Monday, July 13, 2009

WSJ: US Officials in Advanced Talks to Aid CIT Group (CIT)

"Great news" readers; the Wall Street Journal reports that Bailout Nation was only in a bit of a hibernation for a few months... we're baaaaaack. As I wrote last Friday [Jul 10: Keep CIT Group on Radar]

This morning CIT Group (CIT) is crumbling as the FDIC refuses to backstop their loans due to deteriorating quality. If the US wanted to pretend it still believes in free market capitalism they should let this "not too big to fail" financial fall into the ether. Then we can at least pretend we are not propping up zombie financial institutions all over the map. (anyone claiming free market capitalism exists in the US is now banished to FOX News
channel permanently in a state of delusion)

Hah, was there really any debate? Only auto suppliers can be allowed to fail. I almost bought CIT in my personal account today when I saw Sheila Bair was the only person who actually thought the junk on their balance sheet was too risky but Geithner and "the Fed" were "cool with it". I mean, why have standards? Remember we've written countless times the ultimate ending to this is the Federal Reserve will suffer countless losses in their balance sheet passed onto them in the form of "AAA" rates paper (riskless!). Even though they already are suffering through losses from the junk they are sitting on from Bear and others. Anyhow, due to "free market" actions by Geithner and pals CIT is up 23% after hours. My gosh, it feels all 2008 / early 2009 all over again.

But again we HAD to save CIT Group because if we did not countless small business would perish across America; certainly there was no other financial institution in America salivating at taking over the business of a failed company. As we did in the mainline banks, reward those who failed and let those who should be benefiting from the failure sit on the sidelines with head firmly in hand as they are not allowed to scoop up the damaged goods ... like a functioning market would allow.

And the losses suffered by the taxpayer that will come of this? Not to worry - your attention will be diverted by a new bubble, or American Idol by that time. Remember the AIG bailouts that benefited Goldman Sachs along with a host of global financial companies? Well if you do, you are in the minority - we're already past that. Just as we'll be past the losses suffered by Fannie, Freddie, FHA, CIT, Bear, Lehman, Merrill, Bank of America, Citi... by the time it happens. This is the great thing about having a middle class who doesn't keep up with financial news and is happy to partake in reverse Robin Hood actions (steal from the middle to give to the rich)

Oops, I'm sorry - hundreds of thousands of small businesses would fail overnight if CIT Group is not bailed out. Hopefully we can make sure CIT bondholders are also made whole as we did with almost every company in the biggest financial crisis in 80 years. Because investing in financials is a risk less proposition! Sometimes I forgot the company line - forgive me.

Hold on, before I continue let me check call activity on CIT today. Yep someone came in and bought nearly 60,000 CIT August $2.00 calls. Should be a nice little win for Goldman.... err, I'm sorry. Talking points Mark... talking points! Should be a nice little win for any entity that has inside lines to the Washington communication and thinking. Would the SEC ever look into these purchases? Nah, that's part and parcel of the business; no one ever checked who bought that slew of Bear Stearns puts right before they imploded... just darn luck.

p.s. since General Electric (GE) runs a similar type of lending scheme but many times larger than anything CIT has, you can now buy GE with the firm hand of the US taxpayer firmly behind you. GE Finance is in good hands! (yours)


  • U.S. government officials are in advanced talks about aiding CIT Group Inc., one of the country's primary lenders to small and midsize businesses, people familiar with the matter said. The discussions are fluid. It remains unclear if a final deal can be brokered and, if so, how expansive it might be. CIT, which has debts due shortly and is unable to borrow on its own, isn't big enough to typically warrant emergency government help. Support for the company on Capitol Hill appears to be lukewarm.
  • But government officials are worried about unforeseen consequences that a collapse of CIT could trigger. The 101-year-old company is a lender to nearly a million companies.

How about the government take over the company but extinguish it over a span of 1 year. Over the next 12 months parcel off the loans (via auctions in a free market exchange) to companies who actually did the right thing and have viable businesses that don't need the helping hand of the government? You know - reward astute management and punish those who destroyed their company. Then all the small businesses CIT Group is "supporting" are fine, and their loans are sold off to others and we can kill off CIT Group; and the bondholders who made the bad decision to invest with them would be punished.

What's that? Ah - we can't do that! Bring out the "spooky" dogma terms that scare Americans! This would be temporary nationalization! Bad word! Bad word! Like socialization but even more spooky! Therefore bailouts instead! We don't do nationalization in USSA! Plus it would hurt bondholders of a financial company! Nevermind then - just prop up another zombie.

  • One possible source of aid would be a Federal Deposit Insurance Corp. program that guarantees new debt issuance, a hand the FDIC has been reluctant to extend to the company because of its financial weakness.

  • If the FDIC reverses its position, it would be similar to an earlier move this year to backstop debt issued by GMAC. The FDIC was initially hesitant to allow struggling GMAC to participate in the Temporary Liquidity Guarantee Program but relented amid pressure to produce a broad rescue package for the car business. FDIC officials have said credit quality is a key consideration in whether they allow certain companies to participate in the program, and this has been one of their main concerns with CIT, in addition to worries about high operating losses and poor liquidity.

We need more Sheila Bair's. And what happened to good ole GMAC? Ah, it's all part of the plan to provide a nanny state to Americans with low credit or who don't save. Since traditional lenders are shying away from low credit scores or people who put nothing down, GMAC (Geither / Bernanke sponsored and approved!) is more than happy to provide the loans down to FICO 620 and even gave out some juicy 0.0% terms for Chysler last I checked. Thank you! (and I say that to the readers whose tax dollars are the one subsidizing their fellow consumer) You can take it from here what happens down the road when the loans go bad. GMAC will go back to government and ask for more money since they play a critical role in car financing. Notice a pattern yet? It's called a backdoor subsidization scheme - the exact same one happening at Fannie, Freddie, and FHA.

  • The Treasury Department and Federal Reserve are more supportive of such a move, said several people familiar with the process. It is unclear whether the FDIC will soften its position and allow CIT to issue debt guaranteed by the government.

So we need more Bair's, and less Timmy Geithner's and Ben Bernanke's. Ironically we want to give even more power to the Fed - almost as good as fiction. More importantly it is scary how each of these institutions are so dominated by 1 person - literally 3-4 people are running financial decisions of national scope without any checks and balances. Anyhow, that's crony capitalism... err, I'm sorry - that's the free market at work.

