Traderbill's Financial Markets Weblog

(GDP declined by 1% in Q2 vs. consensus of -1.5%, and stocks reacted negatively. See Overnight Section for details. TB)

…today is our first ‘peek’ at GDP for the second quarter…it is expected to have improved from -5.5% in Q1 to a mere -1.5%. Was yesterday the ‘rumor’ while today will just be the news? By the time you are reading this the results will be posted, but does it matter…really? …really matter? After all, there are several options for it going forward: ‘V’ for victory, ‘U’ for useful, ‘L’ for level, or ‘W’ for what the…??? Starting to sound like a listing of Sue Grafton novels.

Last night the local CBS affiliate media station (KCBS) sponsored a ‘business mixer’ and discussion on the real estate market. The sponsors were mainly two huge condo projects who had huge pictures of their ‘unsold’ projects, one in Walnut Creek, and the other in Oakland at Jack London Square. It was strange seeing the conglomeration of realtors, insurance people, prospective house flippers, etc. and they must have been disappointed at the discussion in the second hour.

The first was one of the key people at Zillow, the online company that evaluates real estate prices nationally and with a most effective map display. He even labeled himself ‘Dr. Doom’, another was the CEO of CMG Mortgage, and two author/reporters. The most positive comment was that this is a good time to buy a home, especially in foreclosure (if in an area not inundated by them), but only IF you are planning on it as a long term investment…they pulled no punches and the audience quietly groaned.

The point was also made that another wave of option ARM resets is coming starting in 2010 and will continue in 2011 and even 2012. These are not on the subprime loans but on the higher priced homes bought by people who thought they would be making more money by then…does that cheer you up?

Now take this against the backdrop of the stock market yesterday…euphoria would be a gross understatement…trading technicals would be more accurate. There are two key points about the rally:

1. it was strong right out of the chute and volume was the best since July 8 but still 150 million shy of a normal day…and then not only did it give back half of it’s gain…in the final 20 minutes but there was concern it might give them all back.

2. the S&P 500 surged 21 points stopping at 996.68 just two points shy of the magical 1,000 psychological level but the only one that is significant is 1014.14…the 38.2% Fibonacci retracement from the March 6 low…and taking that out was not to be.

Which brings us to TB’s mea culpa yesterday as it was disconcerting to see an afternoon’s research wiped out immediately after the opening…but it was proved to be a ‘faux’ rally by the end of the day…nevertheless…

What was fascinating was the continuing string of investment people TB has gained respect for on Bloomberg talking about the weak state of the recovery which was unexpectedly confirmed at the conference last night. Not only that but the foreclosure rate jumped by 50% from May to June…that can’t be a good thing! (also the CMG guy said that the default rates used by Moody’s and S&P went back to 1945…they are now using 2007 as a base year!). Hedge fund manager Bill Ackermann who correctly shorted FNM/FRE and other financials says that rising foreclosures will be the next wave in the crisis…seems to be gaining support too!

If TB hears one more comment about the Obama stimulus plan kicking in he is going to scream. It won’t work (other than to help stabilize things) for the following reasons:

1. the scope is incomprehensible. How does one distribute hundreds of billions of dollars yet insure that it isn’t given to frauds….remember the scandals after Katrina? It takes time to do this and the longer the time frame the less effective…in fact there is the risk that usually occurs with fiscal policy of it kicking in after the recovery and thus causing inflation (not to worry about that one this time however). Local governments are complaining about the money not reaching their ‘shovel-ready’ projects…about all that IS getting there is the ‘Build-America-Bonds’ program where bonds are being issued as taxable despite it being cheaper as tax-exempt after adjusting for the federal subsidy, except this is money the states need NOW, not later…so future generations can pay for it instead.

2. the programs are also flawed and so vague that the participants don’t even understand them. Another case of designing the elephant by committee. Cash-for-clunkers is being hailed as a success (it has already run out of money!), yet it originally sounded like you would get $4,500 plus your trade-in, but turns out that is what you get…and then you only get a ‘voucher’ to be applied towards purchase of a new car that mandates you have to take out a five year loan on and the car must cost less than $45,000…too many strings…and what about anyone who has a ‘clunker’…can they even qualify for credit? Oh and here is a good one…the $8,000 first-time home owners tax credit. TB’s son just bought a home and would have had to put down a small down payment for FHA but was told by the realtor that the tax credit could be applied beyond that. He said that never happened because nobody knew how to do it…not the realtors, not the banks, not the escrow company…the point is that what good is a program if it is too complex to work? It didn’t matter in his case as he put plenty down and will just take it on his tax return.

That’s enough for today…you get the point…and the stock market is oblivious to it. Or you may think it is TB that doesn’t get the point…fair enough…and what he wants you do: think for yourself because only a fool would listen tot the blathering fools on CNBC.

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TB is going on vacation so the next scheduled blurb will be on August 18, at least you have lot to play with in the interim. He will be in Minnesota visiting his grandson and kids…and hopefully some friends and readers.

Hope you all have a nice weekend and thrive over the next two weeks.

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, © July 31, 2009.

“If you can’t take ‘em up…take ‘em down!” TB

…sometimes switching from CNBC to Bloomberg isn’t even enough…the insanity or more accurately lack of thinking permeates there too sometimes. Take yesterday, one of the young women there who considers herself a technician was breathlessly explaining that the 200 day moving average on the S&P 500 had turned positive and that this is a very bullish sign as historically once this has happened the stock market rallies further. If you recall this was the same argument used when the 40 day and 50 day moving averages crossed but unlike prior events…due to the naturally bullish nature of equities (or inequities)…both flatlined and have been joined at the hip since July 9…an incredibly long time as the market rallied for those 11 straight sessions but has rolled over for the past four sessions. Too show you just how insignificant her observation on the 200 day is, recall how the 200 day was in a steep decline with a slope of about  -20 degrees but began to flatten out around July 15…it can’t decline forever especially when the S&P 500 has rallied 43% from the March 6 lows! Here are spots of the 200 day since 6/30:

6/30 890.84

7/2   887.91

7/10 879.95

7/17 873.65

7/24 870.59

7/27 870.57

7/28 870.92

7/29 871.30

Note that since last Friday the gain has been 0.69 points! Without a magnifying glass you wouldn’t even see it. Meanwhile, since the 40 day crossed above the 50 day (silver cross), on April 23 the spread peaked at 27 points on May 8 and has since narrowed to just 3 point…another sign that the rally is very tired. The 40 day crossed the 200 day on June 18 (golden cross) followed by the 50 day on June 23 as the 200 day continued to fall and is now 53 points below the 50 day and 57 below the 40 day….there is no conviction!

Also watch as the 4 point difference between the 40 and 50 day narrows and eventually crosses again (double cross…sorry couldn’t resist).

As of now the index is still 48 points above the 40 day but that could evaporate in a few sessions…and this is true of virtually every index which also have the 200 day now flat if not starting to turn up. Imagine how devastating that would be to see several indices drop below not just one but both moving averages in three days or so…we have seen this in individual stocks such as McDonald’s that gapped down on earnings last week right thru the 40 and 50 day AND then closed well below the 200 day….which for the past four sessions has proven to be major resistance.

Now we come to the point for the indices…actually two:

1. the advance from July 10 has been so fast (+11.7%) to the July 27 high (982.49) and high close (982.18), and the highs since have been 982.35 (double top) and 977.76 with two consecutive down sessions, and NYSE Volume has averaged just 1.16 billon shares without a single ‘average volume’ (1.5B) day, that there are a lot of ‘trapped long’ positions which will readily exit on a break of the 40/50 day or before…perhaps the smart ones already are?

2. the volume can only increase if this occurs…a standard event in the selloffs through the entire bear market (the last two down days on the S&P 500 have both been 1.25B shares). If that happens support will drop to the 200 day (871) on a break of 900 and then 869-72 the support in the selloff from the June highs. Remember that the highs failed to take out 1000 …a level last exceeded on November 4 and by just 7 points followed by a huge selloff to741…the November 21 ‘interim low! There was one more attempt that failed and ended in the March 6 low. While TB does not expect this, a ‘correction’ at least to the 200 day should be expected.

