Wednesday, May 7, 2008

Roundup for the Day

1 word comes to mind of late - complacency. Today's medium sized sell off had me thinking of the last time the market sold off in a meaningful way. The fact I could not remember is a case in point. It looks like we had 1 day back there on April 11th but other than that since the quarter turned on April 1, it's been all good. Despite almost all bad on the economic front. No wonder everyone berates us with "it's all priced in", and "all up from here".

If you review this week's postings you see 1 theme - selling and building cash. I'm back to nearly 20% in cash, and about 18% short exposure which is a very hedged exposure. I still am aghast this market does not treat $120+ crude more seriously - as I wrote earlier today the real effects on corporate profits (which the market does care about) and the Main Street economy (which the market apparently could care less about) are pervasive. Even a sustained stay over $100 is a big net negative except for very narrow parts of our market. Anyhow the beat goes on... remember, one of my favorite saying "it doesn't matter until it does" - that applies to reality and the markets acknowledgement of it. We've sold off a bit here, but in theory we could drop all the way to S&P 500 level of uppers 1360s and still be above key support.

Some key news stories... another Uncle Paulson comment about everything is relatively fine and soon enough (a few more rough patches) we'll be back to old form. My comment: watch what they do, not what they say. Due to the Federal Reserve backstop and implicit guarantee to bail out anyone of size in trouble, yes things are "better", but off a terrible base. Credit contraction only continues in the macro theme. But they can't say such things - they have to reassure the peasants everything is fine...
  • In an interview with The Associated Press, Paulson said that the turmoil that has gripped Wall Street and took a turn for the worse again in March has eased somewhat. "There's progress," he said. "I think we're closer to the end of this than the beginning."
  • "We will get some help from the stimulus," Paulson said in the interview. "Later this year, I expect growth will pick up." Still, he acknowledged that the country was facing "tough times" as people struggle with soaring gasoline prices, higher medical costs and a weak jobs market. (in 6 months I am sure)
  • Paulson rejected for now the notion of a second stimulus bill, including such things as extending unemployment benefits being pushed by Democrats in Congress. He said it would be unprecedented to extend unemployment benefits from the current 26 weeks with unemployment at the relatively low level of 5 percent as it is now. (that's because the unemployment rate is a fiction... but I do expect a 2nd stimulus plan coming - don't you worry, more debt for the grandkids to worry about)
Finally CNBC says "whoa, maybe this high oil thing is a negative?" Could it be? Heck even NASCAR is getting his by high gas!
  • The continued surge in oil prices is starting to cut into economic growth--and with it, the slowly recovering stock market.
  • So far, the economy and stocks have taken the unprecedented rise in energy costs in stride. But that's beginning to change. Higher oil costs already are curbing some discretionary spending by consumers, which could slow the economic recovery. The stock market, in turn, could see its recent rally stall on worries about oil's impact on inflation and economic growth. (shocker! It only took them 6 months to connect the dots)
  • Cohn and others are somewhat baffled in particular at the disconnect between the dollar and oil. Traditionally a stronger dollar means weaker oil and vice versa. But as the dollar has picked up 2 percent against the euro since last week's Federal Reserve Rate cut, oil prices have jumped about 10 percent. (hello, read my blog since last August and all the answers shall be revealed - again folks, these people live in 1960s thinking where the world revolves around good old United States of Subprime. Sadly our Federal Reserve is also off in this world of Ward & June Cleaver)
  • The strength in stocks comes from a number of sources and has occurred, some analyst say, in spite of oil rather than because of it. Many believe the worst for Wall Street came during the Bear Stearns bailout. Yet others see the housing collapse at or near its end. And still more see the massive banking writedowns from the subprime mortgage fallout as yet another reason to believe the market has nowhere to go but up. (how about the Fed printing currency at the rate of 1 to 5, and instead of that money being lent out it's going to shore up banks balance sheets and being used for stock market speculation? Try that one for size)
And don't look now, but in a World of Shortages even natural gas could be causing us some issues NEXT winter says Goldman Sachs. (remember, global competition for resources - if we won't pay, someone else i.e. a government with cash - will) No inflation there... no hit to the consumer - it won't be in the inflation numbers because people will stop heating their homes next winter or everyone will move to Arizona I suppose. Don't worry, buy stocks.
  • U.S. natural gas inventories could be at seriously low levels at the start of winter this year, if current rates of liquefied natural gas (LNG) imports remain at record lows, a Goldman Sachs report said Wednesday.
  • The year is already two months into the summer re-fill season when producers traditionally stock up on cheap gas volumes to sell on more profitably in winter, but so far storage facilities have gone unused as prices remain high.
  • More so, ongoing weakness in US natural gas prices compared with prices in the rest of the world is providing no incentive for LNG cargoes to be directed to the US, leaving imports at record-low levels.
Meanwhile, the first story where Wall Street notices there is a little part of the world called "Main Street" out there - that might actually affect them in their ivory tower existence. The horror of the peasants affecting their riches. Egad.
  • Wall Street seems to have concluded that the worst of the credit crisis is over and investors are looking to better economic times ahead, but Main Street is sending the opposite signal.
