Monday, August 31, 2009

Bloomberg: Shipping Rates Seen Falling 50% on China, Fleet Size

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As the Baltic Dry Index (a global shipping "price" mechanism) scuffles back to early May levels despite a "recovering global economy" one must ask what are the drivers? We were raising the question nearly a month ago [Aug 7, 2009: Baltic Dry Index has Worst Week Since October 2008 - Blame China. Prescursor to Slowing Loan Growth?] but as always with the stock markets news does not matter until it matters - hence the cheap headlines of "US markets down on China" today are comical, considering the Chinese market has been down many days this month and it did not matter all those days. But suddenly it matters today.

China has simply been the world's driver of all things trade this year - especially of the commodity sort. When the Baltic Dry Index started rallying early this year we were asking what was the real cause? [Feb 9, 2009: China and the Baltic Dry Index - What's Really Going On?] We opined it was the Alan Greenspan / Ben Bernanke effect on steroids [Feb 16 2009: Is China Pulling an Alan Greenspan?] and in retrospect we appear to have been dead right. When China turned on the spigots, commodities and asset values began to fly higher. The "markets" saw these moves up and attached them to organic recovery signals. Pundits climbed on, and green shoots were shot out from cannons.

If I can be blunt, it really just looks like a major headfake - central banks have been pushing money into the atmosphere and it is going to help out a relatively small band of speculators in most countries [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market] - really very little different than when Greenspan flooded the world with US pesos after the Asian currency crisis in 1998 and before Y2K at the turn of the century. We saw how that turned out (NASDAQ 1999-2002) But until the party ends (see real estate America 2004-2007) no one will ask questions.

Since the market works on its own reality we have rallied constantly on green shoots - and we own a few things (such as a housing stock) not on belief in real recovery, but on the market's belief of perception of a real recovery. Or government's flooding the world with money that artificially create short term recovery. Which goes to the larger point newer investors need to learn - the market is not about reality, it is about the perception of reality... at least in the short to intermediate term. Does it matter if housing falls into a tailspin (which it will if the $8000 handout to 1st time homebuyers doesnt turn into a $15,000 handout for everyone this winter)? Not in the near term. Does it matter if much of the surge in copper, oil, and other said commodities is nothing more than China stockpiling? Not for those who made money on those rallies. Obviously with central bankers across the world working overtime, the old "signals" we used to use are very difficult to use anymore because basic supply and demand issues of more and more paper currencies chasing fixed supplies of "stuff" has bastardized price mechanisms. What is real, and what is Memorex is very difficult to ascertain.

Which brings us back to the shipping index - all I know at this point is whenever China wants to buy things - prices surge and the Baltic Dry Index goes with it. When they turn off the hose - the BDI goes flaccid. What people are now using as a proxy on global trade really has become China's personal plaything. But that won't be how it is couched in the mainstream.


If you really believe the world economies have turned healthier the past 3 months you have to look in the mirror and ask why Baltic Dry Index is back down to first half May 2009 levels. Remember almost EVERY country has based their recovery on EXPORTING their way out of this mess (excluding China, which is trying to get its consumer to act like Americans) So how do all the world's major countries EXPORT their way to prosperity ... and the BDI act like what we see above?

Will it just be too convenient to only use the Baltic Dry Index as a signal when its going in the "right" direction, and ignore it when it's not supporting your case, dear pundit? Based on "hey China does not matter" talk I am hearing now (laughable), surely the pundits are back to their old ways already. But let's remember the reality the next time the BDI starts to rally because while infotainment financial TeeVee is brushing the BDI weakness under the rug, let it be known the minute it turns back up it will be headline news. And we'll know that is simply means China has decided to show up again incrementally making purchases in the commodities market.

Aside from China's hand on the spigot the other (longer term) main issue facing shipping rates is potential supply of new ships. It is a complicated issue because older ships to transport coal, iron ore, fertilizer and the like are being retired while new ones are coming to take their place. There seems to be more supply than needed coming online - but then again with the wonderful recovery we are about to enjoy in theory we would "need" them. Ahem. Bloomberg has a piece on this subject below that is worth highlighting.

Our only position in this sector is Excel Maritime Carriers (EXM) which we've been patiently sitting with a placeholder position waiting for a gap in the lower $6s to fill. Why have I not been shorting it considering the very obvious gap? Scary sector to short when these stocks can move 10-15% in the drop of a hat. Why do I even bother with a long position in this sector? The same reason I own a housing stock when 18 million homes sit empty in America.... Kool Aid ingestion by stock market investors aka fundamentals mean little when 'perception' is everything.


Via Bloomberg
  • Just as global trade starts to recover, the shipping market is crashing for the second time in a year as China reduces raw-material imports and record numbers of new vessels set sail.
  • The rate for leasing capesize ships, boats three times the size of the Statue of Liberty, will drop about 50 percent from the current price of $37,865 a day to as low as $18,000 before the end of the year, according to the median in a Bloomberg survey of six analysts and fund managers. Forward freight agreements traded by brokers show the fourth-quarter average price will be 7 percent lower.
  • Shipping rates, which already fell 59 percent from this year’s high, are retreating as the Organization for Economic Cooperation and Development predicts a 16 percent drop in world trade for all of 2009.
  • A record 146 capesizes will be added this year, equal to 28 percent of the fleet, according to Fearnley Consultants A/S. “The pressure of the new ships will be overwhelming,” said Andreas Vergottis, the Hong Kong-based research director at Tufton Oceanic Ltd., which manages the world’s largest shipping hedge fund, with $1 billion of assets. “It will take a lot of time and a lot of pain before shipping recovers.”
  • “We’ve seen several yards that have delivered their first ships, albeit delayed, and we expect them to increase the pace of deliveries in the second half,” said Svenning, who is based in Oslo. We will see more next year than we see this year.”
  • Mitsui O.S.K. Lines Ltd. and Nippon Yusen K.K., both based in Tokyo, and China Cosco Holdings Co. operate the world’s biggest bulk-shipping fleets, Mitsui says. Nippon Yusen forecast its first full-year loss in 23 years last month, citing lower demand for container shipping, and expects capesize rates to average $55,000 in the six months through March 31. Mitsui cut its full-year profit estimate by 25 percent last month. China Cosco said on Aug. 27 its commodity ships lost money in the first half.
  • Estimates in the survey ranged from $10,000 to $25,000. Sverre Bjorn Svenning, the analyst at Fearnley Consultants who correctly predicted last year’s collapse in the Baltic Dry Index, which fell 92 percent, was at the lower end.
  • The drop in capesizes is consistent with the Baltic Dry Index, a gauge of the cost of carrying dry bulk commodities such as iron ore, coal and grain. The index, which includes four types of vessels including capesizes, more than tripled this year. The index is 44 percent off its high for the year.
Heck the supply issue is so overwhelming I am not even sure if green shoot Kool Aid can save this sector.

Again, China is everything in this market now; Americans need to stop looking inward and using old sign posts or believing BDI is some global growth signal. It's China's import signal now - they are the world's marginal buyer.
  • (Chinese) Imports of refined copper fell 23 percent in July from the previous month. Coal shipments shrank 13 percent, customs data show. Iron-ore purchases will likely average about 16 percent less in the remainder of the year than in the first seven months, according to Will Fray, an analyst at Maritime Strategies International Ltd. in London.[Aug 24, 2009: Bloomberg - Coal Rally Ending as China Shuns Imports, Opens Mines]
  • China could very easily turn the taps off,” Fray said. “Rates will keep sliding.”

