Tuesday, June 7, 2011

TA is Actually Working Again

Most of us who use technical over an intermediate term have been thrown for a loop for much of the past few years as a lot of old rules seemingly have become irrelevant.  (insert grassy knoll here)  However the past few weeks, things have been a lot like last spring and early summer (ex May 6th!) which was the only time a lot of the old rules seemed to work, and trading was a 'pleasure'.  I am not sure exactly why we've reverted back but it's making me feel suddenly smarter.

This morning I wrote:

S&P 1295 was the pivot point yesterday and whatever knee jerk reaction upward should be stymied there, short of something out of the blue. 

Thus far all day, 1295 has been the stymie point.  In fact, we are sitting there as I type.  Nice to see something normal for a few hours at least. This is the old "support becomes resistance" idea, that used to work like a charm pre 2009.  The past few years its been "resistance is futile".

S&P 1306 is a lot more important for the intermediate term - it is the 100 day moving average, and unless my eyes are deceiving me it is begging to take on a downward slope.  The 50 day is firmly in downward slope way up at 1323.

Still would be staying small and cautious until we get substantially higher... or lower.  This is part of the cursory oversold bounce I mentioned yesterday, until proven otherwise.  We're quite oversold still.

Fusion-io (FIO) Ups Pricing from $16 to $18 per Share, from $13 to $15 - Great Analysis by Tech Insidr

I mentioned Fusion-io (FIO) last week as a potential hot IPO.  [Jun 2, 2011:  The Hot IPO of Next Week? Data Storage Company Fusion-io] Looks like institutional demand is still running hot despite a market that is deteriorating, as the offering price was upped significantly.
  • The technology IPO rush continues this week as Fusion-IO, the developer of flash- memory technology for companies, increased the price of its IPO to $16 to $18 per share. The company had previously priced its shares at $13 to $15 per share, which valued the company at as much as $1.17 billion. The increase announced today puts Fusion-io’s total value at $1.4 billion.

Sometimes you can snag an IPO at a much better price if it prices on a particularly poor day in the general market, so we shall see what Thursday brings.  Now again the next quarter reported might be choppy as the Facebook account (about half of last quarter's sales) is supposed to drop significantly but I don't think that will matter for the first weeks it trades.

Tech Insidr blog did a great background story on the company, so if interested see here.

Fusion-io has plenty of star power too:  Apple and Facebook are major customers, cult figure and Apple co-founder Steve Wozniak is their Chief Scientist, and they are bankrolled by legendary tech investors Michael Dell and Marc Andreessen.

Although the story has captivated investors, Fusion-io didn’t get to where they are at by being popular or being associated with prestigious companies in the technology world.  Behind the glitz and glamor is a nuts-and-bolts technology story.

No position

U.S. Funding for Future Promises Lag by Trillions

Sometimes the numbers are so large that you cannot wrap your head about them, but this USA Today piece does a good job by breaking down the data on a "per household" basis.   While the federal deficit increased by a monstrous $1.5 Trillion, that only tells a part of the story.  Future entitlement liabilities skyrocketed even further.   It makes all this haggling of $4T in cuts over a decade (or $400B a year) seem like a joke.

Via USA Today:

  • The federal government's financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit, a USA TODAY analysis shows.    
  • The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.
  • Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit prompting heated debate between Congress and the White House over lifting the debt ceiling.  Social Security added $1.4 trillion in obligations, partly reflecting longer life expectancies. Federal and military retirement programs added more to the financial hole, too.
  • Corporations would be required to count these new liabilities when they are taken on — and report a big loss to shareholders. Unlike businesses, however, Congress postpones recording spending commitments until it writes a check
  • The $61.6 trillion in unfunded obligations amounts to $534,000 per household
  • That's more than five times what Americans have borrowed for everything else — mortgages, car loans and other debt. It reflects the challenge as the number of retirees soars over the next 20 years and seniors try to collect on those spending promises.
  • The government has promised pension and health benefits worth more than $700,000 per retired civil servant. The pension fund's key asset: federal IOUs
  • "The (federal) debt only tells us what the government owes to the public. It doesn't take into account what's owed to seniors, veterans and retired employees," says accountant Sheila Weinberg, founder of the Institute for Truth in Accounting, a Chicago-based group that advocates better financial reporting. "Without accurate accounting, we can't make good decisions."

[Video] Stephen Roach Revisits U.S. & China, Plus the Debt Connection

One of the more sober market strategists, Morgan Stanley's Stephen Roach opines on the U.S. slowdown and the situation in China in these 2 videos from CNBC this morning.  Actually that's the same subject matter he touched on last time around =)

Email readers will need to come to site to view

U.S. & China situation, mostly U.S. - 9 minutes

China, and the Debt Connection to the U.S - 5 minutes

[Jan 14, 2011: [Video] CNBC - Stephen Roach Talks U.S. & China]
[May 31, 2009: Stephen Roach on Asia - No Sail]

Pavlovl Dogs Run Futures Up in Anticipation of Magic from The Bernank

For some reason Bloomberg economic calender has Bernanke's speech at 3:45 PM yesterday, but instead it will be today.  As well trained speculators, the Pavlov Dogs of Wall Street are running up futures imagining more pixie dust from the Fed.  There is no way he is going to announce any QE3 action now, but certainly he could appear more dovish did than in his last comments.
  • The Fed's current $600 billion monetary stimulus is due to expire this month and the prevailing view in the markets until recently was that the central bank would drop the program and possibly start raising interest rates by the end of this year.
  • However, the recent soft batch of economic data has led some in the markets to speculate that the Fed may consider more monetary stimulus and keep interest rates at the record low of near zero percent well into next year.  Bernanke's speech later at the International Monetary Conference in Atlanta, Georgia could have a huge impact on markets.

