In my opinion, there is a once-in-a-lifetime, don't-miss-this, classic opportunity present in certain financials, most notably JPM. In summary, we are in the early stages of a very long and bullish part of the cycle for banks, and they are priced at an epic discount - still; even after big runs from the March lows. While most mainstream media headlines scream about higher mortgage rates, the steep yield curve is the real story: That. Is. How. The. Fed. Helps. Banks. Recover.
Once again, a common-sense question presents itself: If you are fundamentally in the business of borrowing short and lending long, will your business do better or worse when short rates are low and long rates are high? Bueller?
Inflation fears should abate with a little more bad news about the recovery, and conflicting information is what you get, and for months, at this stage of the economic cycle -- remember how the Fed tightened, then had to ease again before tightening, back at the beginning of the recovery of the early '90s?
A logical trade right here might be to buy TLT. I even think Goldman was out saying the long bond should be bought a couple of days ago. The market, and financials, might come in for a while here. The big picture, though, will dominate. In this market, you do better by buying on pullbacks when you can find them, and a correction isn't going to change the truth of their arguments.
Long BAC, FAS
Friday, May 29, 2009
Banks' Outlook Not As Dire As Stock Prices
Can we put aside for a minute all the jitters over this week's selloff in the 10-year Treasury note and what it all means for the global economy? Let's worry about that tomorrow. Whatever else the note's recent tankage portends, the associated 20-basis-point jump in the 10-year's yield created a milestone of its own: The yield curve is now steeper than it's ever been. For banks, that's really, really good.
I doubt I have to explain you why, either. Remember how the banking business works? Banks take in deposits that either pay no yield at all (in the case of checking accounts) or pay a yield tied to short-term interest rates (in the case of savings accounts). Then they turn around and lend those deposits at a longer-term interest rate. So when the yield curve steepens, as it is doing now, banks' net interest margins tend to go up. Which is to say, banks' profitability is expanding as you read this very sentence.
This yield-curve-steepening business isn't the only good thing going on with the banking business lately. Several other events are occurring that, prior to the industry being tossed into the investment community's doghouse, would have been considered bullish. For one, the financial system has come a long way toward recovering from its freeze-up in September following Lehman's collapse. Credit spreads have narrowed generally, on everything from corporate credits to junk.
And as Bloomberg reported on Thursday, the Federal Reserve is no longer the system's buyer of first, last and only resort. Total Fed backstops to commercial paper have fallen to $217 billion, for instance, down 59% from the start of the year. And credit the Fed has extended to financial institutions is off by 38% since the start of the year, to $701 billion. So increasingly, borrowing and lending is going on without the help of the federal government.
In the meantime, the "green shoots" in the economy that everybody seems to be talking about apparently aren't figments of anyone's imagination. Thursday morning, for example, unemployment claims came in better than expected (claims, a key leading economic indicator, have clearly passed their peak), while April durable-goods orders were notably strong. Consumer confidence, another leading indicator, is rising fast.
Put it all together -- widening net interest margins, a return to normalcy in the financial system and credible signs of an economic recovery -- and it's not hard to imagine a steady, rapid recovery in bank profitability in coming quarters. Yet the stocks seem to be priced as if the credit crisis is going to last more or less forever.
Not only are the stocks not trading as if a fundamental recovery is visible; some are trading as if they face years and years of losses. Which they don't.
The steepening of the yield curve is only the most recent piece of encouraging news to hit the banking business lately. The pieces are in place for a broad industry recovery. It's just the stocks' valuations that have yet to catch up.
I doubt I have to explain you why, either. Remember how the banking business works? Banks take in deposits that either pay no yield at all (in the case of checking accounts) or pay a yield tied to short-term interest rates (in the case of savings accounts). Then they turn around and lend those deposits at a longer-term interest rate. So when the yield curve steepens, as it is doing now, banks' net interest margins tend to go up. Which is to say, banks' profitability is expanding as you read this very sentence.
This yield-curve-steepening business isn't the only good thing going on with the banking business lately. Several other events are occurring that, prior to the industry being tossed into the investment community's doghouse, would have been considered bullish. For one, the financial system has come a long way toward recovering from its freeze-up in September following Lehman's collapse. Credit spreads have narrowed generally, on everything from corporate credits to junk.
And as Bloomberg reported on Thursday, the Federal Reserve is no longer the system's buyer of first, last and only resort. Total Fed backstops to commercial paper have fallen to $217 billion, for instance, down 59% from the start of the year. And credit the Fed has extended to financial institutions is off by 38% since the start of the year, to $701 billion. So increasingly, borrowing and lending is going on without the help of the federal government.
In the meantime, the "green shoots" in the economy that everybody seems to be talking about apparently aren't figments of anyone's imagination. Thursday morning, for example, unemployment claims came in better than expected (claims, a key leading economic indicator, have clearly passed their peak), while April durable-goods orders were notably strong. Consumer confidence, another leading indicator, is rising fast.
Put it all together -- widening net interest margins, a return to normalcy in the financial system and credible signs of an economic recovery -- and it's not hard to imagine a steady, rapid recovery in bank profitability in coming quarters. Yet the stocks seem to be priced as if the credit crisis is going to last more or less forever.
Not only are the stocks not trading as if a fundamental recovery is visible; some are trading as if they face years and years of losses. Which they don't.
The steepening of the yield curve is only the most recent piece of encouraging news to hit the banking business lately. The pieces are in place for a broad industry recovery. It's just the stocks' valuations that have yet to catch up.
A Suspicious Last-Minute Buying Frenzy
The indices meandered for most of the day before a frenzied flurry of buying kicked in and took us out near the highs. Usually you don't see that sort of thing in the final minutes of the last day of the month, but we have had so much crazy trading in the final hour for so long now that you can't be surprised anymore.
I believe much of the last-minute spike is related to the preliminary rebalancing of the Russell indices, but I don't have any details on that. Whatever the cause was, it certainly took us out on a high note.
Even with the strong finish, the indices covered up some even stronger action under the surface. Breadth was better than 2 to 1 positive, and it was oil- and commodity-related stocks that led the charge. There was buying all day and it even felt a bit complacent, it was so steady.
The strong finish today was still not enough to take out the overhead resistance at 925 on the S&P 500. We are still in a trading range, although we are now close to testing the upper range.
While the indices haven't do much for several weeks now, there has been very good trading, as we have strong sector rotation. It is one of these times when it is much better to focus on individual stocks and sectors than on the major indices.
The advantage continues to lie with the bulls, but with end-of-the-month games over and summer slowdown coming up, it should be choppy. The good news is that there should continue to be opportunities for adept stock-pickers.
Going into more detail, the S and P 500 spent nearly the entire session gyrating within a nine point range amid light trading volume, but managed to close at session highs following a late flurry of buying and a spike in trading volume... In what was May's final trading session, more than 1.8 billion shares traded hands on the NYSE, the most in more than one month... Financial stocks were integral to the late move. After being a source of weakness for most of the session, financial stocks rallied from a loss in excess of 1% to finish with a 1.7% gain in the final hour... While financial stocks made a strong finish, materials stocks spent the entire session trading with enviable gains. The sector closed 3.0% higher, propped up by diversified metals and mining companies (+4.2%), steel stocks (+3.3%), and gold stocks (+3.2%)... Gold stocks were helped along by a run up in gold prices. Gold contracts settled pit trading with the yellow metal priced at $979.00 per ounce, up 1.8% for the session and more than 20% from their 2009 lows. Gold prices are now less than 3% below their 2009 highs... Meanwhile, crude oil prices rallied 1.7% to finish at a fresh six-month high of $66.21 per barrel... A 1.5% drop in the Dollar Index helped underpin a broad ascent by commodities. As such, the CRB Commodity Index finished 1.3% higher. Commodities finished May with a gain of more than 14%, outperforming the S&P 500, which logged a monthly gain of 5.2%. Still, the S&P 500 has finished the last three months with gains... General Motors has had an awful month, however. The stock has lost more than half its value since the start of May as the company comes face to face with the government's restructuring deadline. With the threat of bankruptcy looming, shares of GM are at record lows... In other corporate news, JCG posted upside first quarter earnings and guided second quarter earnings above the consensus forecast, winning it favor among investors. The stock logged one of its best single-session performances by surging more than 25%... Dell was less fortunate, though. The company faltered after posting better-than-expected earnings... In economic news, preliminary first quarter GDP showed 5.7% drop for the first quarter, which was a slight improvement from the 6.1% decline that had been reported in the advance GDP reading. Participants showed little reaction to the data since most of it was already known... Treasuries logged a solid session as they continue to recover from Wednesday's beating. The 10-year Note climbed more than one full point to push its yield back below 3.5%.
I believe much of the last-minute spike is related to the preliminary rebalancing of the Russell indices, but I don't have any details on that. Whatever the cause was, it certainly took us out on a high note.
Even with the strong finish, the indices covered up some even stronger action under the surface. Breadth was better than 2 to 1 positive, and it was oil- and commodity-related stocks that led the charge. There was buying all day and it even felt a bit complacent, it was so steady.
The strong finish today was still not enough to take out the overhead resistance at 925 on the S&P 500. We are still in a trading range, although we are now close to testing the upper range.
While the indices haven't do much for several weeks now, there has been very good trading, as we have strong sector rotation. It is one of these times when it is much better to focus on individual stocks and sectors than on the major indices.
The advantage continues to lie with the bulls, but with end-of-the-month games over and summer slowdown coming up, it should be choppy. The good news is that there should continue to be opportunities for adept stock-pickers.
Going into more detail, the S and P 500 spent nearly the entire session gyrating within a nine point range amid light trading volume, but managed to close at session highs following a late flurry of buying and a spike in trading volume... In what was May's final trading session, more than 1.8 billion shares traded hands on the NYSE, the most in more than one month... Financial stocks were integral to the late move. After being a source of weakness for most of the session, financial stocks rallied from a loss in excess of 1% to finish with a 1.7% gain in the final hour... While financial stocks made a strong finish, materials stocks spent the entire session trading with enviable gains. The sector closed 3.0% higher, propped up by diversified metals and mining companies (+4.2%), steel stocks (+3.3%), and gold stocks (+3.2%)... Gold stocks were helped along by a run up in gold prices. Gold contracts settled pit trading with the yellow metal priced at $979.00 per ounce, up 1.8% for the session and more than 20% from their 2009 lows. Gold prices are now less than 3% below their 2009 highs... Meanwhile, crude oil prices rallied 1.7% to finish at a fresh six-month high of $66.21 per barrel... A 1.5% drop in the Dollar Index helped underpin a broad ascent by commodities. As such, the CRB Commodity Index finished 1.3% higher. Commodities finished May with a gain of more than 14%, outperforming the S&P 500, which logged a monthly gain of 5.2%. Still, the S&P 500 has finished the last three months with gains... General Motors has had an awful month, however. The stock has lost more than half its value since the start of May as the company comes face to face with the government's restructuring deadline. With the threat of bankruptcy looming, shares of GM are at record lows... In other corporate news, JCG posted upside first quarter earnings and guided second quarter earnings above the consensus forecast, winning it favor among investors. The stock logged one of its best single-session performances by surging more than 25%... Dell was less fortunate, though. The company faltered after posting better-than-expected earnings... In economic news, preliminary first quarter GDP showed 5.7% drop for the first quarter, which was a slight improvement from the 6.1% decline that had been reported in the advance GDP reading. Participants showed little reaction to the data since most of it was already known... Treasuries logged a solid session as they continue to recover from Wednesday's beating. The 10-year Note climbed more than one full point to push its yield back below 3.5%.
Thursday, May 28, 2009
Stocks Rally; Bond Fears Forgotten For Now
U.S. stocks rallied, led by banking and energy shares, as a rebound in 10-year Treasuries eased concern record government debt sales will trigger higher borrowing costs and oil climbed to a six-month high.
JPMorgan Chase & Co., Bank of America Corp. and American Express Co. added at least 3.4 percent to lead gains in the Dow Jones Industrial Average as the benchmark 10-year note climbed, sending its yield lower for the first time in five days. Exxon Mobil Corp. and Schlumberger Ltd. led gains in all 39 Standard & Poor’s 500 Index energy shares after oil topped $65 a barrel as OPEC left production quotas unchanged.
The Standard & Poor’s 500 Index added 1.5 percent to 906.83 at 4:05 p.m. in New York. The Dow Jones Industrial Average advanced 103.78 points, or 1.3 percent, to 8,403.8. Almost two stocks rose for each that fell on the New York Stock Exchange.
“A drop in Treasury yields is a positive for the stock market and for financials,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Investors had been concerned about how quickly rates had been climbing, affecting the ability to refinance and get mortgages. A drop in rates creates a good environment for financials.”
Benchmark indexes drifted between gains and losses earlier as 10-year yields threatened to climb for a fifth-straight day, spurring concern that the rout in Treasuries will spur higher rates for mortgages and other consumer loans.
Yield Watch
JPMorgan, the largest U.S. bank by market capitalization, jumped 5.7 percent to $36.65. American Express added 3.4 percent to $24.30. The yield on the 10-year note slipped 0.09 percentage point, or nine basis points, to 3.64 percent today.
Stocks slid yesterday as the 10-year note’s fourth straight drop sent its yield to a record spread above two-year notes. The so-called yield curve -- the difference between two and 10-year notes --widened to a record 2.75 percentage points yesterday. The curve narrowed to within 2.68 percentage points today.
As of yesterday, yields on 10-year notes had risen more than 100 basis points since Federal Reserve officials said in March they would buy up to $300 billion of U.S. debt over six months in an effort to reduce rates.
Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the gains in Treasury yields resulted from of an oversupply of government debt.
‘A Lot of Money’
“The Treasury is issuing a lot of money,” Gross, who manages the $150 billion Pimco Total Return Fund, the world’s biggest bond mutual fund, said today in an interview in Chicago. “The market is beginning to wonder who is going to be buying these bonds.”
A gauge of 39 energy companies surged 3 percent for the second-biggest gain in the S&P 500 after financials.
Exxon Mobil Corp., the biggest U.S. oil company, added 1.4 percent to $69.23. Schlumberger, the largest oilfield services company, rallied 5.5 percent to $56.35. Occidental Petroleum Corp. advanced 4.2 percent to $65.47.
Newmont Mining Corp., the largest U.S. gold producer, rose 3.2 percent to $47.35 as demand for the metal as a store of value strengthened because the dollar fell.
The dollar declined for the first time this week against the euro, falling as much as 0.9 percent. Gold typically moves inversely to the U.S. currency.
‘Inflation Beneficiaries’
“There’s still a lot of concern about inflation potential and the appetite for the massive government debt issuance,” said David Goerz, who oversees $17 billion as chief investment officer at Highmark Capital Management in San Francisco. “We’re going to see some of the inflation beneficiaries like agriculture, raw-materials, energy move into the leadership category as we get into the second half of the year.”
Orders for durable goods, while lingering near a 13-year low, did increase more than forecast in April, adding to evidence that the recession is easing. Orders climbed 1.9 percent from the previous month after a revised 2.1 percent drop in March that was more than twice as large as previously estimated, the Commerce Department said. A rebound in automobile orders and a jump in defense spending spurred the gain in April.
“It’s comforting to see those economic figures,” said Stanley Nabi, vice chairman of Silvercrest Asset Management Group, which oversees $7.5 billion in New York. “They give us a better indication that the decline in the economy is in fact slowing. That should give some support to the stock market.”
Housing Slump
A gauge of 13 homebuilders declined 4.4 percent after mortgage delinquencies and foreclosures climbed to records in the first quarter, spurring concern the housing slump is far from over. The Mortgage Bankers Association said the U.S. delinquency rate jumped to a seasonally adjusted 9.12 percent and the share of loans entering foreclosure rose to 1.37 percent, both the highest in records going back to 1972.
A separate report from the Commerce Department showed that new-home sales increased 0.3 percent to an annual pace of 352,000 in April, slower than the 1.1 percent growth forecast in a Bloomberg survey of economists.
Centex Corp., the U.S. homebuilder that agreed last month to a $1.3 billion buyout by rival Pulte Homes Inc., declined 6.9 percent to $8.33. Pulte fell 7.8 percent to $8.67. Lennar Corp. retreated 5 percent to $8.90.
Home Depot Inc. led consumer discretionary stocks 0.2 percent lower, for the only decline in the S&P 500 among 10 industry groups. The world’s largest home-improvement retailer fell 2.7 percent to $22.70 for the biggest decline in the Dow average. Smaller rival Lowe’s Cos. slid 3.1 percent to $19.02.
Shorts Retreat
The steepest rally in seven decades is convincing more short sellers they were wrong about the U.S. stock market.
Shares of S&P 500 companies borrowed and sold short fell 1.7 percent to 9.87 billion between April 30 and May 15, the lowest level since Feb. 27, according to exchange data compiled by Bloomberg. Short interest declined the most in technology companies. Traders reduced bets against Microsoft Corp., the biggest software maker, and Cisco Systems Inc., the largest supplier of networking equipment, by more than 25 percent, the data show.
Investors turned less bearish as the S&P 500 surged 37 percent between March 9 and May 8. U.S. stock exchanges release data on short selling, or the sale of borrowed stock with the hope of buying it back at a lower price, every two weeks. Yesterday’s report was the third in a row that showed a decrease in wagers that stocks would decline.
The S&P 500 is up 0.4 percent in 2009 after tumbling 38 percent last year, the worst annual decline since the Great Depression, as global credit losses stemming from the collapse of the subprime mortgage market dragged the nation into a recession.
The S&P 500 has surged 34 percent from a 12-year low in March on speculation the global recession is easing and as earnings at companies from Ford Motor Co. to Wells Fargo & Co. beat analyst estimates.
JPMorgan Chase & Co., Bank of America Corp. and American Express Co. added at least 3.4 percent to lead gains in the Dow Jones Industrial Average as the benchmark 10-year note climbed, sending its yield lower for the first time in five days. Exxon Mobil Corp. and Schlumberger Ltd. led gains in all 39 Standard & Poor’s 500 Index energy shares after oil topped $65 a barrel as OPEC left production quotas unchanged.