[Oct 31, 2008: Credit Tsunami Swamps Trade]
[Nov 3, 2008: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens]

Bookkeeping: Covering ValueClick (VCLK) Short

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This is our second successful round trip in shorting ValueClick (VCLK) in the month of August; first time around we got a quick 9%, and this time about 6%. Not too shabby considering the market has been up the majority of August.

We're going to cover the short restarted on August 19th at $10.75 at $10.14 and see if we should press our luck a 3rd time or find other candidates for this 4% portfolio allocation.


Recall, as we wrote last night on the weekly summary, for the overall market we're looking for the "easy short" to the gap on SPY (S&P 500 ETF) which is in the $101.30s. The market has been met with furious buying each time such a mini gap has formed so we'll see if it happens again - to really press shorts we have to see this pattern begin to fail. If this gap fill happens today or the next few sessions it will coincide perfectly with the 20 day moving average and give us a great tell since that should scream for hard core bulls to buy buy buy. If they do - it appears to be business as usual; if not...

No position


All Shook Up

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Grrrrrr... it is just as easy to be shaken out of a position on the short side as it is the long side. I placed my stop loss at a new recent high (anything over $51 as that was the intraday peak for the entire month of August) when I shorted Shanda Interactive (SNDA) a week ago. That executed Friday at $51.20; we took the realized loss ... and the stock proceeded to reach as high as $52.

Consider myself shook...


Mechanically I would not of done anything different as I look at the chart (even the closing price was over the 50 day moving average AND a monthly high), but that still stinks. Sometimes you are on the shorter end of the probability stick.

So much for matching Goldman's 97% winning percentage this month! Oh well, time to go buy some stock in my trading department and then get my research department to upgrade said stock to a "buy" next week... of course both events being independent of each other and my success next week only being due to me being smarter than anyone else in the room.

No position

Bookkeeping: Limit Order for CNinsure (CISG) Activated

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In the entry last week where we looked at Chinese insurer CNinsure's (CISG) earnings, we wrote

I have a limit purchase order down at $16 for this name; we'll see if it hits.


The stock almost hit $19 that day and has now dropped quite dramatically to hit our entry point this morning... we are in with a 1.4% stake at $16.00. Now let's be clear - individual stocks have lost a lot of their meaning and now are dominated by the movement of the greater market. If any panic sets in, in US markets this chart will be obsolete and CISG could be a $13 stock in the blink of an eye.

Since the U.S. markets are looking (to me anyhow) very similar to what China looked like a month ago, I am going to keep my stops tight here and we'll suffer no more than a 3% loss with a stop at $15.50. Chinese stocks are very volatile and a 3% move can happen within 5 minutes, so I would not be surprised to see this position shaken out. But discipline trumps all.

The problem right now is there are quite a few Chinese stocks I am interested, but they reside on a US exchange that is long overdue for a correction. Hence when (if) the US markets go, so will these stocks.... regardless of their own company specific metrics.

p.s. Lehman Brothers up another 80% today following Friday's 200% run - woo hoo.

Long CNinsure in fund, no personal position



Bookkeeping: Beginning to Rebuild China, Slowly - Morgan Stanely China A Share Fund (CAF)

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I have to say I am quite thrilled with the timing of my decision to get the heck out of (Chinese) dodge on July 24th; if you nail something within a week in the markets, that precision is Goldman Sachs like but without the ability to move the markets after making a call ;). [Jul 24, 2009: Bookkeeping - Selling China Exposure as Chinese Run In] This was the chart then and frankly there was ZERO reasons to sell from a technical analysis point of view but I laid out my case as repeated below


I am still waiting for the Shanghai index chart to be updated with overnight data on stockcharts, but long story short we saw 2 things happening in late July that actually marked a top in China in 2007...

So now we have had in the past week nearly half a million new Chinese brokerage accounts opened... and the largest global IPO since Visa (V) almost 18 months ago.


The retail brokerage accounts exploding is now almost a universally seen situation regardless of country - a great contrarian indicator. In fact that week half a million new accounts were opened, and the FOLLOWING week over 600,000 were opened, bringing the 3 week total to 1.5 million new speculators into the Chinese stock market.

And trust me, institutions are humans too with the same lemming like chasing behavior... at the time we wrote

Funds investing in the so-called BRIC nations of Brazil, China, India and Russia added $2.1 billion for an 18th straight week of gains, EFPR said. China funds posted the largest gains, adding $243 million, while Indian funds attracted $148 million.


Shanghai was rich at the time...

Shanghai overall is now at 36x earnings

Still,
the rally has made Chinese stocks the most expensive since January 2008, Bloomberg data shows. At the peak in October 2007, the benchmark index traded at 48.7 times profit,


... still is not cheap but certainly a 25% haircut is a good place to start. Also keep in mind if you are new to that market, it trades in a parallel universe onto itself.

our REALLY long time readers will know the Chinese market is "closed" (i.e. no shorting, no foreign money) so its a bit of a parallel universe. [Oct 13, 2007: Shanghai - the Mystical Land of Premium Valuations] The same stocks that trade in Hong Kong are traded many times for 50-100%+ higher valuations in Shanghai. (well back in late 2007 it was more like 150% higher - its since "cooled down" hah)


Jim Rogers agreed with our view

I don’t like buying when things are going straight up and China has been going straight up for nine months,Jim Rogers, chairman of Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist,” said in a Bloomberg Television interview in Singapore today. The nation’s stock market may have “gotten ahead of itself,” he said.


The closest parallel to Shanghai is Hong Kong as many shares trade on both markets as this market finally broke a support level overnight.



That said, I exited just about all of my Morgan Stanley China A Share Fund (CAF) ont the 24th noting I am a big fan of China and greater Asia for the long run but it was all starting to get frothy at the time, so I wanted out.

Much like Jim I'm a 10-20 year bull on China. The next 10-20 days? Taking the safer route.


Now let me be clear, China could turn around and begin a new rally tomorrow - or drop another 50% from here. But unlike the majority of invesors nowadays who buy high and sell higher I do like when things get cheaper. I sold CAF just under $37 at the time, and now it has dropped to $30 - so I can get part of my position back at nearly a quarter off.

CAF chart when I sold - (I'll explain why it looks so different than the Shanghai index chart via July below)


CAF now...


The chart is putrid but since this part of a long term incremental purchase I am going to start to rebuild this position slowly. It is obviously not a purchase on technical reasons. My hope is China drops much more from here and I'll try to buy 20% partial positions along the way down. I'd like to buy around $27-$28 with the next batch. I could see that Hong Kong ETF dropping to $13 which would imply more downside to come for China as well...

For today, we simply are taking the position back up to about a 1% allocation. CAF has another variable going for it - which is why it lagged the Shanghai index so badly earlier this summer - in that it is a closed end fund which trades at a premium or discount to NAV. It had traded at a discount to NAV for much of 2007 and first half of 2008 whereas this spring it traded as high as a 33% premium to NAV. That is a HUGE swing and impacts the fund substantially - the current premium is about 3% after turning negative in July. So it's in the middle of the range - the perfect scenario to buy more is for both the Shanghai index is to fall, and the fund to trade at a 10 to 20% discount to NAV; so we have to keep an eye on both situations with such a vehicle.

