Market Comments for April 17, 2008
1) There was a major sell off in the bond market today. Since Monday the 30 Treasury futures have fallen from 120 to 116. This is a huge move. A normal leverage ratio for this trade is 5:1, so a short on Monday would have yielded a 20% return. As you know, I have been pounding the table about shorting bonds for months.
2) Natural gas soared to $10.55/btu, a new high for the year, on fears of supply shortfalls this summer. Natural gas has been one of my core longs since the beginning of the year and is up 40%. My short term target is $13/btu.
3) Copper finally broke through $4/pound on massive Chinese buying. Yesterday's hot Chinese Q1 GDP figure encouraged traders to increase longs. I have been recommending longs in copper since $3/pound. Copper is now up 33% from there. China announced that its current account surplus rose by $150 billion to $1.67 trillion in Q1. This is the largest quarterly increase in world history. China now has enough reserves to pay for its infrastructure build out for the next ten years. This will lead to acceleration in the appreciation of the Chinese Yuan against the dollar.
4) Southwest Airlines (LUV) announced earnings much better than expected. In 2006 it hedged 70% of its 2008 fuel costs and 50% of its 2009 fuel costs at $50/barrel in the futures market. This means that its fuel costs are half of that of other airlines. This hedging profit totaled $1 billion last year. Brilliant. A classic example of a best of breed company.
5) Google (GOOG) reported spectacular earnings after the close today and the stock jumped 11% to $504 in aftermarket trading. They are seeing no slowdown in the global economy whatsoever. Google should be a core holding in any US stock portfolio. The stock has been up 15% during a time when the Dow was virtually unchanged. This is the kind of out performance that you are looking for in a well run hedge fund, known in the trade as 'Alpha'. Today's news augurs well for the stock market tomorrow.
THOUGHT OF THE DAY
A number of technical indicators started to flash 'all clear' this week. The spread between Fed funds and the two year Treasury note has declined from 100 bp to 15bp. The VIX volatility index has fallen from 31% to only 21% as fears of big stock market drops diminish.?? A big sell off in the Treasury market means investors are taking off their safety trade and moving into higher risk trades like commodities, especially crude, natural gas, and the other longs I have been recommending.
Market Comments for April 16, 2008
1) All of the economic news was bad today, but all people wanted to hear about was the upbeat guidance from Intel, and they took the Dow up 256 points. ??Intel is predicting gross margins this year of 53%, great if they can do it. Almost 80% of their earnings come from Asia. The CPI came in at a hot 2.4% YOY, and housing starts were down 11.9% in March, and the Fed's beige book came in overwhelmingly negative. This reconfirms my view that technology, with their global markets and clean hands in the credit crisis, will lead any recovery in the stock market.
2) On February 29 I recommended Petrobras (PTZ) at $11.5, the largest oil producer in Brazil. Yesterday they announced a major offshore oil find the size of Saudi Arabia. The stock shot up to $15. It is still a buy here as is Brazil in general, the only country that is a net exporter of energy, commodities, food, and capital.
3) China's Q1 GDP growth came in at an annualized 10.6%, much higher than expected. The Chinese central bank raised reserve requirements to help cool down the economy.
4) Bill Gross of Pimco argues that Treasury bonds are the world's most overpriced asset and are headed for a big fall. I agree. The current yields on long bonds assume that there will be no reoccurrence of inflation in our lifetimes, a view that I am willing to short.
5) The global food panic is spreading. Russia, Indonesia, Argentina, Egypt, Vietnam, India, Pakistan, and Cambodia have all banned food exports in some form, reinforcing a global hoarding trend. This is a problem that will continue for decades. The upshot of the Chinese wanting to eat better is that many people will not eat at all. Buy fertilizer (Mosaic), seed producers (Monsanto), farm equipment (John Deere), and food exporters (Brazil).
