Wednesday, March 30, 2011

Copper Continues to Not Confirm the Equity Market's Giddiness

Speaking of "Doctor Copper" we continue to see a divergence between the equity markets domestically, and the state of affairs in the copper market.  The chart below has a 1 day delay, but copper is down nearly 2% again today, under $4.27, breaking back below the 50 day moving average.  Something's amiss...

No position

WSJ: State and Local Revenue Bounces Back

Actual good news here - at least partially.  Tax revenue has almost bounced back to pre-recession highs as of year end 2010.   This is a much needed event, considering so much money has come into the states the past few years via federal stimulus.  Of course spending has increased during that time, since government is always expanding (plus all those public worker healthcare and pensions costs) so revenue levels of 2011 need to eventually get much higher than those of 2007/2008 to keep pace.

What would be interesting to know, but is immeasurable do to all the moving parts, is how much of this rebound in revenue is due to higher taxes & fees versus a general increase in economic activity.  Further the states are doing better than the local municipalities, since the latter relies far more heavily on property taxes.

Via WSJ:

  • State and local tax revenue has nearly snapped back to the peak hit several years ago—a gain attributed to a reviving economy and tax increases implemented during the recession.  But the improvement masks deeper problems for state and local governments that are likely to linger for years.
  • To weather the recession, state governments relied on now-depleted federal stimulus funds, which allowed them to put off painful cuts that would have otherwise been necessary to balance budgets. Meanwhile, demand for government services and the tab for public-worker pensions and health care have continued to grow.
  • Total tax receipts for state and local governments hit $1.29 trillion in 2010, just 2.3% shy of the $1.32 trillion taken in during 2008, not adjusted for inflation, according to Census Bureau data.  Peak tax revenue was reached during the first year of the recent recession, which began in December 2007, due to the usual lag between the time a downturn hits and when it is reflected in tax receipts.
  • The latest tallies show a diverging trend in the fiscal health of state and local governments. While state tax revenue increased every quarter of 2010, including a 6.7% jump in the fourth period compared with a year earlier, local tax revenue fell in the first and fourth quarters—in part because of slumping real-estate tax receipts. 
  • While states are primarily funded by sales and income taxes—which tend to grow along with an expanding economy—the nation's 89,000 cities, school districts and other local governments depend heavily on property taxes. 

  • Local "governments are still very much in the midst of the downturn and are likely to have a couple of tough years ahead," says Chris Hoene, director of research for the National League of Cities, adding that local governments will struggle until there is a rebound in housing markets.
  • State income-tax revenue jumped 10.9% in the fourth quarter of 2010 compared with a year ago, as Americans' healthier incomes and stock-market gains translated to higher income-tax payments. Sales taxes grew 1.9% over the period, according to the Census.
  • While state finances are improving, their current fiscal woes largely reflect lingering problems that have yet to be resolved. For decades, the cost of state and local government has risen faster than overall inflation, in part because of pension and health-care promises governments made to their employees.
  • Meanwhile, in the 2012 fiscal year that starts in July, states will no longer have the roughly $150 billion in stimulus funds that over the past two years have been used to fill gaps in states' budgets. That means governors and legislators are just now considering cuts that, but for the stimulus, would have been made years ago.
  • The growing stress on local governments is likely to put more pressure on state budgets, even as states' own revenues improve. State and local finances are intertwined, with states paying for many local services. Also, cities' fiscal woes can raise doubts among bond investors about a state's fiscal health.

Easy Enough, S&P 1330 is Here

Well that was easy enough.  We've now rallied 6.5% straight up in just under 2 weeks.  S&P 1330 which was the old incremental high is now being touched, and once we climb over that level the technical problem we had a few weeks ago in terms of lack of a new higher high will be over and done with.

A few more gap ups in the overnight session and we'll be at highs of the years.... looking at the chart we've gapped up 6 of the past 10 sessions.  Amazing.

Apparently short of nuclear implosions and/or fears of major European debt meltdown (Ireland, November 2010) the market no longer has the ability to go down.  And even those events, only caused 3 weeks of issues.  Those are the only two things that could stagger this market even momentarily since Ben Bernanke added 'pushing the stock market up ' as the Fed's 3rd initiative at Jackson Hole, Wyoming late last summer.  Since the Fed's two other initiatives (price stability and full employment) are not working, I guess he wanted something much easier to handle.  1 for 3 ain't bad.

V shape is the new normal.... what you knew before 2009 is no longer of use.

WSJ: In India, Doubts Gather Over Rising Giant's Course

While I read this piece in the Wall Street Journal, I was struck by the parallels you see in the U.S. - of course, it goes without saying being poor here is a very different thing than being poor in India or any emerging or developing country.   But the distinction between who is benefiting and who is not in the economy, [Oct 22, 2010: Reuters Special Report - The Haves, the Have Nots, and the Dreamless Dead] along with political dysfunction, corruption, empty promises, and the like sounds so very familiar.   Little known fact - after the U.S. the country with the most billionaires at Davos was India. 

I would assume at some point in the future, to make sure the hundreds of millions at the bottom don't start an uprising, the Indian government will follow the American policy of circus and bread to keep the lower tranches of society occupied and fed. A very good read for those who are investing in India to understand the backdrop.