  • Government officials are considering a package including a regulatory waiver that could make it easier for CIT to pass assets from its parent company to its bank division and a separate way to borrow from various government programs.

Oooh, loopholes! Sounds exotic and sophisticated. Tell me more!

Remember, CIT Group already jumped through 1 loophole - to hide under the umbrella of the FDIC in the first place it became a bank holding company; based on its one industrial loan company in Utah! Just like the insurance companies - look ma, we're not insurance companies anymore; we're all banks now (and hence can be protected under all the loophole programs)

  • CIT became a bank holding company in late December and received $2.33 billion in bailout funds from the Treasury.

This was the quote I read midday that had me thinking "Mark stop thinking morally, act like a bailout deranged addict and buy! Timmy G. will protect you Mark!"

  • Treasury Secretary Timothy Geithner, asked in London about CIT, told reporters on Monday that he was "actually pretty confident" that "we have the authority and the ability to make sensible choices."

And you know what "sensible" means to these people.

  • Analysts started speculating last week that CIT may be forced to file for bankruptcy. Mixed messages from Washington and the company sparked confusion in financial markets and led many investors to believe the government was preparing to let the lender fail. CIT shares fell 18 cents Monday, or 12%, to $1.35, the lowest since its 2002 initial public offering. The cost to insure CIT bonds against a default soared, with investors having to pay $4.1 million up front plus $500,000 a year to insure $10 million in CIT debt against default.

But not to worry - unlike most (small) investors who hope to survive in the Wild Wild West of actual markets, the US government has not learned to throw good money after bad.

  • Even if CIT weathers the storm, many still question whether the lender can survive. CIT relied mainly on capital markets for financing, for instance borrowing in short-term debt markets, and those markets aren't hospitable to junk-rated financial companies.

How did we get here?

  • Founded in 1908, CIT focused on lending to businesses snubbed by traditional lenders. In 2004, the company revved up its lending and expanded into areas such as subprime mortgages and student lending, which saddled it with large losses.

  • CIT's troubles deepened in the spring of 2008 when credit ratings companies began downgrading its debt, further limiting its financing options. Delinquencies and bankruptcies of customers hurt by the recession also began to mount. Over the past few months, CIT customers such as Eddie Bauer Holdings, Filene's Basement Inc. and Kainos Partners, a franchisee of Dunkin' Donuts stores, filed for bankruptcy protection.

So do you see how it works? They took on more risk. Their CEO and other C level executies I am sure made tons of money in that era where volume - regardless of quality = profits! (p.s. are we asking for any clawbacks? pshaw!!! don't make me laugh) Those risks blew up. Conclusion? I'm going to help them out of this jam (so are you, it's your national duty as a patriot). Next step: CEO and other C level executives laugh to bank - probably will get retention bonuses because of their "unique skill set" to keep running CIT. Because who knows the company better and knows best how to steer them out of the troubles. I mean if you burn down the house, who knows best how the house looked before you lighted the match - in fact, give the person with a match a bonus! We all win here - reverse Robin Hood style.

Again lesson of USSA. Don't fail small, because you will fail alone. Fail big, and the US taxpayer will be there for you. Because apparently the US taxpayer does not care nor pays attention to these "complicated financial things."

And let me finish this thought with... who else. We do NOT want this (fill in the blank) company to lose any money so bring all the King's horses and all the King's men (more importantly bring the peasants coins) to save the Gold Men again. Whatever is done, CIT Group must be saved. Otherwise - Goldman could lose money.

  • The company secured $3 billion in financing from Goldman Sachs (GS) in June 2008.

The reasons for bailout suddenly became so much more clear.

24 of 25 Long Positions Positive Today

A rare occurrence here, almost every stock positive in the entire long side of the portfolio in the green - generally takes a +4-5% day for that to happen... always a few slackers during even a 1-2% type of rallies. Only laggard today was Perfect World (PWRD). Technically, I suppose it was 25 of 26 as we sold Atwood Oceanics (ATW) earlier today. Just scanning my watch lists a lot of oversold stocks finally got a reprieve which is actually good for the short side in the intermediate term.

We are now in the middle of the range we were expecting this bounce to jump into. S&P 910 is the 200 day exponential moving average so until proven otherwise I'll consider that the near term ceiling. Ironically we have been bouncing off the 200 day simple moving average... and now have resistance ahead with the exponential. A weird divergence that has been with us for 6 weeks now.

So tonight we have some CSX (CSX) earnings (railroads) and Novellus (NVLS) in semis. Then we all pretend to act surprised that Goldman Sachs (GS) beat analysts tomorrow morning and watch from there. I expect a lot of bipolar knee jerk reactions in the next 2-3 weeks, and as I stated this morning a lot more large premarket moves as we extrapolate any 1 company into somehow being a proxy for the entire US, or indeed global economy.

Look for a lot of overreactions from your familiar pundits, along with hyperventilating on certain financial entertainment channels.

I added another 6-7 limit short orders late this afternoon to the group I already had, and hope some of them begin to hit as I express astonishment tomorrow at how Goldman milked the system for record profits. If things go as planned as we ramp into S&P 910 I'll have locked in some number of individual shorts and be back to a neutral or even negative bias overall. The reason I am not getting any hits on these shorts is I am being very "greedy" with my prices, placing them JUST below key moving averages - so in case we forget everything about the past 4 weeks and return to (imagined) green shoots in the weeks ahead, I'll be stopped out for minor losses and protect a very good 4 week run. I don't mind being wrong, even if it's often - as long as the losses are contained.

If we get back over S&P 910 HAL9000 and crew will be back chewing green shoots, as their microchips get happy.

Bloomberg: Emerging Markets Priciest Since 2007

A few more warning shots over the bow of the emerging markets ship. Keep in mind "P/E" has become a very subjective topic - more important than any specific numbers are the comparative valuations. On one hand you should pay a premium for growth (which is completely lacking in much of the developed world), on the other hand you used to pay lower multiples for risk. But whose to say the systems of the US or UK should be considered any less risky anymore. Not with our "financial innovation".

