For the second day in a row, we had a little profit-taking in the final hour, but that didn't stop the senior indices from finishing in positive territory. Once again, the buyers just kept on coming, and there was plenty of positive action to be found.
The market continues to do little wrong, but that doesn't mean it has been easy. I've seen a steady stream of complaints from traders who don't want to pay up for extended names but don't want to short, given the very persistent strength.
One of the central rules of momentum investing is that you respect the trend until there is good reason not to. So far, we haven't had any good reason to believe we are about to fall apart. That doesn't mean that you stay highly aggressive with your buying, but since we have such obviously strong underlying support, we should give the trend the benefit of the doubt.
Typically a new month kicks off with some cash inflows, but we are due for a little bigger bout of profit-taking soon. Trading should also slow as earnings season winds down and summer vacations kick in. That will give us more choppiness and, hopefully, some interesting trading...
Friday, July 31, 2009
Thursday, July 30, 2009
Weak Finish, But Still Chugging Along
A wild start and a weak finish has created a little buzz about today being a possible blow-off top in this market, which has had a frantic two-week rally. There was some very emotional buying this morning but a rush to protect gains kicked in during the final hour.
If we gap down in the morning, it will create an "island reversal" or "abandoned baby" top. That would be bearish but we don't want to get ahead of ourselves here. Despite the last-hour selling it was still quite a strong day for the market. The indices had solid gains, breadth was quite strong and there is a long list of stocks that made big moves on good earnings.
If you have been riding the momentum in this market, you certainly have to be on the lookout for indications of a possible shift in the market and some last-hour selling is worth noting. However, you can't underestimate the power of momentum.
We have not even begun to test underlying support yet. The dip-buyers let things slide a little in the last hour but that is not yet an indication that they are going into hibernation.
This has been a runaway market but I still find AAPL and BAC particularly attractive. We have some more good earnings after the bell, most notably from FSLR, so sentiment is likely to stay upbeat. Betting against this market is likely to continue to be quite a challenge.
If we gap down in the morning, it will create an "island reversal" or "abandoned baby" top. That would be bearish but we don't want to get ahead of ourselves here. Despite the last-hour selling it was still quite a strong day for the market. The indices had solid gains, breadth was quite strong and there is a long list of stocks that made big moves on good earnings.
If you have been riding the momentum in this market, you certainly have to be on the lookout for indications of a possible shift in the market and some last-hour selling is worth noting. However, you can't underestimate the power of momentum.
We have not even begun to test underlying support yet. The dip-buyers let things slide a little in the last hour but that is not yet an indication that they are going into hibernation.
This has been a runaway market but I still find AAPL and BAC particularly attractive. We have some more good earnings after the bell, most notably from FSLR, so sentiment is likely to stay upbeat. Betting against this market is likely to continue to be quite a challenge.
Wednesday, July 29, 2009
Not A Bad Day For The Overall Market
Although I had a bad day since I own quite a few YHOO calls.....and YHOO was hammered today on the disappointment over the search deal with MSFT. Expire in October....Anyway, the worst possible scenario for the bears is that the market would work off its overbought condition by churning for a few days and going nowhere rather than pulling back. That is exactly what we have seen taking place for four days now.
Upside momentum has slowed, but there are still plenty of big movers, and financials, biotechnology and retailers continue to act well. The selling has been mild at best, and there aren't any signs of panic. Oil, steel, casinos and commodity-related stocks were the weak spot today. However, that didn't seem to be of any major concern to the overall market.
What we have is a classic case of a "sticky" market. When we make such a big, strong move, a lot of folks who missed out are anxious to buy weakness. They keep the pullbacks shallow, and that creates more frustration for underinvested bulls and makes them even more anxious to add some long exposure.
Even with four days of churning, we still have plenty of stocks that are quite extended and in need of a rest. That makes it tough to add much new long exposure, but it isn't an invitation to short either.
It is very tempting to want to play the short side after the run we have had, but we just aren't cracking. There just isn't any good technical reason to be overly aggressive with shorts right now. In fact, the stubborn strength needs to be respected until it disappears.
Upside momentum has slowed, but there are still plenty of big movers, and financials, biotechnology and retailers continue to act well. The selling has been mild at best, and there aren't any signs of panic. Oil, steel, casinos and commodity-related stocks were the weak spot today. However, that didn't seem to be of any major concern to the overall market.
What we have is a classic case of a "sticky" market. When we make such a big, strong move, a lot of folks who missed out are anxious to buy weakness. They keep the pullbacks shallow, and that creates more frustration for underinvested bulls and makes them even more anxious to add some long exposure.
Even with four days of churning, we still have plenty of stocks that are quite extended and in need of a rest. That makes it tough to add much new long exposure, but it isn't an invitation to short either.
It is very tempting to want to play the short side after the run we have had, but we just aren't cracking. There just isn't any good technical reason to be overly aggressive with shorts right now. In fact, the stubborn strength needs to be respected until it disappears.
Tuesday, July 28, 2009
The Strength Continues
This market's amazing strength continues. We had a midday dip but the buyers jumped in and took us right back to even at the close.
The upside momentum has slowed a little but the frustration levels for bears and underinvested longs who want this market to correct a bit after a huge run must be sky high. We just aren't seeing any notable pullbacks in one of the most overbought markets ever.
I liken this market to walking a high-wire. We are way up there and we have a few wobbles and little jiggles but we just keep putting one foot in front of the next and keep on moving. Every time we slip we quickly regain our footing, which gives us a lot of confidence.
At some points we will start to wobble more and eventually we will slip and fall enough to suffer some pain. However, there is no sign of faltering yet and we shouldn't anticipate it as long as we are steady. Yes, we are way up in the stratosphere, but that doesn't mean we are suddenly going to go straight down.
This is a very tricky market to navigate, but the easiest way to be hurt lately is to be overly cautious and keep looking for downside. We certainly have to be taking some profits into this strength but being overly aggressive with shorts is the real danger. There will be a time to press the short side, but it isn't when the dips are so shallow and only last for a few hours....
The upside momentum has slowed a little but the frustration levels for bears and underinvested longs who want this market to correct a bit after a huge run must be sky high. We just aren't seeing any notable pullbacks in one of the most overbought markets ever.
I liken this market to walking a high-wire. We are way up there and we have a few wobbles and little jiggles but we just keep putting one foot in front of the next and keep on moving. Every time we slip we quickly regain our footing, which gives us a lot of confidence.
At some points we will start to wobble more and eventually we will slip and fall enough to suffer some pain. However, there is no sign of faltering yet and we shouldn't anticipate it as long as we are steady. Yes, we are way up in the stratosphere, but that doesn't mean we are suddenly going to go straight down.
This is a very tricky market to navigate, but the easiest way to be hurt lately is to be overly cautious and keep looking for downside. We certainly have to be taking some profits into this strength but being overly aggressive with shorts is the real danger. There will be a time to press the short side, but it isn't when the dips are so shallow and only last for a few hours....
Monday, July 27, 2009
Some Say The Action's A Bit Forced, But Still No Real Signs Of Rolling Over....
The market is still showing no real signs of rolling over, and while we are very extended, according to some, there doesn't seem to be any reason to jump into shorts. We just aren't seeing any cracks, although there is a more complacent tone.
The bears are still shell-shocked from last week, and you can't blame them for being nervous about the chances of more last-hour squeezes higher.
I want to be very selective with any new purchases right now and not jump in just because there aren't any meaningful pullbacks. This market has obviously caught a lot of folks by surprise, and that is why we are staying so stubbornly strong, but that doesn't mean we won't see a dip here soon.
While the market is acting just fine, the stuff I'm seeing leading today, such as smaller banks and secondary biotechs, strikes me as being indicative of the late stages of a move. Given that we haven't rested in two weeks, that isn't exactly a profound insight, but it is keeping me more cautious....
The bears are still shell-shocked from last week, and you can't blame them for being nervous about the chances of more last-hour squeezes higher.
I want to be very selective with any new purchases right now and not jump in just because there aren't any meaningful pullbacks. This market has obviously caught a lot of folks by surprise, and that is why we are staying so stubbornly strong, but that doesn't mean we won't see a dip here soon.
While the market is acting just fine, the stuff I'm seeing leading today, such as smaller banks and secondary biotechs, strikes me as being indicative of the late stages of a move. Given that we haven't rested in two weeks, that isn't exactly a profound insight, but it is keeping me more cautious....
Friday, July 24, 2009
Today Was A Remarkable Day
Was looking for a fairly nasty pullback today; and it didn't happen. On the contrary, my stuff had a good day. So after 10 straight days of advancement and then an explosion higher on Thursday, the market was ready for some profit-taking, but after a little dip this morning the buyers just kept on coming and the senior indices finished in the green again.
This is a classic example of the contention some have that strong markets just don't suddenly collapse. There are too many folks who have watched this market levitate. For many technically-minded folks, there was no easy way to get into this market. If they were relying on charts as a guide, the charts weren't much help at all. Everything was supposedly extended and overbought but just kept on going up anyway.
But that is the way the market works. It is going to make a fool out of all of us at times no matter how smart or logical or hard-working we may be. All we can do is accept that, move on and look for the next opportunity.
Next week we have quite a few more earnings reports to come, but the majority of the big boys are out of the way now. I suspect the trading will be much bumpier. We are extended and need a rest, but those dip-buyers have missed out big and there are going to be active.
This is a classic example of the contention some have that strong markets just don't suddenly collapse. There are too many folks who have watched this market levitate. For many technically-minded folks, there was no easy way to get into this market. If they were relying on charts as a guide, the charts weren't much help at all. Everything was supposedly extended and overbought but just kept on going up anyway.
But that is the way the market works. It is going to make a fool out of all of us at times no matter how smart or logical or hard-working we may be. All we can do is accept that, move on and look for the next opportunity.
Next week we have quite a few more earnings reports to come, but the majority of the big boys are out of the way now. I suspect the trading will be much bumpier. We are extended and need a rest, but those dip-buyers have missed out big and there are going to be active.
A Great Article On AIG
Here's an excerpt from Michael Lewis of Vanity Fair:
Here is an amazing fact: nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that, without the intervention of the government, would have led to the bankruptcy of every major American financial institution, plus a lot of foreign ones, too, A.I.G.’s losses and the trades that led to them still haven’t been properly explained. How did they happen? Unlike, say, Bernie Madoff’s pyramid scheme, they don’t seem to have been raw theft. They may have been an outrageous departure from financial norms, but, if so, why hasn’t anyone in the place been charged with a crime? How did an insurance company become so entangled in the sophisticated end of Wall Street and wind up the fool at the poker table? How could the U.S. government simply hand over $54 billion in taxpayer dollars to Goldman Sachs and Merrill Lynch and all the rest to make good on the subprime insurance A.I.G. F.P. had sold to them—especially after Goldman Sachs was coming out and saying that it had hedged itself by betting against A.I.G.? Since I had him on the phone I asked Jake DeSantis for what Congressman Grayson had asked Edward Liddy: names. He obligingly introduced me to his colleagues in London and Connecticut, and they walked me through what had happened—all of them speaking to someone from the outside for the first time. All, for obvious reasons, were terrified of seeing their names in print, and asked not to be mentioned by name. That was fine by me, as their names are not what’s interesting. What’s interesting is their point of view on the event closest to the center of the financial crisis. For while they disagreed on this and that, they all were fairly certain that if it hadn’t been for A.I.G. F.P. the subprime-mortgage machine might never have been built, and the financial crisis might never have happened.
Read the whole thing at:
http://www.vanityfair.com/politics/features/2009/08/aig200908?printable=true¤tPage=all
Here is an amazing fact: nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that, without the intervention of the government, would have led to the bankruptcy of every major American financial institution, plus a lot of foreign ones, too, A.I.G.’s losses and the trades that led to them still haven’t been properly explained. How did they happen? Unlike, say, Bernie Madoff’s pyramid scheme, they don’t seem to have been raw theft. They may have been an outrageous departure from financial norms, but, if so, why hasn’t anyone in the place been charged with a crime? How did an insurance company become so entangled in the sophisticated end of Wall Street and wind up the fool at the poker table? How could the U.S. government simply hand over $54 billion in taxpayer dollars to Goldman Sachs and Merrill Lynch and all the rest to make good on the subprime insurance A.I.G. F.P. had sold to them—especially after Goldman Sachs was coming out and saying that it had hedged itself by betting against A.I.G.? Since I had him on the phone I asked Jake DeSantis for what Congressman Grayson had asked Edward Liddy: names. He obligingly introduced me to his colleagues in London and Connecticut, and they walked me through what had happened—all of them speaking to someone from the outside for the first time. All, for obvious reasons, were terrified of seeing their names in print, and asked not to be mentioned by name. That was fine by me, as their names are not what’s interesting. What’s interesting is their point of view on the event closest to the center of the financial crisis. For while they disagreed on this and that, they all were fairly certain that if it hadn’t been for A.I.G. F.P. the subprime-mortgage machine might never have been built, and the financial crisis might never have happened.
Read the whole thing at:
http://www.vanityfair.com/politics/features/2009/08/aig200908?printable=true¤tPage=all
Thursday, July 23, 2009
Looks Like A Sell-The-News Reaction May Be Coming Tomorrow....
After the run we have had, I don't think there were too many folks looking for so much strength today, but some good earnings report and lots of badly positioned investors combined to give us a very sharp whoosh upward. There was a lot of celebration, and it felt a bit like early 2000, except for the struggling economy part.
After the close, earnings reports are not nearly as positive. Maybe we are finally seeing a sell-the-news reaction after the big runup we have had. MSFT, AAPL, AXP, AMZN, RVBD, DECK and several others are seeing very poor reactions. We have now reversed about half of today's gains, which goes to show that maybe we have gotten a bit frothy and frantic.
I'll be starting fresh in the morning and will be looking for new opportunities - especially if the AMZN selloff is very severe. I'll probably add to my calls on AMZN if the selloff seems too much. The great thing about the market is that if you don't like the action today, you just have to wait a little bit and it will change.....
long AAPL; AMZN
Hav
After the close, earnings reports are not nearly as positive. Maybe we are finally seeing a sell-the-news reaction after the big runup we have had. MSFT, AAPL, AXP, AMZN, RVBD, DECK and several others are seeing very poor reactions. We have now reversed about half of today's gains, which goes to show that maybe we have gotten a bit frothy and frantic.
I'll be starting fresh in the morning and will be looking for new opportunities - especially if the AMZN selloff is very severe. I'll probably add to my calls on AMZN if the selloff seems too much. The great thing about the market is that if you don't like the action today, you just have to wait a little bit and it will change.....
long AAPL; AMZN
Hav
Health "Reform" May Be Dead (And It Died Uninsured)
If the Senate is going to postpone any sort of vote on the administration's proposal until September, my guess is it is going to die (uninsured). This may be it for a long time to come.
I cannot imagine the Members are going to go home and have to apologize to their constituents for not rushing this proposal through. Between the $700 billion TARP and the $787 stimulus package, no one can accuse Congress of being tight-fisted.
Will the administration turn its attention elsewhere or try this one more time in a different guise? My bet is on the latter, and just like an umpire correcting one mistake with a "make-good" call, the second effort may be more of a botch than the first. We are not out of the fiscal woods yet....
I cannot imagine the Members are going to go home and have to apologize to their constituents for not rushing this proposal through. Between the $700 billion TARP and the $787 stimulus package, no one can accuse Congress of being tight-fisted.
Will the administration turn its attention elsewhere or try this one more time in a different guise? My bet is on the latter, and just like an umpire correcting one mistake with a "make-good" call, the second effort may be more of a botch than the first. We are not out of the fiscal woods yet....
Wednesday, July 22, 2009
Due For A Rest? Plus, A Little Currency News And A Bit More On AAPL
The DJIA and S&P 500 traded down today but the Nasdaq managed its 11th straight positive close and breadth was firmly positive with 4,300 gainers to 2,300 decliners. Do we need a rest? Technology and retail stocks were the leaders today while oil and commodity trades lagged.
Some that I read are taking a short-term bearish stance; can't really argue with them too much. QCOM's out, and it's seeing a negative reaction. Qualcomm was up 10 days in a row so it isn't too surprising that it is seeing a "sell the news" reaction.
There are some solid earnings reports after the close from the likes of ISRG and VMW, but the next major one is Thursday night when MSFT reports.