Long Morgan Stanley China A Share Fund in fund; no personal position

Sugar... It's Like AIG (AIG) Except you Actually Need It

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Sugar is putting on a quite prideful display in 2009; granted it is no AIG (AIG) in terms of doubling every week in value but for a commodity that actually is not government supported it is doing quite well.



Wait a second... sugar is also subsidized in the U.S..... is there anything the government is not protecting?

We mentioned sugar was at a 28 year high at the beginning of the month due to a weak monsoon season in India [Aug 7, 2009: India's Growth May Suffer Due to Weak Monsoon Season] and sugar is now making a case for "commodity of the year" [Jun 20, 2009: The 10 Hottest Commodities of 2009] Brazil has now joined the "rain" story in sugar... however, for completely opposite reasons as India.
  • Sugar-cane output in Brazil is declining after rains this month in parts of the Center South, the world’s biggest producing region, were at their most severe in more than six decades.
  • Precipitation in northern Sao Paulo state reached 150 millimeters (6 inches) this month through Aug. 26, the most since 1948, Biagi, the world’s second-biggest sugar-cane grower, said in an interview.
  • The showers will pare the Center South’s cane output in the second half of this month to 30 million metric tons from 40.1 million in the first half, he said.
Speaking of Brazil and sugar.... (mid August story)
  • Cosan SA Industria e Comercio, the world’s biggest sugar-cane processor, gained the most in eight weeks in Sao Paulo trading on speculation a drought in India will boost prices for the sweetener.
  • Piracicaba, Brazil-based Cosan posted a record profit for its fiscal first-quarter on gains from hedges, a stronger real and higher prices for sugar, according to an Aug. 14 filing.

  • Raw-sugar futures in New York have surged to the highest in 28 years amid output shortfalls in Brazil and India, the world’s two largest producers.

China Falls Another 6.7%; Fills Late May Gap

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I will post a chart in this entry a little later in the day since stockcharts.com doesn't update Shanghai data promptly but China fell another 6.7% overnight. I had been targeting a gap in the chart in the mid 2600s (last day of May 2009), and with a close at 2667 they have arrived. The entire move down from peak took almost exactly 1 month; the index is now down 23% from peak.
  • The Shanghai index lost 192.94 to 2,667.75, a three-month low. Today’s slump was the most since June 10, 2008, when the index tumbled 7.7 percent after the central bank ordered lenders to set aside record reserves to curb credit growth and inflation.
  • At least 150 stocks on the 898-member index dropped by the daily 10 percent limit.
Remember all those new retail accounts being opened in China? [Jul 24, 2009: Bookkeeping - Selling China Exposure as Chinese Run In]

Individual investors opened 484,799 stock accounts last week, data from the nation’s clearing house showed today, the most since the five days ended Jan. 25, 2008. “The prospect of making quick bucks in the stock market is luring retail investors,”


Looks like they are learning about the joys of markets in very short order.
  • It’s panic selling we saw today,” said Leo Gao, who helps oversee about $600 million at APS Asset Management Ltd. in Shanghai. “The plunge reflects investor pessimism over short-term liquidity rather than any changes in the fundamentals of the economy. Investors are now waiting for the government to step forward and make some sort of gesture.”
Meanwhile in the "we can have our cake and eat it to" category, the U.S. markets are unfazed as after utilizing the rebound in China as part of the reason to run the market up, it now matters little that it has lost a quarter of its value. [Aug 12, 2009: Shanghai Corrects 10%, America Shrugs it Off] [Aug 17, 2009: China Plunges 5.8% Overnight]

On an anecdotal level, from much of what I am reading - I think the Chinese government is fine with the pullback as they were seeking to stop a bubble before it got out of hand. [Jul 28, 2009: FT.com: China Warns Over Asset Bubbles] Notice the day of that very public warning issued - the Chinese market topped within 2 days. Meanwhile in the likewise (allegedly) managed domestic markets U.S. government officials have no such qualms about bubbles. Since we can not see them here (we have invisible bubbles) we can do nothing about them other than turning the spigots on full blast and crossing our fingers. (source: Greenspan)

On a pure tangent I see Europe's combined index has a valuation of nearly 50x earnings. Not too shabby, approaching NASDAQ 1999/early 2000 levels there.
  • Europe’s Stoxx 600 fell 0.6 percent to 236.07 at 9:16 a.m. in London. The gauge has rallied 49 percent since March 9 as companies from L’Oreal to Goldman Sachs Group Inc. reported higher-than-projected earnings, while the German and French economies unexpectedly expanded. The rally has driven the price- earnings ratio for the index up to 48.6, the highest level since June 2003, according to weekly data compiled by Bloomberg.
Remember in the end, stocks are just like any other commodity - supply and demand. If you have a Fed hell bent on throwing money in all directions and there is a limited supply of stock certificates and plenty more worthless US pesos chasing it; well economics 101 tells you what happens to prices. The ECB has made a ton of short term (1 year duration) money available as well to their collective banking system... Go Team Western Countries.

As always - valuations, China, yada yada yada - none of it matters until it matters... and then Sun Tzu strikes. Quickly. Unless Larry Summers can intervene. (allegedly)

I am growing incrementally more bullish on China, and more bearish on the U.S. as the Chinese market returns to Earth and this divergence between the 2 markets widens.

[Aug 15, 2009: Fibonnaci Stops Rally in China?]

Sunday, August 30, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 4

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Year 3, Week 4 Major Position Changes

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

Cash: 65.8% (vs 58.6% last week)
22 long bias: 12.2% (vs 17.4% last week)
10 short bias: 22.0% (vs 24.0% last week) *includes long term puts

32 positions (vs 36 last week)

Weekly thoughts
The market ended up slightly for the week but aside from the immensely speculative action in government sponsored financial firms, it was mostly a week of "blah" unless you are a daytrader. The greater market - and positions we held - gained one day, fell the next, gained one day, fell the next... but mostly made little progress in any direction; either long or short. We found very little to do... in the portfolio of names we hold or follow, almost nothing has been making consistent moves the past 2 weeks or so; but alas we failed to see the excellent values in Fannie, Freddie or AIG a month or so ago. There are times to attack and times to hold back and until we see something other than range bound activity we are content to hold steady awaiting a direction.

Looking at the 2 major indexes, I substituted the SPY (S&P 500 ETF) for this week's look at the S&P 500 technicals since there is a gap in the SPY that is not there in the S&P 500 chart that I'd expect to be filled shortly. It is just under 102; once again that will be the "easy short" just as we had an "easy short" to fill the gap at 98 that was created in late July. [Easy Short Trade Has been Made] That gap took 3 weeks to fill. Not displayed on the SPY chart but visible in the S&P 500 chart is a gap on the S&P 500 chart at 906 (roughly 90.6 on the SPY). I thought that would be filled within a few weeks of creation but that did not happen - so now it will be a homing beacon for some day in the future.

NASDAQ, after being a long time leader has turned into a laggard the past 3-4 weeks as government sponsored entities and banks, REITs, auto companies - anything subsidized by the government enjoy a rally while the tech heavy NASDAQ does not receive such a level of handout. On Thursday's "good news" by Dell (DELL) along with Intel's (INTC) pre-announcement of an increase in revenue guidance - the NASDAQ made its first leadership move in a while, but closed nearer to the lows of the day rather than highs.

