 Posts tagged with: Daily Profit |
The first revision to fourth quarter GDP is out this morning. And amazingly enough, it was revised higher, from 5.7% to 5.9%. This is the first time I can recall a significant piece of data being revised higher in the last year.
Of course, we know that much of the strength in the economy is a direct result of government stimulus policies. Real growth may be running around 2%. But the bottom line is that the government has, and will continue to, support the economy. That should keep us looking for upside for stocks, even though the economy is basically treading water.
*****Investors seem to think it’s now a law that oil and other commodity prices will trade in tandem with the U.S. dollar. In other words, because oil and other commodities are priced in dollars, as the relative value of the dollar falls the price of oil and other commodities will rise.
The relationship makes sense. And for much of last year, it was actually working. But times have changed…
To keep things simple, we’re going to have a look at just two charts today – the U.S. dollar index and the light, sweet crude oil futures chart, the WTIC. As we’ll see, the relationship between oil and the dollar changed in early December 2009.
Stephen R. responded to yesterday’s column:
"There is sometimes a difference between doing what is legal and what is ethical. Goldman Sachs seems to believe that you can do anything that is legal, even if unethical. Thus, they set up AIG to fail. They help Greece defraud the European Union. They sell products into the marketplace and then bet on them failing, when they knew they would fail in the real world.
At some point in time people recognize that they are dealing with unethical, immoral charlatans and they stop doing business with them. If you know your business associates are crooks, eventually you go somewhere else."
I couldn’t agree more. And I also think it is clear why firms like Goldman continue to attract business. It’s greed. I remember when the Bernie Madoff scandal broke. Some of his investors confessed that since his reported returns were so consistently above average, they figured he must be gaming the system. And that actually attracted them, because they wanted a piece of the action, too.
A similar dynamic is in play with Goldman Sachs. Of course, when you play with fire...
There is an article at Slate.com making the rounds in the financial press. Warren Buffett’s partner at Berkshire Hathaway, Charlie Munger, penned a parable about America’s rise and fall, called "Basically, It’s Over."
The article details how a young, fiscally responsible country called Basicland got caught up in the "casino" of speculation, ignored its export economy, and essentially went bankrupt.
While perhaps a bit simplistic, Munger’s piece is intended as a warning about rising government debt and an over-reliance on risky financial speculation. This speculation is intended to make up for the lack of manufacturing as a major component of GDP.
Some of the statistics he throws out are a bit scary. He says "The winnings of the casinos (investment banks) eventually amounted to 25 percent of Basicland’s GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos."
I haven’t verified those numbers, but they certainly suggest an economy that’s out of balance.
An influential German business confidence survey showed a surprise drop in the country, the first in 10 months. A cold winter has apparently hurt retail sales in Germany.
That’s pressuring the euro, and providing strength for the U.S. dollar. It’s been pretty well documented that the euro does not tend to rally alongside the dollar. And that’s what we saw yesterday.
One positive note from yesterday - Maguire Properties rallied off of support at $1.50. Volume was strong and the stock broke above its 50-day moving average. You may recall yesterday, I said the stock needed to rally, and soon. Now, it needs to keep rising.
*****Also yesterday, TradeMaster Daily Stock Alerts‘ Jason Cimpl told us he expects consolidation for the stock market this week. (Consolidation occurs when prices don’t move much as investors adjust to a new price level.)
Yesterday, the S&P 500 traded in a tight 7-point range. And it won’t be surprising if it holds to a similar tight range today. We might anticipate the negative news from Germany to be offset by an improved reading of the Case-Shiller home price index.
It was just last Thursday that we discussed "talking one’s book" and made special mention of George Soros. If you missed that issue of The Daily Profit, talking one’s book means advocating a belief in public that supports one’s trading position, regardless of whether you actually believe it’s true.
So it’s interesting that Soros has a piece in today’s Financial Times where he states that "The survival of Greece would still leave the future of the euro in question." He goes on to say that the aid package for Greece won’t work for Spain, Italy, Portugal or Ireland.
