Jan 31, 2005
The news that Friday's GDP number may have been mistated seems like it would have hit bonds harder. It now appears in line with expectations so I am not sure why markets would not just rewind.
Given the complete mismanagement of his country since he took power in 1998, it is hard not to see Chavez as the biggest long in the oil market. It will be interesting to see how the market trades tomorrow on the Opec meeting with expectations for a production cut in March and these odd headlines about Venzuela shipping oil to China. Part of me thinks it could goose the market through 50 but more likely we drop like a stone and get to see oil producers sweat for a bit.
While the diversion of oil exports to China for political reasons is at an early stage, analysts say that its expansion will damage Venezuela's credit rating because it will receive less income, especially if oil prices decline. The issue of Venezuela's creditworthiness was called in to question two weeks ago when Standard & Poor's, the ratings agency, dropped the country's debt rating to "selective default" after the country missed a $35m payment due in October.
Richard Francis, analyst at Standard & Poor's, said: "It was more for technical issues, we don't believe that the ability or willingness of the government is really in question, at least at this point."
Venezuelan officials said the payment was missed because of an "error", but other observers are concerned.
"The selective default reflects the state of disarray the public administration is in," said an investment banker dealing in Latin American debt.
The boards of SBC Communications and AT&T were meeting on Sunday to approve a $16bn merger that would create the largest telecommunications company in the US and end AT&T’s 120-history as an independent company.
Executives of both companies had already held extensive discussions about the terms, and board approval was considered extremely likely, with an announcement expected as early as Monday, said people familiar with the discussions.
Jan 30, 2005
If America's economy continues to grow robustly, monetary policy will shift from "loose" to "neutral" and rates will go up. Although there is plenty of controversy about what a neutral fed-funds rate might be, estimates tend to be 3.5-5.5%. Oddly, financial markets are pitching it lower. Futures contracts imply that the central bank will raise short-term rates at each of its next three meetings to 3%, but will then stop, so there will be virtually no more Fed tightening in the second half of 2005 or in 2006.
If that is puzzling, the behavior of long-term interest rates is even odder. At around 4.2%, yields on ten-year Treasury bonds, America's benchmark long-term interest rate, are virtually identical to where they were a year ago (see chart). Adjusted for some measures of inflation, real long-term interest rates are lower. Stephen Roach of Morgan Stanley reckons inflation-adjusted long-term rates are now more than 2.5 percentage points below their average level of the past 20 years.
This long-term rate has a big impact on how much American companies and consumers borrow, and thus on the American economy and Mr Bush's second term. Its level reflects all sorts of things, including demand from investors for bonds, expectations of future inflation and a risk premium for holding longer-term assets. But if you look at what has happened to America's economy over the past year, you would expect long-term rates to be heading much higher. After all, short-term interest rates and inflation are both rising, the current-account deficit is huge and widening, the dollar has fallen and the fiscal outlook has worsened. Surely investors looking over the next ten years will want a better return than 4.2%?
Economists are genuinely puzzled by all this. There are several explanations, each of which has a different implication for Mr Bush's second term. None of them are terribly good.
- The most gloomy theory is that America's economy is, in fact, rather more fragile than the current statistics suggest (and most forecasters presume). Debt-laden American consumers, so the argument goes, will not be able to sustain their current spending patterns, particularly if the housing bubble bursts. Low long-term interest rates, far from being out of kilter, are actually an accurate sign of incipient economic weakness. Mr Bush's second term, in other words, may see another sharp slowdown - not a good backdrop to his domestic revolution.
- A more hopeful argument for Mr Bush is that there has been a deeper "structural" change in the investment markets in favour of bonds. A new theory on Wall Street is that domestic pension funds are shifting more of their cash into long-term bonds in advance of possible regulatory changes from Washington. Asia's central banks have also been buying Treasury bonds to stop their currencies appreciating against the dollar; that demand has certainly pushed down the yields on American bonds, but nobody really knows by how much or how much longer the Asians will continue to be such unchoosy investors. If the Asians were to moderate their appetite, interest rates would shoot up.
- A third theory is that investors are so convinced by the Fed's record as an inflation-slayer that they don't need higher rates on long-term bonds. Overall inflation is indeed much lower than it was a generation ago. But plenty of aspects of America's economy should spook even the most trusting admirer of Alan Greenspan (not to mention the Fed chairman himself). These include that worsening budget outlook and America's rising reliance on foreign capital.
- Which leaves the last possibility: that the financial markets have temporarily mispriced the risks involved. Investors are too complacent about inflation and about America's enormous budget and current-account imbalances. If that theory is correct, long-term interest rates could rise sharply and suddenly.
I lean towards 1 or 4 but would tend to see elements of all the alternatives at work. I would lay out a thesis like this. Foreign central banks are distorting the market process for interest rates and risk premium by involvement in the UST bonds and agency assets. Asset managers also buy the "gloomy" economy scenario that Fed hikes are capped by the interest rate dependence of a liquidity induced recovery. The inflation picture is mixed with booming commodity markets and low capacity utilization rates. The last factor is that the markets are willing to discount the U.S. fiscal deficit and resulting trade imbalance because it has persisted since the Reagan years.
Whatever the causes of the yield curve flattening it is difficult to believe investors won't dump the long-end for the safety of the short-end at some point this year.