Technically the market closed awful yesterday, out almost on the lows of the day.  S&P 1295 was the pivot point yesterday and whatever knee jerk reaction upward should be stymied there, short of something out of the blue.

Monday, June 6, 2011

Turned into an Exciting Day After All

Looked like we were going to sit in the 1292 to 1297 range all day, but near 2 PM the damn finally broke.  Some nice cliff diving since 2:30 PM.  Barring a Bernank stick save post 3:45 PM, looks like April lows will be broken on a closing basis today.  Another win for the bears. 

118 Stocks Withstanding the Correction

On days like today where its a virtual snoozer, it's a good time to do some research & screening.

With the market correction over 5 weeks long, and plenty of high beta names down 10-20-30% (the S&P 500 down 5.5% in that space) it's always interesting to look at relative strength.  Which names are either making new 52 week highs or showing small losses in a time of market turbulence.   If the names are in non-defensive sectors you can often glean a company that institutional buyers want to hold onto - and a potential market leader during the next bounce.

Below I've listed 118 names that have a market cap of $300M+, stock price of $10+, and average daily volume of 100K+.  They are either at new 52 week highs, or 0-3% below their 52 week high. I've sorted it by industry rather than market cap, to see if there are patterns in terms of sub-sector strength.  On first glance, outside of the normal defensive stalwarts, I notice quite a few are foreign ADRs.  And REITs of all varieties are showing impressive strength.  (Before you ask about Netflix, it is down more than 3% as I type - hence not on the list)

