February 26, 2008

1) Yesterday's 182 point rally in the last 30 minutes came from Standard & Poor's ??announcement that it would maintain ??bond insurer MBIA's AAA rating. They indicated they might downgrade the company later. This shows how backward looking and useless these ratings are as MBIA's bonds are already trading at B- levels. Is MBIA really the same credit as GE?

2) Wheat went up a staggering 25% yesterday as Kazakhstan announced it would restrict exports to head off domestic shortages. Wheat is now up 400% YOY. Every major wheat producing area outside the US is now in a drought.

3) The US announced it would support gold sales by the International Monetary Fund. The price went down $10 immediately then shot up to a new high of $954. In a normal market gold would have dropped 10% on this news, so it shows how strong the demand for gold is.

4) The producer price index for January came in at 7% YOY, the hottest number in 23 years. More ammo for the stagflation camp.

5) Natural Gas rocketed to $9.36, a two year high. It's up 25% in a month and is going higher.

6) Google announced that its pay per click revenues were down 7% in January. The stock got slammed 8% down to $449, a 52 week low. They are obviously feeling the absence of the Foggy Bridge Wine Cruise!

7) Home foreclosures leapt 57% in January YOY. Banks are taking possession of 90% of these, indicating that they have negative equity. Another 220,000 homes got late payment notices that month.

8) CNBC has an interesting interview with Sam Zell who made the following points. He is selling the Chicago Cubs but splitting them off from Wrigley Stadium which has valuable unused naming rights. He says that there will be no recession, just a slowdown because most of the current problems are confined to Wall Street, not Main Street. He expects housing to start recovering in the Spring!?

February 26, 2008

1) Yesterday's 182 point rally in the last 30 minutes came from Standard & Poor's ??announcement that it would maintain ??bond insurer MBIA's AAA rating. They indicated they might downgrade the company later. This shows how backward looking and useless these ratings are as MBIA's bonds are already trading at B- levels. Is MBIA really the same credit as GE?

2) Wheat went up a staggering 25% yesterday as Kazakhstan announced it would restrict exports to head off domestic shortages. Wheat is now up 400% YOY. Every major wheat producing area outside the US is now in a drought.

3) The US announced it would support gold sales by the International Monetary Fund. The price went down $10 immediately then shot up to a new high of $954. In a normal market gold would have dropped 10% on this news, so it shows how strong the demand for gold is.

4) The producer price index for January came in at 7% YOY, the hottest number in 23 years. More ammo for the stagflation camp.

5) Natural Gas rocketed to $9.36, a two year high. It's up 25% in a month and is going higher.

6) Google announced that its pay per click revenues were down 7% in January. The stock got slammed 8% down to $449, a 52 week low. They are obviously feeling the absence of the Foggy Bridge Wine Cruise!

7) Home foreclosures leapt 57% in January YOY. Banks are taking possession of 90% of these, indicating that they have negative equity. Another 220,000 homes got late payment notices that month.

8) CNBC has an interesting interview with Sam Zell who made the following points. He is selling the Chicago Cubs but splitting them off from Wrigley Stadium which has valuable unused naming rights. He says that there will be no recession, just a slowdown because most of the current problems are confined to Wall Street, not Main Street. He expects housing to start recovering in the Spring!?

February 25, 2008

1) The spread between Treasuries and AAA rated corporate bonds is now 300 basis points, the largest since the Great Depression. At the first hint of the end of the credit crisis hedge funds will rush to buy corporates and short Treasuries against them and this spread will come screaming down. With a leverage factor of ten times this trade currently yields 30% a year. The hedge funds that are currently in trouble are the ones that put this spread on in big size at 20-30 basis points a year ago.

2) Visa is going public in a few weeks, launching the largest IPO in?? US history which will take in about $19 billion. There is some concern that the size of the deal will divert some money away from the rest of the stock market. Master Card's business has been booming as people reduce the number of cash transactions in favor of more internet based credit card transactions. Master Card's stock has been one of the best performing stocks of the past year and is close to its all time high. This is because it is just a processor of transactions and?? not a lender.

3) Value players are pouring into Japan, where at a 13 times multiple stock prices are at a 23 year low. Today China's sovereign wealth fund announced that it is investing $10 billion in Japanese oil and commodities related stocks.

4) A home owned by the Hearst family in Florida was sold at a foreclosure sale for $22 million to the prime lender. It had $40 million in bank loans on it.

