30 March 2007 Daily Comments
Observations from March 2007:
In considering the present market
environment and in thinking about our profitable trades over the years it is a
truism that we make money when we buy stocks with large cash positions and/or
low revenues to price ratio when we they are under selling pressure. The
companies also have to be of the quality that there is no risk of permanent
failure. That may seem like a simple idea and it is but it also the kernel of
our profitable run over the last many years and when we cease being Masters
of the Universe we usually return to that simple way of trading. The
reality is that if no immediate 10% or more sell off is near and if we continue
an all cash mindset we will miss opportunities that we usually seize.
*****
We haven’t been posting much
lately because we really don’t have much to say beyond what we already have.
The markets are meandering and we wouldn’t be surprised by a rally beginning
soon that could carry into the summer. We aren’t going to try and participate
unless the stock markets see more of a correction before the rally. That’s
because at these levels for stocks the risk versus the reward of a guaranteed
4% interest rate favors cash for us. We think the economy is slowing and if the
Fed changes the language of its comment at its meeting today to suggest that
they are leaning towards an ease the markets may respond with a move higher.
But the only reason the Fed would ease would be to try to prevent a recession
and if there is the chance of a recession we would posit that stocks are
overpriced. But that is our opinion and the big boys and girls are much more
interested in trading potential takeover stocks in the greater fools’
game.
*****
The buyout craze is a true greater fools’ game
because the purpose of the buyouts is to take the companies private, pay big
dividends to the private shareholders by loading up on debt and then resell the
highly leveraged company to the public and mutual funds and institutional
investors ( the greater fools) several years in the future.
All the companies going private
now will be back on the market in a few years because that is the only way but
buyout folks can realize their gains. Of course the markets have to cooperate
by buying the new highly leveraged shares in an IPO but they usually do. It’s
too bad that the executives running these companies supposedly for the
shareholders benefit can’t figure out how to manage them so that the
shareholders receive the dividends and profits instead of the buyout folks and
management that participates in the buyout. But that is capitalism in 21st
Century America,
the era of the new Robber Barons.
*****
Housing Starts for
February were above expectations and Housing Permits were below
expectations. The first is a lagging indicator which means that Starts tells
us what happened. The second, Permits, is a leading indicator in
that it gives an idea of where building will be in the future. The Starts
number was up 9% versus January 2007 and down 27% versus the February 2006
number.
*****
Corporate welfare: privatize
the profits in good times and socialize the losses in bad times.
*****
Mother Merrill is saying that house prices could tumble 10
percent this year and raise the chances the United
States may slip into recession unless the Fed cuts interest rates
to cushion the fall in economic growth.
When we were driving over the
weekend we were thinking of the above and the fact that every time the big
brokers and major banks get in trouble for making or buying stupid loans the
Fed rushes in and cuts interest rates. In
effect the Fed rescues the banks and brokers from their misguided chasing of
profits by reducing the incomes of prudent savers and retirees.
*****
Several gurus are suggesting that
the amount of takeovers occurring is evidence that stocks are cheap. We would
use the same news as evidence of rampant speculation. We have never seen
takeovers occur at market bottoms. This may be the first time but we are
holding cash and not our breath.
*****
It looks like the tail may have
become the dog. On Wednesday the Asian markets did not follow the U.S.
markets higher after Tuesday’s large gain in the U.S.market. Asian markets
mimicking American markets have been the norm for nigh these many years.
Overnight Wednesday (Thursday in Asia) the Asian markets
were strongly higher and this morning the U.S.
markets are going to open higher.
*****
We often speak of
market breadth. Breadth is a measure of overall market strength
and is the relationship of stocks that are higher on the day vs. stocks that
are lower.
Thus if 1000 stocks are trading higher than last night’s close and 500
stocks are trading lower market breadth would be 2/1 positive.
Conversely if 1000 stocks are trading lower than the previous night’s close and
only 500 are trading higher market breadth would be 2/1 negative.
*****
The Gap is lower on lousy earnings and a warning going
forward. We like that Gap is closing the new Forth & Towne chain to
concentrate on the main business. GPS is priced at one times sales while many
of the other specialty retailers are 3 times or more sales. Of course The Gap
is a mature line of stores but there is potential to turn it if they can
develop a concept that works.
*****
The carry trade may be the
proximate reason for the correction but the underlying reason is the pendulum
effect and the need for markets like all other events, conditions, and
creatures to seek equilibrium. A move for too long in one direction requires a
move in the opposite direction to relieve stress. That is what is occurring
now. After such a move has run its course then the markets either resume their
upward move or in very rare instances they move violently lower in a mirror
move to the topping move that they have been correcting. That is our maxim that
markets never crash off the top.
*****
Carl Icahn filed to buy more Motorola stocks. As
with Time Warner Icahn has no long term interest in the company, he is just
trying to make a buck. While that is a laudable goal for Carl we are mystified
as to why managements cater to him. In goofy markets like this there are enough
cowboys and cowgirls around to hitch a ride and move the stock price higher for
Carl to exit at a profit.
Icahn wants Motorola to spend its
$10 billion cash on hand on a special dividend or stock buyback. That is what Ford
did in 2000 with the result that it is close to bankruptcy this year.
*****
Today’s WSJ had a story on today’s front page about traders
who benefited from Tuesday’s stock collapse and Treasury rally. And the first
person they mentioned was John Meriwether. He is the fellow who ran Long Term
Capital which was the hedge fund that blew up in 1997 and almost took the whole
financial community to the woodshed as the fund went out of business and lost
billions of dollars for investors in the fund. Market investors not affiliated
with the fund but who had to sell or sold in panic when the markets collapsed also
lost billions. And that is when hedge fund investments were measured in
billions no trillions as they are now.
That this fellow is still running
money is a tribute to Wall Street’s lack of memory and other people’s money
syndrome. Meriwether now runs $2.6 billion and the WSJ say his fund was up in
February. Whoopee
*****
29 March 2007 Daily Comments
Observations from November 2001:
Enron finally blew up yesterday. An accident waiting to happen. All the analysts on Wall
Street thought Enron was a can't lose buy at $50 per
share. At the top it sold for $85 per share. Now at 67 cents per share, that's
something like $80 billion dollars in market value gone. Include debt of $15
billion and we are talking about some real money down the drain. As we said
earlier this month, Enron is the outfit that caused the California
electricity crisis last winter. Guess they laughed all the way to bankruptcy.
Interestingly, a lot of the company officers sold stock at much higher prices
while lowly employees were prevented from doing so. No one will go to jail. Too bad. And so now we know how unregulated deregulated
utility markets work. Everyone but a few insiders lose their shirts.
*****
A comment on farmers, red and
black steers, and trading stocks.
Farmer Pete, as my grandson Tyler calls him,
lives down the road a piece from us. At one mile he is our nearest neighbor
which suits us all just fine. Can't even see his security
light. For those of you who don't know, security lights are bright
globes that come on automatically at dusk and shine brightly all night,
illuminating the barnyard and half the countryside. Why they are called
security lights is beyond us, since their brightness provides thieves the light
needed to see their way around the farm. Whatever, city folks who move to the
country rarely have security lights because one of the
reasons they moved to the country is to get away from bright lights.