Ticker Company  Market Cap  Industry
UAN CVR Partners, LP Common Units r              1,484 Agricultural Chemicals
SWI SolarWinds, Inc.              1,742 Application Software
SMP Standard Motor Products Inc.                  322 Auto Parts
FMX Fomento Econ          112,267 Beverages - Brewers
HANS Hansen Natural Corporation              6,433 Beverages - Soft Drinks
KOF Coca-Cola FEMSA S.A.B de C.V.            15,904 Beverages - Soft Drinks
PEP Pepsico, Inc.          109,017 Beverages - Soft Drinks
DEO Diageo plc            52,924 Beverages - Wineries & Distillers
GNOM Complete Genomics, Inc.                  553 Biotechnology
CEPH Cephalon Inc.              6,073 Biotechnology
SGEN Seattle Genetics Inc.              2,155 Biotechnology
TLCR Talecris Biotherapeutics Holdings Corp.              3,629 Biotechnology
LSTZA Liberty Starz Group            59,469 Broadcasting - TV
MCO Moody's Corp.              8,982 Business Services
SVVS SAVVIS, Inc.              2,259 Business Services
SQM Chemical & Mining Co. of Chile Inc.            16,187 Chemicals - Major Diversified
MO Altria Group Inc.            57,778 Cigarettes
BTI British American Tobacco plc            89,854 Cigarettes
ECL Ecolab Inc.            12,551 Cleaning Products
NTGR Netgear Inc.              1,542 Communication Equipment
TLVT Telvent Git S.A.              1,164 Computer Based Systems
NOC Northrop Grumman Corporation            18,588 Conglomerates
RURL Rural/Metro Corp.                  436 Consumer Services
SLM SLM Corporation              8,597 Credit Services
ECPG Encore Capital Group, Inc.                  782 Credit Services
NDN 99              1,425 Discount, Variety Stores
DPL DPL Inc.              3,525 Diversified Utilities
EXC Exelon Corp.            27,462 Diversified Utilities
CNP CenterPoint Energy, Inc.              8,121 Diversified Utilities
AZN AstraZeneca PLC            70,576 Drug Manufacturers - Major
NVS Novartis AG          145,664 Drug Manufacturers - Major
JNJ Johnson & Johnson          181,162 Drug Manufacturers - Major
FRX Forest Laboratories Inc.            10,559 Drug Manufacturers - Other
WPI Watson Pharmaceuticals Inc.              8,024 Drugs - Generic
GXP Great Plains Energy Incorporated              2,799 Electric Utilities
D Dominion Resources, Inc.            27,149 Electric Utilities
BIP Brookfield Infrastructure Partners L.P.              3,809 Electric Utilities
AT Atlantic Power Corporation              5,250 Electric Utilities
CIG Cia Energetica de Minas Gerais            13,641 Electric Utilities
CEG Constellation Energy Group, Inc.              7,341 Electric Utilities
PPL PPL Corporation            16,027 Electric Utilities
ST Sensata Technologies Holding NV              6,191 Electronic Equipment
BUCY Bucyrus International Inc.              7,471 Farm & Construction Machinery
UL Unilever plc            96,557 Food - Major Diversified
SBS Companhia de Saneamento Basico              7,135 Foreign Utilities
OKE ONEOK Inc.              7,466 Gas Utilities
NJR New Jersey Resources Corp.              1,853 Gas Utilities
XG Extorre Gold Mines Ltd. Ordinar              1,025 Gold
NPO EnPro Industries, Inc.                  927 Industrial Equipment & Components
ICO International Coal Group, Inc.              2,975 Industrial Metals & Minerals
SRX SRA International Inc.              1,784 Information Technology Services
MMC Marsh & McLennan Companies, Inc.            16,602 Insurance Brokers
WSH Willis Group Holdings Public Limited               7,261 Insurance Brokers
LQDT Liquidity Services, Inc.                  598 Internet Software & Services
GIB CGI Group, Inc.              6,227 Internet Software & Services
SAVE Spirit Airlines, Inc.                  859 Major Airlines
OFIX Orthofix International NV                  731 Medical Appliances & Equipment
AMMD American Medical Systems Holdings               2,312 Medical Appliances & Equipment
DGX Quest Diagnostics Inc.              9,164 Medical Laboratories & Research
CMO Capstead Mortgage Corp.              1,016 Mortgage Investment
CGV Compagnie G              5,644 Oil & Gas Equipment & Services
SODA SodaStream International Ltd.              1,122 Packaging & Containers
UN Unilever NV            97,212 Processed & Packaged Goods
PEET Peet's Coffee & Tea Inc.                  645 Processed & Packaged Goods
PLCM Polycom, Inc.              5,295 Processing Systems & Products
PRA ProAssurance Corporation              2,093 Property & Casualty Insurance
CB The Chubb Corporation            19,051 Property & Casualty Insurance
WRB W.R. Berkley Corporation              4,627 Property & Casualty Insurance
FCE-A Forest City Enterprises Inc.              3,159 Property Management
LOOP LoopNet, Inc.                  598 Property Management
MIM MI Developments Inc.              1,421 Property Management
ENL Reed Elsevier NV              9,833 Publishing - Periodicals
CYS Cypress Sharpridge Investments, Inc.              1,068 REIT - Diversified
RYN Rayonier Inc.              5,348 REIT - Diversified
RLJ RLJ Lodging Trust Common Shares              1,889 REIT - Hotel/Motel
AHT Ashford Hospitality Trust Inc.                  855 REIT - Hotel/Motel
DLR Digital Realty Trust Inc.              5,881 REIT - Industrial
PDM Piedmont Office Realty Trust Inc.              3,553 REIT - Office
MAA Mid-America Apartment Communities              2,466 REIT - Residential
SNH Senior Housing Properties Trust              3,388 REIT - Residential
ELS Equity LifeStyle Properties, Inc.              1,946 REIT - Residential
EQR Equity Residential            18,099 REIT - Residential
ESS Essex Property Trust Inc.              4,420 REIT - Residential
HTS Hatteras Financial Corp              2,174 REIT - Residential
ACC American Campus Communities Inc.              2,350 REIT - Residential
AGNC American Capital Agency Corp.              3,909 REIT - Residential
AVB Avalonbay Communities Inc.            11,460 REIT - Residential
BRE BRE Properties Inc.              3,230 REIT - Residential
CPT Camden Property Trust              4,489 REIT - Residential
SPG Simon Property Group Inc.            33,834 REIT - Retail
DTG Dollar Thrifty Automotive Group Inc.              2,423 Rental & Leasing Services
MCD McDonald's Corp.            83,567 Restaurants
OCN Ocwen Financial Corp.              1,262 Savings & Loans
LB LaBarge Inc.                  303 Scientific & Technical Instruments
FEIC FEI Co.              1,563 Scientific & Technical Instruments
CPHD Cepheid              1,935 Scientific & Technical Instruments
BEC Beckman Coulter Inc.              5,922 Scientific & Technical Instruments
CHKP Check Point Software Technologies Ltd.            13,501 Security Software & Services
NSM National Semiconductor Corporation              5,966 Semiconductor - Broad Line
TSM Taiwan Semiconductor Manufacturing            70,675 Semiconductor - Integrated Circuits
OSIS OSI Systems, Inc.                  754 Semiconductor Equipment & Materials
VSEA Varian Semiconductor Equipment               4,637 Semiconductor Equipment & Materials
GMLP Golar LNG Partners LP              1,050 Shipping
BAK Braskem S.A.            12,852 Specialty Chemicals
LZ Lubrizol Corporation              8,637 Specialty Chemicals
VSI Vitamin Shoppe, Inc.              1,170 Specialty Retail, Other
SUR CNA Surety Corp.              1,194 Surety & Title Insurance
CDNS Cadence Design Systems Inc.              2,837 Technical & System Software
TYL Tyler Technologies, Inc.                  802 Technical & System Software
CHT Chunghwa Telecom Co. Ltd.            32,155 Telecom Services - Domestic
CNSL Consolidated Communications Holdings Inc.                  560 Telecom Services - Domestic
BCE BCE, Inc.            30,498 Telecom Services - Domestic
MICC Millicom International Cellular SA            12,454 Telecom Services - Foreign
VLCM Volcom Inc.                  598 Textile - Apparel Footwear
TSP Telecomunicacoes de Sao Paulo S.A.             15,223 Wireless Communications
TSU TIM Participacoes S.A.            12,430 Wireless Communications
TU TELUS Corporation            16,815 Wireless Communications
VIV Vivo Participacoes S.A.            18,697 Wireless Communications

John Paulson's Funds Have Rough May

Hedge fund manager John Paulson made his name in the subprime crisis, famously working with Goldman Sachs to create mortgage derivatives he could bet against.  The outsized profits of that era led to an avalanche of money seeking his counsel and now his hedge fund is amongst the largest in the world.  After a very rough May, 2011 has not been so kind for Paulson's funds, the FT reports.  And June isn't look so sweet either as a  potential "fake Chinese company" listed in Canada, is a half billion stake for his funds.