Opec, which produces about 40 per cent of global oil supplies, also put consumers on notice that it was prepared to act swiftly to cut supply should prices fall dramatically or should global oil inventories rise to within 56-60 days of consumption from the level of 51 days. Global oil inventories are expected to rise during spring as world oil demand slows.and...
The minister said Opec was currently producing 500,000 barrels a day above the official output ceiling of 27m b/d, and reiterated Opec's recommendation from its meeting last month in Cairo that members must comply with quotas. This in effect signals a possible cut in supplies in the near term.From the FT.
Jan 29, 2005
"Greenspan lost credibility with me when he became too political," Soros, 74, said in an interview today at the World Economic Forum in Davos, Switzerland. "He tried to push interest rates further down in order to help the re-election campaign, and also reached out beyond his sphere of competence by advocating tax cuts which then led to the current deficit."
Soros said he expected the U.S. currency to extend its three-year slide as officials and executives from the U.S., Europe and Asia at Davos blamed the U.S. budget and current account deficits for causing a plunge in the dollar. Microsoft Corp. Chairman Bill Gates, the world's richest man, said yesterday that he's betting on a further slide in the dollar, calling the deficits "scary."
He also had this to say about the yuan:
Financier George Soros warned that China should not be forced by other countries into taking action to allow its currency to find its own level of foreign currency markets.
Speaking at the World Economic Forum's annual meeting here, Soros said: 'China is in a good position to do something about the renmimbi, and I think they are probably going to do it, but I don't think it would be a good idea to push them into it.'
'I think it would be good policy now for them to do something about the exchange rate and widen the band, which would mean effectively some revaluation, and also perhaps go to a currency basket instead of the dollar.'
In contrast the South Korean won, another proxy for the renminbi, rose 1.3 per cent to a seven-year high of Won1,024 to the dollar as the central bank refrained from intervening.
The won strength also adds conviction to the idea that the yen will be strengthening shortly.
I see the GBP as the best currency to be short. Because of their weakening retail and housing market I expect them to start lowering rates soon.
Jan 28, 2005
Maybe there was some short-term cause for the weakness but whether that is true or not there was certainly a lack of buying interest.
Because of the time difference we should have a fair idea of the Iraqi election turnout and the press reaction by the time we show up on Monday. Because of the range we have put in this week Monday's action should get follow through either way.
I am surprised to see Microsoft in the red but maybe it is on the threat of gbrowser. I don't really agree with that either if it is the case as Google has a long way to go to prove it can unseat the reigning champ.
Some attention is being paid to the weak GDP number this morning but I would say the merger action should outweigh it. The economy has overcapacity and that is keeping a lid on growth but over time these large mergers should help alleviate that.
Keep an eye on the metal stocks as they are in some interesting territory. I tend to think they head higher over the next couple months but like the currencies the near term could be quite whippy. They are setting up some pretty tight ranges for stop loss either way.
Still no plans to trade today but maybe I will some good setups for next week.
From CBS Marketwatch.
According to a story in online edition of the Journal Thursday evening citing people familiar with the matter, P&G is offering 0.975 P&G shares for each share of Gillette outstanding.
The offer is 17.6 percent above Gillette's closing price of $45.85 Thursday. Gillette shares, which hit a 52-week high Thursday of $45.90, have risen from about $40 in the fall. P&G stock has risen 32 percent during the past two years, giving the company strong currency to engineer a major acquisition
I am sticking with my plan of remaining a spectator through Monday. I am taking the time to think about the bigger picture. The market has become very familiar with the key features of this rally: low interest rates, a weak dollar, strong oil, stock buybacks, and mergers. All these features are tied together and stem from the low interest rates. The Fed never misses an opportunity lately to refer to rates as accommodative and I would guess it will eventually change the market perception. With the flat yield curve I am a bit concerned that the process will uncoil very quickly.
Another prime candidate to shift the paradigm is the widening of corporate bond spreads. The process will be started by investor's shifting into short treasuries at some point and will probably end a year later with some marginal companies being cut off from debt markets. That process will probably effect emerging markets debt too. This process could still unfold even if the long end of the treasury curves stays where it is.
A third candidate for change is a reversal of the dollar trend. Maybe the Fed hikes manage to bring money to the U.S. or maybe economic prospects abroad start to look less attractive. I don't really see this happening though it seems to be a pretty popular view in the market right now. If China does revalue the Yuan I bet the market experiences a good of month of higher volatility while people figure out exactly what all the new trends will be.
The point of all this is that I get the feeling the macro forces are about to shift a bit and the interrelationships of the last couple of years are about to end. I don't mean this in a bad way that they all reverse direction but some will reverse and in a few cases the correlations will become inverse.
Jan 27, 2005
Next week we get the FOMC meeting on Tuesday and Wednesday. The meeting should be a non-event with a 1/4 point hike. The focus will be on the word "measured". If that word is removed I will assume it means they are done rather than that the pace of hikes may accelerate. If they change the statement to include worries about speculation in the corporate market that would be bad.
I have also decided to stay uninvolved in the currencies until I have more clarity. I get the sneaky feeling that China really is about to change its currency policy and I don't really want to sit through any swings like we had this week while the market sorts it out.
The purpose of this article is to show the precise relationship between consumption expenditures, saving, capital accumulation, and prosperity. It will be shown that consumption in real terms as well as consumption expenditures stated in monetary terms are themselves not the cause but an effect of greater saving and capital accumulation.Doesn't really bode well for the Federal Reserve policy although maybe it doesn't matter where the savings come from as long as investment is occuring in the U.S.