Via Bloomberg
  • The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value.
  • The MSCI gauge trades at 15.4 times reported earnings, compared with 14 for the Standard & Poor’s 500 Index.
  • Developing nations traded at a discount to American equities from 2001 to 2006 even after their economies expanded at almost three times the pace, according to Bloomberg and IMF data. They moved to a premium in October 2007, the peak of a five-year advance that sent the MSCI gauge up fivefold.
  • Groupama Asset Management, Palatine Asset Management and Standard Life Investments say the disparity means investors are paying too much for shares from China to India to Brazil at a time when the global economy is contracting. MSCI’s emerging- market gauge is valued at 1.7 times its companies’ net assets after a 34 percent surge last quarter, the highest on record compared with the MSCI World Index of 23 advanced economies, which trades for 1.5 times, data compiled by Bloomberg show. “Emerging-market stocks are at risk,” said Matthieu Giuliani, a Paris-based fund manager at Palatine, which oversees $5.56 billion. “You should only pay so much for growth.”
  • While developing nations’ economies grew an average 1.7 times faster than developed countries in the past 20 years, their stocks traded at a discount because their economies and returns were more volatile.
  • All 22 emerging-market currencies tracked by Bloomberg depreciated against the yen in the past month, and 16 weakened against the dollar. The yen usually attracts investors during economic turmoil because Japan’s trade surplus makes the nation less reliant on overseas lenders, while the dollar benefits from its status as the world’s reserve currency.
  • “Gains came too quickly in the context of a slow economic rebound,” said Romain Boscher, who helps oversee $119 billion as a director at Groupama in Paris. “Valuations are now high, and that leaves the door open for a drop. Emerging and developed markets are at risk.”
  • For Carmignac Gestion’s Eric Le Coz, emerging-market equities deserve a premium because the economies are the only ones projected to grow this year. Financial institutions in developing nations also avoided most of the credit freeze that caused almost $1.5 trillion of writedowns and credit losses since 2007, according to Bloomberg data.
  • Emerging markets “should be more expensive,” said Le Coz, who helps oversee $28 billion as a member of the investment committee at Carmignac in Paris. “In the past, emerging markets were fragile. Today that’s not the case.”
So onto the question of decoupling which was a failed thesis in 2008. But try try again?
  • Emerging markets “are still dependent on exports and the health of wealthy countries,” Palatine’s Giuliani said. The European Union was the biggest export market for Brazil, Russia, India and China as of 2007, the last period the data were available, according to the Geneva-based World Trade Organization. The U.S. was the second-biggest market for Brazil, India and China.
  • Shares in developing nations are the most vulnerable to further declines because prices “have run too far ahead” of a recovery in profits, according to Standard Life’s Jason Hepner.

Bookkeeping: Short Longtop Financial (LFT)

We finally got the oversold bounce and its hitting the lower end of the range we discussed this morning. If the bounce continues we'll be stopped out of this position but I'm going to put a short, low risk entry in Longtop Financial (LFT). This will be about a 3.3% stake and starts at $24.30. The high of the day is $24.50 which just so happens to be where multiple resistance lines sit.

Since almost all stocks are hostages to the greater market nowadays, if we continue to bounce I expect these resistances to be sliced through and I'll stop out at $24.75. That's only 2% from here - so a low risk play. Downside obviously can go to $22s very easily in this volatile name.

I also covered some Las Vegas Sands (LVS) for a quick (2 day) 8-9%.

Short Longtop Financial, Las Vegas Sands in fund; no personal position

S&P 500 Stocks with Highest Short Interest

Going into earnings season it is always interesting to see which stocks have the highest short interest. The reason for that is if there are any "surprises" to the upside, these tend to be the stocks that take off like a rocket as shorts are forced to cover (buy).

Courtesy of Bespoke blog we have an interesting list below - including many names we discuss, cover, or have shorted from time to time!

(click to enlarge)

A couple notes on some of these names
  • Mylan (MYL) is a generic drug maker that we were once long; it really took off in April (considering its a low volatility name) but has been slowly drifting back down since
  • Ciena (CIEN) is an old long of ours, in the optical networking field... I prefer some of the names we've owned in different parts of the networking path
  • I had not looked at Intuitive Surgical (ISRG) in ages, and until a week ago its chart was actually quite strong, but it fell off a cliff
  • Wynn Resorts (WYNN) we went negative on the whole casino group in 2007 but at the time we could not short individual names, so we missed out on profiting off the 80%+ drops in many of these names. Instead we tried to short in April and got our bell rung. I tried to short it again late last week but it just missed my limit order, so instead we have a peer which has worked out nicely in a very short amount of time.
  • Almost from day 1, as we anticipated a damaged US consumer, we've been against Harley Davidson (HOG); they report tomorrow. Same for Whole Foods Market (WFMI) - the company best suited for the house ATM era when middle class could shop way over their head. Same with Abercrombie & Fitch (ANF) - selling high prices clothes to teenagers and young adults who don't have the parent ATM anymore. Aeropostale (ARO) and Buckle (BKE) have stolen much of their customer base just as Walmart has stolen much of Targets.
  • Similar idea to the above with Whirpool (WHR) which has the additional 'benefits' of debt and pensions to deal with.
  • I am surprised to see Diamond Offshore (DO) here....
  • AutoNation (AN) I'd like to buy at a lower level, been stalking it for 3-4 months only to see it to either rally or go sideways on corrections.
  • Lots of homebuilders on the list.

Bookkeeping: Closing Atwood Oceanics (ATW)

"Reflation" trade is going on week 4 of infamy. We don't have much in this aisle - especially after dropping the fertilizer stocks 2 weeks ago but I am going to close out a tiny position in Atwood Oceanics (ATW) as well. All we had remaining was a 0.2% stake; I am leaving around $23.40. Which is more or less where we restarted the position [May 7, 2009: Bookkeeping - Restarting Atwood Oceanics] This is a pretty simple chart for me; we'd want to see Atwood get back over $25 to show strength; otherwise it is under a mountain of resistance.

Atwood Oceanics, Inc., together with its subsidiaries, engages in the offshore drilling and completion of exploratory and developmental oil and gas wells worldwide.

I expect Atwood to simply move with the program traders who move in and out of one of the more popular ETFs which similarly can bounce to the mid to upper $90s but it would simply be an oversold dead cat bounce until otherwise proven. I don't have enough exposure in Atwood for it to really matter at this point even if this bounce occurs.

