Market Comments for March 3, 2008
1) Natural Gas soared again to a new two year high of $9.61 in its race to catch up with crude. Gold flew to $991, just short of my short term target of $1,000. More concerns about power outages in South Africa.
2) The Sage of Omaha, Warren Buffet, released his annual letter to investors, a must read for all students of the market. A $10,000 investment in his Berkshire Hathaway shares in 1965 would be worth $31 million today. I have been following him for 20 years and have always admired his discipline and his wit.
3) The next shoe to fall in the financial crisis will be the bankruptcy of several large fixed income oriented hedge funds. These funds have earned outsized returns of 30%-40% per annum shorting Treasuries and buying every piece of high yield junk out there on a highly leveraged basis, from credit default swaps to collateralized debt obligations to Icelandic long term bonds. Now Treasuries are gong up and there are no bids for these long positions. Vulture investors like Buffet are being shown $5 billion portfolios of these distressed securities on a daily basis.
4) Many hedge funds invest purely on mindless statistical reversions to a mean strategy. When prices are two standard deviations above a mean, they sell, and when prices are two standard deviations below a mean, they buy. Not too much thought there! The problem is that we are now at 6 standard deviations for almost all fixed income securities which equates to a once in 2,000 years event. The aggregate size of the long positions run by these strategies is in the trillions of dollars. There are now cascading margin calls flooding throughout the industry. That is why these funds always eventually go bust. It seems these days that the 100 year floods are happening every two years. It is a basic flaw in the Black-Schoales equation. Models are great as long as you know when to toss them out. These are just tools, not the Gospel Truth.
5) The big hit today was in securities backed by commercial mortgages. Watch out. Terms are tightening by leaps and bounds.
1) Consumer confidence for January came in at a 16 year low. The market tanked 300 points.
2) MF Global incurred $141 million in unauthorized trading losses in wheat on Tuesday. On that day the market in wheat was limit down and limit up in the same day, producing an intra day range of 25%, the greatest in history for any commodity. The inside story was that the trader involved suffered a computer systems crash in the middle of all this and didn't know his positions while all of this was going on. To MF Global's credit they announced the loss the next day. This is why you never use a cheap computer for a trading platform.
3) Copper could be the next metal to move. It is at the top of a two year trading range at $3.60. You could get a big rotational move into copper as traders move out of gold,?? which is rapidly approach $1,000 an oz, the target for many for the year. The inflation adjusted all time high for gold is $1,200 which is now a chip shot, and the two year target for many is $1,500.
4) Pimco's legendary bond investor Bill Gross says the next big problem market will be commercial real estate. He is prone to extreme forecasts to suit his own book. He predicted the Dow would drop to 5,000 in 2002 and missed by 2,500. He also said that muni bonds now offer 'historic' opportunities.
5) Recession prospects are driving consumers to eat out less and at home more. Sell Morton's and Red Lobster and buy Heinz, Hormel (Spam) and Del Monte (canned beans).
STRATEGY IDEA OF THE DAY
Commodities are now red hot and will probably keep running for a while. The main reason they are the flavor of the day is that hedge funds can't trade bonds because the markets have vaporized, and think it is way too early to buy stocks. So there is no where else for them to go. A great way to play commodities is to buy Brazil. The Bovespa stock index ($BVSP) is at 65,000, close to an all time high. Among things going right: the country is now 100% self sufficient in energy thanks to a high reliance on domestically produced ethanol. Its major commodities like sugar and iron ore, have risen 50% since the summer. Petrobras Energia (PZE) ($11.5) has made a major offshore oil discovery and is itself a strong buy. It is debt free and is in fact a net lender now to the US. No sub prime or real estate crisis. Warren Buffet is playing this by going long the Brazilian currency, the real. Having covered as a journalist the big Brazilian debt default crisis in the seventies this is all amazing to me.
1) Consumer confidence for January came in at a 16 year low. The market tanked 300 points.
2) MF Global incurred $141 million in unauthorized trading losses in wheat on Tuesday. On that day the market in wheat was limit down and limit up in the same day, producing an intra day range of 25%, the greatest in history for any commodity. The inside story was that the trader involved suffered a computer systems crash in the middle of all this and didn't know his positions while all of this was going on. To MF Global's credit they announced the loss the next day. This is why you never use a cheap computer for a trading platform.