That said Mr. Paulson himself is doing fine :) [Jan 28, 2011: WSJ - John Paulson Bests $4B Gains of 2007, with $5B Year in 2010] [Mar 29, 2010: Are John Paulson's Hedge Funds Now Too Big to Outperform]

  • Paulson & Co, the world’s third-largest hedge fund, saw the value of its flagship fund drop close to 6 percent in May, echoing losses across the industry.   The loss tops negative returns in the first quarter at the $37 billion New York-based money manager, famed for the spectacular returns gained by shorting the US mortgage market in 2007, and will again raise questions over its portfolio’s volatility.
  • John Paulson, Paulson & Co’s founder, has maintained his bullish view on the US economy and equity markets, even though many of his peers have recently begun to lower their market exposure levels.
  • May’s loss means that in the year to date, the $9 billion Paulson & Co Advantage Plus fund is down 7.6 percent. The average hedge fund lost 1.39 percent over the month according to preliminary data from Hedge Fund Research, with “event-driven” strategies such as that operated by Paulson & Co’s main fund down on average 0.62 percent.
  • May was also a painful month for Mr Paulson’s other big investment call: gold   The Paulson & Co Gold fund dropped 6.39 percent in May, erasing much of its 8.5 percent April gain. The fund is up 0.9 percent in the year. Paulson & Co is the world’s largest non-sovereign gold investor.  
  • Performance was better for the firm’s other funds. Its Credit fund was down 0.05 percent for May, while the Recovery fund, which is geared to the prospects of the US economy, dropped 0.69 percent. Paulson & Co declined to comment.
  • In the firm’s most recent correspondence with investors Mr Paulson said difficulties for US banks had been a particular drag on his portfolios but that he remained optimistic. The US stock market could rally as much as 40 percent from its first quarter level this year, he said. 
  • June is also shaping up to be a difficult month. Paulson & Co is the largest investor in Sino Forest, the Canadian-listed forestry group that has been accused by short seller Carson Block of fraud, charges that the company disputes.  The collapse in Sino Forest’s share price on Friday handed a $460 million paper loss to Paulson & Co.
  • The Advantage Plus fund returned 17 percent in 2010. It returned 21.5 percent in 2009, 37.6 percent in 2008 and 158.5 percent in 2007. 

[Nov 18, 2008: Paulson Buying Mortgage Backed Securities]
[Jan 31, 2009: Dealbook - John Paulson's Year End Review]
[Feb 17, 2009: Hedge Funds Pile into Citigroup; as does Bruce Berkowitz of Fairholme Funds]
[Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]
[May 16, 2009: John Paulson Continues to Pile Into Gold]
[Jul 9, 2009: Latest Picks and Pans from John Paulson and George Soros]
[Aug 12, 2009: John Paulson Makes Bank of America 2nd Largest Holding after Gold]
[Aug 26, 2009: Citigroup Surges on John Paulson Investment]
[May 18, 2010: John Paulson's Q1 2010 Moves]

Quiet Week for Economic News; No Monday Morning Gap Up

After 5 down weeks in a row - a quite rare losing streak the past few years, many market participants are expecting some sort of cursory bounce this week.   It's going to be tricky for bears to some degree, since we are quite oversold and hence to quick bounces, but the attempt Friday by bulls fizzed by mid day.  A lot of secondary indicators are quite oversold as well.

S&P 1295 (April lows) remain the key level; a close below that could lead to much more meaningful downside in the intermediate term - although near term, we are again quite stretched as last week was horrid.

The first week of the month is data heavy, and then it slows down.  This week does not bring much in the way of market moving economic reports, but The Bernank apparently speaks at 3:45 PM today.  So bears could step out of the way in the closing hour, although at this point I don't know what this guy can say other than "I plan to eradicate the remaining middle and lower class by taking oil to $150 with QE3."  He is boxed in and knows it, although won't admit it.

Earnings season begins anew in about a month, and I expect things to be generally positive again, but between now and then are a few weeks lacking in catalysts ex Greece.

Friday, June 3, 2011

Poor Close - This Week Goes to Da Bears

As expected this morning, we did get a cursory bounce.  Most of the morning was spent battling the 100 day exponential moving average at S&P 1307, with a quick visit over it.  I thought the bulls would pull it off again (I have recency bias, courtesy of The Bernank!).  But the visit was short lived, about an hour or so - and the bulls seemed to be out of bullets after that.  Definitely not the action of Sep 10-Feb 11 We are looking to close near the lows - definitely a week for the bears outside of Tuesday's "Greece is bailed out again" rally - which looks very much like tape painting to close out the month in retrospect.

This is going to be the first 5 week losing streak since 2008 in the S&P 500, if you can believe it.  The action up to this week had been slow motion selling.  S&P 1295 seems to be a level a lot of people are looking at for next week in the blogosphere as it was the intraday low of mid April, and today's lows of 1298 is also going to be watched.  We'll see if some M&A action can create a premarket push Monday morning as we have become accustomed to.

200 day moving average is down there at 1261, which would tie very closely with the lows of mid March (Japan).  Whatever the case its a time to remain small and nimble - cash is not trash.

[Charts] Average Duration of Unemployment Twice the Level of any Previous Peak Since Records Began in 1940s

There are so many ways to splice and dice how poor the underlying structure of the U.S. employment picture is, but Business Insider highlights this graph as one of the most striking.  The average duration of unemployment is now 40 weeks, which is just about twice the level of any other peak, including the 'jobless recovery' of the early 2000s.  The Great Recession lives on for many in this country ....

[click to enlarge]

And also I'll add the now infamous graph Calculated Risk blog puts out each month.  These type of data points show why it is laughable Wall Street celebrates an extra 30K jobs here, or 50K there.  We're digging out of a black hole.  And this with a 10% annual federal deficit to boost the economy.  The scary thing is what happens when the next cyclical recession hits - the base we're working off of, in terms of jobs versus population is already so low.

Current Pullback in Second Longest in Duration Since March 2009 Bottom, but One of the Smallest % Losses

This data from the blog VIX and More is a day old, but it highlights an interesting situation.  Of the 16 pullbacks since the March 2009 "generational bottom", the current episode is the 2nd longest at 23 days, trailing only the 48 days experienced last April-June as QE1 ended and the flash crash hit.   But that said, as of yesterday it was only the 11th most severe with a 4.7% loss on the S&P 500 (obviously a bit higher today).  Which is why this has not been an easy pullback even for bears who target the indexes - it's been a long slow grind with a lot of spring back rallies, and a rotation into defensive sectors which has offset the brash selloffs in 'beta'.