Market Comments for April 16, 2008
1) All of the economic news was bad today, but all people wanted to hear about was the upbeat guidance from Intel, and they took the Dow up 256 points. ??Intel is predicting gross margins this year of 53%, great if they can do it. Almost 80% of their earnings come from Asia. The CPI came in at a hot 2.4% YOY, and housing starts were down 11.9% in March, and the Fed's beige book came in overwhelmingly negative. This reconfirms my view that technology, with their global markets and clean hands in the credit crisis, will lead any recovery in the stock market.
2) On February 29 I recommended Petrobras (PTZ) at $11.5, the largest oil producer in Brazil. Yesterday they announced a major offshore oil find the size of Saudi Arabia. The stock shot up to $15. It is still a buy here as is Brazil in general, the only country that is a net exporter of energy, commodities, food, and capital.
3) China's Q1 GDP growth came in at an annualized 10.6%, much higher than expected. The Chinese central bank raised reserve requirements to help cool down the economy.
4) Bill Gross of Pimco argues that Treasury bonds are the world's most overpriced asset and are headed for a big fall. I agree. The current yields on long bonds assume that there will be no reoccurrence of inflation in our lifetimes, a view that I am willing to short.
5) The global food panic is spreading. Russia, Indonesia, Argentina, Egypt, Vietnam, India, Pakistan, and Cambodia have all banned food exports in some form, reinforcing a global hoarding trend. This is a problem that will continue for decades. The upshot of the Chinese wanting to eat better is that many people will not eat at all. Buy fertilizer (Mosaic), seed producers (Monsanto), farm equipment (John Deere), and food exporters (Brazil).
Market Comments for April 15, 2008
1) Crude hit an all time high today of $114 on the back of a storm which closed oil export ports in Mexico, a report of falling oil production in Russia and an exploding oil pipeline in Nigeria. There was big buying today of the August $140 calls!
2) March PPI came in at a hot 6.9% YOY. We are heading into a period of prolonged high inflation. Normally bonds would collapse on this news but they still have a flight to quality bid supporting them. I believe that once that is gone, long bond futures will drop from 120 to 80. If I am wrong they will rise first to 123, then collapse. This is becoming a core long term trade for every large hedge fund.
3) One aspect of the shortfall in GE's earnings last week was weakness in their medical divisions. Non profit hospitals finance much of their operations in short term money markets, which have effectively shut down. To meet payrolls they have shelved all capital expenditure programs. With machines like MRI's and CAT scans costing up to $10 million each, this can add up to a big impact on suppliers like GE.
4) The Northwest-Delta merger, which I predicted three months ago, finally came off, creating the world's largest airline. The combined entity will have $35 billion in revenues and employ 75,000 people. There is no equity trade here because the combined entity could still go bankrupt if crude prices keep rising, or if the recession is longer than expected. The airline industry has lost $40 billion over the last five years. Five carriers have declared bankruptcy over the last four weeks. Next is United-Continental and American-Alaska.
5) Fact of the day: The top 20% of income earners in the US account for 40% of consumer spending.
6) The European and Japanese economies are starting to slow down sharply as the recessionary spill over from the US begins in earnest. This could bring forward a 25% rebound in the dollar. The euro may go up to $1.62 first, then fall back to $1.20.
6) Median home prices in Los Angeles have dropped 24% YOY. In California one out of every 204 homes are in foreclosure.
7) Intel (INTC) reported earnings somewhat better than expected. The Dow will rally on this tomorrow.
Market Comments for April 15, 2008
1) Crude hit an all time high today of $114 on the back of a storm which closed oil export ports in Mexico, a report of falling oil production in Russia and an exploding oil pipeline in Nigeria. There was big buying today of the August $140 calls!
2) March PPI came in at a hot 6.9% YOY. We are heading into a period of prolonged high inflation. Normally bonds would collapse on this news but they still have a flight to quality bid supporting them. I believe that once that is gone, long bond futures will drop from 120 to 80. If I am wrong they will rise first to 123, then collapse. This is becoming a core long term trade for every large hedge fund.