Foreign demand for US equities has risen to its highest level since the September 11 2001 terrorist attacks, says UBS, the Swiss bank.Well, that's a relief. But wait a second what's this?
Perhaps instead of "Foreigners swoop on US equities" this article should have been called "Americans get the hell out of dodge".
The most recent cross-border portfolio flows data from the US Treasury paints a more mixed picture. Overseas investors bought a net $14.5bn of US equities in November, the highest figure since May 2001. But US investors trumped this, buying a net $16.1bn of foreign equities, the highest monthly outflow in the series' 27-year history.
However the December data, due to be released next month, may well show net equity flows turning positive for the US for the first time since December 2003. The S&P 500 hit a 40-month high in late December and BoNY reports an 81 per cent correlation between its proprietary flows and the performance of the market index.
I would imagine the netflows are really the kicker otherwise all we are seeing is increased globalization in asset markets. This does not make a very dramatic headline I guess.
Also next week we have the FOMC meeting Tuesday and Wednesday. It should be like the last one with a 1/4 pt hike broadly expected. The world will again focus on the word "measured" and my feeling is that they keep it. If I'll interpret it as the hikes ending rather than accelerating. Even with the FOMC meeting I expect Monday to set the tone for the week.
I am putting off anymore currency trades until I get a clearer technical picture. I get the sneaky feeling that a Chinese policy change is right around the corner and would rather avoid the volatility as the market debates the issue.
No stock trades either until Monday unless stops get elected.
Jan 26, 2005
I did add the insider's rss feed to my reader though as he is probably a better news source on the company than most. Apparently the site has been altered in a tribute to his having been temporarily abducted by aliens. The original is still available for those who are interested.
That is a ways off and the stock probably needs to draw in more volume but it is something to notice.
Using today's strength to roll up stops where I can.
The markets seem to be making their bets on a Chinese revaluation through the medium of the yen. According to Ashraf Laidi, chief currency analyst at MG Financial Group, “A revaluation in the renminbi would mean Asian nations could allow their currencies to appreciate against the dollar while offsetting any negative impact on their competitiveness through a decline against the rising renminbi. Therefore, a delay in a renminbi revaluation will have the opposite effect and pressure the Asian currencies including the Japanese yen.”I am not sure if I agree with the idea that holding the Chinese peg pushes the Yen lower. Japan still holds an aweful lot of U.S. debt and with the U.S. funding needs I just don't see the market letting the Yen drop. The technical picture agrees with this.
Posted by Hello
This weekly chart looks like a pennant formation which will tend to break with the prevailing trend. A trade above yesterday's high (maybe to 105.10) would violate the pattern and lead to a quick leg of dollar strength. Some of you might be interested to look at a daily chart and see that this pennant will be down to a very narrow range (if it holds) by the time the Chinese New Year arrives.
**added 6:30 PM** There is now a second article discussing the currency swings.
The other day when GOOG was making its push to get above 200 I opined to a colleague that this rally's fate was a bit tied to the fate of GOOG. My reasoning is simply that its poorly received IPO coincided almost perfectly with the August bottom. The fact that its IPO proved to be such an opportunity emboldened the public and made many other IPOs possible. It is that public participation and buzz that really got this market swinging in Q4. This is an oversimplification and one stock rarely defines the market but the market always needs a story. Making GOOG the poster child of the second internet bubble will have a lot of resonance if the stock begins to let investors down.
I wonder if we will see sideways trade through the weekend and then a big move one way or the other on Monday. Might make sense just to sit and wait until that Iraqi election ends to see which way we break. Maybe we can continue the rally but it felt a bit hesitant. I would not be at all surprised to see vols getting bid up through the week and checking out some straddles might make sense.
Twice the Cramer, twice the ratings?
Is the world ready for double the daily dose of Jim Cramer?
The hard-charging (and occasionally phone-tossing) hedge-fund guru seems set to be the latest moving part in CNBC's ever-changing evening schedule.
First, John McEnroe, tennis ace, had his show cancelled. Now CNBC is set to shoot down Dylan Ratigan's Bullseye by the middle of next month and replace it with an hour of Cramer picking stocks.
For those who follow the cable network's scheduling this raises the possibility of back-to-back Cramer - if he stays put on Kudlow & Cramer.
CNBC was not immediately able to confirm the timing of the switch. But Observer wonders: could the replacement of Ratigan's salon-like "whine and cheese" party with Cramer's vociferous ways signal the return of hard- charging times?
Either way, a glance at Cramer's newest book may hint at why CNBC is betting on him to boost its ratings. Jim Cramer's Real Money, due out in April, begins: "I want you to be rich. Real rich.
"That's my goal . . . I've made too many other people rich for me to think that I won't do it with you."
In a business of egos this guy manages to stand out. While I respect his vision in launching TSCM, I wonder a bit about his ability to really make money for other people. I generally found the other writers on his site to be more useful but maybe that is just me. The pitch of his voice does seem to rise and fall with the markets which sometimes makes for good TV.
Jan 25, 2005
FNM is staying down but no one is talking about it.
The liquidity induced rally caught a lot of people by surprise in '03 but now with the Fed continuing to tighten everyone is convinced low bond yields can keep the market up. I find it particularily scary that CNBC kept reiterating just how "alright" the economy is while I watched the market get clocked on Friday. The market is certainly oversold and the New Year's money may finally arrive but after that it may be time to look for a shift in the pardigm.