The chart also shows how dark of a period this has been for shorts - the 'pullbacks' the past few years - while occasionally sharp, are so quick in duration most of the time (2-8 days) by the time you position for them, the market is already starting a new V shaped bounce!

Prudential Financial Survey: 44% Never to Invest in Stock Market Again

After the twin crashes of fall 2008 and late winter 2008-2009, the mood around markets was especially dire.  Combined with the 2000-2002 crash, investors who had been involved in U.S. markets had suffered more than a lost decade, when adjusting for investor behavior.  That is, retail investors tend to scramble into stocks at higher levels and panic out at lower levels, minimizing gains and exaggerating losses.  Off anecdotal evidence, gathered simply from speaking to quite a few in their 40s and 50s at social functions I gathered back then many were never going to return to the market again.   Many were at the point they were content to simply not lose money in an investment go forward.  Others, due to their age and losses (not including real estate!) simply could not afford any principal loss to what remained, no matter the potential long term gains.  I offered this was a substantial change in the psychological risk tolerance of Americans burnt repeatedly by Fed induced boom/bust cycles of the past 15 years. 

On the other hand, many on financial infotainment TeeVee (most living in a financial bubble spanning from CT to NYC) said "they'll be back... once the market goes up, they'll be back.  They always come back!"  Well here we are 2 years and 100% off the bottom, and those same commentators now scratch their head on why "the people" have not come back en masse... chasing those big returns as they always used to do.  I'll again point out the anecdotal evidence I saw in paragraph 1 - many no longer have the means, nor the risk tolerance as they get closer to retirement age to risk even losing 1 more dollar in the great casino.    A Prudential Financial survey highlighted in CNNMoney reinforces the anecdotal evidence I collected a few years back.  Even today, in a completely different stock market environment versus 2 years ago, 44% of those surveyed said they will NEVER invest in the stock market again.  In a related question, 58% have simply lost faith in the market as a whole.  [Apr 9, 2010: Muriel Siebert - American "Public Does Not Have Faith in the Marketplace"]

  • Prudential, which polled more than 1,000 investors between the ages of 35 and 70 online earlier this year, found that 58% of those surveyed have lost faith in the stock market. Even more alarming, 44% said they plan to never invest in stocks. Ever. 
  • "It's clear that the financial crisis has driven fundamental changes in the way Americans are saving for retirement, with millions of Americans perhaps at even greater risk of having insufficient income for a secure retirement," said Christine Marcks, president of Prudential Retirement, in a release about the firm's survey.
  • "This is similar to what happened in the 1930s. People who grew up during the Depression said they would not buy stocks again," said Ed Keon, portfolio manager with Quantitative Management Associates, a money management firm in Newark, N.J. that is a subsidiary of Prudential.
  • Many investors are distrustful of Corporate America in general and Wall Street especially. "The scarring is very deep and long lasting," said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co in New York. "There's a view that the market is rigged and last year's Flash Crash did not help alleviate those concerns."

While we are on the topic, what has been amazing the past few years has been the striking rise in equity markets even as there have been net OUTFLOWS out of equities for the majority of the past 2+ years - only in the past 4-5 months have we finally seen net INFLOWS.  So somehow the market had been surging since March 2009 even as money has been siphoned out of the market most of this time.  Those of us who live on grassy knolls have our theories [Jan 6, 2010: Charles Biderman of TrimTabs Claims US Government Supporting Stock Market], but we truly have a new paradigm where markets can go up even as money leaves it. ;)  Supply and demand rules have been broken.

Groupon (GRPN) Files IPO Papers with Potential Valuation at $30B

Whatever you think about Groupon (GRPN) itself, or the potential bubble in web2.0 companies - the story of this company is staggering.  This entity was not even in existence until late 2008... within 2 years it rejected an offer by Google for a buyout at $5-$6 Billion. [Nov 30, 2010:  From Startup in 2008 to Potential $5-$6B Buyout from Google in 2010]    And now roughly half a year after that rejection, it is filing IPO papers that will potentially give it a valuation of some $30 Billion.  And that is before the retail crowd jumps in on day 1, pumping the stock to who knows what valuation.  Again - this company was not around 3 years ago. 

The expectation was for a late 2011 IPO but I think the company is smart to go earlier, as the fervor in the space is fever pitch and no one knows what the market will be like in 6 months or 12 months.  As the company is in its early life, hyper growth stage - investors currently are willing to pay almost any price, despite lack of profits.  As with most of these type of companies the idea is build it, and the profits will come. 

Zynga also is striking when the fire is hot.  Obviously the giant on the hill, Facebook, is the ultimate deal - seemingly they are still going to wait until 2012.