I will be looking to buy this reflation trade merchandise back if the computers show favor to them again and their charts improve OR they take some serious hits, on the order of 20%+ lower from here in the coming 6-8 weeks. While I don't like buying "broken charts" if these stocks plummet you can be assured they will rebound the NEXT time the reflation trade is back on... we're just repeating the same pattern over and over the past year+.

But for now, outside of a smallish oversold bounce I don't see much upside here; if proven otherwise I'll jump back in some names when they clear resistance areas.

No position

Potash (POT), Mosaic (MOS) Continue to Take a Hit on Silvinet India Deal

Potash (POT) and Mosaic (MOS) were hit hard Friday [Jul 10: Potash Steamrolled] on news that a Russina provider, Silvinet had signed an agreement with major buyer India for a steep discount, $460 a tonne. To show you the scope of that pricing all the other bidders apparently were in the $625-$635 range. Both stocks continue weak this morning, 3-4% down - interestingly Mosaic (MOS) was surging Friday ahead of this news report due to a flurry of call buying and the ever present "takeover rumor".
  • India has agreed to buy 850,000 tonnes of potash from Silvinit at a delivered price of $460 a tonne, analysts said, citing reports in Fertecon and FMB.
  • "This is a large volume contract between a major seller and large buyer, we thus believe this will establish the market floor price and set the range for Chinese buyers," said UBS analyst Brian MacArthur, who has now placed his "buy" rating and $125 price target for Potash Corp under review.
  • The price of potash -- a key crop nutrient -- has remained stubbornly high even as demand has collapsed, as a small group of companies, which account for roughly 75 percent of global supply, has drastically cut production in a bid to maintain pricing.
  • However, concerns that cash-strapped Silvinit might cave on pricing arose after the price it bid in the recent Indian tender was kept confidential, while the prices bid by other major suppliers were made public.
  • India typically imports between 4 million and 5 million tonnes of potash annually. The contract with Silvinit will account for just a small portion of its 2009 potash requirements, but it will put pressure on other major producers to cut prices.
Now what is interesting is Silvinit is not part of the "cartel" which generally sets the price. They appear to be a financially troubled, desperate company but now we will see if Chindia leverages this weaker player's pricing onto the cartel!
  • BPC is a 50-50 joint venture between Russia's Uralkali (URKA.MM) and Belaruskali, while Canpotex is a partnership of Potash Corp (POT), Mosaic Co (MOS) and Agrium Inc (AGU.). These five companies along with K+S (SDFG.DE) and Russia's Silvinit account for about 75 percent of global potash supply.
Some follow up stories today - Reuters
  • Belarussian Potash Co, a major supplier of potash to world markets, may revise its price offers after reports that rival supplier Silvinit agreed a deal with India at levels far below market expectations.
  • BPC, a 50-50 joint venture between Belaruskali and Russia's Uralkali, was surprised at reports Silvinit had agreed to sell 850,000 tonnes of potash to India at a delivered price of $460 a tonne, a senior company official said. "We did not expect such a significant reduction in price," Oleg Petrov, head of sales at BPC, said in comments emailed to Reuters late on Friday.
and Bloomberg
  • With China out of the potash market due to weak demand from farmers and high stocks, India is the pricing benchmark this year,” VTB Capital analyst Elena Sakhnova said in a note.
Now here is the interesting comment, which was something I echoed Friday. If so, this would actually be quite a buying opportunity (soon) in these potash producers.
  • We would treat this more as financial problems at one of the global players rather than a crack in discipline,” she said.
So while $460 seems an overreach there still now seems to be the thesis that prices will drop from where the potash producers were making a stand, at least in the spot market.
  • The price of potash for immediate delivery will “correct sharply” to $530-560 a ton, from $735-750 a ton currently, Sakhnova said. The price reduction in India may be “a good stimulus for China to buy fresh volumes,” she said.
  • Silvinit’s Epifanov said the Indian deal, a 26 percent price cut, probably signaled the bottom of the potash market and future contracts will likely be signed at higher prices.
If however, this 'distressed price' is a trend setter, than these companies have bigger issues. Note - we closed our long positions in this group and actually went short Potash (POT) in mid $90s, unfortunately it appears we covered 48 hours too early. [Jul 2: Closing Potash, Mosaic - Selling Short Potash] At this point the news should be "in" and we can expect at least an oversold bounce for a quick trade if the larger market holds on to support.

No positions

Meredith Whitney Upgrades Goldman Sachs (GS) Ahead of Earnings

Rarely will an analyst take action ahead of earnings (Goldman Sachs reports Tuesday) but noted bank bear Meredith Whitney is out this morning with an upgrade of the 5th arm of government. This has futures improving. You might recall in my earnings preview Friday I (not a noted banking analyst) wrote

Goldman Sachs (GS) - what more can be said, Goldman has basically cleared the path to prosperity for another generation or two. All major competitors have been destroyed or weakened measurably... transplants live throughout national government... the world is their oyster. All they need to worry about is insiders apparently taking some of their HAL9000 code and trying to get rich off it.

This could be an epic quarter for Goldman - record breaking issuance of stocks - especially financials, in Q2; massive issuance of bonds as credit markets re-opened; massive dominance of weekly program trading. They are everywhere and as less competitors remains their spreads (fancy word for profit margins) widened. I expect a monster beat; it is just a matter of "if it's in the stock".

Via Bloomberg
  • Meredith Whitney gave Goldman Sachs Group Inc. her only “buy” recommendation among the eight banks she covers, saying the shares may climb 30 percent. Whitney, the founder of Meredith Whitney Advisory Group LLC, hasn’t recommended buying shares of New York-based Goldman Sachs since January 2008, when she was an analyst at Oppenheimer & Co. The stock may reach $186 from $141.87 on July 10, the analyst said in a note to clients today.
  • Goldman Sachs, which plans to release second-quarter results tomorrow, is going to post “enormous” revenue from its fixed-income, currencies and commodities business, Whitney said in an interview on CNBC. “Goldman is going to surprise big on the upside,” she said.
  • Goldman Sachs may post the largest profit since it set an earnings record in 2007.
Check out these numbers
  • Goldman Sachs managed $27.9 billion of global equity and equity-linked offerings in the quarter, up from $1.5 billion in the first quarter, and $3.98 billion of high-yield debt sales, compared with $798 million in the first quarter, according to data compiled by Bloomberg.
  • The collapse of rivals including Lehman Brothers Holdings Inc. and Bear Stearns Cos. may help Goldman Sachs beat its 2007 trading-revenue record....

