Market Comments for March 8, 2008
1) The non farm payroll for February came in at a truly disastrous minus?? -63,000. Most analysts had been expecting gain of 30,000. Earlier months were revised down dramatically. It is the worst payroll performance in 5 years. NASDAQ and most other stock indexes hit a new low for the year. An omen of worse to come.
2) The second richest man in the world now is Carlos Slim Helu, according to Forbes Magazine. He has the telecom monopoly for Mexico and is worth $60 billion. To make that amount of money shows you how far the third world has come and how far the US has fallen. Bill Gates lost his number one position to Warren Buffet due to the Yahoo deal.
3) The Fed announced a $100 billion term auction facility (TAF) designed to bring LIBOR interest rates in line with US market rates. This is good. Looks like the Fed will have to cut the discount rate at least another 100 bp to 1.75% in this cycle. The Fed will soon be paying you to buy stocks as this will constitute a?? negative real 1% interest rate.
4) Citibank announced that it is reducing its US mortgage lending by $45 billion this year. This is a case of closing the gate after the horses have bolted. The stock hit $21, down from $60 last June.
5) Thornburg Mortgage, the largest provide of jumbo mortgages in the country, has defaulted to several lenders. The stock has dropped 87% this week and the company has said that it may have to cease operations.
Market Comments for March 7, 2008
The stock market setting up for a big dump!
1) Crude made it to $106 today. The short term target is now $111. Natural gas also flew to $9.90, up 30% from my entry point of six weeks ago.
2) Carlyle Group in San Francisco failed to meet margin calls on fixed income positions this morning which could lead to more panic dumping. Oh, how the mighty have fallen!
3) Some REITs have fallen 45% from their 2007 peaks. They will get hit further when the credit crisis migrates to the commercial debt area. It is the next shoe to drop in all of this.
4) Sub prime loans constituted 7% of all home mortgages in 2007, but accounted for 42% of all foreclosures.
5) My old friend, Steve Roach at Morgan Stanley (MS), had an interesting piece in the New York Times this morning. He is now the chairman of Morgan Stanley Asia. When the last bubble burst, business investment collapsed, which accounted for only 13% of GDP. This time consumer spending and home building have collapsed which accounts for a combined 78% of the economy. With this much of the economy sick the bear market will be longer and deeper than anyone realizes. Morgan Stanley transferred Steve to Asia to get him away from New York where his perennially negative views depressed important clients.
6) The Swiss Franc has risen to 1.03 and will soon be at parity with the dollar.
THOUGHT OF THE DAY
There is a great low risk trade setting up. The spread between two year and ten year Treasuries over the last 20 years has been +250 basis point to -250 basis point. It is now at the top end of that range. The last time it was this high was during the S & L crisis in 1992. Short the two year and go long, then ten year?? ten times on your back book and you could add another 50% return over the next three years.
Market Comments for March 7, 2008
The stock market setting up for a big dump!
1) Crude made it to $106 today. The short term target is now $111. Natural gas also flew to $9.90, up 30% from my entry point of six weeks ago.
2) Carlyle Group in San Francisco failed to meet margin calls on fixed income positions this morning which could lead to more panic dumping. Oh, how the mighty have fallen!
3) Some REITs have fallen 45% from their 2007 peaks. They will get hit further when the credit crisis migrates to the commercial debt area. It is the next shoe to drop in all of this.
4) Sub prime loans constituted 7% of all home mortgages in 2007, but accounted for 42% of all foreclosures.
5) My old friend, Steve Roach at Morgan Stanley (MS), had an interesting piece in the New York Times this morning. He is now the chairman of Morgan Stanley Asia. When the last bubble burst, business investment collapsed, which accounted for only 13% of GDP. This time consumer spending and home building have collapsed which accounts for a combined 78% of the economy. With this much of the economy sick the bear market will be longer and deeper than anyone realizes. Morgan Stanley transferred Steve to Asia to get him away from New York where his perennially negative views depressed important clients.
6) The Swiss Franc has risen to 1.03 and will soon be at parity with the dollar.
THOUGHT OF THE DAY
There is a great low risk trade setting up. The spread between two year and ten year Treasuries over the last 20 years has been +250 basis point to -250 basis point. It is now at the top end of that range. The last time it was this high was during the S & L crisis in 1992. Short the two year and go long, then ten year?? ten times on your back book and you could add another 50% return over the next three years.