Considering this now 7 week rally was borne on the back of a Goldman Sachs / Intel earnings surge in mid July, there would be some irony to see it close out on Intel good news - circle of life. Despite a mountain of warning signals: speculative fever at a code red level, short interest at very low levels, insider selling at highest levels in many quarters, valuations rich, China market falling substantially, Baltic Dry Index returning back to May's levels, natural gas prices (a true proxy for US industrial "recovery") at multi year lows despite being inside hurricane season... the market remains stubborn - corrections have been measured in hours most of the time. Bears have been completely decimated and the hope they had a few weeks ago when the 20 day moving averages on the S&P 500, and NASDAQ were broken only to be met with an onslaught of buying out of the blue - has been dashed. It feels as tough to be short now as it was trying to be long in late February 09.

If this market acted like it used to, with all the warning signals flashing - I'd be in a much more heavily short exposed crouch. But with constant support from "somewhere" at any period the markets look ready to roll over, it is like betting against the immovable object. In the old market, I'd say S&P 950s would be a very probable first level objective with gap fills on S&P 906 and NASDAQ 1800 the obvious secondary objectives. In the new subsidized market, I don't know which rules still work so we'll play it by ear.

I mentioned about a month ago, I was looking for this rally to peter out in weeks 6-7 and I'd get more bearish as we enter football season. September is the market's worth month, even though October is when many of its dramatic crashes have happened. Unfortunately since then I've been reading a lot of "September is the worst month" and some very high profile voices have been calling for corrections (Prechter, Kass) - which I wish had not happened. But right now I have no feel for where sentiment is... it feels like many people are bearish in mind set but unwilling to put money behind those calls. I do believe MANY people are only buying because momentum is on that side of the ledger, and momentum begets momentum. Which means when a true selling episode happens the potential is there for it to mothball because many of the buyers are weak hands - they are only buying because it's fashionable and they missed a large part of the rally and need to make up performance.

Now what does the market have going for it? #1 momentum #2 no one cares about valuation because either it does not matter to them or the argument is you can't value stocks on abnormal 2009 estimates and you can even throw out 2010 estimates because they will be smashed once we move to a normalized economy #3 year over year comparisons are about to get very easy. On the last point, we are about to enter a period where a year ago the world was frozen as Fannie, Freddie went into US ownership.. Lehman Brothers went under (but hey its up 200% Friday alone), Merrill Lynch could of went under if not for a shotgun marriage, and TARP was brought to us as the only way to save the world. So many companies have VERY easy comparisons year over year versus that period. If indeed valuations continue to mean nothing and we are willing to bid companies up based on this period versus a year ago, we can in theory continue this game for many more quarters to go. If all that matters is comparing "now" to "the end of the financial system as we know it" periods, we can find green shoots everywhere - very easy ones in fact. But I thought the market was a forward looking indicator? I will continue to say the seasonality of housing begins to waver in the months to come and just as housing "rebounded" to some degree summer 2008, it has again summer 2009. Without the $8000 handout to first time home buyers things would look far worse in housing than they appear now.

The week ahead will be dominated by Friday's monthly employment report; estimates are for losses of "low 200K" in jobs for the month of August. While a very faulty report - it moves the markets and that's why one must keep an eye on it. Aside from that we'll clap on auto sales Tuesday as we see handing money to people gets them to buy cars - while ignoring the near empty lots coming in the next 2 months. Tuesday also brings the very volatile ISM manufacturing number which I say at this point should be ignored since so little of our economy has to do with it but since auto mfg assuredly saw an uptick this number might "surprise" to the upside. We can also be "surprised" (for the 15th week straight) by existing home sales, which again is dominated by first time home buyers on the low end using 5.1% mortgages, 3.5% down FHA loans in which many states allow the $8000 handout to be used as down payment / closing cost. Incredibly, we find that people will buy homes when you cover the entire cost of getting them into a home - in fact it has become easier for the first time buyer to buy a home in many states than rent. With renting one actually has to come up with a deposit that does not derive from his fellow tax payer.

Overall I expect the story to be the same the next 2-5 months as we look at the much bigger picture. The market has effectively discounted a worldwide government and central bank tsunami of money - some well respected names are calling it the sugar high. The Keynesian belief is this flooding of money will lead to improved economic activity that will raise economic spirits and get people back to normal activity. In the US this means people with no savings will once again spend; and if they don't the government will send them money to shop with. If everything plays out so neatly as that, I say the government should double the amount of money each and every year they spend since then we can all sit at home and shop on Amazon.com - why bother with jobs anymore? They only hurt profitability at companies... let the Asians do the work, and we'll hit the malls. If the playbook works out and we're back to "normal" by middle of 2010 then the market should only gain from here as the market discounts that. If instead the US consumer (the driver of world consumption for 2 decades) is still impaired and will only return to his ways by yearly government handouts, then this should become apparent in the stock market in the coming months as it "discounts" the "new normal" we'll see in 2010.

That is if you believe the market is effective at discounting much at all... if you do, I ask what was the market discounting in October 2007... or February 2000.

p.s. will the "sell in May and go away?" strategists please come back on financial infotainment TeeVee and apologize?

Updated Position Sheet

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Cash: 65.8% (v 58.6% last week)
Long: 12.2% (v 17.4%)
Short: 22.0% (v 24.0%)

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.

*** Please note, I've added an options category for things I am holding longer than intraday.

(click to enlarge)

LONG (2 photo files)


SHORT


OPTIONS (long or short)


Niall Ferguson: Chimerica (China + America) is Headed for Divorce

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Love him or hate him Niall Ferguson is an opinionated fellow who makes you think. [Feb 4, 2009: Vanity Fair - Niall Ferguson: America Needs to Cancel his Debt][Jul 27, 2009: Niall Ferguson, Nouriel Roubini, Mort Zuckerman Interview with Fareed Zakaria] He currently is in an economic p***ing war with the New York Times Paul Krugman over this, that, or the other but I wanted to point out this interesting piece in Newsweek on how he views the long term relationship between Chimerica.

We have posed some thoughts along these lines (both countries shall begin an arms war over the world's resources and eventually China can use our debt / currency against us) but the question is "when" and "to what degree"? I've called the relationship (for now) co-dependent and I don't see that changing in the near term even if one side of the marriage is getting very peeved at the actions of the other - they are still stuck. [Feb 13, 2009: FT.com - China to U.S. "We Hate You Guys"] A decade out it should be a different story. As you read this, regular FMMF readers will see we've discussed many (if not all) of these issues in many pieces. What I want people to understand is the gambit the U.S. government and Fed has undertaken.

First the American people have spent like there is no tomorrow for a few decades and now are tapped out. (that's private debt) As these people went nuts on easy money policies, the banks were happy to feed the hunger. (that's private financial corporate debt) When both of these parties had nowhere left to go, and eliminating said debts would (a) cause a massive long term downturn in the economy that would be years in the making and (b) cause our financial system to implode - the government / Fed has stepped in and taken on much of the debt ... especially private financial corporate. And rather than support the paying down of individual private debt, the government encourages even more via innovative Cash for Clunker programs and multiple other 'spend' oriented incentives. The government now act as a subsidy for spending where the US consumer cannot on her own accord. And they have taken much of the risk away from the corporate financial elite and put it on future taxpayers. All this is the ultimate kick the can policy for which the U.S. has now become infamous for. And we are cheering it as a nation because it gives us subsidized goodies ... drives near term economic activity... and all at no cost!! A blessed situation.