MPG |
It’s pretty hard to ignore the big news this morning – the Fed hiked the discount rate by a quarter point to 0.75%. Now, this is different from an interest rate hike (known as the federal funds rate). The discount rate is the amount of interest the Fed charges banks for direct loans.
The move is designed to make it more expensive for banks to borrow from the Fed, thereby encouraging them to borrow from private sources.
Now, the Fed said in its last meeting that this move was coming. And I’m actually glad to see the Fed make a "surprise" move. By that I mean the markets got very accustomed to the Greenspan policy of only moving rates during policy meetings. That gives the market time to adjust ahead of the meeting. Some argue that strategy decreases the effect of the move.
With this surprise move, Bernanke has taken the market by surprise and forced it to adjust on the fly. That’s actually a good thing. I think it’s important for the Fed to show that it’s proactive.…
You’ve heard me call out big-name investors who are "talking their book" in the past. An investors is "talking his or her book" when he/she states an opinion as fact for the sole purpose of helping a particular trade.
We’ve seen Warren Buffett do this. Last year, it was widely known that he was massively short the U.S. dollar. And he continued to say he thought the dollar was collapsing, even as it hit important support. Then we learned later that Buffett was covering his dollar short, all the while extolling its weakness.
Obviousl, Buffett, in true P.T. Barnum fashion, was attempting to use his influence to talk the dollar down while he covered. He only needed to fool people for a short time as he exited the trade.
******Last month at the Davos conference in Switzerland, George Soros did his version of talking his book. He made headlines when he said "The ultimate asset bubble is gold."
I always view statements like these with skepticism. And sure, recent SEC filings reveal that at the same time Soros was saying gold was a bubble, his Soros Fund Management was buying 6.2 million shares of the SPDR Gold Trust ETF (NYSE: GLD) for $663 million.
So far this year 15 banks have been closed by the FDIC. Last year, it was 134, if I’m counting the closing figures right as posted on the FDIC website. Some of you may remember the last time there were mass amounts of bank closings during the S&L crisis of the late ‘80s and early ‘90s. At the time, a special agency, the Resolution Trust Corporation (RTC) was set up to dispose of the assets of these banks.
The RTC was controversial because many times it sold assets at prices far below market value. Ultimately though, the RTC succeeded in getting assets seized from insolvent banks into stronger hands. And because some of these "stronger hands" had low cost structures due to low up front costs, a new phase of growth was born.
NYSE: LEN |
Bespoke Investment Group is reporting that 10% of U.S. corporations are raising earnings expectations, compared to 4.1% that are lowering them. That’s the largest gap on record, and suggests that analysts still have earnings projections that are too low.
It’s hard to blame the analysts for being cautious. While the economy has improved, uncertainty about unemployment is an issue. It’s easy to imagine that consumer demand could drop. Still, let’s not ignore what corporations are saying. After all, they are the ones in direct communication with their customers. I can’t help but be a little optimistic that there is more upside for the stock market.
*****Don’t ignore the consolidation news from the commercial real estate sector this morning. Mall owner Simon Properties (NYSE: SPG) is offering $10 billion for its rival, General Growth Properties (NYSE: GGP).
Several investors and economists believe commercial real estate will be the next shoe to drop. And within that sector, shopping malls are probably the most beaten down group. That Simon Properties is considering a buyout means that it sees opportunity. And it is moves like these that often mark a bottom for an industry or sector.
I’ve recommended a commercial real estate stock that may have some terrific upside. Maguire Properties (NYSE: MPG) is back to its support level at $1.50. If you didn’t catch it there last time, you might want to give it a look.
NYSE: SPG |
My Washington DC office has been vacant all week. It’s amazing to me that record snowfalls have turned my DC staff into shut-ins (and closed the government for the third day) while life goes on at its normal pace here in Vermont.
The snowstorm that’s crippled the mid-Atlantic region will certainly have an impact on 1st quarter GDP. I would expect that 1st quarter retail numbers will be pretty bad. But there could be some good numbers for restaurants coming. The rally in the dollar over the last few weeks has lowered food costs. And I also think that once we see a thaw on the Eastern seaboard, people will shake off their cabin fever with a night out. I know I would...