Market Comments for March 6, 2008
1) Oil jumped $5 to $104.65 and Natural Gas to $9.90 on an unexpected drop in weekly inventory figures. The chairman of Exxon (XOM) made an interesting comment today. He said that 85% of the growth of oil demand last year was in countries that have artificial price controls and subsidies on oil like China. Demand will fall off a lot if these countries start making consumers pay market prices.
2) There is a rumor that Lennar Homes is in trouble because they have the worst debt/equity ratio of the listed home builders and also carry large off balance sheet items. If they don't, then they will be the best performing stock. You always want to buy the most leveraged player in a rebound.
3) The futures market is saying that there is a 50% chance that the Fed will cut interest rates 0.75% in two weeks and 100% chance that they will cut 0.50%.?? I personally think that inflation fears will limit the Fed to a 0.25% and that the market will tank.
4) 5% of al of the home mortgages in the US are now either late on their payments or in foreclosure.
5) Citibank (C) stock has dropped to a new low of $22 and they are now asking Abu Dhabi for another chunk of money which last bought at $30/share. C is rumored to be planning 37,000 lay offs this year, 10% of its total work force.
THOUGHT OF THE DAY
Once the credit write downs and the share price melt downs finish they will be followed by write ups and melt ups as the credit markets reopen. There may even be an overlap. You want to be long there.
Market Comments for March 6, 2008
1) Oil jumped $5 to $104.65 and Natural Gas to $9.90 on an unexpected drop in weekly inventory figures. The chairman of Exxon (XOM) made an interesting comment today. He said that 85% of the growth of oil demand last year was in countries that have artificial price controls and subsidies on oil like China. Demand will fall off a lot if these countries start making consumers pay market prices.
2) There is a rumor that Lennar Homes is in trouble because they have the worst debt/equity ratio of the listed home builders and also carry large off balance sheet items. If they don't, then they will be the best performing stock. You always want to buy the most leveraged player in a rebound.
3) The futures market is saying that there is a 50% chance that the Fed will cut interest rates 0.75% in two weeks and 100% chance that they will cut 0.50%.?? I personally think that inflation fears will limit the Fed to a 0.25% and that the market will tank.
4) 5% of al of the home mortgages in the US are now either late on their payments or in foreclosure.
5) Citibank (C) stock has dropped to a new low of $22 and they are now asking Abu Dhabi for another chunk of money which last bought at $30/share. C is rumored to be planning 37,000 lay offs this year, 10% of its total work force.
THOUGHT OF THE DAY
Once the credit write downs and the share price melt downs finish they will be followed by write ups and melt ups as the credit markets reopen. There may even be an overlap. You want to be long there.
Market Comments for March 3, 2008
1) Natural Gas soared again to a new two year high of $9.61 in its race to catch up with crude. Gold flew to $991, just short of my short term target of $1,000. More concerns about power outages in South Africa.
2) The Sage of Omaha, Warren Buffet, released his annual letter to investors, a must read for all students of the market. A $10,000 investment in his Berkshire Hathaway shares in 1965 would be worth $31 million today. I have been following him for 20 years and have always admired his discipline and his wit.
3) The next shoe to fall in the financial crisis will be the bankruptcy of several large fixed income oriented hedge funds. These funds have earned outsized returns of 30%-40% per annum shorting Treasuries and buying every piece of high yield junk out there on a highly leveraged basis, from credit default swaps to collateralized debt obligations to Icelandic long term bonds. Now Treasuries are gong up and there are no bids for these long positions. Vulture investors like Buffet are being shown $5 billion portfolios of these distressed securities on a daily basis.
4) Many hedge funds invest purely on mindless statistical reversions to a mean strategy. When prices are two standard deviations above a mean, they sell, and when prices are two standard deviations below a mean, they buy. Not too much thought there! The problem is that we are now at 6 standard deviations for almost all fixed income securities which equates to a once in 2,000 years event. The aggregate size of the long positions run by these strategies is in the trillions of dollars. There are now cascading margin calls flooding throughout the industry. That is why these funds always eventually go bust. It seems these days that the 100 year floods are happening every two years. It is a basic flaw in the Black-Schoales equation. Models are great as long as you know when to toss them out. These are just tools, not the Gospel Truth.