Via NYT Dealbook

  • The social buying site on Thursday filed to go public, a hotly anticipated debut that could raise $3 billion, according to two people close to the company who were not authorized to speak publicly. At that level, the company would be worth roughly $30 billion.
  • LinkedIn’s stunning debut has pushed Silicon Valley and Wall Street bankers to revise expectations higher on all types of technology offerings. According to one person close to Groupon, the company and its bankers have struggled to pinpoint the final valuation for the I.P.O. The person cautioned that it could move higher or lower based on market conditions.
  • “I would urge any investor to think about the fundamentals,” said Sucharita Mulpuru, a Forrester Research retail analyst. “Sure Groupon could be the next Amazon, but as an investor do you have the patience to wait them out?”
  • Groupon, based in Chicago, has enjoyed a meteoric rise in its short life.  Shortly after its founding, Groupon notched revenue of $94 million in 2008. Two years later, it swelled to $713 million. The company — which employs more than 7,000 people and has 83 million subscribers across 43 countries — reported $644.7 million of revenue in the first quarter of 2011 alone.
  • As its prospects have grown, so has investor interest. In 2010, the company was worth roughly $1.4 billion, based on a fund-raising round led by the Russian firm D.S.T. Global. Groupon spurned a $6 billion takeover bid from Google in December, opting instead to raise nearly $1 billion from Fidelity Investments, T. Rowe Price and other investors.
  • At a $30 billion market value, Groupon would top that of Google at its market debut. Google raised $1.67 billion in August 2004, putting its value at $27 billion. 
  • Like many start-ups, Groupon is still struggling to turn a profit. Last year, the company’s loss topped $450 million, compared with $6.9 million in 2009 and $2.2 million in 2008. The company’s biggest expense is marketing. Groupon spent $263.2 million on advertising and subscriber e-mails in 2010, compared with just $4.5 million the year before. 
  • By comparison, Google earned $106 million on revenue of $1.5 billion in the last full year before it went public in 2004.
Here is where the 'bubble' talk resurfaces - since Groupon is not profitable under conventional means... well, they make up their own standard.  Similar to what we saw in 1999.  Although to be fair, Groupon has far more revenue than 99% of the things that were coming out in 1998-1999.
  • With less-than-ideal financials under generally accepted accounting principles, Groupon is trumpeting a nonstandard metric that excludes marketing and acquisition costs. On that basis, it reported $60.6 million in operating income last year and $81.6 million in the first quarter this year.
  • To some, the use of such nonstandard measures harks back to the days of the technology boom in the late 1990s, when unusual metrics like “eyeballs” were used instead of numbers like net income. Those specialized figures were often used to present a rosier picture of a company’s financials, obscuring their profitability.
  • Groupon argues that its enormous marketing budget is both necessary now and will dwindle over time. Locked in a race for subscribers around the world, the company is willing to spend a tremendous amount of money in the short term to secure a dominant market share. It says it will cost less to maintain those subscribers over time.
  • As an example, Groupon said in its filing that it spent $18 million to add about 3.7 million subscribers in the second quarter last year. By March 31 of this year, those customers generated $145.3 million in revenue and $61.7 million in gross profit.
  • Groupon’s investors and early employees stand to reap a windfall in an I.P.O.  The company’s largest shareholder, its co-founder and board member Eric P. Lefkofsky, owns 64.1 million shares, or roughly 21.6 percent of the company’s Class A common stock — a stake that would be worth billions of dollars. The venture capital firm, Accel Partners, which invested in Groupon in November 2009, owns a 5.6 percent stake. Mr. Mason, who made $184,599 last year, controls 7.7 percent of company’s Class A shares.

[Feb 26, 2011: Groupon Revenue Hits $760M in 2010; Staggering Year over Year Growth]
[Dec 31, 2010: NYT Dealbook - New Round of Financing for Groupon Sets Stage for Late 2011 IPO]

First Item of Positive U.S. Economic News in Weeks - ISM Non Manufacturing Jumps to 54.6 v 52.8

I just tweeted that with sentiment suddenly so poorly we're going to need to see a quite horrific ISM Non Manufacturing figure to get to new lows on the day.  Instead we saw an improvement as the figure reversed the recent trend of 'below expectation' in U.S. economic data - coming in at 54.6 in May vs 52.8 in April.  (consensus 54.0)  This is the larger part of the U.S. economy vs manufacturing so it's an actual positive.  The employment subindex grew by 2.1, while prices fell by 0.5 - both positives.  New orders also up in sharp fashion.

As for the market, we are quite stretched to the downside - at S&P 1300 the index is off 3.3% since the close Tuesday and most of the technical secondary indicators have quickly reached oversold levels.  It's head spinning action as we jump from overbought to oversold within days.  The 100 day moving average remains key at 1307; bulls would definitely like to see the S&P 500 close back above that level as this is the first intraday break of this average since March - and only the second such event since September 2010.  I would be harvesting any short side gains here not pressing on the downside due to nothing else but the 'rubber band effect' - we've fallen a long way in 3 sessions and you are in danger of that cursory oversold bounce.  If  the S&P 500 fall to new lows on the day than you have to change course & re-engage on the short side.    But that's very short term - we still appear to be in a bearish condition intermediate term.

Full ISM report here.

  • "Business is O.K. Fuel prices and truck availability are starting to be a negative force on our supply chain." (Agriculture, Forestry, Fishing & Hunting)
  • "Business conditions are stabilized." (Health Care & Social Assistance)
  • "First and second quarters of 2011 have been up 25 percent over 2010; however, we expect a slight slowdown over the summer months." (Professional, Scientific & Technical Services)
  • "Uncertainty within commodity markets, especially fuel- and oil-based products, is putting pressure once again and forcing us to retrench as we look for stability. We expect the remainder of 2011 and at least the first two quarters of 2012 to be tumultuous." (Retail Trade)
  • "Volatile commodity prices adding stress to meat and dairy producers; increasing fuel prices are a problem for many." (Wholesale Trade)
MAY 2011
Non-Manufacturing Manufacturing
Index Series
Direction Rate
NMI/PMI 54.6 52.8 +1.8 Growing Faster 18 53.5 60.4 -6.9
Business Activity/Production 53.6 53.7 -0.1 Growing Slower 22 54.0 63.8 -9.8
New Orders 56.8 52.7 +4.1 Growing Faster 22 51.0 61.7 -10.7
Employment 54.0 51.9 +2.1 Growing Faster 9 58.2 62.7 -4.5
Supplier Deliveries 54.0 53.0 +1.0 Slowing Faster 14 55.7 60.2 -4.5
Inventories 55.0 55.5 -0.5 Growing Slower 4 48.7 53.6 -4.9
Prices 69.6 70.1 -0.5 Increasing Slower 22 76.5 85.5 -9.0
Backlog of Orders 55.0 55.5 -0.5 Growing Slower 5 50.5 61.0 -10.5
New Export Orders 57.0 53.5 +3.5 Growing Faster 9 55.0 62.0 -7.0
Imports 50.5 57.0 -6.5 Growing Slower 2 54.5 55.5 -1.0
Inventory Sentiment 55.0 57.5 -2.5 Too High Slower 168 N/A N/A N/A
Customers' Inventories N/A N/A N/A N/A N/A N/A 39.5 40.5 -1.0
* Non-Manufacturing ISM Report On Business® data