*****I’m really on the fence with this one: did the Obama administration purposefully wait to attack the unemployment situation? Or is it just dumb luck?
I ask because it’s clear to me that now is the time to strike. If stimulus money had been used at this time last year to help the unemployment situation it wouldn’t have worked. Corporations were still in the process of cutting costs to meet lower demand. And at the time, demand itself was a moving target.
Now that the economy has stabilized, demand is returning and corporate earnings are on the upswing. So corporations are starting to hire again. New jobless claims are down again, as are continuing claims. The unemployment rate has dropped, and on-line employment ads are increasing.
The Dow Industrials cruised past 10,000 yesterday. Clearly, the news that Germany may be coming to Greece’s aid was a big relief for investors. The euro rallied against the U.S. dollar as well, an important catalyst for stock and commodity prices on U.S. exchanges.
Some stability in Europe and progress on a jobs bill in Congress will be good for stocks. Earnings are already solid and I suspect there is more upside coming.
I got on the phone with TradeMaster’s Jason Cimpl to see if yesterday was the type of bullish activity he wanted to see from the market. He noted that although the market got a nice bounce (TradeMaster Daily Stock Alerts members closed short positions worth 15% and 5%), the close was very weak.
Typically, indices in a bull trend would have made a push higher into the close. Despite the weak close and his growing pessimism, he did note that market internals were "spectacular." The advancing volume data showed us that the upward action was more than just shorts covering their downside positions - it was also bottom feeders nibbling at the low stock prices. He’s watching the 1085 level on the S&P 500 as an important resistance point this week...
I expect the recent volatility is on readers’ minds, so let’s get right to TradeMaster’s Jason Cimpl and his outlook:
The bulls did not capitalize on Friday’s bullish close yesterday. Stocks were up strongly in the morning with most indices up more than half a percent. Those gains held into the afternoon and it seemed as though we were going to see a nice pop into the close. Then around three, the market started to turn red and indices sold off hard in the last hour of the day. But it is not over for the bulls.
Despite the weak afternoon, the SPX managed to close above 1065 support. Resistance was formidable at 1071, which is the price we will be watching for a break out today in a short squeeze.
Short interest picked up substantially. We closed down most of our shorts already (including one with a sweet 15% profit . Basically, the market is oversold and any pop up will be fast. We held onto most of our longs anticipating a move higher, possibly back up to 1120, but we will be selling into any rally.
***It’s important to remember that the vast majority of stock trading volume comes from institutional investors like mutual funds, hedge funds, and even sovereign investment funds.
As Jason notes, stocks rolled over yesterday afternoon. That’s consistent with institutional trading, which tends to take place during the first and last hour of the trading day.
It’s also important to remember that institutional selling isn’t necessarily an indication of economic or earnings data. Part of the reason stock prices hit such lows last March was that banks and other investors had to raise cash at all costs. And that can mean selling assets, regardless of one’s outlook.
What a great Super Bowl game! I have to admit, I was pulling for the Saints, but mainly because of what the Saints mean for that city. I’m sure we all remember the horrible aftermath of hurricane Katrina. The very existence of New Orleans was in question. The Saints considered moving, and I recall suggestions that only the French Quarter be saved and made into a corporate convention amusement park.
Of course, that would have been an absurd commercialization of a proud and rich heritage. That New Orleans has come back to resemble the city it was before Katrina is nothing short of miraculous, and now the people of New Orleans have a Super Bowl trophy to crown their achievement. Congratulations, New Orleans and the Saints.
*****It’s tempting to extend the metaphor of New Orleans to the United States as we rebuild after the financial crisis. Of course, I have no doubt that we will recover. But there will likely be no single event that crowns the recovery like the Lombardi Trophy does for New Orleans.
And besides, we’re investors. It is our desire to be properly positioned for a growth in stock valuations, all the while avoiding the pitfalls of overvalued stocks and worsening economic conditions.
Clearly, investors have been pondering the potential of weaker economy as some stimulus policies end, Europe faces debt problems and China moves to slow its economy. Bloomberg reports that investors pulled $9 billion out of global equity funds during the last week of January. And investors have bet heavily on an extended sell-off as evidenced by huge volumes of put option activity.