5) The big hit today was in securities backed by commercial mortgages. Watch out. Terms are tightening by leaps and bounds.
Market Comments for March 3, 2008
1) Natural Gas soared again to a new two year high of $9.61 in its race to catch up with crude. Gold flew to $991, just short of my short term target of $1,000. More concerns about power outages in South Africa.
2) The Sage of Omaha, Warren Buffet, released his annual letter to investors, a must read for all students of the market. A $10,000 investment in his Berkshire Hathaway shares in 1965 would be worth $31 million today. I have been following him for 20 years and have always admired his discipline and his wit.
3) The next shoe to fall in the financial crisis will be the bankruptcy of several large fixed income oriented hedge funds. These funds have earned outsized returns of 30%-40% per annum shorting Treasuries and buying every piece of high yield junk out there on a highly leveraged basis, from credit default swaps to collateralized debt obligations to Icelandic long term bonds. Now Treasuries are gong up and there are no bids for these long positions. Vulture investors like Buffet are being shown $5 billion portfolios of these distressed securities on a daily basis.
4) Many hedge funds invest purely on mindless statistical reversions to a mean strategy. When prices are two standard deviations above a mean, they sell, and when prices are two standard deviations below a mean, they buy. Not too much thought there! The problem is that we are now at 6 standard deviations for almost all fixed income securities which equates to a once in 2,000 years event. The aggregate size of the long positions run by these strategies is in the trillions of dollars. There are now cascading margin calls flooding throughout the industry. That is why these funds always eventually go bust. It seems these days that the 100 year floods are happening every two years. It is a basic flaw in the Black-Schoales equation. Models are great as long as you know when to toss them out. These are just tools, not the Gospel Truth.
5) The big hit today was in securities backed by commercial mortgages. Watch out. Terms are tightening by leaps and bounds.
1) Consumer confidence for January came in at a 16 year low. The market tanked 300 points.
2) MF Global incurred $141 million in unauthorized trading losses in wheat on Tuesday. On that day the market in wheat was limit down and limit up in the same day, producing an intra day range of 25%, the greatest in history for any commodity. The inside story was that the trader involved suffered a computer systems crash in the middle of all this and didn't know his positions while all of this was going on. To MF Global's credit they announced the loss the next day. This is why you never use a cheap computer for a trading platform.
3) Copper could be the next metal to move. It is at the top of a two year trading range at $3.60. You could get a big rotational move into copper as traders move out of gold,?? which is rapidly approach $1,000 an oz, the target for many for the year. The inflation adjusted all time high for gold is $1,200 which is now a chip shot, and the two year target for many is $1,500.
4) Pimco's legendary bond investor Bill Gross says the next big problem market will be commercial real estate. He is prone to extreme forecasts to suit his own book. He predicted the Dow would drop to 5,000 in 2002 and missed by 2,500. He also said that muni bonds now offer 'historic' opportunities.
5) Recession prospects are driving consumers to eat out less and at home more. Sell Morton's and Red Lobster and buy Heinz, Hormel (Spam) and Del Monte (canned beans).
STRATEGY IDEA OF THE DAY
Commodities are now red hot and will probably keep running for a while. The main reason they are the flavor of the day is that hedge funds can't trade bonds because the markets have vaporized, and think it is way too early to buy stocks. So there is no where else for them to go. A great way to play commodities is to buy Brazil. The Bovespa stock index ($BVSP) is at 65,000, close to an all time high. Among things going right: the country is now 100% self sufficient in energy thanks to a high reliance on domestically produced ethanol. Its major commodities like sugar and iron ore, have risen 50% since the summer. Petrobras Energia (PZE) ($11.5) has made a major offshore oil discovery and is itself a strong buy. It is debt free and is in fact a net lender now to the US. No sub prime or real estate crisis. Warren Buffet is playing this by going long the Brazilian currency, the real. Having covered as a journalist the big Brazilian debt default crisis in the seventies this is all amazing to me.
1) Consumer confidence for January came in at a 16 year low. The market tanked 300 points.
2) MF Global incurred $141 million in unauthorized trading losses in wheat on Tuesday. On that day the market in wheat was limit down and limit up in the same day, producing an intra day range of 25%, the greatest in history for any commodity. The inside story was that the trader involved suffered a computer systems crash in the middle of all this and didn't know his positions while all of this was going on. To MF Global's credit they announced the loss the next day. This is why you never use a cheap computer for a trading platform.