  • India's economy is going great guns. Among the world's major nations, its growth is second only to China's. Yet in recent months, the mood in the planet's most-populous democracy has soured badly—to the point where even some of India's richest people have begun to complain that things are seriously amiss.
  • No one is disputing that the boom has created huge wealth for the business elite and much better lives for hundreds of millions of people. But the benefits of growth still haven't spread widely among India's 1.2 billion residents. And a string of corruption scandals has exposed an embarrassing lack of effective governance.  (after the first few sentences, I thought the story was about the U.S.
  • This wasn't supposed to be the picture 20 years after India abandoned its Soviet-style, centrally planned economic model, embraced capitalism and jump-started economic growth. Historic reforms begun in 1991 held out the promise of transforming the country from an agrarian backwater into an industrial powerhouse, lifting almost everyone's standard of living in the process. 
  • India enjoyed years of heady growth, despite problems its East Asian peers didn't share, such as its deep caste divisions. Now, though, a host of problems has stalled the transformation.  The public-education system is a shambles. No significant publicly owned businesses have been privatized in years. The promised modernization of the financial system has happened only in fits and starts. Land reform needed to stimulate industrialization has been a political nonstarter. And malnutrition remains widespread. 
  • Ravi Venkatesan, until this week chairman of Microsoft Corp.'s India arm, says his nation is at a crossroads. "We could end up with a rather unstable society, as aspirations are increasing and those left behind are no longer content to live out their lives. You already see anger and expressions of it," he says. "I strongly have a sense we're at a tipping point: There is incredible opportunity but also dark forces. What we do as an elite and as a country in the next couple of years will be very decisive."
  • India's economic liberalization was kicked off by a financial crisis in 1991, when the nation was on the verge of defaulting on its debt. Manmohan Singh, the nation's current prime minister, was finance minister at the time. The initiatives he introduced staved off financial collapse.  Economic growth, which had fallen to about 1% in 1991, quickly picked up. 
  • In many important respects, the changes turned this nation into a success story. Life expectancy rose to 64 years in 2008, from 58 in 1991. Literacy has risen. Hundreds of millions have seen their incomes improve. Per capita gross domestic product increased to $3,270 in 2009, from $925 in 1991, according to the World Bank. 
  • Other important gauges of national well-being paint a more troubling picture. "What has globalization and industrialization done for India?" asks Mr. Venkatesan, Microsoft's former India chairman. "About 400 million people have seen benefits, and 800 million haven't."
  • Calorie consumption by the bottom 50% of the population has been declining since 1987, according to the 2009-10 economic survey conducted by India's Ministry of Finance, even as those at the top of society struggle with rising obesity.  (seems like an ideal time for a food stamp program to keep the poor from getting unruly 
  • Infrastructure in cities and the countryside remains woefully inadequate: In recent years, China has added, on average, more than 10 times as much power as India to its electricity grid each year.
  • Data from McKinsey & Co. show that the number of households in the highest-earning income bracket, making more than $34,000 a year, has risen to 2.5 million, from 1 million in 2005. But the ranks of those at the bottom, making less than $3,000 a year, also have grown, to 111 million, from 101 million in 2005.  
  • But among the most visible signs of India's modernization is an entrenched consumerist creed. Sales of luxury goods are booming. Mansions are replacing one-story homes in middle-class neighborhoods. Upscale malls are sprouting up around the country.  
  • Many of the urban poor, in contrast, are slipping backward because of rising prices—a persistent and destructive accompaniment to India's high growth rate.  Food inflation today is running at about 10%, and general inflation in excess of 8%.  
  • Politics are partly to blame for stalling the liberalization drive. The Congress party, which has ruled the nation for most of the 64 years since India gained independence from Great Britain, depends on smaller regional parties to maintain its governing coalition in parliament. That makes policy formulation risk-averse, since small allies hold the power to break ranks and sink the coalition.  
  • Frustration over the economic miracle's limited trickle-down is fueling political movements around the country. Most base their appeal, in part, on the idea that the poor are being ill-served in the new India.
  • But corruption is considered more prevalent now than ever before, because economic expansion has created more opportunities for graft—for example, in the granting and funding of infrastructure projects.
  • The amount of business activity that evades direct taxes has soared, says Arun Kumar, chairman of the Center for Economic Studies and Planning at Jawaharlal Nehru University in New Delhi and a specialist on the "black economy."   A landmark study in the mid-1950s, he says, estimated that the black economy accounted for 4% to 5% of India's gross domestic product. Rather than declining, he says, the black economy has become systemic. He estimates it reached 40% of GDP by 1996, and 50% by 2006.  (that is simply astounding)  "The reason it has grown is that illegality in society has become more and more tolerable," he says.  
  • India's modernization was expected to prompt a mass movement of workers from farms to factory floors—a critical component in the transformation of China, South Korea and other Asian nations. But manufacturing as a share of India's economy stood at 16% in 2009, the same as in 1991, according to the World Bank.  
  • Services have increased dramatically as a proportion of gross domestic product, rising to 55% in 2009, from 45% in 1991, according to the World Bank, becoming the chief engine of India's economic strength. But many of the fastest-growing areas, such as finance and technology, employ relatively few and rely heavily on skilled employees. The entire software and technology-services sector, including call centers and outsourcing, directly employs just 2.5 million workers, a tiny fraction of the overall work force.
  • Agriculture's share of the economy, meanwhile, has declined to about 17% in 2009, from 30% in 1991. But the number of people working in agriculture hasn't dropped commensurately, according to Arvind Panagariya, a professor of Indian political economy at Columbia University in New York. "The dependence on agriculture remains incredibly high when you compare India's high-growth phase with others," he says. "The potential of the country is to grow at 11% to 12%, and it's growing only at 8% to 9%."

"Doctor Copper" Turning into "Banker Copper" in China?

A quite fascinating blurb in's Alphaville popped up yesterday, calling into question the reasoning behind the huge copper stores in China.  If one is to believe this report, it appears copper - generally used as an indicator of economic activity due to it's use in so many applications (hence the term "Doctor Copper") - is now being used as a form of fiat currency, by property developers trying to work around the Chinese government's tightening actions.

With China being the dominant force globally in the purchase of the red metal, [May 13, 2009: Commodities - It's China's World: We Just Live in It]  [Mar 23, 2009: - Chinese Stockpiling Spurs Copper Price Rally] this report indicates not only is so much copper in storage, they can't even fit it all inside the warehouses in Shanghai.... but anywhere from 40-80% of the copper sitting around (at those locations) is not even being for construction but for rather as some sort of fiat currency, almost like gold.   So is Doctor Copper now Banker Copper in China?

Of course it goes without saying what sort of havoc could incur if the value of your form of 'financing' - which is now a commodity - ever fell substantially

[please note, anything in italics below is from the original research note]

Via FTAlphaville:

  • We’re calling it the “The Great Chinese Commodity-as-Collateral Financing” fiddle.  That is, the purchase of commodities like copper on deferred payment terms for the sole purpose of raising cheap financing for reinvestment in higher yielding assets.
  • The latest comes in the shape of a Standard Bank note by a team freshly back from a Chinese field trip.  Not only do they provide excellent new estimates of just how pervasive the practice in China really is, they’re sounding the loudest alert to the copper market yet.
  • Here are some particularly useful anecdotes we found from the note:
  • We visited China last week, with the aim of gauging Chinese sentiment, the impact of monetary tightening measures on consumers and also investigating the scale and implications of copper’s use as a financing tool. We were already fairly bearish towards copper’s near term prospects before the trip. That negative feeling has intensified, with significant downside risks to copper prices emerging.
  • Anecdotally, something in the region of 600,000 mt of refined copper is currently sat in bonded warehouses in Shanghai, with perhaps another 100,000 mt in the southern ports. This is equivalent to around 11% of China’s total refined consumption and around 40% of China’s net refined copper demand.
  • Bonded stocks have climbed by around 300,000 mt since the beginning of this year, pointing to the absence of end use demand at the moment. The amount of metal is so high, that spare capacity at some bonded warehouses is running out, with some metal being stored outside.
  • The scale of the refined inventory casts into doubt the size of the expected refined deficit in the copper market this year, and raises the prospect of a balanced market, or even a small surplus.
  • More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry.
  • Initially via a letter of credit and then by using deferred payment LC, they create a borrowing vehicle. Estimates for the amount of metal tied up in such a way range from 40-80% of total bonded stocks. Our estimates are towards the upper end of this range.
  • Property developers (or the property developing arms of conglomerates), appear to be behind the lions share of this type of activity, driven by an unwillingness by domestic banks to extend finance, or the imposition of interest rates of anything from 10-20% when they do. On that basis, interest rates on metal of LIBOR + cost of funding look very attractive indeed.

The big news of course is that Standard Bank attributes the lion’s share of the commodity “fiddle” to property developers.  That means, in their opinion, not only is the arrangement exposed to falling copper prices, it’s equally vulnerable to falling Chinese real-estate prices. Potentially, more so.

  • A scenario of falling Chinese property prices, perhaps combined with a government clampdown on alternative sources of funding, would therefore be a devastating outcome for the copper market, simultaneously robbing the metal of an end-user and leading to a mini credit crunch. The obvious home for the bonded material would then be the LME warehouses in the Asian region, with very negative implications for sentiment towards copper prices.

[Nov 23, 2007: Is Copper Signaling a Slowing Global Economy?]

Qihoo 360 Technology (QIHU) IPO Set to be Star Event of the Day

For reasons unclear, we had yet another gap up in what has shaped up as a V shaped, low volume bounce during the past 2 weeks.  While an line ADP report was out this morning, the market was at premarket highs well in advance of that figure. S&P 1330 is a level I have my eyes on as it was an old high in the market, and technicians want to see a new higher high created to resume the uptrend.  That said, since we are now gapping up (many days on no news in particular) 0.4, 0.5% three or four times a week, making new highs should be easy.

We have a new Chinese IPO that is getting a ton of buzz Qihoo 360 Technology (QIHU); should commence trading imminently.  It priced last night @ $14.50 and early indications show roughly a 100% gain with a price in the upper $20s at the open.   I realize valuations don't mean anything when you combine an IPO + China + Internet, but the company was prices at a nose bleed 25x sales at IPO, and speculators look to open it at 50x sales.  To repeat, a tech stock at 6-7x sales would be considered a premium valuation in normal times...