Today's action might not feel that great but I would attribute that to the large gap up in the first hour of trading.
Right on que China announces it's growth is just fine.
KLAC nearing $45, INTC above $22.30
Shorting breakdowns has been tough going since 2002. The only safe short entries seem to be on the retest (double top).
The Yen looks like it is going to try for 105 before 100. I see the Fed hiking but I am just not sure that matters if lenders feel like they own enough US debt.
The blogosphere is the direct result of the plummeting costs of starting and maintaining a website. Do Yahoo!, eBay, Amazon, and Google really benefit from this over the long run?
This move feels like the real deal higher. If that is the case it could mean a rally for a couple of weeks. We shall see.
GM accounts for some 2.25 per cent of the credit index, with $45.5bn of corporate debt. But on Monday Lehman said that, as of July 1, it would also consider ratings from a third credit agency, Fitch Ratings, when deciding which companies to include in its Credit Index. This means even if S&P eventually lowers GM's credit ratings to junk - as many investors expect it will - the automaker will remain in the index as long as the other two ratings agencies continue to consider it "investment-grade".
Maybe it will have a positive effect by allowing the index spread to widen gradually without forced selling when the downgrade occurs but it is hard to have a good feeling about this. There is also some value to having the three ratings companies but again if I owned an investment grade fund I would prefer that a junk rating by any of the three agencies would lead to exclusion. If you buy an investment grade bond fund my guess is that you are interested in security and not return. This decision will simply raise the risk level of available options.
Jan 24, 2005
I posted it mainly because it was funny but the article has some good color if you have an interest in the stock.
Investors worry that Starbucks will soon have no more American soil to
conquer, forcing it to cannibalise its stores. Abroad, especially in Europe,
some fear that Starbucks will not be able to leverage its brand with the same
success it has had at home.
These fears, while not unfounded, have been with Starbucks for a long while.
Back in 1998, satirical website The Onion jokingly reported that Starbucks
"continued its rapid expansion Tuesday, opening its newest location in the men's
room of an existing Starbucks". Meanwhile, betting against Starbucks in Europe
poses risks, given the success of its management.
The long end of the treasury curve just keeps moving higher. I guess it is risk aversion but I don't know.
I liked this analysis I saw of Taser. The Google chart looks like it is starting to show a similar pattern. It is an interesting rally if it leaves behind the high-beta, momentum names. I am a bit surprised RIMM had no mojo at all off the trendline or the 200 day. CME also makes the list of momentum disasters. On the momentum success side we have the homebuilders being led by TOL. Lots of renewed chatter in here about deflation but with housing prices and home builders humming I can't really take it too seriously.
Kind of a slow day overall to me. I have been feeling that way a lot lately so maybe it is just my being out of synch.
I would keep an eye on KLAC and INTC as INTC broke a near term range to the downside while KLAC would look very positive if it can get above 45. I don't see those two stocks diverging for long. GOOG looks like a terrible pattern while RIMM around 70 is finally getting down to the uptrend I mentioned way back.
Jan 22, 2005
One last point. If Norfield is right ($$) and dollar reserve accumulation is only $130 billion, in 2005, there is no way the US will be able to fund a current account deficit of $800 billion -- yet barring some big improvement in the monthly trade balance, that's what we are looking at -- and it could be worse. $130 billion in financing from the world's central banks would be a HUGE change. I have no idea how Norfield came up with that estimate: it may reflect the world's central banks wishes, but it seems inconsistent with the United States' need for cheap funding.Both Brad's piece (make sure to read the comments) and the FT article ($$) he links to are well worth reading. Many people have turned bullish on the dollar here and while most are only calling for a bounce that bounce is facing a very strong headwind (think pennies in front of a bulldozer). U.S. interest rates and bond spreads also seem like amazingly bad bets given the fallout that may occur in interest rates. While these arguments have been made for several years it is probably the wrong time to trade against them. The fundementals are still in place and while frustation with them might cause shorts to stop playing that does little to make the long side attractive. FNM is an excellent example of this.
Jan 21, 2005
FNM will reach the bottom of its upward sloped range around 65. With the bears recently stumped (stomped if you prefer) by the positive market reaction to the preferred issue I would say this is the best chance since '03 of breaking lower. The level should hold at least once if you have a strong heart and a full wallet but given the way the stock moves around being short with a stop around 68 seems like the better trade.
I was stopped out on my AUD / Yen trade and will probably revisit that theme late next week. There was some chatter yesterday that after Chinese New Year (Feb. 9th) the exchange rate of the Yuan would finally be adjusted. The chatter went on to say that Japan would not let the Yen strengthen whatever China does. It may be the case that Japan will intervene and maintain a semi-fixed policy against the dollar but my guess is that the market will want to test the theory at the 100 level before letting them off for rhetoric.
Jan 20, 2005
Other than the net stocks the carnage seems very well localized in the stocks that missed (QCOM, COF, EBAY, SNE, C...).
Jan 19, 2005
EBAY is smashing the nearby uptrend I had shown along with its 200 day moving average. I would put next support around 83-84 with better support coming in at 75.
The 200 DMA in the VXO is at 15 which might make a good spot for a reversal on the first touch. Trading above that would make a nasty reverse-head-and-shoulders (Nov 19th marks the first bar of the left shoulder).
I am looking at the inability to generate selling pressure as a sign of a bottom. I would also view this market as one that is rewarding patience. Buying the first retest seems to be superior strategy to jumping on breakouts as they occur. The reverse was true at the end of last year. The list of retailers I gave the other day still looks interesting though ANF is no longer in a good buying position.