In the exciting world of currencies, I suppose the biggest story today was the Swedish krona sitting off the day's highs against the euro, hurt by news from Lativa and Moody's, but also by broader U.S. dollar strength.
The Swedish krona fell after Latvia indicated it would not accept the IMF's terms, raising concerns about Swedish bank exposure to the Baltic region. That news was followed by Moody's announcement that it is reviewing four Swedish banks for a possible downgrade of only one to two notches.
Earnings reports showed that those Swedish banks with heavier exposure to the Baltic's had larger loan loss write-offs and poorer earnings results than those with less exposure to the Baltic's. The expected downgrades might have been worse Moody's said if it had not expected the banks to receive support from the government to help limit systemic risk.
It is highly likely that the IMF will not walk away from Latvia's program but at worst put the program on hold until it can be reopened. That won't alleviate concerns about the Swedish banks since without loans from the IMF and EU, the risks are higher that the banks with exposure suffer further loan loss write downs.
Given that in the broader market the U.S. dollar is trading with a firmer tone, in particular against the Swedish krona, and near early July lows, the risk is that the U.S. dollar gains ground against the krona rising back above the five- and 20-day moving averages to around 7.80.
Finally, a few more thoughts on AAPL and its quarter, announced yesterday:
As usual, the quarter was superb, and guidance this time was surprisingly strong;
The demand for 3GS phones is proving hard to meet;
The penetration of the enterprise market is really starting to kick in - once the iphone goes with VZ, this should accelerate....
20+ Fortune 500 customers have purchased 10s of thousands of iphones;
Mac sales were "better than expected" - I expect this to continue to improve and also expect market share for Mac's to start rising again;
They're probably 2 quarters away from a meaningful OS ramp, with the requisite effect on revenues and eps; they're about 2 quarters away from meaningful China sales; they're about a year away from a non-exclusive deal with T, which would allow VZ and other carrier sales
Some time in 2009 I believe AAPL trades at $225....
very long AAPL
Some that I read are taking a short-term bearish stance; can't really argue with them too much. QCOM's out, and it's seeing a negative reaction. Qualcomm was up 10 days in a row so it isn't too surprising that it is seeing a "sell the news" reaction.
There are some solid earnings reports after the close from the likes of ISRG and VMW, but the next major one is Thursday night when MSFT reports.
In the exciting world of currencies, I suppose the biggest story today was the Swedish krona sitting off the day's highs against the euro, hurt by news from Lativa and Moody's, but also by broader U.S. dollar strength.
The Swedish krona fell after Latvia indicated it would not accept the IMF's terms, raising concerns about Swedish bank exposure to the Baltic region. That news was followed by Moody's announcement that it is reviewing four Swedish banks for a possible downgrade of only one to two notches.
Earnings reports showed that those Swedish banks with heavier exposure to the Baltic's had larger loan loss write-offs and poorer earnings results than those with less exposure to the Baltic's. The expected downgrades might have been worse Moody's said if it had not expected the banks to receive support from the government to help limit systemic risk.
It is highly likely that the IMF will not walk away from Latvia's program but at worst put the program on hold until it can be reopened. That won't alleviate concerns about the Swedish banks since without loans from the IMF and EU, the risks are higher that the banks with exposure suffer further loan loss write downs.
Given that in the broader market the U.S. dollar is trading with a firmer tone, in particular against the Swedish krona, and near early July lows, the risk is that the U.S. dollar gains ground against the krona rising back above the five- and 20-day moving averages to around 7.80.
Finally, a few more thoughts on AAPL and its quarter, announced yesterday:
As usual, the quarter was superb, and guidance this time was surprisingly strong;
The demand for 3GS phones is proving hard to meet;
The penetration of the enterprise market is really starting to kick in - once the iphone goes with VZ, this should accelerate....
20+ Fortune 500 customers have purchased 10s of thousands of iphones;
Mac sales were "better than expected" - I expect this to continue to improve and also expect market share for Mac's to start rising again;
They're probably 2 quarters away from a meaningful OS ramp, with the requisite effect on revenues and eps; they're about 2 quarters away from meaningful China sales; they're about a year away from a non-exclusive deal with T, which would allow VZ and other carrier sales
Some time in 2009 I believe AAPL trades at $225....
very long AAPL
some real quick metrics on aapl's quarter
margins were really quite strong, surprising most everyone, as the company did a great job keeping down component costs and also was able to keep a lid on costs associated with the ramp of new products.
operating margins topped 20%
international revenue accounted for 44% of the total
cash and investments now total about $31.1 billion, or about $34.60 a share
over 65,000 apps are now available, and customers have downloaded over 1.5 billion apps so far
six new retail stores were opened in the quarter
50% of macs sold were to first-time buyers
the company gave its usual comically conservative guidance, but i think that the next-quarter eps guidance did come in above the whisper numbers; the cfo said eps is expected to fall in the range of $1.18 to $1.23 (vs. $1.30 consensus), and revenue is expected to be $8.7 billion to $8.9 billion (vs. $9.07 billion consensus). gross margins are expected to decline to 34%, and the tax rate should come in around 30%. there was no mention of jobs whatsoever. the only thing management said it was looking forward to was the release of the new snow leopard software.
long aapl
operating margins topped 20%
international revenue accounted for 44% of the total
cash and investments now total about $31.1 billion, or about $34.60 a share
over 65,000 apps are now available, and customers have downloaded over 1.5 billion apps so far
six new retail stores were opened in the quarter
50% of macs sold were to first-time buyers
the company gave its usual comically conservative guidance, but i think that the next-quarter eps guidance did come in above the whisper numbers; the cfo said eps is expected to fall in the range of $1.18 to $1.23 (vs. $1.30 consensus), and revenue is expected to be $8.7 billion to $8.9 billion (vs. $9.07 billion consensus). gross margins are expected to decline to 34%, and the tax rate should come in around 30%. there was no mention of jobs whatsoever. the only thing management said it was looking forward to was the release of the new snow leopard software.
long aapl
Tuesday, July 21, 2009
Turnaround Tuesday Disappeared In The Afternoon...
It looked like it was going to be a day of mild profit-taking, but market players just couldn't stand not being in for the big earnings report from AAPL, which seemingly has pleased investors, as it's up after-hours. The conference call is underway, plus there may be analyst activity in the morning, so we'll see how it shakes out tomorrow. I'm very long the name, mostly via calls, so tomorrow can't get here soon enough for me. The Nasdaq-100 surged to a new high late in the day, and the Nasdaq managed to close in positive territory for the 10th straight day. The underlying action was mixed, but there was some strong support, and quite a few things snapped back late in the day.
Even though expectations were sky-high for Apple, so many folks love the name that I think it has a good chance of holding up, even if it isn't a massive blowout. I'm not sure how to differentiate between "blowout" and "massive blowout;" but suffice to say it was a fantastic quarter, especially in this environment. Again, we'll see how it goes tomorrow with AAPL, and then we have some banks in the morning. There isn't much we can do until that news is out.
This market seems to be quite extended now, but the news continues to be good and is supporting the move so far. I don't like to fight that, but that doesn't mean I won't lighten up a bit tomorrow. We'll see how it goes, how the market reacts to the news, and then I'll figure out my next move.
long, very long, AAPL
Even though expectations were sky-high for Apple, so many folks love the name that I think it has a good chance of holding up, even if it isn't a massive blowout. I'm not sure how to differentiate between "blowout" and "massive blowout;" but suffice to say it was a fantastic quarter, especially in this environment. Again, we'll see how it goes tomorrow with AAPL, and then we have some banks in the morning. There isn't much we can do until that news is out.
This market seems to be quite extended now, but the news continues to be good and is supporting the move so far. I don't like to fight that, but that doesn't mean I won't lighten up a bit tomorrow. We'll see how it goes, how the market reacts to the news, and then I'll figure out my next move.
long, very long, AAPL
These People In Congress Are Driving Me Up A Wall......
What is the actual cost of the government's programs being used to restore the U.S. financial system to health?
The offices of Issa of California reportedly leaked the contents of the upcoming testimony of TARP Inspector General Barofsky, who suggests that the total liability of the government's various and sundry bailout programs, including TARP, has reached a staggering $23.7 trillion! That's almost twice the size of America's GDP.
It's wrong! It's utter rubbish! We know they smoke some good stuff in Cali, but this is ridiculous. Issa has displayed his complete ignorance of economics in front of TV cameras on more than one occasion. And yesterday's gaffe is likely no exception, though this was an off-camera stunt.
The many critics of the emergency programs have no idea what they are talking about. Despite fits and starts, and ad hoc policies that were frightening at the time, the totality of the programs put in place by the Federal Reserve (mostly) and the Treasury (partly) did exactly what they were intended to do: They stopped a financial crisis of historic proportions from becoming an economic crisis that would have made "The Great Depression" look like the "good 'ole days."
That American citizens are not demanding economic literacy over the obvious incompetence of their elected representatives on all matters financial, at a time when it is most needed, is beyond my comprehension.
Barofsky will soon present his "findings" to a House Oversight Committee, chaired by Towns of Brooklyn, and tell the august group that TARP and other crisis-induced government backstops have a price tag of the aforementioned $23.7 trillion. As far as I can tell, Barosfky is making several fundamental mathematical errors and completely misapprehends the functions and costs of the emergency programs put into place to date.
It appears he is at least double-counting some guarantees, liabilities and insurance facilities developed by the Treasury and the Fed. Further, his claims that banks have misused the original TARP money -- the $700 billion doled out to recapitalize the banking system -- by purchasing other banks or using the funds to make money, is flat-out wrong....
He is investigating some 35 instances of fraud and abuse, some of which, however, have nothing to do with the TARP program of his (apparently) paranoia-induced calculations of the programs' size.
Oh good grief if the TARP money should lead to the successful recapitalization of the financial system and the renewed ability to lend....that's just terrible...
It was only four to six months ago that the global financial system was on the brink of real collapse. Seriously. We were within possibly a moment or two of a run on banks, money market mutual funds and brokerage accounts. That's very serious, scary stuff.
The institution of necessary backstops, guarantees of money market funds, commercial paper programs, troubled assets, bank debt and corporate debt, to name but a few, were vital in bringing us back from the brink and to the much safer place where we sit today.
The highest tally I have seen for the dollar value of the "commitments" from the government and from the Fed is about $13 trillion - yes, a huge number; but much less than $24 trillion! Only a fraction of that has actually been spent.
Taxpayers could lose some money from these programs, but my bet is that at the end of the day, taxpayers will make, not lose, money from all this government intervention. Now how many years that will take, I don't know....(and any "profits" of course will just be subsequently wasted....)
Again, why aren't we DEMANDING that our local congressman or congresswoman take a college course in economics and finance?
The offices of Issa of California reportedly leaked the contents of the upcoming testimony of TARP Inspector General Barofsky, who suggests that the total liability of the government's various and sundry bailout programs, including TARP, has reached a staggering $23.7 trillion! That's almost twice the size of America's GDP.
It's wrong! It's utter rubbish! We know they smoke some good stuff in Cali, but this is ridiculous. Issa has displayed his complete ignorance of economics in front of TV cameras on more than one occasion. And yesterday's gaffe is likely no exception, though this was an off-camera stunt.
The many critics of the emergency programs have no idea what they are talking about. Despite fits and starts, and ad hoc policies that were frightening at the time, the totality of the programs put in place by the Federal Reserve (mostly) and the Treasury (partly) did exactly what they were intended to do: They stopped a financial crisis of historic proportions from becoming an economic crisis that would have made "The Great Depression" look like the "good 'ole days."
That American citizens are not demanding economic literacy over the obvious incompetence of their elected representatives on all matters financial, at a time when it is most needed, is beyond my comprehension.
Barofsky will soon present his "findings" to a House Oversight Committee, chaired by Towns of Brooklyn, and tell the august group that TARP and other crisis-induced government backstops have a price tag of the aforementioned $23.7 trillion. As far as I can tell, Barosfky is making several fundamental mathematical errors and completely misapprehends the functions and costs of the emergency programs put into place to date.
It appears he is at least double-counting some guarantees, liabilities and insurance facilities developed by the Treasury and the Fed. Further, his claims that banks have misused the original TARP money -- the $700 billion doled out to recapitalize the banking system -- by purchasing other banks or using the funds to make money, is flat-out wrong....
He is investigating some 35 instances of fraud and abuse, some of which, however, have nothing to do with the TARP program of his (apparently) paranoia-induced calculations of the programs' size.
Oh good grief if the TARP money should lead to the successful recapitalization of the financial system and the renewed ability to lend....that's just terrible...
It was only four to six months ago that the global financial system was on the brink of real collapse. Seriously. We were within possibly a moment or two of a run on banks, money market mutual funds and brokerage accounts. That's very serious, scary stuff.
The institution of necessary backstops, guarantees of money market funds, commercial paper programs, troubled assets, bank debt and corporate debt, to name but a few, were vital in bringing us back from the brink and to the much safer place where we sit today.
The highest tally I have seen for the dollar value of the "commitments" from the government and from the Fed is about $13 trillion - yes, a huge number; but much less than $24 trillion! Only a fraction of that has actually been spent.
Taxpayers could lose some money from these programs, but my bet is that at the end of the day, taxpayers will make, not lose, money from all this government intervention. Now how many years that will take, I don't know....(and any "profits" of course will just be subsequently wasted....)
Again, why aren't we DEMANDING that our local congressman or congresswoman take a college course in economics and finance?
Monday, July 20, 2009
Turnaround Tuesday Looming? Or Not?
After the big move last week you might think we were ready to rest a bit before the next group of major earnings reports. However, you underestimated the anxiety over being left out of this market. When we go from struggling to holding support to testing highs within a week without any notable pullback, the anxiety over being left behind rises exponentially.
We had one dip this morning but otherwise it was a steady, very broad upward move. The weak dollar plays -- gold, oil, steel and commodities -- led but there was strong action in big-cap technology names and many of the Investor's Business Daily-type names, like PWRD, CYOU, etc. Many of these types of names had very strong moves. Many of these are China-related names and smaller-caps in that sector also performed very well.
It is obviously very strong action; trying to short this is like trying to time when a speeding locomotive will come to a stop. On the other hand, it's nearly impossible to find stocks that haven't gone straight up for several days and are now extended. It is almost bubble-like action in some stocks and if you aren't chasing, you are being left behind.
Right now the big worry is underperformance and that tends to promote strong underlying support, but with some big earnings on Tuesday night and Wednesday morning, volatility is likely to pick up sharply.....
We had one dip this morning but otherwise it was a steady, very broad upward move. The weak dollar plays -- gold, oil, steel and commodities -- led but there was strong action in big-cap technology names and many of the Investor's Business Daily-type names, like PWRD, CYOU, etc. Many of these types of names had very strong moves. Many of these are China-related names and smaller-caps in that sector also performed very well.
It is obviously very strong action; trying to short this is like trying to time when a speeding locomotive will come to a stop. On the other hand, it's nearly impossible to find stocks that haven't gone straight up for several days and are now extended. It is almost bubble-like action in some stocks and if you aren't chasing, you are being left behind.
Right now the big worry is underperformance and that tends to promote strong underlying support, but with some big earnings on Tuesday night and Wednesday morning, volatility is likely to pick up sharply.....
odds and ends
from the plaza yesterday = A CHANGE IN CONSUMER MOOD? = high - end retail establishment - employee there said she's definitely seen a positive shift
in consumers' moods = "pleasure to work with people again!" = hmmmmmmmmmmmmm
is bac losing its 'tell' status? = down 5% while market was up nicely today?
what about turnaround tuesdays? still apply? (might find out tomorrow)...
keep things in perspective; and understand that anyone who puts his or her opinion out there is allowed to change his or her tune with the times - goldman's top us strategist kostin said on 2/26/09 - remember? - that the s and p 500 may sink as low as 650 because home prices haven't stabilized and losses for financial institutions aren't diminishing...........hmmmmmmmmmmm..........today, with the index 25% higher than from his last statement, he boosted his forecast to 1060, saying improving earnings will spur the steepest second-half rally since 1982....hmmmmmm......
think positive; profitability always begins within.....
in consumers' moods = "pleasure to work with people again!" = hmmmmmmmmmmmmm
is bac losing its 'tell' status? = down 5% while market was up nicely today?
what about turnaround tuesdays? still apply? (might find out tomorrow)...
keep things in perspective; and understand that anyone who puts his or her opinion out there is allowed to change his or her tune with the times - goldman's top us strategist kostin said on 2/26/09 - remember? - that the s and p 500 may sink as low as 650 because home prices haven't stabilized and losses for financial institutions aren't diminishing...........hmmmmmmmmmmm..........today, with the index 25% higher than from his last statement, he boosted his forecast to 1060, saying improving earnings will spur the steepest second-half rally since 1982....hmmmmmm......
think positive; profitability always begins within.....