Via Marketwatch:
  • A China-based Internet company has commenced an initial public offering of shares that some analysts expect could be one of the biggest IPOs out of that country this year.  Qihoo 360 Technology,  which offers free Internet browsing and security products to a growing base of users in China, priced its IPO on Tuesday night at $14.50 per depositary share, above the expected range. 
  • Beijing-based Qihoo had planned to sell 12.1 million shares at a price range of $10.50 to $12.50 a share, according to a filing with the Securities and Exchange Commission. Underwriters include UBS Investment Bank and Citi. 
  • Sweet called Qihoo “one of the best Chinese IPOs” to come out since the fourth quarter of last year, describing the company as “a dominant force in the Chinese Internet space” in a note to clients. He upgraded his rating on the deal from 3 to 4, citing strong investor interest.
  • Stephanie Chang, analyst with Renaissance Capital in Greenwich, Connecticut, said the Qihoo IPO is “definitely attracting interest because it plays into the trends that are popular now” — that is, the Internet and China, the world’s biggest Internet market
  • With more than 300 million monthly users in China, Qihoo runs the second-most popular browser in China, after Microsoft Corp’s Internet Explorer, according to the company’s SEC filing.
  • For the year ended Dec. 31, 2010, the company reported net income attributable to shareholders of $5.5 million, on revenue of $57.7 million, according to the company’s filing. That compares with a net income of $2.1 million, on revenue of $32.3 million for the year-earlier period. 
  • The company’s biggest customer is Google (GOOG) which pays Qihoo 360 in exchange for referral of Internet search traffic, the prospectus said. Google accounted for 21% of Qihoo’s revenue in 2010, according to the filing. 
 No position

Tuesday, March 29, 2011

[Video] An In Depth Look at China's Empty Cities

Australia's SBS Dateline has an in depth on the ground look at the construction boom in China, which is created a subset of empty cities.  We've touched on this in the past but this is the most comprehensive piece I've seen yet.  It looks like Jim Chanos, Hugh Hendry and the like are definitely onto something... seems like the country has more than one Ordos.  [Nov 13, 2009: Ordos - China's Empty City]

14 minute video - email readers will need to come to site to view

Hat tip to BusinessInsider for this find.

Earlier posts on the topic:

[Dec 16, 2009: CNBC Video - Hedge Fund Maven Jim Chanos on Autos, Banking, and China] 
[Jan 8, 2010: Hedge Fund Manager Jim Chanos Continues to Sound the Warning on China]
[Mar 4, 2010: Hugh Hendry Continues to Doubt China]
[Jul 21, 2010: A Reader's Observations of China] 
[Dec 10, 2010: Jim Chanos Remains Bearish on China with some Compelling Statistics]
[Jan 14, 2011: [Video] Behold China's Nearly Empty Mega Mall]

Nearly 1/3rd of Home "Owners" in the U.S. in Default Have Not Made a Payment in 2 Years - a Boon to the Economy

Nearly a year and a half ago I was one of the first to identify a huge stealth stimulus the government, Fed, and banking system was creating - the strategic default stimulus.  [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home "Owners" to be Deadbeats]  By the spring of 2010, Cramer and quite a few in the financial blogosphere began picking up on it.  Now as we enter spring 2011, we are seeing truly how pervasive this stimulus has become per a whopping statistic on Mish Shedlock's blog.  Regular readers will know that 1 in 10 American households that has a mortgage is now in default.  But of that 10% of our home "ownership" class (I use the word loosely) living 'rent free', nearly 1 in 3 has not made a mortgage payment in 2 years.  That's astounding.

[click to enlarge]

Another 17% has not made a payment in 18-23 months.  So roughly HALF of defaulters have not made a payment in a year and a half.  Mull that for a moment....

However, as I wrote throughout 2010 that is a BOON to the economy.  Granted, it's a hit to the banks and/or those who hold the securitized mortgages but the Fed is taking care of that problem to compensate them [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors] [Apr 20, 2009: How Banks will "Outearn" their Losses]  Just another method of ponzi scheme in the new paradigm economy.

You can do the math pretty easy on the benefits to a typical household - let's say a $1300 mortgage x 24 months = $31,200 into the pockets of the home "owner" to spend on vacations, eating out, car payments, iPads, et al - that's a huge stealth stimulus.  Just imagine what you could do with an extra $15-$16K a year.  Of course many have mortgages in excess of $1300 a month, hence have even greater benefit.  And we're not even discussing all the people who have not made a payment for 12 months, 15 months, etc.

Perversely, one of the major things that will slow down the economy in the next few years is when these households are finally forced out of the "rent free living arrangement", and have to make a house payment again. Frankly, it's a wonder consumer spending is not doing better with so many Americans living in a household where the view is those who make mortgage payments are "suckers".

[Feb 18, 2010: Jim Cramer has Lightbulb Moment - Not Paying Mortgages is Keeping Americans Spending]
[Apr 13, 2010: One out of Ten US Mortgages is Now Delinquent ... Which is Great for Consumer Spending]
[Apr 15, 2010: More on Anecdotal Benefits of Strategic Default]
[May 4, 2010: Strategic Defaults in Q1 2010 Rise to One Third of All Foreclosures v One Fifth a Year Ago]
[Jun 2, 2010: (Even More) Anecdotal Benefits of Strategic Default]

Bad News Once More Enjoys Miniscule Half Life

This morning the monthly Case-Shiller housing price index dipped again (7th month in a row), with just about every major city seeing a drop in prices.  The one major exception was Washington D.C. which has become a micro economy unto itself with the massive federal government spending boom.  If only every major city in the country could benefit from the perks of what D.C. enjoys - we'd be scoffing at any mention of weakness on Main Street.  [Feb 3, 2011: Washington D.C. Leads Nation's Major Cities in Job Growth in 2010]  [Mar 11, 2010: [Video] America's 3 Wealthiest Counties Now Ring Washington D.C.

Consumer confidence also fell, as inflation expectations rose (gas prices of course weighing on the psyche) - but once those 2 reports were out of the way and the market sold off for 30 minutes, off to the races we went.  Bad news is back to having a half life of minutes once more.

Other than that it is pretty quiet out there... in fact you know it's quiet when the Fast Money crew brings on Rick Santelli for a segment called 'fast money in bonds'.

Best Performing Russell 3000 Stocks Year to Date

As we near the end of the first quarter, the major U.S. averages are back in the +4-5% range YTD after the rapid ascent the past week and a half.  That is a great pace, and if we straightline it sets up for a 3rd very good year for stocks, +16-20%ish.  As always, you could have done better with the right stocks - according to Bespoke here are the 47 stocks in the Russell 3000 that already have gained 50%.  Most of these names are not in my normal wheelhouse, and on quick glance it appears energy stocks definitely have been place to hang out thus far in 2011.... for obvious reasons.

[click to enlarge]

Most of the $110B Payroll Tax Cut of 2011 is Being Diverted to Food and Energy Costs

Economists were very quick to ratchet up 2011 GDP estimates to the 3.5 to 4.0% range, once the bipartisan "compromise" to give away almost everything both the GOP and Dems wanted passed late in 2010, to the tune of some $800B over 2 years.  Part of that package was the 2% temporary payroll tax cut - costing roughly $110B.  Essentially this increased the income of every worker by 2% as of Jan 1, 2011 for a period of a year.  One only wonders what sort of dogma will be spun next fall/early winter when this tax is slated to go back up from 4% to 6% and the chirping begins about putting the American people through a "tax hike".

