July 15, 2009

Global Market Comments
July 15, 2009 Featured Trades: (SPX), (GOLD), (BAC), (WFC), (GS), (CVX), (XOM)

 

1) When I turned on my computer this morning and saw the S&P 500 futures up 40 from yesterday’s low, I knew it was time to fix the flat on my kid’s bicycle, trim the hedges, repair the torn screen window, and unclog the downstairs toilet. The worst thing you can do in these low volume, summer short covering rallies is sell too soon. Kudos to Goldman Sachs for bringing in a blowout quarter, which I had long expected. When junk yields move from 25% to 13% how hard is it to make money? It just shows you what a great business model they have, that of a ‘portfolio’ of traders, some of which are making money at all times. But what is great for GS is not so good for the rest of us. Much or their future will rely on the vast expansion of public debt from every quarter, from 30 year Treasuries to your local sewer works, all of which has to be traded where they have the Ax. The remaining  financials and the economy as a whole are no Goldman Sachs. So you have to view the rally they sparked as a gift to sell into. There are no green shoots in the US, and only a few in Asia, as the Shanghai market’s doubling since November has been shouting at us at the top of its lungs. Call them bamboo shoots. Look at the chart below prepared by Price Headly at Big Trends at http://www.bigtrends.com/index.php, showing that we are still safely and solidly in a downtrend. Still, keep some buy stops up above as insurance, just in case traders really want to go nuts and squeeze the index above 930.

2) I have been a huge bull on gold this year, piling investors into the yellow metal at the $800 level in early January. But after an exciting couple of months, it has tiresomely become dead money. This is a commodity that has absolutely everything going for it; the Great Depression II, threats of nuclear war with North Korea, riots in Iran and China, a government borrowing binge of Weimar proportions, and money supply growth that is through the roof. In fact the US is doing everything imaginable to debase its own currency. Unfortunately,  all I see on my screen right now is an ugly smudge at $910 an ounce. So what gives? Someone has been leaning heavily on gold every time it approached the magic $1,000 level, and they have now created a quadruple top on the charts. Gold has become the metal that everyone loves, but nobody wants to buy. There have been rumors of European Central Bank selling of gold reserves, Russian selling to cope with a lower oil price, and traders simply playing the range for lack of anything else better to do. The global risk reduction that began with a vengeance a few weeks ago is certainly having an impact. If demand from the famed Indian wedding season doesn’t come through, things could get worse. Gold bugs should expect to suffer more short term pain in this great long term core holding.

3) Who is holding the bag of rapidly rottening commercial real estate loans? Banks, led by Bank of America (BAC) and Wells Fargo (WFC), hold 50%, followed by collateralized mortgage backed securities 30%, life insurance companies 10%, and pension funds 10%. It is no accident that these two banks have the greatest exposure  in the melt down states of California and Florida. The scary thing is that the banks with the biggest exposures are also suffering from a simultaneous assault on their balance sheets from defaulting residential home loans. As low as these stocks are, a rollover in global equity markets could send them right back into survival mode. Use the Goldman Sachs rally to sell into.

4) As a former research biochemist at UCLA, I have long viewed biofuel as a huge waste of time, because there are not enough hamburger stands in the whole world to generate the needed grease for recycling. Ethanol was never more than expensive pork for corn producing swing states, and it’s no surprise they are going bankrupt, even with large subsidies. That’s ignoring the fact that they were burning food to power our chrome wheeled Cadillac Escalades, driving up prices for the starving masses in emerging markets. But when Exxon (XOM) commits $600 million to move algae from the realm of science fiction to mass production, I have to sit up and pay attention. This is not a company that is interested in tree hugging or saving the world, but in the hardnosed business finding and selling energy for a profit. There is no law confining them to the oil business, and it is wise for them to find alternatives while they have the bucks to do it. Never underestimate the power of pond scum. Algae have been used for centuries to produce agar and additives for food, cosmetics, and medicines. You’re probably already eating more than you realize. According the Exxon (XOM), one acre of algae also has the ability to produce 2,000 gallons of fuel per year, compared to 650 gallons for palm trees, 450 gallons for sugar cane, and 250 gallons for corn. As any marine biologist will tell you, these simple organisms accomplish this by absorbing massive amounts of carbon dioxide and turning it into oxygen, killing two birds with one stone from an environmentalist’s point of view.  The catch is that no one has ever tried to do this on an industrial scale, and the production problems are certain to be formidable, with enormous inputs of water and nutrients required. Of course, you probably wouldn’t want to live next door to where this is happening. But if we have to hold our nose to beat the next energy crisis, so be it.

QUOTE OF THE DAY

‘The stronger dollar has no greater friend than China, and no greater enemy than Ben Bernanke’¦. A weak dollar is a wealth transfer from China to the US, and they’re not going to stand for it’¦.Bernanke wakes up in the morning and thinks ‘How can I weaken the dollar today?’ He’s got quantitative easy, zero interest rates, and junk of the Fed balance sheet. He’s a smart guy, so I think he’ll come up with other things,’ said Jim Rickards, senior managing director for market intelligence at the applied research organization Omni