That is what happens when you have a rapid advance without building a base. True, there are also a lot of trapped long positions at the June highs were the highs ranged from 938-945 for seven sessions as managers who missed the runup bought to provide cover on their June 30 statements.

Daily, TB has commented on the volume of just two stocks (BofA and Citi) as a percentage of total volume which has run 50% or more of total NYSE volume. But those volumes include trading on Electronic Trading Networks (ETN’s) which are at least equal to NYSE volume. Still, that is a massive percentage of the volume on the NYSE.

For the last two days, Citigroup’s total volume has exceeded 1 billion shares, or about 85% of total NYSE trading, while BofA continues to be more than 20%. If this isn’t an indication of a thin market TB doesn’t know what is!

This brings us to ‘high frequency’ trades…computer generated trades on the electronic trading platforms which receive rebates for ‘providing liquidity’ so that they can ‘wash’ a trade and still make ¼ cent a share on each side! Is this truly liquidity? There is a huge debate going on in Washington and both sides have huge interests…Wall Street and a few big hedge funds (Citadel, Renaissance mainly) who profit from this.

TB has mixed feelings on the topic but feels that the market activity of late, especially the trades in BofA and Citi, prove that they do not provide liquidity but a false sense of liquidity. The reason being that they are run by computers using complex algorithms and testing the market on 100 share bids or offers posted for just a microsecond to see if they get any bites….that is 1,000 times faster than the blink of an eye! The ‘false’ sense of liquidity is that it is there until you need it. Also, TB has noted wide bid/offer spreads on ETF’s and less actively traded stocks so that when you buy you have no idea what the value of the stock is if you put in a market order and if you test it by bidding in between you will see an almost immediate change in the spread…first noticed in trading preferreds. Look at this example:

Lately, the spread on the iShares S&P California Municipal Bond Index ETF (CMF) has been about 50 cents…and that spread was centered on the 200 day moving average of the ETF! It has been tracking the 200 day since June 11 with some wild swings in between. For instance, on July 9 at that peak of the California budget mess, the ETF traded down to 95.66 yet closed at 100.39 with a high of 101.90! This is madness. On several days before and after it traded between 100 and 101…again huge moves. This illustrates just how important it is that you NOT put in a market order without ascertaining the spread between the bid and offer! Your performance depends on it.

What TB believes high frequency trades are doing due to the overall thinness of the market is creating ranges which is why for the third time in three months the market has hit plateaus that lasted for five or more days and while eventually rising the prior two times, the market is clearly ahead of itself…companies cannot continue to ‘beat’ on lower costs alone…they have to have higher revenues…significantly higher revenues.

Both Shell and Exxon reported overnight and both suffered huge declines in earnings and revenues…Shell earnings down 67%….Exxon profit -66%…a five year low!  …and guess what? Crude averaged   $59.63  in Q2 and is just $64.21 so far this quarter with the peak being on July 1…just under $70…in Q2 it peaked at $72.68. Better rethink those oil service companies…and what about oil company dividends? Energy was the worst performer yesterday, down 2.04% (oil services -3.1%), and the NYSE Energy Index closed just above the 40/50 day moving averages…it will break them today!  

Bonds have been similarly volatile and that means you can be buried in a bond within minutes…especially with all the supply coming. We are now seeing the yield curve flatten as optimism picks up on an economic rebound…more like stopping the bleeding. TIPS have, despite comments to the contrary provided little or no relief due to their volatility. But if consumption is 70% of GDP and the the consumer is not only tapped out but trying to improve his balance sheet can we really have inflation? Especially with tons of excess capacity and even if that were to be sopped up, would wages rise? Not other than minimum wages…which just increased but is below minimums in most states! So how do you get inflation? Why do you need inflation protection when the real fear should continue to be deflation?

Please answer these questions for yourself instead of listening to a thirty-something tell you how optimistic he is based on historical data which does not apply in this situation, and has never seen a market he didn’t like! TB recalls the short 1987 crash which was the first downturn many in the business had ever seen…since then we had the 2000 crash which was salvaged by the housing market…what will save us this time? Not housing!

Here is some scary data for you: in addition to the $165 billion in commercial real estate loans that have to be refinanced this year, there are now $2.2 trillion of U.S. commercial properties bought or refinancd since 2004 that are worth less (worthless?) than the purchase price as reported in a Bloomberg article yesterday. In San Francisco, 333 Bush St., a 43 story tower, will be surrendered to the lender(s) after the main tenant, a law firm, filed for bankruptcy. The owners are Hines Interests and Sterling American Property Inc. Worse yet how many of these buildings are in commercial real estate REITS?

Everyone was excited about home prices ticking up yesterday…even Robert Schiller was feeling better, yet the foreclosure rate rose to 2.86% in June from 2.5% just a month earlier! That means banks are sitting on even more OREO’s that will eventually have to be sold…somehow. Are you (still) bullish? TB is NOT…green shoots – what a bad joke!

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Don’t be a bull….they don’t always get rich…or a bear…they don’t either especially in this market…and definitely not a pig as they always get slaughtered!

Keep thinking not spending!

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, © July 30, 2009.

…yesterday, Mort Zuckerman was on Bloomberg and very agitated about how overly optimistic the markets are on the economy. Today, former assistant treasury secretary Richard Clarida was on Bloomberg and calmly explained how an economy that depends on the consumer for 70% of its GDP cannot have a ‘V’ shaped recovery, especially as the unemployment rate continues to rise. All day yesterday TB heard more intelligent people than the thirty-somethings who weren’t even around for the 1987 crash tell us how rosy the future is…the immediate future. These ‘kids’ have also convinced some of the nations well-regarded money managers to jump on the bandwagon…well rightly or wrongly, TB isn’t going to make that leap and the market action of the last few days makes the future  of the stock market look tenuous at best…especially after 11 straight up days with just a slight rollover yesterday (except for the two Nasdaq indices and the Russell 2000…the NDQ 100 extended it’s rally to 12 days with just one minor blip but has created a quadruple top at 1600-1609 while the closes have been between 1599-1601…don’t look down). But can this rally continue with the naysayers becoming more open? Depends.

First, let’s look at what Zuckerman said. He said we are in for a huge problem in commercial real estate and that it isn’t the rising vacancy rate that concerns him but the volume of commercial real estate loans that have to be refinanced this year. A day earlier Bloomberg put that number at $165 billion! Even though the new ‘smart’ buildings are attracting tenants from older more stodgy buildings they are at sharply reduced rents and occupancy means little if the bankers don’t wish to lend to you. Furthermore, many of these properties have been packaged into commercial real estate REITS which due to mandatory 98% distributions of profits have little cushion and it is further minimized by problems of refinancing. Look, the banks are already loaded with OREO’s from the housing bust and the last thing they want is to take on a commercial property that could also go bust.

Zuckerman, along with Sam Zell, are arguably the two most brilliant real estate investors of our time. Zell sold out his Equity Office Properties which he cofounded with Robert Lurie in early 2007 to Blackstone Group for $39 billion. Blackie immediately broke it up and sold it at a big profit to other investors. TB heard Zell when interviewed by Maria Barteromo respond to her question of whether he felt bad after it rose. He said that he did not (after all he made a fortune off EOP), but that he sold because he thought prices were going to drop…unfortunately, for him he bought the Chicago Tribune and his antics with the Cubbies have not endeared him to Chicago residents….but TB did not say he was a brilliant investor…merely a brilliant commercial real estate investor. Zell must have seen the wave of ‘crap’ housing loans some of which were beginning to default on the first payment! So if you are bullish on real estate, commercial or otherwise, you must think you are much smarter than these two veterans…ah but isn’t that what youth is all about?

But can’t the stock market stay up here…at least for a little while longer? Of course, but that doesn’t mean that is where it should be. Not on the mixed earnings reports coming in lately and those that are beating on the bottom line are only achieving that by cost-cutting. Which brings us back to Clarida. With all that excess capacity out there, and unemployment rising…albeit at a slower rate, does GDP turning positive really matter? Not from the current levels and hasn’t the stock market already anticipated an inflection point in GDP and has perhaps seen it already in other indicators which are reported monthly rather than quarterly?