Big Disappointment in Jobs Creation at +54,000; Unemployment Rate Jumps 9.1%

Still digging through though the numbers but the first glance is very disappointing.  A net 54,000 accounting for 83,000 private sector growth, versus 29,000 contraction in the public sector.  The estimate for May was about 175,000 a few days ago before the ADP report Wednesday.

Initial knee jerk in the S&P 500 is a drop from -0.3% in premarket to -1.0%ish.  ISM non manufacturing up at 10 AM.  S&P currently around 1300...


Unemployment rate jumped to 9.1%.

Only positive on first glance is hourly earnings up 0.3%.  (Year over year growth 1.8%)

Average workweek flat at 34.4 hours.

Revisions from previous two months also decreased job growth by 39,000.

The all important labor force participation rate remains punk at 64.2%; the same figure for 5 months.  Hence the unemployment rate increase does NOT have anything to do with more people entering the work force (which would be a more benign explanation).  A more normal labor participation rate would be adding roughly 2% to the unemployment rate.  Please recall some 1M Americans have gone to the disability rolls in the past 2 years, which is obviously retarding the labor force participation rate at the margins.  [Apr 7, 2011: Nearly 1 in 20 Working Age Americans are on Disability, a Doubling versus 1990]

U-6: unemployed + marginally attached dropped from 15.9% to 15.8%.

Will revise this as I look through the numbers.  But considering the McJobs creation and birth death model job creation this is really a poor number.  Indeed if all 62,000 McJobs created fell in May - almost the entire net growth of jobs in the private sector was due to McDonald's.  The irony is great.

Full report from BLS here.

Thursday, June 2, 2011

China Now Beginning to Feel Hangover from Lending Boom - Government May Assume Some Local Debt

Long time readers may remember some stories I wrote in 2009 as the Chinese 'economic miracle' took place.   In February 2009 I asked if the Chinese simply were repeating the Alan Greenspan gameplan in [Feb 16 2009: Is China Pulling an Alan Greenspan?]

Some very interesting data out of China of late in terms of loan growth - in fact staggering data. Before I write the rest of this entry don't take it as bashing the Chinese. In fact they are learning from the masters of manipulation - the United States. They are following the Greenspan playbook - to forestall a normal economic cycle flood the system with dollars... which creates new bubbles. But now we see China is embarking on the same game plan - which in the long run will lead to bad outcomes, but in the short(er) run can goose values.

Chinese banks extended a record 1.62 trillion yuan ($237 billion) in loans in January,
more than double the year before, as lenders heeded government calls to loosen credit controls to help revive the economy. Facing an abrupt slowdown due to plunging demand for China's exports, regulators have sought to boost liquidity after years of trying to rein in lending. Banks made 771.8 billion yuan ($113 billion) in new loans in December, figures show, up nearly 15 fold over the same month a year before.

Just as in the U.S., China has been applauded (as Greenspan once was, and Bernanke has been the past few years) for somehow bending the shape of the economic cycle.  Of course the actions of all these folk, just create mis-allocations of capital as too much money chases too few assets.  This has happened in the U.S. as well as the 'real economy' does not need all the liquidity the Fed has pushed into the system - already the price is being paid by the lower and middle class via commodity inflation, but there will be many other bad outcomes down the road (i.e. "stupid deals" are once more being made in credit markets - as if we are right back to 2006/2007)

But let's focus back on China.  Unlike the U.S. the central command type economy made it much easier to push out this enormous loan growth straight into the economy.  Some of the money certainly went to good causes.... others?  Well that's why you tend to build empty cities. [Mar 29, 2011: [Video] An in depth Look at China's Empty Cities] [Jan 14, 2011: [Video] Behold China's Nearly Empty Mega Mall] [Nov 13, 2009: Ordos - China's Empty City] A few months after that February piece I wrote another [May 27, 2009: How is China Spending their Stimulus... and How Many Loans Will go Bad?]

They seem to be in a "build it, build anything" mode with loans flying out the wazoo to combat a slump in both exports and imports ...

....while no one seems to care except me, I am curious how many of these loans will go bad. Because as the US so aptly showed - when you make money easy, and banks lend to anything that moves ... well let's just say there is some fallout to that.

....let me say even if many bad things happen down the road from the actions of today - it really does not matter to "the market". "The market" is only concerned about finding a short term speculative profit in the near term, so it is clapping with both hands (and feet) for money to be thrown in every direction to create new bubbles. No matter the ultimate outcome

Certainly these things take a while to play out.  And probably longer in a country as opaque as China, but we are now only 2 years down the road from when I wrote those pieces, and it looks like the fallout is beginning.  Two stories in Bloomberg & Reuters the past 24 hours point this out.  First we hear the Chinese "federal" level of government may soon be assuming local government debt.  This is the equivalent of Washington D.C. taking on the debt of your local city, county, or state.  Now of course, China runs massive surplus rather than deficit at the "federal" level so at least they are not borrowing money to pay off bad debts, but this is still a ponzi effectively - do stupid things at the local level, with the heaps of loans a few years ago - and than have the government absorb the losses.  It sounds a lot like 2007 in the USA mortgage market - but don't worry, I'm sure "subprime is contained" in China.