Friday, July 17, 2009
From Anirvan Banerji Of RealMoney: Is The Recession Over?
Back in late April, amid rampant pessimism about the economy, the Economic Cycle Research Institute (ECRI) predicted that the recession would end this summer. The leading indices on which that call was based have since seen a synchronized surge.
In fact, the cyclical improvement in the economy is proceeding in a textbook sequence, from long leading indicators to short leading indicators to coincident indicators. In essence, there are now pronounced, pervasive and persistent upturns in a succession of leading indices of economic revival.
When approaching a cyclical turning point in U.S. economic growth, the growth rate of the U.S. Long Leading Index (USLLI) typically turns first, followed by the growth rate of the Weekly Leading Index (WLI), growth in the U.S. Short Leading Index (USSLI) and growth in the U.S. Coincident Index (USCI). Notably, the levels of the USLLI, WLI and USSLI are all rising.
Finally, the USCI is still slipping, indicating that as of June, the U.S. economic recovery had not yet begun. Yet USCI growth, which represents the rate of growth of aggregate economic activity, has now risen for three months. While still in negative territory, it's now at a six-month high; almost certainly, the upturn in the growth rate cycle we predicted in April is now in progress.
But the sequential upswings in the leading indices aren't just about less negative growth -- we have pronounced, pervasive and persistent upswings in a succession of leading indices of economic revival, the most powerful possible predictor of a business cycle recovery. What's impressive here is the degree of unanimity within and across these leading indices, along with the classic sequence of advances in those indices. Such a combination of upturns doesn't happen unless an end to the recession is imminent.
If so, why is there such broad pessimism among analysts? The problem is a widespread inability to distinguish among leading, coincident and lagging indicators, along with the vast majority of economic indicators that don't fall neatly into any of those three categories. Thus, indicators are typically judged by their freshness, not their foresight. Because most market-moving numbers are coincident to short leading, while corporate guidance is often lagging, it's no surprise that analysts don't discern any convincing evidence of an economic upturn.
The arguments marshaled by standard-bearers of the pessimistic consensus hold little water. Usually, their "analysis" is based on gut feel, bolstered by any seemingly plausible argument that would support their case.
For instance, last month, with oil prices and interest rates staging something of an advance from their lows, skeptics opined that this would nip any potential recovery in the bud. But it's hardly unusual for such indicators to turn up in anticipation of economic revivals, which would never take place if higher oil prices or interest rates were able to head them off.
This month, the rise in the jobless rate to a 25-year high is being taken by some as an argument against recovery: Consumers supposedly won't spend when joblessness is mounting. Apparently, many analysts are unaware that even the 1929-33 recession ended when the jobless rate was over 25% -- and still rising!
The "second-derivative rally" in equities has provoked much derision, especially from those who missed it. Yet ECRI's leading indices now have positive second derivatives. More important, they've already had positive first derivatives for some months. It's worth reminding calculus-challenged analysts who doubt the significance of these cyclical upswings of the second-derivative test: When the first derivative of a univariate function rises to zero and its second derivative turns positive, it marks the low point of the function. That development is already in the rearview mirror for every one of ECRI's leading indices of economic activity.
In sum, the economy has a raft of problems that'll take a long time to resolve. But none of them can head off the imminent economic recovery that ECRI's objective leading indices are promising.
In fact, the cyclical improvement in the economy is proceeding in a textbook sequence, from long leading indicators to short leading indicators to coincident indicators. In essence, there are now pronounced, pervasive and persistent upturns in a succession of leading indices of economic revival.
When approaching a cyclical turning point in U.S. economic growth, the growth rate of the U.S. Long Leading Index (USLLI) typically turns first, followed by the growth rate of the Weekly Leading Index (WLI), growth in the U.S. Short Leading Index (USSLI) and growth in the U.S. Coincident Index (USCI). Notably, the levels of the USLLI, WLI and USSLI are all rising.
Finally, the USCI is still slipping, indicating that as of June, the U.S. economic recovery had not yet begun. Yet USCI growth, which represents the rate of growth of aggregate economic activity, has now risen for three months. While still in negative territory, it's now at a six-month high; almost certainly, the upturn in the growth rate cycle we predicted in April is now in progress.
But the sequential upswings in the leading indices aren't just about less negative growth -- we have pronounced, pervasive and persistent upswings in a succession of leading indices of economic revival, the most powerful possible predictor of a business cycle recovery. What's impressive here is the degree of unanimity within and across these leading indices, along with the classic sequence of advances in those indices. Such a combination of upturns doesn't happen unless an end to the recession is imminent.
If so, why is there such broad pessimism among analysts? The problem is a widespread inability to distinguish among leading, coincident and lagging indicators, along with the vast majority of economic indicators that don't fall neatly into any of those three categories. Thus, indicators are typically judged by their freshness, not their foresight. Because most market-moving numbers are coincident to short leading, while corporate guidance is often lagging, it's no surprise that analysts don't discern any convincing evidence of an economic upturn.
The arguments marshaled by standard-bearers of the pessimistic consensus hold little water. Usually, their "analysis" is based on gut feel, bolstered by any seemingly plausible argument that would support their case.
For instance, last month, with oil prices and interest rates staging something of an advance from their lows, skeptics opined that this would nip any potential recovery in the bud. But it's hardly unusual for such indicators to turn up in anticipation of economic revivals, which would never take place if higher oil prices or interest rates were able to head them off.
This month, the rise in the jobless rate to a 25-year high is being taken by some as an argument against recovery: Consumers supposedly won't spend when joblessness is mounting. Apparently, many analysts are unaware that even the 1929-33 recession ended when the jobless rate was over 25% -- and still rising!
The "second-derivative rally" in equities has provoked much derision, especially from those who missed it. Yet ECRI's leading indices now have positive second derivatives. More important, they've already had positive first derivatives for some months. It's worth reminding calculus-challenged analysts who doubt the significance of these cyclical upswings of the second-derivative test: When the first derivative of a univariate function rises to zero and its second derivative turns positive, it marks the low point of the function. That development is already in the rearview mirror for every one of ECRI's leading indices of economic activity.
In sum, the economy has a raft of problems that'll take a long time to resolve. But none of them can head off the imminent economic recovery that ECRI's objective leading indices are promising.
Earnings Beat Up The Bears This Week
It was quite a remarkable week for the market. Just last Friday, the major indices were holding on to some key support levels by their fingertips, and many were talking about the "head-and-shoulders top in the S&P 500." On Monday morning we opened weak, and it looked like the breakdown was going to kick in and the bears were ready to push the market down.
Unfortunately for the bears, they underestimated their opponent. The mighty Meredith Whitney appeared at the CNBC studios and applied the "clothesline from Wall Street" move in the form of an upgrade of GS and a number of other banks. The bears were caught by surprise and scrambled all day to reposition, but the problem was that Goldman was ready to deliver a great quarter, which it did.
The next day, the market inched up a bit more as we awaited earnings from INTC. A mildly positive quarter was expected, but Intel came through with a better one. Now the bears, who were still reeling from Goldman move, were really on the ropes and had no choice but to cover shorts and try to find some longs.
What was really amazing about the move in the market on Wednesday and Thursday was how relentless the uptrend was. We barely paused for a minute and had just the slightest of dips. We finally rested a bit on Friday but stayed stubbornly strong. The folks who were stunned by the week's reversal were providing good underlying support, and we didn't pull back at all.
One of the main lessons of the week is the danger of trading in front of earnings reports. Earnings are a gamble. They can pay off if you are right, but you shouldn't think you have any edge. They are always a coin toss.
The market is now a bit technically extended but with so many folks out of position this week that will give it some underlying support. We have another big earnings report from AAPL on Tuesday and then MSFT on Thursday, but earnings should be less of a factor now.
Even though there has been some real celebration as folks once again declare the recession over, it has not made for easy trading. Embracing this market has required some real optimism, and there was little of that around just a week ago.
Will next week be rockier? Takes just 2 days to find out.......
A healthy market will churn like this for a while, maybe even dip a bit more and then produce another leg higher. An unhealthy market will see the dip-buyers lose interest and an increased inclination to protect recent gains.
Unfortunately for the bears, they underestimated their opponent. The mighty Meredith Whitney appeared at the CNBC studios and applied the "clothesline from Wall Street" move in the form of an upgrade of GS and a number of other banks. The bears were caught by surprise and scrambled all day to reposition, but the problem was that Goldman was ready to deliver a great quarter, which it did.
The next day, the market inched up a bit more as we awaited earnings from INTC. A mildly positive quarter was expected, but Intel came through with a better one. Now the bears, who were still reeling from Goldman move, were really on the ropes and had no choice but to cover shorts and try to find some longs.
What was really amazing about the move in the market on Wednesday and Thursday was how relentless the uptrend was. We barely paused for a minute and had just the slightest of dips. We finally rested a bit on Friday but stayed stubbornly strong. The folks who were stunned by the week's reversal were providing good underlying support, and we didn't pull back at all.
One of the main lessons of the week is the danger of trading in front of earnings reports. Earnings are a gamble. They can pay off if you are right, but you shouldn't think you have any edge. They are always a coin toss.
The market is now a bit technically extended but with so many folks out of position this week that will give it some underlying support. We have another big earnings report from AAPL on Tuesday and then MSFT on Thursday, but earnings should be less of a factor now.
Even though there has been some real celebration as folks once again declare the recession over, it has not made for easy trading. Embracing this market has required some real optimism, and there was little of that around just a week ago.
Will next week be rockier? Takes just 2 days to find out.......
A healthy market will churn like this for a while, maybe even dip a bit more and then produce another leg higher. An unhealthy market will see the dip-buyers lose interest and an increased inclination to protect recent gains.
market notes so far
i thought a pretty impressive (but i'm biased) capital-building quarter for bac - so far, i guess, the market's not sure - although probably was expected and this is options x, after all. citi seems to be hanging in there; not doing things fast enough for my taste, but who am i?
ge's wasn't that bad either - they're obviously not cit. and not just the too-big-to-fail yada yada but obviously a totally different capital structure.
as for bac, this was a capital-building quarter in a morass of an economy that would have normally depleted capital. forbearance? - the regulators giving these entities a little room - i don't know; but the capital increases and what is left of them after charges impressed me.
wondering if the big permit jump is from builders selling land to maintain cash flow. sounds like something most would do. it's plausible and means i'll be staying away from homebuilders for a little while longer still.
long bac
ge's wasn't that bad either - they're obviously not cit. and not just the too-big-to-fail yada yada but obviously a totally different capital structure.
as for bac, this was a capital-building quarter in a morass of an economy that would have normally depleted capital. forbearance? - the regulators giving these entities a little room - i don't know; but the capital increases and what is left of them after charges impressed me.
wondering if the big permit jump is from builders selling land to maintain cash flow. sounds like something most would do. it's plausible and means i'll be staying away from homebuilders for a little while longer still.
long bac
Thursday, July 16, 2009
These Congressional Hearings Are Almost Unbearable To Watch.......
I rarely worry about the end of civilization as we know it, our planet being destroyed by global warming (we could be destroyed by poor stewardship of the environment, but I don't think the earth is going anywhere), or the sun flaming out in our lifetime.
I think those types of sentiments are hyperbolic at best, and purposefully ignorant at worst.
And while I think Paulson could have done a MUCH better job, the grilling he is taking on Capitol Hill, for his actions, or lack thereof, during the economic crisis is frightening in the extreme. One after another representative is putting on full display, to the American public, his or her ignorance of economic and market issues. This is ridiculous; how are we going to get good people to serve if any and every move they make is scrutinized to the nth degree?
And it's not just unfamiliarity of complex subject matter that they are displaying; it is willful ignorance of the very areas of the economy they have been elected to oversee. It makes me worry that the "American empire" is in its death throes when I see Democrats and Republicans alike express phony outrage over Paulson's tax-deferred sale of Goldman Sachs (GS) stock when he left the investment bank to become Treasury secretary.
Ronald Reagan's right-hand man, James Baker, got the same treatment when he left a Texas bank to go into government work 29 years ago. So has every other Treasury Secretary since.
Other representatives are appalled at the profits being earned by commercial and investment banks, after they were bailed out by the government. Are they in favor of the banks losing more money so that the entire system fails?
While the profits are, indeed, surprisingly large, I for one am thrilled that banks are being recapitalized (and yes I own FAS and BAC), and no longer threatening to topple the U.S. financial system, or the global economy either.
That's exactly what the bailout program was designed to do, and it has worked in near record time, relative to the enormity of the problem.
Further, our representatives don't understand that the warrants the government received, in exchange for bailout funds, allow the government to reap a profit from the renewed good fortunes of the banks, however they have been attained, earning the taxpayers hefty returns on their sizable and risky investment.
It is almost unbearable to watch! I was highly critical of Paulson's handling of the crisis, an ad hoc, bungled affair that was instituted far too long after the crisis began and with far too little understanding of the complexities of the situation.
Only the Fed's massive and historic efforts to restore normality to the system offset the Treasury's ham-handed efforts to fix what went wrong.
Despite that reality, Congress - both parties - was far more complicit in creating the environment that led to the credit crisis than almost any other single actor.
Who allowed FNM and FRE to get so big? Who created the "Enron loophole" that allowed derivatives and off-balance-sheet "special-purpose vehicles" (SPVs) to grow in a completely unregulated environment? Who allowed the "shadow banking system to grow unchecked? Who repealed the 1930s-era Glass-Steagall legislation and thereby allowed commercial and investment banks to merge? Who failed to supervise the very areas of the economy that for which they had direct supervisory oversight?
Congressman Barney Frank, Senator Phil Gramm, Senator Chris Dodd, Congressman Charlie Rangel and Senator Chuck Schumer, to name a few.
Certainly, the executive and regulatory branches of government had a big role as well, as did the Federal Reserve, but it is beyond galling that our elected representatives feign outrage over a situation that they are directly responsible for creating and exacerbating.
They were as asleep at the switch as anyone they criticize. And their commentary and questions just prove their ignorance, arrogance and utter lack of accountability on all matters financial.
Forget about pay caps for bankers or prosecuting former CEOs, let's just vote these folks out of office and put in the guys and gals who know how to make money. If I have to choose, I'll take greed over ignorance any day!
The stock market, meanwhile, has handled the expected bankruptcy, or possible failure, of CIT with remarkable equanimity today.
That tells me the financial system is in better shape than we know. CIT does not pose "systemic risk," as the FDIC and Treasury correctly surmise, and the market is now separating winners from losers in the financial system in a way that is healthy for the market and the economy.
Six months ago, a run on CIT would have knocked us over the precipice upon which we so tentatively stood. Today, not so much.
It again speaks to the remarkable job the Fed has done in restoring confidence to the markets, recapitalizing the banking system and preparing the way for an economic recovery.
Bernanke, yeah, under fire from Congress, has done a good job lately, and a little credit to Geithner and Bair as well.
The VIX continues to fall. It is now at its lowest level since before the collapse of Lehman Brothers. Is this a good sign?
While I am extremely encouraged about the market's recent advance, which is within striking distance of the "important" target of around 950 on the cash S&P, I am growing concerned about how quickly we have gone from oversold to overbought in equities.
It may be time to protect the 'ole portfolio through the use of index put options, or ETFs, against a potential seasonal slide into September and October. However, recent strength could also portend and "upside breakout," rather than a "downside breakdown." If the VIX falls too far, maybe that would be flashing signs of investor complacency and would be a yellow flag for the market, other fundamental and technical considerations aside.
At this point, I have no intention of selling the stocks I own, but given the explosive run-up in banks, materials and other stocks I recently purchased, I want to take precautionary measures to lock in those gains....
I think those types of sentiments are hyperbolic at best, and purposefully ignorant at worst.