The Standard & Poor’s 500 Index added 1.5 percent to 906.83 at 4:05 p.m. in New York. The Dow Jones Industrial Average advanced 103.78 points, or 1.3 percent, to 8,403.8. Almost two stocks rose for each that fell on the New York Stock Exchange.
“A drop in Treasury yields is a positive for the stock market and for financials,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Investors had been concerned about how quickly rates had been climbing, affecting the ability to refinance and get mortgages. A drop in rates creates a good environment for financials.”
Benchmark indexes drifted between gains and losses earlier as 10-year yields threatened to climb for a fifth-straight day, spurring concern that the rout in Treasuries will spur higher rates for mortgages and other consumer loans.
Yield Watch
JPMorgan, the largest U.S. bank by market capitalization, jumped 5.7 percent to $36.65. American Express added 3.4 percent to $24.30. The yield on the 10-year note slipped 0.09 percentage point, or nine basis points, to 3.64 percent today.
Stocks slid yesterday as the 10-year note’s fourth straight drop sent its yield to a record spread above two-year notes. The so-called yield curve -- the difference between two and 10-year notes --widened to a record 2.75 percentage points yesterday. The curve narrowed to within 2.68 percentage points today.
As of yesterday, yields on 10-year notes had risen more than 100 basis points since Federal Reserve officials said in March they would buy up to $300 billion of U.S. debt over six months in an effort to reduce rates.
Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the gains in Treasury yields resulted from of an oversupply of government debt.
‘A Lot of Money’
“The Treasury is issuing a lot of money,” Gross, who manages the $150 billion Pimco Total Return Fund, the world’s biggest bond mutual fund, said today in an interview in Chicago. “The market is beginning to wonder who is going to be buying these bonds.”
A gauge of 39 energy companies surged 3 percent for the second-biggest gain in the S&P 500 after financials.
Exxon Mobil Corp., the biggest U.S. oil company, added 1.4 percent to $69.23. Schlumberger, the largest oilfield services company, rallied 5.5 percent to $56.35. Occidental Petroleum Corp. advanced 4.2 percent to $65.47.
Newmont Mining Corp., the largest U.S. gold producer, rose 3.2 percent to $47.35 as demand for the metal as a store of value strengthened because the dollar fell.
The dollar declined for the first time this week against the euro, falling as much as 0.9 percent. Gold typically moves inversely to the U.S. currency.
‘Inflation Beneficiaries’
“There’s still a lot of concern about inflation potential and the appetite for the massive government debt issuance,” said David Goerz, who oversees $17 billion as chief investment officer at Highmark Capital Management in San Francisco. “We’re going to see some of the inflation beneficiaries like agriculture, raw-materials, energy move into the leadership category as we get into the second half of the year.”
Orders for durable goods, while lingering near a 13-year low, did increase more than forecast in April, adding to evidence that the recession is easing. Orders climbed 1.9 percent from the previous month after a revised 2.1 percent drop in March that was more than twice as large as previously estimated, the Commerce Department said. A rebound in automobile orders and a jump in defense spending spurred the gain in April.
“It’s comforting to see those economic figures,” said Stanley Nabi, vice chairman of Silvercrest Asset Management Group, which oversees $7.5 billion in New York. “They give us a better indication that the decline in the economy is in fact slowing. That should give some support to the stock market.”
Housing Slump
A gauge of 13 homebuilders declined 4.4 percent after mortgage delinquencies and foreclosures climbed to records in the first quarter, spurring concern the housing slump is far from over. The Mortgage Bankers Association said the U.S. delinquency rate jumped to a seasonally adjusted 9.12 percent and the share of loans entering foreclosure rose to 1.37 percent, both the highest in records going back to 1972.
A separate report from the Commerce Department showed that new-home sales increased 0.3 percent to an annual pace of 352,000 in April, slower than the 1.1 percent growth forecast in a Bloomberg survey of economists.
Centex Corp., the U.S. homebuilder that agreed last month to a $1.3 billion buyout by rival Pulte Homes Inc., declined 6.9 percent to $8.33. Pulte fell 7.8 percent to $8.67. Lennar Corp. retreated 5 percent to $8.90.
Home Depot Inc. led consumer discretionary stocks 0.2 percent lower, for the only decline in the S&P 500 among 10 industry groups. The world’s largest home-improvement retailer fell 2.7 percent to $22.70 for the biggest decline in the Dow average. Smaller rival Lowe’s Cos. slid 3.1 percent to $19.02.
Shorts Retreat
The steepest rally in seven decades is convincing more short sellers they were wrong about the U.S. stock market.
Shares of S&P 500 companies borrowed and sold short fell 1.7 percent to 9.87 billion between April 30 and May 15, the lowest level since Feb. 27, according to exchange data compiled by Bloomberg. Short interest declined the most in technology companies. Traders reduced bets against Microsoft Corp., the biggest software maker, and Cisco Systems Inc., the largest supplier of networking equipment, by more than 25 percent, the data show.
Investors turned less bearish as the S&P 500 surged 37 percent between March 9 and May 8. U.S. stock exchanges release data on short selling, or the sale of borrowed stock with the hope of buying it back at a lower price, every two weeks. Yesterday’s report was the third in a row that showed a decrease in wagers that stocks would decline.
The S&P 500 is up 0.4 percent in 2009 after tumbling 38 percent last year, the worst annual decline since the Great Depression, as global credit losses stemming from the collapse of the subprime mortgage market dragged the nation into a recession.
The S&P 500 has surged 34 percent from a 12-year low in March on speculation the global recession is easing and as earnings at companies from Ford Motor Co. to Wells Fargo & Co. beat analyst estimates.
2 I Will Be Buying ASAP....
In my view, AAPL is going to go to $200 or above by late summer. The fundamental momentum in this stock is amazing and major catalysts are on the horizon. Yes, relative to fundamentals, the stock is cheap. If I am correct, AAPL is going to drag the NAZZ and the entire market up with it.
In terms of a short term trading idea, it has recently been profitable to go AGAINST the more established trading patterns of the past six months. Too many traders are on to these patterns and thereby they no longer work.
One tried-and-no-longer-true pattern has been for a strong 2%+ up day to be immediately followed a slightly weak day – 0.5%-1.0%. My guess is that traders may have been gunning for that yesterday.
As I posted recently, I think BAC is probably worth around $40 right now, as opposed to about $11. As soon as they are officially done with their capital raises (or slightly before) look for a rash of analysts to upgrade the stock with target prices in the mid to high $20s. This will move the stock and the market as a whole. Once the “flippers” from the secondary deals are cleared, this stock may take off like a rocket.......
Position: I will be long very soon in BAC and AAPL common and/or calls
In terms of a short term trading idea, it has recently been profitable to go AGAINST the more established trading patterns of the past six months. Too many traders are on to these patterns and thereby they no longer work.
One tried-and-no-longer-true pattern has been for a strong 2%+ up day to be immediately followed a slightly weak day – 0.5%-1.0%. My guess is that traders may have been gunning for that yesterday.
As I posted recently, I think BAC is probably worth around $40 right now, as opposed to about $11. As soon as they are officially done with their capital raises (or slightly before) look for a rash of analysts to upgrade the stock with target prices in the mid to high $20s. This will move the stock and the market as a whole. Once the “flippers” from the secondary deals are cleared, this stock may take off like a rocket.......
Position: I will be long very soon in BAC and AAPL common and/or calls
Some Stock Bargains - Negative Enterprise Value!
Enterprise value is market cap of the stock plus any net debt minus cash and equivalents. A company can only have a negative enterprise value if its cash balance (including short-term marketable securities) exceeds the entire market value of the stock.
In other words, if you shut down the company and got nothing for the plant, property and equipment, inventory, and all other non-cash assets, you'd still make money off the cash.
FACT is a company that has a market value of $234 million, cash and marketable securities of $344 million, no debt, but about $36 million in lease and other long-term liabilities. If you include all these numbers, the EV ($234 million - $344 million + $36 million) is negative $74 million.
The $344 million in cash and short-term marketable securities represents $14.30 a share. The cash portion of that $344 million is $288 million, so even if you assume that the short-term marketable securities go to zero, you have $12 a share in cash sitting on the balance sheet. Facet was spun off in December from PDLI.
To be sure, Facet has no commercial products at this point. The company's pipeline currently contains five products with a focus on multiple sclerosis and oncology. Two of Facet's products are currently in Phase II of the drug pipeline, and the company has strategic collaboration on both of them with BIIB and BMY.
Facet doesn't have any revenue-generating products yet and sports a short history as a separate public company, so Mr. Market is obviously concerned that the company may burn through the cash before realizing any commercial success from any of its products. This is a legitimate concern, especially in the pharmaceutical business.
But both the Phase II products are showing positive test results, and the company is working with two major drug companies in Biogen and Bristol. And the most recent quarterly results barely showed any depletion in the cash level. The slightest hint of positive news could send this stock soaring due to the cash-rich balance sheet. In the meantime, noted value investor Seth Klarman is holding more than 17% of the shares -- if you have to pick a horse to back, you could do a lot worse than Klarman.
Another is ATV, which sells consumer products in China through television and a direct sales platform. Think of the company as part QVC, part Avon, part catalog and just about any other sales platform you can think of. The company sells all kind of stuff to bookstores, pharmacies, department stores and specialty retailers, including cosmetics, cell phones, auto supplies, cell phones and household goods.
The market cap is $117 million and net cash is about $176 million, so we have a $4 stock with $6 a share in cash. Two months ago you could have bought the shares for about $1, so the company is not the screaming bargain it was.
As you might expect, 2008 was an unprofitable year for Acorn, but the company did manage to produce free cash flow of $18 million. There is no indication that the company is burning cash. And with such a wide net of distribution channels, the company can easily reach the Chinese consumer. If shares just traded for the cash alone, that would mean a 50% return from here. A caveat -- this one is pretty thinly traded, so be mindful of wide bid-ask spreads.
When you find a stock with a negative enterprise value, you have a built-in catalyst on the balance sheet. Of course, the market has to see that the business is not going to quickly burn through the cash -- if that happens, the investment is no longer a bargain, but a very sneaky value trap. The two businesses here seem to have business models that can get through this recession; if they can, they could add a nice jolt to a portfolio's performance.
In other words, if you shut down the company and got nothing for the plant, property and equipment, inventory, and all other non-cash assets, you'd still make money off the cash.
FACT is a company that has a market value of $234 million, cash and marketable securities of $344 million, no debt, but about $36 million in lease and other long-term liabilities. If you include all these numbers, the EV ($234 million - $344 million + $36 million) is negative $74 million.
The $344 million in cash and short-term marketable securities represents $14.30 a share. The cash portion of that $344 million is $288 million, so even if you assume that the short-term marketable securities go to zero, you have $12 a share in cash sitting on the balance sheet. Facet was spun off in December from PDLI.
To be sure, Facet has no commercial products at this point. The company's pipeline currently contains five products with a focus on multiple sclerosis and oncology. Two of Facet's products are currently in Phase II of the drug pipeline, and the company has strategic collaboration on both of them with BIIB and BMY.
Facet doesn't have any revenue-generating products yet and sports a short history as a separate public company, so Mr. Market is obviously concerned that the company may burn through the cash before realizing any commercial success from any of its products. This is a legitimate concern, especially in the pharmaceutical business.
But both the Phase II products are showing positive test results, and the company is working with two major drug companies in Biogen and Bristol. And the most recent quarterly results barely showed any depletion in the cash level. The slightest hint of positive news could send this stock soaring due to the cash-rich balance sheet. In the meantime, noted value investor Seth Klarman is holding more than 17% of the shares -- if you have to pick a horse to back, you could do a lot worse than Klarman.
Another is ATV, which sells consumer products in China through television and a direct sales platform. Think of the company as part QVC, part Avon, part catalog and just about any other sales platform you can think of. The company sells all kind of stuff to bookstores, pharmacies, department stores and specialty retailers, including cosmetics, cell phones, auto supplies, cell phones and household goods.
The market cap is $117 million and net cash is about $176 million, so we have a $4 stock with $6 a share in cash. Two months ago you could have bought the shares for about $1, so the company is not the screaming bargain it was.
As you might expect, 2008 was an unprofitable year for Acorn, but the company did manage to produce free cash flow of $18 million. There is no indication that the company is burning cash. And with such a wide net of distribution channels, the company can easily reach the Chinese consumer. If shares just traded for the cash alone, that would mean a 50% return from here. A caveat -- this one is pretty thinly traded, so be mindful of wide bid-ask spreads.
When you find a stock with a negative enterprise value, you have a built-in catalyst on the balance sheet. Of course, the market has to see that the business is not going to quickly burn through the cash -- if that happens, the investment is no longer a bargain, but a very sneaky value trap. The two businesses here seem to have business models that can get through this recession; if they can, they could add a nice jolt to a portfolio's performance.
Wednesday, May 27, 2009
Some Thoughts On Yields, Spreads, And The Like
In light of today’s sell off on the long end of the curve, it is appropriate to ask at what point the increase in rates could jeopardize the prospects for economic recovery.
First of all, it is far more important what is happening to spreads in private markets than what is happening to the yield on long term government paper. Corporate bond rates have been declining thereby outstripping the negative effect from the increase in government bond yields. As long as corporate and other private market spreads keep contracting, the rise in government bond yields will not matter much. Indeed, they are simply both sides of the same coin. Indeed, they go hand in hand. They are both reflective of the decline of risk aversion.
In some sense, rising long bond yields are a symptom of an economy that is recovering and a financial crisis that is subsiding. It is a sign that capital markets are back in business.
The same could be said of the decline in the dollar. Despite all of the hype about “monetization” and so forth, much of the decline of the dollar simply has to do with the unwinding of the flight to quality panic. This can be seen in the resumption of flows towards emerging markets. People do not buy Brazilian Reals because they think that it is a more stable currency than the US Dollar in the long term. They buy Reals because in an environment of global growth, they opportunities to make a profit by investing in securities and/or businesses in Brazil. This is an important distinction to make.
Still, rising yields at the long end of the US Treasury curve will have a negative impact on growth if it gets out of hand. Sharply rising yields impacts expectations and has a reflexive effect causing people to wonder: is there a deeper reason why yields are rising?
10 Year yields above 4% is probably the level at which the positive effects of Fed and Treasury stimulus starts to be partially counteracted by the negative effects – particularly the effect on mortgage rates. Note that because of the decline of spreads in the credit markets, mortgage rates have not really gone up nearly as much as one might have thought given the rise in long Treasury rates. However, spreads can only contract so far and 4% is probably the level at which mortgage rates will probably have to rise tick by tick with Treasury yields.
This is an expectations game; not a matter of arithmetic. For example, there is no set quantitative relationship between a given increase in the monetary base and an increase in inflation. This depends on many factors. And expectations are foremost.
In my view, not even the Fed, with its unlimited purchasing power, can prevent long rates from rising if market participants expect that rates will rise further. The Fed and the Treasury must be astute about managing expectations. Recently, there has been too much uncertainty surrounding Fed securities purchase programs and there has been too many delays in the implementation of programs such as the PPIP and TALF. Days like today will remind Geithner and Bernanke that they need to get on top of the expectations game.
Buying Treasuries in a tepid fashion is not a good way to manage expectations. For example, if Treasuries are going to be bought, they should be bought aggressively with a view to crush shorts. This sort of expectation will dissuade shorts to begin with.
With respect to expectations about inflation, the Fed will need to address the issue directly and explain why inflationary risks are minimal. There are plenty of solid arguments to support this view and they need to actively get out in front of this issue.
And somebody should go over and have a confidential talk with some high level Chinese officials and let them know that if import-substituting trade restrictions (tariff or non-tariff) are erected in the US, the US Treasury will not be needing the patronage of the Chinese for purchasing US Treasuries, nor will the Chinese have the money to do so (or to be able to threat that they will refrain from doing so). Every dollar that does not flow out through the current account has the same effect as Fed monetary stimulus and will directly and indirectly become available in the financial system for purchase of US treasuries, in particular by institutions that will capture the savings generated though the current account. Somebody needs to let the Chinese know that further jawboning on the US Dollar at this sensitive juncture may come with a steep price.
First of all, it is far more important what is happening to spreads in private markets than what is happening to the yield on long term government paper. Corporate bond rates have been declining thereby outstripping the negative effect from the increase in government bond yields. As long as corporate and other private market spreads keep contracting, the rise in government bond yields will not matter much. Indeed, they are simply both sides of the same coin. Indeed, they go hand in hand. They are both reflective of the decline of risk aversion.
In some sense, rising long bond yields are a symptom of an economy that is recovering and a financial crisis that is subsiding. It is a sign that capital markets are back in business.
The same could be said of the decline in the dollar. Despite all of the hype about “monetization” and so forth, much of the decline of the dollar simply has to do with the unwinding of the flight to quality panic. This can be seen in the resumption of flows towards emerging markets. People do not buy Brazilian Reals because they think that it is a more stable currency than the US Dollar in the long term. They buy Reals because in an environment of global growth, they opportunities to make a profit by investing in securities and/or businesses in Brazil. This is an important distinction to make.
Still, rising yields at the long end of the US Treasury curve will have a negative impact on growth if it gets out of hand. Sharply rising yields impacts expectations and has a reflexive effect causing people to wonder: is there a deeper reason why yields are rising?
10 Year yields above 4% is probably the level at which the positive effects of Fed and Treasury stimulus starts to be partially counteracted by the negative effects – particularly the effect on mortgage rates. Note that because of the decline of spreads in the credit markets, mortgage rates have not really gone up nearly as much as one might have thought given the rise in long Treasury rates. However, spreads can only contract so far and 4% is probably the level at which mortgage rates will probably have to rise tick by tick with Treasury yields.
This is an expectations game; not a matter of arithmetic. For example, there is no set quantitative relationship between a given increase in the monetary base and an increase in inflation. This depends on many factors. And expectations are foremost.