Remember, you are only allowed in Goldman's sandbox because they want you here. You humor them with your presence. And this crisis probably has worked out better than they ever could of anticipated, obliterating any foes they once had. They love it when a plan comes together.

[Jun 25, 2009: Rolling Stone - Goldman Sachs; the Wall Street Bubble Mafia]
[Apr 13, 2009: Goldman Sachs PreAnnounces 14 Hours Early]
[Mar 17, 2009: Your TARP Dollars Hard at Work Supporting Goldman Sachs Employees]
[Jul 21, 2008: It's Goldman Sachs World - We Just Live in It]

Also below are 2 videos from this morning with Whitney's views on banks in general

12 minutes

Specific to earnings reports - 5 minutes

[Mar 18, 2009: CNBC - Meredith Whitney's Latest Views]
[Jan 30, 2009: Meredith Whitney Joins Roubini & Soros in Smothering the Kool Aid]
[Sep 23, 2008: Meredith Whitney and I Continue to Agree, Bailout or No Bailout]
[Aug 4, 2008: Meredith Whitney Continues to be Negative on Financials (and Housing)]
[Mar 26, 2008: I'm on Meredith Whitney's Side]

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 49

Year 2, Week 49 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 74.1% (vs 72.1% last week)
26 long bias: 21.2% (vs 22.1% last week)
7 short bias: 4.7% (vs 5.8% last week)

33 positions (vs 34 last week)

Weekly thoughts
Keeping it short this week First to our 2 charts, simple versus exponential....

On the Exponential moving averages, it is a quite negative picture - all key moving averages have been broken and we are holding dearly onto the "neck" of our head and shoulders formation. I will say, there is room for a bounce however to anywhere in the low S&P 890s to low 900s so until S&P 870 is broken it is hard to get aggressively short because of that reflex bounce. Especially considering this market will "move" in afterhours as much as during the day I anticipate with the slew of earnings reports coming.

On the Simple moving averages, we are still clutching to the 200 day moving average. Ironically, the slope of this marker is falling so quickly that the market can keep going down, yet "hold" support. This continues to be the case, but barely.

The economic slate is extremely heavy this week but I expect earnings to dominate. On the economic front we have inflation figures (PPI, CPI), June retail sales (which again I always get a laugh at the attention considering the actual retail companies reported the previous week and we quickly forget it and focus on what the government tells us is retail sales), Fed minutes, June industrial production, housing starts and building permits.

S&P 500 type companies dominate the first 3 weeks of earnings, and then we get to smaller and/or foreign names in the latter part of the period. One very nice thing the past few weeks has been the lack of "gap up" or "down" futures in premarket. So many days in January or February we were gapping down 10 to 15 S&P points, and vice versa in March, April and parts of May. I do expect that to change now as we take 1 companies earnings and extrapolate the entire US market's health on said company, either pro or con.

As for positioning I am still playing small and just trying to catch some intraday moves with a smallish portion of the portfolio. Which is another reason I am enjoying the lack of huge moves in premarket because many days this year 80% of the move has been done premarket (or in the post 3:30 PM half hour) I see a lot of oversold charts; very damaged charts but you could see where a bounce into resistance could happen. I still have a bevy of short limit orders waiting if we do get those bounces for intermediate purposes. Otherwise the plan is to attack short below S&P 870 which has been the floor of last week.

Sunday, July 12, 2009

Updated Position Sheet

Cash: 74.1% (v 72.1% last week)
Long: 21.2% (v 22.1%)
Short: 4.7% (v 5.8%)

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

(click to enlarge)



Saturday, July 11, 2009

WSJ - Small Investors Pile into Emerging Markets, Junk Bonds, and Commodities

If you've been around these markets for a while you generally know by the time the retail investor is piling into a group, chasing huge scores - it's generally time to run away (at the least) and for the 5% among us who short, begin to think seriously about betting against the small fry. It sounds cold, but this is just the way it tends to work ... trust me, I used to be one of these people, so I learned the hard (read: expensive) way. As we read the piece below let us trust in the fact that none of these people were buying in early March, but most likely jumped in when it was "safe" a month or so later.

Contrast the lemmings running into "what's hot" with what you've been reading here - about a month ago I was saying commodities is crowded and I would not want to be exposed highly there. People who heeded that thought process avoided the sand blasting that has gone on for 3 weeks running in this sector. While I do like these emerging markets for the long term, I think they are vulnerable here as well; some are beginning to roll over - Russia has already been in a "technical" bear market (down over 20% from peak). And I am saying the same thing I said in commodities a month ago, now for the latest darling - technology. It is crowded - everyone is hiding there. Beware.

I don't really talk much bonds but while junk bonds (highest risk) has provided the most juice the past 3-4 months, its basically been a parallel to the stock market. The 'worst of breed' has run up the most as green shoots flower across the world. Just as with the green shoots themselves, I find the junk bond love way premature. This economy is stalled and I expect many more companies to suffer - so buying bonds of the worst seems not such a great intermediate term strategy. I'd be more interested around next spring when a lot more carnage is exposed. This thesis has left me lagging the lemming pack for much of May and part of June but lately things have been going back my way.