At the same time, 73% of S&P 500 companies have beaten 4th quarter earnings expectations. That’s the best performance since 1993. Strong earnings, coupled with the recent 7.3% decline, have left the P/E for the S&P 500 at 18, down from 24. The forward P/E, based on future earnings expectations, is below 13.
Yesterday’s decline reversed the rally we enjoyed to start the week. The S&P 500 is now below support at 1071. Is that a death knell? No. But it’s not good, either.
Mounting debt problems in Greece, Spain and Portugal are spooking investors. Oil prices are lower as investors worry the global recovery isn’t gaining momentum.
The Labor Department reported that companies cut 20,000 in January. New unemployment claims also rose. But somehow, the unemployment rate fell to 9.7%. I’m not going to call that a "damn lie", but statistics don’t always tell the whole truth.
***We’ve noted frequently in Daily Profit that we can expect to see some pretty wild swings in the data as the housing market and unemployment rate bottom. One month’s positive data gets revised lower, and then the next month’s negative data gets revised higher.
There’s no doubt the economy is improving, but is it happening fast enough? And perhaps more importantly, where will the base-line be?
An unemployment rate around 4%-5% used to be the norm. We’re certainly looking at a higher base for unemployment over the next few years. GDP growth will be lower. Investors will probably support lower P/E ratios and levels for the major indices.
That’s not a disaster, but it does mean you’ll need to be focused on value and not afraid to take profits when you have them
NYSE:F |
It’s quite a conundrum. America spent around $475 billion for foreign oil in 2008 (2009 numbers are not complete yet, although the total is certainly projected to be lower). It’s clear that electric powered battery technology for cars would allow us to keep more U.S. dollars at home, improve the trade deficit and provide manufacturing and other jobs, too.
We have enough sunlight, wind, natural gas, and coal to generate the power it would take to transition to domestically supported power generation. The long-term benefits are obvious. Wind and solar installations have an upfront cost, but pay for themselves over time. Natural gas and even coal are domestic resources that can and should be leveraged to allow us to be more energy independent.
But getting to the point of energy independence is a difficult path.
*****It’s easy to look at that $475 billion figure and say if we invested that into the power generation economy, we’d have efficient battery technology for electric cars and plenty of new manufacturing jobs.
However, that simple conclusion totally ignores the economics of wind and solar generation. First Solar (Nasdaq: FSLR) is one of the most successful American solar companies. Based in Tempe, Arizona the company sold nearly $2 billion of its thin-cell solar panel equipment over the last year. Demand is so strong, that First Solar is expanding its manufacturing capacity to 1,802 megawatts by 2012 (a megawatt can power about 800 homes).
Sounds great. Should provide a lot of jobs, at least in Malaysia, where most of First Solar’s plants are. There should be no doubt that one of the keys to any solar company’s success is cost. Solar equipment has to be produced at a cost that allows it to be competitive with current energy sources.
In China, the minimum wage works out to $141 dollars a month. In Malaysia, there is no minimum wage. Here in the U.S., minimum wage will pay you $1,320 a week. I think we can all agree that even that comparatively high wage isn’t particularly attractive to American workers. And it should also be clear that the success of solar energy depends on cheap manufacturing costs.
FSLR |
Wow. Two strong rallies to kick off February. It’s great to see some buying interest after January’s sell-off. But I would caution that 2010 will be more volatile than the final 9 months of 2009, when stocks were on a one-way trip higher.
You could argue that stocks are overvalued based on index P/E levels. The trailing P/E for the S&P 500 is 21. At the same time, companies are once again beating earnings estimates. Business is better than analysts expected.
The forward P/E for the S&P 500 is 14. That’s based on analysts’ expectations of 2010 earnings. If analysts are once again low-balling the numbers, then the S&P 500 may actually be cheap. But if unemployment continues to weaken, or if banks don’t loosen up lending, or if the housing market doesn’t improve, then perhaps stocks are expensive.
Nasdaq: CS |
It sure was nice to see stocks make a nice move higher yesterday. Especially after I came out yesterday and said Dow 10,000 and S&P 500 1,071 were support points.
