Traderbill’s Financial Markets Weblog

…given the bad news on AIG indicating the worst is not yet behind us…this morning MBIA (MBI)reported a loss of $3.01 a share vs estimates of a $1.21 loss…whether they survive is moot…they are out of the municipal insurance underwriting business. It is not over yet!

 

 

1. U.S. Stocks. TB did a lot of catch-up reading over the weekend and was not cheered up. That after a week where the Dow not only was down but had the lowest weekly close in four weeks…same for the S&P 500, Russell 2000, while both Nasdaq indices were just down on the week. Oddly, Transports which were down for the week but posted a new six month high on Tuesday and Energy (up on the week and a new record high) were bedfellows…hard to imagine with a weakening economy and rising fuel costs, no? The hapless Philly Semiconductor Index was down slightly on the week but at least well off the 3/19 lows. 

 

Year to date the Dow is -3.9%; S&P 500 -5.5%; Nasdaq Composite -7.8%; NDQ 100 -6%; and Russell 2000 -6%; Utilities -4.5% but -3.4% with dividends reinvested, while Energy is up 5.2%.

 

For 12 mos. the Dow is -4.5%; S&P 500 -7.6%; Nasdaq Composite -4.9%; NDQ 100 +3.8%; and  Russell  2000 -12.4%! Utilities –3.7% but -0.9% with dividends reinvested…Energy is +24.9%!

 

Now look at these interesting highlights:

 

*S&P 500, while down 7.6% for 12 months was down 5.8% if dividends were reinvested…and that with a puny 2.19% dividend…that is the power of dividends and compounding…what if div. had been 5%? That is why TB is focusing on dividend producing value stocks not growth stocks.

 

*Barron’s, earlier this year proudly introduced the Barron’s 400 index of the ‘best’ stocks. That index is -3.9% year to date…same as the Dow…and down 8.2% over the past 12 months or almost double the loss in the Dow. The point is there are no defensive stocks, stock prices are determined by fundamentals.

 

*Everyone is excited about transportation stocks…why not? …they are +13.6% year to date and only positive group. But over the past 12 months they are up just 1.5%! Why should Transports be doing well with a slowing economy and rising fuels prices…certainly not the shippers or truckers…airlines? You have to be kidding…leaving just rails as the low cost providers. As for shipping companies, they are volatile (cruise lines break even with ticket sales and make money off of purchases aboard ship and tours…some are adding fuel surcharges), with dry ships and tankers often diverging in performance. OSG is +11.6% 12 months and 9% year to date with dividends reinvested while Dryships (DRYS) is +130% and 19% ytd while some like Teekay have large losses in both periods. This is why Transports like Biotech and Pharma are not good ways to play ETF’s…too divergent returns.

 

*Utilities are not bonds. -4.5% ytd and -3.7% 12 months, or -3.4% and -0.9% with dividends reinvested, contrast to bonds as follows: 2yr treasury +2.3% and +8.1%; 5 yr +3.2% and +11.4%; 10 yr +3.3% and +11.1%; 30 yr +0.6% and +9.3%. The iShares TIPs ETF (TIP) meanwhile is up 7.3% over the past 12 months and +13.2% with dividends reinvested, +1.9%, +1.9%/4% respectively ytd. Yet we continue to be told that stocks are cheap and bonds expensive…that will hold till they aren’t!

 

2. International Stocks. TB believes in being diversified, especially globally. But when too many throw too much at anything it gets killed…witness the hapless European pension funds who threw money into the US stock market right after Y2k! The EAFE Index of global stocks, ex the Americas, is -5.1% ytd, -3.5% with reinvested dividends and down 4.7% and 1.6% respectively for the 12 months…about the same as the Dow 30. But how about the hot markets since the Nikkei is down 22.3% over the past 12 months and -10.2% year to date…what about China and India? Here is the breakdown for Asia:

 

Hang Seng +19.5% for 12 months but from the high on 12/7 it is -13% after falling 21% to 1/31 and then recovering. Mainland China is surprising: Shanghai…DOWN 10% over past 12 months after surging to 10/16 then falling 40% since then…including a recovery since 4/`8 of 17% while the Shenzhen is down 1.4% for the 12 months after falling 19% since the high on 1/15/08 including a 21% recovery since 4/22. So much for the easy money but then there is always India, right?