In my view, not even the Fed, with its unlimited purchasing power, can prevent long rates from rising if market participants expect that rates will rise further. The Fed and the Treasury must be astute about managing expectations. Recently, there has been too much uncertainty surrounding Fed securities purchase programs and there has been too many delays in the implementation of programs such as the PPIP and TALF. Days like today will remind Geithner and Bernanke that they need to get on top of the expectations game.
Buying Treasuries in a tepid fashion is not a good way to manage expectations. For example, if Treasuries are going to be bought, they should be bought aggressively with a view to crush shorts. This sort of expectation will dissuade shorts to begin with.
With respect to expectations about inflation, the Fed will need to address the issue directly and explain why inflationary risks are minimal. There are plenty of solid arguments to support this view and they need to actively get out in front of this issue.
And somebody should go over and have a confidential talk with some high level Chinese officials and let them know that if import-substituting trade restrictions (tariff or non-tariff) are erected in the US, the US Treasury will not be needing the patronage of the Chinese for purchasing US Treasuries, nor will the Chinese have the money to do so (or to be able to threat that they will refrain from doing so). Every dollar that does not flow out through the current account has the same effect as Fed monetary stimulus and will directly and indirectly become available in the financial system for purchase of US treasuries, in particular by institutions that will capture the savings generated though the current account. Somebody needs to let the Chinese know that further jawboning on the US Dollar at this sensitive juncture may come with a steep price.
Momentum Runs Away And Hides
Poor action in the bond market, as it is wont to do, eventually spilled over and took its toll on equities. The bulls were doing a good job of holding on to yesterday's gains, but they couldn't generate any upside, and bonds and the weak dollar provided an excuse to lock in some recent gains.
The good news is that the indices are still above key support, but volume increased and breadth was poor. Still, the market isn't in that bad of shape here, but there are definitely some things to worry about. Bonds are very troubling. The last thing we need at this point in the economic "recovery" are higher long-term interest rates, but the bonds are not cooperating.
Technically we are still OK, but momentum has been slowing for three weeks now. While we haven't rolled over and cracked, there has definitely been an increase in the aggressiveness of selling into strength. There is still underlying support, but when upside follow-through is limited, the buyers will be less aggressive with each successive dip.
The good news is that the indices are still above key support, but volume increased and breadth was poor. Still, the market isn't in that bad of shape here, but there are definitely some things to worry about. Bonds are very troubling. The last thing we need at this point in the economic "recovery" are higher long-term interest rates, but the bonds are not cooperating.
Technically we are still OK, but momentum has been slowing for three weeks now. While we haven't rolled over and cracked, there has definitely been an increase in the aggressiveness of selling into strength. There is still underlying support, but when upside follow-through is limited, the buyers will be less aggressive with each successive dip.
Tuesday, May 26, 2009
Bulls Deliver A Somewhat Surprising Rally
Even though everyone on CNBC is now confidently bullish, the market strength today caught a lot folks by surprise. News over the weekend and overseas market action was uninspired. Early indications were for a negative open, but a big target increase of Apple by Morgan Stanley and better-than-expected consumer confidence jumped-started things and we moved along strongly until the final-hour volatility set in.
Breadth was very strong and major groups except for precious metals were in the green at the end of the day. Retailers led on the consumer confidence boost, but energy and semiconductors also came on strong. Select small-caps continued to see some wild momentum as traders are still worried about missing out on big moves.
Coming into the day, the textbook play would have been a break of the 875 support on the S&P 500 that triggered stops and then a rally. Instead we never got the shake-out and moved straight up, which turned the potential dip buyers into chasers if they wanted in.
We are right in the middle of the 875 to 925 trading range of the S&P 500, which started at the beginning of the month. We have some positive seasonality and obviously some folks who are having a hard time adding long exposure without paying up.
The corrections in this market continue to be quite shallow and the bulls just keep on coming back. I sure don't want to fight that, but the complacency of some of the bulls is a little troubling -- so many see clear sailing for a while.
Overall the technical action is fine and the easiest mistake to make lately is to sell too early. We shouldn't spend too much trying to fight that.
Breadth was very strong and major groups except for precious metals were in the green at the end of the day. Retailers led on the consumer confidence boost, but energy and semiconductors also came on strong. Select small-caps continued to see some wild momentum as traders are still worried about missing out on big moves.
Coming into the day, the textbook play would have been a break of the 875 support on the S&P 500 that triggered stops and then a rally. Instead we never got the shake-out and moved straight up, which turned the potential dip buyers into chasers if they wanted in.
We are right in the middle of the 875 to 925 trading range of the S&P 500, which started at the beginning of the month. We have some positive seasonality and obviously some folks who are having a hard time adding long exposure without paying up.
The corrections in this market continue to be quite shallow and the bulls just keep on coming back. I sure don't want to fight that, but the complacency of some of the bulls is a little troubling -- so many see clear sailing for a while.
Overall the technical action is fine and the easiest mistake to make lately is to sell too early. We shouldn't spend too much trying to fight that.
Commentary For Friday, 5/22/09...
We have had classic holiday trading today, and now we are seeing some profit-taking to close things out - the negativity was probably enhanced due to "downgrade" fears of our country's debt. Whatever - we're still the best risk out there. The groups that turned out to be the traders' favorites today were small-cap biotechnology and agriculture. Stocks such as OGXI, SEED, VNDA and GRO attracted the hot money today, but it was primarily oil and energy that helped to keep the senior indices up.
One of the key themes this week was weakness in the U.S. dollar. That drove gold stocks higher and also helped agriculture and other metals that are mainly mined overseas. It is a bit troubling to see bonds act so poorly. Just take a look at the chart of the iShares Barclays 20+ Year Treasury Bond, TLT, which is back to where it was last November. Higher interest rates are going to be a headwind for equities if it continues.
Next week we're going to see some signs of how much more juice the bulls might have. They have been slowing down lately but haven't run out of gas yet.
One of the key themes this week was weakness in the U.S. dollar. That drove gold stocks higher and also helped agriculture and other metals that are mainly mined overseas. It is a bit troubling to see bonds act so poorly. Just take a look at the chart of the iShares Barclays 20+ Year Treasury Bond, TLT, which is back to where it was last November. Higher interest rates are going to be a headwind for equities if it continues.
Next week we're going to see some signs of how much more juice the bulls might have. They have been slowing down lately but haven't run out of gas yet.
Friday, May 22, 2009
The Fed's Balance Sheet
Federal Reserve credit expanded to a four-week high in the week ended May 20, increasing to $2.165 trillion, an increase of $48.64 billion. The Fed increased credit mainly through securities purchases, which totaled $59.9 billion. The purchases were concentrated, as usual, in mortgage-backed securities, which totaled $46.4 billion. The Fed also bought $2.4 billion of agency securities and $11.1 billion of Treasury securities.
Cumulative purchases for the asset-purchase program total $431 billion of mortgage-backed securities, $77 billion of agency securities and about $120 billion of Treasuries. The combined tally of about $600 billion leaves the Fed with plenty of firepower to influence securities prices, having committed to purchasing $1.75 trillion of securities, consisting of $1.25 trillion of MBS, $250 billion of agencies and $300 billion of Treasuries.
The Fed's securities purchases increase the amount of money that exists in the banking system, mainly in the form of excess reserves, which are those monies over and above required reserves, which are the monies that banks must put aside against deposits they hold. The excess reserves are available for lending, so in theory the increase in excess reserves should boost lending.
After months of increases to the point where excess reserves have gone from near zero to about $800 billion, lending has gone nowhere, because banks have been hoarding cash, fearing losses and marks against their assets. In other words, the velocity of money has fallen; money is not turning over. If velocity were normal, each dollar of excess reserves would translate into between $8 and $10 of loans in the banking system. The more the Fed increases excess reserves, the more comfortable banks might become to boost lending, although the de-leveraging process will likely keep a lid on any increase.
As an important aside, within the H.4.1 release on the Fed's balance sheet is information on foreign central bank purchases of Treasuries. The data show that central banks purchased $25.9 billion of Treasuries in the week ended May 20, following a $23.5 billion purchase the previous week, bringing cumulative holdings to $2.71 trillion. The two-week gain was the most since last October. These figures help show that concerns about the speed at which foreign central banks will diversify out of dollars is misplaced.
Cumulative purchases for the asset-purchase program total $431 billion of mortgage-backed securities, $77 billion of agency securities and about $120 billion of Treasuries. The combined tally of about $600 billion leaves the Fed with plenty of firepower to influence securities prices, having committed to purchasing $1.75 trillion of securities, consisting of $1.25 trillion of MBS, $250 billion of agencies and $300 billion of Treasuries.
The Fed's securities purchases increase the amount of money that exists in the banking system, mainly in the form of excess reserves, which are those monies over and above required reserves, which are the monies that banks must put aside against deposits they hold. The excess reserves are available for lending, so in theory the increase in excess reserves should boost lending.
After months of increases to the point where excess reserves have gone from near zero to about $800 billion, lending has gone nowhere, because banks have been hoarding cash, fearing losses and marks against their assets. In other words, the velocity of money has fallen; money is not turning over. If velocity were normal, each dollar of excess reserves would translate into between $8 and $10 of loans in the banking system. The more the Fed increases excess reserves, the more comfortable banks might become to boost lending, although the de-leveraging process will likely keep a lid on any increase.
As an important aside, within the H.4.1 release on the Fed's balance sheet is information on foreign central bank purchases of Treasuries. The data show that central banks purchased $25.9 billion of Treasuries in the week ended May 20, following a $23.5 billion purchase the previous week, bringing cumulative holdings to $2.71 trillion. The two-week gain was the most since last October. These figures help show that concerns about the speed at which foreign central banks will diversify out of dollars is misplaced.
Thursday, May 21, 2009
Sellers Rule The Markets Again
The final-hour rally saved us once again. The S&P 500 managed to breach the key 880 level by just a few cents and then reversed, and we rallied strongly into the finish.
The action was certainly ugly, but because of the tendency for last-hour games and the thinner holiday trading, the likelihood of a bounce rather than a complete collapse when we tested support was quite high.
While we might have held support today, things are getting much trickier going forward. We are doing technical damage with each one of these stabs lower. We might expect the first test of a key level to hold, but the chances of holding decrease each time a level is tested. These last-hour bounces are even more problematic because they are so manipulative. Many people feel they are a product of daily rebalancing of the ultra-ETFs, and I don't see any reason to think otherwise.
In any event, the holding of support, while a positive, isn't something we should be too optimistic about. We will have thin trading tomorrow in front of the holiday, and then the battle will intensify again next week. There are some cracks in the uptrend, and it's time, in the very near term, to start being more cautious.
Going into more detail - Emboldened by economic concerns, sellers took control of stocks and handed the major indices a marked loss. Though declines were deep and broad, stocks still finished off of their session lows... A sharp pullback by the U.S. dollar helped gold prices close 1.5% higher at $951.20 per ounce and oil prices pare their losses to settle pit trading with a 1.6% loss at $61.02 per barrel. The greenback's 0.8% slide took the dollar index to a four-month low and came as global investors showed concern about the U.S. economic outlook in the wake of Standard & Poor's decision to lower its outlook for the United Kingdom. Just yesterday the Fed lowered its outlook for U.S. economic growth... Worse-than-expected jobless claims supported the premise that economic conditions remain tenuous. Initial claims for the week ending May 16 totaled 631,000, while continuing claims climbed to a new record of 6.66 million... Treasuries took a pounding amid the economic concerns. The benchmark 10-year Note fell 43 ticks, which pushed its yield near 2009 highs. Disappointing buybacks by the Fed also provided a catalyst for the downward move by Treasuries; investors have expected that the Fed will be expanding the size of such repurchases... Participants largely dismissed a 1.0% increase in leading economic indicators for April even though the data was better than expected and marked the first increase in ten months... Financials (+0.2%) attempted to provide support to the broader market. They oscillated between positive and negative ground before finishing as the only sector to log a gain. Regional banks (-4.5%) were a heavy drag on the financial sector as FITB became the latest bank to come to market looking for capital in the wake of the government's stress tests. Fifth Third filed a $750 million common stock offering. Meanwhile, RF disappointed investors by pricing its previously announced offering markedly below recent averages... Losses were broad-based for the entire session. In the end, roughly 85% of the companies listed in the S&P 500 closed in the red. The S&P 500 did find some technical support as it encountered last week's lows... GM was one of only a handful of Dow components to log a gain. GM was supported by news the company has reached a labor contract deal with the United Auto Workers Union (UAW) and the Treasury, along with more reports indicating that GM's finance arm, GMAC, will receive $7 billion from the Treasury. Including this session's spike, shares of GM are up 77% week-to-date.
The action was certainly ugly, but because of the tendency for last-hour games and the thinner holiday trading, the likelihood of a bounce rather than a complete collapse when we tested support was quite high.
While we might have held support today, things are getting much trickier going forward. We are doing technical damage with each one of these stabs lower. We might expect the first test of a key level to hold, but the chances of holding decrease each time a level is tested. These last-hour bounces are even more problematic because they are so manipulative. Many people feel they are a product of daily rebalancing of the ultra-ETFs, and I don't see any reason to think otherwise.
In any event, the holding of support, while a positive, isn't something we should be too optimistic about. We will have thin trading tomorrow in front of the holiday, and then the battle will intensify again next week. There are some cracks in the uptrend, and it's time, in the very near term, to start being more cautious.
Going into more detail - Emboldened by economic concerns, sellers took control of stocks and handed the major indices a marked loss. Though declines were deep and broad, stocks still finished off of their session lows... A sharp pullback by the U.S. dollar helped gold prices close 1.5% higher at $951.20 per ounce and oil prices pare their losses to settle pit trading with a 1.6% loss at $61.02 per barrel. The greenback's 0.8% slide took the dollar index to a four-month low and came as global investors showed concern about the U.S. economic outlook in the wake of Standard & Poor's decision to lower its outlook for the United Kingdom. Just yesterday the Fed lowered its outlook for U.S. economic growth... Worse-than-expected jobless claims supported the premise that economic conditions remain tenuous. Initial claims for the week ending May 16 totaled 631,000, while continuing claims climbed to a new record of 6.66 million... Treasuries took a pounding amid the economic concerns. The benchmark 10-year Note fell 43 ticks, which pushed its yield near 2009 highs. Disappointing buybacks by the Fed also provided a catalyst for the downward move by Treasuries; investors have expected that the Fed will be expanding the size of such repurchases... Participants largely dismissed a 1.0% increase in leading economic indicators for April even though the data was better than expected and marked the first increase in ten months... Financials (+0.2%) attempted to provide support to the broader market. They oscillated between positive and negative ground before finishing as the only sector to log a gain. Regional banks (-4.5%) were a heavy drag on the financial sector as FITB became the latest bank to come to market looking for capital in the wake of the government's stress tests. Fifth Third filed a $750 million common stock offering. Meanwhile, RF disappointed investors by pricing its previously announced offering markedly below recent averages... Losses were broad-based for the entire session. In the end, roughly 85% of the companies listed in the S&P 500 closed in the red. The S&P 500 did find some technical support as it encountered last week's lows... GM was one of only a handful of Dow components to log a gain. GM was supported by news the company has reached a labor contract deal with the United Auto Workers Union (UAW) and the Treasury, along with more reports indicating that GM's finance arm, GMAC, will receive $7 billion from the Treasury. Including this session's spike, shares of GM are up 77% week-to-date.
Before Posting My Regular Market Comments, Here Are My Views Right Now On The Markets, Economy, Etc.
Though the availability of bank credit remains too tight, most impressive to me regarding our economy has been the improvement in the credit markets (particularly spreads). Indeed, Libor as well other credit spreads and gauges are equivalent to their fall 2008 numbers, when the S&P 500 stood at approximately 1,040, almost 15% higher than current levels.
I am also impressed by the appetite, receptivity and the ability of the markets to absorb hefty equity offerings, which not only fills company financing gaps and provides capital for growth but it speaks volumes regarding investors' propensity to accept more risk.
Finally, from a sentiment standpoint, unlike previous market "takeoff" periods in the 1970s and 1980s, the dire sentiment existing in early March has not been materially reversed towards bullishness, which I think is another good sign. Anecdotally, my opinion is that the hedge fund cabal remains materially underinvested and skeptical about the recent "bear-market rally" -- and very frustrated!
The market typically does his best to harm the most investors, and a sideways correction would likely continue to keep the skeptics out of the market and poorly position those investors for the next leg higher.
In this framework, a two-sided market becomes our investment reality, in which money can be made in "playing" the sideways consolidation (both long and short). This means that tactically I plan to be bolder in buying sector- and stock-specific ideas on dips.
While the world's stock markets are no longer on sale, I continue to see improving credit spreads, a general skepticism surrounding the "bear-market rally," growing signs of economic stability, upward corporate profit revisions and a reallocation of large U.S. pension plans out of fixed income into equities as the proximate catalysts to the next leg up in the S&P 500 to around 1,050 by late summer.
I am also impressed by the appetite, receptivity and the ability of the markets to absorb hefty equity offerings, which not only fills company financing gaps and provides capital for growth but it speaks volumes regarding investors' propensity to accept more risk.
Finally, from a sentiment standpoint, unlike previous market "takeoff" periods in the 1970s and 1980s, the dire sentiment existing in early March has not been materially reversed towards bullishness, which I think is another good sign. Anecdotally, my opinion is that the hedge fund cabal remains materially underinvested and skeptical about the recent "bear-market rally" -- and very frustrated!
The market typically does his best to harm the most investors, and a sideways correction would likely continue to keep the skeptics out of the market and poorly position those investors for the next leg higher.
In this framework, a two-sided market becomes our investment reality, in which money can be made in "playing" the sideways consolidation (both long and short). This means that tactically I plan to be bolder in buying sector- and stock-specific ideas on dips.
While the world's stock markets are no longer on sale, I continue to see improving credit spreads, a general skepticism surrounding the "bear-market rally," growing signs of economic stability, upward corporate profit revisions and a reallocation of large U.S. pension plans out of fixed income into equities as the proximate catalysts to the next leg up in the S&P 500 to around 1,050 by late summer.
Wednesday, May 20, 2009
Stocks Slip Amid Lack Of Support, Rebalancing
We have what the technicians call a little double top forming and we'll have to watch very carefully if we come back down and test the lows of last week around 878 on the S&P 500. That will be the line in the sand that will trigger stops, so keep it on your radar.