Anyway, Farmer Pete runs cattle on our farm. Each
fall he sells his steers and bull calves, which he did last week. A few days
after he shipped them we asked how he did on price. Without revealing too much,
which of course is the country way, he allowed as he got 82 cents a pound for
the black ones and 76 cents for the red ones. We asked why he got different
prices since all the cattle were in good shape and about the same except for
the color. His response was that the cattle buyers usually prefer black ones
and so they usually pay more for them. We then asked him why he didn't raise
all black ones, since he'd get a higher price for them. His response was
simply, "I like red ones better."
Makes sense to us since that is
usually our response when folks ask why we trade certain stocks when other
stocks sometimes move better. As traders we have to own stocks with which we
are comfortable. A good example of this philosophy was our catastrophic Barnes
& Noble trade last week. We lost a good piece of change on the trade and
this week the stock is back to our purchase price where we could get out even
if we still had it. We have learned over the years that when a trade goes
against us and we hold to get out even, our mind tends to focus on the bad
trade to the exclusion of other opportunities. In this case, having taken our
lumps and moved on, our accounts are back to their pre-Barnes & Noble trade value and our mind has been clear to focus on
other more comfortable opportunities.
*****
Several clients have e-mailed to remind us that
we are repurchasing stock this week that we sold last week at lower prices. Our
response is that last week when we sold we were expecting a pullback. More
importantly, the Northern Alliance and US forces weren't doing well in Afghanistan.
On Wednesday of this week, when it became clear that the US
was winning big, one very large uncertainty was removed from the markets.
Seasonally, the market often sells off for a few weeks in December, but the
timing of the big down this year was mid September not October as has been
usual. So, even though the market needs a pullback, we are guessing that maybe
the push higher will continue. Greed is coming back. Remember, we are only
trying to catch the year end bounce. All stocks are anchovies to us. Anchovy
stocks are for trading, not for keeping. The easiest course was to go back into
stocks we know and want to own. The reality is that all stocks are higher than
they were a week or month ago. The stocks that are still moving lower should
probably be avoided until they turn higher or until year end, whichever comes
first.
(note: we finished 2001
up 21% while the S&P 500 was down 12 %.)
*****
Rate cuts at these levels are
hurting savers. Folks who have been prudent and patient and not speculative are
being used by Washington as the
voiceless funders who will rebuild the capital of the
high rolling banks and brokers. The brokers and gurus say cash is trash, buy
stocks and high yield bonds. Shame! It's not different this time. It's just
like it was at the end of 1968when the markets were at new highs which were not
pierced for 12 years. September 11 was a travesty, and a tragedy. But because
the USA was
attacked, and because the USA
has chosen to fight back, it does not follow that the markets are through their
time of trouble.
*****
28 March 2007 Daily Comments
We will be traveling Thursday and
Friday to visit clients and our next daily post will be Monday April 2. We have added observations we
made during the months of March 2007 and November 2001 in the post above dated March 29 and March 30 to provide some
material for thought while we are away.
*****
Thoughts
Rumors of a missile being fired
at U.S.
warships in the Middle East caused Oil to spike $5 overnight
before is settled back to up $1.50 when the U.S.
said they had no knowledge of such a missile.
But with Gold up $3 to $666 and
Oil at $64.50 the stock markets were nervous as the day began. Interestingly European
bourse indexes were lower but not by much at midday.
Asian market indexes closed mostly lower overnight and Treasuries are rallying
on the scare and also on disappointing Durable
Goods numbers.
Investors Intelligence has an increase in bulls to 48% in the
latest reporting period and Bears have dropped to 27%.
*****
The major stock measures are down
about ½% out of the gate but volume is muted. Uncle Ben testifies before a
joint session of Congress this morning.
*****
"Uncomfortably high" is
how Uncle Ben described inflation while he also expressed a degree of worry
about the economy. Fed watchers took Uncle Ben’s testimony to mean that the Fed
isn’t going to cut rates until it gets inflation under control and that while
the economy isn’t doing as well as a Fed Chairman might hope that the Fed isn’t
inclined to rescue it just yet.
*****
As Bernanke speaks the DJIA has cratered
to down 110 points at 10:30am.
*****
Apple is the darling of Wall Street. Their next big item is their
Apple phone which will retail for $500. Apple has a market value of $82 billion
and yearly revenues of $20 billion. AAPL has $11 billion in cash and a cash
flow of $3.7 billion and free cash flow of $2.3 billion
For a definition of cash flow and free cash flow see: http://en.wikipedia.org/wiki/Cash_flow
Motorola is a dog on Wall Street. MOT has a market value of $42
billion and yearly revenues of $42 billion. MOT has $11 billion in cash and a cash
flow of $3.4 billion and free cash flow of $1.9 billion.
Intel is another tech stock in the dog house. INTC has a market cap
of $110 billion and $35 billion in yearly revenues. INTC has $8 billion in cash
and a cash flow of $10 billion and free cash flow of $3.4 billion.
*****
Gold ended at $666.70 which is as aficionados know the sign of the
devil. Oil gained $1.15 to $64.02
just in case that missile is fired tonight. Treasuries surrendered their gains after Big Ben’s testimony with
the two-year ending at 4.57% and the ten-year at 4.62%.
*****
Europe followed the U.S.
markets lower and Brazil and Mexico
did likewise.
*****
The DJIA closed down 105 points at 12295. The S&P 500 lost 12 points to 1415 which took out its 50 day moving
average and the NAZZ dropped 20
points to 2417.
Breadth was 2/1 negative for the second day but volume remained moderate.
New highs again contracted to 195 and new lows expanded to 85.
And there are two more days at
the casino for the big boys and girls to spin the wheel of fortune and then the
billions of dollars in the March Madness office pools will move closer to
payoff day on Monday.
*****
27 March 2007 Daily Comments
Thoughts
Asian indexes were mixed
overnight and European bourse indexes are small fractions higher at midday. Treasuries have a bid and Oil is down
40 pennies at $62.50 while gold is at $665 in the early going in NYC.
*****
Utilities and Railroads were
given a public franchise and protected from competition by the government for
eons. They were given public property on which to construct their facilities
and public protection with a guaranteed return. The railroads were given millions
of acres of land from the public weal. The idea of taking utilities and
railroads private and out of the semi-public realm is ludicrous but is going to
occur. The same goes for hospitals which feed at the public trough of Medicare
to support their operations but are being taken private. Heck, Hospital Corp
has been taken private for the second time after screwing the public out of
billions of dollars though their Medicare scams. Eventually the piper will be
paid, and it will be the public that does the paying.
The more we think about this
period the more it reminds of the Robber Barons, the latter part of the 1920s,
the 1985 to 1987 time period, and the late 1990s. None of those periods ended
well but the ones we lived through did last longer than we thought they would.
Greed may be good to some but most pigs are eventually slaughtered.
*****
Consumer Confidence was 107 for
March versus 108 expected and 111 last time. That is being given as the reason
for the sell off in stocks this morning with the DJIA down 75 points after an
hour of desultory trading.
*****
$1.3 trillion in adjustable rate
mortgages will reset this year according to CNBC.
*****
Gold ended the day down $2 at $662 and oil reversed to close up 2 pennies at $62.93.
Treasuries were mixed with the
short end firm and the long end lower. the two-year end at 4.58% and the
ten-year was 4.61%.
*****
European bourse indexes closed higher while Mexico
and Brazil
were lower on the day.