However it is not that simple...thet risks of gathering as much of the nations private debt...especially corporate financial and layering it on top of an already egregious public debt will be borne in 1 place - the currency. But not yet - because many other Western countries are taking the same steps albeit (aside from the UK and a few smallish countries like Iceland) not at the level the U.S. has taken. And the U.S. is still seen as the world's safe haven and its currency is the reserve currency. It takes a long time to break long held notions. But let us be clear - that there is nowhere else left to hide the debt. There is no one to bail out the federal government other than the Federal Reserve. So the next crisis will simply require the Federal Reserve to monetize the debt by printing - which they have given us a preview of during this crisis. Hence, we've shifted all these debts listed above onto the balance sheet of the future American - via his/her currency.

***********************************************

Ferguson's thoughts below:

When does a rising power become a threat? There is seldom a single moment. A century ago, AngloGerman antagonism was still a relatively new phenomenon; an alliance between the two empires seemed plausible as late as 1899. Likewise, the United States took time to identify Japan as a serious rival in the Pacific region; it was not until the 1930s that relations really soured. In both cases, the perception of a strategic threat was slow to grow. But grow it did—and ultimately it led to war. Could the same be happening to the United States and China today? Are we imperceptibly but inexorably slipping from cooperation to competition?

Back in early 2007, it seemed as if China and America were so intertwined they'd become one economy: I called it "Chimerica." The Chinese did the saving, the Americans the spending. The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing.

As the Chinese strategy was based on export-led growth, they had no desire to see their currency appreciate against the dollar. So they intervened consistently in currency markets, and as a result, they now have international reserves totaling $2.1 trillion. About 70 percent of these are in dollar-denominated securities, and a large proportion of these are in U.S. government bonds. The unintended effect of this was to help finance the U.S. current-account deficit at very low interest rates. Without those low long-term rates, it's hard to believe that the U.S. -real-estate market would have bubbled the way it did between 2002 and 2007.

For a time Chimerica seemed like a marriage made in heaven: both economies grew so fast that they accounted for about 40 percent of global growth between 1998 and 2007. The big question now is whether or not this marriage is on the rocks. America's highly indebted consumers just can't borrow anymore. The U.S. savings rate is soaring upward, and U.S. imports from China have slumped, down 18 percent between May 2008 and May 2009. Of course, that doesn't mean the Chinese are going to stop buying dollars. They dare not allow their currency to appreciate when so many jobs in the export sector are under threat. But it does mean that they are questioning the Chimerica strategy.

It ' s a bit like one of those marriages between a compulsive saver and a chronic spender. Such partnerships can work for a certain period of time, but eventually the penny-pincher gets disillusioned with the spendthrift. Every time Chinese officials express concern about U.S. fiscal or monetary policy, it reminds me of one of those domestic tiffs in which the saver says to the spender: "You maxed out on the credit cards once too often, honey."

Let's look at the numbers. China's holdings of U.S. Treasuries rose to $801.5 billion in May, an increase of 5 percent from $763.5 billion in April. Call it $40 billion a month. And let's imagine the Chinese do that every month through this fiscal year. That would be a credit line to the U.S. government of $480 billion. Given that the total deficit is forecast to be about $2 trillion, that means the Chinese may finance less than a quarter of -total federal-government borrowing—whereas a few years ago they were financing virtually the whole deficit.

The trouble is that the Chinese clearly feel they have enough U.S. government bonds. Their great anxiety is that the Obama administration's very lax fiscal policy, plus the Federal Reserve's policy of quantitative easing (in layman's terms, printing money), are going to cause one or both of two things to happen: the price of U.S. bonds could fall and/or the purchasing power of the dollar could fall. Either way the Chinese lose.

Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn't address the currency risk. In a best-selling book titled Currency Wars, Chinese economist Song Hongbing warned that the United States has a bad habit of stiffing its creditors by letting the dollar slide. This, he points out, is what happened to the Japanese in the 1980s. First their currency strengthened against the dollar. Then their economy tanked.

What is China's alternative if it seeks a divorce from America? Call it the empire option. Instead of continuing in this unhappy marriage, the Chinese can go it alone, counting on their growing economic might (according to Goldman Sachs, China's gross domestic product could equal that of the United States by 2027) to buy them global power in their own right. In some ways they've already begun doing this. Their naval strategy clearly implies a challenge to U.S. hegemony in the Asia-Pacific region. Their investments in African minerals and infrastructure look distinctly imperial too. And now the official line from Prime Minister Wen Jiabao is to "hasten the implementation of our 'going out' strategy and combine the utilization of foreign exchange reserves with the 'going out' of our enterprises." That sounds like a Chinese campaign to buy up foreign assets—exchanging dodgy dollars for copper mines.

At the same time, crucially, the Chinese need to have their own domestic consumers step up to take the place of over leveraged Americans. China's economy is, above all, a manufacturing concern; if no one is going to the shopping malls, China's companies are just building their inventories. So a post-Chimerican China needs to be not only an empire, but also a consumer society. This will boost China's internal market as well as trade with its Asian neighbors, and will spur the development of an Asian economic bloc.

The global implications of this divorce are huge. Imagine a new Cold War, but one in which the two superpowers are economically the same size. Or, if you prefer an older analogy, imagine a rerun of the Anglo-German antagonism of the early 1900s, with America in the role of Britain, and China in the role of imperial Germany. This is a better analogy because it captures the fact that a high level of economic integration does not necessarily prevent the growth of strategic rivalry and, ultimately, conflict.

We are a very long way from outright warfare, of course. The tectonic plates of geopolitics don't move that fast. But the danger signs are there. In a succession of official and semi-official statements, Chinese spokesmen have signaled their interest in a substitute for the dollar in the form of International Monetary Fund Special Drawing Rights, or even gold. At the very least, a gradual increase in the share of euros and yen in Chinese reserves must surely be in the cards. But they could go further than that. It's not impossible that, at some point within the next five to 10 years, the Chinese will feel ready to remove their capital controls and allow their own currency, the renminbi, to develop as a freely convertible international currency. At that point, the Chimerican marriage will be over. Not too surprising, really. As the name implied, such an unbalanced relationship was always something of chimera.

Ferguson, a NEWSWEEK contributor, is author of The Ascent of Money: A Financial History of the World.


Saturday, August 29, 2009

Lehman Brothers (LEHMQ.PK) Up 200% Friday

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Thanks to a reader for alerting me on this action Friday - the shell known as bankrupt Lehman Brothers (LEHMQ.PK) which now trades on the pink sheets rallied a solid 200% Friday. And why not - fundamentals no longer matter; even having a functioning business is just an afterthought.

As long as you have a shell that one high frequency trading firm can trade with another (or if you are real clever, I assume the same HFT firm can work in the dark pools and trade among themselves to create "demand" - not that this would ever happen because its illegal) - and lo and behold you can attrack other HAL9000s and the retail trader in.