5) Horrendous home sales figures for January came out this morning. Sales are down 23% year on year. Inventories were up 5.5% to a ten month supply. Average prices are down 4.8%. Anyone who thinks the housing crisis will end soon is either smoking something or talking their own book.

6) Coal has doubled in price over the last three months. There are now 100 coal fired power plants under construction in the US. With a 200 year supply the US is the Saudi Arabia of coal. The only question is whether you can bring this much new coal generation on stream without causing major environmental problems. Hence Bush's comments last week about clean coal technologies.

February 25, 2008

1) The spread between Treasuries and AAA rated corporate bonds is now 300 basis points, the largest since the Great Depression. At the first hint of the end of the credit crisis hedge funds will rush to buy corporates and short Treasuries against them and this spread will come screaming down. With a leverage factor of ten times this trade currently yields 30% a year. The hedge funds that are currently in trouble are the ones that put this spread on in big size at 20-30 basis points a year ago.

2) Visa is going public in a few weeks, launching the largest IPO in?? US history which will take in about $19 billion. There is some concern that the size of the deal will divert some money away from the rest of the stock market. Master Card's business has been booming as people reduce the number of cash transactions in favor of more internet based credit card transactions. Master Card's stock has been one of the best performing stocks of the past year and is close to its all time high. This is because it is just a processor of transactions and?? not a lender.

3) Value players are pouring into Japan, where at a 13 times multiple stock prices are at a 23 year low. Today China's sovereign wealth fund announced that it is investing $10 billion in Japanese oil and commodities related stocks.

4) A home owned by the Hearst family in Florida was sold at a foreclosure sale for $22 million to the prime lender. It had $40 million in bank loans on it.

5) Horrendous home sales figures for January came out this morning. Sales are down 23% year on year. Inventories were up 5.5% to a ten month supply. Average prices are down 4.8%. Anyone who thinks the housing crisis will end soon is either smoking something or talking their own book.

6) Coal has doubled in price over the last three months. There are now 100 coal fired power plants under construction in the US. With a 200 year supply the US is the Saudi Arabia of coal. The only question is whether you can bring this much new coal generation on stream without causing major environmental problems. Hence Bush's comments last week about clean coal technologies.

February 22, 2008

1) A new wrinkle has developed in the housing crisis. Loans have been sold so many times that banks are unable to foreclose because they can't find the original loan documentation. This could affect up to 40% of the anticipated 1.5 million foreclosures in 2008. New businesses like youwalkaway.com have sprung up to help borrowers head off foreclosures by finding deficiencies in the?? disclosures in the original loan documentation. Some 19% of home mortgages in the US, or $2.1 trillion, have been securitized.

2) Another economic indicator: MGM Mirage says that middle market gamblers have been drying up because of the high price of gas to get to Las Vegas and economic worries. High end gambling and foreign gamblers continue strong, as is the management of foreign casinos like in Dubai. Yet another industry that sees all of its future growth in the overseas markets.

3) Here is another extreme anomaly in the market. Crocs, the maker of the world's ugliest shoes, has seen earnings rise 147% in the past year. But the stock has fallen from $75 to $26 since June because investors are shunning all high end discretionary consumer stocks and is now at eight times next year's earnings. Put it on your watch list.

4) Another one of these is Garmin, maker of navigational devices. Earnings are up 65% but the stock is down 50%. The company has spent $350 million on R & D in the last three years so there are many highly profitable products in the pipeline.

5) Merrill Lynch put out a report predicting that the residential real estate market will fall another 25% by the end of 2009. Freddie Mac, Fannie Mae, and the home builders got slammed.

6) Rumors of a bailout of mortgage insurer Ambac in the last 30 minutes of the day. The market rallied 250 points in 30 minutes.

THOUGHT FOR THE DAY

With commodity prices as high as they are now, inflation will rocket when the economy comes out of the recession next year. The best way to play this is to short long bonds. If the 30 year goes from a 4% yield to an 8% yield, which they may do over the next three years, the underlying price of the bond will drop by half. Zero coupon bonds could drop by up to 80%. We are already seeing the beginnings of this trade now. Last June the yield curve was virtually flat with two year and 30 year paper yielding close to 5%. Now two year paper is at 1.9% with the 30 year at 4.4%. This curve steepening trade is now a major trade for hedge funds.