Some have begun mentioning the Iraqi election on Jan 30th as a catalyst for the long side. Based on fundementals it is a non-event to me but it may spur retail buying. I would guess if that is the case the tape will start to show some strength before the event.
He also has a good summary of how the world economy got us to where we are.
So, the missed chance by the Fed to tighten early on to prevent the stock market bubble (and its further Fed Funds easing in 1998) was an important factor in allowing the bubble go on and eventually burst. Then, the bursting in early 2000 - only partly driven by the 175bps reversal btw mid 1999 and mid 2000 - was the main factor behind the 2001 recession (dot.com and Nasdaq crash leading to a real investment crash after the real investment bubble that had been itself fed by easy liquidity for too long). And the attempt to avoid the real consequences of the dot.com (and of all stock markets) crash then triggered another massive Fed easing - from 6.5% to 1% - that created the great bubble of 2003-2004 with all risky assets - equities, emerging market debt, housing, high yield corporates, commodities and even long-treasuries - surging in value and becoming overvalued and feeding even further the US households' leverage build-up and savings contraction. So, as Ken Rogoff once put it, massive Fed easing (6.5% to 1%), massive and reckless fiscal easing (from 2.5% of GDP surplus to 4% deficit) and sharp dollar fall (15% trade weighted so far and still going) gave us the best recovery that money can buy; but it also gave us the most drugged and artificial recovery that money can but leaving the US imbalances worse than before: twin deficit, short-term financing of these deficits with increasing rollover risk, sloshing liquidity, housing and risky assets bubbles, low savings and high leverage in households and among highly-leveraged agents, carry-trades and chasing for yield.This summary in my mind is what explains why the Fed seems worried about inflation while the bond market remains calm. The Fed is not seeing a current problem so much as seeing an abundance of liquidity being provided through the corporate bond market. Today's CPI number while reassuring bond investors (and maybe stock investors), will not really relieve the current worries at the Federal reserve.
None of this really matters today. For, today I think JPM picked the wrong day to miss earnings.
Fannie Mae on Tuesday slashed its stock dividend in half to raise money to help it comply with new capital requirements imposed on the mortgage finance provider in the wake of an accounting scandal.
Fannie said it would reduce its common stock dividend by 50 per cent to 26 cents per share for the first quarter, and said its board would assess future dividend payments quarter by quarter. The company had some 968m common shares outstanding at the end of June, according to its annual filing with the Securities and Exchange Commission.
The stock traded down near 68 in the after-market. Like the last time there was bad news, I could easily see the stock going either way tomorrow. Over the long-term I don't see why anyone owns it or how their business model is effective if the gov't is considering a complete privatization. The market to date has not really agreed with that view. It will be more interesting to see if the banks and brokers that traded strong today can keep their gains.
Jan 18, 2005
I don't see too much going on that is worth a comment. FCX, a stock I mentioned the other day, is having a nice day after its earnings and keeping the suspense alive by staying within a pennant formation. The precious metal companies seem strong in spite of the strong dollar. My only involvement today was a stop loss in MMM.
Jan 17, 2005
The article I pulled that from has a nice summary of where those currencies stand. Maybe they will reverse off highs like the Euro did but I don't think so.
The won's 0.7 percent fall against the yen this year has already made Korean products cheaper abroad relative to those of its Japanese rivals. Yesterday, the yen advanced to 101.70 per dollar, the highest since January 2000. Other Asian currencies strengthened after the yen's rise.
The won climbed 0.7 percent to 1,035.70 won to the dollar, its highest close since December 31.
Jan 16, 2005
I also thought the leap higher in South Korean iShares (EWY) was interesting. That country took up a lot of slack in the 4th quarter buying something like $25 bln in US Treasuries while cutting rates in their own country all to weaken the Won. The net effect is a big shot in the arm to their economy. The effects of that stimulus probably wouldn't be felt yet but something seems to be going on. I have mentioned Japan on a few occasions and it seems to me that the two countries getting jiggy together should have nice synergism. They may need to carry each other if '05 is to be the year China slows down.
The weak spot in the market was still General Motors (GM) though it did hold the Oct lows and appears to have put in a reversal on the S&P ratings and outlook affirmation. I would keep watching that stock and Fannie Mae (FNM) to see if they weigh on the finance sector. Verizon (VZ) has been getting clocked lately but it is at kind of an interesting point having filled a gap right as it retests the broken downtrend line.
I did end up exiting my GBP / Yen trade on Friday and am getting pretty convinced '05 will be a good year for the Yen. On Friday, I read Mark Faber's musing that '05 ($$) may be the year the dollar is goes up as opposed to stocks, bonds, commodities, and any other currencies. I don't see it but above 105 dollar / Yen I would give it a lot more consideration.
Jan 14, 2005
By the President's definition, Social Security is bust because it can only pay about 80% of promised benefits with dedicated revenues in 2053, after the trust fund is exhausted in 2052, and only 75% of promised benefits in 2062 (using the CBO forecast).Read the full post here.
"If you're 20 years old, in your mid-20s, and you're beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt, unless the United States Congress has got the willingness to act now," Bush said.
Right now, though, the non-Social Security part of the government has dedicated revenues sufficient to cover only about 70% of its expenses. Revenues in 2004 were around 11.3% of GDP, expenditures were about 16.25% of GDP (including interest payments on the Social Security trust fund), for an overall deficit in the non-Social Security part of government of a bit under 5% of GDP. Put differently, non-social security government spending exceeded non-social security revenue by over 40%.