*****
The DJIA was unlabeled to mimic
yesterday’s last hour rally and closed on its lows for the day.
The DJIA was down 60 points at 12405. The S&P 500 closed down 8 points at 1430 which was above its 50 day
moving average at 1425. The NAZZ
lost 18 points to 2438.
Breadth was 2/1 negative all day
and volume was moderate.
There were 215 new highs and 75
new lows.
And the games continue tomorrow
at the casino.
*****
26 March 2007 Daily Comment
Thoughts
Asian and European markets were
mixed overnight and Oil is up to $62.80 this morning with Gold up to $660.
Treasuries are better as a flat opening is expected.
*****
The DJIA is down 100 points after
one and one half hours of trading. The Iran/British navy standoff is weighing
on the overall tenor of trader thinking and New Home sales fell 3.7% in February to the lowest level since June
2000 and the supply of new homes completed but not sold is up 43% year over
year.
*****
Citigroup is going to fire 15,000 folks and take a $1 billion
charge. They are doing it to cut costs and save the CEO’s job. 15,000 for 1 is
the trade required in today’s capitalist system.
*****
Folks often ask us about long term care insurance.
We have never been a fan and the story in today’s NYT is the reason: http://www.nytimes.com/2007/03/26/business/26care.html?hp
*****
The S&P 50 day moving average
is now at 1425 which is where it stopped going down in this morning’s retreat.
*****
Gold closed up $7 at $663 in NYC. Oil was up 70 pennies to $62.98. as the
stock markets recovered Treasuries
weakened with the two-year ending at 4.58% and the ten-year at 4.60%.
European indexes closed lower on the day as their market trading
ended when U.S.
stocks were on their lows for the day. Mexico
and Brazil
also lost ground.
*****
The DJIA closed lower but well above its lows for the day. At the bell
the DJIA was down 15 points at 12465.
The S&P 500 gained 1 point to 1438
and the NAZZ rose 6 points to 2455.
Breadth improved from 2/1 negative early on to 5/4 negative at the
close and volume was moderate.
There were 300 new highs and 60 new
lows.
And there are four more days of
fund games at the casino this week.
*****
23 March 2007 Daily Comment
Thoughts
Asian indexes finally and
grudgingly closed lower on Friday and European market indexes are also slightly
lower at midday. Gold is down a
couple of dollars and Oil has given up 30 pennies of yesterday’s $2 plus gain.
Treasuries are a bit better as U.S.
stocks look to open lower.
*****
Existing Home sales were up 3.9%
in February. That represents closings from houses sold in December and earlier.
On the news of an increase in home sales Treasuries have retreated to negative
on the day.
*****
Gold ended the day in NYC down $8 at $657. Oil was higher on the Iran/British navy news at $62.22 up 53
pennies and Treasuries lost ground
with the two-year at 4.61% and the ten-year at 4.61%.
European stocks closed slightly lower.
*****
The DJIA gained 20 points to close at 12480. The S&P 500 rose 2 points to 1437 and the NAZZ was up 5 points at 2456.
Breadth was positive and volume
was moderate.
There were 320 new highs and 50 new
lows.
And the casino is closed until
Monday.
*****
22 March 2007 Daily Comment
Thoughts
For the last month and one half
we have been in an all cash position. That is a record for us. In that time the markets have had a 5%
correction and recovered from that correction. We expected more of a correction
and that is why we were in cash. We also wanted to step aside and do some thinking.
Netting the stocks that rose in price after we sold with the stocks that
dropped in price we didn’t sacrifice any gains by going to cash. We live and
trade and learn.
The Fed action of yesterday
suggests that they are willing to lower interest rates if the economy falters,
even in the face of inflation. That is a
significant change in their position and one for us to consider in our
analysis. Inflation is not running
away by the measures the Fed uses but it is higher than the 2% benchmark that
Fed Chairman Benanke has suggested is his target.
Because the markets stopped going
down and rallied back we have had to reevaluate our thinking. Our consistency
is that we are always willing to change our relation to the markets as the
market give us reason to do so. We do believe that a more sustained correction
is somewhere down the road (after all the Fed changed the wording because of
the weakness in the economy) but for now our guess is that a rally higher into May
or later may be in the cards.
In considering the present market
environment and in thinking about our profitable trades over the years it is a
truism that we make money when we buy stocks with large cash positions and/or
low revenues to price ratio when we they are under selling pressure. The
companies also have to be of the quality that there is no risk of permanent
failure. That may seem like a simple idea and it is but it also the kernel of
our profitable run over the last many years and when we cease being Masters of the Universe we usually
return to that simple way of trading. The reality is that if no immediate 10%
or more sell off is near and if we continue an all cash mindset we will miss opportunities
that we usually seize.
And so the long
and short of it is that we purchased a few stocks today in which we have
been interested.
Motorola
is down $1 on a reduction in earnings announcement and the shares are $1 below
where we sold them last month in many accounts. MOT has $12 billion cash and is
selling for less than one times sales. We don’t like the fact that Carl Icahn
is involved with the stock but his involvement probably means that the share
price will go higher over the next year.
We think General Electric
will have to participate in any further rally. We sold the shares at $37.50 in January
and we are buying them back today at $35.60. We continue to believe that if the
company were split up it would command a combined price north of $50 a share in
today’s market climate.
We want to own Sprint. We sold it as part of our going all to cash scenario
but would rather own and add to it that not own it. The company is out of favor
on the street as it continues to try and integrate the Nextel takeover. But as
AT&T and Verizon move higher in price the disparity in valuation of Sprint
versus the other two becomes more glaring. Eventually the markets are going to resolve
that disparity and we think it will be by Sprint rising in value. We are paying
20 pennies more than the price at which we sold.
Intel
is the dog of the large cap technology stocks. The introduction of Vista
by Microsoft has not created unusual demand for computers and AMD is giving
INTC more competition and so Intel is mired in the price doldrums. Eventually Intel
will recover its luster. We are repurchasing at $19.30 which is $1.50 lower
than where we sold it.
Finally we purchase The Gap. Our better half actually commented favorably on
their Spring offerings for the first time in five years. And with buyout folks
paying 3 times earnings for specialty retailers we think that GPS with $2 billion
in cash, no debt and selling at 1 times earnings has value at the $18 level. Gap
has been dragging for 3 years and even a stopped clock is right twice a day.
*****
Asian markets continued their
three day rally on Thursday following the U.S.
lead and European markets are also 1% or higher at midday. Oil is back over $60 and Gold is up $5 as all the
markets are in a rally mode. Treasuries are flat after yesterdays up move in price
on the short end of the market.
*****
Jobless claims dropped to 316,000
in the latest reporting period.
*****
Energy Trader Brian Hunter whose
outsized bets in the energy market caused the collapse of $8 billion Amaranth
Hedge Fund is forming his own hedge fund. It used to take a year or two before
failed traders could return, the time elapsed for this guy is six months.
*****
Oil
closed up $2.08 at $61.69. Gold was $5 higher at $665. Treasuries
gave ground with the two-year at 4.58% and the ten-year at 4.59%.
European indexes closed 1% to better than 2% higher. Mexico
and Brazil
indexes were fractionally lower.
*****
The DJIA gained 12 points to end at 12463. The S&P 500 was down 2 points at 1434 and the NAZZ dropped 5 points to 2451.