And while I think Paulson could have done a MUCH better job, the grilling he is taking on Capitol Hill, for his actions, or lack thereof, during the economic crisis is frightening in the extreme. One after another representative is putting on full display, to the American public, his or her ignorance of economic and market issues. This is ridiculous; how are we going to get good people to serve if any and every move they make is scrutinized to the nth degree?
And it's not just unfamiliarity of complex subject matter that they are displaying; it is willful ignorance of the very areas of the economy they have been elected to oversee. It makes me worry that the "American empire" is in its death throes when I see Democrats and Republicans alike express phony outrage over Paulson's tax-deferred sale of Goldman Sachs (GS) stock when he left the investment bank to become Treasury secretary.
Ronald Reagan's right-hand man, James Baker, got the same treatment when he left a Texas bank to go into government work 29 years ago. So has every other Treasury Secretary since.
Other representatives are appalled at the profits being earned by commercial and investment banks, after they were bailed out by the government. Are they in favor of the banks losing more money so that the entire system fails?
While the profits are, indeed, surprisingly large, I for one am thrilled that banks are being recapitalized (and yes I own FAS and BAC), and no longer threatening to topple the U.S. financial system, or the global economy either.
That's exactly what the bailout program was designed to do, and it has worked in near record time, relative to the enormity of the problem.
Further, our representatives don't understand that the warrants the government received, in exchange for bailout funds, allow the government to reap a profit from the renewed good fortunes of the banks, however they have been attained, earning the taxpayers hefty returns on their sizable and risky investment.
It is almost unbearable to watch! I was highly critical of Paulson's handling of the crisis, an ad hoc, bungled affair that was instituted far too long after the crisis began and with far too little understanding of the complexities of the situation.
Only the Fed's massive and historic efforts to restore normality to the system offset the Treasury's ham-handed efforts to fix what went wrong.
Despite that reality, Congress - both parties - was far more complicit in creating the environment that led to the credit crisis than almost any other single actor.
Who allowed FNM and FRE to get so big? Who created the "Enron loophole" that allowed derivatives and off-balance-sheet "special-purpose vehicles" (SPVs) to grow in a completely unregulated environment? Who allowed the "shadow banking system to grow unchecked? Who repealed the 1930s-era Glass-Steagall legislation and thereby allowed commercial and investment banks to merge? Who failed to supervise the very areas of the economy that for which they had direct supervisory oversight?
Congressman Barney Frank, Senator Phil Gramm, Senator Chris Dodd, Congressman Charlie Rangel and Senator Chuck Schumer, to name a few.
Certainly, the executive and regulatory branches of government had a big role as well, as did the Federal Reserve, but it is beyond galling that our elected representatives feign outrage over a situation that they are directly responsible for creating and exacerbating.
They were as asleep at the switch as anyone they criticize. And their commentary and questions just prove their ignorance, arrogance and utter lack of accountability on all matters financial.
Forget about pay caps for bankers or prosecuting former CEOs, let's just vote these folks out of office and put in the guys and gals who know how to make money. If I have to choose, I'll take greed over ignorance any day!
The stock market, meanwhile, has handled the expected bankruptcy, or possible failure, of CIT with remarkable equanimity today.
That tells me the financial system is in better shape than we know. CIT does not pose "systemic risk," as the FDIC and Treasury correctly surmise, and the market is now separating winners from losers in the financial system in a way that is healthy for the market and the economy.
Six months ago, a run on CIT would have knocked us over the precipice upon which we so tentatively stood. Today, not so much.
It again speaks to the remarkable job the Fed has done in restoring confidence to the markets, recapitalizing the banking system and preparing the way for an economic recovery.
Bernanke, yeah, under fire from Congress, has done a good job lately, and a little credit to Geithner and Bair as well.
The VIX continues to fall. It is now at its lowest level since before the collapse of Lehman Brothers. Is this a good sign?
While I am extremely encouraged about the market's recent advance, which is within striking distance of the "important" target of around 950 on the cash S&P, I am growing concerned about how quickly we have gone from oversold to overbought in equities.
It may be time to protect the 'ole portfolio through the use of index put options, or ETFs, against a potential seasonal slide into September and October. However, recent strength could also portend and "upside breakout," rather than a "downside breakdown." If the VIX falls too far, maybe that would be flashing signs of investor complacency and would be a yellow flag for the market, other fundamental and technical considerations aside.
At this point, I have no intention of selling the stocks I own, but given the explosive run-up in banks, materials and other stocks I recently purchased, I want to take precautionary measures to lock in those gains....
Steady Upturn From The Start
For the second day in a row the indices moved steadily up with barely a downtick. Volume slowed and the price action wasn't as energetic but there were some big moves once again like WHR, FDX and MA - these could be telling.
IBM and GOOG ran up strongly in front of their earnings reports. IBM numbers came in very strong and it is trading up further on the news but Google was just a little ahead and is trading down fairly sharply. We have BAC and GE in the morning, so that should give us some additional volatility as well.
This market has been remarkable in how little it has pulled back all week. I see many stocks up four to five days in a row on light volume, but they just keep on going as calls for the end of our economic demise grow louder each day this week.
On a day like today, when an overbought market goes even higher on lighter volume in front of major earnings reports, if I'm a buyer then I'm picky. Make sure you have an edge. That doesn't mean we won't have another two or three days up, but the odds of further upside at this point are diminishing - maybe.
At least with these earnings reports and varying reactions from IBM and Google some out there should have some better volatility to play with.
long BAC
IBM and GOOG ran up strongly in front of their earnings reports. IBM numbers came in very strong and it is trading up further on the news but Google was just a little ahead and is trading down fairly sharply. We have BAC and GE in the morning, so that should give us some additional volatility as well.
This market has been remarkable in how little it has pulled back all week. I see many stocks up four to five days in a row on light volume, but they just keep on going as calls for the end of our economic demise grow louder each day this week.
On a day like today, when an overbought market goes even higher on lighter volume in front of major earnings reports, if I'm a buyer then I'm picky. Make sure you have an edge. That doesn't mean we won't have another two or three days up, but the odds of further upside at this point are diminishing - maybe.
At least with these earnings reports and varying reactions from IBM and Google some out there should have some better volatility to play with.
long BAC
Lessons From 18 Years Apply Today........
I remember 1991. I remember reading and hearing worse and worse stories about commercial real estate. The stories were horrendous. Each month was more negative than the previous ones. What started in Texas spread to New York and then California. It was a wildfire. Panic everywhere. Headline after headline of the coming storm. Real estate tsunami ahead.
Then, one day, WFC said the problems were winding down. The worst was behind us.
Many just assumed they were lying; talking their book. They had to be trying to stay afloat. They obviously didn't even read the papers.
And it turned out they were right. We were wrong to question the credibility. The coming storm gathering? The storm had already happened. The worst was over.
JPM's call this morning may turn out to be a similar event. TV and the web are aflame with stories about the big coming spike in foreclosures, how things are getting worse and worse, that there is no end in sight.
And JPM says the worst is behind us for a whole host of loans and charge-offs for individuals, including residential real estate. It definitely is not getting worse. Given that JPM owns Washington Mutual, obviously the worst major residential lender on earth, even worse than the Golden West portion (pick or don't pay) loans of Wachovia, we have to listen to them. We have to.
No one seems to be listening. No, they are just repeating what happened in 1991. I just don't think it's a good idea to assume the worst is still ahead. Reminds me too much of 1991; I am siding with JPM today, not with those who are singing the jeremiads about foreclosures, especially because Southern California, the epicenter of foreclosures, is seeing transactions up huge and rising prices. How can we have rising prices if foreclosures are flooding the market? The answer is that in the area that led us down, we are about to go back up.
It is so compelling to stay short and negative. And, as Jamie Dimon said, regional banks are going to get hurt as commercial real estate is going to get worse and worse and worse. Will the net interest margin bail out the regionals that have bad commercial real estate? I don't know. In 1991 some regional banks stayed in trouble and failed. But that's always going to happen.
Seems to me like JPM today is like WFC of 1991.
Then, one day, WFC said the problems were winding down. The worst was behind us.
Many just assumed they were lying; talking their book. They had to be trying to stay afloat. They obviously didn't even read the papers.
And it turned out they were right. We were wrong to question the credibility. The coming storm gathering? The storm had already happened. The worst was over.
JPM's call this morning may turn out to be a similar event. TV and the web are aflame with stories about the big coming spike in foreclosures, how things are getting worse and worse, that there is no end in sight.
And JPM says the worst is behind us for a whole host of loans and charge-offs for individuals, including residential real estate. It definitely is not getting worse. Given that JPM owns Washington Mutual, obviously the worst major residential lender on earth, even worse than the Golden West portion (pick or don't pay) loans of Wachovia, we have to listen to them. We have to.
No one seems to be listening. No, they are just repeating what happened in 1991. I just don't think it's a good idea to assume the worst is still ahead. Reminds me too much of 1991; I am siding with JPM today, not with those who are singing the jeremiads about foreclosures, especially because Southern California, the epicenter of foreclosures, is seeing transactions up huge and rising prices. How can we have rising prices if foreclosures are flooding the market? The answer is that in the area that led us down, we are about to go back up.
It is so compelling to stay short and negative. And, as Jamie Dimon said, regional banks are going to get hurt as commercial real estate is going to get worse and worse and worse. Will the net interest margin bail out the regionals that have bad commercial real estate? I don't know. In 1991 some regional banks stayed in trouble and failed. But that's always going to happen.
Seems to me like JPM today is like WFC of 1991.
Wednesday, July 15, 2009
It's Not Just Buying; It's Also Short Covering
Stocks rocketed higher today after a very good second quarter report from INTC. The bullishness generated from INTC helped the S&P 500 and the Dow log their third straight gain and gave the Nasdaq its fourth consecutive finish in higher ground. The major equity averages spent the entire session ascending steadily before finishing with some of their best gains in the last few months...
The positive tone was actually set after the previous session's close when INTC announced better-than-expected adjusted earnings of $0.18 per share in its latest quarter, thanks partly to fatter profit margins. The company went on to issue an upside revenue forecast for the third quarter... Intel was able to lead the tech sector to a 4.2% gain, which was more than any other sector. Perhaps more importantly, Intel encouraged buying in the broader market. In turn, more than 95% of the companies in the S&P 500 finished higher, while MCD was the only company in the 30-member Dow Jones Industrial Average to finish lower. AXP was a primary leader in the Dow after the company posted better-than-expected trust data...
Strength in AmEx and other financial issues helped send the financial sector 4.1% higher. Financials proved to be a leader for the broader market, a position that was reclaimed earlier this week amid positive analyst comments about the short-term prospects of banks. Financials are currently up more than 10% week-to-date... Renewed strength among financials has helped carry the broader market. Week-to-date, the Dow and the S&P 500 up 5.8% and 6.1%, respectively, while the Nasdaq is up 6.1% this week. That helped all three major indices close above their 50-day moving averages. What's more, should the gains hold, stocks will log their best weekly performance since March...
Health care stocks have spent the week trading as laggards. They managed to advance 0.8% this session, but are up 2.7% for the week. ABT weighed on the sector as investors reacted negatively to the company's in-line earnings and forecast in the latest round of trading...
Trading volume came in near longer term averages by hitting almost 1.4 billion shares on the NYSE. Still, more recent levels have been unimpressive. That often signals a lack of conviction. However, many participants are likely waiting to see if earnings announcements continue to top expectations. Banking giant JPM is scheduled to report tomorrow morning before the opening bell. BAC and GE are all scheduled for Friday morning...
Market participants will likely be looking for encouraging guidance from major industry players. Optimistic forecasts would complement economic reports that suggest economic conditions are bottoming and even showing signs of improving...
Manufacturing activity in the New York area declined a fractionally in July; the Empire State Manufacturing Index came in at a better-than-expected 0.55, which is the best reading since April 2008...However, a 0.4% drop in June industrial production meant that production has fallen in 17 out of 18 months. Still, the decline was less than expected and the softest downturn since a positive reading in October 2008... Meanwhile, capacity utilization was in-line at 68%... The Consumer Price Index, a widely-watched inflationary gauge, showed a sharper-than-expected increase for June by coming in with a 0.7% increase. That is the sharpest increase since July 2008. However, core prices increased 0.2%, which is more in-line with recent trends, even if it was slightly above what had been expected...
long AAPL/BAC
The positive tone was actually set after the previous session's close when INTC announced better-than-expected adjusted earnings of $0.18 per share in its latest quarter, thanks partly to fatter profit margins. The company went on to issue an upside revenue forecast for the third quarter... Intel was able to lead the tech sector to a 4.2% gain, which was more than any other sector. Perhaps more importantly, Intel encouraged buying in the broader market. In turn, more than 95% of the companies in the S&P 500 finished higher, while MCD was the only company in the 30-member Dow Jones Industrial Average to finish lower. AXP was a primary leader in the Dow after the company posted better-than-expected trust data...
Strength in AmEx and other financial issues helped send the financial sector 4.1% higher. Financials proved to be a leader for the broader market, a position that was reclaimed earlier this week amid positive analyst comments about the short-term prospects of banks. Financials are currently up more than 10% week-to-date... Renewed strength among financials has helped carry the broader market. Week-to-date, the Dow and the S&P 500 up 5.8% and 6.1%, respectively, while the Nasdaq is up 6.1% this week. That helped all three major indices close above their 50-day moving averages. What's more, should the gains hold, stocks will log their best weekly performance since March...
Health care stocks have spent the week trading as laggards. They managed to advance 0.8% this session, but are up 2.7% for the week. ABT weighed on the sector as investors reacted negatively to the company's in-line earnings and forecast in the latest round of trading...
Trading volume came in near longer term averages by hitting almost 1.4 billion shares on the NYSE. Still, more recent levels have been unimpressive. That often signals a lack of conviction. However, many participants are likely waiting to see if earnings announcements continue to top expectations. Banking giant JPM is scheduled to report tomorrow morning before the opening bell. BAC and GE are all scheduled for Friday morning...
Market participants will likely be looking for encouraging guidance from major industry players. Optimistic forecasts would complement economic reports that suggest economic conditions are bottoming and even showing signs of improving...
Manufacturing activity in the New York area declined a fractionally in July; the Empire State Manufacturing Index came in at a better-than-expected 0.55, which is the best reading since April 2008...However, a 0.4% drop in June industrial production meant that production has fallen in 17 out of 18 months. Still, the decline was less than expected and the softest downturn since a positive reading in October 2008... Meanwhile, capacity utilization was in-line at 68%... The Consumer Price Index, a widely-watched inflationary gauge, showed a sharper-than-expected increase for June by coming in with a 0.7% increase. That is the sharpest increase since July 2008. However, core prices increased 0.2%, which is more in-line with recent trends, even if it was slightly above what had been expected...
long AAPL/BAC
The Health Care "Crisis" Will Not Bankrupt Our Country
I'm opposed to taxing healthcare benefits. I'm also getting tired of the Washington mantra that the "health care crisis" will bankrupt our country.
This is just nonsense. It might bankrupt our generation, but it won't destroy the nation.
I know that the entitlement burden saddles us with about $17 trillion in unfunded future liabilities. However, once the baby boomers die, there is a baby-bust that will not require nearly the amount of government "babysitting" that the 77 million boomers have needed since they were born.
I also don't like "class" or generational warfare, but some boomers out there helped create three financial bubbles -- the LBO bubble of the late 1980s, the Internet bubble of the 1990s and the credit bubble of more recent vintage -- making money on both sides of the trade, bidding asset prices up and then getting fat fees and government assistance to restructure the very system they broke, over and over and over again!
Now, frankly, they are warning us that unless the rest of us foot the bill for their Viagra, CAT scans, PET scans and liposuction, our country will go to ruin.
This is a generational problem, and it is no more a threat to our children and grandchildren, whom politicians always invoke when they want their way, than is global warming. (My opinion.)
Future generations will be highly adaptable, just as we have been and as our ancestors were.
My parents lived through the Depression and World War II. They didn't saddle us with any debts, despite a government-debt-to-GDP ratio of 120 after World War II. They also enjoyed one of the most prosperous periods in modern history, from 1946 to 1971, in the wake of those catastrophes.