Either way due to the "it's not inflation" in food and energy, the first few months of 2011 has seen much of that 2% pay raise go directly back to the producers of gas and oil.

Via AP:

  • Americans are earning and spending more, but a lot of the extra money is going down their gas tanks. Gas prices have drained more than half the extra cash Americans are getting this year from a cut in Social Security taxes.
  • Unlike some other kinds of spending, paying more for gas doesn't help the economy much. Most of the money goes overseas, and higher prices leave people with less money to buy appliances, computers, plane tickets and other things that can be postponed.
  • Consumer spending jumped 0.7% last month, and personal incomes rose 0.3%, the Commerce Department said Monday. Both gains reflected the cut of two percentage points in the Social Security tax, raising take-home pay.
  • After adjusting for (government reported!) inflation, spending rose just 0.3%. After-tax incomes actually fell 0.1%.
  • The Social Security tax cut will give most households an additional $1,000 to $2,000 this year. In December, when President Barack Obama signed it into law, economists predicted higher take-home pay would lead to more spending and stronger economic growth.
  • But gas prices have jumped more than 50 cents a gallon this year.
  • ... much of the anticipated benefit from the tax cut will be lost. Christopher estimates half to two-thirds of the extra cash will ultimately go toward higher gas prices. Food prices have also risen in recent months, he noted.
  • Most people don't have the luxury of deciding to buy less fuel. They have to get to work. So they spend more on gas, and less on other goods and services -- from household purchases to restaurant meals to vacations -- that do more to drive U.S. economic growth.  (hence why all the QE is great for the stock holder class, but yet another knife in the back of the bottom 60%+ of the country)
  • Ultimately, less spending can hurt job growth because businesses will feel less confident. Christopher said a rise of just 25 cents a gallon in gasoline prices, if it persisted for an entire year, could cost the economy 270,000 jobs. (which again, is against the supposed purpose of QE - but if you listen to the Fed they tell you their studies indicate QE1+QE2 "created" 3M jobs)  [Jan 11, 2011: Fed's Yellen - QE1+QE2 to Create 3 Million Jobs]
  • Economists are lowering expectations for the January-to-March quarter. Paul Dales, senior U.S. economist at Capital Economics, said consumer spending will likely grow only 2 percent to 2.5 percent in that stretch. That would be down sharply from the 4 percent increase in consumer spending in the October-December period, the fastest pace in four years.

Monday, March 28, 2011

Productivity - (Wo)Man v Machine

An interesting story today on Bloomberg on something I certainly do not talk enough about - the boon in productivity as capital spending takes share from labor spending in the U.S.  Some of this is for automation reasons - especially in manufacturing, but a lot of things we don't think about even in an office setting have improved productivity.   Thankfully email and meetings are still around to help ruin productivity or we might have a few million more unemployed!

Not sure there is any 'fix' for this; it's the nature of the way the world is headed and greater efficiency (and lower costs) is the goal of any business, but the focus on capital spending has helped contribute substantially to the labor issues the country faces.    Via Bloomberg:

  • Cummins (CMI) and Kohl's (KSS) are accelerating equipment purchases to boost productivity, reinforcing an unprecedented gap between capital spending and employment in the U.S. that’s restraining a labor-market rebound.
  • Corporate investment will rise 11 percent this year as sales pick up, following a 15 percent gain in 2010, according to “Man vs. Machine,” a Feb. 2 report from Bank of America Merrill Lynch. Employment will grow just 1.7 percent, after a 0.7 percent increase last year, the study projects.
  • Inventory rebuilding, low borrowing costs and government policies that include a new tax break on equipment purchases are powerful spurs for capital spending, says Neil Dutta, the Bank of America economist who wrote the report. The job market lacks such drivers and will form a “mediocre” underpinning for household spending, the biggest part of gross domestic product, he said.
  • “Machines have the upper hand,” Dutta said, “You see this huge pickup in capital spending, but there isn’t a meaningful increase in employment; it’s being grudgingly pulled along. The consumer is not going to perform the way people expect.”
  • More than 8 million positions were cut as a result of the recession that began in December 2007. Investors are focusing on a factory-driven recovery, with the Standard & Poor’s 500 Supercomposite Machinery Index rising 44 percent since March 2010, compared with a 13 percent increase in the broader S&P 500 index. 
  • The man-machine gap is evident at Cummins, a maker of diesel truck engines and generators. The Columbus, Indiana-based manufacturer has said it may lift capital spending this year to as much as $650 million, or 79 percent higher than 2010’s $364 million. In the same period, it will add about 2,500 workers, a 15 percent increase to its U.S. workforce of 16,500.
  • Kohl’s is pursuing initiatives to reduce labor input as part of an increase in capital spending this year to $1 billion from $761 million in 2010. The department-store retailer is installing electronic signs in 500 locations, up from 100 in 2010, in a program that will cover the entire chain by the holiday season of 2012.  This means “payroll savings, because we don’t have to change several thousand signs in each of our stores anytime we run a new promotional event,” Chief Executive Officer Kevin Mansell said.
  • This helps explain why productivity last year climbed 3.9 percent, the most since 2002, while labor costs fell 1.5 percent after a 1.6 percent drop in 2009, the first back-to-back declines since 1962-63, government data showed.
  • “At this point, productivity growth is bad news for employment, though in the long term it’s good for the economy,” Shierholz said.

  • Even though employment tends to lag behind investment early in recoveries, BofA’s Dutta said the current gap is “unprecedented” in the postwar era: Capital expenditures are expanding at an almost 14 percent pace, while job growth stays below zero, according to calculations he based on a six-quarter annualized change from the ends of the recessions.
  • In addition, the “unintended consequences” of policy changes indicate the government may “undercut its own principal aim of job creation,” he said.  While the tax bill President Obama signed Dec. 17 allows businesses to write off 100 percent of some purchases in 2011, there’s no similar incentive to speed up hiring. The Fed’s commitment to keep its benchmark interest rate near zero for an extended period also facilitates lower-cost financing for machines.
  • The policy environment is incentivizing firms to limit job creation,” he said. “The government doesn’t need to stimulate capex, which is doing fine on its own, compared with sectors that are impaired, like the labor market.”

Quiet Day of Consolidation

Ironically after 6-7 sessions, many of which had substantial "gap ups" to begin the day, the now famous Monday morning gap up was not to be found.  Not that surprising considering how ferocious the rally has been the past week and a half; news reports indicated last week was the best for markets since July 2010.  News flow is light other than some secondary economic reports and a deal between EBay (EBAY) and GSI Commerce (GSIC) - but frankly this market has been rallying tremendously with or without news of late. 

With the S&P 500 back over the 50 day moving average and the lagging NASDAQ also joining the fray, one definitely has to be back to a market neutral and/or bullish outlook.  While I cautioned we were due for an oversold bounce a week ago Thursday - the strength of this move certainly was far more than I thought, considering the deteriorated technical condition of the indexes and a breakdown by quite a few of 2010's leaders.  As always, we can work off a big move via time (going sideways and consolidating) or price (pulling back).  For the past 2 years it has been mostly time.   Intermediate term I still want to see a new 'higher high' in the index before calling the all clear - i.e. S&P 1330.

Later in the week the news flow picks up  - keep in mind Friday is labor reports day, along with one of the ISM reports.

Friday, March 25, 2011

Sina (SINA) - Another Breakout

I've been pounding the table pretty relentlessly on Sina (SINA) since late last year, and it continues to sparkle and amaze.  I thought the stock was finally going to come back to earth in late February after it broke some key supports, but it pulled off a fantastic stick save.  During the Japan selloff it barely blinked, only falling to the 20 day... and since then, off to the races. 