Breadth was slightly negative and volume was active.
There were 370 new highs and 50 new
lows.
And March Madness basketball
begins again tonight.
*****
21 March 2007 Daily Comment
Thoughts
We haven’t been posting much
lately because we really don’t have much to say beyond what we already have.
The markets are meandering and we wouldn’t be surprised by a rally beginning
soon that could carry into the summer. We aren’t going to try and participate unless
the stock markets see more of a correction before the rally. That’s because at
these levels for stocks the risk versus the reward of a guaranteed 4% interest
rate favors cash for us. We think the economy is slowing and if the Fed changes
the language of its comment at its meeting today to suggest that they are
leaning towards an ease the markets may respond with a move higher. But the
only reason the Fed would ease would be to try to prevent a recession and if there
is the chance of a recession we would posit that stocks are overpriced. But
that is our opinion and the big boys and girls are much more interested in
trading potential takeover stocks in the greater
fools’ game.
*****
Speaking of takeovers, Apollo Investors
which is run by Leon
lack of Drexel Burnham fame is buying Claire
Stores for $3.2 billion. Claire has sales of $1.2 billion and thus the
buyout folks are paying three times sales which seems rich to us but then...
By the by, we note that in this instance insiders are selling out and not
participating in the buyout which says something (see next post).
*****
The buyout craze is a true greater fools’ game because the purpose
of the buyouts is to take the companies private, pay big dividends to the
private shareholders by loading up on debt and then resell the highly leveraged
company to the public and mutual funds
and institutional investors ( the greater
fools) several years in the future.
All the companies going private
now will be back on the market in a few years because that is the only way but buyout
folks can realize their gains. Of course the markets have to cooperate by
buying the new highly leveraged shares in an IPO but they usually do. It’s too
bad that the executives running these companies supposedly for the shareholders
benefit can’t figure out how to manage them so that the shareholders receive
the dividends and profits instead of the buyout folks and management that
participates in the buyout. But that is capitalism in 21st Century America, the
era of the new Robber Barons.
*****
Asian markets were again higher
overnight and European bourses are mixed. Oil is up 50 pennies and Gold is up
$3 in early NYC trading. Treasuries are unchanged.
U.S.
stocks are opening mixed awaiting the 1:15pm
Fed statement.
*****
FedEx said on Wednesday that quarterly earnings fell and warned its
growth targets would be at risk if the U.S.
economy did not improve. Fed Ex has become a bellwether of economic activity.
*****
Crude oil inventories were higher than expected while gasoline and
distillates inventories dropped by more than expected.
*****
Investors Intelligence has 48% bulls and 28% bears in the latest
reporting period.
*****
The Fed left rates unchanged and stocks and Treasuries both rallied on
the news. Traders in both types of securities see gold in the Fed’s revised
statement.
The Federal Open Market Committee decided
today to keep its target for the federal funds rate at 5.25%.
Recent
indicators have been mixed and the adjustment in the housing sector is ongoing.
Nevertheless, the economy seems likely to continue to expand at a moderate pace
over coming quarters.
Recent
readings on core inflation have been somewhat elevated. Although inflation
pressures seem likely to moderate over time, the high level of resource
utilization has the potential to sustain those pressures.
In these circumstances, the
Committee's predominant policy concern remains the risk that inflation will
fail to moderate as expected. Future policy adjustments will depend on the
evolution of the outlook for both inflation and economic growth, as implied by incoming information.
*****
According to the markets and to
Bill Gross of Pimco, who is an expert, the changes in the above statement mean
that the Fed has removed its tightening bias and will begin easing within the
next six months.
*****
The markets’ interpretation of
the Fed’s statement is counterintuitive since the Fed has always seen inflation
as the important bugaboo that needs to be controlled. But traders read the statement
as saying that even though the Fed is worried about inflation the Fed is going
to loosen to aid a slowing economy. If that is the case then traders and maybe
the Fed need to convince The Bureau of Labor Statistics to adjust the inflation
numbers to get rid of inflation. The BLS can do that by including housing
prices as a measure of inflation instead of using rents as the measure as the
BLS has over the years. Now that housing prices are falling the BLS may be
willing to make the change that they didn’t when housing prices were rising.
*****
European bourses closed mostly higher on the day.
*****
Gold ended up $1 at $660 in NYC trading and Oil was up 40 pennies at $59.61. Treasuries ended strong with the two-year at 4.53% and the ten-year
at 4.54%.
*****
The DJIA gained 155 points to close at 12442. The S&P 500 was up 23 points at 1434 and the NAZZ gained 44 points to 2452.
Breadth improved all day and ended at 3/1 positive and volume
picked up to active after the Fed statement.
There were 360 new highs and 65 new
lows.
The casino will be open tomorrow
and Friday. Today’s action is the reason we never short stocks when we are
bearish.
*****
20 March 2007 Daily Comment
Thoughts
Housing Starts for February were above expectations and Housing Permits were below expectations.
The first is a lagging indicator which means that Starts tells us what happened. The second, Permits,
is a leading indicator in that it gives an idea of where building will be in
the future. The Starts number was up
9% versus January 2007 and down 27% versus the February 2006 number.
*****
Asian exchanges were large
fractions higher overnight while European bourses are small fractions lower at midday. Gold is up $2 and Oil is 50 pennies higher
in the early going. Treasuries are firm as traders concentrate on the Housing Permits number.
The Fed begins its two day
meeting today. In the early going the major stock measures are mixed as the
markets digest yesterday’s gains and traders vacillate awaiting the Fed’s
statement tomorrow afternoon.
*****
Oil ended up 14 pennies at $56.73. Gold gained $5 to $659 and Treasuries
were better with the two-year at 4.61% ands the ten-year at 4.55%.
European bourses finished higher.
The DJIA gained 61 points to 12288. The S&P 500 was up 9 points to 1410 and the NAZZ gained 14 points to 2408.
Breadth was again better than 2/1 positive and volume was active.
There were 250 new highs and 95 new
lows.
And the Fed speaks tomorrow and
the trading world will be listening.
*****
19 March 2007 Daily Comment
Thoughts
Traders in the U.S.
stock markets are celebrating St. Patrick’s Day a few days late as the big boys
and girls paint the trading screens green in the early going Monday.
Asia
markets were strong over night with most of them up over 1% and European
bourses are also higher but more constrained. Gold is up $1 and Oil is 50
pennies lower. Treasuries were giving ground as the stock markets move higher.
The Fed meets on Tuesday and
Wednesday of this week and the markets are concentrating on that and hoping for
intimations of a rate cut in their Wednesday afternoon release.
Deals continue to proliferate and
there is talk of a bidding war for TXU which is currently a $45 billion deal
and may go higher.
Gurus are suggesting that the
worst of the sub prime loan meltdown has occurred and that now the smart folks
are buying rather than selling.
*****
Corporate welfare: privatize the profits in good times and socialize
the losses in bad times.
*****
China
raised interest rates over the week-end in part to place a damper on
speculation. China’s
market rose 3% overnight on the news.
Several gurus are suggesting that
the amount of takeovers occurring is evidence that stocks are cheap. We would use
the same news as evidence of rampant speculation. We have never seen takeovers
occur at market bottoms. This may be the first time but we are holding cash and
not our breath.
*****
European bourses closed up 1% or
better.