The secret, IMHO is that the fear is out of the market…but is it being replaced by complacency? True, we will not have a financial Armageddon but is that a reason to buy stocks at double digit multiples…that only look good when you use the companies ‘estimates’ which we have already seen are worthless….CEO’s are always optimists. That is what they are paid to do and they are centivized nicely for doing so.

Enter high frequency trading…where trading firms receiving rebates for using electronic platforms to provide additional ‘liquidity’ make money buying and selling at the same price. That is why the volume on a few stocks like Citi, BofA, and CIT mainly is routinely 60% or more of total volume on the NYSE. Yesterday, Citigroup (C) had total volume of 1,035M shared or 82% of the total volume that traded on the NYSE! Plus another 119M of the new Citi shares so that combined this was over 90% of the volume. BofA added another 240 million or 19%…do you think that many shares were actually bought and sold on a ‘net’ basis??? Not hardly. That is the ‘illusory’ liquidity provided by high frequency trading and why it must be regulated. Who are the defenders? Those who are profiting from it…Wall Street brokers, Citadel, Renaissance and a few others. If you call that liquidity I suggest you look at the bid/ask spreads on all but the most actively traded stocks…and ETF’s. You  can drive a truck thru the spreads lately. Be careful!  

But that is only part of the story. The rest lies with the low volume as we continue to deleverage…and no, Virginia, that deleveraging is not over yet. Banks are still way too overleveraged and brokers are merely making money off fees…that is the old way pre-2005 when they began to create all those exotic derivatives and we know what happened to those. While these fees are sustainable they only good in comparison to the last few quarters…even for Goldman, which has been distorted by those payments from AIG and others. Also, much of those fees are coming from their commodities groups who are writing the commodities index swaps to commodities index funds and then buying unlimited amounts of the futures…how else do you think oil prices are rising as demand falls and there is a huge glut in storage tanks and tankers?

Yesterday, Gary Gensler, CFTC Chairman in the first of three hearings on commodities market speculation said that over the past twelve months position limits have been exceeded by two to three times by about 70 traders! If that doesn’t answer why the commodities price of oil has no correlation to supply or demand, TB doesn’t know what does. As TB has repeatedly said it is institutional investors piling into commodities index funds beginning a year and a half ago that created this problem and rather than limit the banks from writing the commodities swaps and then buying up the underlying commodities, the NYMEX has instead stretched the position limits to accommodate the additional demand…for the futures not the underlying physical commodity!

Had the NYMEX restricted the banks, the index funds would have lagged the index and that would have curbed investment by public pension funds rather than fuel it! Somebody…and likely it will be the pension funds…will get burned badly in this and the pension funds do not need that right now…in fact they can’t stand it. In fact, in California the governator has limited the additional contribution by cities and counties to 1.5% due to the weak economy when state law allows up to a 15% increase and the unfunded liabilities are huge….we are in trouble…especially if the stock market declines.    

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Barney Frank was on yesterday about the bill to limit compensation by public companies. What it would not do is have the government tell companies what to pay but what it would do is require shareholder approval. While you may scoff at this, as boards have ignored the shareholders for years even when they put up initiatives that pass solidly, this time it may be different. Citi just named three outside directors including a former Superintendent of Banks for New York (Diana Taylor), Timothy Collins, CEO of an investment manager who specializes in financial firms, and Robert L.Hoss, Dean of the Graduate School of Business at Stanford and former CEO and Managing Director of Westpac Banking Corporation Ltd. Jose was also an executive of Wells Fargo and just resigned as a director to take this spot!  Doesn’t appear it will be business as usual…at Citi at least.  

Also at Citi, the head of their commodities group (Phibro) is suing for them to honor a 2009 pay package of as much as $100 million! TB wonders how much of his compensation came as a result of commodities index swaps? …and at whose expense? The U.S. consumer and the global economy. Still $100 million is what it used to be…it is now more! Get real people. How much risk was he subject to personally? His job? OPM!

That’s enough for today….hope it is a good one for you!

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, © July 29, 2009.

TB’s Quote of the Day: “The jockey’s too big, the horse is too small, the trainer is too old, and I’m too dumb to know the difference.” From ‘Seabiscuit,’ (the movie)

…remember when Jerry and George were pitching the Seinfeld Show…they kept saying: it’s about nothing. That is exactly what this market is…and you have two sides who have dug in their heels and each thinks the other is crazy…personally I believe someone like former Merrill analyst John Hermann who was on Bloomberg yesterday is out of his gourd to believe that the banks are going to start lending and people will start spending again… he is using historical data which like the saw that the real estate market nationally will never fall…he also believes the banks have restored their balance sheets…they have but to what??? 2003 levels of leverage??? And they are still hemorrhaging loan losses! Still, he could be right….but…gimme a break! 

Fortunately, TB has banned CNBC from his office and is listening to Bloomberg exclusively. Fortunately because what he is now hearing on Bloomie is inane enough. Not the news coverage but their guests and panels of the ‘best and brightest’ who are saying exactly the opposite of one another…but believe it or not that is an improvement as there is not screaming or butting in while the other is talking…it’s very civilized…but it is also confusing and that makes it worthless…except to keep one sidelined which might not be all bad.

So either we are headed for a ‘V’ shaped recovery or while the worst is over it won’t get better in the foreseeable future and stocks are way ahead of themselves. Obviously, TB subscribes to the latter. The problem is the ‘new normal.’ For example:

*Banks have repaired their balance sheets…if that is the case how come Deutsche Bank stock plunged overnight on great earnings (+68%) but had to increase loan losses…ditto Wells Fargo last week. Have we become so numbed to 30-40 times leverage that 25 looks good? It is incomprehensible and the banks only want to lend to one another as evidenced by declines in one and three month Libor to record lows (0.28% and 0.49% respectively).

*”Falling at a slower pace is the new rising. We are seeing that in home prices which are selling at lower prices but falling at a declining rate…of course they are…you can’t maintain that pace forever….look at year over year levels which eliminate some of the seasonal factors…by the way that improvement in home sales is simply a seasonal factor.

*GDP probably fell by just 1.5% in Q2 vs -5.5% in Q1. Not only that but one day it will turn positive…but again…look at the dollar amount and in year over year terms.

*Less is more. The problem is the consumer is thinking that way. He needs fewer TV’s, even cars…he is finding he doesn’t need all the bells and whistle on cable, cellphones, etc. that he thought he couldn’t live without…and those are the areas of high profit margin. Why did Verizon disappoint yesterday? It’s the opposite of the old song “how you gonna keep ‘em down on the farm after they’ve seen Paree?” Paying down credit card debt is the number one occupation of most people these days…and meanwhile they are tightening credit and lowering credit limits as fast as they are paid down. This will make it much more difficult to go on a spending spree…and penalties for exceeding limits are horrendous…not sure if the new law will prevent this.

That is enough to give you the idea. Now look at this: aluminum is rallying for the 11^th straight day…longest in 22 years. Why? Because automakers supplies of it are dwindling. Do you honestly think they will stock up? Here is another from the overnight news: platinum prices to rise 16% due to auto incentives…more catalytic converters! This is exactly the type of knee-jerk reaction we have come to expect. Since 7/13 aluminum is up 38%, Alcoa +21%…aluminum is at the highest level since November 2008 while AA is still below the June 11 high.

Contrast the change to Gold….since the 4/17 low the lead gold contract is up 10.1%, the ETF (GLD) is up 10.3% (despite the fee), and the Philly Gold/Silver Stock Index is up 9.7%…now that is correlation! Oddly, it is normally the gold producers who outperform the commodity on psychology, and one would expect the ETF to lag due to the 40bp expense ratio due to fees and storage costs. Incidentally, we are going into the seasonal strong time in sales due to Indian and Chinese gift giving holidays which are big!