But all that said, let's see what "Mad Money" watching money is doing now. Boo Yah!
  • It’s amazing the difference a rally can make in investors’ appetite for risk. A few months ago, mutual-fund investors were yanking money out of stocks and high-quality corporate-bond funds and parking it in safer places, like money-market funds and U.S. Treasurys. Lately, however, as stock and bond markets have rebounded, mutual-fund investors have had a split personality.
  • They’re back to buying relatively safe investments like high-quality corporate bonds. But they’re also pouring money into the riskiest investments. They’re lukewarm toward U.S. stocks but plunging into high-octane vehicles like emerging-market companies, commodities and junk bonds—making these among the 10 best-selling mutual-fund categories this year.
  • Some market watchers think these investors are trying to quickly recoup their massive losses from last year. Or they believe these investors are simply chasing performance.
  • In the first five months of this year, investors poured a net $4.9 billion into diversified emerging-market mutual funds, more than reversing the net $2.6 billion they pulled out in all of 2008, according to Morningstar Inc.
  • In comparison, mutual funds that invest in large U.S. stocks have had outflows of $11.2 billion, following a $52 billion outflow last year. (hmm, that last point is interesting - perhaps Joe 6pack is looking around on Main Street and unlike the Wall Street crowd realizing just how bad it is out there in America - he/she seems to have a lot better feel for what reality is... so I suppose they must be thinking "can't be worse in Thailand!")
  • Meanwhile, natural-resources and precious-metals funds combined have had inflows of $7.8 billion so far this year, versus an outflow of $2.1 billion last year. (that's just a staggering switch in terms of amounts of money)
  • As for junk-bond funds, investors have put in $12.6 billion, after adding $1.2 billion in 2008. (another staggering switch)
So let's look at some thinking from an individual anecdote
  • Murray Schofield, a retired orthodontist in Arizona who sold most of his foreign investments in the second half of 2008, has been buying emerging-market funds, and funds dedicated to China and India, since March. He now has 23% of his portfolio in funds that invest in these stocks. “I have to recapture part of my losses,” says the 84-year-old. “Otherwise I’d be more conservative.” His portfolio is up 20.4% for this year, following a 44% loss in 2008, he says.
I kind of worry for Murray if this market begins to tank again - I hope he is quick to pull the trigger is things go awry. To make up a 44% loss he needs to make +79% - just to get to even. Sounds like - despite enjoying one of the biggest stock market rallies in our lifetime - he is only 1/4th of the way there. Shows you again, the first rule of making money is... not to lose money.

A deeper look into all 3 of the "favored" groups

Emerging Markets - aka decoupling all over again
  • Stock markets of developing countries like India and Brazil have gone through the roof since early March, reversing some of their declines from last year. The MSCI Emerging Markets Index is up about 34% for the first six months of the year, after losing 54.5% in 2008. Some niche markets have had wilder swings. Russia’s benchmark RTS index is up 56% for the year’s first half, after losing 72.4% in 2008. [May 24, 2009: NYT - As Economy Struggles, Russia's Market Has Surged]
  • What’s changed? Not only do investors have a greater appetite for risk these days, they’re also more optimistic about the economic outlook for some of these countries. In China, the world’s third-largest economy, the government’s massive stimulus is starting to take effect. While exports are still down, internal growth is gaining strength. Meanwhile, commodity prices have been on the rise, improving confidence in Brazil and Russia.
  • Despite hot performance for emerging-market funds so far this year—an average 33% return—some money managers say caution is in order. While they’re optimistic that emerging-market economies will grow at a much faster rate than the U.S. over the next several years, some worry about the recent explosive rally in these markets. “It’s been the lower-quality, the riskier companies that have done better this year,” says Simon Hallett, co-portfolio manager of the Harding Loevner Emerging Markets fund. “Emerging markets have probably overshot in the short term.”
Commodities - aka reflation trade
  • The price of oil has been on a roller coaster since 2007, hitting an all-time high last summer and then losing more than half its value over the next several months. Since February, however, it has reversed course, more than doubling. Stocks of companies that operate in the commodities space, like drillers and gold miners, have fallen and risen even more steeply than the underlying commodities.
  • Recently, investors have been piling into commodities, partly because they fear impending inflation, as the U.S. government prints money to deal with the financial crisis.
  • What’s more, a number of people who were sitting on cash waiting for markets and the economy to improve have rushed in lately. The upshot: The average naturalresources fund, which invests in stocks of energy-related companies, is up 15% so far this year, after losing 49% in 2008.
  • What do the pros think? Fred Fromm, co-manager of the Franklin Natural Resources fund, is bullish on commodities over the long term but says challenges remain in the near term. r. Fromm says until there’s confirmation that demand is picking up or supply has slowed down significantly, the rally in prices might not be sustained in the near term. Pimco’s Mr. Worah says a dip in the market wouldn’t surprise him, given the recent gains in commodity prices.
Junk Bonds - aka "the coast is clear" and the Federal Reserve will protect even the worst companies in America under "no company left behind"; stretch for yield - the feds has your back.
  • Bonds of companies that have low credit ratings have been on a tear lately, after a crushing 2008. Mutual funds that invest in these bonds have gained on average 23%, making them the second-best-performing bond-fund category, after bank-loan funds, which are up 26%.
  • Last year, junk-bond funds lost 26%, making them among the worst performers in bonds. Investors feared that the financial system was on the verge of collapse, and companies wouldn’t be able to repay debt. Lately, investors have turned to these bonds in search of high returns and yields of 11% or more.
  • But long-term fund investors should weigh the risks before buying. Given the weak economy, analysts expect that an increasing number of companies will be filing for bankruptcy protection and defaulting on their debt.
  • Given all that, as well as the recent run-up in bond prices, money managers are approaching junk bonds with caution. Dan Shackelford, manager of T. Rowe Price New Income fund, had been buying such bonds late last year when they appeared to be cheap across the board. But he’s more selective now. “At some point, we do a gut check here and say, ‘Have things fundamentally improved that much?’ ” he says. His view: “A lot of the value has been squeezed out.”

NYT: China / Australia - Where Iron is Bigger than Gold & Oil

I don't necessarily agree with the title of the piece, but it's an interesting observation within this New York Times story. For newer readers, let me remind how the Baltic Dry Index (a pricing index for shipping costs which now is seized by investment pundits as one of "the tells on global growth") has been completely dominated by the Chinese and their interest in iron ore. When they are making purchases - the BDI rises, when they are not so interested, it drops. I pointed that out while the so called investment professionals on TeeVee had hearts aflutter that "the uptick in Baltic Dry Index surely tells us everything will soon be allright!" [Feb 9, 2009: China and the Baltic Dry Index - What's Really Going On?] But more importantly that showing pundits being wrong for the 89th time out of 100, this dominance shows how weak global trade is - one country, importing one product (mostly from Brazil and Australia) is causing massive fluctuation in shipping rates.