This shows a good example of what to look for (technically) for those looking for new ideas - during any material selloff, try to find the stocks that are holding up the best - they tend to be the leaders out of the gate during the next move up.  We saw less than 30% of stocks were holding their 50 day moving average at the depths of the selloff middle of  last week - yet SINA did not even break its 20 day.  That's relative strength.

SINA has definitely become one of the new leadership stocks taking the mantle from the F5 Networks (FFIV) and Riverbed's (RVBD) of the world.  Starting to hear some talk the past two weeks about something I've proposed - that is a spin off of Weibo into its own IPO.  (something Ebay should have done with Paypal years ago!)  Seems more like a 2012 event for any potential IPO, not 2011, but just the conversation seems to have energized the bulls.

(if you are new to the name, click on the label at the bottom of the post for previous comments and why the stock is so enticing)

No position

What a Move

In the 7+ sessions since the S&P 500 hit an intraday low of 1249, it is now up 5.5%.  Still needs to take out 1330-ish to make a new "higher high" (maybe the 'Monday morning gap up' takes us past it) but it's been quite a move - albeit until the past 2 days, most of it overnight.  I keep harping on these "V" shaped bounces solely because historically they just did not happen very often, and now they seem to happen EVERY rally.  Hence all of us with a stock market history pre 2009 are constantly saying "it can't happen again", and it does.  Knowing how pervasive they have become, you can imagine how antsy money managers must be once you see these rallies move past what would be considered a normal oversold bounce.  Another new paradigm market dilemma...

We have also made quick work of the % of stocks over their 50 day moving average.  One thing you notice is things can stay overbought (80-90% of stocks over their 50 day MAs) for months on end, but the oversold readings usually resolve themselves quickly!

Brazil's Housing Carnival Stokes Bubble Worries

Are we in the early to mid stages of a bubble forming in Brazilian real estate?   Who can tell - with the global liquidity tsunami gushing in every direction, there has to be other areas other than commodities where dislocations are forming.  I found this interesting piece while looking over the news for Brazilian homebuilder Gafisa (GFA). While the "mass" mortgage market is still relatively new in Brazil - hence a whole slew of new potential buyers can now enter the market - some of the anecdotes in this Reuters story are eerily similar to those in the U.S. circa 2005.  Who can forget people who were camped out in developments in Las Vegas and Phoenix, just to put a bid down on an empty lot (which of course could be flipped within 2 weeks for a 30% premium).  There is also a massive push by the government to expand home ownership - hmmm, it's starting to all sound so familiar.

I was surprised to hear about the cost of offices in Rio's business district - only trailing London, Hong Kong, and Tokyo?  More than Manhattan? Must be the beaches. ;)

Via Reuters:

  • Listening to Jose Carlos de Vasconcellos talk about Rio de Janeiro's property market is like being transported back to the bubble days in the United States or Europe.  The 60-year-old, who came out of retirement to join Brazil's swelling ranks of real estate brokers, is convinced that property in the beachside city (Rio) is a one-way bet despite a near doubling of house prices in just three years.
  • "I'm confident that the market isn't going to slow down any time soon," he said, taking a break from his afternoon class at a Rio school for real estate brokers. "I don't see any investment that's as good as property."
  • Burned property investors elsewhere may beg to differ, but Vasconcellos is typical of the blissful optimism that has infused Brazil's real estate market at a time when property in much of the developed world remains buried in sour debts.
  • Rio, boasting picture-postcard scenery and plans for big investments ahead of the soccer World Cup in 2014 and the Olympic Games two years later, is not alone in a Brazilian housing boom that is inevitably raising fears of an asset bubble in one of the world's hottest emerging markets.
  • Since early 2008 -- just as the credit crunch was biting in the developed world -- residential property prices in Rio have risen 99 percent with Sao Paulo not far behind on 81 percent, according to a newly launched index by Brazil's Fipe economic research institute. Brazil lacks an official gauge of national house prices, but there have been similar booms in other major cities, including the capital Brasilia and coastal cities in the northeast such as Recife and Salvador.
  • Americans and Europeans would recognize many of the symptoms of Brazil's property fever.  Apartment prices are popular dinner table -- and beach -- conversation in Rio, anecdotes of humble doormen and taxi drivers becoming real estate brokers are common, as are stories of people snapping up apartments without seeing them.
  • Rio's swankier addresses, such as beachside Leblon or Ipanema, are catching up with the eye-watering prices of Manhattan and central London with three-bedroom apartments changing hands for 2 million reais ($1.2 million) or more.
  • Rio's central business area has overtaken Manhattan's Midtown district to become the world's fourth most expensive city to rent office space, behind only Hong Kong, London and Tokyo, according to global real estate group Cushman & Wakefield.
  • Demand for places on training courses to become real estate brokers is booming. Just over 3,300 new brokers were registered in Rio state last year, a nearly ten-fold increase from 2005.  (reminds me of the statistic I read a few years back that 1 in 7 people in California had a brokers license)
  • Brazil's economy grew a sizzling 7.5 percent last year, driven by record-high employment and confident consumers who are swelling the middle class and eager to get a foot on the housing ladder, often with the help of credit.  Millions had for long been locked out of owning property because of a lack of financing, but the mortgage market is now growing rapidly on the back of unprecedented economic stability, bringing home ownership into reach.
  • With a national housing deficit estimated at more than 7 million units, there is plenty of pent-up demand.
  • ......backed by a $41 billion government low-income housing program.
  • Mortgage debt in Brazil is indeed relatively low, standing at about 4 percent of GDP compared to about 15 percent in China in 2009, and much higher levels in developed economies
  • Brazilian banks have stricter standards too, generally lending no more than 80 percent of a property's value.  High mortgage rates also act as a sobering force, although they are now low by Brazil's historical standards. ...... offers 30-year home loans at a 13 percent fixed annual interest rate, almost triple the current rates in the United States.
  • Mortgage debt may be low, skeptics say, but the overall consumer debt burden has been growing fast when taking into account credit cards and installment payments that carry average annual interest rates of around 30 percent.
  • The explosion of credit in recent years has raised concern that Brazil is nurturing a new breed of sub-prime consumers who are not financially astute enough to manage their debts and who could default as the economy cools and interest rates rise.  "It's like putting someone who has never eaten in front of a banquet. They will get ill from eating too much," said Heitor Mello Peixoto, the head of eyesonfuture, a Sao Paulo business consultancy.
  • Matos has noticed that more of his apartments are being bought by investors these days, accounting for 40-45 percent of sales, rather than by families who want a permanent home.

Here is where it gets interesting....while mortgage debt is tiny in relative terms to other countries, household debt has surged.  This in a society where all forms of credit are relatively new.

  • Household debt costs stand at around 22 percent of income in Brazil, according to Sao Paulo consultancy LCA Consultores, compared to 15 percent in the United States at the end 2010.
One wonders if there is going to be a post World Cup / Olympics hangover.  This certainly happened in China in 2008.  Something to keep an eye on the next few years.

NYT: G.E.'s (GE) Strategies Let it Avoid Taxes Altogether

Lost in the current political fuss about lowering the corporate tax from "35%" is the fact that corporate profits as a % of GDP are at record lows in the U.S.  With armies of accountants (many former government officials) and tax havens across the globe our largest corporate citizens play games of "Double Irish" and "Dutch Sandwich" (what are these? see here), in between lobbying for loopholes galore in the U.S. tax system.  Yes we do have socialism in America ... but it's mega corporate socialism.   Whose are the suckers actually paying 35%?  Small business.  This is why there is actually resistance on Capital Hill to changing the corporate farce that is the "35%" rate to something lower - because it's nothing more than a talking point for our multinationals to whine about.