After a weak close last night and a poor response to earnings from HPQ, it looked like the market was ready to struggle again this morning. However, a huge secondary offering by BAC that was quickly gobbled up gave the bulls something to cheer about. Once again the bears were caught flat-footed and we end up with some short-squeeze-induced euphoria.
But what has made this market much more interesting lately isn't the choppiness of the major indices but the very strong momentum under the surface. Even with the red close, breadth was still positive and we had some big moves in select small-caps particularly in the solar energy group.
One group of particular interest was gold, which had some big volume and some good looking breakouts. It's a group that can be tricky to trade, but it seems weakness in the dollar is providing a tailwind. Market players have been trying to catch this group for a while and the recent pockets of momentum could easily shift to precious metals at this juncture.
After the market rolled over last Wednesday, a lot of folks were looking for more downside but we squeezed and bounced big on Monday with little volume, which helped reignite bullish optimism. With the rollover today, the light-volume rally on Monday is even more suspect.
Going into more detail, recovering from losses last week, a bullish bias has supported buying in recent sessions, which helped participants begin Wednesday with strong gains. The upbeat tone was supported by continuing gains among commodities and an early advance by financial stocks. However, stocks began drifting lower midway through the session and ultimately closed with a loss as participants turned against financials... Early gains were helped along by investors that chased commodities and materials stocks, which have benefited from the assumption that stronger economic conditions in the back half of the year will rekindle commodity demand. A weaker dollar has also helped bolster commodity prices... The minutes from the April FOMC meeting indicated that participants project a contraction for real GDP this year, and that committee members believe the near-term economic outlook has weakened relative to the projections made in January. However, a recovery in sales and production is still expected to begin in the second half of this year... With the dollar dropping more than 1% against a basket of major foreign currencies, gold prices advanced 1.2% to settle pit trading at seven-week high of $937.40 per ounce. Gold stocks like NEM provided leadership to the materials sector (0.5%), which had spent most of the session trading with gains exceeding 2%. Meanwhile, metals and mining stocks climbed 1.0%... Oil prices built on the prior session's advance to register fresh six-month intraday highs and closing highs. The advance was helped along by bullish inventory data, which showed a 2.1 million barrel draw for the week ending May 15 while a draw of 400,000 barrels was expected. Crude contracts settled more than 3% higher just above $62 per barrel... Financials proved to be a weak link during the session. The financial sector spiked to a near 3% gain in the early going, helping drive the broader market higher, but the move ultimately collapsed. Financial stocks closed the session with a 2.4% loss... Though BAC showed strength after announcing that it raised $13.5 billion through a previously announced share offering following government stress tests, banks were among the sectors weakest performers. The KBW Banking Index slid 2.8%... Consumer finance companies (-3.5%) also showed considerable weakness amid continued concern that new rules are in order for credit card companies. Following the Senate's approval yesterday, the House of Representatives approved a bill imposing changes for the credit card industry... Retailers had a seesaw session, which saw the sector trade with a 3.0% gain before settling with a 1.6% loss. Despite the disappointing finish, TGT still logged an impressive gain following better-than-expected earnings... Dow component HPQ generated in-line earnings for its latest quarter and issued an in-line forecast for the current quarter. The company's upside outlook for fiscal 2009 wasn't enough to win it favor, though. The stock traded as a laggard among tech issues (-0.7%)...
After a weak close last night and a poor response to earnings from HPQ, it looked like the market was ready to struggle again this morning. However, a huge secondary offering by BAC that was quickly gobbled up gave the bulls something to cheer about. Once again the bears were caught flat-footed and we end up with some short-squeeze-induced euphoria.
But what has made this market much more interesting lately isn't the choppiness of the major indices but the very strong momentum under the surface. Even with the red close, breadth was still positive and we had some big moves in select small-caps particularly in the solar energy group.
One group of particular interest was gold, which had some big volume and some good looking breakouts. It's a group that can be tricky to trade, but it seems weakness in the dollar is providing a tailwind. Market players have been trying to catch this group for a while and the recent pockets of momentum could easily shift to precious metals at this juncture.
After the market rolled over last Wednesday, a lot of folks were looking for more downside but we squeezed and bounced big on Monday with little volume, which helped reignite bullish optimism. With the rollover today, the light-volume rally on Monday is even more suspect.
Going into more detail, recovering from losses last week, a bullish bias has supported buying in recent sessions, which helped participants begin Wednesday with strong gains. The upbeat tone was supported by continuing gains among commodities and an early advance by financial stocks. However, stocks began drifting lower midway through the session and ultimately closed with a loss as participants turned against financials... Early gains were helped along by investors that chased commodities and materials stocks, which have benefited from the assumption that stronger economic conditions in the back half of the year will rekindle commodity demand. A weaker dollar has also helped bolster commodity prices... The minutes from the April FOMC meeting indicated that participants project a contraction for real GDP this year, and that committee members believe the near-term economic outlook has weakened relative to the projections made in January. However, a recovery in sales and production is still expected to begin in the second half of this year... With the dollar dropping more than 1% against a basket of major foreign currencies, gold prices advanced 1.2% to settle pit trading at seven-week high of $937.40 per ounce. Gold stocks like NEM provided leadership to the materials sector (0.5%), which had spent most of the session trading with gains exceeding 2%. Meanwhile, metals and mining stocks climbed 1.0%... Oil prices built on the prior session's advance to register fresh six-month intraday highs and closing highs. The advance was helped along by bullish inventory data, which showed a 2.1 million barrel draw for the week ending May 15 while a draw of 400,000 barrels was expected. Crude contracts settled more than 3% higher just above $62 per barrel... Financials proved to be a weak link during the session. The financial sector spiked to a near 3% gain in the early going, helping drive the broader market higher, but the move ultimately collapsed. Financial stocks closed the session with a 2.4% loss... Though BAC showed strength after announcing that it raised $13.5 billion through a previously announced share offering following government stress tests, banks were among the sectors weakest performers. The KBW Banking Index slid 2.8%... Consumer finance companies (-3.5%) also showed considerable weakness amid continued concern that new rules are in order for credit card companies. Following the Senate's approval yesterday, the House of Representatives approved a bill imposing changes for the credit card industry... Retailers had a seesaw session, which saw the sector trade with a 3.0% gain before settling with a 1.6% loss. Despite the disappointing finish, TGT still logged an impressive gain following better-than-expected earnings... Dow component HPQ generated in-line earnings for its latest quarter and issued an in-line forecast for the current quarter. The company's upside outlook for fiscal 2009 wasn't enough to win it favor, though. The stock traded as a laggard among tech issues (-0.7%)...
The Stupidity Of "Dr. Doom," Nouriel Roubini
Here's what Nouriel Roubini, pushing for a large-scale nationalization of the banks, told The Wall Street Journal back in February:
Six months from now, even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.
Oh, that Dr. Doom! Not yet three months later, the 19 biggest banks have come through the government's stress tests with results Tim Geithner called "reassuring." Nine of the 19 didn't need to raise any new capital at all and are lately on a fast track to repaying their TARP money and ridding themselves of the government's meddling altogether. Nine of the 10 that do need to raise capital are in the process of doing so (or have done so already) without breaking a sweat. (Only GMAC will apparently have to go back to the government.)
If this is the picture of solvency becoming insolvency, I don't see it. More likely, Roubini is 100% wrong. Given the ease with which banks (both stress-tested and not) are raising capital lately, not only is the system not insolvent, it's on its way to becoming overcapitalized. As a bank investor at this point in the cycle, I'm not too concerned about worsening credit. Those problems are well known and more than priced into the stocks. JPM, to pick one of the best-run, least-controversial names in the group, is still just trading at book value.
Six months from now, even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.
Oh, that Dr. Doom! Not yet three months later, the 19 biggest banks have come through the government's stress tests with results Tim Geithner called "reassuring." Nine of the 19 didn't need to raise any new capital at all and are lately on a fast track to repaying their TARP money and ridding themselves of the government's meddling altogether. Nine of the 10 that do need to raise capital are in the process of doing so (or have done so already) without breaking a sweat. (Only GMAC will apparently have to go back to the government.)
If this is the picture of solvency becoming insolvency, I don't see it. More likely, Roubini is 100% wrong. Given the ease with which banks (both stress-tested and not) are raising capital lately, not only is the system not insolvent, it's on its way to becoming overcapitalized. As a bank investor at this point in the cycle, I'm not too concerned about worsening credit. Those problems are well known and more than priced into the stocks. JPM, to pick one of the best-run, least-controversial names in the group, is still just trading at book value.
Bank Discussion
In 2008, most failed to forecast the magnitude of the economic and housing downturn. I saw it by contrast. What I didn't see (in part, owing to the opaqueness of
the banking industry's disclosure) was the magnitude of the weight of the toxic assets held on their balance sheets.
Now market participants are aware of the depth of the problems, and the industry has been recapitalized. Normalized earnings will come into greater focus, and
the value of a low-cost and stable deposit base will emerge following solvency fears.
The stocks have been huge winners, and Armageddon is thankfully off the table.
I suspect that the pace of increase in share price appreciation will not moderate as the above factors come into focus. I also think that there is risk of a double-dip, but I strongly believe that before that double-dip becomes an issue, the bank stocks will continue on their ascent. (BAC at $40, anyone?)
The group is game-able, as I'm deferring legitimate cycle concerns for the time being....
the banking industry's disclosure) was the magnitude of the weight of the toxic assets held on their balance sheets.
Now market participants are aware of the depth of the problems, and the industry has been recapitalized. Normalized earnings will come into greater focus, and
the value of a low-cost and stable deposit base will emerge following solvency fears.
The stocks have been huge winners, and Armageddon is thankfully off the table.
I suspect that the pace of increase in share price appreciation will not moderate as the above factors come into focus. I also think that there is risk of a double-dip, but I strongly believe that before that double-dip becomes an issue, the bank stocks will continue on their ascent. (BAC at $40, anyone?)
The group is game-able, as I'm deferring legitimate cycle concerns for the time being....
LIBOR's Drop
There are some who believe the decline in the LIBOR is solely the function of increased liquidity. One of the most important lessons of the credit crisis is that liquidity can be fleeting and that its existence cannot by itself alter the price of financial assets. The keepers of liquidity can withhold the money and do so in a moment's time, or they can release it just the same.
With respect to LIBOR, the fact that there is today more money than yesterday cannot alone explain LIBOR's drop. For example, excess reserves ramped up way back in October, and bank holdings of cash did, too, yet LIBOR was stubbornly high.
Whenever there is a surfeit of something, its price falls, but a surfeit of money alone cannot cause its price to decline. This was proven in the fall and winter months when the cost of money on many fronts remained high. Only since the start of the "green shoots" phase has the surfeit been subject to the laws of supply and demand and lowered the cost of money, because the suppliers of inter-bank funds have released their surfeit.
LIBOR's collapse has been a long time in coming, in part on the idea that the surfeit (excess reserves) would lower its price, but critical to the idea was that the surfeit would alter attitudes about risk-taking. There is hence a bit of a chicken-and-egg situation here, although in the final analysis no amount of "liquidity" is sufficient to keep the cost of money low in a frightful environment.
In the 1930s, Frank Knight said that uncertainty is a risk that can't be measured. This is known as the Knightian Uncertainty principle. In such a case, the keepers of money will demand a high price when there are uncertainties. In other words, LIBOR could not have fallen recently without the removal or reduction of uncertainties.
With respect to LIBOR, the fact that there is today more money than yesterday cannot alone explain LIBOR's drop. For example, excess reserves ramped up way back in October, and bank holdings of cash did, too, yet LIBOR was stubbornly high.
Whenever there is a surfeit of something, its price falls, but a surfeit of money alone cannot cause its price to decline. This was proven in the fall and winter months when the cost of money on many fronts remained high. Only since the start of the "green shoots" phase has the surfeit been subject to the laws of supply and demand and lowered the cost of money, because the suppliers of inter-bank funds have released their surfeit.
LIBOR's collapse has been a long time in coming, in part on the idea that the surfeit (excess reserves) would lower its price, but critical to the idea was that the surfeit would alter attitudes about risk-taking. There is hence a bit of a chicken-and-egg situation here, although in the final analysis no amount of "liquidity" is sufficient to keep the cost of money low in a frightful environment.
In the 1930s, Frank Knight said that uncertainty is a risk that can't be measured. This is known as the Knightian Uncertainty principle. In such a case, the keepers of money will demand a high price when there are uncertainties. In other words, LIBOR could not have fallen recently without the removal or reduction of uncertainties.
Changing Gears: Thoughts On Deflation/The Fed Minutes And What I Think BAC Is Worth
The Fed minutes leave no doubt in my mind that most of the members realize how crucial low rates are to our fragile economy. Higher rates would not only ruin the fed’s credibility but also destroy any hope for a recovery. Make no mistake if they have to choose between a weaker dollar and lower rates they only have one way to go. We can argue about the timing and degree of dollar destruction but fight the fed on rates in the near term at your own peril.
In a deflationary environment coupon clipping is a viable strategy. In other words if asset prices are going down, staying where you are isn’t such a bad thing and anything else is gravy.
Quantitative easing is attempting to punish savers but that doesn’t mean you have to play their game. Chasing risky assets that have run 30% or more is just that: chasing.
Now, on to BAC. Celebrate Dilution. At least that is how the bears will likely snort at the BAC deal and the other secondary placements.
But the glass is also half full.
Take the BAC example. Factoring in the dilution, applying the loss assumptions laid out under SCAP, the stock is worth $40. Once the stock is fully capitalized, with fears of insolvency and massive dilution past it, the stock will be able to realize that value.
The deal is clearly a win/win.
There are at least five other bullish elements to the BAC story from the point of view of the market:
1. A huge share overhang is removed.
2. A huge risk – ie backdoor nationalization under the CAP regime --for the financial sector is removed. (At least for now).
3. Clear evidence of massive cash availability + clear evidence of collapsing risk aversion.
4. Clear evidence of the restoration of functionality in private capital markets.
Let us recall that in February, Roubini and a whole slew of misinformed but influential commentators were competing to outdo themselves to see who could most rabidly call for the nationalization of the entire US banking system. For example, Dr. Doom literally recommended in a WSJ interview on February 21st that ALL US banks be “taken over all at once” since “six months from now, even firms that today look solvent are going to look insolvent.”
I wonder if any of these eschatological prophets of economic apocalypse might be feeling a bit silly right now?
The BAC deal, and the success of the other secondary offerings, are suggesting very strongly that the US financial crisis is essentially over. The patient has been stabilized and the healing process has begun.
More broadly, it is beginning to appear that variously giddy and manic depressive reports proclaiming the “death of capitalism” may, to borrow a phrase from Mark Twain, have been greatly exaggerated.
In a deflationary environment coupon clipping is a viable strategy. In other words if asset prices are going down, staying where you are isn’t such a bad thing and anything else is gravy.
Quantitative easing is attempting to punish savers but that doesn’t mean you have to play their game. Chasing risky assets that have run 30% or more is just that: chasing.
Now, on to BAC. Celebrate Dilution. At least that is how the bears will likely snort at the BAC deal and the other secondary placements.
But the glass is also half full.
Take the BAC example. Factoring in the dilution, applying the loss assumptions laid out under SCAP, the stock is worth $40. Once the stock is fully capitalized, with fears of insolvency and massive dilution past it, the stock will be able to realize that value.
The deal is clearly a win/win.
There are at least five other bullish elements to the BAC story from the point of view of the market:
1. A huge share overhang is removed.
2. A huge risk – ie backdoor nationalization under the CAP regime --for the financial sector is removed. (At least for now).
3. Clear evidence of massive cash availability + clear evidence of collapsing risk aversion.
4. Clear evidence of the restoration of functionality in private capital markets.
Let us recall that in February, Roubini and a whole slew of misinformed but influential commentators were competing to outdo themselves to see who could most rabidly call for the nationalization of the entire US banking system. For example, Dr. Doom literally recommended in a WSJ interview on February 21st that ALL US banks be “taken over all at once” since “six months from now, even firms that today look solvent are going to look insolvent.”
I wonder if any of these eschatological prophets of economic apocalypse might be feeling a bit silly right now?
The BAC deal, and the success of the other secondary offerings, are suggesting very strongly that the US financial crisis is essentially over. The patient has been stabilized and the healing process has begun.
More broadly, it is beginning to appear that variously giddy and manic depressive reports proclaiming the “death of capitalism” may, to borrow a phrase from Mark Twain, have been greatly exaggerated.
Tuesday, May 19, 2009
On "Quantitative Easing"
It is not so much that I do not like trying to solve every problem with a printing press. I do not like the opposite, either: the Federal Reserve trying to slow the economy down by withdrawing liquidity.
The evidence the Federal Reserve or any other central bank can fine-tune the economy, either alone or in concert, simply does not exist. The older I get, the more I am convinced that Milton Friedman had it right: The one objective of monetary policy should be to match the growth rate of the money supply to the long-term capacity curve of the economy.
Will the excess money create the sort of financial market bubble so many enjoyed in the late 1990s? It could give the markets a kick, as excess money tends to find its way into financial assets before it moves into real assets.
But here is the question: We have three cases of major central banks engaging in quantitative easing this year and a surprising one in December 2008. Concurrent with the Dec. 16, 2008, Federal Open-Market Committee meeting and the cut of the target federal funds rate to the 0-0.25% range, the Bank of Japan quietly went back to its policy of quantitative easing first begun in March 2001 and abandoned in May 2006. The Bank of England and Swiss National Bank went to quantitative easing this past March 5 and 12, respectively.
This gives us an opportunity to assess whether these four quantitative-easing moves led to over- or underperformance relative to the world as a whole by the respective national stock markets. The Morgan Stanley Capital International total return indices will be used on both a local currency and a U.S. dollar basis. All four comparisons will be re-indexed to the day before their central-bank actions.