*****
Oil ended down 52 pennies at $56.59. Gold was unched at $654. Treasuries
closed lower with the two-year at 4.63% and the ten-year at 4.57%.
The stocks markets were strong
all day and Breadth was over 2/1 positive
at the close in active trading.
The DJIA gained 115 points to 12225. The S&P 500 rose 16 points to 1402 and the NAZZ gained 22 points to 2395.
There were 220 new highs and 93 new
lows.
And there are two more days till Spring
and four more trading days in the week.
*****
16 March 2007 Daily Comment
Thoughts
Mother Merrill is saying that house
prices could tumble 10 percent this year and raise the chances the United
States may slip into recession unless the Fed cuts interest rates to cushion the fall in
economic growth.
When we were driving over the
weekend we were thinking of the above and the fact that every time the big
brokers and major banks get in trouble for making or buying stupid loans the
Fed rushes in and cuts interest rates. In
effect the Fed rescues the banks and brokers from their misguided chasing of
profits by reducing the incomes of prudent savers and retirees.
*****
Asian markets were mostly lower
overnight as are European markets at midday.
Gold is up $7 at $654 and Oil is also higher but still below $58. Treasuries
are weaker as the markets are higher.
CPI was as expected with core CPI up 0.2%, and year over year up
2.7%. The Fed has set 2% as the number to seek for inflation.
*****
The University of Michigan Confidence Survey
was 88 for March versus 92 last month.
*****
Today is Quadruple Witching day and there is big volume. Stocks were up in
the early going but at 11am the DJIA
is down about 35 points. With NCAA and state basketball tournaments on the TV
and a snowstorm on the East Coast there is a lot of extraneous activity pulling
traders away from the casino today.
*****
Cody Willard at www.realmoney.com
says it well:
The topic is Blackstone Group. Here goes:
Blackstone Group files to go public,
although nobody knows yet if the IPO will represent shares of the Blackstone
Group itself or a Blackstone-managed fund. I think it's brilliant timing.
Blackstone is taking something off the table and spreading its risk to the
public while the trumpets of private equity are sounding.
What's
really mind-blowing here is that the public is sucker enough to buy this stock
from these guys, who obviously are smarter about when to buy and sell than the
public is, given their outsized ownership of capital vs. the average Joe who'll
buy their stock. More to the point, how about the fact that bankers are
allowing these guys to use OPM (other people's money, including the bank's own
money) as leverage to take these companies private though debt?
So let me
get this straight: The private-equity guys have been whining to the press and
hiring lobbyists to help change their image of being bad for the world. But
they're now about to offload their equity onto the public, enriching themselves
by using the multiple at which the market will value their earnings and assets
to really become richer than most any individual on this planet could ever
conceive.
And all the
while, they're going to borrow a bunch of other people's money to put to work
generating those earnings and assets. Borrow OPM to buy companies even as you
sell your own assets to take money off the table.
I wrote the other day
that I believe private equity is a sell here. Apparently the guys at Blackstone
agree with me. They're selling to the public, right?
When the smartest guys in the
room are selling to you, it's
probably not the best time to buy. Put it this way: If the Blackstone gang
really thought that their equity was a great investment here, do you think
they'd want to sell? This isn't a tech company trying to raise assets to grow.
These are some whiny rich dudes trying to cash out on the public while the
cashing out is good.
*****
Oil ended down 44 pennies at $57.11. Gold gained $6 to $653. Treasuries
were weaker with the two-year at 4.62% and the ten-year at 4.53%.
European bourses closed mostly lower and Mexico
was lower with Brazil down over 1%.
*****
The DJIA closed down 50 points at 12110. The S&P 500 lost 5 points to 1386 and the NAZZ dropped 6 points to 2372.
Breadth was 3/2 negative and volume
was witching active.
There were 140 new highs and 110 new
lows.
And the casino is closed for the
weekend.
*****
15 March 2007 Daily Comment
Thoughts
2050 years ago on this day- maybe
since we don’t know how the Gregorian Calendar affects
the date- Julius Caesar was assassinated by Brutus and others. Thus the Beware the Ides of March not said at the
time (since Romans spoke in Latin) but by actors in Shakespearean England for
the first time.
Today PPI was double what was expected and even core PPI was higher than
expected. On this news Treasuries lost a bit of their recent market down
firmness but stocks held in the face of the dreaded word Stagflation. On top of
that Uncle Alan just can’t seem to fade away and he commented that the sub
prime loan problem may be more serious that the markets are taking them.
Overnight Asia was strong as the drop of 100 points and rally to positive territory
on Wednesday by the DJIA gave overseas markets some renewed confidence. European markets closed higher by 1% or
better on Thursday also.
Gold is higher by $5 to $647 on Thursday and oil is at $57.50.
We are still getting our land legs
under us after our foray to Ohio
and we’ll be ready to share total wisdom by next week.
With today’s action the markets
have regained about half of what they lost on Tuesday and so we don’t expect
much more upside for the rest of the week.
We will have another post
tomorrow as the markets react to CPI
which is announced at 7:30am Friday
morning.
Enjoy the basketball.
*****
14 March 2007 Daily Comment
Thoughts
NKU was whomped last night in the
regional final. And so we end our season with a great 24 wins and nine losses.
Wait till next year.
http://www.nku.edu/~athletics/
*****
Yesterday the stock markets
headed south with a 240 point loss in the DJIA and overnight Asia
followed our markets lower. Oil dropped under $58 yesterday and hasn’t
recovered today and Treasuries finished strong and remain firm today as the
stock markets are trying to stage a rally.
Our guess is that there is more
to go on the downside. We may consider some short term trades if the major measures
get down about 10% from their high but for now we are content to remain in cash
earning 4.3%.
We’ll be home tomorrow afternoon
and have another post then.
*****
13 March 2007 Daily Comment
Thoughts
Beware the Ides of March
The stock markets closed slightly
higher on Monday and at midday
Tuesday they have given back all of their Monday gains. The pending bankruptcy
of New Century, the sub prime lender, is a weight and Asian markets were mostly
lower overnight as well.
Treasuries are stronger and Oil
is approaching the $60 level again as gasoline prices rise around the country.
The game for the Regional
Championship is early this evening (listen or watch streaming video at www.nku.edu/~athletics/ ) so we are
going to take the rest of the afternoon to focus.
We’ll have another short post
tomorrow night.
*****
12 March 2007 Daily Comment
Thoughts
We are still in Findlay
Ohio for the NCAA division II regional
basketball final. The Northern Kentucky Men’s Basketball Team has made it to
the final 16 teams in the country still playing in that division by beating the
number 3 ranked team in the country in Division II. If you would like to read
the story you may at www.nku.edu and then
click on the first news story.
The Sweet 16 Final is tomorrow
night and we are remaining for that game.
*****
The markets were mixed on Friday.
After being up 75 points on the DJIA in the early going because of a just right Employment Report the major
measures surrendered their gains and moved to negative territory until the
final hour when most of the major stock measures moved to positive territory.
In Monday’s early trading the markets
were mixed. Oil was down over $1 to 58.35 and Treasuries were weak with the
two-year at 4.62% and the ten-year at 4.53%.
We are heading off to see if we
can find the family farm on our father’s side of the family. It is near Mt
Gilead, Ohio which is near where we are staying.
We’ll have another short post
tomorrow.
