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 11th 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.