If you are interested in iron ore as a stock, I've written many pieces on 2 players - Cleveland Cliffs (CLF) which is a smaller player in the US, and a major player Brazil ....I think they are on their 3rd name change but now its called Vale (VALE) - when I started the blog it was called CVRD (RIO)
  • Oil, gold and rice are the commodities that often grab headlines. But for countries like China and Australia, it is the price of iron ore that can determine whether their economies go boom or bust.
  • For months, China has been locked in an intense, behind-the-scenes dispute over iron ore pricing with the world’s top miners, having refused the price that steel makers in other major countries like Japan and South Korea had already accepted. [May 26, 2009: Rio Tinto (RTP) Agrees to 33% Price Cut for Iron Ore with Japanese Nippon Steel but Chinese Want More] The price haggling is an annual ritual that pits China, now the world’s third-largest economy, against exporting countries like Australia, as each acts in its best national interest. [Jun 13, 2009: Australia in Perfect Position Aside China, but at a Cost?]
  • In the latest escalation of tension in negotiations this year, China has detained an Australian national who is the chief negotiator for one of the world’s mining giants, Rio Tinto, and accused the person of stealing state secrets. Three Chinese nationals working for Rio Tinto have also been detained. (that's one way to negotiate!) Whatever the details of the accusations, the detentions underscore the growing importance and extreme sensitivity of what might to outside eyes appear an arcane, dull and mysterious business: iron ore.
  • In the world of iron ore trade, the relationship between China and Australia is especially tight-knit. China takes up 80 percent of the ore shipped from Australia, said another analyst, who spoke on condition of anonymity because he was not authorized to speak to the media.
  • It may not command the political attention of oil — over which wars are waged — but iron ore ranks among the most important commodities in the world, the main ingredient in steel that goes into construction, bridges and ships.
  • China, which is rapidly expanding its cities, imports about half the world’s supply each year. Japan, the world’s second-largest importer of iron ore, imports about 15 percent. South Korea, Germany and France follow. (again it goes without saying how dominant the Chinese are in iron ore, and in a larger sense all commodities - one of my long term theories is lack of "resources" especially that of the fresh water type - will be the cause of future wars) [May 13, 2009: Commodities - It's China's World: We Just Live in It]
  • About 850 million tons of iron ore were shipped around the world in 2008. With prices averaging about $90 per ton last year, the market totaled between $75 billion and $80 billion. (that sounds huge but it's really only 1/4th of one Citigroup bailout... I make these remarks to show you how much national treasure we've thrown at our financial oligarchs since people have become numb to the numbers... that's just 1 oligarch, for a long time headed by Robert Rubin. Again to make it clear, all the world's global trade in iron ore is but a fraction of your grandchildren's money given to (pick one) --> Goldman Sachs via AIG, or Citigroup, or Bank of America, or Fannie, or Freddie. Prosperity indeed)
  • ....most of the world’s ore, unlike oil or stocks, is not traded on global exchanges. Instead, contracts are agreed upon annually between producers like Rio Tinto, BHP Billiton and Vale — which account for three-quarters of the market — and the steel makers who buy the ore, like Bao-steel Group of China and Nippon Steel Corp. of Japan.
  • Each year, these companies meet behind closed doors in talks that can last as long as six months to determine the price at which various types of ore are to be shipped during the next year.
  • This benchmark contract system accounts for about 70 percent of the market and is a system that gives miners the predictability they need to make the huge capital outlays needed to extract the ore from the ground. Buyers also enjoy that predictability. But with so much of the price fixed a year in advance, the stakes are huge.
  • And this year, with the jury still out on how rapidly the world’s economy — and with it the demand for iron ore — will recover, the annual round of pricing negotiations has been especially intense.
  • Japanese and South Korean steel makers recently accepted a price 33 percent below the previous year’s level. But breaking the usual practice of adopting these earlier agreements, China has dug in its heels and is holding out for a larger reduction, of as much as 45 percent. It can afford to. China’s growing economic importance, especially in a year of crisis like this one, has given the country’s negotiators unprecedented clout.
  • In the last 15 years or so, the global market has gone from 400 million tons a year to about twice that — and all that has been because of demand from China,” said Peter Strachan, an independent analyst in Australia. “In the last five years or so, China has become absolutely dominant in the marketplace.”
Now the irony is I used to hang out in potash and iron ore in mid 2008 thinking I'd be safe, because of (a) long term contracts in place or (b) wide moats to get to the product. So while I was in the commodity space, I thought I had found an oasis when the time would come for a commodity correction. Well lo and behold, I forgot how dominant HAL9000 is, and all the HALs congregate in the same stocks and when its time to panic sell, they don't care about fundamentals - everything must go. So I learned my lesson; 1 year contracts versus spot pricing means nothing in a world of computer driven trading. There was no difference in buying iron ore versus buying a company levered to spot natural gas. It's all the same to HAL.

[Aug 30, 2008: WSJ - Steelmakers Develop New Iron Recipes]
[Mar 7, 2008: Bookkeeping - Starting 2 Mining Positions Emphasizing Iron Ore]
[Feb 19, 2008: CVRD (RIO) Secures 65% Increase in Iron Ore Pricing]
[Sep 27, 2007: Shortages Here, Shortages There - Iron Ore is the Shortage of the Day]

Friday, July 10, 2009

A Look Ahead at Earnings Early Next Week; and a Blue Lobster Sighting

So far it's relatively quiet out there on the indexes as bulls and bears battle over S&P 875 (line in the sand) and 880 (200 day simple moving average, falling by the day). With volume so light it should be easy to 'mark this market' up into the close after that "close call" earlier in the day and keep us from breaking down. No volume followed the close call, hence I don't see any more damage being done. Never short a dull market as they say. I continue in the hands off treatment that has served well the past few weeks - there are times to be aggressive and times to just let the market do its thing; until the market makes a decisive move no reason to be aggressive.


Let's take a quick look ahead at earnings at some companies of note coming early next week - remember, the game plan is the same as last quarter when we saw many "awful, but better than expected results". Chop as many Americans as possible from the payroll, cut back benefits, cut back all sorts of expenses and try to sell as much to China. Have a poor revenue number (which can't be lied about unless you are Enron), and lowball analysts with earnings guidance(which is easily "played with" in American accounting) then "beat it" mostly with the above mentioned expense cuts ... and we all sing green shoots. At the beginning of the earnings season come many of our multinationals so the weaker dollar in the past quarter should also help them spike the earnings bowl.