*****
8 March 2007 Daily Comment
Thoughts
There
will be no post on Friday as we are heading to Chicago on business and then to Ohio for business and the NCAA Division II
Regional in which NKU is playing.
Thoughts
It looks like the tail may have
become the dog. On Wednesday the Asian markets did not follow the U.S.
markets higher after Tuesday’s large gain in the U.S.market. Asian markets
mimicking American markets have been the norm for nigh these many years. Overnight
Wednesday (Thursday in Asia) the Asian markets were strongly
higher and this morning the U.S.
markets are going to open higher.
Australia
All Ordinaries - 0.06%
Hong Kong Hang Seng + 1.36%
Japan
Nikkei + 1.94%
Singapore
STI + 2.07%
South Korea
Composite + 0.92%
Taiwan
Weighted + 1.24%
India
Sensex +3.73%
*****
Gold is up $2 in the early going
and Oil is off a few pennies.
Treasuries are giving ground on
the higher stocks scenario since about 10 basis points of the yield rally in
Treasuries is due to the sell off in stocks in the last week and the flight to quality trade.
*****
Twenty-nine of thirty DJIA stocks
are higher out of the gate this morning as the bulls are in control for now. Wal-Mart is the only DJIA stock lower
on a disappointing same store sales increase of 0.9% for February.
*****
The yen feel
sharply overnight, which boosted Japanese exporters and relieved some of the
pressure on the carry trade which is what helped Japanese stocks.
*****
An interesting interview with
George Soros:
http://www.ft.com/cms/s/269b437c-ccca-11db-a938-000b5df10621.html
*****
At 1pm New Century Financial’s, a sub prime mortgage lender, share price
fell $1 (it was already down from $51 to $5) on rumors that would seek Chapter
11 bankruptcy protections.
This drop in NEW precipitated a
drop in the DJIA from up 100 points to up 40 points at 1:30pm before stocks
began to recover.
The worry of a bankruptcy in NEW
and the effect of sub prime lender bankruptcies
on the earnings of major banks and brokers that have financed their lending is
the reason for the market nervousness.
*****
Gold ended unchanged at $653 and Oil was down 18 pennies at $61.64. Treasuries had a bid at the close but still were lower with the
two-year at 4.55% and the ten-year at 4.51%.
*****
European bourses closed higher:
FTSE London +1.16%
CAC France +1.27%
DAX Germany + 1.44%
IBEX Spain +2.02%
MILAN +1.27%
AMSTERDAM +1.48%
STOCKHOLM +1.96%
SWISS + 0.87%
*****
The DJIA backed off toward the close but still was up 66 points at 12260.
The S&P 500 gained 10 points to
1401 and the NAZZ was up 13 points
to 2387.
Breadth was better than 2/1 positive and volume was active.
There were 175 new highs and 95 new lows.
And there will be no post
tomorrow but the big boys and girls will be playing their games. The Employment
report is released in the morning and that will set the tone for the day.
*****
7 March 2007 Daily Comment
Thoughts
Asia
closed mixed overnight with Japan
and Hong Kong and India
lower but Shanghai was higher.
European bourses are also mixed at midday.
Gold is up $2 in early NYC trading and Oil is a few pennies higher. Treasuries
are flat.
The Fed Beige Book is released
today.
*****
Oil inventories and gasoline and distillates inventories were all
lower than expected by a wide margin and Oil is rallying up $1 on the miss.
There was fog on the Houston Ship Channel that prevented delivery of supplies.
*****
Investors Intelligence showed a drop to 46% Bulls and a rise to 27%
Bears and 26% for a correction in the latest week.
*****
Google was raised to a buy by UBS and it is trading lower at 10:30am. Maybe everyone who wants to won it already
does own it.
*****
The Beige Book release was a non
event for the markets.
*****
Oil ended up $1.16 at $61.85 in
NYC. Gold gained $7 to $653 and Treasuries were firm with the two-year at 4.53%
and the ten-year at 4.50%.
*****
European bourses were higher at
their close:
Belgium
+ 1.21%
U.K.
+ 0.29%
France
+ 0.33%
Germany +0.34%
Netherlands +0.78%
Norway + 0.29%
Spain
+0.63%
Italy -0.01%
*****
We spent the day watching the Big East tournament which
we will also be doing tomorrow. There will be no post on Friday as we are heading
to Chicago on business and then to Ohio for business and the NCAA Division II Regional in which NKU is playing.
*****
After being higher most of the
day the DJIA lost ground in the last hour to finish in the minus column.
The DJIA closed down 20 points to close at 12188. The S&P 500 lost 3 points to 1391 and
the NAZZ dropped 10 points to 2382.
Breadth was positive on the NYSE and negative on the NAZZ and volume was active.
There were 135 new highs and 80 new lows.
And there are two more trading
days this week.
*****
6 March 2007 Daily Comment
Thoughts
Asia was
higher over night as Japan
was up after five losing sessions:
Australia
All Ordinaries + 1.91%
Hong Kong Hang Seng +
2.11%
Japan
Nikkei + 1.22%
Singapore
STI + 1.82%
South Korea
Composite +
1.95%
Taiwan
Weighted +
1.45%
*****
European bourses are higher at midday and U.S.
futures are indicating a strong opening. The bulls are going to have their way
in the early going and then we’ll see how much latent buying desire there is. Gold
is trading +8.50 to 647.5 and crude
oil is +0.55 to 60.62 this morning. Treasuries are weaker
as the stock markets are up.
*****
United Health
the second largest health insurance company whose CEO
resigned because of an options backdating scandal (but kept the money he made)
said options backdating at the managed-care provider will result in the company
reducing previously reported earnings by a combined $1.55 billion. Now that is
a miss. And so far no one has gone to jail.
*****
Citigroup
announced a $10.78 billion deal to take control of Nikko
Cordial, in what would be the biggest foreign acquisition of a Japanese
brokerage firm. We suppose the money was burning a hole in their pockets. The
CEO of Citi has been under pressure to get the price of the shares moving
higher.
*****
Productivity was revised to down to + 1.6% from the +3% figure
released Februarys 7. Unit Labor Costs
was revised to + 6.6% from an initial figure of up 1.7%. The net effect of the rise in Unit Labor Costs was almost
entirely due to one-time payments to high income workers like bonuses to
Wall Street workers. (Nonfarm productivity and costs provide measures of the
productivity of workers and the costs associated with producing a unit of
output. During times of inflationary concern, the unit labor cost index in this
report can move the market. If productivity is falling, unit labor costs may be
rising faster than hourly earnings and other labor cost measures. Because
productivity can be quite volatile from one quarter to the next and because the
previously released GDP report will give a good indication of productivity
growth, this report seldom has a significant impact on the market. In addition
to the preliminary report, a revision to the productivity data is released in
the third month of each quarter.
*****
Alan
Greenspan said there's a ``one-third probability'' of a U.S.
recession this year and that the current expansion won't have the staying power
of its decade-long predecessor.
``We are in the sixth year of a
recovery; imbalances can emerge as a result,'' Greenspan, 81, said in an
interview yesterday at his office in downtown Washington.
``Ten-year recoveries have been part of a much broader global phenomenon. The
historically normal business cycle is much shorter'' and is likely to be this
time, he added.
*****
We often speak of market breadth. Breadth is a measure of overall market strength and is the
relationship of stocks that are higher on the day vs. stocks that are lower .