Then of course there is jewelry. On Friday, DeBeers said diamond sales are at the lowest level in a decade and they see no rebound. Today, Cartier said they are not sure ‘the worst is over’ for jewelry market…yet Blue Nile (NILE), the online jewelry retailer is only off slightly from the recent highs and is trading at a p/e of 64x trailing earnings…but only 39x estimated…how can that be if sales are slowing…their PEG rate is 1.73x so it is also significantly overpriced…especially for a jewelry retailer…contrast to Tiffany (TIF) at 18.6x estimated…contrast that that is HIGHER than the trailing p/e of 14.5x…one of them is wrong. TIF has a 1.52x PEG…still expensive but…more realistic? Would you rather receive a present in a blueTiffany box or a package from Blue Nile? Just asking.  

Speaking of commodities, a former head of the CFTC says the trading is corrupt in energy as do well-known oil experts. Furthermore, they know what is wrong and it is the same thing that caused the bubble in oil prices in 2008 and has nothing to do with either supply (which is huge) or demand (which is slowing). It is all about pension funds putting their money in commodities index funds and the funds engaging in commodities index swaps with ‘banks’…meaning Citi, JPMorgan Chase, BofA, Goldman Sachs and Morgan Stanley…the latter two now being afforded ‘bank’ (sic) status can buy unlimited amounts of commodities, unlike either the commercials or speculators who have trading limits, claim they are ‘hedging’ a position when the only things the funds will do is ‘buy’ NOT sell or short. What is sick about this is the CFTC has had 18 months to analyze this problem and has done nothing! It is for this reason that commodities stocks are not performing as well as the underlying commodities…because it is a sham! But what is sicker is that Citi now wants to spin-off its commodities trading subsidiary so they can pay higher bonuses….and just how do you think they are making all those profits??? Commodities index swaps…financed with taxpayer money…god, we are dumb!

More earnings reports…more mixed signals…and the beat goes on…and on…

The Dollar is in the tank again with the index barely hitting a new 2009 low. There are only a couple of levels of support left before it freefalls…not saying it will…it should on its own merits but it is still the safest currency in the world…what does that say about the rest of the alternatives? While TB disagreed with a strategist last week that Japanese stocks are a good place to invest (except possibly for a quick trade in the Nikkei), he dos agree with the sad fact that the Japanese banks are much better off than U.S. or their European counterparts….they have been thru this for 20 years and know what to do…also they are not levered up like the U.S. and Europe who have deleveraged but are still at unsound levels…for a broker…let alone a bank!  

Bonds have to digest not only the 20 year TIP auction yesterday but 2, 3, and 7 year auctions the rest of the week totally a huge $115 Bil…and then next Wednesday we get the announcement of the August refunding of 10’s and 30’s plus the regular monthly auctions at the end of August…supply as far as the eye can see and it will just take one auction where the Chinese fail to show that will wreak havoc on yields. How long can this go on and with a falling dollar which direction can bond yields go? Higher?

The SEC has announced new guidelines on shortselling. Shorts will have four days to cover naked positions…but positions won’t be announced for one month…and only in aggregate for each stock so no way of knowing who was shorting. They will also however provide a ‘tape’ of shortselling that will show the time, date, and size of each trade per stock which will help forensically but nothing more. no reimplementation of the uptick rule….this is sad…too little…too late. Now let’s see what they say about those high-frequency trades which the proponents…Wall Street brokers, Citadel, Renaissance and a few others defend….they say that eliminating eigths protected investors…yet what they don’t say is how easy it is to take a penny here or there without notice while an eighth was spottable. Not to mention those rebates that allow them to cross hundreds of thousands or millions of shares in total at the same price and get paid for facilitating the market…what’s wrong with this picture??? 

Guess that covers all the bases today…hope it helped!

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Did anyone take the time to study that ‘cash for clunkers’ program? First, you have to have owned the car for one year and it has to be currently registered….some soldiers in Afghanistan, etc. have let registrations lapse…they do not qualify. Second, the rebate is all you get…not on top of  trade-in that’s it…so it really must be a clinker, not just a gas-guzzler! Third, you have to finance the purchase of the new car and it can’t cost over $45,000…if that isn’t bureaucratic meddling TB doesn’t know what is…oh and by the way remember in 2002 when they put in that law that said you could write off  up to $100,000 on a new ‘truck’ purchase in the first year so long as it weighed ‘x’ number of pounds and was used for business purposes? That law was intended to help construction workers who had to buy specialized trucks…glaziers, etc. but by the time Congress…and Detroit…got hold of it they changed it so the majority were going to white collar businesses! Why do you think we got so many of those Hummers, Suburbans, etc. on the road….so we were encouraging gas guzzlers and now we want them off the road…but they aren’t the ones that will be coming off the road…undrivable ones will…if the owners can afford to buy a new car which they probably couldn’t have in the first place The alternative? Buy a car and amortize it over 5 years on any car costing more than $35,000 – classified as a ;luxury’ car??? This is why the Beltway can’t ever get it right…and why the defense industry outwits them (appeals to their own greed?) by having various parts produced in as many states as possible…the leader of the fight to keep the overpriced ‘presidential’ helicopter program going comes from the district where it is assembled!  Oh, and a friend who sells cars says that their credit division isn’t making it easy to qualify for any loan or lease…huge rejection ratio. Go to your bank? Are you kidding???

Come back in ten years…perhaps TB will be bullish by then!

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, © July 28, 2009.

TB’s Quote of the Day: “The market will continue to go up until it doesn’t.” – Dennis Gartman, who shorted stocks last week,  on Bloomberg this morning…TB also said this!

…last week’s sharp rally of course being round one, the second straight up week following  four consecutive down weeks, and taking the Dow almost exactly to where it was on January 6…the peak of that mini-rally before we plunged to the March lows. Ah, but it is different this time…isn’t it? After all we just had all those great earnings reports. True…but where did the positive earnings surprises come from, you ask? Cost cutting! Revenues for the most part were sorely lacking yet the companies raised their earnings forecast or affirmed…does this mean another round of layoffs are coming? Does this mean that all that excess capacity we have heard about is a myth? Does that mean that CIT who has been the lifeline of small businesses as well as heavy equipment and aircraft leasing can fail and all those companies who couldn’t have gotten a loan elsewhere last week will all be able to miraculously borrow from the banks? (Alternatively, was it a conspiracy to not lend to companies and small business that relied on CIT to keep the pressure on them so the IF and when they fail the banks can swoop in for the kill?)

Not only was there a diversion in earnings between Goldman Sachs (“sustained rally”and Morgan Stanley (“a rally to sell into”), their strategists are at odds….naturally Goldie being the bull. But the funny thing is the boost in 2010 earnings estimates provided by Goldman was to $75 from, $72 according to Abelson in Barron’s. Remember these are ‘top down’ estimates meaning they are an aggregate of the weightings in the S&P 500 whereas money managers use ‘bottom up’ estimates by looking at individual stocks earnings. This is significant when you realize how the S&P is skewed to the biggest companies…so that is why TB has been saying the market will rally until it doesn’t and Gartman found out the expensive way by shorting it.

But what does it all mean? To TB it means that when one cuts costs more than revenue declines, earnings will go up. It also means that if the stock rallies the p/e ratio may still actually decline but that can be illusory…especially if revenues don’t pick up sharply which TB doubts they can…of course we have a ‘green shoot’ coming on Friday and TB doesn’t mean open season on environmentalists! That is in the form of our first peek at GDP for the second quarter and it is expected to improve from -5.5% in Q1 to -1.5% and will be subject to revision when we get the preliminary and final numbers over the next month or so. But think about this…if you were short $5,500 in paying your bills but you improved to just being short $1,500 would you be down at the local gin mill buying the boys a drink? Yet stocks will go ga-ga over this and rally as the light surely must be at the end of the tunnel…isn’t it?