3) Copper could be the next metal to move. It is at the top of a two year trading range at $3.60. You could get a big rotational move into copper as traders move out of gold,?? which is rapidly approach $1,000 an oz, the target for many for the year. The inflation adjusted all time high for gold is $1,200 which is now a chip shot, and the two year target for many is $1,500.
4) Pimco's legendary bond investor Bill Gross says the next big problem market will be commercial real estate. He is prone to extreme forecasts to suit his own book. He predicted the Dow would drop to 5,000 in 2002 and missed by 2,500. He also said that muni bonds now offer 'historic' opportunities.
5) Recession prospects are driving consumers to eat out less and at home more. Sell Morton's and Red Lobster and buy Heinz, Hormel (Spam) and Del Monte (canned beans).
STRATEGY IDEA OF THE DAY
Commodities are now red hot and will probably keep running for a while. The main reason they are the flavor of the day is that hedge funds can't trade bonds because the markets have vaporized, and think it is way too early to buy stocks. So there is no where else for them to go. A great way to play commodities is to buy Brazil. The Bovespa stock index ($BVSP) is at 65,000, close to an all time high. Among things going right: the country is now 100% self sufficient in energy thanks to a high reliance on domestically produced ethanol. Its major commodities like sugar and iron ore, have risen 50% since the summer. Petrobras Energia (PZE) ($11.5) has made a major offshore oil discovery and is itself a strong buy. It is debt free and is in fact a net lender now to the US. No sub prime or real estate crisis. Warren Buffet is playing this by going long the Brazilian currency, the real. Having covered as a journalist the big Brazilian debt default crisis in the seventies this is all amazing to me.
1) Natural Gas went ballistic today, up 5% to $9.46. Crude closed at $102.20. Fed governor Bernanke is driving prices, not OPEC.
2) Thoroughbred horse sales at Keeneland have fallen off a cliff, another leading economic indicator.
3) Incredible stat of the day: Triple 'B' rated bonds a year ago traded 200 basis points over Treasuries. Now they are 800-1,000 basis points over Treasuries, an all time high.
4) Michael Jackson's palatial fantasy estate in Southern California, Neverland, complete with its own merry-go-round and Ferris wheel, is going into foreclosure unless he can come up with $24 million by March 14. It almost certainly has negative equity and the bank will take it back. Weren't you looking for a weekend place?
5) China is raising its minimum wage by 17% to $120 a month. Of the last 50 centuries, China had the world's dominant economy for 48. The rise of China today is just a reversion to the mean.
6) There was massive buying of long dated calls in Toll Brothers and Pulte Homes which are among the best performing stocks in the market this year.
7) US labor costs are now 30% cheaper than in Europe. This will lead to more factory construction in the US.
8) The California state pension fund (Calpers) is raising its allocation to commodities 16 times to $7 billion. A sign that a top in this torrid asset class is not far off.
THOUGHT OF THE DAY
What has been driving the euro up against the dollar for the last 8 months has been stubbornly high euro interest rates and the most rapid decline in dollar interest rates in history, causing the euro/dollar interest rate differential to widen to a record 300 basis points. What happens next? The Fed will carry out its last 50 basis point rate cut at its March meeting. After that the next Fed rate move will be a rate increase to head off inflation, possibly quickly. The European central bank will be forced to cut its rates as the effects of the US recession spill over there. This will cause the dollar/euro interest rate differential to shrink dramatically. This scenario has the euro peaking at the $1.55 to $1.60 range sometime in Q2 2008. After that it could retrace as far back as $1.25 over the following year. Q2 could be a good time to take profits in an any euro based assets you may have.
TRADE RECOMMENDATION
Copper could be the next metal to move. It is at the top of a two year trading range at $3.60 and is clearly breaking out to the upside. You could get a big rotational move into copper as traders move out of gold,?? which is rapidly approach $1,000 an oz, the target for many for the year. Chinese demand has been voracious in the massive construction build out for the Olympics. Electrical cars, the most immediate short term solution to high oil prices, use a lot of the red metal. And there are no major new mines coming on stream in the foreseeable future. A classic supply demand squeeze.
1) The big development today was the Euro which finally blasted through $1.50, which had capped it for the last three months. Short covering took it all the way up to $1.51. All of the other weak dollar plays, like gold and silver, soared to new highs. Next stop $1.55.
2) The EU hit Microsoft with a $1.35 billion fine. MSFT is the most fined company in history. The stock was unchanged. This amount is only two weeks of free cash flow for Mr. Softy. It's just another cost of doing business for them. I think the stock is a strong buy here at $28.