Thus if 1000 stocks are trading higher than
last night’s close and 500 stocks are trading lower market breadth would be 2/1 positive. Conversely if 1000 stocks are
trading lower than the previous night’s close and only 500 are trading higher
market breadth would be 2/1 negative.
*****
It’s interesting and important
that today’s market up is following on the heels of up markets in Asia.
Five years ago Asian markets followed U.S.
markets. That seems to have reversed to some degree.
*****
In the early going our screen is
a sea of green.
*****
Pending home sales were down 4.1%
for January when down 1.7% was expected. Factory Orders for January were down
5.6% when down 4.8% was expected.
*****
General Motors, the auto company,
may have to take a $ 1 billion charge (loss) on its mortgage portfolio held by
51% owned subsidiary GMAC.
*****
European
bourses closed higher on Tuesday:
Belgium
+ 0.75%
U.K.
+ 1.32%
France + 0.97%
Germany + 0.92%
Netherlands + 0.54%
Norway + 1.06%
Spain
+ 0.56%
Italy
+ 0.54%
*****
Oil ended up 60 pennies at $60.69. Gold gained $7 to $646. Treasuries
were higher in yield and lower in price on the increase in stocks with the
two-year at 4.57% and the ten-year at 4.53%
*****
The bulls won the day with up
over down volume as skewed to the upside today as it was skewed to the downside
on last Tuesday.
The DJIA gained 155 points to 12205. The S&P 500 was up 22 points to 1397 and the NAZZ rose 45 points to 2385.
Breadth was better than 3/1 positive and volume was active.
There were 120 new highs and 110 new
lows.
And the big boys and girls have
three more days of fund games this week.
*****
5 March 2007 Daily Comment
Thoughts
Asia was lower last night- big-time:
Hang Seng -4.00%, Nikkei -3.34%, India -3.66%, Taiwan -3.74% and Shanghai -1.63%.
European markets are also lower at midday: France -1.68%, Germany -1.94%, London -1.61%,
Austria -2.08%, Swiss Mkt. -1.68% and Stockholm -2.92%.
Gold is down $3 at $640 and Oil
is down $1.13 at $60.57 in the early Monday going. Treasuries have a bid on the
backs of the Asian and European sell off.
*****
Stocks opened lower and then
rallies to the plus side after 9am and
now after and hour of trading are holding at better levels.
*****
The ISM non-manufacturing Index
was 54 versus 57 expected.
*****
The DJIA moved to up 65 points in
the second hour of trading only to move to the negative side in the third hour.
In the fourth hour the DJIA is again up 40 points.
*****
European bourses took heart form the U.S.
market holding and halved their losses by the close of trading.
*****
Oil ended down $1.62 at $60.02 in NYC. Gold dropped $5 to $639. Treasuries
closed flat to lower as the stock markets strengthened and the two-year closed
at 4.54% with the ten-year at 4.51%.
*****
The DJIA lost 65 points to close at 12050. The S&P 500 was down 13 points at 1372 and the NAZZ dropped 27 points to 2341.
Breadth was more than 2/1 negative and volume was active.
New lows expanded to 275 while new highs contracted to 95.
And there are four more fund and
games days for the big boys and girls this week.
*****
2 March 2007 Daily Comment
Thoughts
Asia was mostly
lower overnight:
Australia All Ordinaries - 0.40%
Hong Kong Hang Seng + 0.49%
Japan Nikkei - 1.35%
Shanghai Composite + 1.20%
Singapore STI - 0.45%
South Korea Composite - 0.20%
Taiwan Weighted -0.10%
Sensex India -2.07%
*****
European bourses are mixed at midday.
Gold is off $10 in morning trading in NYC and Treasuries have a bid.
The University of Michigan Sentiment Index was 93 in February versus 96
in January.
*****
Dell is higher on lousy earnings and a warning going forward.
The Gap is lower on lousy earnings and a warning going forward. We
like that Gap is closing the new Forth & Towne chain to concentrate on the
main business. GPS is priced at one times sales while many of the other
specialty retailers are 3 times or more sales. Of course The Gap is a mature
line of stores but there is potential to turn it if they can develop a concept
that works.
*****
Stocks opened lower on Friday but
after two hours of trading the major measures are trying to poke into positive
territory. Trading volume is active and breadth is 3/2 negative.
*****
Top
Single-Day DJIA Declines of the Last 10 Years
|
Date
|
%
Decline
|
Notes
|
10/27/97
|
7.2
|
|
9/17/01
|
7.1
|
First trading
day after 9/11
|
8/31/98
|
6.4
|
Long term
Capital management blowup
|
4/14/00
|
5.7
|
Top of the market
|
7/19/02
|
4.6
|
|
9/20/01
|
4.4
|
9/11
|
8/27/98
|
4.2
|
|
9/3/02
|
4.1
|
|
3/12/00
|
4.1
|
Top
of the market
|
9/27/02
|
3.7
|
|
3/7/00
|
3.7
|
Top
of the market
|
10/12/00
|
3.6
|
|
3/24/03
|
3.6
|
|
8/4/98
|
3.4
|
|
2/27/07
|
3.3
|
3/7/00 ??
|
The top in 2000 came in the early
March time period as did the top in 1972.
*****
Warren Buffet’s annual letter to shareholders: http://berkshirehathaway.com/2006ar/impnote06.html
*****
With the Chinese market up 130%
in the last year it is ironic that in
China 2007 is the year of The Pig. It is not the Year of the Bull or the
Year of the Bear. And we all know what happens to pigs.
*****
European bourses ended unchanged
to lower:
Belgium
0.10%
U.K.
0.00%
France
-0.49%
Germany
-0.47%
Netherlands -0.37%
Norway
0.69%
Spain
-0.73%
Italy
-0.28%.
*****
Gold closed down $21 at $644. Oil
lost 36 pennies to end at $61.64 in NYC. Treasuries
rallied as stocks dropped and the two-year went out at 4.55% and the ten-year
at 4.52%.
*****
Mexico
lost 0.75% and Brazil was down 2.17%.
*****
The DJIA and S&P 500 are now
down about 5% from their highs a few weeks ago. That is the correction many
bulls were calling for so the coming week may see a rally into Triple Witching
on Friday next.
*****
We see one major financial blog fellow talking about a Back
Friday/Monday scenario ala 1987. We don’t know where he was but as we continually
reiterate, in 1987 the markets were down 20% over 45 days before the Crash that
lopped another 20% off occurred.
We were there in 1987 and this is not yet a 1987 scenario. In fact is
much more a 1972 scenario and we were there too.
*****
The DJIA closed down 121 points at 12113. The S&P 500 lost 16 points to 1387 and the NAZZ was off 36 points to 2368.
Breadth was more than 2/1 negative on the day and volume was active.
Combined new lows (132) on the NYSE and NAZZ exceeded new highs (129) for the second day in a row and this
hasn’t occurred in many months.
And the big boys and girls need
to rest and lick their wounds for the weekend so they will be ready to play
fund games on Monday.
*****
1 March 2007 Daily Comment
Thoughts
The major measures are opening 1%
lower this morning as the Asian Contagion
continues. This morning’s sell off is supposedly the result to the unwinding of
the carry trade. We mentioned the carry trade several days ago and have a
better explanation below
One
reason Tuesday's plunge in global stocks happened so fast involved money that
helped fuel their recent rise: super-low-cost funds from Japan.