With respect to the health care crisis, which I believe is more of an "insurance crisis," there are numerous, lower-cost solutions to our health care problems, from electronic medical records to outcome-based measures of medical treatments (which should be widely publicized by doctors and by institutions. That will improve treatment and lower costs!), to utilizing existing government programs to insure children and college-age individuals.
President Clinton's S-CHIP program would cover anywhere from 5 million to 9 million kids, reducing the roles of the uninsured by between 12% and 20%.
No one even knows about the program, which President Obama recently expanded, because it is state-administered, and the states don't bother to inform the poor of the available and funded benefits.
Why is every problem we face being declared a national emergency? There is no proportionality in the presentation anymore.
While I agree that entitlement costs are a pressing need that we should deal with, it is we, not our children, who should, and will, bear the burden of reform.
Judging from Wall Street's rather nonchalant reaction to the "landmark" health care reform measure introduced by the House leadership yesterday, the Senate may offer a much less invasive procedure to cure what ails us.
Hence, there has been a noted lack of response in health care and pharmaceutical stocks.
I'm all for fixing the system, but I reject the notion that we are saddling our kids with a burden that is too big too bear. Despite the claims of economically illiterate members of Congress, countries don't go bankrupt. They suffer declining living standards, or lose their standing in the world.
But they don't go away. The British Empire is gone, but Great Britain has survived. There is no country that has gone bankrupt and closep up shop. Our problems will pass, and not without some financial pain to go along with whatever physical ailments ultimately afflict us.
As President Obama has said over and over again, we need a national dialogue to decide if we are "entitled to" every drug, procedure or benefit we want, regardless of cost.
Many of us out there expect cradle-to-grave benefits. The "Greatest Generation" did not. Nor do the generations that follow, if current surveys are correct.
Our kids and grandkids will have a whole set of other issues to deal with, and they won't be the same as ours. Just as I didn't fight World War II or face polio or the plague, our kids will have other worries that will supplant our own.
Just my opinion; I could be wrong.
This is just nonsense. It might bankrupt our generation, but it won't destroy the nation.
I know that the entitlement burden saddles us with about $17 trillion in unfunded future liabilities. However, once the baby boomers die, there is a baby-bust that will not require nearly the amount of government "babysitting" that the 77 million boomers have needed since they were born.
I also don't like "class" or generational warfare, but some boomers out there helped create three financial bubbles -- the LBO bubble of the late 1980s, the Internet bubble of the 1990s and the credit bubble of more recent vintage -- making money on both sides of the trade, bidding asset prices up and then getting fat fees and government assistance to restructure the very system they broke, over and over and over again!
Now, frankly, they are warning us that unless the rest of us foot the bill for their Viagra, CAT scans, PET scans and liposuction, our country will go to ruin.
This is a generational problem, and it is no more a threat to our children and grandchildren, whom politicians always invoke when they want their way, than is global warming. (My opinion.)
Future generations will be highly adaptable, just as we have been and as our ancestors were.
My parents lived through the Depression and World War II. They didn't saddle us with any debts, despite a government-debt-to-GDP ratio of 120 after World War II. They also enjoyed one of the most prosperous periods in modern history, from 1946 to 1971, in the wake of those catastrophes.
With respect to the health care crisis, which I believe is more of an "insurance crisis," there are numerous, lower-cost solutions to our health care problems, from electronic medical records to outcome-based measures of medical treatments (which should be widely publicized by doctors and by institutions. That will improve treatment and lower costs!), to utilizing existing government programs to insure children and college-age individuals.
President Clinton's S-CHIP program would cover anywhere from 5 million to 9 million kids, reducing the roles of the uninsured by between 12% and 20%.
No one even knows about the program, which President Obama recently expanded, because it is state-administered, and the states don't bother to inform the poor of the available and funded benefits.
Why is every problem we face being declared a national emergency? There is no proportionality in the presentation anymore.
While I agree that entitlement costs are a pressing need that we should deal with, it is we, not our children, who should, and will, bear the burden of reform.
Judging from Wall Street's rather nonchalant reaction to the "landmark" health care reform measure introduced by the House leadership yesterday, the Senate may offer a much less invasive procedure to cure what ails us.
Hence, there has been a noted lack of response in health care and pharmaceutical stocks.
I'm all for fixing the system, but I reject the notion that we are saddling our kids with a burden that is too big too bear. Despite the claims of economically illiterate members of Congress, countries don't go bankrupt. They suffer declining living standards, or lose their standing in the world.
But they don't go away. The British Empire is gone, but Great Britain has survived. There is no country that has gone bankrupt and closep up shop. Our problems will pass, and not without some financial pain to go along with whatever physical ailments ultimately afflict us.
As President Obama has said over and over again, we need a national dialogue to decide if we are "entitled to" every drug, procedure or benefit we want, regardless of cost.
Many of us out there expect cradle-to-grave benefits. The "Greatest Generation" did not. Nor do the generations that follow, if current surveys are correct.
Our kids and grandkids will have a whole set of other issues to deal with, and they won't be the same as ours. Just as I didn't fight World War II or face polio or the plague, our kids will have other worries that will supplant our own.
Just my opinion; I could be wrong.
Tuesday, July 14, 2009
Today Was A "Push" Before This Week's Big Earnings Announcements...
The market did such a great job yesterday of anticipating today's earnings report that all the moves already occurred and left us with a pretty dead day. GS closed almost flat, and the indices were stuck in tight range all day. The action wasn't bad, in fact breadth, particularly on the NYSE, was quite good, but there just wasn't much energy.
The problem is that it is tough to act with major earnings reports pending. Even though market conditions look wobbly, the bears don't want to be run over by an upbeat report, but the bears are also a bit hesitant, given that the big technical picture isn't that positive. That leaves us with a stalemate while we await news from INTC, GOOG, AAPL and the like.
Intel is now halted ahead of its earnings report, which I have never seen them do before, and it looks like the numbers are quite good and guidance strong. The Nasdaq 100 is up sharply on the report.
This will give a boost to the market tomorrow, and we'll have a good test of how much juice the bulls have. They have some good news to work with, and they will be off to a strong start in the morning....
The problem is that it is tough to act with major earnings reports pending. Even though market conditions look wobbly, the bears don't want to be run over by an upbeat report, but the bears are also a bit hesitant, given that the big technical picture isn't that positive. That leaves us with a stalemate while we await news from INTC, GOOG, AAPL and the like.
Intel is now halted ahead of its earnings report, which I have never seen them do before, and it looks like the numbers are quite good and guidance strong. The Nasdaq 100 is up sharply on the report.
This will give a boost to the market tomorrow, and we'll have a good test of how much juice the bulls have. They have some good news to work with, and they will be off to a strong start in the morning....
Holding Our Recent Gains Because The House "Health Bill" Is "Dead"?
I'm with Cramer in not buying the House's version of reality on health care. I don't think Pelosi has the muscle (or votes) to get it done in the Senate. I think we're holding yesterday's gains, and maybe setting up for more gains, because the market also senses the health care bill is "dead." Given the devastating health care taxes Pelosi et. al. are talking about, if the market thought it'd pass it'd probably be down 200 points instead of flat. Again, I agree with Cramer, in that these tax increases make investing a goner, because many of the people who invest would see those marginal stock dollars go up in health care smoke.
The action's really in the Senate, and I think the Senate is not going to let this stuff happen. I don't think that health care reform is done with, I simply believe that only Medicare Advantage will get hurt - think HUM and AET - and we won't need radical tax increases to fund this one.
I think the stock market has got it right. The Senate is going to deep-six this stuff, and that's why we are rallying/holding gains.
The action's really in the Senate, and I think the Senate is not going to let this stuff happen. I don't think that health care reform is done with, I simply believe that only Medicare Advantage will get hurt - think HUM and AET - and we won't need radical tax increases to fund this one.
I think the stock market has got it right. The Senate is going to deep-six this stuff, and that's why we are rallying/holding gains.
Call Me Crazy, But Inflation (At Least The Way It's Officially Measured) Seems To Be A Long Ways Off....
I think there's a lack of true inflationary pressures in the economy at home and abroad, and the continued presence of deflationary pressures in housing, autos and manufacturing are still with us.
Interest rates are at quite low levels, especially compared to the shrieking from deficit and inflation hawks about exploding interest rates and a crashing dollar as foreigners finally refuse to finance our stimulative spending spree.
Someday they will be right. The problem is that I simply don't know when.
I can remember way back in 1984 when the pundits proclaimed the mounting "twin deficits," budget and trade, could not be financed by surplus foreign funds. That proved to be as untrue then as it is today.
The recent record bond sales by Uncle Sam were met with record demand. Indirect bidders -- that is, foreign central banks -- have been snapping up Treasuries like they are going out of style, which quite clearly they are not.
The Federal Reserve has openly stated that it has been a big buyer of both Treasury and mortgage bonds in an attempt to keep rates low while the issuance of U.S. debt explodes.
Despite all that, the dollar has not crashed either; the greenback has been ignoring the many calls from our most important trading partners to create a global reserve currency that would supplant the dollar as the world's repository of wealth and purchasing power.
It's just not going to happen.
That said, I would not be a buyer of plain-vanilla Treasury notes and bonds and would instead buy long-dated Treasury inflation-protected securities (TIPS). You simply are not being compensated to hold U.S. Treasury bonds and notes at these extremely low yields since they will likely rise as the economy recovers.
A steep yield curve, 245 basis points wide, from two-year to 10-year maturities is signaling an economic recovery within the next six to nine months, along with stock prices, commodity prices (despite their recent setback) and other market-based indicators. As a consequence, the short end of the yield curve looks particularly vulnerable to a sell-off here, if stocks and commodities continue to recover.
Yields may also move up if Federal Reserve Chair Ben Bernanke outlines the Fed's plans to extract the stimulus and insurance programs from the economy so as to give the market a clear timeline and process by which to judge when the Fed will allow the economy to breathe on its own.
While I am not an inflation hawk, by any means, I believe five- to 10-year TIPS are a great buy and offer not only higher real rates of return, but protection against future inflation, which some day will be a problem again -- I just can't say when.
As for Bernanke, he may not be long for the world of central banking. He made some mistakes early on, but he is decidedly the hero of the horror show we all just lived through in the last two years.
If it becomes increasingly apparent that the Obama administration wants to throw Ben to the cats and move in someone more in tune with the administration's legislative and social agenda, hopefully a very vocal media campaign will commence from some of his media fans out there to stop that from happening.
I believe Bernanke is entirely misunderstood by the current administration. Should he be removed, Obama will quickly come to realize that it is imperative to "have a friend like Ben" at the Fed, particularly after the markets respond forcefully to a monetary trap the administration may have unwittingly set for itself.
Interest rates are at quite low levels, especially compared to the shrieking from deficit and inflation hawks about exploding interest rates and a crashing dollar as foreigners finally refuse to finance our stimulative spending spree.
Someday they will be right. The problem is that I simply don't know when.
I can remember way back in 1984 when the pundits proclaimed the mounting "twin deficits," budget and trade, could not be financed by surplus foreign funds. That proved to be as untrue then as it is today.
The recent record bond sales by Uncle Sam were met with record demand. Indirect bidders -- that is, foreign central banks -- have been snapping up Treasuries like they are going out of style, which quite clearly they are not.
The Federal Reserve has openly stated that it has been a big buyer of both Treasury and mortgage bonds in an attempt to keep rates low while the issuance of U.S. debt explodes.
Despite all that, the dollar has not crashed either; the greenback has been ignoring the many calls from our most important trading partners to create a global reserve currency that would supplant the dollar as the world's repository of wealth and purchasing power.
It's just not going to happen.
That said, I would not be a buyer of plain-vanilla Treasury notes and bonds and would instead buy long-dated Treasury inflation-protected securities (TIPS). You simply are not being compensated to hold U.S. Treasury bonds and notes at these extremely low yields since they will likely rise as the economy recovers.
A steep yield curve, 245 basis points wide, from two-year to 10-year maturities is signaling an economic recovery within the next six to nine months, along with stock prices, commodity prices (despite their recent setback) and other market-based indicators. As a consequence, the short end of the yield curve looks particularly vulnerable to a sell-off here, if stocks and commodities continue to recover.
Yields may also move up if Federal Reserve Chair Ben Bernanke outlines the Fed's plans to extract the stimulus and insurance programs from the economy so as to give the market a clear timeline and process by which to judge when the Fed will allow the economy to breathe on its own.
While I am not an inflation hawk, by any means, I believe five- to 10-year TIPS are a great buy and offer not only higher real rates of return, but protection against future inflation, which some day will be a problem again -- I just can't say when.
As for Bernanke, he may not be long for the world of central banking. He made some mistakes early on, but he is decidedly the hero of the horror show we all just lived through in the last two years.
If it becomes increasingly apparent that the Obama administration wants to throw Ben to the cats and move in someone more in tune with the administration's legislative and social agenda, hopefully a very vocal media campaign will commence from some of his media fans out there to stop that from happening.
I believe Bernanke is entirely misunderstood by the current administration. Should he be removed, Obama will quickly come to realize that it is imperative to "have a friend like Ben" at the Fed, particularly after the markets respond forcefully to a monetary trap the administration may have unwittingly set for itself.
More On AAPL
Analyst Kathryn Huberty of MS is one of the most influential on AAPL. She recommended selling AAPL last September, thus sidestepping a big fall in the stock. Now she's turned bullish again - which of course I agree with. She sees the stock headed up from a current 142 or so to at least 180 again - the previous high - and just maybe 270 - within a year.
She's upbeat on the prospects for the iphone; but she's really high on AAPL's "core" (ha ha) Mac business. The signs are out there for a PC revival, but the biggest winner will most likely be the Mac.
Windows PCs will probably tread water the rest of the year, as buyers wait for Windows7. Then it looks like PC unit sales will trend higher, rising maybe 10% in 2010 as businesses finally face the need to upgrade.
But I think the Mac will be a big winner, even this year, as the company ramps up its typically strong back-to-school promotions.
They're already on the ascent, as recent Street research indicate Mac shipments on the commercial side rose 25% month-over-month in May, compared with market growth of just 1%. Huberty also sees unit sales growth for Macs in the 3rd and 4th quarters of about 10%, with a 15% increase for 2010.
Of course, these predictions could be wrong if consumer spending remains weak. And AAPL shares could fall quickly if Jobs' closely watched health takes a turn for the worse.
But assuming none of that comes to pass, AAPL certainly seems well-positioned for the months ahead. I look for EPS of about $10 a share for the year ending 9/30/2010 - well above most current estimates, which are currently under $7. The $180 number is simply based on her $9 projection times $9 a share. And AAPL has about $35 a share in net cash, and growing quickly.
If the iphone continues its gains and the Mac continues its growth as well, then I think AAPL could rise to between $250 and $300.
long AAPL
She's upbeat on the prospects for the iphone; but she's really high on AAPL's "core" (ha ha) Mac business. The signs are out there for a PC revival, but the biggest winner will most likely be the Mac.
Windows PCs will probably tread water the rest of the year, as buyers wait for Windows7. Then it looks like PC unit sales will trend higher, rising maybe 10% in 2010 as businesses finally face the need to upgrade.
But I think the Mac will be a big winner, even this year, as the company ramps up its typically strong back-to-school promotions.
They're already on the ascent, as recent Street research indicate Mac shipments on the commercial side rose 25% month-over-month in May, compared with market growth of just 1%. Huberty also sees unit sales growth for Macs in the 3rd and 4th quarters of about 10%, with a 15% increase for 2010.
Of course, these predictions could be wrong if consumer spending remains weak. And AAPL shares could fall quickly if Jobs' closely watched health takes a turn for the worse.
But assuming none of that comes to pass, AAPL certainly seems well-positioned for the months ahead. I look for EPS of about $10 a share for the year ending 9/30/2010 - well above most current estimates, which are currently under $7. The $180 number is simply based on her $9 projection times $9 a share. And AAPL has about $35 a share in net cash, and growing quickly.
If the iphone continues its gains and the Mac continues its growth as well, then I think AAPL could rise to between $250 and $300.
long AAPL
Monday, July 13, 2009
In Anticipation Of Good Earnings Reports.....
Anticipation of positive earnings reports probably would have helped the market bounce today anyway, but Meredith Whitney's CNBC appearance and bullishness on GS and a few other financials is what really helped to move things along. In addition, the over-anxious bears found themselves trapped when we suddenly reversed from weakness in the opening hour.