February 22, 2008

1) A new wrinkle has developed in the housing crisis. Loans have been sold so many times that banks are unable to foreclose because they can't find the original loan documentation. This could affect up to 40% of the anticipated 1.5 million foreclosures in 2008. New businesses like youwalkaway.com have sprung up to help borrowers head off foreclosures by finding deficiencies in the?? disclosures in the original loan documentation. Some 19% of home mortgages in the US, or $2.1 trillion, have been securitized.

2) Another economic indicator: MGM Mirage says that middle market gamblers have been drying up because of the high price of gas to get to Las Vegas and economic worries. High end gambling and foreign gamblers continue strong, as is the management of foreign casinos like in Dubai. Yet another industry that sees all of its future growth in the overseas markets.

3) Here is another extreme anomaly in the market. Crocs, the maker of the world's ugliest shoes, has seen earnings rise 147% in the past year. But the stock has fallen from $75 to $26 since June because investors are shunning all high end discretionary consumer stocks and is now at eight times next year's earnings. Put it on your watch list.

4) Another one of these is Garmin, maker of navigational devices. Earnings are up 65% but the stock is down 50%. The company has spent $350 million on R & D in the last three years so there are many highly profitable products in the pipeline.

5) Merrill Lynch put out a report predicting that the residential real estate market will fall another 25% by the end of 2009. Freddie Mac, Fannie Mae, and the home builders got slammed.

6) Rumors of a bailout of mortgage insurer Ambac in the last 30 minutes of the day. The market rallied 250 points in 30 minutes.

THOUGHT FOR THE DAY

With commodity prices as high as they are now, inflation will rocket when the economy comes out of the recession next year. The best way to play this is to short long bonds. If the 30 year goes from a 4% yield to an 8% yield, which they may do over the next three years, the underlying price of the bond will drop by half. Zero coupon bonds could drop by up to 80%. We are already seeing the beginnings of this trade now. Last June the yield curve was virtually flat with two year and 30 year paper yielding close to 5%. Now two year paper is at 1.9% with the 30 year at 4.4%. This curve steepening trade is now a major trade for hedge funds.

February 21, 2008

1) The Architectural Design Services index fell sharply in January from 55 to 50. The boom, bust level is 50. Below 50 means that more business is being completed than there is new business coming in. This is the second consecutive quarterly decline. A drop in architectural services is followed by a decline in commercial construction activity nine months later. Overall, commercial real estate construction grew by 13.2% in 2007, but no growth at all is expected in 2008. There especially has been a fall off in spec properties as financing for these has dried up. Time to renegotiate the presidio winery construction contract?

2) Whenever oil hits a benchmark a bunch of interesting data spews out. The US has 5% of the world's population but is using 25% of the world's oil. Global oil production is 85 million barrels a day and is not expected to rise much from there. At $100 a barrel the US is paying $500 billion a year to foreigners to buy oil, most of whom hate us.

3) Boone Pickens said he is shorting oil over $100 with a Q2 target of $85. I have been following this guy since the early eighties when I met him while working at Morgan Stanley on an oil company merger. I have never known him to be wrong about oil. (Remember the Pacman mergers when it was cheaper to prospect for oil on the floor of the NY stock exchange than in the field?)

4) Oil has become the safe haven asset. Instead of a flight to the dollar in times of uncertainty, you are now getting a flight to oil. There is great reluctance by foreigners to go into dollar denominated assets now.

4) All time highs today in oil, gold, palladium, platinum, coal, iron ore, and bulk shipping. Stocks and bonds are dead.

5) The CEO of Hovnanian, a major home builder,?? came out and said that the housing market will recover at the end of 2008. Wishful thinking.

February 21, 2008

1) The Architectural Design Services index fell sharply in January from 55 to 50. The boom, bust level is 50. Below 50 means that more business is being completed than there is new business coming in. This is the second consecutive quarterly decline. A drop in architectural services is followed by a decline in commercial construction activity nine months later. Overall, commercial real estate construction grew by 13.2% in 2007, but no growth at all is expected in 2008. There especially has been a fall off in spec properties as financing for these has dried up. Time to renegotiate the presidio winery construction contract?

2) Whenever oil hits a benchmark a bunch of interesting data spews out. The US has 5% of the world's population but is using 25% of the world's oil. Global oil production is 85 million barrels a day and is not expected to rise much from there. At $100 a barrel the US is paying $500 billion a year to foreigners to buy oil, most of whom hate us.

