Traderbill's Financial Markets Weblog

…nope, not reminiscing about Dallas, J.R. Simplot has died at the ripe old age of 99. If you have ever had a MacDonald’s french fry you are connected with JR! Simplot was an eighth grade dropout, owned a successful ‘dirt farmer’ company that provided agricultural consulting and products and was 89th on the Forbes wealthiest list. TB used to travel to Boise when he was in banking in the ’70’s and his home on the hills was highly visible…due to a monstrous flagpole…causing it to be known as Fort Simplot. The flag must be at half mast now.

 

 

1. Global stocks. Want half a BRIC? The ‘BRIC’ countries, Brazil, Russia, India, and China have seemed impervious but looks can be deceiving. India and China are seeing slowing growth, and as one observer noted yesterday, they too are vulnerable to a slowdown in demand by the U.S. consumer. India has already been slowing leaving Brazil (and Mexico) and Russia. Here are the changes from the lows…all have settled back from the recent highs…in the case of China they have given back about 50% of the bounce from the lows. Data as of last close:

Losers:

Hang Seng:           12/7/07, -19%

  Shanghai:            1/14/08, -37.4%

  Shenzhen:           1/15/08, -33.3%

India Sensex:        1/10/08, -22.1%

Winners:

Brazil Bovespa:     1/23/08, +33.9%!

Mexican Bolsa:     1/21/08, +24.3%!

Russia All Traded: 1/22/08, +37.7%! 

 

Of course a contrarian might say that the losers are oversold and winners overbought. TB won’t enter that argument but is only illustrating the changes of fortune. Here are a couple of caveats though:

1. Mainland China exchanges (Shanghai/Shenshen) are unregulated so be careful.

2. India is seeing signs of a slowing economy due to rising food and fuel costs

3. Brazil has a lot going for it such as biofuels, and oil but could be vulnerable to price drop in crude

4. Mexico is not only aligned with the U.S. in trade, but with a loose peg to the dollar

5. Russia…ah the darlings, yet 20 years ago they were in crisis along with Asia. Bloomberg reports today that hedge funds own much of the corporate debt that was issued 15 years ago and is coming due and that is creating a credit crunch there (no man or country is an island). Some companies are facing costs of 16% to roll debt so those gains this year might prove elusive. Bloomberg story says that Moscow office rents have almost doubled, replacing Mumbai as Number Two…behind London.

 

2. Commodities. Another Bloomberg article talks about the price of crude hitting a one week low on concern prices are hurting fuel demand…isn’t this basic economics? But what about this: India is pulling out of OPEC as oil imports exceed exports! They are eating their own! Of course, neither of these means a high is in but is indicative of cracks in the system and with so much speculative money involved (whether or not you subscribe to the conspiracy theory), a rush for the doors could become a stampede as those exit doors are not wide enough. Also, with rice, just as panic set in, prices peaked, largely due to export curbs put on by countries to insure there was enough food for their people. There is a lot of money chasing commodities: hedge funds and commodity index funds fueled by pension funds seeking returns in an otherwise lackluster market…that 8% nut is hard to crack! Yesterday, TB covered the futures market in oil and how delivery was being taken…also how Iran is paying $14,000 a day to store crude per tankers, in anticipation of higher prices…of course if they fall there will be a stampede to dump it. How low could it go in that case? Your guess is as good as TB’s but the NYSE Energy Index looks to be forming a head and shoulders formation…a very clear one so far…and if so a lot of those stellar gains are going to be given back. 

 

3. Currencies. With a lackluster economy in Japan and 10 year Japanese governments trading at 1.72%, speculators are back borrowing in Yen and then selling yen to buy other currencies…follow the money…the dollar is just off it’s lows while the yen is back to its 40 day moving averages while both Sterling and Euro are supporting at their 40 day m/a’s. Nothing clear yet but keep an eye on all three to see where the flows are going as that means the money will be invested there…are loans Japan’s biggest export? What happens here is important for stocks, bonds, and commodities. TB wonders if they might mount a charge on stocks taking advantage of the thin summer doldrums (remarkably it appears they began on 3/24) trading, or not!

 

4. Trade Wars. The best indicator of a global slowdown is the emergence of protectionist policies. Above we have discussed crude and rice and there is no reason to believe that it will end there. In the past, wars have been started over these…undoubtedly Hitler came to power as a result of the global depression and unrest partially due to a widening wealth gap…don’t we have that now? The U.S. is planning to file a complaint with the WTO against the EU on electronics…be careful what you wish for.

 

5. Inflation, margins, and sales. Here is a story just out on Bloomberg: Dow Chemical said it will raise prices on all of its products by as much as 20% on June 1 because of rising costs for energy, raw materials and transportation. Dow says this is due to a 42% jump in 1st quarter raw materials and energy. Watch the stock today (DD) and see if they believe they can make this happen. In a slowing economy you cannot pass on all your costs, note the increases are less than half the rise in input costs, and that goes up the entire food chain (no pun intended). Not only that, small businesses are suffering…TB reported about a winery who has seen costs of sulfur and fertilizers increase tenfold this year. Restaurants respond by raising menu prices or more likely cutting portions or both, but no matter business will slow. The winemaker, restraunteur, or other small business has less business and narrower margins and that means lower take home and don’t forget their own costs of food and energy are rising…while their assets are declining in value. Another example of how the virtuous cycle becomes a vicious circle.

 

One reason transportation stocks, ex-airlines, is that they have fuel surcharges…all but the smaller and independent drivers. Also, the big truckers load them on trains for long hauls speeding up delivery times at lower costs. If fuel costs decline, don’t expect airlines to be outperformers…except perhaps from deeply oversold (whatever that means as TB wouldn’t touch them with a ten foot pole), the same as financials have done.

 

We keep hearing the worst is behind us but somehow TB doubts this is true…the markets still seem far too complacent…except bonds which are showing some weakness…especially TIPS…but if they get back to 2% could be a buy again. As for stocks, for the reasons listed above they should see lower revenues, shrinking margins, and thus increasing p/e ratios. Rather than the worst being behind us, the worst of the news may be behind us, but we still haven’t filtered and digested it. Take Wall Street, despite lowered earnings estimates and record write-downs, layoffs are not even at the pace of 2001, so there is another shoe to drop there. The most positive thing TB can see is that the flight to quality if off as the 3 month Bill is at 1.90%…almost to the 2% Fed Funds rate while the 1 mo bill which got to well below 1% is now at 1.98%!…or is that positive if indeed investors are too complacent. Watch the results of the 2 year treasury note auction today and the 5 year tomorrow for a clue. 

 

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 28, 2008