What is inside that shell is really a moot point. The key is generating volume and earning rebates for each trade since you are adding liquidity - the cheaper the better (more shares = more rebates). Boo yah. Via Reuters:
  • It’s either a sign of sheer boredom on Wall Street, or an early celebration of the one-year anniversary of Lehman Brothers’ demise, but shares of the fallen investment bank were red hot today. The stock rose some 200%. Take that AIG.
  • For some inexplicable reason, shares of the bankrupt investment bank, which trade on the loosely regulated over-the-counter Pink Sheets, changed hands some 73 million times on Friday. That’s a lot of trading in a stock that’s been worthless for nearly 12 months. Indeed, on a typical day, the average trading volume in Lehman shares is about 2.6 million.
  • Then again, today’s trading surge boosted Lehman’s closing stock price to 15 cents. It had been sitting around 5 cents for months. Better yet, Lehman now has a respectable market cap of $103 million–not too shabby for a small-cap company on the Pink Sheets.
  • Of course, this trading in Lehman is just crazy. There’s not good explanation for it. Just as there is no good explanation for the big surge in shares of American International Group.

After watching Lehman I have decided to take the website public, under symbol FMMF - I believe I too deserve a market capitalization of $100M. I have 1 employee named Mark. I'd tell you some more of the fundamentals - but really it's a moot point. I just need a few HFT firms to take notice and start trading FMMF shares so we can draw in some retail daytraders and then it all self reinforces from there - we can all win here. I also have a llama farm I'd like to take public - symbol: LLAMA. I have another firm I want to take public, it does nothing in particular but I figure should be worth $50M since by doing nothing it is not losing money - symbol: FARCE.

The US stock market ... now akin to a scratch off ticket at your local liquor store.

March 6, 2009: Generational Bottom? What Was 'Fund My Mutual Fund' Saying

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I caught a neat post from The Reformed Broker blog titled "What Your Favorite Blogs Were Saying at the Bottom". Despite not being one of the Reformed Broker's favorite blogs, if you are reading this I am sure I am *your* favorite blog and you are what matters. ;)

The bottom in retrospect was March 6, 2009 - it was a Friday and we hit the foreboding S&P 666 level intraday before closing at 683. It's been just about straight up since. Noted hedge fund manager Doug Kass has called this a generational bottom i.e. we won't see those levels tested for a generation. Of course we won't know until we look back in 20 years but for now it is looking like a great call. Like Doug I was trying to get more long oriented the 2 weeks previous as I was counting on a rubber band effect... the S&P 500 in fall of 2008 had fallen an almost unheard of 38% below the 200 day moving average. Coming into that week the S&P 500 had fallen to 32% below....

As the market went into another free fall week after week in late winter 2009, I kept track of how far the rubber band was being pulled back ... 25% below the 200 day, 28% below, 33% below... 36%... I kept trying to get long some stocks in the 2 weeks previous to March 6th and kept getting my head handed to me. Looking at my position sheet that week, I was (considering it felt like the world was ending) aggressively long with 33% long, and only 11% short (rest in cash). Being even 2 weeks early on the "reversal of the ages" actually hurt. Then eventually we hit 38% the week of March 6th- as far below where the market was at the worst in fall 2008; keep in mind fall 2008 had a week where the market lost 20%. Yet we KEPT going down, indeed we reached 40% below the 200 day moving average on that fateful day: March 6th.

For curiosity sake I wondered what I was saying on that day and right before and after. Here is how the week played out.

Ironically with AIG surging hundreds of percent this week, back in March we were talking a lot about the AIG itself, and how the 100% payoffs for AIG's obligations basically were a handout to other financial firms. In most bankruptcies, creditors are happy to get 30 cents on the dollar, but the US taxpayer is a poor negotiator and was happy to pay 100 cents on the dollar.

Sunday March 1st, I posted an excellent piece by NY Times Joe Nocera on how AIG got to be where it was, and why it was so central to the global financial system - AIG: Propping Up a House of Cards

Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions. The recent quarterly losses suffered by Merrill Lynch and Citigroup — “only” $15.4 billion and $8.3 billion, respectively — pale by comparison.

At the same time A.I.G. reveals its loss,
the federal government is also likely to announce — yet again! — a new plan to save A.I.G., the third since September. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. It has softened the terms it set for the original $85 billion loan it made back in September. To ease the pressure even more, the Federal Reserve actually runs a facility that buys toxic assets that A.I.G. had insured. A.I.G. effectively has been nationalized, with the government owning a hair under 80 percent of the stock.


Again it is amazing to read that when you consider how the stock acts now - by amazing I mean infuriating but anger has no place in America anymore. We simply live in a win, win, win society where there are no costs.

That Sunday night Harry Markopolos appeared on 60 Minutes explaining how he basically tried to hand Bernie Madoff to the SEC for close to a decade.

At the time things were so dire, and the mood so dour I had taken to posting panda pictures (pandas are soothing, cute creatures) in many posts - including my weekly summary.

Yet another horrible week in the markets with the S&P 500 down -4.5%. While we have outlined how flawed the Dow Jones Industrial Index is [Reuters: Is it time to Overhaul the Dow?] it is the oldest index at 113 years old, so these data points are staggering. We just came off the worst (by %) January in history; and followed it up by the second worst (by %) February in history. Back to back. Thrown on top of horrific Sept, Oct and most of November. This 6 month stretch is debilitating if your sitting in a fully invested long only account - you can almost hear the 401k withdrawals and mutual fund closings in the wind....

Remember, at its worst in history the S&P 500 traded 37% below the 200 day moving average (Nov 2008) 25% used to be considered "extreme". Where are we today? Roughly 1080 on the 200 day moving average, so S&P 735 is 32% off. The rubber band is being pulled farther... and farther... and farther - eventually it will be released and we'll "snap" back upwards. If you are curious - to get to a 37% distance from the 200 day moving average we'd have to get to S&P 680. So yes Dorothy - it can get worse from here.


On the plus side the sharper we fall, the more pronounced the following rebound will be (small comfort) - timing that turn is very difficult and if November 2008 is any indication if you are 2 hours late you missed half the rebound.

If you have been reading the blog longer than a few months you now see how silly the
cheerleading of "it's a new year! therefore it must be better" OR "2008 was so bad, surely we will rebound in 2009" OR "the first 5 days of the year clearly identify how the year will go" - all Kool Aid handed out by the sirens of punditry. We said the market was still way overpriced (and in fact - sadly - still is) and that 2009 will ping pong between hope and reality. We started the year off with hope and have been facing a relentless onslaught of reality since. Now let's be clear - hope will come back at some point... and just like the action 8 weeks ago did not "signal the economy is improving" (as the talking heads screamed) the same will be said for the "coming rebound".


How quickly things change...

Monday, the 2nd - by mid afternoon the S&P 500 was down another 4%. I posted the S&P 500 was now 34% below the 200 day moving average. We wrote about another wave of hedge fund withdrawals that looked set to hit, which in theory would extract even more pressure on the market.

Louise Yamada
showed on up on CNBC's Fast Money - when she appeared the previous fall the market bottomed within a week. Amazingly her Fast Money appearances now seem to be the contrarian indicator! She of course called for S&P 600 back in November 2008 which she reiterated, and also gave the same "potential to S&P 400" call she mentioned in November.

Tuesday, the 3rd - Nouriel Roubini showed up on Yahoo Tech Ticker and CNBC. Unfortunately, instead of sticking to making good economic calls he turned into a stock market prognosticator and his infamous S&P 600 call also surfaced.

We posted a story on how Germany's auto sales were booming (10 years highs) based on Cash for Clunkers... I said I was surprised Obama had not latched onto it. As always, I tend to be early.

