…old geezers like TB will recognize the title as an old Rodgers & Hammerstein song title. We busted out yesterday all right but in the wrong direction. You will recall TB was worried about this possibility based on Friday’s poor showing. Confusing the matter is that fact that bonds are not providing a good barometer for what is to come.
Truth be known, TB is really concerned about interaction of stocks, bonds, and the dollar. Here is a comparison of the Dow, Dollar Index, the TIP ETF (TIP) and index of the entire TIP curve, 30 yr TIP, and 30 yr bond. For the 30 yr TIP and 30 yr bond the daily price range is shown as there are some big swings relative to the price change. Secondly note that the 30 yr TIP and 30 yr bond declined by 4-1/8 and 2-3/4 points respectively from 5/26-29 and gapped down on the 27th and 28th, nothing days for the Dow. In addition to the wide spreads, especially in a low volume market, anomalies are highlighted.
DOW DXY TIP 30 yr TIP/Range 30 yr Bond/Range
5/20/08 -200 -0- +3/4 +1-1/4 / 3 points +3/4 / 1 point
5/22/08 -227 - -3/4 -1-1/2 / 2-1/8 +5/8 / 3/4
5/27/08 +69 + -3/4 -2-1/8 / 1-3/4 -3/4 / 1 point
5/28/08 +44 + -1 pt -2 pts / 2 pts -3/4 / 3/4
5/29/08 +51 + -1/2 -1 pt / 2-1/4 -7/8 / 1-5/8
6/02/08 -133 + -3/8 +1/8 / 1-1/8 +5/8 / 1-1/8
This is amid a very confusing commodities market, an equity market where at times Energy and Transportation have rallied in lockstep, weak economic data, and increasing credit problems. Note that the dollar has rallied for four straight sessions…and is holding above the 40 day moving average. In addition to the disturbing financial problems yesterday, here are some top stories today from Bloomberg:
*Lehman may need to raise billions in new capital as analysts see the first loss since 1994 (note that broker ratings were lowered across the board yesterday after S&P lowered ratings)
*RESCAP, a busted residential mortgage company unable to sell assets…just out, GMAC to buy the assets in question for $1.4B with Cerberus to provide bridge loan…you can’t make this stuff up!
*Toll Brothers reports third consecutive loss due to weak new home sales…duh!
*Bank of Ireland share price drops most in 19 years on higher UK mortgage defaults
*Bradford & Bingley forced to buy $4 billion in mortgages due to a 2006 commitment by the end of next year…company is already cash strapped and raising cash through a rights offering!
So the theory…misplaced as it was…that the worst is behind us, has been shattered! A myth…more write-downs to come…but hey, they can offset some of them by writing-up their declining bond values. A Bloomberg story by Mark Gilbert also shows how financial institution debt has outperformed their stock…higher preference in a reorganization! It just keeps going…and going…and going…
Lastly, a story on aluminum traders seeing a shortage of aluminum by 2013 due to rising energy costs and power shortages. Energy is now 40% of the cost of aluminum manufacturing up from 30% in 2007. China has lost production of 560,000 tons of aluminum due to power shortages. Meanwhile, demand is growing by 6% a year and would require 6 new smelters each year to keep up…similar for copper too.
We have created a mess…investigations into crude oil futures are a waste of time says T. Boone Pickens…and he is right…it may have started with hedge funds seizing control but when the investigations started more than a year ago they cut their trading by 80%….replaced by commodity index funds and ETF’s…and supported by your friendly pension funds. While greed is somewhat a motive, we are first and foremost capitalists, but pension funds are grasping at straws to remain fully funded…and that can only get worse as public funding problems emerge…pension fund…and retirement health benefits costs are the fastest growing expenses for state and local government…a true vicious cycle…where do we go from here?
Sadly regulation…a little sound regulation could have prevented the mortgage meltdown…the auction rate securities crisis…and many other problems facing us. Instead, we became complacent with Sabanes-Oxley, an act that has truly hurt small businesses…much more so proportionally than the big culprits. Suits are brought against companies and the proceeds used to fill the coffers of NY State, not return the money to those who were harmed. We bailout Bear Stearns and other financial companies yet those who caused the problems are not penalized…indeed, like failed hedge fund managers, they go on to new things…after all, now they are experienced. Unless we stop thinking about the short run in everything we do from managing earnings to personal consumption we will face one problem after another…and the solution will in either way be painful…we can pay now…or in installments…which do you prefer?
June may be busting out…just don’t you go bust!
All the best,
TB
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 June 3, 2008