  • China plans to shift as much as 3 trillion yuan ($463 billion) of debt off of local governments, reducing the possibility of defaults that could threaten stability, Reuters reported, citing unidentified people.  The central government will pay off some local debt and make state-owned banks write off some bad loans.
  • Chinese cities and provinces, also currently barred from directly taking bank loans, have set up about 8,800 companies to fund infrastructure projects, Credit Suisse Group AG estimates. Fitch Ratings cited the risk from these vehicles, used to fund stimulus spending from the 2008 global financial crisis, in lowering its outlook on China’s AA- long-term local-currency debt rating in April.
  • Many of those loans will not be repaid and ultimately it is the central government that will probably have to bail out either the banks or local governments, or both more likely, as they did a decade ago,” Qinwei Wang, China economist at Capital Economics Ltd. in London, said in an e-mail response yesterday to questions from Bloomberg News.
  • Local government financing vehicles had loans totaling 9.09 trillion yuan at the end of November, with 1.77 trillion deemed to have repayment risks, the 21st Century Business Herald newspaper said in March.
  • China’s last banking crisis was in the late 1990s, when years of state-directed credit left lenders saddled with bad loans, forcing the government to spend more than $650 billion over a decade in bailouts.

Second, China is not done yet.  To keep GDP going, it appears they have new programs that will lard even more debt onto local governments - much of which should go bad in a few years from today.  At which point I assume the federal level of government will need to step in again.  Rinse. Wash. Ponzi. Repeat.  This Bloomberg has a story about the Chinese lending binge creating a hangover in 2013.  (this is a very lengthy piece, so if you want the full scoop, follow the link)   That hangover should coincide nicely with timing of the next recession in the U.S., setting up for fun times in the market in 2012-2013.

  • China's plan to rein in property prices with a record homebuilding program may worsen local debt risks even as it proves a boon to companies from domestic cement makers to Chilean copper exporters.
  • Premier Wen Jiabao aims to build 36 million low-cost homes by 2015, an initiative that will see 2 trillion yuan ($307 billion) added to local government borrowing by 2012, bringing it to a total 12 trillion yuan, Standard Chartered Plc estimates. The surge of loans to local authorities may spark a wave of bank bailouts that hobble economic growth.
  • We’re going to see more financial shenanigans, we’re going to see more money pushed off balance sheets” as banks seek to mask the extent of their lending to local governments, said Singapore-based Fraser Howie, who co-wrote “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” and has been an investment banker in Asia for almost two decades. “We’re going to see some major recapitalization coming at some point” in the banking system, he predicted.
  • Local governments have created more than 8,000 investment companies that allow them to get around regulations prohibiting direct borrowing. Fitch Ratings cites lending to the vehicles and to property developers in a worst-case scenario predicting bad loans could reach 30 percent of the total at China’s banks.
  • “Already banks are dealing with two years worth of questionable lending and now you are going to load this on top?” asked Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management. Bad debt is “just inevitable. The question is the dimension. Is it catastrophic or is it just harmful?”
  • ....the perception that bad debts in the banking sector are unlikely to materialize for a few years, according to Charlene Chu, senior director, financial institutions at Fitch Ratings in Beijing. “Investing for the long term in Chinese banks is risky,” said Chu, whose company in March said its gauge of systemic risk indicated a 60 percent chance of a banking crisis by mid-2013 
  • Banks had a total of 50 trillion yuan of all loans outstanding in April. Standard & Poor’s has said the bad-loan ratio may climb next year to as high as 10 percent, from 1.1 percent now.
  • Social housing projects have “a pretty thin profit,” said Zhang Yi, senior analyst at Moody’s in Beijing. “It’s not like you are lending to highly profitable companies.” Chris Ruffle, who helps manage $19 billion for Martin Currie Inc. in Shanghai, said, “it’s not a great situation and I wouldn’t want to be an investor in banks” after the record boom in lending.

I am not highlighting these stories to take a pat on the back (although if I worked in a white shoes Wall Street firm, I'd be getting lauded globally "the next Roubini!" for highlighting these issues years in advance - thankfully, I'm only a lowly two bit blogger) but to highlight two things.  As I said above - Wall Street only focuses on the here and now.  Just like it now cries for more QE3 (because all it cares about is inflated asset values), and it applauded Greenspan, and China, and Bernanke for near term actions to keep the balls juggling - the "Street" cares nothing about the consequences of all these steroid hits.  But there are costs for all these imbalances - and they eventually get paid.    Second, the risks to the China story are growing go forward, as they are due to pay for their massive loan schemes of 2009.  And apparently new schemes being put into place now. Considering China is the world's linchpin for growth - it is important to be aware of this situation, which is getting little notice in the U.S.  It will only matter.... when it matters.

Somewhere Alan Greenspan has to be laughing ......

S&P 500 Falls to 100 Day Moving Average

Finally the lows of last week at 1311-1312ish have been broken, and the S&P 500 now sits right at its 100 day moving average.  This was the level that held in mid March, other than 1 session which if memory serves was in reaction to the Japan situation.

Generally these key supports don't break on the first test.  Again, I expect the news flow tomorrow morning to be the big driver - up or down.  Coin flip at this moment which way it goes, but short of such market moving news the trend is not good.

[Video] Peter Thiel Offers $100,000 for Some Bright Minds Not to Go to College

Paypal co-founder, venture capitalist and (not as successful) hedge fund manager Peter Thiel is leading the charge against the university bubble in the United States.  He talks about an interesting initiative to pay potential students $100K not to go to college with CNBC.  Obviously this has a relatively limited scope, but the audacious nature of the offer certainly has the internets (sic) buzzing based from my readings the past few months

5 minute video - email readers will need to come to site to view.

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