(One note: I used the CBO's data for FY 2004, and the Trustees' data for calendar year 2004 for Social Security, I could not quickly find the CBO's forecast for FY 04 Social Security payroll tax revenue. The resulting error is tiny).
On the external side, revenues (exports) only cover 65% of our current spending (imports). By my calculations, based on data through November and conservative estimates for December exports and imports, end 2004 exports will be around 9.75% of GDP, imports around 15.05% of GDP. Our current trade deficit of 5.3% of GDP is equal to 54% of export revenues.
In other words, using the President's criteria for Social Security, we are already bust.
Near the end of last year I put on a tiny Short GBP long Yen trade and I am now looking to exit and look for a bounce to reshort. I also reentered a short AUD long Yen trade when it got back below my original stop. I plan to just keep rolling down my stop there. EUR/Yen has moved below the 135 level which I considered an important breakout and I will now be looking to short that on a bounce as well. Through the great dollar rally of 2005 the Yen has barely budged and I simply don't trust the dollar long term against the currencies that have been supporting it these last couple of years.
I have been outright wrong on interest rates in the U.S. for the last couple of months. I don't see how the market can continue shifting its estimates of short-term rates higher while the long-end stays down. If the market anticipates a slowdown why isn't it showing up in commodity prices or the equity markets? I continue to see it as an accident waiting to happen and would prefer to own foreign bonds for interest rate exposure. Either the Japanese short end or the European long-end with the currency hedged.
The markets are in a good position now both in price and by the market psychology to resume the rally from last year. I would own companies that make something whether it is a technology product or machinery, I just prefer something physical. I am generally nervous about the financials because they are most exposed to a credit event. They have still not really reacted to the changes at Fannie Mae (FNM) or the general deteriorating credit of consumers. I am short-term bullish only and if I wasn't comfortable trading actively I would just be investing in a foreign stock or bond index.
Jan 13, 2005
By funneling domestic and foreign credit into residential real estate, they have created a variant of the mal-investment that Mises first identified in his business cycle theory. Mises noted that the extension of bank credit to producers would result in a form of mal-investment from the creationg of more higher order capital goods than could be afforded given the amout of available savings. The GSEs enable credit expansion to fund the construction of residential real estate, while the socialization of risk defeats the markets’ mechanism for containing credit which would occur naturally if private parties were required to bear the risk. The result is an over-consumption of housing, a mal-investment in home building and mortage-brokering, and the creation of the liability associated with the interest-rate and default risk of the mortgage credit.
Is OFHEO really a regulatory agency? Regulatory agencies create and enforce rules that the private sector must follow. The Fannie flap, then, is really a brawl between multiple government agencies: Fannie, OFHEO, and the SEC. Can the government really regulate itself? Raines has been chosen to fall on his sword, taking semi-retirement with a multi-tens-of million dollar pension as his show of contrition and acceptance of responsibility.
In the end, will anything change as a result of the accounting scandal? Undoubtedly, a new CEO with impeccable bean-counting credentials will be put in place to clean up the political mess. Likely, they will not have Raines personal charisma, his Washington connections, or his ability to lobby congress.
I am confident that Greenspan understands the importance of extending the housing bubble to avert the liquidation of the mal-investments that remain from the stock market bubble that he created. Putting Fannie Mae on a tighter leash would inhibit its ability to further inflate US residential real estate. But competition between government agencies is not entirely planned. Perhaps Fannie now is under enough scrutiny and the political capital generated by going after another fat-cat CEO will have unintended consequences of its own.
There has been increased talk of "privatization" of these entities, but like the “privatization” schemes proposed for Social Security, the biggest hurdle would be unwinding the current liabilities. What private entities would take on Fannie’s balance sheet without the Fed guarantee? Risk has been significantly under-priced throughout the financial sector, but no where more so than in the GSEs. An accurate pricing of risk would surely show these firms to have a negative net worth. Who will pick up the difference?
Read the full post here.
Maybe it is the statement on spreads made by the CFO causing the new concerns in GM.
But Mr Feldstein said the company had found new ways of raising funds and believed it would be able to continue operating even if locked out of the unsecured bond markets.
He admitted a downgrade would initially lead to "a lot of turmoil" as bondholders unable or unwilling to invest in junk bonds were forced to sell, and the company's spreads would widen sharply - maybe to 600 basis points, from 290 today.
One positive here not being mentioned anymore is that M&A is humming along just like people expected into year end. Also, I would be pretty surprised if the retail investors that showed up after the election didn't get into the game again sometime soon. We will see.
He also comments on external imbalances:
In the financial markets, this broadly positive outlook has been accompanied by a dramatic reduction in risk premia, leaving the price of insurance unusually low against a less favorable or more volatile environment.
These developments imply a view among market participants that future macroeconomic shocks will be more moderate than in the past and more likely to be absorbed without broader damage to economic performance or the financial system. They reflect a general increase in confidence that monetary authorities here and in other countries can keep inflation stable at appropriately moderate levels. They reflect diminished uncertainty about the expected path of monetary policy in the United States. And they imply that the imbalances in the global economy will be diffused smoothly.
Of course, not much is certain in economics and finance. One cannot know with confidence whether future economic policies and outcomes will justify the confidence in the benign outlook now reflected in risk premia.