They also love to tout the sharp rise in the market which is just back to the Jan. 6 levels which if you recall was when it peaked…but why do they insist on telling us how much we are up from the highs rather than where we are over the past 1, 3, 5, and 10 years? Because nobody would be buying and that means Wall Street wouldn’t be selling! Frankly, little would be going on at all if it weren’t for those pesky ‘high frequency trades and the fact that BofA, Citi, and CIT and a few others subbing for one of the three continue to equal 60% or more of the volume on the entire NYSE (of course their volume is combined with the ETN trading that is high frequency). Why do the insist on reporting on a $50 stock that fell to $1 and is now $3 as up 300%? How many of you wish you had bought BofA or Citi at the lows…and how many of you bought AIG thinking it had a fighting chance? Ok, so you missed them…BofA and Citi NOT AIG…but how much would you have seriously put down on them…even at $1? $1,000? $2,000?  Yet if you bought a $30 stock and it is now $33 you made more…true, on a bigger ‘investment’ but you were investing – not speculating.

Let’s look at two stocks last week that had mixed results: Caterpillar (CAT) that gapped up on earnings and closed at the high for the week…despite the fact that the company may not do so well for the rest of the year…but who cares, it was up 23% on the news…yet is still -37.6% over the past 12 months even with dividends (4%), re-invested. Then there is Microsoft (MSFT) which rallied for 7 days into the earnings, only to gap down on Friday when they disappointed taking out the 40 day and nearly the 50 day m/a.  Microsoft I one of those companies like GE that trades in ranges and it stalled at resistance Thursday, (high $25.72), then fell thru the top of the next range $25 as well as closing the gap it created on the way up that began the rally. It closed Friday at $23.45.

Be careful and before you criticize yourself or your manager for underperforming look how Barron’s reported some of the sectors: Energy +1.6% YTD…since 3.9 +26.2%; Financials -0.5%; +100.6%; Tech 36.3%; 58.3%; Industrials -1.7%; +53.3%; Telecom -5.0%; +20.5%…and TB’s favorite Consumer Discretionary +16.4% AND +58.8%…it takes a lot of green shoots to believe in that one!

Lastly, Barron’s once again is plugging Master Limited Partnerships….which is all well and good but they never tell you that they aren’t IRA/401(k) eligible…meaning you can buy them but you have to fill out the tax form and if it the gain is above a certain level pay tax on it…even while you hold it. Seems they should tell you that, right? They don’t!

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TB frankly about fell out of his chair in Obama’s ‘health care’ press conference last week when the prez felt obliged to answer the reporters question on the Gates arrest. First, he said Gates was a friend, and then compounded his lack of ‘objectivity’ by saying the police acted ‘stupidly.’ He had no idea what happened yet he turned an event into a racial one…this from a president who was supposed to stop this type of thing. He has divided blacks against whites and lost a lot of support from law enforcement. This not only derailed his message on health care which was vague at the least, and  prompted a special press conference to explain how he may have made some wrong comments. Stupidly is stupidly no matter how you phrase it…it was not just a poor choice of words, it was stupid! He would have done well to own up to it and would do well in the future not to answer stupid questions from the press. That cost him a lot of points not just to TB but overall…we already had one uniter who disappointed (Bush)…will we have it again?

Frankly, he is taking on far too much when as James Carville would say: it’s the economy, stupid! TB is starting to lose patience…even with a president he supported.

Have a great week!

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, © July 27, 2009.

TB’s Quote of the Day: “A rolling loan gathers no loss.” – Will Beaumont – well said, Beau! TB

…or piqued? Not only was TB flabbergasted at yesterday’s rally in which the spurned industrials rallied and workhorse Mickey D (MCD) was the biggest loser, and only one to subtract more than one index point on the NYSE…gapping down on the open by %1.29 on the open and falling another $1.10 by the close for a loss of 4.6%…this from the highest high since 6/10 the prior day. Not only that but it gapped right thru the 40 and 50 day moving averages and then drove thru the 200 day to close at the lowest level since May 21 on huge volume of 34 million shares or three times normal. That is the highest since 1/28/08 and the third highest the stock has ever experienced. Why? Revenue dropped by 7%, partly due to the stronger dollar? Or so Bloomberg says but the point is that even hamburgers aren’t recession proof. A Bloomberg article today says the French are favoring fast food to haut cuisine…certainly not for the taste but even that isn’t enough to offset cost cutting by the less fortunate or earnings matching analysts estimates…and that is exactly what MCD did…to the penny!

At the other end of the spectrum is Starbucks (SBUX) whose stock gapped up Wednesday to the highest level since June 2008. Why? Because earnings beat estimates by 5 cents…but revenues declined by 7.6% year over year…they did it by cost cutting: laying off employees and shuttering stores. Every time TB goes into one of their stores he asks the employees how sales are and is always told same as usual…obviously this is not the case.

Starbucks is selling at 22.9x estimated earnings…is that a good level for a food company? The p/e to growth rate (PEG) is 1.5x but that is based on long-term growth of 15.3%…but that was when they were opening stores and people were making money. MCD with an estimated p/e of 14.5x and long term growth rate of a more sustainable 10.6% for a PEG of 1.4x makes it no value either….but at least they have a 3.6% dividend…at least for now…

But one of these companies soared on cost cutting while the other got nailed by a decline in revenues…to TB both should have hit the skids.

This brings us to what produces earnings: revenues and costs. Thus while the analysts have been lowering earnings estimates and companies for the most part have been exceeding them, most of the ‘surprise’ is coming from bigger cost cuts than the analysts estimated. So that can work for one quarter…or possibly two but you have to have earnings growth to support the p/e ratio. But in the short-term…especially in this era of knee-jerk trading where beating the estimates trumps all else in the short term as speculative shorts are forced to cover.

Similar to Starbucks is on-line jewelry company Blue Nile (NILE)…which will announce its earnings for the quarter on August 6. They had better be good as their p/e had been 66.3x but estimates are 40.5x, which TB still continues to be nosebleed and the PEG is 1.8x using long-term growth of 22.6%….which seems impossible given the problems at MCD, right? Yet the stock is up 19.9% over the past year and 260% from its 1/23/09 low.

Making this even more problematic is a Bloomberg story this morning that diamond giant De Beers says diamond sales are off the most in 30 years…if you can reconcile these two factors let TB know, because he is dying to hear!

Looking at the industrial leaders of the Dow yesterday you get the following estimated p/e’s: MMM 16.8x, CAT 28.6x (11.5x current), Chevron 14.9x (7x current), DuPont 17x; Exxon 17.4x (9.8x current), IBM 12x, Disney 15.6x. Do any of those look cheap to you?

The average p/e on the S&P 500 is now 16.2x, 12.5x on the Dow, and the hot Nasdaq 100 is 33.2x while the Nasdaq Composite is 31.7x yet they are down 11.2% and 12.5% respectively for the past twelve months…with their meager dividends reinvested. You don’t make big money in stocks with those p/e’s…the money has been made! We are in a recession people…wake up and smell the napalm!

TB learned early in his career that those who produce revenue earn the most while those who cut the costs don’t not get compensated commensurately…and can in fact fall victim to their own cost cuts.

To offset the decline in revenues costs have been cut by reducing staff, reducing hours, and closing plants leading to an enormous output gap. With consumers lowering quality, paying down debt, and not earning more where will the growth of revenues come from? This is a food chain remember? Not only that but credit has been sharply curtailed.

Doesn’t anyone remember when U.S. growth started to slow? Nobody worried too much because we are a global economy so the others will ‘lift’ us…instead we dragged them down with us. Why? Because our growth was all financial and when that sector faltered it took everything else with it….and the rest of the world. How have we forgotten that California, the 7th  largest country in the world is dragging the U.S. down…along with Florida? If just the five biggest brokers took us down, what will it be like with just three? Especially if we resume our borrowing ways yet that will only get us back to where we are or worse…IF we can even resume our spending ways.   

The reason TB spent this much time on this is that he had more calls and emails from readers on the market than usual…much more…and all are bewildered.  

Lastly, TB has spent so much time discussing technicals such as 40 and 50 day moving averages that he wants to emphasize that these are, to him, timing devices for entry or exit and do not replace fundamentals on the individual stocks. Remember, we have removed fear from the marketplace…perhaps prematurely as we did in the 30’s and Japan has done since 1989 leading to big up moves followed by disappointment.