First, let's use the local currency case, which is not the one a U.S. investor would be interested in for a typical mutual fund or ETF holding. As an aside, the base for the MSCI World Index in local currency terms must be a monster to maintain; congratulations are in order to some unsung group of heroes somewhere.
The outcome is surprising. All four national markets have underperformed the World index at last reading. The Japanese market outperformed briefly between mid-February and early March as the yen weakened, but it lost those gains quickly. The U.S. market has drifted lower with respect to the World index, even as we gained in nominal terms.
Now let's shift the comparison to a U.S. dollar basis, the one you most likely would encounter. Only the U.K. market is outperforming the rest of the world in USD terms, and there by a trivial 1.3%. The U.S. has drifted lower with respect to the rest of the world, and both Japan and Switzerland have underperformed the World index in USD terms since their respective quantitative easing dates.
The two best-performing categories, by a wide margin, have been high-yield bonds and U.S. real estate investment trusts, or REITs. If we return to the maxim that inflation benefits debtors and lower-quality balance sheets, this makes sense. Both markets increased in response to expectations of future inflation. Gold rose, but it rose nowhere near as much: Gold by itself has no balance sheet and no debt to repay beyond its cost of carry. It benefits from inflation, but it is not a low-quality asset.
The dollar's decline over the period has been trivial, and we still are in a period where currencies are trading for reasons other than expected interest rate and inflation differentials. The surprise in the table is the negative total return on the Merrill Lynch U.S. Government Master index. Only the federal government could announce a program to buy $300 billion of its own bonds out of thin air and watch the prices decline.
The net effect of American quantitative easing has been to reward low-quality debtors at the expense of the government. The net effect of all quantitative easing on stock markets has been underperformance as investors conclude the measures undertaken will lead to higher inflation in the future. Prosperity, so far as anyone can determine, involves real wealth creation via work, savings, investment and productivity. If it could be achieved via a printing press, Zimbabwe would be a nice place to live today.
The evidence the Federal Reserve or any other central bank can fine-tune the economy, either alone or in concert, simply does not exist. The older I get, the more I am convinced that Milton Friedman had it right: The one objective of monetary policy should be to match the growth rate of the money supply to the long-term capacity curve of the economy.
Will the excess money create the sort of financial market bubble so many enjoyed in the late 1990s? It could give the markets a kick, as excess money tends to find its way into financial assets before it moves into real assets.
But here is the question: We have three cases of major central banks engaging in quantitative easing this year and a surprising one in December 2008. Concurrent with the Dec. 16, 2008, Federal Open-Market Committee meeting and the cut of the target federal funds rate to the 0-0.25% range, the Bank of Japan quietly went back to its policy of quantitative easing first begun in March 2001 and abandoned in May 2006. The Bank of England and Swiss National Bank went to quantitative easing this past March 5 and 12, respectively.
This gives us an opportunity to assess whether these four quantitative-easing moves led to over- or underperformance relative to the world as a whole by the respective national stock markets. The Morgan Stanley Capital International total return indices will be used on both a local currency and a U.S. dollar basis. All four comparisons will be re-indexed to the day before their central-bank actions.
First, let's use the local currency case, which is not the one a U.S. investor would be interested in for a typical mutual fund or ETF holding. As an aside, the base for the MSCI World Index in local currency terms must be a monster to maintain; congratulations are in order to some unsung group of heroes somewhere.
The outcome is surprising. All four national markets have underperformed the World index at last reading. The Japanese market outperformed briefly between mid-February and early March as the yen weakened, but it lost those gains quickly. The U.S. market has drifted lower with respect to the World index, even as we gained in nominal terms.
Now let's shift the comparison to a U.S. dollar basis, the one you most likely would encounter. Only the U.K. market is outperforming the rest of the world in USD terms, and there by a trivial 1.3%. The U.S. has drifted lower with respect to the rest of the world, and both Japan and Switzerland have underperformed the World index in USD terms since their respective quantitative easing dates.
The two best-performing categories, by a wide margin, have been high-yield bonds and U.S. real estate investment trusts, or REITs. If we return to the maxim that inflation benefits debtors and lower-quality balance sheets, this makes sense. Both markets increased in response to expectations of future inflation. Gold rose, but it rose nowhere near as much: Gold by itself has no balance sheet and no debt to repay beyond its cost of carry. It benefits from inflation, but it is not a low-quality asset.
The dollar's decline over the period has been trivial, and we still are in a period where currencies are trading for reasons other than expected interest rate and inflation differentials. The surprise in the table is the negative total return on the Merrill Lynch U.S. Government Master index. Only the federal government could announce a program to buy $300 billion of its own bonds out of thin air and watch the prices decline.
The net effect of American quantitative easing has been to reward low-quality debtors at the expense of the government. The net effect of all quantitative easing on stock markets has been underperformance as investors conclude the measures undertaken will lead to higher inflation in the future. Prosperity, so far as anyone can determine, involves real wealth creation via work, savings, investment and productivity. If it could be achieved via a printing press, Zimbabwe would be a nice place to live today.
Stalled Out Or Building A Base? Tough To Tell Today In The Choppy Trading
The market finished poorly and the indices didn't do much at all, but breadth was pretty good and there was a lot of small-cap momentum under the surface. Although the Memorial Day holiday is still a few days off, it felt like fairly typical holiday trading where the traders pushed a number of stocks in rather euphoric fashion.
The hottest action today was in small-cap China, solar energy, fertilizers, some bulk shippers, select gold and metals and some energy stocks. Weakness was in the financials and retailers, which was why the senior indices lagged.
Even with the pockets of momentum there was some very choppy action. I was looking for this sort of action yesterday, but the bulls got the short squeeze going so we ended up with the consolidation-type action today at a higher level.
The question now is whether the market stalls out or just continues to base out a bit. The speculative action is a good sign: You don't see that sort of trading when folks are anxious to hit the exits.
On the other hand, we saw last week what happens when the small-cap momentum fizzles out. It slowed on Monday and Tuesday and we fell hard on Wednesday. We'll have to watch for that cycle to play out again.
Hewlett-Packard earnings are out after the close and although they look to be mostly in line, the stock is trading down on the news.
Going into more detail, a late selling effort caused stocks to close a choppy session in mixed fashion. The session's lack of direction followed disappointing housing data and a pullback by financial stocks... News that housing starts and building permits recently fell below expectations jostled participants in the early going and undermined what was a positive bias ahead of the opening bell. Housing starts during April came in at an annualized rate of 458,000, while building permits for April hit a rate of 494,000. Both marked record lows... However, there is a silver lining to the report. Fewer housing starts and building permits means there will be fewer homes on the market, which should help clear the glut of existing homes and improve pricing... Contrasting its performance in the prior session, financials were the worst performing sector in the S&P 500. They finished 2.6% lower amid weakness in consumer finance stocks and banking stocks... Consumer finance companies (-4.8%) saw their shares come under increased pressure following news that the Senate has passed legislation to place new restrictions on the credit card industry. Dow component American Express showed particular weakness, even though the company announced plans to save $800 million this year by slashing jobs, investments, and costs... Diversified banks dropped 4.9% as participants shrugged off news that the Fed has expanded collateral eligible under its TALF to include high-quality commercial mortgage-backed securities in order to ease balance sheet pressures. The Fed's announcement was made in the wake of a report from The Wall Street Journal that suggested commercial real-estate loans could generate $100 billion in bank losses by next year... Meanwhile, CNBC reported that TARP repayment announcements will not be made until after June 8, and that the Treasury will announce a process for auctioning TARP warrants in the next several days... On a similar note, Financial Times reported that Britain has begun talks with sovereign wealth funds and other investors about selling stakes in its part-nationalized banks... Health care stocks also traded as laggards. They finished with a 0.6% loss, though ABC showed strength after it announced better-than-expected earnings, raised its guidance, hiked its quarterly dividend by 20%, and issued a 2-for-1 stock split... There weren't many earnings reports for participants to assess this session. However, Dow component HD did post better-than-expected earnings for the latest quarter. That wasn't enough to win the company favor among participants, though. The stock surrendered nearly all of its gains from the prior session, and traded as a laggard among retailers, which finished the session 0.3% higher... Utilities made up the best performing sector by finishing 1.7% higher. The strong performance followed a flat finish in the prior session, and losses in the three preceding sessions. Only a handful of companies are scheduled to announce earnings results ahead of tomorrow's opening bell. The minutes from the FOMC's April 29 meeting are due at 2:00 PM ET and should help provide investors with details regarding the Fed's quantitative easing efforts...
The hottest action today was in small-cap China, solar energy, fertilizers, some bulk shippers, select gold and metals and some energy stocks. Weakness was in the financials and retailers, which was why the senior indices lagged.
Even with the pockets of momentum there was some very choppy action. I was looking for this sort of action yesterday, but the bulls got the short squeeze going so we ended up with the consolidation-type action today at a higher level.
The question now is whether the market stalls out or just continues to base out a bit. The speculative action is a good sign: You don't see that sort of trading when folks are anxious to hit the exits.
On the other hand, we saw last week what happens when the small-cap momentum fizzles out. It slowed on Monday and Tuesday and we fell hard on Wednesday. We'll have to watch for that cycle to play out again.
Hewlett-Packard earnings are out after the close and although they look to be mostly in line, the stock is trading down on the news.
Going into more detail, a late selling effort caused stocks to close a choppy session in mixed fashion. The session's lack of direction followed disappointing housing data and a pullback by financial stocks... News that housing starts and building permits recently fell below expectations jostled participants in the early going and undermined what was a positive bias ahead of the opening bell. Housing starts during April came in at an annualized rate of 458,000, while building permits for April hit a rate of 494,000. Both marked record lows... However, there is a silver lining to the report. Fewer housing starts and building permits means there will be fewer homes on the market, which should help clear the glut of existing homes and improve pricing... Contrasting its performance in the prior session, financials were the worst performing sector in the S&P 500. They finished 2.6% lower amid weakness in consumer finance stocks and banking stocks... Consumer finance companies (-4.8%) saw their shares come under increased pressure following news that the Senate has passed legislation to place new restrictions on the credit card industry. Dow component American Express showed particular weakness, even though the company announced plans to save $800 million this year by slashing jobs, investments, and costs... Diversified banks dropped 4.9% as participants shrugged off news that the Fed has expanded collateral eligible under its TALF to include high-quality commercial mortgage-backed securities in order to ease balance sheet pressures. The Fed's announcement was made in the wake of a report from The Wall Street Journal that suggested commercial real-estate loans could generate $100 billion in bank losses by next year... Meanwhile, CNBC reported that TARP repayment announcements will not be made until after June 8, and that the Treasury will announce a process for auctioning TARP warrants in the next several days... On a similar note, Financial Times reported that Britain has begun talks with sovereign wealth funds and other investors about selling stakes in its part-nationalized banks... Health care stocks also traded as laggards. They finished with a 0.6% loss, though ABC showed strength after it announced better-than-expected earnings, raised its guidance, hiked its quarterly dividend by 20%, and issued a 2-for-1 stock split... There weren't many earnings reports for participants to assess this session. However, Dow component HD did post better-than-expected earnings for the latest quarter. That wasn't enough to win the company favor among participants, though. The stock surrendered nearly all of its gains from the prior session, and traded as a laggard among retailers, which finished the session 0.3% higher... Utilities made up the best performing sector by finishing 1.7% higher. The strong performance followed a flat finish in the prior session, and losses in the three preceding sessions. Only a handful of companies are scheduled to announce earnings results ahead of tomorrow's opening bell. The minutes from the FOMC's April 29 meeting are due at 2:00 PM ET and should help provide investors with details regarding the Fed's quantitative easing efforts...
For Stock Ideas, Watch Seth Klarman
It's filing season for the investment funds, and the 13-F filings are an excellent source of ideas, both for individual plays and also for emerging investment themes. One of the best managers to watch is value investor Seth Klarman at the Baupost Group.
Klarman's track record is the envy of many. From its inception in 1983 through Dec. 31, his Baupost Limited Partnership Class A fund has earned an average annual return of 16.5% net of fees compared to 10.1% for the S&P 500. During the "lost decade" of 1998 to 2008, Baupost's fund crushed the S&P, returning 15.9% for the period vs. a loss of 1.4% for the S&P.
Klarman is well known for making bets against the crowd, and his track record demands that investors pay close attention. In the most recent quarter, Baupost remained steadfast to its holdings in energy master limited partnerships (MLPs), an asset class that I believe the market is still mispricing. Baupost did not exactly stand pat, though -- the fund shuffled quite a bit within the space.
Baupost completely sold out of its investment in Atlas Pipeline Holdings (AHD) . Compared to other MLPs, Atlas hasn't been keeping up, and its performance and balance sheet is weakening relative to its peers.
Baupost sold off 50% of its holdings in Linn Energy (LINE) , my favorite MLP in the space today. Linn's commodity price hedges are the some of best in the industry; nearly 100% of its production over the next three years is hedged at significantly higher gas and oil prices. And even after the 50% position reduction, Baupost still holds a meaningful block of Linn Energy. I will be curious to what the fund does next quarter. Nonetheless, with a yield of 14% supported by solid commodity price hedges, Linn is still a solid bet.
Finally, Baupost did increase its stake in another master limited partnership, BreitBurn Energy Partners (BBEP) as the stock price continued to decline. At $8 a share, the MLP was yielding over 25%, but the company recently had to suspend the payment to secure attractive financing. MLPs that must cut its dividend payments can lose many investors who simply own the stock for the income. Breitburn knows this and is working diligently to restore it as soon as possible. Baupost's increased position should offer comfort to investors.
Baupost's biggest position continues to be its stake in News Corp. (NWS.A) , a company that Klarman believes has assets that are substantially worth more than the whole company is trading for. News Corp. does hold some valuable, irreplaceable media assets, which now include The Wall Street Journal.
Another theme in Baupost's holdings is its various holdings in the biopharmaceutical industry. Its biggest position in the space -- and the fund's second-largest holding after News Corp. -- is Theravance (THRX) . Baupost owns nearly 20% of the company.
Klarman and company also own 12% of PDL Biopharma (PDLI) and also hold PDL's recent spinoff, Facet Biotech (FACT) . Facet is noteworthy because the stock is trading for about $9.35 a share and the company has about $14 a share in cash, or $13 a share after debt. Interestingly enough, Baupost also owns over 11% of Facet.
While the recent market rally has caused the stock price many of Baupost's holdings to appreciate -- in some cases by more than 100% -- Klarman invests in situations where the opportunity for multifold returns exists. His ideas are always worth taking seriously -- for many of them, it might not be too late to jump on board.
Klarman's track record is the envy of many. From its inception in 1983 through Dec. 31, his Baupost Limited Partnership Class A fund has earned an average annual return of 16.5% net of fees compared to 10.1% for the S&P 500. During the "lost decade" of 1998 to 2008, Baupost's fund crushed the S&P, returning 15.9% for the period vs. a loss of 1.4% for the S&P.
Klarman is well known for making bets against the crowd, and his track record demands that investors pay close attention. In the most recent quarter, Baupost remained steadfast to its holdings in energy master limited partnerships (MLPs), an asset class that I believe the market is still mispricing. Baupost did not exactly stand pat, though -- the fund shuffled quite a bit within the space.
Baupost completely sold out of its investment in Atlas Pipeline Holdings (AHD) . Compared to other MLPs, Atlas hasn't been keeping up, and its performance and balance sheet is weakening relative to its peers.
Baupost sold off 50% of its holdings in Linn Energy (LINE) , my favorite MLP in the space today. Linn's commodity price hedges are the some of best in the industry; nearly 100% of its production over the next three years is hedged at significantly higher gas and oil prices. And even after the 50% position reduction, Baupost still holds a meaningful block of Linn Energy. I will be curious to what the fund does next quarter. Nonetheless, with a yield of 14% supported by solid commodity price hedges, Linn is still a solid bet.
Finally, Baupost did increase its stake in another master limited partnership, BreitBurn Energy Partners (BBEP) as the stock price continued to decline. At $8 a share, the MLP was yielding over 25%, but the company recently had to suspend the payment to secure attractive financing. MLPs that must cut its dividend payments can lose many investors who simply own the stock for the income. Breitburn knows this and is working diligently to restore it as soon as possible. Baupost's increased position should offer comfort to investors.
Baupost's biggest position continues to be its stake in News Corp. (NWS.A) , a company that Klarman believes has assets that are substantially worth more than the whole company is trading for. News Corp. does hold some valuable, irreplaceable media assets, which now include The Wall Street Journal.
Another theme in Baupost's holdings is its various holdings in the biopharmaceutical industry. Its biggest position in the space -- and the fund's second-largest holding after News Corp. -- is Theravance (THRX) . Baupost owns nearly 20% of the company.
Klarman and company also own 12% of PDL Biopharma (PDLI) and also hold PDL's recent spinoff, Facet Biotech (FACT) . Facet is noteworthy because the stock is trading for about $9.35 a share and the company has about $14 a share in cash, or $13 a share after debt. Interestingly enough, Baupost also owns over 11% of Facet.
While the recent market rally has caused the stock price many of Baupost's holdings to appreciate -- in some cases by more than 100% -- Klarman invests in situations where the opportunity for multifold returns exists. His ideas are always worth taking seriously -- for many of them, it might not be too late to jump on board.
Monday, May 18, 2009
Market Moves With Spike In Financials - Particularly BAC
After struggling last week, the bulls regained their footing and had the bears on the run all day. There was a little selling following the initial gap up open this morning, but the bulls shook it off and were able to trend up all day. The bears could not dig their claws in and just gave up completely in the final minutes as news hit that GS, JPM and MS are looking to repay a total of $45 billion in TARP funds.
Breadth was strong all day, but volume was quite light. It is pretty obvious that some folks were caught off guard by the strength after the poor action we had last week. The light volume makes the move suspect, but obviously that does not prevent shorts from being squeezed.
I was not expecting this market to stay as strong as it was. It certainly felt like a squeeze, but the bulls did not relent, and they regained the upper hand. There never was any serious technical breakdown last week, so they do deserve the benefit of the doubt. It was just a bit surprising that they recovered so quickly today on no real news.