Frankly, it's just a direct subsidy to car makers disguised as a rebate check but hey, it seems to be working in Germany. Surprised Obama has not latched onto this since you could make an environmental case to boot (older cars being less Earth friendly)


After the bell Google announced they are not immune to the economy and traders dumped it an additional 3.5% after hours.

Oh boy, and here is an interesting one - you know how Jim Cramer says he was calling the bottom, as he agreed with Doug Kass. Revisionist history seems to be Jim's hallmark. You want to know who called the bottom in stocks? President Obama!! In [Barack Obama: Buy Stocks; Jim Cramer - Stop it Obama!] we posted 3 videos - Obama said stocks were a good value (the video is no longer available on that entry but surely can be googled) while Jim Cramer was arguing with Erin Burnett that the market was not a place to be; meanwhile Robert Gibbs actually made remarks about Cramer's viewpoints. Hilarious in retrospect. Just like Jim called for a housing bottom in 2006... and now claims he says it would be 2009 :)

This is all starting to get surreal - I feel like a fiction writer nowadays. Now that President Obama has destroyed the payday lenders and much of the healthcare sector I am wondering if he finds value in those sectors. I am hoping he starts a stock blog so I can pick up some specific tips...


Cramer: "We're going lower" "I see no reason to own bank stocks" - etc etc. Sounds like a bottom call to me. Here is the irony - Jim has been attacking Nouriel Roubini endlessly the past few months for not calling the economic or stock market bottom. But if you look what I just posted above, on the 3rd of March both were in complete agreement. That said, Nouriel is not good at revisionist history... just remember, Jim Cramer was there with Doug Kass calling the bottom - it will be the basis of his coming book.

Wednesday, the 4th - Jim Rogers said to let the financials fail. Not in America Jim - remember we are not Japan and please don't call them zombies. If only you could see their stocks fly up 100s of percent 6 months later.

We noted 1 in 5 Americans were underwater on their mortgages and reiterated our long held call this would hit 1 in 4.

The market was actually up that day, so I covered the last of my Apple short and brought out the heavy guns... Kool Aid man.



Thursday, the 5th
- Jon Stewart had been all over the stock market, and begun his turf war with CNBC at large. Joe Nocera actually paid a visit that week to speak more of AIG.

Look things were out of control - this blog author went to the extreme of asking readers to send him positive economic stories; that's when you know it's bad.

I noted how many times we rallied on nonsense, specifically in the financials - the latest incarnation in fall had been "Tim Geithner would save us" - I said it was now clear he had not saved us. But that had not stopped the market from rallying

Since Tim Geithner has opened his mouth the S&P has fallen from 870 to 682; thats nearly 22% or a full bear market Tim. I am not placing the blame on him; I am just shaking my head at the excitement over his magical speech and 'thesis' buying, even to this day. We also rallied 3-4% in an hour when he was announced late in 2008 because after all - he walks on water and the government will make all our problems go away. If its not one Treasury secretary its another - someone will save us. False idols.


That should sound familiar to you - just replace Tim Geithner with Alan Greenspan, or Ben Bernanke and our idol worship continues. The more things change...

That day we were also getting more details on Obama's handouts to current mortgage holders - in theory saving 1 in 9 mortgage holders in America - so much wasted national treasure.

Friday, the 6th
- so this was the bottom. Clearly it was bad as I was posting stories about opportunities to move to Canada - Saskatchewan in particular. Look folks, per Fox News I hear any Canadian that has to go to doctor's office usually dies immediately*, so if I was posting stories about moving to Canada you know we were in dire straits.

*fair and balanced

The New York Post asked where was Paul Volcker - we also wondered but it had already been made clear he had been ambushed by Larry Summers. Based on generations of future Americans we were to steal from in the coming months to make today's generations happy - his "disappearance" will be something our grandchildren and great grandchildren will rue as the only voice in reason turned into a hood ornament.

As the markets crumbled down to S&P 666, I threw on a 6% short exposure on Amazon.com in case (and I literally used the words) an End of Days scenario occurred Monday. Remember, October 19, 1987 was a Monday.

The previous night Stephen Colbert created the Doom Bunker. Stephen, completely unnecessary - but you might want to build one for the great grandchildren. By taking from them, we saved ourselves - I believe the new term is generational theft and its at a 52 week high. Boo Yah!

The AIG counterparty furor grew, but as all American leaders know - you simply must lay low during times of crisis and let the furor pass - the peasantry soon loses all interest as it moves on to American Idol, Jon and Kate Make Eight, or NFL (the boob tube = modern day gladiator games)- whichever part of the year we happen to be in. In fact if you wait long enough a company that owes the US 30x its market capitalization can run up 100% of percents making a slice of said peasantry mad money. Only in Cramerica.

Saturday the 7th... the day after - details of the government's handouts to countless international financial firms finally made the press. I could only do one thing - do the ultimate contrarian act - post a series of happy videos on the blog.

And that folks is a look back of just 1 week of 2 crazy years.

Friday, August 28, 2009

Sampling of News Stories Today;FDIC Troubled Bank List (Yawn), Apple (AAPL) iPhone into China, Detroit & Whirpool Cut Workers,Steel Production Rebound

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There is a smattering of interesting stuff on Bloomberg today, but nothing large enough to put into 1 separate entry so let me combine them.

(1) First let me say I normally post the FDIC troubled bank list (every quarter) with some analysis and warnings....
  1. [May 27, 2009: FDIC Troubled Bank List Now 305]
  2. [Feb 26, 2009: FDIC Troubled Bank List Up to 252]
  3. [Nov 25, 2008: FDIC Troubled Bank List Grows 46% - Is Your Bank Safe?]
  4. [Aug 26, 2008: FDIC Troubled Bank List]
.... but I think it's become a moot point. After all our trouble are over (see financial stock performance) At least if you are big enough to be attached to the government teat. But enough sarcasm - the real reason is Citigroup (C) & Bank of America (BAC) which required $300B (each!) of taxpayer assistance were never "troubled" enough to make the list. How do we know? Because not only do we see the # of troubled institutions but the aggregate dollars in said institutions. If any of our "too politically connected to fail" financial oligarch entities made the list it would stick out like a sore thumb in the asset area.

Aside from Citi and Bank of America never being troubled enough to make the list, the FDIC missed Washington Mutual - the largest S&L in America which was so untroubled it was forced in a firesale into JPMorgan as the stock rallied to $0ish. Meanwhile a no name blogger named Mark said Washington Mutual would fail on these very virtual pages - but he does not work at the FDIC.

Earnings should continue to dominate and the market reaction to Bank of America (BAC) Monday, and Wachovia (WB) and the death spiral that is Washington Mutual (WM) on Tuesday will be telling. The latter is the largest Savings & Loan in America and frankly appears headed for IndyMac status.


And then IndyMac, which was small enough that the US government allowed it to fail, was never on the list - although at the time it was the 3rd largest failure in US history. Apparently it passed under the radar of the FDIC. So what use is a list when we missed the 2 largest commercial banks in America (by missed I mean "would not admit they were troubled"), the largest S&L, and then even in the quarter before it failed, did not include IndyMac? It's a moot point but for amusement reasons we hear the "list" its up to 416 institutions now; just remember the top 19 banks in America have been deemed too large to fail (pinky swear arrangement), and ring fenced by our politicians so they will never make the list. Hence now hedge funds across the world are piling in since you, dear reader, are backstopping their investment. It's good to be an oligarch - or investor. Taxpayer? Not so much.






