Wednesday, February 28. 2007
The irony is that Mainland China has a closed capital account, which means that their stock market is isolated and irrelevant as most people can't buy those stocks, save for the Chinese and a few approved institutions. But a trigger is a trigger; and someome yelled "fire" in the crowded theater full of global equity investors. Soo… how much was that Russell 2000 up by the end of the day? 0.57 points (it has not settled yet so I may be off by a few decimals). That is to say that under the surface the market's a lot weaker than what the Dow and the S&P show. The "end-of-day verdict" is very tentative. And here's Jimmy on the China situation and the US market outlook.
The Dow and the S&P have bounced, but the small-cap Russell 2000 is barely in the green. I'll wait for the close before making any conclusions. As Dick Arms said today, panic at a bottom is one thing, and panic at a top is quite different. Indeed.
Tuesday, February 27. 2007
One would need the advice of communists in a ruling coalition to make such an informed decision. Futures aid price discovery -- they don’t create inflation -- especially if there are no passive commodity index fund investors, like in this case.
This market has room to produce one more day like this and still be fine (theoretically). The trouble is if it doesn't strop after another day of selling. As I said yesterday regarding the banks, when they're fine, all is fine. When they're under pressure due to the subprime fiasco, the yen carry trade unwinding, or both (which looks to be the case here), the market's in trouble. 
www.stockcharts.com You need a live quote of the BKX index more that you need a quote of anything else. I have not seen the S&P go down 50 points in one day since 2002. The VIX was up 64 percent today and the trouble is that it's still cheap at 18 percent if you look at options volatility historically. The coil has begun to rapidly unwind in the other direction. Can you make the call that is stops right here? I didn't think so. 
www.stockcharts.com My point is that this sense of false calm that prevailed in the fall of 2006 and in early 2007 has resulted in many positions being increased disproportionately as the market wasn't moving much either to the upside or the downside. It was gliding higher, but it has struggled to make progress since late November. In one day we wiped out 3 months' worth of gains. I wonder what the next week brings. I have an idea, but I'll shut up for the time being. Yep, the bears swallowed Goldilocks in one go.
If you are looking for the "told you so", there won't be any. I had no idea that today will be the day, even though I was prepared. I'll have to say more after the close. This is the very beginning of the move.
Monday, February 26. 2007
This is funny, although it is the numerous recalculations and recalibrations of the CPI "to make it better" that give birth to the conspiracy theories. On different note, the KBW Bank Index (BKX) is coming down aggressively in the past two days. The banks are the most important sector in the US market. I wonder if that has anything to do with the subprime fiasco. It must. 
www.stockcharts.com The US market goes where the banks go, so this downside leadership, albeit coming from all time highs and still in the form of a mild pullback, needs to be monitored. The BKX move today is the equivalent of the Dow being down 120.
Friday, February 23. 2007
I have to share this Bloomberg story that just crossed. I realize this is turning into The Bloomberg Blog, but I spend too much time in front one of one of those terminals every day (and nights lately): Feb. 23 (Bloomberg) -- The perceived risk of owning low- rated subprime mortgage bonds rose again, heading for the fifth straight weekly increase, as companies that lend to the riskiest borrowers continued to report losses. An index of credit-default swaps on 20 securities rated BBB-, the lowest investment grade, and sold in the second half of 2006 tumbled 7.7 percent to 68.5 today, according to Deutsche Bank AG. It's down 30 percent since trading started Jan. 18, meaning an investor would pay more than $1.25 million a year to protect $10 million of bonds against default, up from $389,000. ``Despite some sporadic buying, sentiment remains mostly negative and many believe the index will go lower,'' said Peter DiMartino, an asset-backed securities strategist at RBS Greenwich Capital in Greenwich, Connecticut. The index has dropped to record lows for six straight days as some investors used it to bet on the declining fortunes of the housing market and of companies that make loans to the riskiest borrowers rather the performance of the underlying bonds. The level of delinquencies and defaults on subprime mortgages made last year is the highest ever for such loans at a similar age,[note: higher than the 1990 recession, yet there is no recession now] according to New York-based Bear Stearns Cos. At least 20 subprime lenders have shut down, scaled back or sold themselves to larger companies since the start of 2006, according to data compiled by Bloomberg. Moody's Investors Service this week said it may cut the loan servicing ratings of five lenders, including NovaStar Financial Inc., which this week reported a surprise fourth-quarter loss. Price Gap The ABX-HE-BBB-07-1 index continued to fall even as the gap between prices at which dealers will buy or sell the contracts reached 5 points, according to Deutsche Bank prices. That means the index would have to drop 5 points for investors betting on a decline to make money. ``Clearly the wide bid-offer spreads are not an incentive; however, it has done little so far to stem the tide of short selling this week,'' DiMartino said. Short selling refers to investors who buy credit protection through the index contracts to bet it will decline. Credit-default swaps on mortgage bonds offer payments to protection buyers if the securities aren't repaid as expected. Sellers of the contracts are provided monthly payments.