The ease with which we shook off the breakdown we suffered last week shows how strong the underlying support is and how anxious folks are not to be left out once again of further upside. However, this was a pretty classic low-volume bounce back to resistance, and it is very tough to trust in further upside. If you have a lot of longs, I'd consider some hedges, but there certainly is some strong momentum in individual stocks, and that isn't something you want to fight.
Going into more detail, stocks closed at session highs as diversified bank stocks and financial services stocks steadily led the broader market to its best single-session percentage advance in nearly two weeks... BAC was a primary leader among financials after reports indicated that analysts at Goldman Sachs added shares of BAC to their Conviction Buy List. Even in the face of persistent capital concerns, regional banks jumped 7.1%, diversified banks finished 8.5% higher, and diversified financial services companies advanced 7.6%. The KBW Banking index climbed 7.5%... Strength in bank stocks led the financial sector to a 7.2% gain, and helped carry the S&P 500 back above 900 as the broader market's advancing issues outnumbered its decliners by 10-to-1... The positive bias also helped pare losses in the utilities sector, which looked as if it would close lower for its fourth straight session. Instead, utilities finished flat... Buyers favored cyclical stocks for most of the session, bidding materials stocks (+3.6%), industrial stocks (+3.2%), and shares of retailers (+4.5%) higher. Retailers received added support after better-than-expected top and bottom line quarterly results and an upbeat earnings outlook from home improvement outfit LOW helped home improvement retailers tack on 7.0%... Home improvement retailers will likely have their gains tested Tuesday as April housing starts and building permits data hits news wires (8:30 AM ET). No other economic data is scheduled for release ahead of tomorrow morning's opening bell... According to Reuters, M was added to the Conviction Buy List at Goldman Sachs, winning additional favor for retailers. Reuters also reported that Goldman cut its rating on JWN, but shares of JWN were able to overcome sellers' initial efforts and close higher with its peers... Energy stocks (+3.1%) climbed as crude oil futures rallied 4.8% to settle pit trading just above $59 per barrel at a six-month closing high... Precious metals fell out of favor, though, as equities bounded in broad-based fashion. Gold prices settled 1.0% lower at $921.70 per ounce, while silver slipped 1.3% to settle the session at $13.93 per ounce... Also a defensive benchmark, the 10-year Treasury Note dropped 23 ticks, lifting its yield to roughly 3.22%... Trading volume during the session was rather low, however. Roughly 1.4 billion shares traded hands on the NYSE.
Breadth was strong all day, but volume was quite light. It is pretty obvious that some folks were caught off guard by the strength after the poor action we had last week. The light volume makes the move suspect, but obviously that does not prevent shorts from being squeezed.
I was not expecting this market to stay as strong as it was. It certainly felt like a squeeze, but the bulls did not relent, and they regained the upper hand. There never was any serious technical breakdown last week, so they do deserve the benefit of the doubt. It was just a bit surprising that they recovered so quickly today on no real news.
The ease with which we shook off the breakdown we suffered last week shows how strong the underlying support is and how anxious folks are not to be left out once again of further upside. However, this was a pretty classic low-volume bounce back to resistance, and it is very tough to trust in further upside. If you have a lot of longs, I'd consider some hedges, but there certainly is some strong momentum in individual stocks, and that isn't something you want to fight.
Going into more detail, stocks closed at session highs as diversified bank stocks and financial services stocks steadily led the broader market to its best single-session percentage advance in nearly two weeks... BAC was a primary leader among financials after reports indicated that analysts at Goldman Sachs added shares of BAC to their Conviction Buy List. Even in the face of persistent capital concerns, regional banks jumped 7.1%, diversified banks finished 8.5% higher, and diversified financial services companies advanced 7.6%. The KBW Banking index climbed 7.5%... Strength in bank stocks led the financial sector to a 7.2% gain, and helped carry the S&P 500 back above 900 as the broader market's advancing issues outnumbered its decliners by 10-to-1... The positive bias also helped pare losses in the utilities sector, which looked as if it would close lower for its fourth straight session. Instead, utilities finished flat... Buyers favored cyclical stocks for most of the session, bidding materials stocks (+3.6%), industrial stocks (+3.2%), and shares of retailers (+4.5%) higher. Retailers received added support after better-than-expected top and bottom line quarterly results and an upbeat earnings outlook from home improvement outfit LOW helped home improvement retailers tack on 7.0%... Home improvement retailers will likely have their gains tested Tuesday as April housing starts and building permits data hits news wires (8:30 AM ET). No other economic data is scheduled for release ahead of tomorrow morning's opening bell... According to Reuters, M was added to the Conviction Buy List at Goldman Sachs, winning additional favor for retailers. Reuters also reported that Goldman cut its rating on JWN, but shares of JWN were able to overcome sellers' initial efforts and close higher with its peers... Energy stocks (+3.1%) climbed as crude oil futures rallied 4.8% to settle pit trading just above $59 per barrel at a six-month closing high... Precious metals fell out of favor, though, as equities bounded in broad-based fashion. Gold prices settled 1.0% lower at $921.70 per ounce, while silver slipped 1.3% to settle the session at $13.93 per ounce... Also a defensive benchmark, the 10-year Treasury Note dropped 23 ticks, lifting its yield to roughly 3.22%... Trading volume during the session was rather low, however. Roughly 1.4 billion shares traded hands on the NYSE.
A History Of The Deficit
When President Barack Obama signed the American Recovery and Reinvestment Act of 2009 into law earlier this year, he was adding to what is already almost guaranteed to be the largest deficit in American history. In January, the Congressional Budget Office projected that the deficit this year would be $1.2 trillion before the stimulus package. That's more than twice the deficit in fiscal 2008, more than the entire GDP of all but a handful of countries, and more, in nominal dollars, than the entire United States national debt in 1982.
But while the sum is huge, it is not in and of itself threatening to the solvency of the Republic. At 8.3% of GDP, this year's deficit is by far the largest since World War II. But the total debt is, as of now, still under 75% of GDP. It was almost 130% following World War II. (Japan's national debt right now is not far from 180% of that nation's GDP.)
Still, it's the trend that is worrisome, to put it mildly. There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.
It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer -- no deficit hawk when his party is in the majority -- called it "porky."
It was not ever thus. Before the Great Depression, balancing the budget and paying down the debt were considered second only to the defense of the country as an obligation of the federal government. Before 1930, the government ran surpluses in two years out of three. In 1865, the vast debt run up in the Civil War amounted to about 30% of GDP; by 1916 it was less than a tenth of that.
There even was a time when the U.S. made it a deliberate policy to pay off the national debt entirely -- and succeeded in doing so. It remains to this day the only time in history a major country has been debt free. Ironically, the president who achieved this was the founder of the modern Democratic Party, Andrew Jackson.
Jackson was a Jeffersonian through and through. The smaller the federal government, the more he liked it. And, like Jefferson, he hated banks, speculation and the "money interest." Unlike Jefferson, however, he was born poor and made his own fortune. An early personal encounter with debt had taught him to fear it. When the notes of someone who had bought land from him proved worthless, he became liable for the debts he had secured with those notes, and it took him years to pay them off.
When he ran for president the first time, in 1824, Jackson called the debt a "national curse." He vowed to "pay the national debt, to prevent a monied aristocracy from growing up around our administration that must bend to its views, and ultimately destroy the liberty of our country."
"How gratifying," he wrote in 1829 as he began his presidency, "the effect of presenting to the world the sublime spectacle of a Republic of more than 12 million happy people, in the 54th year of her existence . . . free from debt and with all . . . [her] immense resources unfettered!"
When Jackson entered the White House, the national debt, which had reached $125 million at the end of the War of 1812, had already been reduced to $48 million. To get it to zero he was perfectly willing to forego what were then called "internal improvements" and are now known as infrastructure projects. One Kentucky congressman, after a trip to the White House to beg Jackson to sign one such bill, reported to his allies that "nothing less than a voice from Heaven would prevent the old man from vetoing the Bill, and [I doubt] whether that would!"
At the end of 1834, Jackson reported in the State of the Union message that the country would be debt free as of Jan. 1, 1835, with a Treasury balance of $440,000. Government revenues that year would be twice expenses.
It didn't last long, to be sure. The great prosperity of the early 1830s broke in the summer of 1836 when a bubble in land speculation, fueled by easy credit, abruptly ended. The bubble burst, ironically enough, thanks to Andrew Jackson's issuance of the "specie circular," which required that all land bought from the government, except that actually settled on, be paid for in gold or silver.
By the next spring, just as Jackson left the White House, the longest contraction in American history -- six years -- had begun. As one Wall Streeter put it, "The fortunes we have heard so much about in the days of speculation, have melted like the snows before an April sun." Federal revenues fell by half that year and the national debt was back, this time for good.
While today there is no hope of balancing the budget -- or wisdom in trying to -- until the economy substantially improves, we could make a sort of down payment on reforming Washington's porky ways by simply starting to tell the truth.
It has been widely noted that 2009 will have the first "trillion-dollar deficit" in American history. Actually it's the second. In fiscal 2008, the national debt increased from $9 trillion to slightly over $10 trillion. Yet the budget deficit in the last fiscal year was officially reported as being $455 billion. How could the national debt have increased by considerably more than twice the "deficit"? Simple. Just call the money borrowed from the Social Security trust fund an "intragovernmental transfer" and exclude it from the calculation of the deficit.
Corporate managers have gone to jail for less book cooking than that.
But while the sum is huge, it is not in and of itself threatening to the solvency of the Republic. At 8.3% of GDP, this year's deficit is by far the largest since World War II. But the total debt is, as of now, still under 75% of GDP. It was almost 130% following World War II. (Japan's national debt right now is not far from 180% of that nation's GDP.)
Still, it's the trend that is worrisome, to put it mildly. There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.
It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer -- no deficit hawk when his party is in the majority -- called it "porky."
It was not ever thus. Before the Great Depression, balancing the budget and paying down the debt were considered second only to the defense of the country as an obligation of the federal government. Before 1930, the government ran surpluses in two years out of three. In 1865, the vast debt run up in the Civil War amounted to about 30% of GDP; by 1916 it was less than a tenth of that.
There even was a time when the U.S. made it a deliberate policy to pay off the national debt entirely -- and succeeded in doing so. It remains to this day the only time in history a major country has been debt free. Ironically, the president who achieved this was the founder of the modern Democratic Party, Andrew Jackson.
Jackson was a Jeffersonian through and through. The smaller the federal government, the more he liked it. And, like Jefferson, he hated banks, speculation and the "money interest." Unlike Jefferson, however, he was born poor and made his own fortune. An early personal encounter with debt had taught him to fear it. When the notes of someone who had bought land from him proved worthless, he became liable for the debts he had secured with those notes, and it took him years to pay them off.
When he ran for president the first time, in 1824, Jackson called the debt a "national curse." He vowed to "pay the national debt, to prevent a monied aristocracy from growing up around our administration that must bend to its views, and ultimately destroy the liberty of our country."
"How gratifying," he wrote in 1829 as he began his presidency, "the effect of presenting to the world the sublime spectacle of a Republic of more than 12 million happy people, in the 54th year of her existence . . . free from debt and with all . . . [her] immense resources unfettered!"
When Jackson entered the White House, the national debt, which had reached $125 million at the end of the War of 1812, had already been reduced to $48 million. To get it to zero he was perfectly willing to forego what were then called "internal improvements" and are now known as infrastructure projects. One Kentucky congressman, after a trip to the White House to beg Jackson to sign one such bill, reported to his allies that "nothing less than a voice from Heaven would prevent the old man from vetoing the Bill, and [I doubt] whether that would!"
At the end of 1834, Jackson reported in the State of the Union message that the country would be debt free as of Jan. 1, 1835, with a Treasury balance of $440,000. Government revenues that year would be twice expenses.
It didn't last long, to be sure. The great prosperity of the early 1830s broke in the summer of 1836 when a bubble in land speculation, fueled by easy credit, abruptly ended. The bubble burst, ironically enough, thanks to Andrew Jackson's issuance of the "specie circular," which required that all land bought from the government, except that actually settled on, be paid for in gold or silver.
By the next spring, just as Jackson left the White House, the longest contraction in American history -- six years -- had begun. As one Wall Streeter put it, "The fortunes we have heard so much about in the days of speculation, have melted like the snows before an April sun." Federal revenues fell by half that year and the national debt was back, this time for good.
While today there is no hope of balancing the budget -- or wisdom in trying to -- until the economy substantially improves, we could make a sort of down payment on reforming Washington's porky ways by simply starting to tell the truth.
It has been widely noted that 2009 will have the first "trillion-dollar deficit" in American history. Actually it's the second. In fiscal 2008, the national debt increased from $9 trillion to slightly over $10 trillion. Yet the budget deficit in the last fiscal year was officially reported as being $455 billion. How could the national debt have increased by considerably more than twice the "deficit"? Simple. Just call the money borrowed from the Social Security trust fund an "intragovernmental transfer" and exclude it from the calculation of the deficit.
Corporate managers have gone to jail for less book cooking than that.
The BDI And Shippers
The Baltic Dry Index, possibly "the best economic indicator you've never heard of," has begun showing signs of life after losing about 95% from its historic high in 2008. The BDI is a daily indicator released by the Baltic Exchange that tracks the average dry bulk shipping costs across 26 sea routes.
From a basic economic perspective, the BDI is set by the supply of available cargo ships against the demand for raw material shipments. External factors come into play, of course, including energy prices, port fees and regional issues. Nevertheless, given the BDI's position in tracking global commodity demand coupled with "real-time" data, it is an effective yet oft-ignored leading indicator for global industrial production -- factoring out potential inventory reserves, manufacturers that anticipate a sustained rise in orders need to source raw material inputs before they can meet customer demands.
BDI has been a highly effective tool for tracking global economic activity over the past decade. But given the current economic climate and a potential supply shock, interpreting the BDI right now is not as straightforward as it might seem.
After reaching all-time highs in mid-2008 thanks to China's insatiable demand for natural resources, the BDI experienced an unprecedented drop of nearly 95% by year's end. To help put this into perspective, an article published by The Independent noted that at its peak, the cost of a coal shipment from Brazil to China would have been $15 million, compared to just $1.5 million by the end of 2008. But since the beginning of 2009, the BDI has begun showing signs of recovery, reaching a seven-month high this past week.
A casual observer might take this as the beginning of an upward trend in global economic activity. It is unlikely, however, that the BDI's current rally can be sustained -- it has resulted primarily from a Chinese government stimulus package that stoked the country's imports of iron ore, coal, and copper, combined with companies looking to take advantage of historically low commodity prices to boost reserves.
Without a global uptick in demand for Chinese goods, these levels cannot likely be sustained; portions of these imports are just adding to growing reserves. Further downward pressure will come in the form of a supply shock on the horizon. Shipping companies looking to take advantage of historically high margins contracted a record number of new vessels from 2005-08, most of which are scheduled for completion over the next two years. According to Lloyd's List, a leading journal for the maritime industry, 492 vessels -- or 9.6% of the bulk tonnage on order -- have been canceled since the crisis began.
Roy Thomson, a regional manager in Asia for Lloyd's Register, indicated at a recent conference that he expects that number to rise further and that current cuts will not circumvent a supply glut. In all, this confluence of factors should place downward pressure on dry bulk carriers and ship builders.
As for the BDI, I expect it will remain rangebound between 1,500 and 3,500 through 2010, mostly dependent on the magnitude of any economic recovery and supply management of new vessels.
Unsustainable demand coupled with a capacity glut will place significant strains on dry bulk margins through 2010. Furthermore, highly leveraged shipping companies, with extensive ongoing new vessel orders, will face even greater pressure over the coming months.
From a basic economic perspective, the BDI is set by the supply of available cargo ships against the demand for raw material shipments. External factors come into play, of course, including energy prices, port fees and regional issues. Nevertheless, given the BDI's position in tracking global commodity demand coupled with "real-time" data, it is an effective yet oft-ignored leading indicator for global industrial production -- factoring out potential inventory reserves, manufacturers that anticipate a sustained rise in orders need to source raw material inputs before they can meet customer demands.
BDI has been a highly effective tool for tracking global economic activity over the past decade. But given the current economic climate and a potential supply shock, interpreting the BDI right now is not as straightforward as it might seem.
After reaching all-time highs in mid-2008 thanks to China's insatiable demand for natural resources, the BDI experienced an unprecedented drop of nearly 95% by year's end. To help put this into perspective, an article published by The Independent noted that at its peak, the cost of a coal shipment from Brazil to China would have been $15 million, compared to just $1.5 million by the end of 2008. But since the beginning of 2009, the BDI has begun showing signs of recovery, reaching a seven-month high this past week.
A casual observer might take this as the beginning of an upward trend in global economic activity. It is unlikely, however, that the BDI's current rally can be sustained -- it has resulted primarily from a Chinese government stimulus package that stoked the country's imports of iron ore, coal, and copper, combined with companies looking to take advantage of historically low commodity prices to boost reserves.
Without a global uptick in demand for Chinese goods, these levels cannot likely be sustained; portions of these imports are just adding to growing reserves. Further downward pressure will come in the form of a supply shock on the horizon. Shipping companies looking to take advantage of historically high margins contracted a record number of new vessels from 2005-08, most of which are scheduled for completion over the next two years. According to Lloyd's List, a leading journal for the maritime industry, 492 vessels -- or 9.6% of the bulk tonnage on order -- have been canceled since the crisis began.
Roy Thomson, a regional manager in Asia for Lloyd's Register, indicated at a recent conference that he expects that number to rise further and that current cuts will not circumvent a supply glut. In all, this confluence of factors should place downward pressure on dry bulk carriers and ship builders.
As for the BDI, I expect it will remain rangebound between 1,500 and 3,500 through 2010, mostly dependent on the magnitude of any economic recovery and supply management of new vessels.
Unsustainable demand coupled with a capacity glut will place significant strains on dry bulk margins through 2010. Furthermore, highly leveraged shipping companies, with extensive ongoing new vessel orders, will face even greater pressure over the coming months.