With all the favors done to the banks and since we now don't care about balance sheets (old loans) since we've politicized FASB (the accounting board), we only care about current profits. Which again, Sally the 4 year old can now make at any bank as they borrow from the Fed at nearly zero and lend to American consumers at numbers far higher than zero. Plus the bevy of fees now being added to those who bailed them out. We're all winners here.

p.s. Goldman Sachs just upgraded a slew of technology names today; which basically means the rally in technology is just about over as they get their clients out into the "upgrade" - or at least thats the cynic's view ;)


CSX (CSX) - we always like looking at the railroads as economic indicators; companies like this are far better than faulty government reports.

Posco (PKX) - South Korean steel; the hope is for some uptick in the steel market in the "reflation / weak dollar" thesis area. Posco is the first major global steel maker to report.


Goldman Sachs (GS) - what more can be said, Goldman has basically cleared the path to prosperity for another generation or two. All major competitors have been destroyed or weakened measurably... transplants live throughout national government... the world is their oyster. All they need to worry about is insiders apparently taking some of their HAL9000 code and trying to get rich off it.

This could be an epic quarter for Goldman - record breaking issuance of stocks - especially financials, in Q2; massive issuance of bonds as credit markets re-opened; massive dominance of weekly program trading. They are everywhere and as less competitors remains their spreads (fancy word for profit margins) widened. I expect a monster beat; it is just a matter of "if it's in the stock".

HDFC Bank (HDB) - I like the chart as a short here; we own a tiny long position ... but with earnings coming out I don't like being involved heavily in anything so I'll wait. Major gap to fill in low $80s, and this stock is PRICEY.

Intel (INTC) - I've long since caring about Intel but it still moves the markets and "semiconductors" are the playbook for 'early recovery' so it will impact.

Johnson & Johnson (JNJ) - not my cup of tea but one of those stocks you can actually buy and then come back in 10 years and not worry it's out of business.

Yum Brands (YUM) - it's all about China. My only hope is our culture invades China to the point they become more like us, then we can get back our prominence. Go KFC! (Trojan Horse)


And for something totally unrelated may I present to you a blue lobster

Potash (POT) Steamrolled

Ouch - while the stock bounced yesterday and was as high as $95 this morning a nasty reversal has occured and as I type it, Potash (POT) is below $86. Wow. I covered in the $92s hoping to reshort around $97 after the "dead cat bounce" (which happened) - but just missed re-entry. This is some strange action - almost feels like a hedge fund liquidating again.

As for the market, S&P 875 is here again and being tested, we are slightly below it - but I'd like to see us a bit lower to get aggressively short. Las Vegas Sands (LVS) short is working out well thus far, already in $6.90s from $7.50 initiation.

Right now this market feels very dangerous to me, things could turn very badly here soon if bulls don't wake up and / or that Goldman Sachs quantitative program is not restored quickly. ;)

Short Las Vegas Sands in fund; no personal position

Trade Deficit Improves but for All the Wrong Reasons

I have not delved into the intricacies of this trade report since its not one of the more important things I follow - for so long it's just been a huge number that we shrug off as status quo. We buy much more from people outside the country than they buy from us - that's the new and innovative economy we've build. Hence I don't know all the 'seasonal adjustments' or what not that may or may not be done with it, but I would assume there is not much to fudge in this report. Some sum of goods is valued as going out of the US, and some sum of goods is valued as coming in. The difference between the two is either your deficit or your surplus. We've run huge trade deficits for as long as the eye can see - essentially absorbing far more than we export out. This has been part of our structural problems in the country.

First the green shoots - this deficit has shrunk dramatically the past year. Now for the brown manure - it's for all the wrong reasons. We'd want exports surging (meaning people want stuff we make) to be the primary driver of this shrinking trade deficit. Instead, a massive falloff in imports is the reason... which speaks to the absolute weakness in both the business and consumer economies. An eye opening drop in demand for things outside the country as businesses "make less" and consumers "shop less". Imports are down 35% versus 1 year ago... that is just incomprehensible for an economy of this size.

Now remember, almost every country in the world depends on the US consumer to "shop like there is no tomorrow" for part (or in some cases, much) of their growth. So this has implications not just for us, but the entire world. The whole thesis of export led growth by China, Germany, and a host of other countries seems implausible until you get to work people. By work, I mean get to the mall and "do your thing".
  • The U.S. trade deficit fell to the lowest level in more than nine years in May as exports posted a small gain while the weak American economy pushed imports down for a 10th straight month. The Commerce Department said Friday the deficit narrowed to $26 billion, a drop of 9.8 percent from April and the lowest level since November 1999. Economists expected the deficit to widen to $30.2 billion in May.
  • So far this year, the deficit is running at an annual rate of $350 billion, about half of the $695.9 billion deficit for all of 2008. Economists believe that trend will continue as weakness in the U.S. depresses demand for imported goods.
  • The big improvement reflects the prolonged U.S. recession, which has sharply reduced American demand for imported goods. U.S. exports also are down from last year's peaks, hurting American manufacturers, but those declines have been smaller than the plunge in imports.
  • America's deficit with Canada, its largest trading partner, dropped to $628 million, the smallest monthly imbalance in 15 years. The deficit with Japan shrank to $1.9 billion, the lowest deficit with that country in more than two decades.
Now again, we have to thank our lucky starts that (a) we have so much fertile agricultural land and (b) we have not found a way to export said farmland to other countries where wages are far lower - because if they could, they would. Thus far they have not thought of a way, so we still benefit from the farm products - one of the last great exports we can count on. That said, our exports are still down 25% from a year ago, so only partially balancing the 35% drop in imports. All in all, global trade has really shriveled.
  • Exports of goods and services rose 1.6 percent to $123.3 billion in May, reflecting increased sales of soybeans, corn and other farm products, along with higher exports of industrial machinery, generators and computers. But even with the May increase, U.S. exports are 25 percent below the record-high set in July 2008.
  • Imports edged down 0.6 percent to $123.3 billion, the 10th consecutive monthly decline. Imports are 34.9 percent below the all-time high set last July.

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