It’s also interesting that this advance came on the first day of February. Recall that the positive GDP surprise came on Friday, the last trading day of January. Investors were not interested in buying stocks in January. But now that it’s February, the buyers are back.
It might seem strange, but mutual funds and other institutional investors don’t base their buy and sell decisions solely on making money. They have to play the percentages. And that sometimes means taking profits when the economic data supports better earnings and higher stock prices.
Is that what took stocks lower in January? Maybe, although it’s a little too soon to say the upside trend has been re-established. But sometimes, when you hear hoof-beats, it’s best to think horses not zebras.
NYSE: UPS |
There’s no doubt that there are investors who believe that current valuations for stocks and an improving economy offer money-making opportunity. It’s also true that there are plenty of investors who feel the exact opposite and are selling stock. And for the last three weeks, the sellers have been winning.
The fact that stocks couldn’t hold a 1% gain after a stellar 4Q GDP number
on Friday is a little worrisome. That was a lay-up for the bulls, and still, stocks finished the day with losses.
Volume has been stronger on the down days lately, and the S&P 500 is now well below its 50-day moving average, a common measure of support. I expect we’ll see stocks bounce before Dow 10,000 is breached to the downside.
But at the same time, there’s nothing magical about Dow 10K. Just because it holds on the first test or two doesn’t make it an important line in the sand. The Dow is just 30 stocks. Far more important is the S&P 500. And interestingly, there is an important support point at 1064 on the S&P 500. And 1071 actually lines up with Dow 10,000 nicely.
NYSE:UPS |
I managed to catch part of Treasury Secretary Geithner’s testimony yesterday. I actually thought he represented himself pretty well. I can appreciate his stance that AIG really was to big to fail. But that notion that the New York Fed had to make sure all of AIG’s credit default swaps were paid still doesn’t make sense.
Geithner’s explanation was that if AIG did pay off debts like the $25 billion that went to Goldman, AIG would get downgraded and it would become more expensive to unwind the company. Maybe I’m wrong, and I haven’t checked to be sure, but I’m pretty sure AIG’s debt was downgraded. And do you even need a rating for a company that’s 80% owned by the government?
Bottom line: I still think former Treasury Secretary Paulson made sure Goldman Sachs got paid and it really stinks that tax payers get taken advantage of like that. Unfortunately, it’s unlikely anything will come of it.
*****The Fed reiterated its pledge to keep interest rates low for an extended period. No surprise there, but investors liked the news. Stocks finished the day with a nice rally.
Still, it’s not like the Fed is keeping the liquidity spigots wide open. The Fed plans to end its mortgage-backed securities purchases. With so many stimulative monetary policies in place, low interest rates will probably be the last thing to get changed.
*****China is also d oing its part to soothe investors. According to Bloomberg, China’s banking regulator has told lenders to "....step up scrutiny of property loans while pledging to satisfy "reasonable" financing needs..."
I plan to be unavailable for a few hours, starting around 10 a.m. this morning. I want to hear the members of the New York Fed try and defend their actions regarding the AIG (NYSE: AIG) bailouts in front of Congress.
The New York Tines published some of the prepared testimony of the principal players. I try to keep a level head, but I’m reaching for my pitchfork and torch right now.
*****Recall that the New York Fed orchestrated what ultimately became an $85 billion bailout. A good portion of that cash was paid directly to other companies with which AIG had entered into the now famous credit default swaps. These were essentially insurance contracts on mortgage backed securities held by banks and underwritten by AIG.
A full $25 billion in AIG bailout money went to pay off Goldman Sachs (NYSE: GS). Here’s a section from the New York Times (Mr. Baxter s the general counsel for the NY Fed):
Mr. Baxter explained that the New York Fed felt compelled to pay out A.I.G.’s counterparties in full to unwind tens of billions of dollars in derivative contracts because "there was little time, and substantial execution risk and attendant harm of not getting the deal done by the deadline of Nov. 10." That was the date when A.I.G. was scheduled to report its earnings and could face downgrades from credit ratings agencies. A downgrade would have led to more collateral calls and even greater liquidity problems for A.I.G., Mr. Baxter said.
AIG |
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