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The Dems and the country are in trouble when Rep. Maxine Waters becomes a spokesperson on derivatives…yet she says she favors a total ban on credit default swaps which is insane…but she toned that to she just wanted to get a discussion going. This is damaging to the credit markets especially now when banks are reluctant lenders at best.

TB believes they should be exchange traded and regulated and that the argument that they should be allowed to trade freely in order to provide liquidity is spurious at best since 80% of the swaps are held by people not owning the underlying security. Imagine the commodities market functioning that way…OK, so that is how oil is but you see how it bears little resemblance to reality! Furthermore, an exchange would allow those swaps to be paired off instead of piled atop one another dramatically reducing risk.

Lastly, the supply-siders in their never-ending fear of inflation have forced the Fed to say they have an exit strategy. True, one needs one but it does not need to be discussed this early in the game when we still don’t know what the impact of the stimulus will be as only a fraction of it has been put to work. No matter what the Fed says the supply-siders will argue that it won’t work. They argue that the Taylor rule for maintaining price stability is being ignored yet the author, John Taylor, says that is not true (Citi just announced this morning he will be going on their board). All TB hopes is that the stimulus is not removed too quickly…or increased from the current levels…as we are in a liquidity trap that even Keynes couldn’t imagine. In the 1930’s the Fed raised reserve requirements forcing the banks to call loans and thus exacerbated the depression. This time the Fed is being lenient since Bernanke is the scholar on this subject and has openly blamed the Fed, yet it is the banks themselves that are doing the tightening…when we least need it…the ill-designed ‘stress tests’ did little to encourage them otherwise however. We better all hope they get it right this time but remember that if inflation is bad, deflation is unacceptable…especially in a nation that is debt-laden top to bottom.

Hope you all have a fun and relaxing weekend,

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, © July 24, 2009.

Bloomberg Quote of the Day: “I’m not a vegetarian because I love animals. I’m a vegetarian because I hate plants.” – A. Whitney Brown

….that’s double ‘peak’ not ‘speak’ although that too might be apropos. For the past three sessions the dollar has hovered at the lows and just off the June 2 lows…on the edge of a precipice. Meanwhile the Dow came within 25 points of the June 11 HIGH (8878) three days ago (8855), then took it out in the following fashion: 8927.13, 8949.80.  The first day was a slight ‘outside’ day and the last two were higher highs and higher lows, but yesterday the Dow closed -34 from it’s 8915.94 high close for the rally from the March lows. The fact that the highs were taken out but with so little additional gain…just 0.8%, high to high, begs the question of whether this rally is long in tooth?…or worse.

Additionally, we have been in an earnings period of unprecedented (in TB’s memory) lowering of earnings estimates in which most companies handily beat them…so where do we go from here? Will the analysts start raising the estimates based on these earnings which in most cases were a result of significant cost cutting…and can only be replicated by laying off more workers…although TB did note that Mattel said one of the main ways they did it was to reduce advertising expense!…something TB always felt was overrated.. MAT must be doing something right because the rewarded the stock,which had been trading on the 40 and 50 day moving averages with a ‘gap up’ and surge of 13.3% in three days to the high…but it has settled back since, closing just above the first day’s high…still that is the highest level since Oct. 2008 and up 70% from the March 5 low.

Then there was Wells Fargo yesterday, who dazzled like Goldman, JPMorgan and BofA, and like Mattel had been trading right on its 40 and 50 day m/a’s, plunged 3.6% when it was disclosed that loan losses were soaring. Write-offs increased 35% to $4.39B) while non-performing loans jumped 45% in the quarter ($5.3B). These were primarily Wachovia loans. This resulted in an immediate credit downgrade by Fitch from AA to AA-. See how you have to look past the numbers?

Poor ole Morgan Stanley (MS – stock symbol not the disease), however took a loss due to rising employee compensation costs and a drop in trading revenue…odd man out against GS, JPM, and BofA. The road gets tougher for MS while the strong get stronger. This is what happens when ‘too big to fail’ is not only applied but encouraged by the Fed and other regulators…first Wall Street gave investors an uneven playing field…or more accurately the SEC allowed them to do it…now the Big Five has turned into the Big Three. Is this a good thing? You decide…after all…it’s your money!

A friend wrote yesterday that rather than attack Goldman Sachs he should just buy the stock and watch from the sidelines…happily. But if there was a water company that had huge influence on the government and cornered most of the available water and was charging extortion rates for it…would you want to invest in that? Perhaps you would, but morally TB cannot…and then there is always reversion to the mean…always. GS is trading at a multiple of just 10x estimated earnings (down from 27x) while MS is 78x. JPM stands at 27x and is overvalued by 2.6x to the earnings growth rate (PEG) while GS stands at 0.85x. BAC’s estimated p/e is 20x and the PEG stands at 2.4x…while WFC has an estimated p/e of 15.8x and PEG of just 1.16x. Do any of these stocks look ‘cheap’ to you? Time will tell…it always does.

Yesterday, TB listened to a one hour discussion with the economist, domestic and international managers of a well-known global financial advisor…don’t speculate on who it is as you will be wrong and TB won’t say…that isn’t the point.

The point is this:  the economist who is well-known believes we are far too optimistic on an economic recovery as evidenced by the stock market which he feels is over-priced. The domestic manager was looking for sectors of growth but also felt we had come too far too fast, and the international manager said the he sees emerging markets, due to their huge runup at fair value at best…he likes India, China and Japan. On China he said that they can sustain 7-8% growth but not double digit without a global recovery to boost their exports…in analyst terms ‘organic’ growth can sustain the lower level but a global rebound is required to boost that growth…similar for India. As for Japan…and this is the only disagreement TB had in the entire discussion…he feels there is value in the stocks as they have felt their pain…but TB feels that the pain is only going to get worse with the aging of their population which will require multiples of workers to support the growing number of aged. They are, and have been, on the forefront of that global phenomenon.

Golden Glider? Wendelin Wiedeking CEO of Porsche has agreed to leave immediately after 16 years and is the last stumbling block in the merger of VW and Porsche. For this he is to receive a 50 million euro severance package. What were his accomplishments?

First, he was opposed to a merger between the two companies. Second he accumulated VW shares so that Porsche had a 50% plus stake and bought options on an additional 20%…which roiled the German markets. Third, he did this by raising Porsche’s debt to 10 billion euros in turn causing the company to turn to the owning family and to try to get Qatar to take a stake in the company. The CFO also agreed to step down as well he should for allowing this to happen in yet another case of a megalomaniac – usually relegated to dictators. To the CEO’s credit he will give half of it to charity leaving him with a paltry 25 million euros…before taxes. Performance based compensation?

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Obama is blinking….it started out with a minor ‘tic’ when he said he would extend the deadline to August if there was very close agreement this month…now he is saying by year-end which to TB if he misses August it won’t happen by yearend.

There are two arguments against healthcare which he addressed last night. The first is the cost, and that remains to be seen despite his projections…which if you note are ‘over the next decade’ they won’t cost the taxpayers…but what then? Along with Medicare and Social Security. The second is who will decide on healthcare…that was answered by the Mayo Clinic, which had been opposed, having signed off on how it will be administered. Remember, right now you are relying on your insurer to decide what you do or do not need. What will be the outcome? We should know pretty soon.

As for Obama’s declining ratings, Bloomberg conducts a quarterly poll of institutional investors.  Overseas he has an 87% approval rating which is unheard of…while in the U.S. it is just 49%. On the economy only 25% of U.S. investors rate his policies ‘good’ or ‘excellent’ versus more than  50% in Europe and Asia. Bloomberg ascribes some of this to the distaste for Bush but is it possible that we, like humans everywhere, resist change but once the die is cast we adjust to it…unlike any other species? The GOP, following the break from the ‘contract with America’ era of Newt Gingrich spent like madmen…while refusing to raise taxes and in fact dropping them sharply for the wealthiest Americans. To them, even a return to the pre-1972 cuts is anathema…and was even when the economy was booming…you simply cannot lower taxes forever…although TB doubts this is the time to be raising them…especially when the states are grabbing the stimulus from the taxpayers faster than the Feds can dole it out.