  • The U.S. Federal Reserve's quarterly survey of senior loan officers, released this week, showed widespread tightening of credit. The percentage of banks reporting tougher lending standards was close to, or above, historical highs for nearly all loan categories in the survey. (huh? Paulson just told me 2 stories ago we are all good... darnit all - oh yes watch what he does, not what he says - got it) Banks clamped down on loans to companies large and small, to prime and subprime mortgage holders, and on credit cards, home equity lines and other consumer credit. (did we leave anyone out? what about student loans? Oh wait, that area has nearly completely died a few months ago)
  • Stock markets are forward-looking by nature, so it is not surprising that investors would think about how the economy might look in the coming months. To say that Wall Street is expecting a second-half recovery would be an understatement. According to Thomson Reuters research, analysts are expecting fourth-quarter earnings growth of 62 percent for the S&P 500. (sounds VERY plausible to me - buy stocks) Granted, that is a comparison with a disastrous fourth quarter of 2007, when earnings were down some 25 percent.
  • Not only is the market anticipating a swift recovery, but the earnings forecasts suggest that they think it will be lasting. For next year, analysts think earnings will be up 18 percent, twice the growth they are predicting for 2008. (very plausible as the economy roars back, malls get packed, the consumer maxxes out all his credit lines, and housing prices boom)
  • They see particularly strong growth for consumer discretionary companies, beginning with the next quarter. Earnings for that sector are expected to jump by 41 percent in the fourth quarter, and 24 percent next year. (oh my favorite sector, consumer discretionary - you mean stuff people could do without as inflation terrorizes the rest of their budget? 41% growth by Q4 and 24% next year. Hold on while I chuckle..... ok nevermind, I won't stop chuckling... let's move on)
  • The head of Walmart (WMT) U.S. stores division said in late April that consumers appeared to be "topped out" and unable to obtain any more credit. (more credit... need more credit... feed me... feed me... must have credit)
So the above should show you the fantasy between what Wall Street "thinks" is going to happen and what *I* think is going to happen and why there is such a huge disconnect between Main Street and Wall Street. I mean 62% earnings growth by end of this year and then another 18% next year... led by consumer discretionary at 41% (Q4 08) and 24% (2009). Let's raise a toast to "hope". I mean signs like this where consumers borrowing is surging is a great thing right! Right? Right? Umm... that's the spin I am sure - I see it as a desperate consumer going to the next lines of defense (credit) since they cannot pay for things with cash anymore, and house ATM and 401k ATMs are now getting tapped. I expect to see more such "surges" into latter 2008 and 2009 ... before the wave of personal bankruptcies.
  • Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month. The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7.2 percent, compared with a 3.1 percent rate of increase in February.
  • The gain was much larger than economists had been expecting and reflected strong borrowing on credit cards and also in the category that includes auto loans.
  • Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.
Surely we can spin this in a positive fashion? Let me work on this tonight and try to think of the bull case... or can I just wait until the pundits tell us tonight. Speaking of the coming wave of personal bankruptcies (remember, that won't hit until the credit cards get maxxed, and then 6 months of evading those late night phone calls), don't forget the coming wave of business bankruptcies.
  • There's one pot of gold for the battered financial services industry: Firms that offer corporate restructuring and bankruptcy advice are adding staff and seeing profits climb as the slowing U.S. economy yanks the rug out from under struggling companies.
  • Los Angeles restructuring firm Scouler has increased its staff by more than 40 percent since the beginning of the year. It's been busy and it's going to get busier," said Dan Scouler, Scouler founder and managing principal. "I think the downturn will be pretty bad. We haven't seen the end of the housing problems -- that's a slow-motion train wreck. And consumer spending is coming down. Consumers are tapped out." (see, this guy lives in that far off place called the "real world"; a very distant galaxy from Wall Street - he actually has to make money in the "real economy" as opposed to trading paper on fantasy earnings forecasts and dreams of nirvana in 6 months)
  • Goldin Associates, which offers turnaround consulting and restructuring services, has struggled to keep up with requests for information. "The number of calls we have received in the past eight weeks is almost four times the number of calls we received in the preceding six months," said David Pauker, Goldin Associates managing director and national practice leader. (real world... fantasy world... real world...fantasy world)
  • When companies are hit with higher costs, many can't immediately raise prices to compensate. That can cut drastically into working capital. When commodity prices rise yet further, companies take more hits, sometimes causing them to have trouble paying vendors and creditors. (hmm, so high commodity prices have a real effect in the real world... fascinating--- we need to send a news alert to NYC traders about this nasty situation)
  • "I think there's going to be a growth period where we have at least two to three years of more activity and more work for advisers," Henkin said. (that doesn't jive with my 6 month recovery thesis - please no more talking - you will spook the stock buyers)
Conclusion: Don't worry about all this. This is stuff we leave to people we call "realists". We are stock market investors - stand strong, proud, and buy stocks. Ignore all the mainstream media doomsday stuff - what do they know? They don't make 6 or 7 or 8 figures... they don't understand the "real world" of "high finance" I bet they are so low brow they buy they own groceries or something like that... haha... peons. Did I mention buy stocks? Please?

On the docket tomorrow we have fund holding Atwood Oceanics (ATW) - while I expect good things it will be a prisoner to if tomorrow is a good or bad day for energy stocks. A couple of interesting names like Toyota Motors (TM) - let me guess flagging US sales, good international... stop me there... and (PCLN)

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