The New York Times has a fantastic expose on the nation's largest welfare recipient corporation - General Electric (GE).  I will give the CEO Jeffrey Immelt credit though - at least he admits what GE does - here is a quote I've posted a few times the past few years on the site when discussing the "free market" in the U.S.:

It's never been a free market; it's never gonna be a free market. That's just the way it is. The fact that I'd like GE to work in concert with where government policy is in the U.S. doesn't mean that I'm a traitor or a bad guy, I think it's just being practical that that's gotta happen.

That quote speaks more to 'winning' business, but the NYT piece today focuses far more on the financials of the company.  For example:

  • General Electric, the nation’s largest corporation, had a very good year in 2010.   The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States
  • Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion

It all has become a bit of a farce - we've posted many stories on this subject ....who can forget the public housing companies who banked record profits due to the Greenspan/Berananke bubble - but lobbied to get all those taxes credited back during the downturn?  When they did not get what they wanted, they rescinded lobbyist dollars .....and within weeks they got the legislation they demanded.  [Jun 23, 2009: WSJ - Land Rules, Tax Changes and Government Largess Keep Homebuilders Alive] [Apr 4, 2008: Congress is Rushing to Help Homeowners Out!! (Not)]   Who says Congress can't move fast?  I believe it is called bribery in other countries, but we just call it "the political process".  I could go through a litany of examples in almost every industry, but I prefer to keep my breakfast down...

As speculators in the market - this is a 'good thing'.  After all paying a tiny fraction in taxes increases profits.  So we can slap a PE ratio on that lightly taxed profit base and apply an appropriate price, which obviously would be much higher than if these corporations paid what was due under the spirit of the tax code.  However, in terms of a $1.6T annual federal deficit ... it's not quite so bright of an outcome.


Anyhow, some snippets from the NYT piece:
  • In a regulatory filing just a week before the Japanese disaster put a spotlight on the company’s nuclear reactor business, G.E. reported that its tax burden was 7.4% of its American profits.  (stop taxing us at 35%.... it's onerous!  Yes your local owner of the plumbing business is paying 35% but not the mega honchos filling the pockets of the political class)
  • Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.
  • Its (GE's) extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress. 
  • Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals, have pushed down the corporate share of the nation’s tax receipts — from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.   Yet many companies say the current level is so high it hobbles them in competing with foreign rivals. 
  • In a rational system, a corporation’s tax department would be there to make sure a company complied with the law,” said Len Burman, a former Treasury official who now is a scholar at the nonpartisan Tax Policy Center. “But in our system, there are corporations that view their tax departments as a profit center, and the effects on public policy can be negative.” 
  • Transforming the most creative strategies of the tax team into law is another extensive operation. G.E. spends heavily on lobbying: more than $200 million over the last decade, according to the Center for Responsive Politics. Records filed with election officials show a significant portion of that money was devoted to tax legislation.  (lobbying has the best Return on Investment of any major operation our largest corporations do - billions in profits saved for a mere couple hundred million in this case)
[click to enlarge]

  • While the financial crisis led G.E. to post a loss in the United States in 2009, regulatory filings show that in the last five years, G.E. has accumulated $26 billion in American profits, and received a net tax benefit from the I.R.S. of $4.1 billion

G.E. obviously has tiger blood.... adonis DNA.

Of course as a side note you know Immelt is now the head of the committee to figure out how to create jobs in the U.S. - even as GE has axed tens of thousands in the U.S.  Sounds logical.....corporate socialism rocks.
  • President Obama has designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes.  
  • Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment.

No position

Crude Oil Approaching Key Technical Levels

The market has completely brushed off - indeed embraced - the rebound in oil the past few days, despite price levels than 3 weeks ago were causing consternation.   After the Japanese news (remember that 'old' story?) temporarily punctured the price, we've seen a rebound and the price in West Texas Intermediate has reached the old closing highs from earlier in the month. 

Technically this is a very interesting juncture - in a stock chart, this would be setting up for either a double top (bearish) or a double top breakout (bullish).  If it's a breakout, I'll be very interested to see what price levels the market can continue to shrug off as apparently every piece of news the past 6 days requires a gap up to celebrate.

Thursday, March 24, 2011

S&P 500 Back Over Key Resistance

Well, I'll be - I guess you can create an intermediate bottom nowadays on a gap up.  And there is no need to go retest that low.  The new paradigm rulebook.   I am still unclear why with a bevy of bad news the market gapped up this morning but we're back to all news is good news.  The economic news this week has been disappointing to benign but as Bob Pisani says on CNBC today:  the news doesn't matter.  Portugal, durable goods, housing, oil over $105 (which 3 weeks ago was considered a reason to sell off)... doesn't matter.

I would definitely be stopped out of any index hedges now as the S&P 500 finally cleared the 50 day simple moving average at 1303.  (at least the market has gone up during the actual U.S. trading session)

The NASDAQ has cleared the 50 day exponential moving average which was a key level for me... still a bit short of the 50 day simple for those who use that.

And it appears we are right back to something that was rare pre 2009, but has now become the common rule since.  The V shaped bounce.  As I said last week you need to carry around 2 rulebooks nowadays; the one that used to work in the 'old days', and the one for the new paradigm market.

Amazing Statistic in the Housing Market

Earlier this week we have had data from both existing home sales and new home sales.  Both have been abysmal.... and I'm not speaking in hyperbole.  As I often say, focus on existing home sales because it is generally around 90% of the market - but currently up to 95% since new homes are simply so uncompetitive with so much distressed inventory on the market.  That said, in one story I read on the new home sales figures yesterday an amazing statistic:

Sales are now just half the pace of 1963 -- even though there are 120 million more people in the United States now.

Again that speaks to new home sales, rather than the more important existing home sales but still astounding.

1963 population: 190M
Today: 310M

1963 new home sales: 560K
Current pace 2011: 250K
(Worst year ever was 2010 @ 323,000)


Whatever the case, the data is making certain pundits who did declare a housing bottom in 2009... and 2010... look a bit silly.  I am sure they will go to their typical revisionist history and/or just repeat it again this year.  Eventually they will be right and can claim credit.  Indeed it is almost that time of year - spring/early summer buying season - when housing data ALWAYS picks up and the "it's a housing bottom" cadre will come to your friendly national business television station.

With that said we are getting closer to the median housing value I outlandishly proposed in late 2007 when the "housing prices cannot fall nationally" crowd was crowing exceptionally loud.   [Dec 6, 2007: Analysis - What Should Median Home Prices be Today?]  Unfortunately, our Fed head in chief was one of those believers.  Anyhow, 'subprime is contained'.... why are we still talking about a housing problem? ;)

Historically, a regional housing recession has lasted around 7 years.  So if you use 2007 (maybe 2006) as the starting point of the downturn, we're talking 2014ish for the real recovery.*  Of course this was the mother of all bubbles in housing, with many unique features - so the recovery is going to be disjointed.  And rather than letting the market settle (more painful in short run, but a quicker path to a real recovery), the government stepped in with countless measures: from outright bribery (go buy a home, here is $8000), to record low interest rates, to 95% of the mortgage market now in Fannie, Freddie, FHA hands, to implicitly backstopping the banks while they "mark to myth" the value of defaulted homes on their balance sheets, putting them in no rush to foreclose and admit reality.  So in effect we've "Japan-ized" our housing market.

*I am excluding some of the micro climates of course like Washington D.C. which is in it's own government bubble, Manhattan, or some cities in the upper plains.