Alongside these fiscal challenges, the size and concentration of external imbalances in the system are at an unprecedented scale, between five to six percent of GDP in the case of the U.S. current account deficit. This imbalance is the result of a combination of a sharp decline in U.S. net national savings, driven by increased public sector borrowing and a large rise in household debt, and a sustained increase in the relative strength of U.S. demand growth compared with Europe and Japan.And the sums it all up.
Hard not to view the current low risk premiums in a reflexive way. The trend toward tighter spreads and cheaper borrowing has allowed marginal companies to borrow their way out of difficulties. Maybe the trend has farther to run but at this point the odds definitely favor a widening of risk spreads across the board.
These four broad forces will have substantial implications for the macroeconomic performance of the world economy over the medium term.
This combination of fiscal sustainability problems, large external imbalances, and the tension in the existing exchange rate system creates the risk of unanticipated shocks to financial prices, even in a context where monetary policy credibility is strong. The probability of these shocks may be low, but it is higher than it has been, and higher than we should be comfortable with.
These shocks could be large enough to lower future growth outcomes. The world's economies have very different capacities to comfortably manage the inevitable adjustments.
Without policy action commensurate with the challenges, we face some risk, it may not be high, but it is material, of a world with somewhat lower growth performance and higher volatility.
Geithner's full speech is here.
I rented videos there over the weekend and received the vague guidance that there were no late fees but the company would appreciate it if I brought the movies back within 10 days. No mention of the "you just bought it" side of the policy.
On another note, virtually every video was out. I guess when you take customer holding periods from 2-5 days to 10 days it eats into the available inventory. Shocking! Besides eliminating late fees the company is pushing its monthly fee service that allows users to have 2 movies on hand at a time. This has a similar inventory depleting effect and customers paying monthly fees probably get turned off looking through an empty video store.
I would say the company did not give much thought to the operational aspects of their new plan and this is going to turn into an absolutely giant disaster. It is a company with a ton of retail floor space in a business where floor space is just extra overhead.
A good chart to watch here might be the copper company Freeport Mcmoran (FCX).
It still might break out of a pennant to resume its climb but the stock looks heavy here and a trade to $34 would leave it with a lot of room to fall.
The bank of England decided to keep interest rates unchanged. They see the economy there as mixed with strong manufacturing and some inflationary pressure in wages while housing prices and retail spending a showing weakness.
The ECB also kept rates unchanged. More and more I get the feeling they are going to provide liquidity by fiddling with their currency rather than just lowering rates.
Google (GOOG) is launching a new low cost version of its out of the box intranet search solution. That stock could be back above 200 and off to the races shortly given where it is sitting.
The Korean steel maker Posco posted strong earnings and provided a data point that Chineese demand is not weakening. The company expects steel prices to continue rising in '05
Japanese balance of trade data caused some concern as imports grew faster than exports. Personally, as long as export growth is positive it seems alright to me that their imports are growing. Seems like people will need to adjust to current account shifts as the U.S. is really running out of rope as the consumer (importer) of last resort.
One thing that stood out to me today was Brian Reynold's article ($$) mentioning the possible beginning of a trend where companies utilize low borrowing rates to buyback convertible bonds. Given the low vol levels this probably makes pretty good sense for some companies. If it gains any traction it may even push vols up which might pull some liquidity out of the marketplace. He also mentions the possible impact on particular issues as convertible traders cover their hedges. This world of excess liquidity we are living in creates some strange cross currents.
Also, we began the morning with some rumors that GM's debt rating would be lowered to junk. The thought that this may happen has already been kicked around pretty good, and honestly I have never heard of a case where the timing of the rating announcement has ever been leaked to or guessed by the market. GM will speak at the autoshow on Thursday and reacting to rumors this morning is more a sign of tension among traders than anything else.
Jan 12, 2005
To many, this is an overdue come-uppance for a company that has been known to call its detractors "anti-housing" and "pencil-brains'. Fannie Mae and its smaller sibling Freddie Mac, which also stumbled over accounting rules in 2003, enjoy special privileges because they buy up home loans, providing liquidity to the housing market. A $2.25-billion line of credit to the Treasury, tax advantages and low capital requirements together imply a government guarantee that translates into lower borrowing costs. The Congressional Budget Office puts the value of this implicit subsidy to the two mortgage giants at $19.6 billion a year.
Does Fannie Mae really deserve to be fed by taxpayers? When it was formed in the wake of the Depression, the company did much to revive America's collapsed housing market. But now there is a vigorous secondary market for jumbo mortgages that could easily soak up the smaller loans dominated by Fannie Mae and Freddie Mac. The companies have also strayed from their mission of helping people afford their own home: they lag behind regular mortgage banks in funding first-time home-buyers, especially those from ethnic minorities. The subsidy is all the more objectionable when so much of it seems to go into shareholders' and executives' pockets and on a huge, and so far effective, lobbying effort aimed at preserving its status. And the subsidy has fuelled such fast growth and high leverage (Freddie and Fannie have $1.7 trillion in debt outstanding) that Alan Greenspan, chairman of the Federal Reserve, has mused that a blow-up could do great damage to the American economy.
This is a tiny portion of a great article, I encourage people when they have time to go check out the original.