3) Fannie Mae and Freddie Mac said they would eliminate caps on jumbo loans on March 1. This means that these loans can be securitized for the first time. It will be helpful when people start buying securitized mortgages again, which may be by year end. This will be big news for sellers of luxury homes in New York, California and Florida.
4) The Hang Seng soared 769 points last night. It is up 15% since I showed you that chart and is on its way back to HK$31,000.
5) With Google stock plummeting from $750 to $449 Sergei Brin and Larry Page have each lost $8 billion in net worth since November. Their holdings have dropped from $21 billion to $13 billion each, some 40%. This is the sector you want to be in when the market recovers.
6) Toll Brother announced a record loss and said they see no recovery on the horizon. The stock was unchanged. These stocks are totally sold out, and in fact are the best performing sector of the market this year.
9) New home sales in January came in at an annual rate of 533,000, a 13 year low. At least 1.2 million homes a year are needed to meet the demands for population growth.
1) The big development today was the Euro which finally blasted through $1.50, which had capped it for the last three months. Short covering took it all the way up to $1.51. All of the other weak dollar plays, like gold and silver, soared to new highs. Next stop $1.55.
2) The EU hit Microsoft with a $1.35 billion fine. MSFT is the most fined company in history. The stock was unchanged. This amount is only two weeks of free cash flow for Mr. Softy. It's just another cost of doing business for them. I think the stock is a strong buy here at $28.
3) Fannie Mae and Freddie Mac said they would eliminate caps on jumbo loans on March 1. This means that these loans can be securitized for the first time. It will be helpful when people start buying securitized mortgages again, which may be by year end. This will be big news for sellers of luxury homes in New York, California and Florida.
4) The Hang Seng soared 769 points last night. It is up 15% since I showed you that chart and is on its way back to HK$31,000.
5) With Google stock plummeting from $750 to $449 Sergei Brin and Larry Page have each lost $8 billion in net worth since November. Their holdings have dropped from $21 billion to $13 billion each, some 40%. This is the sector you want to be in when the market recovers.
6) Toll Brother announced a record loss and said they see no recovery on the horizon. The stock was unchanged. These stocks are totally sold out, and in fact are the best performing sector of the market this year.
9) New home sales in January came in at an annual rate of 533,000, a 13 year low. At least 1.2 million homes a year are needed to meet the demands for population growth.
1) Yesterday's 182 point rally in the last 30 minutes came from Standard & Poor's ??announcement that it would maintain ??bond insurer MBIA's AAA rating. They indicated they might downgrade the company later. This shows how backward looking and useless these ratings are as MBIA's bonds are already trading at B- levels. Is MBIA really the same credit as GE?
2) Wheat went up a staggering 25% yesterday as Kazakhstan announced it would restrict exports to head off domestic shortages. Wheat is now up 400% YOY. Every major wheat producing area outside the US is now in a drought.
3) The US announced it would support gold sales by the International Monetary Fund. The price went down $10 immediately then shot up to a new high of $954. In a normal market gold would have dropped 10% on this news, so it shows how strong the demand for gold is.
4) The producer price index for January came in at 7% YOY, the hottest number in 23 years. More ammo for the stagflation camp.
5) Natural Gas rocketed to $9.36, a two year high. It's up 25% in a month and is going higher.
6) Google announced that its pay per click revenues were down 7% in January. The stock got slammed 8% down to $449, a 52 week low. They are obviously feeling the absence of the Foggy Bridge Wine Cruise!
7) Home foreclosures leapt 57% in January YOY. Banks are taking possession of 90% of these, indicating that they have negative equity. Another 220,000 homes got late payment notices that month.
8) CNBC has an interesting interview with Sam Zell who made the following points. He is selling the Chicago Cubs but splitting them off from Wrigley Stadium which has valuable unused naming rights. He says that there will be no recession, just a slowdown because most of the current problems are confined to Wall Street, not Main Street. He expects housing to start recovering in the Spring!?
1) Yesterday's 182 point rally in the last 30 minutes came from Standard & Poor's ??announcement that it would maintain ??bond insurer MBIA's AAA rating. They indicated they might downgrade the company later. This shows how backward looking and useless these ratings are as MBIA's bonds are already trading at B- levels. Is MBIA really the same credit as GE?
2) Wheat went up a staggering 25% yesterday as Kazakhstan announced it would restrict exports to head off domestic shortages. Wheat is now up 400% YOY. Every major wheat producing area outside the US is now in a drought.