We had taken out the lows from Friday when the buying came in and it was then straight up the rest of the day. It was quite an unusual swing and probably caught a lot of folks by surprise.
There were some very big reversals today and some very good action, especially for financials, but volume was mediocre and we didn't do anything technically to reverse the downtrend that began in mid-June. It was a good countertrend day, but there isn't much to suggest follow-through unless earnings reports come in well.
And now we will have some earning to anticipate. The big report tomorrow morning will be Goldman Sachs. It is widely anticipated that they will knock the cover off the ball, but the big question will be how much of a "surprise" will be enough to avoid disappointment?
NVLS is the first big technology report and it looks a little soft but guidance will be the key there. DELL is trading down a little following some cautious guidance.
Today we enjoyed some high hopes about earnings, but for the rest of the week we'll be wrestling with real numbers. We raised expectations today and that is going to make the job much tougher for the bulls. They were anxious to buy in front of the news today, especially with a little prodding from Whitney, but betting on earnings can be a very difficult way to make money in the market. It was a good day, but was it driven by hope? Is that something you can stick with for long?
We had taken out the lows from Friday when the buying came in and it was then straight up the rest of the day. It was quite an unusual swing and probably caught a lot of folks by surprise.
There were some very big reversals today and some very good action, especially for financials, but volume was mediocre and we didn't do anything technically to reverse the downtrend that began in mid-June. It was a good countertrend day, but there isn't much to suggest follow-through unless earnings reports come in well.
And now we will have some earning to anticipate. The big report tomorrow morning will be Goldman Sachs. It is widely anticipated that they will knock the cover off the ball, but the big question will be how much of a "surprise" will be enough to avoid disappointment?
NVLS is the first big technology report and it looks a little soft but guidance will be the key there. DELL is trading down a little following some cautious guidance.
Today we enjoyed some high hopes about earnings, but for the rest of the week we'll be wrestling with real numbers. We raised expectations today and that is going to make the job much tougher for the bulls. They were anxious to buy in front of the news today, especially with a little prodding from Whitney, but betting on earnings can be a very difficult way to make money in the market. It was a good day, but was it driven by hope? Is that something you can stick with for long?
Why Isn't The Media (Or Seemingly Anyone Else For That Matter) Discussing The Positives?
Why is it whenever I open a magazine, turn on the tv, or browse the media's insisting that I will lose my home? No qualifications about anyone's specific situation - just an insistence it's gonna happen to ME. They're telling me to expect the vast majority of homes to be defaulted upon and everyone who has a mortgage to walk away from it.
Likely 14 million homes were bought in 2005-2007. They seem to be figuring that 50% of those mortgages will default. That's 7 million mortgages. Average mortgage $200,000. That comes to one trillion four hundred billion. Sounds big. However, we've written off more than that.
That's what needs to be focused upon! We have written off more than 50% of all homes purchased during the heyday. For investment purposes, what matters isn't the number, it is the charges against the number. And that's above the 50% threshold.
Now, 50% of the mortgages done in that period were adjustable. You are saying that 100% of the adjustable -- pick or pay all of that nonsense -- are going to default. Come now, that's too high.
But what do I know? Let's use it. The worst case is built in then.
Yet, does anyone believe in that? Maybe that's why we can rally, especially now that one of the 50-percenters, Meredith Whitney, seems to be breaking ranks....
Likely 14 million homes were bought in 2005-2007. They seem to be figuring that 50% of those mortgages will default. That's 7 million mortgages. Average mortgage $200,000. That comes to one trillion four hundred billion. Sounds big. However, we've written off more than that.
That's what needs to be focused upon! We have written off more than 50% of all homes purchased during the heyday. For investment purposes, what matters isn't the number, it is the charges against the number. And that's above the 50% threshold.
Now, 50% of the mortgages done in that period were adjustable. You are saying that 100% of the adjustable -- pick or pay all of that nonsense -- are going to default. Come now, that's too high.
But what do I know? Let's use it. The worst case is built in then.
Yet, does anyone believe in that? Maybe that's why we can rally, especially now that one of the 50-percenters, Meredith Whitney, seems to be breaking ranks....
Sunday, July 12, 2009
Some Thoughts On The US Consumer
Some thoughts on the U.S. consumer, who accounts for approximately 70% of U.S. GDP (and about 20% of global GDP). The 70% number is up from about 60% to 65% decades ago, the increase resulting mainly from increased healthcare spending. Anyway, not only is the U.S. consumer a workhorse, but he or she is resilient as well. Acceleration of personal consumption expenditures (PCE) have pulled us out of past recessions.
And this may be a dangerous thought, but I do think "this time is different." I think it's akin to what happened on a large scale during and after the '30s depression: permanent, or at least very long-term behavior change. America and the world should be concerned with the U.S. consumer’s ability to pull the U.S. out of this recession.
It's been a shocking last couple of years, as americans have experienced almost $14 trillion of wealth destruction since the second half of 2007, about the equivalent of one year of nominal GDP. More importantly, however, is the source of this destruction. While we’ve lived through challenging financial markets before (does anyone remember the valuation metric for “eyeballs and clicks”?), americans have never seen their homes, their largest and historically most stable asset, fall in value. Fortunately, capital markets can rebound, and rebound quickly, so there is always a chance for smart investors to earn back some of their retirement savings, college tuition savings and the like. Home prices, however, don’t rebound as quickly, especially when the ability to receive financing for a home is, well, challenging at best. With his or her net worth (possibly) significantly impaired, his or her job at risk and/or wages stagnant, is the consumer going to borrow and spend his/her way out of this recession? I kind of doubt it.
People are spending money; just not in a profligate manner as before. The refi/home equity ATM is closed. Certainly not forever; but for a significant period of time in my opinion. Now, having spread a bit of gloom above, I'm not bearish on the markets (or on anything else, for that matter). I'm optimistic, but then again I almost always am - so that's a bias that needs to be known.
I'm "in" the market; and some people ("experts?") may think my 2 largest holdings are insane: AAPL and BAC. Even in today's environment, there are winners and losers; obviously I think AAPL's a winner. I've gone over the AAPL ground a few times lately, so I won't do it again here. BAC? Am I crazy? No, I don't think so. I think BAC stock is truly suffering from irrational pessimism at the moment. I believe CA real estate has bottomed; their normalized earnings power is more like $2.50 rather than $0.20, as some have written. Therefore, even though BAC itself could certainly be in much better shape, its stock should be trading at 20 right now, not 12. I think it'll be worth at least somewhere in the 30s the next few years.......
long AAPL and BAC
And this may be a dangerous thought, but I do think "this time is different." I think it's akin to what happened on a large scale during and after the '30s depression: permanent, or at least very long-term behavior change. America and the world should be concerned with the U.S. consumer’s ability to pull the U.S. out of this recession.
It's been a shocking last couple of years, as americans have experienced almost $14 trillion of wealth destruction since the second half of 2007, about the equivalent of one year of nominal GDP. More importantly, however, is the source of this destruction. While we’ve lived through challenging financial markets before (does anyone remember the valuation metric for “eyeballs and clicks”?), americans have never seen their homes, their largest and historically most stable asset, fall in value. Fortunately, capital markets can rebound, and rebound quickly, so there is always a chance for smart investors to earn back some of their retirement savings, college tuition savings and the like. Home prices, however, don’t rebound as quickly, especially when the ability to receive financing for a home is, well, challenging at best. With his or her net worth (possibly) significantly impaired, his or her job at risk and/or wages stagnant, is the consumer going to borrow and spend his/her way out of this recession? I kind of doubt it.
People are spending money; just not in a profligate manner as before. The refi/home equity ATM is closed. Certainly not forever; but for a significant period of time in my opinion. Now, having spread a bit of gloom above, I'm not bearish on the markets (or on anything else, for that matter). I'm optimistic, but then again I almost always am - so that's a bias that needs to be known.
I'm "in" the market; and some people ("experts?") may think my 2 largest holdings are insane: AAPL and BAC. Even in today's environment, there are winners and losers; obviously I think AAPL's a winner. I've gone over the AAPL ground a few times lately, so I won't do it again here. BAC? Am I crazy? No, I don't think so. I think BAC stock is truly suffering from irrational pessimism at the moment. I believe CA real estate has bottomed; their normalized earnings power is more like $2.50 rather than $0.20, as some have written. Therefore, even though BAC itself could certainly be in much better shape, its stock should be trading at 20 right now, not 12. I think it'll be worth at least somewhere in the 30s the next few years.......
long AAPL and BAC
Friday, July 10, 2009
Talk About Disinterest, Today MUST Have Been A Summer Friday.....
The major theme for the market today was disinterest, which was fitting for a very dull week. We had some slightly positive action early in the day due to upbeat analyst comments on some big-cap technology stocks, but in general that fizzled. AAPL, however, did tack on over 1%.
The troops had just enough energy for a little last-minute run into the close but it wasn't anything too impressive. At the end of the day it was a bounce in oil and commodities rather than technology that helped. Volume was about the lightest of the year, and breadth ended up close to flat. Boring.
It was a listless summer trading today, but next week should be much more entertaining, as we have some major earnings reports due.
The most important reports hitting next week are NVLS, GS, INTC, JNJ, GOOG, IBM, JPM, BAC, C, GE, and a number of others.
Some of the analyst comments today lifted expectations a little in the technology sector, so it is going to be very interesting to see the psychology of the market in the near future.
Stocks reacted quite well to first-quarter earnings quarter back in April, because expectations where so low and many companies did a good job of cutting costs. Expectations may not be as low this time, and a lot of cost-cutting has already been done. When you combine that with deteriorating technical conditions, the potential for a sell-the-news reaction is fairly high.
Betting on earnings is always a roll of the dice, but once they are out, they create some good trading opportunities as they are digested. At least the action should be much more interesting than it was this past week.
And yes, I continue to like AAPL and BAC very much at these prices.
long AAPL; long BAC
The troops had just enough energy for a little last-minute run into the close but it wasn't anything too impressive. At the end of the day it was a bounce in oil and commodities rather than technology that helped. Volume was about the lightest of the year, and breadth ended up close to flat. Boring.
It was a listless summer trading today, but next week should be much more entertaining, as we have some major earnings reports due.
The most important reports hitting next week are NVLS, GS, INTC, JNJ, GOOG, IBM, JPM, BAC, C, GE, and a number of others.
Some of the analyst comments today lifted expectations a little in the technology sector, so it is going to be very interesting to see the psychology of the market in the near future.
Stocks reacted quite well to first-quarter earnings quarter back in April, because expectations where so low and many companies did a good job of cutting costs. Expectations may not be as low this time, and a lot of cost-cutting has already been done. When you combine that with deteriorating technical conditions, the potential for a sell-the-news reaction is fairly high.
Betting on earnings is always a roll of the dice, but once they are out, they create some good trading opportunities as they are digested. At least the action should be much more interesting than it was this past week.
And yes, I continue to like AAPL and BAC very much at these prices.
long AAPL; long BAC
Thursday, July 9, 2009
What A Boring Day
For the second day in a row the indices did very little but the action under the surface was mildly positive. Breadth was pretty good and there were some bounces in oil, commodities and big-cap momentum names like GOOG, GS and AMZN.
After the selloff on Friday through Tuesday, we were oversold and due for some sort of relief bounce but all we've really done is run in place. The churning is using up the buying power of the dip-buyers and sets the stage for things to roll back over again. Buyers should be anxious to snap up some of these bargains after these sharp pullbacks, but they are hesitant and that increases the chances that they will stick with a bounce for long.
The dollar was largely weaker as sentiment reversed on Thursday, but the euro was still unable to move much above 1.40. Yen was also softer and underperformed the buck, so dollar/yen traded back to 93. EM currencies were largely firmer, but have yet to recoup their recent losses fully. Biggest gainers vs. USD on the day were PLN, HUF, GBP, SEK, and NOK, while only losers vs. USD were MXN, KRW, PKR, and JPY. US weekly initial claims fell sharply to 565k, but the data was distorted by seasonality. Continuing claims surged, however, pointing to a still-weak US labor market. FX markets still struggling to find next trend, so volatility to remain high as we close out the week. EM currencies are likely to remain under pressure near-term. The Fed balance sheet shrank to $12.8 billion to $1.99 trillion this latest week, while Fed UST custody holdings jumped $22 billion (the biggest rise since mid-May).
After the selloff on Friday through Tuesday, we were oversold and due for some sort of relief bounce but all we've really done is run in place. The churning is using up the buying power of the dip-buyers and sets the stage for things to roll back over again. Buyers should be anxious to snap up some of these bargains after these sharp pullbacks, but they are hesitant and that increases the chances that they will stick with a bounce for long.
The dollar was largely weaker as sentiment reversed on Thursday, but the euro was still unable to move much above 1.40. Yen was also softer and underperformed the buck, so dollar/yen traded back to 93. EM currencies were largely firmer, but have yet to recoup their recent losses fully. Biggest gainers vs. USD on the day were PLN, HUF, GBP, SEK, and NOK, while only losers vs. USD were MXN, KRW, PKR, and JPY. US weekly initial claims fell sharply to 565k, but the data was distorted by seasonality. Continuing claims surged, however, pointing to a still-weak US labor market. FX markets still struggling to find next trend, so volatility to remain high as we close out the week. EM currencies are likely to remain under pressure near-term. The Fed balance sheet shrank to $12.8 billion to $1.99 trillion this latest week, while Fed UST custody holdings jumped $22 billion (the biggest rise since mid-May).
Wednesday, July 8, 2009
Should Any Market Strength Right Now Be Trusted?
After watching the Nasdaq and small-cap indices drop over 5% over the last three days, traders were looking to catch a quick oversold bounce today but ended up with another disappointing session. We did open up slightly higher but were unable to gain any traction and quickly lost steam. After the midday fade we managed some buying in the closing hour, but it merely brought us back around flat.
It was not an impressive bounce. We simply relieved a little of the oversold pressure and took us back to resistance levels that invite more selling and/or shorting, for those of you technically incline. Sorry to repeat myself, but the dip-buyers who were so aggressive a month or so ago are no longer with us and bounces cannot be trusted to last for long.
The most important thing in this market right now may be to stay skeptical of strength, especially in stocks or indices that have had some technical breakdowns. Even the worst-looking stocks will deliver some upside and can be quite profitable if you catch them right. You just have to make sure you don't start convincing yourself that a broken stock or index is repaired if it bounces for a day or two.
Yes, I still think AAPL and BAC are compelling buys.
long AAPL ; long BAC
It was not an impressive bounce. We simply relieved a little of the oversold pressure and took us back to resistance levels that invite more selling and/or shorting, for those of you technically incline. Sorry to repeat myself, but the dip-buyers who were so aggressive a month or so ago are no longer with us and bounces cannot be trusted to last for long.
The most important thing in this market right now may be to stay skeptical of strength, especially in stocks or indices that have had some technical breakdowns. Even the worst-looking stocks will deliver some upside and can be quite profitable if you catch them right. You just have to make sure you don't start convincing yourself that a broken stock or index is repaired if it bounces for a day or two.
Yes, I still think AAPL and BAC are compelling buys.
long AAPL ; long BAC
Oil, The Futures Markets And Manipulation
Many half-truths are told about oil trading. It doesn't take long to get right into the bias: many are out there "debunking" the idea that speculation was behind the oil price run-up. The Bush administration was against any form of regulation. Most conclusions were reached beforehand. This is the notion that the markets are "too deep" to be manipulated. We know just last week that the markets were moved $10 by a rogue trader. That's empirical evidence of manipulation.
Some say "One person's speculator is another's welcome provider of market liquidity." The "liquidity" argument has been repeatedly debunked by the work of Eric Oberg on RealMoney.com, who has often talked about how excessive speculation has led to a diminution of liquidity. You get real players frightened out of the market. We know this from the asides of many of the major oil producers who simply believe these markets are rigged -- correct assumption -- and can't be used.
Some say that the CFTC's Gensler wants to "re-examine the rule that exempts traders from position limits when they are hedging actual deliveries of a commodity. If that exemption was removed, those who took a purely financial interest in a commodity - through, say, derivatives that settle for cash -- would face constraints." To which I say, why not? Why shouldn't there be some constraints? Given the imperative of having a functioning oil market, some financial institutions that demonstrated no success or big losses speculating or investing in mortgages or private equity shouldn't be trusted to do the right thing in this market. So why not have some constraints? Where does it say that markets are free for everyone who hangs a banking or brokerage shingle on the wall?