China Aviation Oil was the country's largest crude and refined products trading firm, and while I don't know much of the story about the company's demise, I roughly know that they put when they should have called and called when they should have put. For anyone not familiar with the language of commodities trading, that means they bet that prices would go down when they went up and bet they would go up when they went down. Upon its demise, brought on after the government in Beijing refused to bail the company out (crony communist rulers willing to allow a big company to go bust; would our crony capitalists be so bold?), the company had staked out $500 million in bad positions, mostly in West African light, sweet crudes.
Some believe that when it is all over, China Aviation Oil may rack up $1.5 billion in losses.
A lot of crude oil traders, especially those east of Suez, had to quickly unwind long positions designed to take advantage of China Aviation Oil's rapacious need. A large number of tankers full of West African crude were suddenly stuck without destinations. Those tankers were not unwanted for very long, however, and most got snapped up and sent to alternate destinations in the Americas and Europe.
Logic dictates, however, that even with the demise of China Aviation Oil, demand in China for gasoline has probably not really fallen any. Eventually, West African crude exports to China will pick up as other firms step in to fill that demand. Whether that will provide any more oomph to crude markets in the coming year remains to be seen.
Infosys Technologies, the Indian software services and call-centre company, on Wednesday raised its earnings forecast for 2005 on an optimistic outlook on outsourcing demand.Read the full story here.
The Bangalore-based company raised its forecast earnings per share from Rs67 to Rs68.70, an annual growth of 47 per cent. This followed strong growth in its third-quarter results, a sign that companies in the west were increasingly aggressive in outsourcing back-office business processes.
Posted by Hello
The chart shows a good long term stock but nothing interesting in the short run. If anything the chart looks like it is in for a month or more of consolidating.
Jan 11, 2005
MMM and CMC (previously mentioned) also look like excellent technical longs here.
The 5-yr is flirting with the Nov. yield highs. It might pull back but it should claim that level and head towards 4% soon.
Morgan Stanley (under the heading "The three ladies don't sing from the same sheet") posted some thoughts on the state of UK and European interest rates compared to the US. I couldn't agree more.
Breadth showed some improvements while the indices were flat yesterday which might lead to divergence if the markets go lower.
I got stopped quickly on my metal entries last week. I still want to buy the stocks here but am making myself wait until they can at least get above the short-term downtrend line.
The news from retail continues to be disappointing. The reduction in consumer borrowing announced on Friday makes me think the world's consumer of last resort is finally trying to put its house in order. Long term it is a good thing but with out other consumers stepping up in another part of the world it might lead to a nasty adjustment.
What if S&P 1140 is to this year what S&P 1050 was to last year? The brief rally last year was not really comparable to '03 but the widespread use of technicals may lead to a similar phenomenon. The bulls can continue to see themselves as correct longer term, the bears as correct in the shorter term and the falling VIX would grind out trading overcapacity.
Jan 7, 2005
I don't know anything about the stock but that is just my first guess from seeing the chart and the news. Obviously all the real geniuses bought it today. If you are not among them it is probably still goood for entertainment value.
Posted by Hello
Click on the chart to see a larger image!!
And while I am on. The breadth had been kind of crap all through December so with yesterday's performance we have managed to set a pretty low bar. It would not take much now for the breadth to actually begin improving even if the indices make a new low. Check out the oscillator to see what I mean.
Jan 6, 2005
I will probably keep watch on OS and CMC (mentioned prevously) in here as they are hanging out just above their recent breakouts and look good from the long side still. AAPL is still holding within a very nice bull pennant.
I would like to talk about my thoughts leading into the new year. On Friday I sat for a while and really thought about how difficult it was to make a case we would go lower Monday or Tuesday. While I generally try to avoid the crowd my net opinion was that it was pretty directly comparable to Nov 3rd and that the end of one tax season and start of another in a consolidating tape would make the upside the winner. I would guess when we get flow information for the week we will learn that retail did not really show up. I would guess this little downside jog is mostly a correction of the short term sentiment and has left the tape in an alright position. I would still think we will get retail flows coming into the market that at the very least make me want to wait for rallies to sell.
I am gaining confidence in the idea that either the yield curve will steepen or stocks and corporate spreads need to correct. Given how widely manipulated the yield curve has been by foreign Central Banks I am leaning towards it occurring on the bond side rather than stocks. Whatever is happening the rising short end is creating a coiled spring effect where the long end will jump higher or the Fed will rapidly change course.
If I wanted to argue that it is the front end and spreads that would adjust I would focus on the consumers. They finally seem to be getting scared of their credit cards and general indebtedness. There certainly has been enough in the popular press about America's lack of savings.
Jan 4, 2005
The averages also do not look so bad. 68% of NYSE stocks are still above their 40 day averages and a full 82% are still above their 200 days. The percent above 40 day could be viewed as a bearish number because 69% were above the 40 day on the Dec. 7th pullback creating a negative divergence. The indicator I would really be watch here is new 52 week lows. They did not really expand on recent pullbacks and I am pretty sure most stocks have a pretty fair buffer. Without stocks making lows it is hard to imagine the momentum really getting turned around here.
I keep thinking tonight that the path of maximum frustation (at least for me) is a pullback in the S&P to 1140. Maybe it happens but I have never made any money trying to out think myself. Only one stop got hit today but many are nearby.
My small GPB / Yen trade is doing pretty well. The Euro also looks like it is breaking its uptrend against the Yen. The level to watch there looks like 138.40 .
Jan 3, 2005
The XAU is getting its hard retest of the 200 day today. I am buying a bit but if it can't find its footing by Weds. I will dump my stocks and wait. The metal has quite a bit more risk here than the equities.