As for the recovery, we have a lot of issues highlighted in the Gary Shiller piece below that are secular in nature and will retard any actual bounce - frankly with some of the middle class permanently eradicated the pool of buyers has shrunk (barring another substantial drop in prices).  Of course about 10% of all current mortgage owners sit in a home they don't make a payment on, so we still need to expunge that group in the coming years.  And with wages stagnant for many, and the new jobs created in the recovery often paying far less than those that existed 5 years ago, there is not a huge pool of buyers out there - especially if we speak of anyone who can afford to put down more than 3.5%.  Don't even ask what happens to the market if mortgage rates on a 30 year go back to an unruly (gasp) 6.5%.

But other than those inconvenient issues I'm bullish and calling for a housing bottom for the 3rd year in a row - because that's fashionable and is far easier to explain in a 45 second spot on pundit TV. ;)

[Apr 8, 2008: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces]
[Apr 23, 2009: As More Homes Fall Underwater, Trapped Americans Cannot Migrate]
[Apr 9, 2010: 1.2 Million American Households Lost in Great Recession]

[Video] Yahoo Tech Ticker - Gary Shilling "The Two Tier Recovery"

While like every pundit, Gary Shilling has had some years with excellent trading calls and some years with not so great calls, his general macro economic views are usually very much worth listening to.  Yahoo Tech Ticker has an excellent overview with him on the general "big picture" state of the U.S. economy, condensed into 5 minutes.  Many of the topics and long term secular challenges we've identified over the years on FMMF are outlined in this video, so if you are new(er) to the site, I highly recommend a view.  Obviously this touches more on Main Street than Wall Street .... unless your Main Street happens to be Park Avenue ;)

5 minute video - those who are email subscribers will need to come to site to view

The U.S. has been in official recovery mode since June 2009. But, with millions of Americans still without work and a housing market that continues to take a beating, you may not know that things are looking up.
There's a reason for that disconnect, says economist Gary Shilling of A. Gary Shilling & Co: The U.S. is experiencing a "two-tiered recovery" that consists of the haves and have-nots.

"The last few years we had a revival of all the markets that were crushed during the recession…and anybody that was participating in that — in and out of Wall Street -- has done very well," he tells Aaron and Henry in this interview. "But the rest of the economy has pretty much been lagging and those are the people that are reflected in the high unemployment rate."

Not only is a high jobless rate taking a toll on the majority of Americans, those on the bottom continue to face "depressed pay…and falling house prices," he writes in his latest Insight research note.

He goes on to make the following points in his newsletter:

Income: The top 20% of house holds share of income has been rising since the data began in 1967. The other four quintiles share have consistently fallen…. Note, however, that a falling share of income is not the same as an absolute fall in income. Nevertheless, the real median income per household actually fell 5% between 1999 and 2009.

Depressed Pay: Those who were employed at least three years, lost their jobs between January 2007 and December 2009 and are now employed full-time, 54.9% are earning less than before and 35.8% have suffered 20% or greater income declines.

Employer Cost-Cutting: Serious cost-cutting by American business has been going on for years, importantly in reaction to the international competition brought on by globalization.... Business has been improving productivity and cutting costs for years by not hiring new people as output expands rather than laying off existing employees. After rising in the Great Recession, layoffs have returned to their flat trend while job openings have jumped. But new hires have been relatively flat. Why?

With so many unemployed, businesses can be choosy and take their time in hiring. [But] many of the unemployed probably lack the skills needed for the available jobs. With the collapse in housing stocks and drastic decline in commercial construction, many mechanics are mismatched to job openings.

Housing: The massive overhang of excess house inventories, the mortal enemy of prices, suggests another 20% fall in prices, resulting in a 43% peak-to-trough total decline. This decline would return prices adjusted for general inflation as well as for the tendency for houses to get bigger and, therefore, more expensive over time to their century-long flat trend….. With that further drop in prices, we estimate that about 40% of mortgages will be under water, up from 23% in the fourth quarter 2010. At that point, few will be able to get above water by repaying their mortgage principals.

As you can imagine, there is no easy way out of this. Even more so now with Congress more divided than ever on whether to cut spending or spend more on stimulus programs aimed at helping working men and women in this country.

Tuesday, March 22, 2011

Riverbed Technology (RVBD) Joins F5 Networks (FFIV) in House of (Technical) Pain

I mentioned last week how a mega stalwart from the past few years, F5 Networks (FFIV), had completely broken down technically.  [Mar 18, 2011: Fall from Grace for F5 Networks]  Despite this rally it has not recovered much and it remains a 'short on bounces until it proves otherwise' stock.  Joining it now, is another of the superstars of the past few years - Riverbed Technology (RVBD) - which is faltering badly today after breaking the key 50 day moving average a few days ago.  Indeed, it has been down 8 of the past 10 sessions.

RVBD does not have a lot of gaps to fill like F5 Networks had, but as I said with the FFIV... if the stock drops to that 200 day moving average, I'd be a very interested buyer.  The chart would be a mess, but at that point you'd be speaking more from a fundamental/valuation basis.

For whatever reason, there seems to be a major rotation out of some of the "2009-2010 tech superstars"... if only we could read HAL9000's mind.

No positions

NASDAQ Still Underperforming

While I usually focus on the S&P 500 as a market index, the NASDAQ has been more of a leading indicator the past month.  It was the first major index to break down, and has been a laggard during this selloff.  Despite the "off hours" rally we've experienced, it still sits below the 50 day moving average.  Indeed, relatively substantially below... and the 20 day just crossed below the 50 day moving average, another negative sign.  Of course all it takes is one nice gap up tomorrow of 1%+ in premarket to take care of all these conditions, but for now it is something to be aware of.

The S&P 500 is a bit more tricky - I like to use exponential moving averages and on that count, the premarket surge yesterday gapped the S&P 500 over the 50 day moving average.  But it has been held back at the (less important) 20 day moving average.   That said, the simple moving average is something more people seem to be focused on around 1303 and we remain below those levels.  For now, we keep returning to this 1294 level which has been a big pivot point the past few weeks, and is currently the 50 day exponential moving average.

Again, with the news flow and increasingly much of the action now happening in the overnight sessions, this is a difficult market to get your hands around... but I still stand by the (perhaps now old fashion) notion that you don't bottom on a "gap up" as we did Thursday morning.  At minimum we should go retest that low... but a lot of old rules have become obsolete in the new paradigm.  The great irony is this market is now solidly negative the past 4 sessions during American market hours...

Finally, circling back to a measure I noted Thursday morning, the % of stocks in the SP 500 over the 50 day moving average has quickly doubled (percentage wise) from the very oversold levels of the middle of last week.

U.K. Inflation Spikes to 4.4% - Probably a Better Comparable for U.S. Inflation than Government Data

I've spent quite a bit of time the past few months dissecting the variances between U.K. inflation and U.S. inflation figures, as reported in other posts.  While some of the cost pressures are due to the British tax system - namely the VAT (which was hiked recently) - the biggest difference is accounting for the cost of a roof over one's head.  Essentially it is excluded in the U.K. inflation figures while it is the dominant weighting in the U.S.  So as we try to get our arms around what the true inflation situation is in the U.S. - rather than the politically convenient figures that have been massaged tremendously the past few decades [Dec 16, 2010: - Consumer Inflation as Measured in 1980 would be 8%+, as Measured in 1990, 4%], watching the U.S. "mini me" is one route I am going.

As I've written in the past, the central banker in the UK must write a letter each time inflation is past target explaining what is going on.  Thus far Mervyn King keeps writing such inflation is 'temporary' - one wonders how many years it can remain temporary before you actually have to remove the temporary label.  The comments section in the British papers online seem very similar to what I read on U.S. stories for inflation - lots of frustration with their central bankers.  The main difference is the Brits actually believe the figures the government is reporting because they actually seem realistic.