From
2001 until July 2006, Japan's central bank kept its benchmark short-term interest rate at zero,
and even after a rate increase last week, the rate is only 0.5%. That
compares with 5.25% in the U.S. and 3.5% in the euro zone. The difference
has enabled investors to profit by borrowing money in yen to buy
higher-yielding assets denominated in other currencies.
This
technique is known as the carry trade -- because it takes advantage of the
gap in returns, or "carry," from different assets. Once the
preserve of sophisticated financial traders like hedge funds, its use now has
spread to include mutual funds and others in countries where yen loans are
available.
To
execute a carry trade, investors have to sell the yen they borrow so they can
buy assets in other currencies. With so many investors selling yen, the
growth of the carry trade helped push down the yen in recent months to its
lowest level in years against major currencies. That makes the carry trade
more attractive because a falling yen makes profits earned in other
currencies worth more in comparison.
When
concerns about the U.S. economy and overheated stock markets around the world helped trigger
market drops Tuesday, investors say the unwinding of yen loans accelerated
the declines. Market participants say it is likely that when some investors
grew nervous, they began to sell their holdings in everything from Indian
stocks to the Australian dollar and used the proceeds to buy yen to pay back
their loans.
Investors'
rush to buy yen pushed up the value of the yen against the dollar by more
than 2% on Tuesday. In New York yesterday, the dollar rebounded to 118.41 yen, up from 117.98 yen
late Tuesday, but still below 120.57 yen the day before.
"Everything
that happened was consistent" with the unwinding of carry trades, said
Jay Bryson, global economist with Wachovia Corp. in Charlotte, N.C. "We
had the Japanese yen strengthening and high-yielding currencies
declining." Mr. Bryson thinks such unwinding could continue over the
next week or two if investors reduce their positions in stock markets that
have posted big gains in recent months.
There
had been concerns about the risks of carry trades. When the Bank of Japan last week raised rates despite few signs
of inflation, Governor Toshihiko Fukui cited "extreme positions" in
financial markets that could result in sudden and dramatic swings. European
Central Bank President Jean-Claude Trichet told market participants to be
"aware of the risk in one-way bets," such as carry trades.
*****
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The carry trade may be the proximate reason for the correction but the
underlying reason is the pendulum effect and the need for markets like all
other events, conditions, and creatures to seek equilibrium. A move for too
long in one direction requires a move in the opposite direction to relieve
stress. That is what is occurring now. After such a move has run its course
then the markets either resume their upward move or in very rare instances they
move violently lower in a mirror move to the topping move that they have been
correcting. That is our maxim that markets
never crash off the top.
*****
Asian markets were
lower overnight:
Australia
All Ordinaries - 0.38%
Shanghai Composite
- 2.91%
Hong Kong Hang Seng - 1.55%
Japan
Nikkei - 0.86%
Singapore
STI - 0.37%
South Korea
Composite - 2.56%
Taiwan Weighted - 2.83%
Shanghai -2.93%
*****
Jobless claims for the latest week were 338,000 which a few thousand
more that expected.
Personal Income for January was up 1% and Personal Spending was up 0.5%.
*****
European markets were mixed at midday but will begin
selling off if the early morning down in the U.S.
market continues.
Support on the DJIA is at 11855 and Resistance is at 12500. After
fifteen minutes of trading the DJIA is down 200 points at 12060.
Support on the S&P 500 is at 1364 and Resistance is at 1430. After
fifteen minutes of trading the S&P 500 is down 25 points at 1382.
Trading curbs are in effect which means that no computer program
trades may occur.
*****
Alan Greenspan said a recession
in the U.S. is possible, though not probable this year
as excess inventory is being reduced quickly, according to people attending a
CLSA Japan Forum in Tokyo Thursday.
“By the end of the year, there is the possibility, but not the probability of
the U.S. moving into recession.”
*****
ISM Manufacturing Index was 52.3 in February versus 49.3 in
January. That means manufacturing is improving. ISM Prices Paid was 59 versus
54 expected.
The strong ISM number has allowed
the major measures to rally 150 points. That is an indication of the lack of conviction
either way in the marketplace.
*****
Carl Icahn filed to buy more Motorola stocks. As with Time Warner
Icahn has no long term interest in the company, he is just trying to make a
buck. While that is a laudable goal for Carl we are mystified as to why managements
cater to him. In goofy markets like this there are enough cowboys and cowgirls
around to hitch a ride and move the stock price higher for Carl to exit at a
profit.
Icahn wants Motorola to spend its
$10 billion cash on hand on a special dividend or stock buyback. That is what Ford did in 2000 with the result that
it is close to bankruptcy this year.
*****
Today’s WSJ had a story on
today’s front page about traders who benefited from Tuesday’s stock collapse and
Treasury rally. And the first person they mentioned was John Meriwether. He is
the fellow who ran Long Term Capital which was the hedge fund that blew up in
1997 and almost took the whole financial community to the woodshed as the fund went
out of business and lost billions of dollars for investors in the fund not to
mention the overall market investors who sold when the markets collapsed and
that is when billions of hedge fund dollars were a lot more than they are now
when hedge fund dollars are measured in trillions.
That this fellow is still running
money is a tribute to Wall Street’s lack of memory and other people’s money
syndrome. Meriwether now runs $2.6 billion and the WSJ say his fund was up in February.
Whoopee.
*****
After an hour and one half of
trading NYSE volume is approaching 1.5 billion shares. Program curbs are no off
and programs are moving the major measures. Breadth remains 3/1 negative but
the S&P 500 and DJIA are both moving toward the positive column.
*****
It took till 1:30pm for the major measures to reach positive territory
but they are now positive.
*****
Gold closed down $7 at $665. Oil
was up 21 pennies at $62 at the close of NYC trading. Treasuries closed better but off their best levels as the flight to quality money slowed with the
markets rebounding. The two-year ended at 4.61% and the ten-year was at 4.55%,.
*****
European markets closed lower:
Belgium
-0.87%
U.K.
-0.90%
France
-1.05%
Germany
-1.12%
Netherlands
-1.68%
Norway
-0.97%
Spain
-1.291%
Italy
-1.14%
*****
General Motors reported a 3.4% rise in U.S.
vehicle sales for February, and, separately, said it will postpone filing its
2006 financial results until mid-March. A sharp drop in so-called fleet sales
drove Ford's sales down 13%. Chrysler, which recently announced a
major restructuring, saw its monthly sales fall 7%l. Toyota vehicle
sales were up 12.2%.
*****
We are baffled by the fact that 4th
Quarter GDP was revised downward from 3.5% to 2.2% and no major talking heads
are commenting on the miss. Adjusting the main number of the economy by 33%,
that is missing the number by 33% in the preliminary report on January 31 seems
to us to be a gigantic calculation miss.
*****
The DJIA was in positive territory at 2pm
but settled lower on the day. The DJIA traded in a 250 point range.
The DJIA lost 35 points to close at 12235. The S&P 500 lost 4 points to 1402 and the NAZZ was down 13 points at 2403.
Breadth was 3/2 negative at the close and volume was very active.
New lows overtook new highs 170 to 150.
And there is one more day of
foolishness this week.
*****
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Summary of Business Continuity Plan
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