Friday, May 15, 2009
Stocks Continue Sliding
It was not a good week for the bulls. After some cooling of momentum and weaker closing action on Monday and Tuesday, we rolled over hard on Wednesday. Nothing much was spared, and many or the recently hot small-caps were pummeled. We had a dead-cat bounce on Thursday and wrapped up the week with another anemic day. The action wasn't terrible, but breadth was soundly negative, and the hot money that has been chasing things was very skittish. I'm not sure how much of this week's weakness was due to the usual options-week machinations.
Technically, the major indices are all starting to roll over. The question is whether they will find some support and bounce back. That has been the pattern for the last 60 days or so, but the selling pressure this week was more severe and the dip-buying much weaker.
When the market starts to roll over like it did this week, it creates overhead, which helps to keep the downward pressure on. Psychologically, the folks who bought recently will start questioning their buying and will have a greater tendency to sell if they can get back to even.
What we saw develop this week was a shift from buying weakness to selling strength. It was a real change in character, and we now are in danger of it developing further.
I think we do have a good chance of developing a rocky trading range in the very near future. There has been a surge in speculative trading in the last few weeks and I think these folks may stick around and continue to look for some opportunities. I don't think it will materialize - see a post from yesterday - but it will be brutal if we roll over again like we did last year and the beginning of this year. Some market players are very frightened of that, and they will lose confidence quickly if the market struggles for long.
The good thing about a trading range is that it rewards active traders and good stock-picking.
Going into more detail, choppy trading in the early going gave way to broad-based selling, which resulted in the stock market's fourth decline this week. As a result, stocks logged a weekly loss of 5.0%, which is its worst in two months... Stocks struggled to find clear direction in the first couple of hours of trading. Participants were generally uninspired by news that the Euro zone economy contracted for its fourth consecutive quarter, and that the pace of that contraction has accelerated. Despite the dour batch of data, European indices closed in mixed fashion... U.S. economic data also did little to motivate. The April Consumer Price Index (CPI) met expectations by coming in flat, while Core CPI saw a stronger increase than had been expected by coming in with a 0.3% monthly increase. Industrial production for April fell 0.5%, which wasn't quite as bad as what had been expected, and capacity utilization came in at 69.1%, moderately better than what was expected... Though the economic readings were generally in-line to slightly better than expected, participants are beginning to look for signs that economic conditions are actually tilting toward growth... News that life insurers will have access to $22 billion in TARP funds initially won support for the group. However, concern that government funds may not win higher ratings for the companies along with the recognition that many companies continue struggling with macro headwinds undercut the group's strength. Life and health insurers finished 3.5% lower... In a similar vein, rating agency Fitch placed several regional banks on Credit Watch Negative amid concern related to further credit deterioration. Regional banks finished the session 3.0% lower... Weakness in insurers and banking issues dragged the financial sector to a 2.5% loss, which was worse than any other sector. With abounding weakness in the financial sector, the broader market was left without one of its primary leaders... Sellers also hit energy stocks with stiff pressure. The sector shed 2.2%. Its weakness was exacerbated by a 3.6% drop in crude oil prices, which settled at $56.52 per barrel... Utilities underperformed for the entire session, extending the prior session's weakness. Electric utilities fell 2.7% amid news that FE held a disappointing rate auction... Retailers showed periodic strength in the wake of better-than-expected earnings from Nordstrom and JCP, but the group still finished 0.7% lower... Tech, which is the largest sector in the S&P 500 by market weight, showed relative strength and actually spent the majority of the session as the only sector in the green. While several large-cap tech stocks held their gains, the broader tech sector was unable to fight off the negative bias and finished 0.1% lower... The broader market did find some support late in the session, but only after it broke below its 20-day moving average to hit 880. Stocks recovered a bit from there, but still finished with broad-based losses as declining issues outnumbered advancers by 3-to-1 in the S&P 500... Options for May expired this session, but that didn't seem to lift trading volume above recent averages. Less than 1.5 billion shares traded hands on the NYSE big board this session...
Technically, the major indices are all starting to roll over. The question is whether they will find some support and bounce back. That has been the pattern for the last 60 days or so, but the selling pressure this week was more severe and the dip-buying much weaker.
When the market starts to roll over like it did this week, it creates overhead, which helps to keep the downward pressure on. Psychologically, the folks who bought recently will start questioning their buying and will have a greater tendency to sell if they can get back to even.
What we saw develop this week was a shift from buying weakness to selling strength. It was a real change in character, and we now are in danger of it developing further.
I think we do have a good chance of developing a rocky trading range in the very near future. There has been a surge in speculative trading in the last few weeks and I think these folks may stick around and continue to look for some opportunities. I don't think it will materialize - see a post from yesterday - but it will be brutal if we roll over again like we did last year and the beginning of this year. Some market players are very frightened of that, and they will lose confidence quickly if the market struggles for long.
The good thing about a trading range is that it rewards active traders and good stock-picking.
Going into more detail, choppy trading in the early going gave way to broad-based selling, which resulted in the stock market's fourth decline this week. As a result, stocks logged a weekly loss of 5.0%, which is its worst in two months... Stocks struggled to find clear direction in the first couple of hours of trading. Participants were generally uninspired by news that the Euro zone economy contracted for its fourth consecutive quarter, and that the pace of that contraction has accelerated. Despite the dour batch of data, European indices closed in mixed fashion... U.S. economic data also did little to motivate. The April Consumer Price Index (CPI) met expectations by coming in flat, while Core CPI saw a stronger increase than had been expected by coming in with a 0.3% monthly increase. Industrial production for April fell 0.5%, which wasn't quite as bad as what had been expected, and capacity utilization came in at 69.1%, moderately better than what was expected... Though the economic readings were generally in-line to slightly better than expected, participants are beginning to look for signs that economic conditions are actually tilting toward growth... News that life insurers will have access to $22 billion in TARP funds initially won support for the group. However, concern that government funds may not win higher ratings for the companies along with the recognition that many companies continue struggling with macro headwinds undercut the group's strength. Life and health insurers finished 3.5% lower... In a similar vein, rating agency Fitch placed several regional banks on Credit Watch Negative amid concern related to further credit deterioration. Regional banks finished the session 3.0% lower... Weakness in insurers and banking issues dragged the financial sector to a 2.5% loss, which was worse than any other sector. With abounding weakness in the financial sector, the broader market was left without one of its primary leaders... Sellers also hit energy stocks with stiff pressure. The sector shed 2.2%. Its weakness was exacerbated by a 3.6% drop in crude oil prices, which settled at $56.52 per barrel... Utilities underperformed for the entire session, extending the prior session's weakness. Electric utilities fell 2.7% amid news that FE held a disappointing rate auction... Retailers showed periodic strength in the wake of better-than-expected earnings from Nordstrom and JCP, but the group still finished 0.7% lower... Tech, which is the largest sector in the S&P 500 by market weight, showed relative strength and actually spent the majority of the session as the only sector in the green. While several large-cap tech stocks held their gains, the broader tech sector was unable to fight off the negative bias and finished 0.1% lower... The broader market did find some support late in the session, but only after it broke below its 20-day moving average to hit 880. Stocks recovered a bit from there, but still finished with broad-based losses as declining issues outnumbered advancers by 3-to-1 in the S&P 500... Options for May expired this session, but that didn't seem to lift trading volume above recent averages. Less than 1.5 billion shares traded hands on the NYSE big board this session...
Thursday, May 14, 2009
Financials Lead A Rebound
Led by financials, stocks spent the majority of the session trading with impressive gains, but some late selling pressure challenged the broader market's advance and made for a choppy close... Stocks struggled to find direction in the first few minutes of trading as participants assessed the implications of rising jobless claims. According to the latest data, continuing claims climbed more than expected to a record high of 6.56 million. Weekly initial claims also topped expectations by totaling 637,000... With jobless claims mounting, many expect consumer spending to remain challenged. Such a notion was supported in the prior session when advance retail sales data for April showed an unexpected decline... Shares of retailers fought to hold on to gains this session. They finished 0.3% higher after being up more than 2%. Wal-Mart slipped after posting in-line earnings, which were also on par with what the company had already forecast... Financials provided leadership to the broader market, but only after recovering from a flurry of selling pressure in the early going. Financials were down 0.6% at their session low, but managed to close with a 4.0% gain... Multiline (+9.3%) insurers led gains in the financial sector as they recovered from rating concerns in the prior session. Meanwhile, Moody's has put Bank of America's financial strength on review for possible upgrade... Energy stocks also climbed back from an early loss. The sector had been down more than 1%, but closed with a 0.3% gain amid a rebound in crude oil prices. Crude oil prices were down in early pit trading after the IEA trimmed its demand forecast, but crude prices settled 1.0% higher at $58.62 per barrel... Of the 10 major sectors in the S&P 500, only the utilities sector closed lower; it shed 0.4% amid weakness in electric utilities stocks (-0.8%)... Without any major companies reporting earnings results tomorrow, participants will be taking their cues from economic data. Due tomorrow morning at 8:30 AM ET, April total CPI is expected to be flat, while Core CPI is expected to increase 0.1%. That ties in with the April PPI, which was released this morning. Total April PPI increased 0.3% month-over-month, while Core PPI increased 0.1% month-over-month... Separately, capacity utilization and industrial production for April are due tomorrow at 9:15 AM ET.
Some Things To Consider
It is my contention that when the various Fed and Treasury programs such as TALF, PPIP and the others actually kick in during second half of 2009 this is going to have a revolutionary impact on the credit markets, tightening spreads across the board. It is also my contention that the lowering of private borrowing costs has uber bullish implications for equity markets.
Time will tell, but I do not believe it is the best bet out there to fight the Fed and Treasury. Make no mistake: The Fed and Treasury, through announced policies and others likely to come, will explicitly be gunning after credit market spreads to bring them down.
REITS are a sector that could directly benefit hugely from this phenomenon. I believe that shorting this sector, which is almost certainly heavily shorted, could be quite dangerous.
Time will tell, but I do not believe it is the best bet out there to fight the Fed and Treasury. Make no mistake: The Fed and Treasury, through announced policies and others likely to come, will explicitly be gunning after credit market spreads to bring them down.
REITS are a sector that could directly benefit hugely from this phenomenon. I believe that shorting this sector, which is almost certainly heavily shorted, could be quite dangerous.
Wednesday, May 13, 2009
Sellers Control The Session To Say The Least - A Bloody Day
It was a very bloody day for stocks. We had intense selling all day and nothing much was left unscathed. For the first time in a while, the bulls couldn't even mount the standard late-day spike that we have seen so often lately. Breadth was terrible with only defensive sectors gold and pharmaceuticals showing any life.
What can really make days like today tough is that the action under the surface is often even worse than indicated by the major indices. Momentum stocks were just plain destroyed. The stuff that has been running up as traders chased them crashed back to earth today. Plenty of small momentum stocks saw corrections of 10% or more.
As I've been discussing for the last few days, there was some signs that momentum was cooling off, but today things really kicked into reverse and it got very ugly very fast.
The big issue now is whether this is just the pause that refreshes before the new bull market continues or is this the beginning of the end of an aggressive bear market bounce. I've never embraced the idea that the bear market is over but I do think we have the possibility of some better trading ahead of us.
That doesn't mean we don't downtrend some more but the recent speculative action has the capacity to keep traders engaged. For a while the hot money just disappeared but it came back and hopefully will stay focused on some good stock picking.
It won't be easy, but it never is and that is what makes this job so potentially rewarding. Stay fleet and flexible; pullbacks like we had today hold the seeds of opportunity. We just have to keep working to find them.
Going into the gory details, sellers obviously controlled the session. A broad-based selling effort weighed on stocks for the entire session and sent buyers recoiling as more than 90% of the companies in the S&P 500 finished lower, which resulted in the S&P 500's third consecutive loss... A negative bias loomed in premarket trading as sellers prepared to continue their efforts amid weakness among major foreign indices. Their cause was strengthened by an unexpected decline in advance retail sales data for April, which was released ahead of the opening bell and supported the notion that consumers aren't completely ready to lead an economic turnaround... According to the data, April total retail sales decreased 0.4%, and sales less autos decreased 0.5%. The April figures failed to meet the consensus forecast, which called for total sales to be flat and sales excluding autos to increase 0.2%. However, the decline wasn't as sharp as what was seen in March, when total sales slid 1.3%, and sales less autos declined 1.2%... Shares of retailers slid 3.3%. Retail giant WMT also finished with a loss, but outperformed the broader market on a relative basis. The company is scheduled to announce its latest quarterly results tomorrow morning, ahead of the opening bell... Financials dropped 5.2%, more than any other major sector, and extended their week-to-date decline to more than 13%. While financials logged the worst loss of any sector this session, sellers weren't entirely focused on financial stocks. Cyclical plays also saw outsized losses as materials stocks (-4.5%) and industrials stocks (-4.0%) sank. Small-cap and mid-cap stocks were also strongly out of favor as the Russell 2000 Small-Cap Index sank -4.7% and the S&P 400 Mid-Cap Index made a 4.4% drop... Large-cap tech had showed relative weakness in the early going, but managed to firm up a bit. INTC was a relative leader among its peers after stating that the second quarter is going better than the company had expected. That overshadowed news that Intel has been hit by the European Commission with a $1.45 billion fine for breaking antitrust laws. The fine represents nearly 14% of Intel's cash and short-term investments... IBM attempted to drum up support by stating that earnings for fiscal 2009 will be least $9.20 per share, which is above the current consensus estimate of $9.11 per share... Energy stocks finished 3.0% lower amid the broader market's downward bias and a downturn in crude oil prices. Crude oil contracts finished 1.4% lower at $58.02 per barrel after surrendering solid gains that were bolstered by bullish inventory data midmorning. Enthusiasm was partly capped by a lowered demand forecast from OPEC... All 10 major sectors finished the session lower amid relatively high trading volume (approx. 1.8 bln shares on NYSE). Even health care, which had spent most of the session as the only sector in positive territory, buckled in late trading. Health care closed 0.1% lower, though pharmaceuticals were able to finish 0.7% higher... The latest business inventory data had no real impact on this session's trading. Nonetheless, March data showed a 1.0% decrease in inventories, which was largely in-line with expectations. Tomorrow's economic data carries a bit more weight and will be in closer focus; both the April Producer Price Index and weekly initial jobless claims data are due at 8:30 AM tomorrow.
What can really make days like today tough is that the action under the surface is often even worse than indicated by the major indices. Momentum stocks were just plain destroyed. The stuff that has been running up as traders chased them crashed back to earth today. Plenty of small momentum stocks saw corrections of 10% or more.
As I've been discussing for the last few days, there was some signs that momentum was cooling off, but today things really kicked into reverse and it got very ugly very fast.
The big issue now is whether this is just the pause that refreshes before the new bull market continues or is this the beginning of the end of an aggressive bear market bounce. I've never embraced the idea that the bear market is over but I do think we have the possibility of some better trading ahead of us.
That doesn't mean we don't downtrend some more but the recent speculative action has the capacity to keep traders engaged. For a while the hot money just disappeared but it came back and hopefully will stay focused on some good stock picking.
It won't be easy, but it never is and that is what makes this job so potentially rewarding. Stay fleet and flexible; pullbacks like we had today hold the seeds of opportunity. We just have to keep working to find them.
Going into the gory details, sellers obviously controlled the session. A broad-based selling effort weighed on stocks for the entire session and sent buyers recoiling as more than 90% of the companies in the S&P 500 finished lower, which resulted in the S&P 500's third consecutive loss... A negative bias loomed in premarket trading as sellers prepared to continue their efforts amid weakness among major foreign indices. Their cause was strengthened by an unexpected decline in advance retail sales data for April, which was released ahead of the opening bell and supported the notion that consumers aren't completely ready to lead an economic turnaround... According to the data, April total retail sales decreased 0.4%, and sales less autos decreased 0.5%. The April figures failed to meet the consensus forecast, which called for total sales to be flat and sales excluding autos to increase 0.2%. However, the decline wasn't as sharp as what was seen in March, when total sales slid 1.3%, and sales less autos declined 1.2%... Shares of retailers slid 3.3%. Retail giant WMT also finished with a loss, but outperformed the broader market on a relative basis. The company is scheduled to announce its latest quarterly results tomorrow morning, ahead of the opening bell... Financials dropped 5.2%, more than any other major sector, and extended their week-to-date decline to more than 13%. While financials logged the worst loss of any sector this session, sellers weren't entirely focused on financial stocks. Cyclical plays also saw outsized losses as materials stocks (-4.5%) and industrials stocks (-4.0%) sank. Small-cap and mid-cap stocks were also strongly out of favor as the Russell 2000 Small-Cap Index sank -4.7% and the S&P 400 Mid-Cap Index made a 4.4% drop... Large-cap tech had showed relative weakness in the early going, but managed to firm up a bit. INTC was a relative leader among its peers after stating that the second quarter is going better than the company had expected. That overshadowed news that Intel has been hit by the European Commission with a $1.45 billion fine for breaking antitrust laws. The fine represents nearly 14% of Intel's cash and short-term investments... IBM attempted to drum up support by stating that earnings for fiscal 2009 will be least $9.20 per share, which is above the current consensus estimate of $9.11 per share... Energy stocks finished 3.0% lower amid the broader market's downward bias and a downturn in crude oil prices. Crude oil contracts finished 1.4% lower at $58.02 per barrel after surrendering solid gains that were bolstered by bullish inventory data midmorning. Enthusiasm was partly capped by a lowered demand forecast from OPEC... All 10 major sectors finished the session lower amid relatively high trading volume (approx. 1.8 bln shares on NYSE). Even health care, which had spent most of the session as the only sector in positive territory, buckled in late trading. Health care closed 0.1% lower, though pharmaceuticals were able to finish 0.7% higher... The latest business inventory data had no real impact on this session's trading. Nonetheless, March data showed a 1.0% decrease in inventories, which was largely in-line with expectations. Tomorrow's economic data carries a bit more weight and will be in closer focus; both the April Producer Price Index and weekly initial jobless claims data are due at 8:30 AM tomorrow.
Tuesday, May 12, 2009
Stocks Fight Through Profit-Taking; Plus, Maybe Some Options Expiration Machinations?