(2) Some local flavor in this one; if you want to see how bad things have to get for local governments to cut workers - Detroit has been in a 30 year downturn, the past 10 have been awful. Population has been cut in half. - see video here [May 15, 2008: One City Block in Detroit] to see that part of your country has turned into a 3rd world backwater. But finally the city comes to the realization it needs to cut a few workers... a whopping 200. And I will tell you from experience the protests are going to be immense - I would not be surprised to see them hired back in fact! Again, please reinforce to your children it is imperative to work in the public sector - your job is almost completely immune from reality. Even in a city like Detroit it takes decades to lose positions.
  • Bing, a Democrat, warned earlier this month that Detroit would run out of cash by October and may seek receivership unless the city’s 10,000 unionized workers agreed to wage reductions. Tax receipts and state aid have fallen as area unemployment surged to 17.1 percent in June.
  • The gap in Detroit’s $1.5 billion budget has risen to $275 million since 2007 from $155.6 million, according to Moody’s. In the 2010 fiscal year that began July 1, the deficit is expected to rise another $60 million to $70 million.





(3) Speaking of lost jobs (remember, jobs are a backwards looking indicator and the US economy can roar without them) Whirpool (WHR) will cut another 1100 people in 2010. While this is tiny versus previous cuts at Whirlpool and many other companies, it should shout at you to buy Whirlpool stock. Why? Because this means they can beat analysts estimates in 2010 - boo yah. More prosperity. Ironically, Whirlpool is cutting jobs in advance of a taxpayer giveaway in terms of "Cash for Clunker Appliances" which is just about to launch. [Aug 20, 2009: Cash for Clunkers Coming to Your Kitchen and Laundry Room] Strange - everyone tells me the economy is rebounding. Anyhow don't get bogged down in details about the economy (cursory "green shoots" sighting here); just know Whirpool's profits shall increase ever more. Hopefully other companies take their lead and continue to shed more workers as well, so profits can rise exponentially in the quarters to come. Then we can have Asians buy fridges overseas, while the US government hands money to unemployed Americans to buy domestically. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] The perfect economy. Evansville, Indiana - welcome to the new US economy paradigm.
  • Whirpool, the world’s largest appliance maker, will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs as the housing slowdown hurts demand.
  • Last year, the company said it would fire 5,000 employees through 2010 to cut costs.
There IS a bright side - I want you to get long Chinese stocks and Mexican stocks along with Whirpool - the consumers there will still have jobs.
  • The plant’s refrigerator production will be moved to an existing factory in Mexico.
Ross Perot, yes I do hear the great sucking sound. And it feels good! As jobs Americans "won't do" leave the country we are replacing them with more government and healthcare work Ross. Working fantastic. New game changing industries to add jobs in place of those that are shifted overseas? Why bother Ross. That's what government is for. See entry above re: Detroit. I remember they called you a bit crazy Ross. They called Ron Paul crazy. And they call me crazy. It's crazy here outside the Matrix, I want to go back in where unicorns and butterflies live.






(4) Speaking of China, Apple (AAPL) is set to sell the iPhone in China. No surprise but just more incremental bullish data for Apple. Thankfully many Chinese have jobs and save money so I don't think "Cash for iPhone Clunkers" will be necessary.
  • Apple iPhone will go on sale in China in the fourth quarter, entering a market that has more wireless subscribers than the combined populations of the U.S. and the 16 nations that use the euro.
  • “It’s essential for Apple to be in China; it’s a huge market,” said Bertram Lai, deputy head of research at CIMB Securities (HK) Ltd. in Hong Kong. The iPhone “is not just the premium product, it’s an aspirational product,” he said.
  • Shipments of smart phones -- handsets that can handle Web browsing, video and applications -- will more than triple in China by 2013, up from last year’s unit sales of 11 million, said Aloysius Choong, a Singapore-based analyst at IDC.
Should also be a benefit for China Unicom (CHU) who appears to be the first distributor, although it is not an exclusive deal.
  • Unicom, which trails China Mobile Ltd. in the wireless market, may use the iPhone to attract higher-spending customers and bolster demand for more profitable Internet services, such as Web browsing and game downloads. Unicom announced the agreement with Apple as it reported a 45 percent decline in first-half profit today.
  • The company is the only Chinese carrier using technology that’s compatible with the iPhone, according to Clark.
  • Unicom will subsidize the iPhone handsets, Chang said, without saying how much they would sell for. Prices of the iPhone 3G in Hong Kong range from HK$4,488 ($579) to HK$6,288, according to Apple’s Web site.
  • Unicom had 141.1 million wireless-phone users at the end of July, fewer than a third of China Mobile’s 497.7 million. The company plans to invest 100 billion yuan ($14.6 billion) in mobile services during 2009 and 2010, with most of the money going into so-called third-generation networks.
We obviously are invested in a bevy of "mobile internet" and "China upgrade" names - they are currently being ignored as investors pile into ... well, see the previous post.






(5) Contrasting to what China appears to be doing , steel production is increasing elsewhere.
  • OAO Novolipetsk Steel, Russia’s largest producer, raised its 2009 output forecast today, and Voestalpine AG, the biggest in Austria, ended shortened working hours and restarted a blast furnace.
  • The price of hot-rolled coil, a benchmark steel product, has rebounded 15 percent since March 31 after declining 55 percent in the previous three quarters, according to data supplied by Metal Bulletin. Steelmakers cut prices, output and staff numbers in the second half of 2008 as builders and automakers struggled to survive the world economic crisis.
  • Demand will increase from here, but fairly slowly,” John Kovacs, an analyst at London-based metals consultant CRU Ltd., said today by phone. “The risk is whether too much capacity comes back to the market too soon, which may cause a ‘two steps forward, one step back’ type of recovery.”
  • Tata Steel Ltd., the biggest Indian steelmaker, said Aug. 21 its Corus unit would reopen a mill in Wales. ArcelorMittal, the world’s biggest steelmaker, last month said it was restarting furnaces in Belgium, France and Spain. On July 28, U.S. Steel Corp. Chief Executive Officer John Surma said some plants were firing up again as orders improved.





---------->>> So this situation in steel is a direct parallel to the big questions of the day for world government's, and world investors. The largest stimulus in history by central banks and world government's has just been undertaken, making Keynes aficionados proud of their accomplishments.

Now that loads of debt have been added to government balance sheets, what happens after the government and central bank efforts wear off? Will the US consumer - the champion of the world for 2 decades take his mantle back in early 2010 so a "natural" global supply and demand can somehow reassert itself, as the stimulative efforts of world governments wear off? Or will he / she have to show up in 2010 at all? Surely another US stimulus plan as unemployment stays high and politicians panic, cash for clunkers 2.0, and a new housing stimulus ($15,000 for anyone with a pulse) will await us this winter. Will responsible US citizens who save money finally backlash against the irresponsible handout takers ? Is there any breaking point for the former group? Or will the majority who gladly take any money handed out to them continue to dominate?

Will Mark be correct in his long term theory that is indeed just 1 long historic recession only interrupted by a tsunami of government spending that makes it look like a double dip recession?

Stay tuned - same bat channel, same bat time.

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