 

India is +15.2% over the past 12 months, but that is after falling 18% since January 10. Perhaps the US recession is becoming global and even emerging markets are not immune?

 

Korea is up 19.5% over the past 12 months and Mobius just came out very bullish on it. Since the 11/1 peak however is it down 11.6% including a 12% rebound since 3/19/08.

 

As for Europe the CAC 40 is down 17% over the past 12 months and 19% since the 6/1/07 high, and has only bounced 9% since the 3/15 low; UK FTSE is -4.9% (but just 1.1% with divs) and is -1.7% ytd, while the German DAX is -5.5% for 12 months but -12.7% since the 12/12 high even with a 14% bounce from the 3/17/08 lows.

 

Now for the reason TB did this research. A friend sent him a commentary (AIA “Advocate for Absolute Returns”), in which the authors said the future is in Africa and point to how the iShares South Aftrica ETF (EZA) is up nearly 80% since they recommended it in April 2005. Now TB started following this in 2004 but gave up after it got hammered. True, it is up 73% as of Friday, but was +104% at the high on 11/8 and has fallen 14% since then…so it appears South Africa is in the same world as the rest of us.

 

3. Commodities. There is a lot of conspiracy theorizing going on about how prices are all due to speculation…undoubtedly this is true to an extent, but TB’s favorite daily commentary writer, Joan McCullough laid the problem at the feet of the Fed and the dollar…TB would reverse the order but is otherwise in agreement. Wait…she really laid the blame on regulators for not raising margin requirements in securities…that reduces leverage and mitigates prices…especially when first announced. Why else do we see grains…including a global rice shortage…she cites Haiti which was encouraged to get rid of their rice crop due to low prices and now are suffering for that decision…with some rioting. We have a total failure at the regulatory level and the cure will be worse than the cause. Cox now wants to reduce leverage at brokers…and that means cutting back on prime broker accounts which are highly profitable to them…of course it is borrowing short and lending to some guys who think the more leverage the more you make…and why not when those that fail seem to have no problem getting new money…witness John Merriwether of LTCM fame but there are others. As for the Fed it is that it has committed more than half of its balance sheet to taking in collateral that is worthless or totally illiquid and may never again be liquid…and is of questionable value…that is not good for the dollar despite those who are enthralled by the recent rally. Looking at just two contracts TB checked the performance of the lead contract in Crude since the 11/19/01 low of $16.70 to Friday’s record high of $126.27…up 756%! …and rising! Gold has a low of $255 on 2/16/01 and hit $1,033.90 on 3/17/08 which is an increase of 405%. Note the start dates for both commodities…the peak in the Dollar Index was 7/16/01 at 121.02 and the low was 72.34 on 3/17/08, a decline of 40%…it is only slightly off that low! Read on.

 

4. Currencies. With the dollar down 40% against the basked since July 2001 let’s see how the other major currencies have fared. The Euro which was $1.19 at inception 1/1/98 fell to 82.30 on 10/26/00…again note the date…a decline of 31% and since rallied to a high of $1.60 on 4/22/08, a gain of 94.4%. The Yen bottomed at 102 on 4/4/00 and after a rally fell back to 135 on 1/31/02…since then it hit a high of 95.78 on 3/17/08 for a gain of 41%. Sterling was $1.3682 on 6/12/01 and peaked at $211.62 on 11/19/07, a gain of 36.8% but has since fallen back to $1.9588. Thus we are suffering far more from the rise in food and energy prices than anyone else in the world and that is not a good thing when you are the largest debtor nation. The trade balance improvement for April should not be view as sustainable…it was caused by a larger drop in imports than the increase in exports and due to the weaker dollar.      

 

To TB the above suggests further dollar weakness, or at least not a meaningful rally and while commodities prices could fall don’t expect them to be meaningful either…Houston we have a problem!  

 

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC May 12, 2008