With the ECB potentially increasing interet rates late spring to summer (the euro is now at a 4.5 month high v the dollar despite all the issues in Europe), it will be interesting to see when the BOE moves.  Compounding matters in the U.K. is a government that is trying to cut its budget deficit rather than let the hose run loose indefinitely as continues in the U.S., so the potential for a return to recession 3-5 quarters down the road, seems to be increasing.  Whatever the case, the Fed is nowhere near contemplating any such moves - hence we can expect the U.S. dollar to continue to be treated as trash.

Via UK Telegraph:

  • CPI rose to 4.4pc in February, up from 4pc in January. Economist had forecast a rise to 4.2pc. 
  • Retail price inflation (RPI), which is based on a longer-running index and is used as a starting point for many wage negotiations, rose to 5.5pc from 5.1pc, its highest since July 1991. 
  • Mervyn King, the Governor of the Bank of England, has said that the January VAT rise and other inflationary pressures meant that prices would likely outstrip pay again this year, leaving real wages no higher than they were six years ago. Not since the Depression-hit 1920s has a fall of such scale taken place, said the central banker. 

Via Bloomberg:
  • The gain in inflation was led by clothing prices and the costs of housing services such as heating, the statistics office said. Clothes prices jumped an annual 2.8 percent in February, the most since the data began in 1997. 
  • So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, rose an annual 3.4 percent after a 3 percent increase in January. 

When will the BOE move?
  • Investors have pared bets on the timing of the next increase after the earthquake, tsunami and radiation leaks in Japan, the world’s third-largest economy. Forward contracts on the sterling overnight interbank average showed yesterday the first 25 basis-point increase will be in August. That compares with bets on March 9 for a June increase.

Despite the 3.3% Gain the Past 3 Sessions, the S&P 500 Has Been Negative During Normal Market Hours

Repeating a pattern very common since the March 2009 bottom, much of the movement in the stock market continues to happen during the thinly traded off hours.  Indeed, we've just seen a three day rally in the S&P 500 which has tacked on a massive 3.3%.  However, during those 3 days the index is actually DOWN during normal hours - all the gains (and some) have come overnight, so you've completely missed the move if you tried to play these moves during the day.  Thursday was essentially flat on the close vs open, Friday the market closed significantly lower than where it opened, and yesterday again was essentially flat (slightly up).  Meanwhile, we've seen three gap ups in a row ....

click for large chart

Friday, March 18, 2011

No SEC Letter this Week After All

After offering a verbal commitment late last week to our point of contact (fund attorney) that our initial SEC comments/letter would be coming in this week, as of 2 PM Friday we have zilch, nada, nothing.  This after  comments they offered acknowledging how incredibly behind they are, and how patient we’ve been with them... (obviously they have not been talking directly with me).  This is now approaching 90 days after submittal of the documentation needed.  A very frustrating experience... I am off to go bang my head against the wall.

Fall from Grace for F5 Networks (FFIV)

One of our big winners the past few years has fallen on seriously hard times - F5 Networks (FFIV).  After disappointing guidance mid January [Jan 19, 2011: F5 Networks Implodes After Hours on Disappointing Guidance] the stock was hammered, and filled a gap from October 2010.  After a cursory bounce back that tacked on some $25 and took it back to $130 it's been through another round of downside since mid February, tracking the general indexes.

However, today we are seeing another breakdown as it has fallen below the lows of mid January.   Next stop would appear to be $90, where the stock bottomed in mid October.   Technically, this looks to remain a 'short on any bounce' candidate until it can work out of this tailspin.  On the plus side, this is another name that is getting more interesting from a long term perspective as the valuation was nosebleed.  Still not "cheap" but it's fallen from a peak of 40x forward (2011) earnings, to 27x in the past two months.  Expectations should be quite low going into the next earnings report in April.

[Jan 21, 2011: [Video] Interview with FFIV CEO John McAdams]
[Sep 7, 2010: [Video] F5 Networks on the Rise]
[Aug 27, 2010: IBD - F5 Networks Leads in Key Cloud Market]
[Jan 22, 2010: CEO Interview with F5 Networks]
[Apr 8, 2009: Stimulus Fire Hydrant (Worldwide) Should Benefit Networking Companies/Broadband]

No position

S&P 500 Quickly Bouncing into a Test of Resistance

Yesterday morning premarket I wrote

For more aggressive folk, trying to play some sort of near term bounce becomes more attractive.  Due to the rapid pace of this selloff, bears probably would like to see a short term bounces of a few days help to work off this condition.   A move back closer to S&P 1290 would be an attractive area to try a new short trade with a very convenient 'stop out' level just above, in case the market pulls off one of its now infamous "V-shaped" bounces. 

In no way did I expect a 30 point S&P move in such a short period of time, but at this point nothing surprises me about the market anymore.  The reason I used S&P 1290 instead of 1294 is I thought any sort of bounce would take at least 3-4 days to play out (hence the 50 day moving average would drift down a bit), but it has happened in essentially 1 market day.

So at this point if you are a believer that resistance still matters and the market is not about to go onto yet another new paradigm V shaped bounce it has now become famous for, this is an area (the next 5 S&P points) where an index short could be built.   Using the old rules of the market, this should be a high probability short for 2 reasons - (a) markets don't usually bottom on gap ups as happened yesterday AM and (b) markets usually go back to test recent lows before making a sustained move up ("double bottom"), hence at minimum one could short until a retest of the lows of Wednesday.  Whatever short exposure one had sold off Tuesday/Wednesday on the swoon selling, I would be re-employing as a hedge here - of course it depends on cash position and long exposure as well.

But again that is how the market acted pre QEinfinity, so nowadays I carry around 2 sets of rules ... new paradigm and pre 2009.  S&P 1294 will be a closely watched area from here for obvious reasons....secondary resistance 1300.  A move over those 2 levels and the bears will be sent back to the corner they have been consigned to for half a year. 

Longer term coast is not completely clear for bulls until a new higher high is in place - I'd want to see S&P 1330 cleared to be singing the praises of The Bernank.

Cost Pressures Begin to Filter their Way into Impacting Margins - Nike (NKE) an Early Example

It was just a matter of time when commodity cost pressures began to impact margins - you just never know when exactly due to the length of contracts and type of pricing, but record corporate profit margins at U.S. corporations are beginning to take a hit.  Oil is the most obvious issue as it's essentially a tax on everyone and everything, but it's actually been one of the more benign commodities over the past year.  As mentioned early last fall, the response to The Bernank's global liquidity party will be to protect margins by either trying to pass along price increases to consumers and/or by laying off workers.  Obviously neither is good for the 'Main Street' crowd. 

Last evening Nike (NKE) reported a significant hit to profits due to commodity pressure  The response will be across the board price hikes in coming quarters... but for now we have a stock hit 8% in the premarket and a price in the $78s.

Should be an interesting earnings reporting period coming in April as we hear both about these commodity impacts and supply chain disruptions in Japan for some of the global multinationals.  Probably the first reporting period in 2 years where the normal 70-80% of companies beating the analysts' lowly expectations game might be threatened. 
  • Nike is grappling with higher costs for cotton, labor and transportation, which the company projected may reduce profit margins this year. Gross margin, the difference between sales and cost of goods, narrowed 1.1% points in the quarter

More worrisome than the one quarter hit to gross margins is the outlook for the future.
  • Management sees gross margins down 300 basis points year over year for the rest of this fiscal year, and believes there is more downward pressure in 2012

Hence, shoe inflation....
  • Nike, which reported after the close, had been engaging in "surgical" price increases that targeted specific products and markets, but coming price increases will be "across the board," the company said. 

On the plus side, I hear iPads (which are dropping in price) make excellent footwear in a pinch.  (Ok, I promise this is the last iPad joke of the week!)

No position

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