I have been aware of this ABX-HE-BBB various vintage fiasco since last fall, but it took 3 months for it to start making headlines. Since the matter is not easily understood by the retail investing public, when the issue reaches critical mass (if it has not already) the broader ramifications should be quite abrupt. You ain't seen nothin' yet. Have a nice weekend.
The move in gold and silver bullion on Wednesday (continuing today) above a 7 month trading rage feels like the train is leaving the station. I am positioned for a big rally here and the fundamentals behind the precious metals move have only changed in favor of the bullion bulls since this great summary by TCR. It's good for those of you that have not read this piece to go back and read it now, as we are very early in the precious metals rally. 
www.bloomberg.com
Wednesday, February 21. 2007
... from good sources. As per the prior post, that devil is really in those details, isn't he? Jeff Matthews does a great job of what I thought was impossible to describe in plain language.
This subprime fiasco has been well documented here, so I won't repeat myself. The trouble with Goldilocks is that the CPI numbers were stronger than expected with oil down so much. The stock market has been celebrating the end of Fed tightening for a while. What happens if the Fed has to hike again? Inflation, you know, is a monetary phenomenon, and it's not driven by oil prices. The Fed has been "behind the curve" for a while. It also doesn't help that rents are rising because housing is weak (weakness that is Fed-driven to a great degree). So core inflation (that is 40 percent or so weighted towards rents) is rising partially because the Fed is hiking and because housing is weak? Some dilemma. The stock market has completely ingnored this subprime collapse. The question remains when, not if, it will be noticed.
Tuesday, February 20. 2007
This is very much related to the ethanol story, but so much broader. Compliments to Dr. Faber who has been very early onto this trend. They always forget that there is the word "boom" in The Gloom, Boom and Doom Report he writes.
Friday, February 16. 2007
Those ethanol facts aren't new, but that won't stop the government from proceeding with the "grow our energy" theme. There should be some very interesting moves in agricultural commodity prices. You have to grow less soybeans to grow more corn , etc. I'm very bullish on the processing stocks.
Wednesday, February 14. 2007
As per those comments, read this. I have never seen such a "sticky" stock market where any dip is bought with a vengeance, indiscriminately, I might add. I would have never guessed that the beginning of the implosion in housing and the related shady financing schemes would be celebrated with "all-time" highs in the Dow.
Tuesday, February 13. 2007
I wanted to say something bullish this morning as precious metals were trading strong and my model portfolio is well exposed to that sector. Gold is closing in on six-month highs, while silver is just under $14/oz. But I came upon this web site from a Bloomberg story on the developments in the wild world of subprime mortgage lending (the model portfolio has a hedging position against a subprime lender). The site name is self explanatory--"The Mortgage Lending Implode-O-Meter: Tracking the housing finance breakdown: a saga of corruption, stupidity, and government complicity." The guy is certainly obsessed with the issue, but his collection of headlines just below his ranking suggests why this story is far from over. Here's some anecdotal evidence. On the right corner of the Yahoo portal main page there is a little pesky banner ad (at least there was one this morning): “$200,000 loan for only $667/mo. Bad credit OK – Lending Tree” I had to restart my computer several times today as I had Internet connection issues and I was trying to make sure it wasn't the router or router software. The web browser refreshes after the restart: “$400,000 Loan for only $1,334/mo. Bad credit OK – Lending Tree”
They sure raise those loan amounts in a heartbeat for the bad credit people. Every time you refresh the page, Yahoo would alternate between the two Lending Tree ads, so it's easier to notice. Incidentally, Lending Tree is the same company that has a TV commercial about refinancing loans with the guy who brags about his house and golf course membership: “And how do I do it? I am in debt up to my eye balls. I can barely pay my finance charges. Somebody help me.” And Lending Tree is there to help. Get people in debt to their eyeballs and then help them refinance. This is a “can’t lose” business model. Sure, Lending Tree just brings different banks together and gets the fees, so what do they care? The main point is that this subprime lending nonsense is still being advertised, even after the streak of fiascos in the sector. The idea is if you repackage the loans you spread the risk and therefore you “sweep the problems under the carpet”. There's a notable mountain under that carpet so someone should stop sweeping, soon.
Monday, February 12. 2007
For some reason I draw out my vowels big time when I record these presentations over the phone. It's a little strange speaking into a phone receiver without anything but a computer on the other side. This is the latest presentation. And here's a link to the one before (some overlap, but not ridiculous).
|