3) The US announced it would support gold sales by the International Monetary Fund. The price went down $10 immediately then shot up to a new high of $954. In a normal market gold would have dropped 10% on this news, so it shows how strong the demand for gold is.
4) The producer price index for January came in at 7% YOY, the hottest number in 23 years. More ammo for the stagflation camp.
5) Natural Gas rocketed to $9.36, a two year high. It's up 25% in a month and is going higher.
6) Google announced that its pay per click revenues were down 7% in January. The stock got slammed 8% down to $449, a 52 week low. They are obviously feeling the absence of the Foggy Bridge Wine Cruise!
7) Home foreclosures leapt 57% in January YOY. Banks are taking possession of 90% of these, indicating that they have negative equity. Another 220,000 homes got late payment notices that month.
8) CNBC has an interesting interview with Sam Zell who made the following points. He is selling the Chicago Cubs but splitting them off from Wrigley Stadium which has valuable unused naming rights. He says that there will be no recession, just a slowdown because most of the current problems are confined to Wall Street, not Main Street. He expects housing to start recovering in the Spring!?
1) The spread between Treasuries and AAA rated corporate bonds is now 300 basis points, the largest since the Great Depression. At the first hint of the end of the credit crisis hedge funds will rush to buy corporates and short Treasuries against them and this spread will come screaming down. With a leverage factor of ten times this trade currently yields 30% a year. The hedge funds that are currently in trouble are the ones that put this spread on in big size at 20-30 basis points a year ago.
2) Visa is going public in a few weeks, launching the largest IPO in?? US history which will take in about $19 billion. There is some concern that the size of the deal will divert some money away from the rest of the stock market. Master Card's business has been booming as people reduce the number of cash transactions in favor of more internet based credit card transactions. Master Card's stock has been one of the best performing stocks of the past year and is close to its all time high. This is because it is just a processor of transactions and?? not a lender.
3) Value players are pouring into Japan, where at a 13 times multiple stock prices are at a 23 year low. Today China's sovereign wealth fund announced that it is investing $10 billion in Japanese oil and commodities related stocks.
4) A home owned by the Hearst family in Florida was sold at a foreclosure sale for $22 million to the prime lender. It had $40 million in bank loans on it.
5) Horrendous home sales figures for January came out this morning. Sales are down 23% year on year. Inventories were up 5.5% to a ten month supply. Average prices are down 4.8%. Anyone who thinks the housing crisis will end soon is either smoking something or talking their own book.
6) Coal has doubled in price over the last three months. There are now 100 coal fired power plants under construction in the US. With a 200 year supply the US is the Saudi Arabia of coal. The only question is whether you can bring this much new coal generation on stream without causing major environmental problems. Hence Bush's comments last week about clean coal technologies.
1) The spread between Treasuries and AAA rated corporate bonds is now 300 basis points, the largest since the Great Depression. At the first hint of the end of the credit crisis hedge funds will rush to buy corporates and short Treasuries against them and this spread will come screaming down. With a leverage factor of ten times this trade currently yields 30% a year. The hedge funds that are currently in trouble are the ones that put this spread on in big size at 20-30 basis points a year ago.
2) Visa is going public in a few weeks, launching the largest IPO in?? US history which will take in about $19 billion. There is some concern that the size of the deal will divert some money away from the rest of the stock market. Master Card's business has been booming as people reduce the number of cash transactions in favor of more internet based credit card transactions. Master Card's stock has been one of the best performing stocks of the past year and is close to its all time high. This is because it is just a processor of transactions and?? not a lender.
3) Value players are pouring into Japan, where at a 13 times multiple stock prices are at a 23 year low. Today China's sovereign wealth fund announced that it is investing $10 billion in Japanese oil and commodities related stocks.
4) A home owned by the Hearst family in Florida was sold at a foreclosure sale for $22 million to the prime lender. It had $40 million in bank loans on it.
5) Horrendous home sales figures for January came out this morning. Sales are down 23% year on year. Inventories were up 5.5% to a ten month supply. Average prices are down 4.8%. Anyone who thinks the housing crisis will end soon is either smoking something or talking their own book.
6) Coal has doubled in price over the last three months. There are now 100 coal fired power plants under construction in the US. With a 200 year supply the US is the Saudi Arabia of coal. The only question is whether you can bring this much new coal generation on stream without causing major environmental problems. Hence Bush's comments last week about clean coal technologies.