3) One aspect of the shortfall in GE's earnings last week was weakness in their medical divisions. Non profit hospitals finance much of their operations in short term money markets, which have effectively shut down. To meet payrolls they have shelved all capital expenditure programs. With machines like MRI's and CAT scans costing up to $10 million each, this can add up to a big impact on suppliers like GE.
4) The Northwest-Delta merger, which I predicted three months ago, finally came off, creating the world's largest airline. The combined entity will have $35 billion in revenues and employ 75,000 people. There is no equity trade here because the combined entity could still go bankrupt if crude prices keep rising, or if the recession is longer than expected. The airline industry has lost $40 billion over the last five years. Five carriers have declared bankruptcy over the last four weeks. Next is United-Continental and American-Alaska.
5) Fact of the day: The top 20% of income earners in the US account for 40% of consumer spending.
6) The European and Japanese economies are starting to slow down sharply as the recessionary spill over from the US begins in earnest. This could bring forward a 25% rebound in the dollar. The euro may go up to $1.62 first, then fall back to $1.20.
6) Median home prices in Los Angeles have dropped 24% YOY. In California one out of every 204 homes are in foreclosure.
7) Intel (INTC) reported earnings somewhat better than expected. The Dow will rally on this tomorrow.
Market Comments for April 14, 2008
1) Retail sales were up 0.2% in March, better than expected. Don't pop the champagne corks yet. Most of the increase was due to higher fuel sales due to higher prices. The market was on hold today due to the imminent release this week of earnings by Intel, IBM, Ebay, Google, and Merrill Lynch.
2) The Wachovia Bank bail out was announced today. Not as draconian as WAMU's, the stock still fell 10%, and pulled down the rest of the financials.
3) The average salary on Wall Street is $387,000. Wall Street accounts for 15% of the jobs in New York City, but 35% of the reported income.
4) Another lagging indicator for the economy: breast augmentations, which are used by the youngest, least earning, and most recession sensitive consumers in the market, are down. Botox treatments and hair replacement, which are used by the high earning, recession immune consumers are still increasing. It is a lagging indicator because these operations are typically booked three months in advance. There were 2.2 million breast augmentations last year.
5) Blockbuster has made a takeover bid for Circuit City at a 30% premium to Friday's close. The company has been decimated by competition from best of breed Best Buy, and the stock has fallen from $20 to $4 in the past year. Carl Icahn is a 10% owner of Circuit City as a takeover target.
6) REIT's are trading at levels indicating a further 10% fall in real estate prices. Real Estate prices have already fallen by 15%, so that indicates a top to bottom fall of 25%, which is normal for a recession. Thus, the recession is fully discounted by REIT's. Cash flows are holding up well because there has not been the degree of overbuilding seen in past recessions. They are also not facing the credit crunch of other industries since their debt has long maturities and their cost of money has fallen. It is, however, a bad time to negotiate a debt roll over.
THOUGHT OF THE DAY
Copper could soon have a major melt up as occurred with wheat in January. Chile accounts for 40% of the world's copper supply and much of the electric power there is hydroelectric. A severe draught will soon lead to power cut backs that will force mine closures. Something similar happened in South Africa recently which caused the precious metals to spike upward. I recommended a buy of copper earlier this year at $3/pound. It is now $3.90 and close to breaking out to an all time high.
Market Comments for April 14, 2008
1) Retail sales were up 0.2% in March, better than expected. Don't pop the champagne corks yet. Most of the increase was due to higher fuel sales due to higher prices. The market was on hold today due to the imminent release this week of earnings by Intel, IBM, Ebay, Google, and Merrill Lynch.
2) The Wachovia Bank bail out was announced today. Not as draconian as WAMU's, the stock still fell 10%, and pulled down the rest of the financials.
3) The average salary on Wall Street is $387,000. Wall Street accounts for 15% of the jobs in New York City, but 35% of the reported income.