TB listened to GOP Senator Bonior last night as he said we cannot afford this healthcare plan which he says will be over a $1 trillion over the next decade…yet he said nothing of the cost of our ill-fated Iraq excursion which is still costing us money…and remember we were told that we would get the cost back from sales of  Iraq oil…they no longer mention that point…or that had we focused on Afghanistan…where the terrorist were…we might not be having the upheaval there that will protract our involvement. Isn’t it great to be a politician on criticize while ignoring your own foibles?…and get paid to do it!

Have a great day!

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, © July 23, 2009.

…was yesterday’s confusing session a sign of peaking? It looked so to TB after opening up fading and then climbing into the close at the highs. True, most indices eked out new highs but even in those cases we are just above that protracted plateau from the June highs. The question is: can the market continue its climb on low volume or is there enough support to take it down on low volume? It is always tough to call the market during the doldrums…tougher? In seven days, we are told, the earth and everything on it was created…or was that the entire solar system? But just seven days of rallying and wer are beginning to look exhausted.

Goldman Sachs continues to stir excitement from those who blast it and the supporters who say it is all bull…they are looking after the interests of the country…which merely happen to coincide with theirs, right?

Pimco giveth and Pimco taketh away. CIT is being charged more than 25 times Libor in the bondholders bailout led by the above mentioned firm. CIT will pay bondholders 13%+ and a ‘fee’ of 5% to the creditors for their largesse. But get this…CIT allegedly rejected and offer of $2 billon from competitor GE Capital at a much lower rate at least partially because they couldn’t settle until at least July 31…that is how dire it is!

Now to continue in our tale of two finance companies…and essentially GE is a finance company…we learn today that GE has gotten approval from FDIC to exit the TGLP plan on the guarantees for their commercial paper. Now consider that the credit crunch is what drove CIT to the brink and would have done the same to GE without the government guaranteeing their paper and letting them borrow $12 billion in TGLP bonds…which will NOT be repaid…including $3 billion issued just this week! Doesn’t anyone get this? This is the biggest taxpayer ripoff in history whereby we the taxpayers are guaranteeing the debt of GE, Goldman Sachs and others and yet we are told that they are sound enough to go it alone…and what galls TB is the fact that in the case of the banks, they underwrote at least some of their own issues…in other words they were paid to issue their own debt. Also, the GAO says that they overpaid…and TB knows that in many cases the buyers were hedge funds which immediately flipped them depriving institutional buyers the opportunity to buy the issues on the offering and having to pay up to buy them when the hedgies were done with them. This is what cost so much more…as soon as you come up with an idea…Wall Street finds a way to profit from it…even when it is at the rescuers expense. Once again, Bernanke tried to explain why Lehman was let go…why CIT is being let go…and it still doesn’t make sense….TB guesses that CIT is not too big to fail even if they take down the nearly 10,000 small businesses that they are financing with them….we will worry about that and all those lost jobs in a later bill, right? Aarrgghh!!!!

Oh there is much more, BABS….BABS being the ‘Build America Bonds’ promoted by the Obama administration for ‘shovel ready’ municipal projects. Under this brilliant yet ill-conceived idea to make a handout not appear to be one, state and local governments can issue bonds as either tax-exempt OR taxable and by doing so receive a 35% federal rebate. Herein lies the rub.

Let’s say the cost of issuing tax-exempt bonds is 5%…then with the 35% rebate of interest costs, the issuer could go with taxable muni’s at 6.75% and breakeven. They are also ‘supposed’ to evaluate in this manner and do what is the most efficient. Well…when you are going bankrupt it is a slam dunk….even if you pay more than 7% who cares…you are getting money you desperately need to survive. Meanwhile, the costs are running way over that 35% (by the way for buyers the interest is still state tax exempt in your own state). We are not talking chump change here on these big bond issues. Furthermore, most if not all are being done as ‘negotiated’ which the MBIA has already found costs more than competitive bidding  while the underwriter is not taking any risk!

California has already issued more than one-third of its total BABS allocation.  

We are digging a very deep hole…no, a PIT and if we aren’t careful it will become bottomless. This is some way to get out of a Wall Street induces mess while Goldie, JPM, BofA, and the rest of the bunch rakes in the money…is this a great country or what?

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Damn the GOP…and while we are at it damn the Democrats…donkeys that they are! What kind of fools are we to be whipped around by these pachyderms and jackasses especially over healthcare. We NEED healthcare reform…Obama says we need a deadline and how right he is…leave the details up to you to decide how it should be structured but without a deadline, like auto mileage rules, or anything else it gets shoved on the back burner…for good. The GOP…and the bashing of the plan if not led by Karl Rove certainly in a Rovian manner…has fought for nearly two decades and the fight is on fear, not logic and meanwhile healthcare costs are breaking the back of America without an appreciable, and in some cases shorter, increase in lifespan…and we are paying multiples of what it costs in other industrialized countries. The cry goes out: do you want the government telling you what operations you can have?…when you have a profit driven administrator doing so now…and meanwhile dropping coverage on anyone they see as a risk.

What got TB off on this was one of those circulating emails with a spoonful of fact blown out of reality to drive one insane with fear that everyone over 59 is going to die if this plan or any plan goes thru. They point to Canada…using as an example Natasha Richardson who they say it took 8 hours to get to a hospital…and that no Medivac service is available anywhere in Canada…both ridiculous lies. Go to www.snopes.com and if you are forwarding all this trash you owe it to your pride to do so…in the first place, Richardson refused treatment….two hours later was worked on for 45 minutes and the trip to the hospital was just 40 minutes…not unusual in a ski area! Also, most of Canada does have Medivac. They also cited the UK as being deplorable and that is not true either.  Is the overall deal not quite as good…yep…but is it affordable? That is the answer. The interesting thing is that if you are wealthy you don’t have to worry…if it isn’t approved go get whatever treatment you want…you can afford it. We have gone nowhere since Hillary’s plan…when the GOP could have come up with alternatives…they were running the White House and both houses of Congress.

Now for TB’s sorest spot (after the VA anyway): social security! Why should someone with $100,000 of interest income be allowed to collect it when a person who has to work can only make $15,000 a year and then lose $1 for every dollar above that?  Or why not make it that if you don’t need the money you can ‘defer’ it until you might lose it or have it become a legacy that can be passed on…of course the reason for this was that to get it through it had to be shown not to be a social program…but we have gone far beyond that point…and hard working people between 60-65 are being grossly penalized at a time when they need it most…oops…forgot there is no deadline so let’s put that off 10 years!

TB hopes Bernanke will be retained but in the back of his mind is how badly Larry Summers wants the job…and that worries TB because WE need Bernanke!

Sorry for the tirade but TB is sick of politics in this country, aren’t you?

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, © July 22, 2009.

…what can you say about a day when nothing of technical significance happened? True, the stock market was up following more of those lowered-bar, fear-driven estimates being broken in a positive way. Not even Halliburton (HAL) which broke above the 40/50 day moving average resistance it was bumping despite a 48% decline in earnings which STILL beat analysts estimates! So why not take the stock up 4.4%? …or was it the downtrodden hunter Dick Cheney’s friends giving moral support? The point is with oil tanks full to the brim why do you think they are going to do well? Natural gas outlook not good either and they are stacking rigs and layed off 5,000 already this year or 9% of their workforce.

Ah, but let’s look at what TB bought a few months ago Mesabe Trust (MSB) which ‘had’ a 30% dividend and continuously posted …as late as June 15…record free cash flow! Yesterday, they announced no royalty dividend and the stock plunged 19% on the news, the second biggest loser on the NYSE. Mesabe produces taconite a substitute for iron ore in the production of steel. The reason was cited as being ‘prudent’ given the current economic conditions. The good news is it bounced off the low and closed well above it on huge volume for the stock…so the bottom should be in and fortunately. Fortunately, TB bought it well below the highs and is almost at breakeven

The above admission is merely cited as showing how inconsistent the market is…and of course how rapidly we can suffer a reversal of fortune…even a small one!