3) Boone Pickens said he is shorting oil over $100 with a Q2 target of $85. I have been following this guy since the early eighties when I met him while working at Morgan Stanley on an oil company merger. I have never known him to be wrong about oil. (Remember the Pacman mergers when it was cheaper to prospect for oil on the floor of the NY stock exchange than in the field?)

4) Oil has become the safe haven asset. Instead of a flight to the dollar in times of uncertainty, you are now getting a flight to oil. There is great reluctance by foreigners to go into dollar denominated assets now.

4) All time highs today in oil, gold, palladium, platinum, coal, iron ore, and bulk shipping. Stocks and bonds are dead.

5) The CEO of Hovnanian, a major home builder,?? came out and said that the housing market will recover at the end of 2008. Wishful thinking.

February 20, 2008

1) In the last bear market we had six false rallies of 5% over an 18 month period. Then the market was discounting both the dot com bust and 9/11. We are four months into this bear market and so far we have had two false rallies. The main driver has only been changing accounting standards. Actual defaults on sub prime loans are not enough to give this bear market legs. We need a completely new, out of the blue crisis if this bear market is going to be as long lived as the last one.

2) China is losing an average of $4 billion a month on its treasury holdings because of the weak dollar. The next big leg down in the dollar will be triggered by China's move to diversify away from the US currency as a reserve asset, possibly sometime after the Beijing Olympics. Euro could go to $1.60 on this.

3) Goldman Sachs has fallen from $250 to $170 and is now selling for seven times earnings and is getting tempting. This is the only major firm that made a profit off of the sub prime crisis.

4) Commercial real estate prices have dropped about 15% from last year's peak. They are not expected to drop further as long as income streams are maintained at current levels which they will as long as the recession remains a short one.

5) Natural Gas over $9 today, my home run recommendation of the month. It is up 20% from my entry point 4 weeks ago.

6) Harry Macklowe is selling the GM Building on 5th avenue in Manhattan which he bought in 2003 for $1.4 billion. A bidding war has broken out with three players coming in with bids over $3 billion, or more than $1,500 a square foot. While this is far in excess of the market for this type of property, it shows the degree to which trophy properties are commanding premiums to the market.

THOUGHT OF THE DAY

There is a massive flight to liquidity going on. Hedge funds are dumping every kind of bond, afraid that market will close and trap them, and pouring the cash into all commodities. Oil is being dragged up by gold, palladium, copper and the grains. This is all being financed by the Fed rate cuts, which in trying to deal with one bubble (Housing) they are merely creating another (Commodities).

February 20, 2008

1) In the last bear market we had six false rallies of 5% over an 18 month period. Then the market was discounting both the dot com bust and 9/11. We are four months into this bear market and so far we have had two false rallies. The main driver has only been changing accounting standards. Actual defaults on sub prime loans are not enough to give this bear market legs. We need a completely new, out of the blue crisis if this bear market is going to be as long lived as the last one.

2) China is losing an average of $4 billion a month on its treasury holdings because of the weak dollar. The next big leg down in the dollar will be triggered by China's move to diversify away from the US currency as a reserve asset, possibly sometime after the Beijing Olympics. Euro could go to $1.60 on this.

3) Goldman Sachs has fallen from $250 to $170 and is now selling for seven times earnings and is getting tempting. This is the only major firm that made a profit off of the sub prime crisis.

4) Commercial real estate prices have dropped about 15% from last year's peak. They are not expected to drop further as long as income streams are maintained at current levels which they will as long as the recession remains a short one.

5) Natural Gas over $9 today, my home run recommendation of the month. It is up 20% from my entry point 4 weeks ago.

6) Harry Macklowe is selling the GM Building on 5th avenue in Manhattan which he bought in 2003 for $1.4 billion. A bidding war has broken out with three players coming in with bids over $3 billion, or more than $1,500 a square foot. While this is far in excess of the market for this type of property, it shows the degree to which trophy properties are commanding premiums to the market.

THOUGHT OF THE DAY

There is a massive flight to liquidity going on. Hedge funds are dumping every kind of bond, afraid that market will close and trap them, and pouring the cash into all commodities. Oil is being dragged up by gold, palladium, copper and the grains. This is all being financed by the Fed rate cuts, which in trying to deal with one bubble (Housing) they are merely creating another (Commodities).