I was looking for the final hour spike-up to fail. We faded some, but the bulls managed to hold onto some of the move and we closed well off the lows.
It was pretty dismal trading for most of the day with the DJIA covering up some weak action under the surface. A lot of small-cap momentum plays failed and gold led for most of the day. Defensive plays have been showing more life lately, making me question how much steam the bulls have left. Oil and biotechnology recovered by financials and retailers were the main drag. Technology stocks have been losing their luster, but there were some positive comments from INTC on the wires that are giving QQQQ an after-hours boost.
The market seems to be getting a bit tired, but I'm wondering if that's just options expiration weighing the market down.
Going into more detail, profit-takers sold early gains and sent the major indices markedly lower for most of the session, but stocks were able to battle back in the second half and finish in mixed fashion despite a lack of positive catalysts... Out of favor for the second straight session, financials fell 1.8%. Financials were actually up more than 1% in the early going, but sellers pounced on the sector, focusing their efforts on regional banks (-5.6%) and diversified banks (-3.2%)... BAC was a primary laggard in the financial sector. Investors were unimpressed by news that the company is selling a partial stake in China Construction Bank for $7.3 billion to a consortium of buyers... BK also traded with weakness. It was the latest financial outfit to announce a secondary common stock offering...F also fell out of favor after it announced a common stock offering that will raise funds for general purposes and help provide for certain union obligations, but the offering is also expected to dilute existing shareholders... GM was dogged as investors become increasingly concerned about whether the company will have a restructuring plan ready for government review by June. Yesterday GM's management indicated that it is more probable that GM will need to accomplish its goals through bankruptcy. Shares of the Dow component are at their lowest level in many decades...Fellow Dow component MSFT will issue $3.75 billion of senior unsecured notes to help fund working capital requirements, capital expenditures, or share repurchases. Microsoft was a primary leader among tech stocks (-0.6%), which actually underperformed the broader market... Participants also rotated out of early cycle stocks in favor of defensive-oriented holdings. As such, industrials fell 1.2% and consumer discretionary stocks slid 2.2% as shares of retailers surrendered 0.9%. Retailers will come into sharper focus tomorrow, when the Advance April Retail Sales data is unveiled (8:30 AM ET)... Meanwhile, consumer staples stocks climbed 1.3%, health care advanced 1.4%, telecom tacked on 1.1%, and utilities closed 0.6% higher. Gold gained 1.1% to settle pit trading at $923.90 per ounce... There weren't any major earnings announcements this session. In terms of economic data, the U.S. trade deficit widened to $27.6 billion in March, which is the first time in eight months that the deficit widened. However, the increase comes off of February's $26.1 billion deficit, which was the narrowest deficit since 1999... Additionally, the March reading is an improvement from the first quarter average through February, so it should factor favorably into the revised first quarter GDP reading. The latter point aside, the March trade balance report serves as another reminder that global trade continues to contract as countries around the globe grapple with the effects of the current economic situation.
It was pretty dismal trading for most of the day with the DJIA covering up some weak action under the surface. A lot of small-cap momentum plays failed and gold led for most of the day. Defensive plays have been showing more life lately, making me question how much steam the bulls have left. Oil and biotechnology recovered by financials and retailers were the main drag. Technology stocks have been losing their luster, but there were some positive comments from INTC on the wires that are giving QQQQ an after-hours boost.
The market seems to be getting a bit tired, but I'm wondering if that's just options expiration weighing the market down.
Going into more detail, profit-takers sold early gains and sent the major indices markedly lower for most of the session, but stocks were able to battle back in the second half and finish in mixed fashion despite a lack of positive catalysts... Out of favor for the second straight session, financials fell 1.8%. Financials were actually up more than 1% in the early going, but sellers pounced on the sector, focusing their efforts on regional banks (-5.6%) and diversified banks (-3.2%)... BAC was a primary laggard in the financial sector. Investors were unimpressed by news that the company is selling a partial stake in China Construction Bank for $7.3 billion to a consortium of buyers... BK also traded with weakness. It was the latest financial outfit to announce a secondary common stock offering...F also fell out of favor after it announced a common stock offering that will raise funds for general purposes and help provide for certain union obligations, but the offering is also expected to dilute existing shareholders... GM was dogged as investors become increasingly concerned about whether the company will have a restructuring plan ready for government review by June. Yesterday GM's management indicated that it is more probable that GM will need to accomplish its goals through bankruptcy. Shares of the Dow component are at their lowest level in many decades...Fellow Dow component MSFT will issue $3.75 billion of senior unsecured notes to help fund working capital requirements, capital expenditures, or share repurchases. Microsoft was a primary leader among tech stocks (-0.6%), which actually underperformed the broader market... Participants also rotated out of early cycle stocks in favor of defensive-oriented holdings. As such, industrials fell 1.2% and consumer discretionary stocks slid 2.2% as shares of retailers surrendered 0.9%. Retailers will come into sharper focus tomorrow, when the Advance April Retail Sales data is unveiled (8:30 AM ET)... Meanwhile, consumer staples stocks climbed 1.3%, health care advanced 1.4%, telecom tacked on 1.1%, and utilities closed 0.6% higher. Gold gained 1.1% to settle pit trading at $923.90 per ounce... There weren't any major earnings announcements this session. In terms of economic data, the U.S. trade deficit widened to $27.6 billion in March, which is the first time in eight months that the deficit widened. However, the increase comes off of February's $26.1 billion deficit, which was the narrowest deficit since 1999... Additionally, the March reading is an improvement from the first quarter average through February, so it should factor favorably into the revised first quarter GDP reading. The latter point aside, the March trade balance report serves as another reminder that global trade continues to contract as countries around the globe grapple with the effects of the current economic situation.
Monday, May 11, 2009
Profit-Takers Dictate The Day
Although they tried a few times today, the troops were never really able to get anything going to the upside. Given the big gains we saw last week, a little weakness here really shouldn’t have been all that surprising, but that doesn’t mean that there was still some good action to be found under the surface. Despite poor action in energy and financial stocks (which saw some big moves to the upside last week), tech (which has been lagging lately) and biotech showed good relative strength.
The fact that market players continue to root around for pockets of activity even with the major indices struggling is a good sign. We’ll have to wait to see if the frothiness that we been seeing lately cools off a bit as we move forward, but so far momentum traders look to be interested in staying active.
Going into more detail, profit-takers dictated the tone today. Declining issues outnumbered advancers by 4-to-1 in the S&P 500 as profit-takers pressured stocks for the entire session. Financials felt the brunt of the selling effort, but strength in large-cap tech helped the Nasdaq outperform its counterparts... There weren't any major earnings announcements or economic reports to act as positive catalysts for the stock market Monday. The dearth of data seemed to encourage a round of profit taking by participants who had watched stocks climb nearly 6% last week... As has been the recent trend, financials were the best performers last week, which made them an easy target for sellers looking to lock in gains. In turn, the financial sector shed 6.8%, cutting into last week's 23% gain... Diversified banks slipped 6.7% and regional banks dropped 8.5% after several companies announced plans to raise capital... In a common equity offering, WFC announced it raised $8.6 billion, which is more than it originally set out to raise. The bank was told by regulators last week that it needs to come up with $13.7 billion in capital. Wells Fargo indicated future earnings will help plug the company's capital shortfall... Meanwhile, BAC was told last week that it needs more Tier 1 capital, but the company didn't offer any immediate plans to satisfy the measure during a conference call today... Despite the weakness in bank stocks, multiline insurers (-7.5%) and life and health insurers (-10.5%) saw some of the steepest losses. Their weakness comes as debate over health care reform is set to intensify during coming days. The threat of reform also weighed on managed health care providers, which finished 4.7% lower... Pushed on by the usual crazy etf action, sellers intensified their efforts against the financial sector into the close, which exacerbated weakness in the broader market and caused the S&P 500 to finish near session lows... The Nasdaq was able to limit its losses, thanks to the relative strength of large-cap tech stocks. Large-cap tech rebounded from hefty losses in the early going as participants considered the early gap down to be an opportunity to rotate into the sector, which didn't see the trend chasing that financials saw the week before... Despite the strength of large-cap tech, the broader tech sector finished just above the unchanged mark... Telecom was the only sector to log a respectable gain, thanks to leadership from T, which will pay VZ $2.35 billion for certain wireless assets. Meanwhile, AT&T has also agreed to sell certain wireless assets to Verizon for $240 million... With equities under pressure, Treasuries were able to snap back after contending with weakness last week. The benchmark 10-year Note regained a full point, which lowered its yield to 3.17%... There are only a few earnings announcements scheduled for Tuesday morning, none of which are expected to act as catalysts for the broader market. In terms of tomorrow's economic data, the March trade balance (8:30 AM ET) is expected to show continued contraction as countries contend with ongoing economic headwinds. The Treasury's budget statement for April is due is expected to be released later.
The fact that market players continue to root around for pockets of activity even with the major indices struggling is a good sign. We’ll have to wait to see if the frothiness that we been seeing lately cools off a bit as we move forward, but so far momentum traders look to be interested in staying active.
Going into more detail, profit-takers dictated the tone today. Declining issues outnumbered advancers by 4-to-1 in the S&P 500 as profit-takers pressured stocks for the entire session. Financials felt the brunt of the selling effort, but strength in large-cap tech helped the Nasdaq outperform its counterparts... There weren't any major earnings announcements or economic reports to act as positive catalysts for the stock market Monday. The dearth of data seemed to encourage a round of profit taking by participants who had watched stocks climb nearly 6% last week... As has been the recent trend, financials were the best performers last week, which made them an easy target for sellers looking to lock in gains. In turn, the financial sector shed 6.8%, cutting into last week's 23% gain... Diversified banks slipped 6.7% and regional banks dropped 8.5% after several companies announced plans to raise capital... In a common equity offering, WFC announced it raised $8.6 billion, which is more than it originally set out to raise. The bank was told by regulators last week that it needs to come up with $13.7 billion in capital. Wells Fargo indicated future earnings will help plug the company's capital shortfall... Meanwhile, BAC was told last week that it needs more Tier 1 capital, but the company didn't offer any immediate plans to satisfy the measure during a conference call today... Despite the weakness in bank stocks, multiline insurers (-7.5%) and life and health insurers (-10.5%) saw some of the steepest losses. Their weakness comes as debate over health care reform is set to intensify during coming days. The threat of reform also weighed on managed health care providers, which finished 4.7% lower... Pushed on by the usual crazy etf action, sellers intensified their efforts against the financial sector into the close, which exacerbated weakness in the broader market and caused the S&P 500 to finish near session lows... The Nasdaq was able to limit its losses, thanks to the relative strength of large-cap tech stocks. Large-cap tech rebounded from hefty losses in the early going as participants considered the early gap down to be an opportunity to rotate into the sector, which didn't see the trend chasing that financials saw the week before... Despite the strength of large-cap tech, the broader tech sector finished just above the unchanged mark... Telecom was the only sector to log a respectable gain, thanks to leadership from T, which will pay VZ $2.35 billion for certain wireless assets. Meanwhile, AT&T has also agreed to sell certain wireless assets to Verizon for $240 million... With equities under pressure, Treasuries were able to snap back after contending with weakness last week. The benchmark 10-year Note regained a full point, which lowered its yield to 3.17%... There are only a few earnings announcements scheduled for Tuesday morning, none of which are expected to act as catalysts for the broader market. In terms of tomorrow's economic data, the March trade balance (8:30 AM ET) is expected to show continued contraction as countries contend with ongoing economic headwinds. The Treasury's budget statement for April is due is expected to be released later.
Friday, May 8, 2009
Financials, Market Rally Following Release Of "Stress Test" Results Thursday Evening
Well, the recent propensity for short-lived pullbacks and active dip buying was in effect again today as some ugly reversals after a gap higher at the open gave way to a steady upward trend as the day developed. Financials were once again the leader on the day as market players cheered the official release of the bank stress tests, while rising oil prices helped energy names show a good deal of relative strength. Interestingly, though, there were more than a few recent momentum names, such as DRYS, which took a big hit after a few analyst downgrades and a share offering. Meanwhile, leading areas such as tech and retail also are showing signs of losing steam.
The hope, however, is that market players are now shifting their focus to other areas after catching a great wave. We’ll see if that turns out to be the case, and if it is, that will be a sign that this market’s recent run may have legs yet.
Going into more detail, the major indices settled with solid gains on Friday, as financial institutions rallied after the government released the results of its stress test. Meanwhile, the number of job losses in April slowed, another indication that the pace of economic contraction is decelerating. Eight of the ten economic sectors posted a gain. Financials led the way, surging 8.3%. The energy sector also had a strong showing, climbing 4.2%, after crude prices rose 3.1% to $58.47. Defensive sectors underperformed, with telecom (-0.4%) falling into the red after shares of T slid on reports that the company is near a deal to buy $2.5 billion in Alltel assets from VZ... The strength in financials came after the close Thursday when the government announced the findings of its much anticipated stress test on 19 major financial institutions. The government has instructed 10 financial institutions to raise more capital by June 8. The $75 billion in new capital requirements includes: BAC, $33.9 billion; WFC, $13.7 billion; GMAC, $11.5 billion; Citigroup, $5.5 billion and MS, $1.8 billion... The remaining five banks that need more capital are regional banks: RF, $2.5 billion; STI, $2.2 billion; KEY, $1.8 billion, FITB, $1.1 billion; PNC, $600 million... The companies are utilizing several ways to increase their common equity ratios, including common stock offerings, converting preferred shares and selling assets... BofA plans to raise $17 billion in a common stock issue, with the remaining coming from preferred stock to equity conversion and asset sales. Wells Fargo is issuing common stock (~$7.5 bln announced this morning), retaining earnings and utilizing other internally generated sources. Citigroup will expand its previously announced conversion of preferred to common. GMAC said it may issue new common equity, issue mandatory convertible preferred shares or convert existing equity into a form of Tier 1 common equity. In addition, Morgan Stanley (MS), which was directed to raise $1.8 billion by the government, priced 146 million shares of its stock, and a 21.9 million over-allotment, at $24 per share... In other notable corporate news, shares of MCD rose 2.9% after the fast food giant reported that April same-store sales rose 6.9%, the 72nd consecutive monthly increase... In economic news, released at 10:00 ET, wholesale inventories dropped 1.6% in March, after falling 1.7% in February. The decline was worse than the consensus estimate that called for a 1.0% decline. The major indices gave up some gains after the release, but the market managed to trend higher throughout the session, eventually climbing above pre-release levels... Separately, the April employment report was released at 8:30 ET. The April decline in payrolls of 539,000 was better than the expected decline of 600,000, but still represents bad economic news. Part of the smaller decline is explained by a 72,000 jump in government payrolls, compared to the sharp drop in the private sector, including a 149,000 decline in manufacturing and 110,000 in construction. Also on the negative side, several prior months were revised lower, and the unemployment rate jumped to 8.9% from 8.5%, as expected. The stock market had a relatively muted response in premarket trade compared to the typical response to this release... For the week, the Dow, Nasdaq, S&P 500 rose 4.4%, 1.2% and 5.9%, respectively. Financials spiked 23% on the week.
The hope, however, is that market players are now shifting their focus to other areas after catching a great wave. We’ll see if that turns out to be the case, and if it is, that will be a sign that this market’s recent run may have legs yet.
Going into more detail, the major indices settled with solid gains on Friday, as financial institutions rallied after the government released the results of its stress test. Meanwhile, the number of job losses in April slowed, another indication that the pace of economic contraction is decelerating. Eight of the ten economic sectors posted a gain. Financials led the way, surging 8.3%. The energy sector also had a strong showing, climbing 4.2%, after crude prices rose 3.1% to $58.47. Defensive sectors underperformed, with telecom (-0.4%) falling into the red after shares of T slid on reports that the company is near a deal to buy $2.5 billion in Alltel assets from VZ... The strength in financials came after the close Thursday when the government announced the findings of its much anticipated stress test on 19 major financial institutions. The government has instructed 10 financial institutions to raise more capital by June 8. The $75 billion in new capital requirements includes: BAC, $33.9 billion; WFC, $13.7 billion; GMAC, $11.5 billion; Citigroup, $5.5 billion and MS, $1.8 billion... The remaining five banks that need more capital are regional banks: RF, $2.5 billion; STI, $2.2 billion; KEY, $1.8 billion, FITB, $1.1 billion; PNC, $600 million... The companies are utilizing several ways to increase their common equity ratios, including common stock offerings, converting preferred shares and selling assets... BofA plans to raise $17 billion in a common stock issue, with the remaining coming from preferred stock to equity conversion and asset sales. Wells Fargo is issuing common stock (~$7.5 bln announced this morning), retaining earnings and utilizing other internally generated sources. Citigroup will expand its previously announced conversion of preferred to common. GMAC said it may issue new common equity, issue mandatory convertible preferred shares or convert existing equity into a form of Tier 1 common equity. In addition, Morgan Stanley (MS), which was directed to raise $1.8 billion by the government, priced 146 million shares of its stock, and a 21.9 million over-allotment, at $24 per share... In other notable corporate news, shares of MCD rose 2.9% after the fast food giant reported that April same-store sales rose 6.9%, the 72nd consecutive monthly increase... In economic news, released at 10:00 ET, wholesale inventories dropped 1.6% in March, after falling 1.7% in February. The decline was worse than the consensus estimate that called for a 1.0% decline. The major indices gave up some gains after the release, but the market managed to trend higher throughout the session, eventually climbing above pre-release levels... Separately, the April employment report was released at 8:30 ET. The April decline in payrolls of 539,000 was better than the expected decline of 600,000, but still represents bad economic news. Part of the smaller decline is explained by a 72,000 jump in government payrolls, compared to the sharp drop in the private sector, including a 149,000 decline in manufacturing and 110,000 in construction. Also on the negative side, several prior months were revised lower, and the unemployment rate jumped to 8.9% from 8.5%, as expected. The stock market had a relatively muted response in premarket trade compared to the typical response to this release... For the week, the Dow, Nasdaq, S&P 500 rose 4.4%, 1.2% and 5.9%, respectively. Financials spiked 23% on the week.
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