More: "this could throw a big wrench in the market. Say a bank sold fuel hedges to an airline. The bank could trade energy futures freely, but if it tried to lay off its own exposure to the airline using cash-settled instruments, its trading partners might face limits." Here goes the slippery slope: If one can't do it, the other can't do it. But I question the chain. Why do we care what happens if a bank makes this trade? Maybe it shouldn't. Maybe it's too risky. Maybe they should be more cautious.
The imperative is a fair market that doesn't create huge economic uncertainty. We got that uncertainty when oil went to $140 on what we now know was not economic demand, or terrorist premium, or a lack of supply, but simply the ease with which you could keep this market higher with very little capital in order to have gains, gains so outsized that you forced airlines to hedge when they didn't need to. And hedging isn't free or foolproof. The idea of creating something artificially that needs hedging is such circular reasoning as to be laughable.
To analogize to stocks, which, again, are not nearly as important for the future of the consumer, the commercial enterprises or the nation, and national and economic security for that matter, why can't we think about limits? It's a disclosable event to go over 5% for an institution. Some entities, such as banks, require a halt at 9.9% of investment by any one account because of fears of manipulation.
Some out there are still refusing to acknowledge the proposition that rules were even enforced. They weren't, because of ideology. The resources are there. The ideology is based on the pattern that runs through the article: Markets should be free and unfettered because they "work." It also presumes that nothing even went wrong, yet a run from $70 to $140 when there wasn't economic demand for the product, or a run from $30 to $72 which occurred when there was reduced demand and booming inventories, seem to be simple cases for the rules not working and the enforcement being nil. It also presumes that there is an inalienable right to hedge, when there isn't and has never been.
In fact we all have to admit that the oil market worked much better pre-futures. It also presumes that all futures are good futures and that all leverage is good leverage. We have seen the hazards of excessive leverage in other businesses. How about here, in the 10-to1 model? How about some recognition that the self-enforcing nature of these exchanges is nil, because the imperative, the real imperative, is to have more trading and therefore more fees, regardless of the cost to society?
We all agree there is too much leverage in the system. That's the great lesson of the near collapse of the financial world. We also agree that there has been an endless slippery slope toward it, as per the amazing 3-to1 leveraged products in ETF land, that specifically go around the feds' ability to regulate margin. We accept that any trading -- no matter how unfair -- is fine. How about supporting insider trading? Hey, maybe it's good for trading and provides liquidity for those who might be dumping the stock -- yeah, it can be extrapolated that easily.
Here's the bottom line: This market has gotten out of control. This time, the self-regulation has failed. Because of that, the government has had to get involved. Gary Gensler of the CFTC wants to change things in a way that protects national interests and wants to stop the endless backfiring that is occurring right now. How can that be "harmful" when the current system is egregiously harmful? What will his hearings do, allow oil to go to $170 or $200 when it should be at $60 or $50?
All that said, these scurrilous and insidious arguments will prevail, I believe, because the traders have enough money to fight any serious regulation. Gensler is smart, the administration is smart, but as Stalin says, how many divisions do they have? The anti-regulators have so much congressional mind-share courtesy of ignorance and contributions that is suspect this kind of chicanery will be with us for some time. At least we have to be able to analyze the argument for the gossamer reasoning that pervades them.
Some say "One person's speculator is another's welcome provider of market liquidity." The "liquidity" argument has been repeatedly debunked by the work of Eric Oberg on RealMoney.com, who has often talked about how excessive speculation has led to a diminution of liquidity. You get real players frightened out of the market. We know this from the asides of many of the major oil producers who simply believe these markets are rigged -- correct assumption -- and can't be used.
Some say that the CFTC's Gensler wants to "re-examine the rule that exempts traders from position limits when they are hedging actual deliveries of a commodity. If that exemption was removed, those who took a purely financial interest in a commodity - through, say, derivatives that settle for cash -- would face constraints." To which I say, why not? Why shouldn't there be some constraints? Given the imperative of having a functioning oil market, some financial institutions that demonstrated no success or big losses speculating or investing in mortgages or private equity shouldn't be trusted to do the right thing in this market. So why not have some constraints? Where does it say that markets are free for everyone who hangs a banking or brokerage shingle on the wall?
More: "this could throw a big wrench in the market. Say a bank sold fuel hedges to an airline. The bank could trade energy futures freely, but if it tried to lay off its own exposure to the airline using cash-settled instruments, its trading partners might face limits." Here goes the slippery slope: If one can't do it, the other can't do it. But I question the chain. Why do we care what happens if a bank makes this trade? Maybe it shouldn't. Maybe it's too risky. Maybe they should be more cautious.
The imperative is a fair market that doesn't create huge economic uncertainty. We got that uncertainty when oil went to $140 on what we now know was not economic demand, or terrorist premium, or a lack of supply, but simply the ease with which you could keep this market higher with very little capital in order to have gains, gains so outsized that you forced airlines to hedge when they didn't need to. And hedging isn't free or foolproof. The idea of creating something artificially that needs hedging is such circular reasoning as to be laughable.
To analogize to stocks, which, again, are not nearly as important for the future of the consumer, the commercial enterprises or the nation, and national and economic security for that matter, why can't we think about limits? It's a disclosable event to go over 5% for an institution. Some entities, such as banks, require a halt at 9.9% of investment by any one account because of fears of manipulation.
Some out there are still refusing to acknowledge the proposition that rules were even enforced. They weren't, because of ideology. The resources are there. The ideology is based on the pattern that runs through the article: Markets should be free and unfettered because they "work." It also presumes that nothing even went wrong, yet a run from $70 to $140 when there wasn't economic demand for the product, or a run from $30 to $72 which occurred when there was reduced demand and booming inventories, seem to be simple cases for the rules not working and the enforcement being nil. It also presumes that there is an inalienable right to hedge, when there isn't and has never been.
In fact we all have to admit that the oil market worked much better pre-futures. It also presumes that all futures are good futures and that all leverage is good leverage. We have seen the hazards of excessive leverage in other businesses. How about here, in the 10-to1 model? How about some recognition that the self-enforcing nature of these exchanges is nil, because the imperative, the real imperative, is to have more trading and therefore more fees, regardless of the cost to society?
We all agree there is too much leverage in the system. That's the great lesson of the near collapse of the financial world. We also agree that there has been an endless slippery slope toward it, as per the amazing 3-to1 leveraged products in ETF land, that specifically go around the feds' ability to regulate margin. We accept that any trading -- no matter how unfair -- is fine. How about supporting insider trading? Hey, maybe it's good for trading and provides liquidity for those who might be dumping the stock -- yeah, it can be extrapolated that easily.
Here's the bottom line: This market has gotten out of control. This time, the self-regulation has failed. Because of that, the government has had to get involved. Gary Gensler of the CFTC wants to change things in a way that protects national interests and wants to stop the endless backfiring that is occurring right now. How can that be "harmful" when the current system is egregiously harmful? What will his hearings do, allow oil to go to $170 or $200 when it should be at $60 or $50?
All that said, these scurrilous and insidious arguments will prevail, I believe, because the traders have enough money to fight any serious regulation. Gensler is smart, the administration is smart, but as Stalin says, how many divisions do they have? The anti-regulators have so much congressional mind-share courtesy of ignorance and contributions that is suspect this kind of chicanery will be with us for some time. At least we have to be able to analyze the argument for the gossamer reasoning that pervades them.
Who Is Buying All The Treasuries?
One of the persistent questions from investors is who is going to buy all these Treasuries the government is issuing to finance the yawning budget deficit. Ironically, thus far this year, at least three countries, Germany, the UK and today, joined by China, have failed in selling the amount of bonds they intended. The US has not had that problem. Today's 10-year auction, like yesterday's 3-year note sale was warmly received and it does appear that indirect bidders, which include foreign central banks are picking up a greater share (there was a rule change recently that could be bolstering the indirect bid figures, though it appears to make the indirect bidders more transparent and not concealed in primary dealer activity).
There is another buyer of Treasuries. Look around you. American households (and non-for-profit organizations) bought $377.3 billion of Treasuries in Q1 09 and held $643.89 billion, the greatest amount in nearly a decade. By comparison, note that Treasury data indicates that foreign central banks increased their holdings by almost $160 billion.
The US reports May TIC data on July 16th. In April, foreign investors were small net buyers of US long-term assets, but were sizable sellers of bills, leading to a net outflow of about $53 billion. American investors, for their part, in addition to buying Treasuries, appear to be deploying money into foreign equity markets, financing it in part at least through the drawing down of money market funds.
There is another buyer of Treasuries. Look around you. American households (and non-for-profit organizations) bought $377.3 billion of Treasuries in Q1 09 and held $643.89 billion, the greatest amount in nearly a decade. By comparison, note that Treasury data indicates that foreign central banks increased their holdings by almost $160 billion.
The US reports May TIC data on July 16th. In April, foreign investors were small net buyers of US long-term assets, but were sizable sellers of bills, leading to a net outflow of about $53 billion. American investors, for their part, in addition to buying Treasuries, appear to be deploying money into foreign equity markets, financing it in part at least through the drawing down of money market funds.
Tuesday, July 7, 2009
Things Just Kept Getting Worse All Day...
The day started off slow but grew very ugly by the close. The bulls had no energy, and traders decided that if they can't take them up we might as well take them down. The dip-buyers who did such a nice job of supporting us for so long back in April and May are nowhere to be found now as we crack some important technical support, such as the 50-day simple moving average on the Nasdaq and the 200-day on the S&P 500.
Breadth was solidly negative with all major sectors in the red by the end of the day. Most troubling was that the bigger-cap momentum names were particularly weak. Names like GS, AAPL - see below, RIMM, ICE, FSLR and BIDU acted very poorly. Volume wasn't particularly heavy, but that may be offset by the technical levels that are being breached.
This is looking like a full-blown correction now, and the trend is definitely turning down. What that means is that bounces and strength are likely to be sold and that that dip-buyers will only be in for quick flips.
Is defensive action needed? Possibly, but I'm sticking to my major long positions - GGWPQ.PK, AAPL and BAC. This market may be changing character now, and the one thing we know from the rally off the March low is that trends can last a lot longer than you think they will.
As for AAPL, I'm still seeing good news out there - regardless of what the stock is doing at the moment. Analysts seem to be feeling bullish ahead of the June quarter results. Sell-side analysts are taking a fresh look at their estimates for AAPL ahead of the upcoming announcement of financial results for the fiscal third quarter ended June. And the pundits like what they see:
* BMO Capital analyst Keith Bachman this morning asserted in a research note that Apple should be able to maintain gross margin in the 34%-35% in the September quarter despite recent price cuts, thanks in part to a richer mix of iPhones. He thinks the company will guide lower, likely in the 32% range, reflecting its typical caution; and he expects EPS guidance as usual to come in below the consensus. He figures they will forecast $1.05 to $1.15, below the Street at $1.28. That said, Bachman today lifted his EPS estimates for FY 2010 to $6.10 from $6 on a GAAP basis, and to $7 from $6.75 on a non-GAAP basis. His new target is $152, up from $150.
* Cross Research analyst Shannon Cross today lifted her EPS estimate for the September 2009 fiscal year to $5.63, from $5.46; for FY 2010 she goes to $6.13, from $5.73. For the June quarter, she sees sales of 2.5 million Macs, 4.9 million iPhones and 10.8 million iPods. Cross sees sales in the quarter of 1.4 million Mac notebooks, down 4%, less than an estimated 8% for notebooks overall, with desktops down 4%, versus an estimated 14% drop for the overall PC desktop sector. For the June quarter, she now forecasts $8.4 billion and $1.20 a share, up from $8.24 billion and $1.16.
* Piper Jaffray analyst Gene Munster today writes that he is “increasingly confident” in his June quarter forecast of 2.2 million Macs and 5 million iPhones. He reports that there is a 7-10 day lead time for the new lower-priced 13-inch MacBook Pros on the company’s online store, the longest wait in over two years.
* Barclays Capital analyst Ben Reitzes today repeated his Overweight rating and $173 price target on the stock. He notes that Apple retail store availability for the 16 GB version of the iPhone 3GS remains low; he also noted that MacBook Pro lead times lengthened this week, and that “demand for these models is quite strong.”
Apple will report June quarter results on July 21.
long AAPL; GGWPQ.PK; BAC
Breadth was solidly negative with all major sectors in the red by the end of the day. Most troubling was that the bigger-cap momentum names were particularly weak. Names like GS, AAPL - see below, RIMM, ICE, FSLR and BIDU acted very poorly. Volume wasn't particularly heavy, but that may be offset by the technical levels that are being breached.
This is looking like a full-blown correction now, and the trend is definitely turning down. What that means is that bounces and strength are likely to be sold and that that dip-buyers will only be in for quick flips.
Is defensive action needed? Possibly, but I'm sticking to my major long positions - GGWPQ.PK, AAPL and BAC. This market may be changing character now, and the one thing we know from the rally off the March low is that trends can last a lot longer than you think they will.
As for AAPL, I'm still seeing good news out there - regardless of what the stock is doing at the moment. Analysts seem to be feeling bullish ahead of the June quarter results. Sell-side analysts are taking a fresh look at their estimates for AAPL ahead of the upcoming announcement of financial results for the fiscal third quarter ended June. And the pundits like what they see:
* BMO Capital analyst Keith Bachman this morning asserted in a research note that Apple should be able to maintain gross margin in the 34%-35% in the September quarter despite recent price cuts, thanks in part to a richer mix of iPhones. He thinks the company will guide lower, likely in the 32% range, reflecting its typical caution; and he expects EPS guidance as usual to come in below the consensus. He figures they will forecast $1.05 to $1.15, below the Street at $1.28. That said, Bachman today lifted his EPS estimates for FY 2010 to $6.10 from $6 on a GAAP basis, and to $7 from $6.75 on a non-GAAP basis. His new target is $152, up from $150.
* Cross Research analyst Shannon Cross today lifted her EPS estimate for the September 2009 fiscal year to $5.63, from $5.46; for FY 2010 she goes to $6.13, from $5.73. For the June quarter, she sees sales of 2.5 million Macs, 4.9 million iPhones and 10.8 million iPods. Cross sees sales in the quarter of 1.4 million Mac notebooks, down 4%, less than an estimated 8% for notebooks overall, with desktops down 4%, versus an estimated 14% drop for the overall PC desktop sector. For the June quarter, she now forecasts $8.4 billion and $1.20 a share, up from $8.24 billion and $1.16.
* Piper Jaffray analyst Gene Munster today writes that he is “increasingly confident” in his June quarter forecast of 2.2 million Macs and 5 million iPhones. He reports that there is a 7-10 day lead time for the new lower-priced 13-inch MacBook Pros on the company’s online store, the longest wait in over two years.
* Barclays Capital analyst Ben Reitzes today repeated his Overweight rating and $173 price target on the stock. He notes that Apple retail store availability for the 16 GB version of the iPhone 3GS remains low; he also noted that MacBook Pro lead times lengthened this week, and that “demand for these models is quite strong.”
Apple will report June quarter results on July 21.
long AAPL; GGWPQ.PK; BAC
Monday, July 6, 2009
The Undertow Was Still Negative, But The Major Indices Managed To Strengthen As The Day Wore On
The bulls pushed for some upside today; will it last? Has the "tone" changed for the time being? Probably for the time being bounces will most likely be sold, rather than embraced. The skittish shorts may be squeezed a bit as well, but more aggressive sellers may be lurking above, much as the dip-buyers were lurking under this market for so long during the uptrend off the March low.
It has been a very deceptive day, with the senior indices looking much better than the overall market. Small-caps did not act well, and breadth stayed close to 2-to-1 negative. Retail and biotechnology led, but it is disappointing that semiconductors can't seem to get going despite some good news in that group. Consumer staples like CL and GIS are doing well, but oil and commodities were the obvious big drag today.