3) Copper could be the next metal to move. It is at the top of a two year trading range at $3.60. You could get a big rotational move into copper as traders move out of gold,?? which is rapidly approach $1,000 an oz, the target for many for the year. The inflation adjusted all time high for gold is $1,200 which is now a chip shot, and the two year target for many is $1,500.
4) Pimco's legendary bond investor Bill Gross says the next big problem market will be commercial real estate. He is prone to extreme forecasts to suit his own book. He predicted the Dow would drop to 5,000 in 2002 and missed by 2,500. He also said that muni bonds now offer 'historic' opportunities.
5) Recession prospects are driving consumers to eat out less and at home more. Sell Morton's and Red Lobster and buy Heinz, Hormel (Spam) and Del Monte (canned beans).
STRATEGY IDEA OF THE DAY
Commodities are now red hot and will probably keep running for a while. The main reason they are the flavor of the day is that hedge funds can't trade bonds because the markets have vaporized, and think it is way too early to buy stocks. So there is no where else for them to go. A great way to play commodities is to buy Brazil. The Bovespa stock index ($BVSP) is at 65,000, close to an all time high. Among things going right: the country is now 100% self sufficient in energy thanks to a high reliance on domestically produced ethanol. Its major commodities like sugar and iron ore, have risen 50% since the summer. Petrobras Energia (PZE) ($11.5) has made a major offshore oil discovery and is itself a strong buy. It is debt free and is in fact a net lender now to the US. No sub prime or real estate crisis. Warren Buffet is playing this by going long the Brazilian currency, the real. Having covered as a journalist the big Brazilian debt default crisis in the seventies this is all amazing to me.
1) Natural Gas went ballistic today, up 5% to $9.46. Crude closed at $102.20. Fed governor Bernanke is driving prices, not OPEC.
2) Thoroughbred horse sales at Keeneland have fallen off a cliff, another leading economic indicator.
3) Incredible stat of the day: Triple 'B' rated bonds a year ago traded 200 basis points over Treasuries. Now they are 800-1,000 basis points over Treasuries, an all time high.
4) Michael Jackson's palatial fantasy estate in Southern California, Neverland, complete with its own merry-go-round and Ferris wheel, is going into foreclosure unless he can come up with $24 million by March 14. It almost certainly has negative equity and the bank will take it back. Weren't you looking for a weekend place?
5) China is raising its minimum wage by 17% to $120 a month. Of the last 50 centuries, China had the world's dominant economy for 48. The rise of China today is just a reversion to the mean.
6) There was massive buying of long dated calls in Toll Brothers and Pulte Homes which are among the best performing stocks in the market this year.
7) US labor costs are now 30% cheaper than in Europe. This will lead to more factory construction in the US.
8) The California state pension fund (Calpers) is raising its allocation to commodities 16 times to $7 billion. A sign that a top in this torrid asset class is not far off.
THOUGHT OF THE DAY
What has been driving the euro up against the dollar for the last 8 months has been stubbornly high euro interest rates and the most rapid decline in dollar interest rates in history, causing the euro/dollar interest rate differential to widen to a record 300 basis points. What happens next? The Fed will carry out its last 50 basis point rate cut at its March meeting. After that the next Fed rate move will be a rate increase to head off inflation, possibly quickly. The European central bank will be forced to cut its rates as the effects of the US recession spill over there. This will cause the dollar/euro interest rate differential to shrink dramatically. This scenario has the euro peaking at the $1.55 to $1.60 range sometime in Q2 2008. After that it could retrace as far back as $1.25 over the following year. Q2 could be a good time to take profits in an any euro based assets you may have.
TRADE RECOMMENDATION
Copper could be the next metal to move. It is at the top of a two year trading range at $3.60 and is clearly breaking out to the upside. You could get a big rotational move into copper as traders move out of gold,?? which is rapidly approach $1,000 an oz, the target for many for the year. Chinese demand has been voracious in the massive construction build out for the Olympics. Electrical cars, the most immediate short term solution to high oil prices, use a lot of the red metal. And there are no major new mines coming on stream in the foreseeable future. A classic supply demand squeeze.