4) Another lagging indicator for the economy: breast augmentations, which are used by the youngest, least earning, and most recession sensitive consumers in the market, are down. Botox treatments and hair replacement, which are used by the high earning, recession immune consumers are still increasing. It is a lagging indicator because these operations are typically booked three months in advance. There were 2.2 million breast augmentations last year.
5) Blockbuster has made a takeover bid for Circuit City at a 30% premium to Friday's close. The company has been decimated by competition from best of breed Best Buy, and the stock has fallen from $20 to $4 in the past year. Carl Icahn is a 10% owner of Circuit City as a takeover target.
6) REIT's are trading at levels indicating a further 10% fall in real estate prices. Real Estate prices have already fallen by 15%, so that indicates a top to bottom fall of 25%, which is normal for a recession. Thus, the recession is fully discounted by REIT's. Cash flows are holding up well because there has not been the degree of overbuilding seen in past recessions. They are also not facing the credit crunch of other industries since their debt has long maturities and their cost of money has fallen. It is, however, a bad time to negotiate a debt roll over.
THOUGHT OF THE DAY
Copper could soon have a major melt up as occurred with wheat in January. Chile accounts for 40% of the world's copper supply and much of the electric power there is hydroelectric. A severe draught will soon lead to power cut backs that will force mine closures. Something similar happened in South Africa recently which caused the precious metals to spike upward. I recommended a buy of copper earlier this year at $3/pound. It is now $3.90 and close to breaking out to an all time high.
Market Comments for April 11, 2008
1) GE was the bad boy today, announcing earnings 10% less than expected, totally blindsiding the street, which had been expecting a gain of 10%. Outraged analysts were screaming for Jeff Immelt's head on a platter, claiming he mislead them only a month ago. Most of the shortfall was on the financial side caused by the collapse of several real estate deals in March because the end buyers couldn't get financing. Sales of all product lines in emerging markets continue to go gangbusters. The stock fell 12%, the biggest drop for GE since the 1987 crash, and the Dow fell 246 points. GE is a big 'tell' stock for the market because it is considered the best managed company in the world and it gives indications on the health of a large array of businesses. Investors are now wondering what other shoes are to fall. At 13 times earnings the stock is a strong buy here at $32.
2) Chip inventories are at six year lows. Whenever this happens the shares of chip makers have a big rebound as the J curve kicks in when they get control of pricing and volumes. Best of breed is Intel (INTC), a strong buy here at $21, down from $28 in November.
3) The University of Michigan consumer sentiment index for March came in at 63.2, down from 69.5, the worst reading in 26 years.
4) Just to give you an indication of the influence of hedge funds now, TPG announced the following deals this week: $7 billion bailout out of WAMU, purchase of the largest pharmaceutical company in Russia for $800 million, and the purchase of 25% of Citibank's mortgage backed portfolio for $12 billion. And this is only one hedge fund.
5) The company with the largest short interest in the S&P 500 is tobacco company Reynolds American at 56% of outstanding shares. The lowest is GE at 0.4%. The highest short interest ratio, the number of days of average trading volume that is short, is the New York Times at 21 days. The lowest is Humana at 0.6 days. Just another example of the sort of data I look at.
6) This real economic growth chart for 2008 shows why I am such a long term raging bull on China and Hong Kong. Net growth of +4.0% vs. -2.9%. Hmmmm, which shall it be?
| Country | GDP Growth | Inflation Rate | Net |
| US | 0.8% | 3.7% | -2.9% |
| EC | 1.3% | 2.5% | -1.2% |
| China | 9.8% | 5.8% | 4.0% |
Market Comments for April 11, 2008
1) GE was the bad boy today, announcing earnings 10% less than expected, totally blindsiding the street, which had been expecting a gain of 10%. Outraged analysts were screaming for Jeff Immelt's head on a platter, claiming he mislead them only a month ago. Most of the shortfall was on the financial side caused by the collapse of several real estate deals in March because the end buyers couldn't get financing. Sales of all product lines in emerging markets continue to go gangbusters. The stock fell 12%, the biggest drop for GE since the 1987 crash, and the Dow fell 246 points. GE is a big 'tell' stock for the market because it is considered the best managed company in the world and it gives indications on the health of a large array of businesses. Investors are now wondering what other shoes are to fall. At 13 times earnings the stock is a strong buy here at $32.
