largest in history, was a blow out success. The IPO price was $44 and the opening trade was $59.5, making an instant $6.3 billion profit for the new shareholders. Good news for the leads, Morgan and Goldman.
5) My alma mater, Morgan Stanley, reported better than expected earnings. The stock is up 40% from the Monday low. Can't keep a good house down.
THOUGHT OF THE DAY
The Fed has made fundamental changes to the US financial system that will have long lasting effects. In a week they have done nothing less than drag the country's creaking financial structure from 1933 into the 21st century. Investment banks can now access the Fed's discount window directly which was previously only open to commercial banks. It will accept mortgage backed securities as collateral. They have put together a series of agreements with foreign central banks to meet the liquidity demands of overseas banks, making it the real central bank to the world. They are formally recognizing de facto changes that the marketplace has recognized for decades, such as the rise of capital markets and the investment banks. The ultimate effect of all of this will be long term support of global asset prices.
Market Comments for March 18, 2008
1) The price action of Lehman Brothers these days is frighteningly similar to that of Bear Stearns just before it went bankrupt. In the last week Lehman's share price has dropped from $60 to $20. At the very least this has to be considered a near death experience. Today CEO Richard Fuld came out and said that there were no liquidity concerns at Lehman. Thanks to better than expected earnings announced today the stock is back up to $45. If they go under the way that Bear did they will get taken over the same way at a nominal price, say $1/ share, wiping out the equity holders but not actually going bankrupt. That effectively wipes out all of the shareholders but preserves the rights of bond holders, minimizing the impact on the financial community. Watch out for LEH!
2) The big news today was the Goldman Sachs earnings which came in at $3.23/ share vs. and expected $2.58/share. They disclosed that their leveraged loan book shrunk from $47 billion to $20 billion, a staggeringly rapid shrinkage of their balance sheet. This shows you how quickly the whole industry is downsizing.
3) The homebuilders most likely to go bust are those that have the highest reliance on revolving credit facilities. Those are WCI, and Hovnanian. The most liquid and financial strongest homebuilders are?? NVR Inc., MDC Holdings, KB Home, and Toll Brothers.
4) With the Fed rate cut from 3.0% to 2.25%, and the inflation rate now at 2.5% on its way to 3%, real interest rates are now officially negative.
5) Bear Stearns stock today traded up to $8, four times the bid from JP Morgan. This is not a cash deal but an exchange for JP Morgan stock which is up big today. There are also moves by Bear employees to sue to tie up the deal in court for a few years. In the meantime the sub prime market will recover and Bear will regain the $80/ share in book value the firm had a few months ago. Many shareholders also believe they will do better in a plain vanilla bankruptcy or that JPM will increase their bid. Another big payday for the lawyers.