CAT was the big winner on the Dow adding 20 points but the next biggest gainer  was UTX with 8…in other words it was a broad-based rally with few stars. Most of the indices are now bounded by the July 1 high as support and the June 11 highs as resistance, EXCEPT the Nasdaq Composite and the SOX which have both put in two days of higher highs…but is the volume there to keep it going?…or more importantly can they take it down if they really want to? Very vulnerable to bad news and rallying on news of questionable sustainability….but you wouldn’t know that listening to CNBC or even Bloomberg yesterday. Don’t fight the tape but don’t fall in love with it either!

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Going to call it quits this morning after a long and exhausting day yesterday in which TB forgot to set is alarm and woke up an hour and a half late…mea culpa!

The question of the week is: will Bernanke remain as Fed Chairman (good choice), or will heir apparent Larry Summers take his place and achieve his holy grail? Not so much a good choice…competent but the wrong man at the wrong time! Note while Congress remains critical of the Fed it is the only government or quasi-government operation that makes money!

Have a nice day!

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, © July 21 2009.

Bloomberg Quote of the Day: “Confusion is always the most honest response.” Marty Indik…who also said, “Half of analysis is anal.”

…that may be what Friday’s rally might be for someone who bought in to it. Here is an excerpt from the market summary TB wrote late that afternoon…pretty interesting:

The Dow it was up 598 points on the week breaking a four week losing streak and gaining back all but 50 of the points, but here is something unheard of: IBM was the biggest index point gainer in the Dow for three straight sessions and look at the index points: +36, +26, +20…a total 82 points or 14% of the Dow’s gain for the week! Now we’ll do something TB never does…look at IBM: while it is up 15% from the July 7 close (and gapped up today), for the highest close since 9/30/08, it is still DOWN 15% from the 7/24/08 high! The high and close today were just 1 point shy of the 23.6% Fibonacci retracement from that high and there as a load of congestion right there…caution! On the same three weeks there were three different second place stocks (AXP, MMM, JPM) combining for a total of just 48 points…and it drops off sharply from there…the only broad gain day was Wednesday with 10 stocks scoring 10 index points or more. Thank you, IBM!

Not only that but despite it being options expiry total volume was just 1.29 billion shares with 470 million coming on the close…in other words it was just 918 million right before the bell which was the lowest since July 2’s 2009 low of 733 million shares. You all know how TB has been breaking out the volume leaders…three stocks with two constants, BofA and Citi, that comprise more than 50% of NYSE volume each and every day. Look at Friday as this is another first:

CIT/BAC/C were EACH 35% of total NYSE volume but that includes electronic trading networks (ETN’s) where those mega trades are being done that are attracting so much attention from the regulators. In other words at the bell each was 50% of NYSE volume or 150% of the trading of the entire exchange that was done on the floor, and it took that extra 470 million shares on the close to bring it back to a total of just 105%! Is this a sign of a healthy market? You decide!  

The dollar is in the tank overnight yet stock futures are up on all those stocks with lowered bar earnings estimates beating….not so for Halliburton (HAL) whose profit plunged 48%…guess it isn’t so easy when your former CEO isn’t doling out all those luctrative contracts! Also, look at these two headlines from Bloomie overnight:

*Stocks, Oil Rise on Optimism Earnings to show Economic Slump is Bottoming

*Leading Indicators Index May Signal U.S. Economy Nearing End of Recession

Honk if you believe this is anything more than a pipe dream! HONK!!! HONK!!! Have we taken total leave of our senses??? How about that ‘green shoots’ response to last weeks weekly jobless claims which plunged…indeed they did on faulty seasonals caused by the auto makers furlowing early due to the GM bankruptcy…we are SICK! Deal with it! Those two headlines show just how desperately Wall Street is seeking a bottom…and why not? The value of their homes in the Hamptons is plunging, their condos in Manhattan are doing likewise…even winemakers tell TB that sales of wine to New York and surrounding areas is dwindling. More desperation:

*Bernanke May Hold Rates Down by Showing He Can ‘Forcefully’ Reverse Course

This is an obvious response to the cry that the Fed needs an ‘exit strategy.’ Do tell…but when will they need it? 2015? The biggest fear TB has and you…especially if you own a home should have is deflation and if the Fed tightens too early as they are being urged by the supply-siders, not only will they but WE the people regret it and pay a heavy price!

Now along with this comes the following: IF the Fed has an exit strategy they must think the economy is doing well…remember the stock market is always six months ahead of everything including sound logic! Especially nowadays when we are turning over every stone, rock and boulder looking for those elusive green shoots…isn’t pond scum green?

So off we went last week, half-cocked by listening to half of what Meredith Whitney, and Nouriel Roubini said: JPM is NOT  the entire financial sector…the best is NOT yet to come for financial stocks, and while Roubini sees the recession ending in six months he doesn’t see a ‘V’ shaped recovery, no sir…he sees slightly better than an ‘L’ with a risk of a big ‘W’…but let’s not quibble…borrow and buy…even as the world continues to deleverage and deleverage it must! Will someone please explain how an economy can expand when the major financial institutions are doing this and so are consumers???

Who owns Barron’s? Dow Jones…what else does DJ own? The Wall Street Journal. Now who owns Dow Jones? News Corp…and who is the Chairman and principal shareholder, of the VOTING shares, that is? Rupert Murdoch. Murdoch whose newspaper has been routinely using deception to view personal information on key politicians and celebrities. The Journal has always supported business…such as during the Milken affair when their investigative reporters were filling the front page with who, what, when, where, and why, while the editorial page, run by the late Jude Wanniski was praising Milken and talking about how he was being unfairly tried. (TB was at a meeting with Wanniski once where he abruptly left to “have lunch with Mike at Pleasanton (the jail)” So perhaps Alan Abelson can be forgiven for defending Goldman two weeks in a row and saying that any and all written about their shady dealings is just unfounded sour grapes. Funny, Goldman has been awfully quiet about those allegations. Then there is the defense of Henry Paulson who stammered through hours of Congressional testimony last week…and why should he be blamed…after all he was listening to the Goldman consulting firm that was advising Treasury!

At least Abelson did one good thing…remind us that while Goldie and JPM paid back their TARP funds they and other banks still have those TGLB bonds out there for which the government is on the hook and that they are paying a pittance of interest on …especially at the time they issued them…if memory serves, Goldman was first out of the chute there too…just as they were with issuing debt on their own so they could pay back the TARP funds. But pay back TGLP…are you nuts? They had to pay 5% interest on the TARP and give up some options and a lot of control…especially about that which they care most about…their own salaries and bonuses! But this is a freebie…how special!

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Hope you all had a pleasant weekend…TB did as he spent Saturday with his friends and neighbor’s at their vineyard, Lamborn Family Vineyards in the mountains just east of Napa Valley…Howell Mountain to be precise…and overlooking the Pope Valley which is also becoming filled with vineyards. We had a wonderful lunch while quaffing the unreleased 2007 Lamborn zinfandel and their cult wine cabernet which with breathing was excellent. It was interesting as everyone else was involved in the wine industry while TB has always been on the fringe and moved in closer years ago when he met Mike’s dad, Bob…a great guy and fun. Check out their website at  www.lamborn.com

TB believes that Bob was the first to incorporate ‘family’ into the name on a wine label. Amazing how many have followed since…and many top producers!

A lot is going on in the wine industry but sadly most of it is not good due to the economy…and the reluctance of the banks to lend these days.

Hope you got to see the one hour special on Walter Cronkite last night replacing 60 Minutes. Sorry Katie…you are no Walter Cronkite…but then, who is…and that’s the way it is…

Last week a friend sent an article about a law professor who is joining Obama’s team to control what is said on the internet…but what they are trying to do is to stop irresponsible people from defaming etc. with no accountability…on Friday, TB heard an interview with Cronkite where he said his greatest fear was misuse of the Internet…he did not advocate censorship but accountability…when was the interview? 1997!!!

Have a great day and week!

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, © July 20, 2009.