I have a massive position (for me) in AAPL on the long side - see the note today - as I believe it's ridiculously cheap. Overall, it is muddled action with a negative bias. The dip-buyers are obviously weakening, and if you chase strength on a short-term basis, you'd better be ready to flip pretty quickly or you'll end up stuck. Having stated that, however, I was compelled to add to my BAC and AAPL longs today, as I believe both will be much, much higher in the future.
long BAC and AAPL
It has been a very deceptive day, with the senior indices looking much better than the overall market. Small-caps did not act well, and breadth stayed close to 2-to-1 negative. Retail and biotechnology led, but it is disappointing that semiconductors can't seem to get going despite some good news in that group. Consumer staples like CL and GIS are doing well, but oil and commodities were the obvious big drag today.
I have a massive position (for me) in AAPL on the long side - see the note today - as I believe it's ridiculously cheap. Overall, it is muddled action with a negative bias. The dip-buyers are obviously weakening, and if you chase strength on a short-term basis, you'd better be ready to flip pretty quickly or you'll end up stuck. Having stated that, however, I was compelled to add to my BAC and AAPL longs today, as I believe both will be much, much higher in the future.
long BAC and AAPL
Is AAPL Still A Buy? My Thoughts........
Yes, I think AAPL's a table-pounding buy; to that end, I've made it my largest position BY FAR - picking up stock, short-term calls and some leaps. AAPL at sub-$140 in my opinion is some kind of joke - I think it's exceedingly inexpensive - no debt; about $35/share in cash - $35/share!; so at today's prices you're getting it for about $100 a share, which is probably much less than 20x next year's earnings. That's cheap for AAPL's kind of growth. Huge cash balance (could there some time in the future be a $10/share special dividend to shareholders?). Conservative accounting. My feeling is what's occuring now is ETF domination and TA trumping all - for the time being. Obviously the best trade is many times the one not made - Additionally, frustration breeds mistakes. My feeling, backed up by my actions, is don't trade or get shaken out due to frustration and/or boredom. I see AAPL at least 60 points higher by year-end.
long AAPL; AAPL calls; AAPL leaps
long AAPL; AAPL calls; AAPL leaps
Thursday, July 2, 2009
Yesterday Was Frustrating; Today Was BAD
Starting today, I'm going to try to update what's going on with the USD each day; just a brief synopsis each day of what I think is going on...The dollar posted gains across the board vs. most of the other major currencies. Asian and European sessions saw the buck move higher, and the rally was extended by the slightly worse-than-expected U.S. jobs report.
For now, the dollar continues to benefit from bad news and suffer from good news. However, with dollar bearishness still strong in the markets, many will probably sell into this dollar rally. The yen was firmer too but outperformed the buck, so dollar/yen fell back through the 96 level. Emerging-market currencies were weaker against the buck. Biggest gainers vs. USD on the day were JPY, PEN, IDR and EGP, while the biggest losers vs. USD were SEK, HUF, AUD, CZK and PLN. Markets were thin today with the U.S. holiday, with very little seen in the way of data or news.
The indices have been trading in a tight range just off the lows all afternoon. I believe we closed at the lows, but volume will be too thin to inspire much confidence in anything. The bulls are not anxious to do a lot of buying with so much negative focus on the employment report today -- that's likely to get a lot of press this weekend and isn't going to help confidence.
The saving grace today is that volume is low, as you'd expect with the long weekend coming up, but the lack of a typical positive holiday bias is troubling. Also, breadth is terrible and we have broken some support levels with the move today. We aren't in great distress, but this is looking like a failed bounce attempt following the breakdown from June 15 to June 22.
You never want to read too much into light trading around a holiday, but this has been unusually poor action and it creates more overhead resistance in the indices. So if we do attempt to bounce again, the bears and sellers will likely be more active on strength.
Going into more detail, a disappointing jobs report prompted sellers to knock stocks sharply lower in the first few minutes of trading. Stocks then locked into an extremely narrow trading range until the S&P 500 slipped below the psychologically significant 900 level in the final half-hour of trading. Following an uninspiring finish to the previous session, stocks had already been showing weakness ahead of the government's latest jobs report, which was released shortly before the opening bell. However, sellers became emboldened when the June Nonfarm Payrolls report indicated that 467,000 jobs were lost last month. That marked pickup from the 322,000 jobs that were lost in May, and topped the 365,000 losses that were widely expected... Meanwhile, the national unemployment rate now stands at 9.5%, which isn't quite as bad as the 9.6% that was expected, but it still marks a 26-year high. According to Reuters, the White House expects unemployment rate to climb to 10% in the next two to three months. Average weekly hours came in at a slightly worse-than-expected 33.0. Since hours often lead payrolls and employers are cutting back hours suggests that hiring remains a long ways off, which will damper consumer spending and hopes of a consumer-led economic recovery... May factory orders made a surprisingly strong 1.2% increase, which bested the 0.9% increase that had been forecast. The stock market attempted to pare some of its losses following the orders announcement, but the disappointing jobs report dominated headlines and overshadowed the encouraging orders data... Since U.S. market's are closed Friday in observance of Independence Day, this session's decline gave stocks their third straight weekly loss. During that time, stocks have shed more than 5%. This session's weakness was widespread as declining issues outnumbered advancers by more than 20-to-1 in the S&P 500... Losses were steepest among energy and financial stocks. They both finished 3.7% lower. Energy was hampered by a 3.7% drop in crude oil prices, which closed at $66.73 per barrel. Crude has fallen for three consecutive sessions. Meanwhile, financials were severely undercut by losses among insurers...Trading volume was extremely light ahead of the long, holiday weekend. Hardly 700 million shares traded hands on the NYSE in what was the most thinly traded session this year....
For now, the dollar continues to benefit from bad news and suffer from good news. However, with dollar bearishness still strong in the markets, many will probably sell into this dollar rally. The yen was firmer too but outperformed the buck, so dollar/yen fell back through the 96 level. Emerging-market currencies were weaker against the buck. Biggest gainers vs. USD on the day were JPY, PEN, IDR and EGP, while the biggest losers vs. USD were SEK, HUF, AUD, CZK and PLN. Markets were thin today with the U.S. holiday, with very little seen in the way of data or news.
The indices have been trading in a tight range just off the lows all afternoon. I believe we closed at the lows, but volume will be too thin to inspire much confidence in anything. The bulls are not anxious to do a lot of buying with so much negative focus on the employment report today -- that's likely to get a lot of press this weekend and isn't going to help confidence.
The saving grace today is that volume is low, as you'd expect with the long weekend coming up, but the lack of a typical positive holiday bias is troubling. Also, breadth is terrible and we have broken some support levels with the move today. We aren't in great distress, but this is looking like a failed bounce attempt following the breakdown from June 15 to June 22.
You never want to read too much into light trading around a holiday, but this has been unusually poor action and it creates more overhead resistance in the indices. So if we do attempt to bounce again, the bears and sellers will likely be more active on strength.
Going into more detail, a disappointing jobs report prompted sellers to knock stocks sharply lower in the first few minutes of trading. Stocks then locked into an extremely narrow trading range until the S&P 500 slipped below the psychologically significant 900 level in the final half-hour of trading. Following an uninspiring finish to the previous session, stocks had already been showing weakness ahead of the government's latest jobs report, which was released shortly before the opening bell. However, sellers became emboldened when the June Nonfarm Payrolls report indicated that 467,000 jobs were lost last month. That marked pickup from the 322,000 jobs that were lost in May, and topped the 365,000 losses that were widely expected... Meanwhile, the national unemployment rate now stands at 9.5%, which isn't quite as bad as the 9.6% that was expected, but it still marks a 26-year high. According to Reuters, the White House expects unemployment rate to climb to 10% in the next two to three months. Average weekly hours came in at a slightly worse-than-expected 33.0. Since hours often lead payrolls and employers are cutting back hours suggests that hiring remains a long ways off, which will damper consumer spending and hopes of a consumer-led economic recovery... May factory orders made a surprisingly strong 1.2% increase, which bested the 0.9% increase that had been forecast. The stock market attempted to pare some of its losses following the orders announcement, but the disappointing jobs report dominated headlines and overshadowed the encouraging orders data... Since U.S. market's are closed Friday in observance of Independence Day, this session's decline gave stocks their third straight weekly loss. During that time, stocks have shed more than 5%. This session's weakness was widespread as declining issues outnumbered advancers by more than 20-to-1 in the S&P 500... Losses were steepest among energy and financial stocks. They both finished 3.7% lower. Energy was hampered by a 3.7% drop in crude oil prices, which closed at $66.73 per barrel. Crude has fallen for three consecutive sessions. Meanwhile, financials were severely undercut by losses among insurers...Trading volume was extremely light ahead of the long, holiday weekend. Hardly 700 million shares traded hands on the NYSE in what was the most thinly traded session this year....
Wednesday, July 1, 2009
A Very Frustrating Day
Indices finished in the green, and breadth was better than 2-to-1 positive, but after hitting highs about an hour after the market opened, it was steady selling all day. We had some strong action in technology due to an upgrade and breakout in Intel and a good move in consumer staples due to good earnings from General Mills, but oil, retail and financials rolled over and finished in the red.
With the end-of-the-quarter window-dressing, Russell index rebalancing, beginning-of-the-month cash inflows and pre-holiday trading, the indices have held up extremely well over the past week or so. On the other hand, we are unable to gain the traction needed to move through key technical resistance at around 930 or so. The bulls are certainly holding up very well, but they are lacking the drive that led to such a quick and vigorous recovery in May and early June.
The question now is whether the bears will have an edge as the various positive factors I listed above come to an end. The bears have been even more inept in pressing when they have an advantage, but we are a bit overbought and are losing some traction.
Tomorrow will prove to be tricky regardless, because we will have both very thin holiday trading and the very important monthly jobs report. No one is expecting great jobs numbers, and this market has shown that it is very willing to overlook poor news, but if traders can't take stocks up, they may start to stand aside and let them fall a bit....
With the end-of-the-quarter window-dressing, Russell index rebalancing, beginning-of-the-month cash inflows and pre-holiday trading, the indices have held up extremely well over the past week or so. On the other hand, we are unable to gain the traction needed to move through key technical resistance at around 930 or so. The bulls are certainly holding up very well, but they are lacking the drive that led to such a quick and vigorous recovery in May and early June.
The question now is whether the bears will have an edge as the various positive factors I listed above come to an end. The bears have been even more inept in pressing when they have an advantage, but we are a bit overbought and are losing some traction.
Tomorrow will prove to be tricky regardless, because we will have both very thin holiday trading and the very important monthly jobs report. No one is expecting great jobs numbers, and this market has shown that it is very willing to overlook poor news, but if traders can't take stocks up, they may start to stand aside and let them fall a bit....
Cautions In Using Free Cash Flow
Scrutinize a company with hefty free cash flow - better take a close look at its capital leases.
Free cash flow is usually in vogue on Wall Street. It is supposed to reflect how much cash an owner can pull out of a business and thus how much a new owner would pay for it.
For example, a while back Jack In The Box nearly tripled free cash flow in just two years, an impressive accomplishment for a company that's essentially a hamburger joint. There was a catch: Jack in the Box didn't subtract from its free cash flow $10 million that it had spent on restaurant buildings and equipment. Doing so would have lowered its free cash flow to $80 million. Jack in the Box, which said it was following the rules and disclosed its leases, was still on the hook for the $10 million, but the sum didn't show up as part of the company's capital expenditures.
Instead the costs were being financed with a "capital lease," a perfectly legit accounting move which delivers all the effects of a heavily mortgaged asset but keeps the asset's cost out of the free cash flow calculation.
Free cash flow is always inflated when capital leases are used, because companies don't have to subtract these very real costs of doing business as cap-ex and instead can bury them in the financials. That makes the stock look cheaper than it really is.
Say a company needs to acquire $10 million worth of stoves to outfit several new restaurants but doesn't have the cash. So it leases the assets through a finance company by using a capital lease with an underlying interest rate of 8%. Lease payments run for five years and total $2.5 million per year. In the first year $800,000 of this sum is interest and $1.7 million a repayment of principal.
With a capital lease the equipment user treats the transaction more or less as property purchased with a mortgage. That is, the $10 million of equipment gets booked as an asset, the future payment obligations get booked as debt, and the company reports both depreciation and interest expense. So far this is how the books would look if the company purchased the equipment for cash and then took out a bank loan. The screwy part comes in the flow-of-funds statement. There the equipment acquisition in a capital lease simply fails to show up--either in the first year or in later ones--as a capital expenditure. The somewhat tenuous logic of omitting the $10 million cap-ex from the cash flow statement is that no cash changed hands when the lease was signed.
Capitalized leases don't affect earnings. Rather they boost free cash flow. Investors who want an accurate free cash flow number have to create it themselves by reading the footnotes.
Jack in the Box shares appeared to be trading at 15 times free cash flow. But if you made the necessary adjustment to the latter figure, the ratio went up to 17.
Companies can artificially reduce their reported cap-ex-and thus boost their free cash flow-by financing their equipment purchases and calling the resulting leases "capital leases."
Flowers Foods makes packaged brand-name bakery goods like Nature's Own and BlueBird. The company had free cash flow of $77 million in fiscal 2004. Deduct the cost of its capital leases and its free cash flow falls to $59 million. Flowers says capital leases are a financing tool that can be appropriately used, and it discloses them.
Grocer Safeway boasted free cash flow for 2003 (it has yet to release fiscal 2004 figures) of $815 million, giving it a price/free cash flow ratio of 10. Had it subtracted newly signed capital leases for equipment, free cash flow would have been $701 million, and its multiple would have been 12. Safeway says it's following the rules....
Free cash flow is usually in vogue on Wall Street. It is supposed to reflect how much cash an owner can pull out of a business and thus how much a new owner would pay for it.
For example, a while back Jack In The Box nearly tripled free cash flow in just two years, an impressive accomplishment for a company that's essentially a hamburger joint. There was a catch: Jack in the Box didn't subtract from its free cash flow $10 million that it had spent on restaurant buildings and equipment. Doing so would have lowered its free cash flow to $80 million. Jack in the Box, which said it was following the rules and disclosed its leases, was still on the hook for the $10 million, but the sum didn't show up as part of the company's capital expenditures.
Instead the costs were being financed with a "capital lease," a perfectly legit accounting move which delivers all the effects of a heavily mortgaged asset but keeps the asset's cost out of the free cash flow calculation.
Free cash flow is always inflated when capital leases are used, because companies don't have to subtract these very real costs of doing business as cap-ex and instead can bury them in the financials. That makes the stock look cheaper than it really is.
Say a company needs to acquire $10 million worth of stoves to outfit several new restaurants but doesn't have the cash. So it leases the assets through a finance company by using a capital lease with an underlying interest rate of 8%. Lease payments run for five years and total $2.5 million per year. In the first year $800,000 of this sum is interest and $1.7 million a repayment of principal.
With a capital lease the equipment user treats the transaction more or less as property purchased with a mortgage. That is, the $10 million of equipment gets booked as an asset, the future payment obligations get booked as debt, and the company reports both depreciation and interest expense. So far this is how the books would look if the company purchased the equipment for cash and then took out a bank loan. The screwy part comes in the flow-of-funds statement. There the equipment acquisition in a capital lease simply fails to show up--either in the first year or in later ones--as a capital expenditure. The somewhat tenuous logic of omitting the $10 million cap-ex from the cash flow statement is that no cash changed hands when the lease was signed.
Capitalized leases don't affect earnings. Rather they boost free cash flow. Investors who want an accurate free cash flow number have to create it themselves by reading the footnotes.
Jack in the Box shares appeared to be trading at 15 times free cash flow. But if you made the necessary adjustment to the latter figure, the ratio went up to 17.
Companies can artificially reduce their reported cap-ex-and thus boost their free cash flow-by financing their equipment purchases and calling the resulting leases "capital leases."
Flowers Foods makes packaged brand-name bakery goods like Nature's Own and BlueBird. The company had free cash flow of $77 million in fiscal 2004. Deduct the cost of its capital leases and its free cash flow falls to $59 million. Flowers says capital leases are a financing tool that can be appropriately used, and it discloses them.
Grocer Safeway boasted free cash flow for 2003 (it has yet to release fiscal 2004 figures) of $815 million, giving it a price/free cash flow ratio of 10. Had it subtracted newly signed capital leases for equipment, free cash flow would have been $701 million, and its multiple would have been 12. Safeway says it's following the rules....
Subscribe to:
Posts (Atom)