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.
1) A new wrinkle has developed in the housing crisis. Loans have been sold so many times that banks are unable to foreclose because they can't find the original loan documentation. This could affect up to 40% of the anticipated 1.5 million foreclosures in 2008. New businesses like youwalkaway.com have sprung up to help borrowers head off foreclosures by finding deficiencies in the?? disclosures in the original loan documentation. Some 19% of home mortgages in the US, or $2.1 trillion, have been securitized.
2) Another economic indicator: MGM Mirage says that middle market gamblers have been drying up because of the high price of gas to get to Las Vegas and economic worries. High end gambling and foreign gamblers continue strong, as is the management of foreign casinos like in Dubai. Yet another industry that sees all of its future growth in the overseas markets.
3) Here is another extreme anomaly in the market. Crocs, the maker of the world's ugliest shoes, has seen earnings rise 147% in the past year. But the stock has fallen from $75 to $26 since June because investors are shunning all high end discretionary consumer stocks and is now at eight times next year's earnings. Put it on your watch list.
4) Another one of these is Garmin, maker of navigational devices. Earnings are up 65% but the stock is down 50%. The company has spent $350 million on R & D in the last three years so there are many highly profitable products in the pipeline.
5) Merrill Lynch put out a report predicting that the residential real estate market will fall another 25% by the end of 2009. Freddie Mac, Fannie Mae, and the home builders got slammed.
6) Rumors of a bailout of mortgage insurer Ambac in the last 30 minutes of the day. The market rallied 250 points in 30 minutes.
THOUGHT FOR THE DAY
With commodity prices as high as they are now, inflation will rocket when the economy comes out of the recession next year. The best way to play this is to short long bonds. If the 30 year goes from a 4% yield to an 8% yield, which they may do over the next three years, the underlying price of the bond will drop by half. Zero coupon bonds could drop by up to 80%. We are already seeing the beginnings of this trade now. Last June the yield curve was virtually flat with two year and 30 year paper yielding close to 5%. Now two year paper is at 1.9% with the 30 year at 4.4%. This curve steepening trade is now a major trade for hedge funds.
1) A new wrinkle has developed in the housing crisis. Loans have been sold so many times that banks are unable to foreclose because they can't find the original loan documentation. This could affect up to 40% of the anticipated 1.5 million foreclosures in 2008. New businesses like youwalkaway.com have sprung up to help borrowers head off foreclosures by finding deficiencies in the?? disclosures in the original loan documentation. Some 19% of home mortgages in the US, or $2.1 trillion, have been securitized.
2) Another economic indicator: MGM Mirage says that middle market gamblers have been drying up because of the high price of gas to get to Las Vegas and economic worries. High end gambling and foreign gamblers continue strong, as is the management of foreign casinos like in Dubai. Yet another industry that sees all of its future growth in the overseas markets.
3) Here is another extreme anomaly in the market. Crocs, the maker of the world's ugliest shoes, has seen earnings rise 147% in the past year. But the stock has fallen from $75 to $26 since June because investors are shunning all high end discretionary consumer stocks and is now at eight times next year's earnings. Put it on your watch list.
4) Another one of these is Garmin, maker of navigational devices. Earnings are up 65% but the stock is down 50%. The company has spent $350 million on R & D in the last three years so there are many highly profitable products in the pipeline.
5) Merrill Lynch put out a report predicting that the residential real estate market will fall another 25% by the end of 2009. Freddie Mac, Fannie Mae, and the home builders got slammed.
6) Rumors of a bailout of mortgage insurer Ambac in the last 30 minutes of the day. The market rallied 250 points in 30 minutes.
THOUGHT FOR THE DAY
With commodity prices as high as they are now, inflation will rocket when the economy comes out of the recession next year. The best way to play this is to short long bonds. If the 30 year goes from a 4% yield to an 8% yield, which they may do over the next three years, the underlying price of the bond will drop by half. Zero coupon bonds could drop by up to 80%. We are already seeing the beginnings of this trade now. Last June the yield curve was virtually flat with two year and 30 year paper yielding close to 5%. Now two year paper is at 1.9% with the 30 year at 4.4%. This curve steepening trade is now a major trade for hedge funds.
1) The Architectural Design Services index fell sharply in January from 55 to 50. The boom, bust level is 50. Below 50 means that more business is being completed than there is new business coming in. This is the second consecutive quarterly decline. A drop in architectural services is followed by a decline in commercial construction activity nine months later. Overall, commercial real estate construction grew by 13.2% in 2007, but no growth at all is expected in 2008. There especially has been a fall off in spec properties as financing for these has dried up. Time to renegotiate the presidio winery construction contract?
2) Whenever oil hits a benchmark a bunch of interesting data spews out. The US has 5% of the world's population but is using 25% of the world's oil. Global oil production is 85 million barrels a day and is not expected to rise much from there. At $100 a barrel the US is paying $500 billion a year to foreigners to buy oil, most of whom hate us.
3) Boone Pickens said he is shorting oil over $100 with a Q2 target of $85. I have been following this guy since the early eighties when I met him while working at Morgan Stanley on an oil company merger. I have never known him to be wrong about oil. (Remember the Pacman mergers when it was cheaper to prospect for oil on the floor of the NY stock exchange than in the field?)
4) Oil has become the safe haven asset. Instead of a flight to the dollar in times of uncertainty, you are now getting a flight to oil. There is great reluctance by foreigners to go into dollar denominated assets now.
4) All time highs today in oil, gold, palladium, platinum, coal, iron ore, and bulk shipping. Stocks and bonds are dead.
5) The CEO of Hovnanian, a major home builder,?? came out and said that the housing market will recover at the end of 2008. Wishful thinking.