2) Chip inventories are at six year lows. Whenever this happens the shares of chip makers have a big rebound as the J curve kicks in when they get control of pricing and volumes. Best of breed is Intel (INTC), a strong buy here at $21, down from $28 in November.
3) The University of Michigan consumer sentiment index for March came in at 63.2, down from 69.5, the worst reading in 26 years.
4) Just to give you an indication of the influence of hedge funds now, TPG announced the following deals this week: $7 billion bailout out of WAMU, purchase of the largest pharmaceutical company in Russia for $800 million, and the purchase of 25% of Citibank's mortgage backed portfolio for $12 billion. And this is only one hedge fund.
5) The company with the largest short interest in the S&P 500 is tobacco company Reynolds American at 56% of outstanding shares. The lowest is GE at 0.4%. The highest short interest ratio, the number of days of average trading volume that is short, is the New York Times at 21 days. The lowest is Humana at 0.6 days. Just another example of the sort of data I look at.
6) This real economic growth chart for 2008 shows why I am such a long term raging bull on China and Hong Kong. Net growth of +4.0% vs. -2.9%. Hmmmm, which shall it be?
| Country | GDP Growth | Inflation Rate | Net |
| US | 0.8% | 3.7% | -2.9% |
| EC | 1.3% | 2.5% | -1.2% |
| China | 9.8% | 5.8% | 4.0% |
Market Comments for April 10, 2008
1) Walmart (WMT) and Dupont (DD) announced better than expected earnings today, prompting a mini short covering rally. The Dow was up 55 points.
2) Huge buyers have emerged in the Crude August $120 calls. Watch out above!
3) As I expected, the Bank of England cut interest rates by 25 bp. The European Central Bank will follow soon which will cause the Euro to fall. Now is a good time to take profits on Euro denominated assets.
4) The Chinese Yuan dropped below 7.0 to the US dollar for the first time, an all time high.
5) I am starting to like Boeing (BA) here which has recently fallen from $107 to $72. This normally well run company has experienced a perfect storm in the last quarter. It lost a huge Air Force tanker contract to EADS. Today it announced the third delay in the roll out of the 787 Dreamliner of 6-9 months. And it has been dragged down by the general market weakness. But the company has a 5 year order backlog for new aircraft, including 75 for the 787, which offers operators a 40% savings on fuel consumption. It has a four year lead over EADS in this class of aircraft, its only competitor. It is also a high quality multinational, being one of this country's largest exporters.
THOUGHT OF THE DAY
If you look just at the numbers, the economic performance of the Bush administration has been the worst since Herbert Hoover 80 years ago. The performance of the Dow has been zero over eight years. The dollar has fallen 40% against the Euro, and more against other currencies. The Federal deficit has nearly doubled from $5 trillion to almost $10 trillion. About $1 trillion of this was spent on the war in Iraq. Unemployment has increased from 4% to 5.1% and it is climbing rapidly. The real estate market is in free fall. By the time Bush leaves office some real estate prices may be approaching unchanged over the eight years. Several state governments, including California, are approaching bankruptcy. Crude has rocketed from $20 to $112 and gasoline from $1 to $4. The performance has been so dismal that republicans may not be electable for decades (8 years of Hillary followed by 8 years of Obama?). After Hoover was elected in 1928 the GOP could not elect a candidate until Eisenhower in 1952. This is all going to make very tough sledding for John McCain. Hoover only won six states in the 1932 election, and five were small ones (DE, PA, ME, NH, VT, and CT).