Leaving for the coast soon for a little rest and relaxation. Plan on sleeping for the next 36 hours. Won't have internet access which will be nice.
It has gotten to the point that it seems so worthless to talk about economic news. It just doesn't matter. The news / earnings can be bad and the market is digesting it. It is becoming a game of just trying to figure out the signs, the signals, for when the rally is over with. When the last liquidity pump is complete. As I have mentioned before, I believe the probabilities are really high that we are in the last sixty days but very unconfident if we have another 10% or more to go or not.
The cash for clunkers thing is getting alot of attention. I actually think this is one of the best ideas the government has come up with. Capitalism needs creation and destruction. You have to have both. You have to have destruction and the government has tried stopping destruction for years. You need financial destruction also which the government still isn't allowing but at least this is a start. The government is scrapping that what is old to make way for that what is new. About a year ago, I was asked to make suggestions on how to fix the problem. I had a whole list (this went to Paulson, a very well connected person who was on a panel asked me to create this) but one of the most important suggestions was to have the government buy defaulted homes from the banks. Bulldoze them. Create a law that those plots of land would be sold back to the public over 5 years starting in year 10. This would have accomplished several major things. Put a huge dent into the housing inventory which would have stabilized the biggest collateral in the banking system. Would have helped the banks shrink their books. Would have ended up bailing out consumers along with the banks though the consumers would not be walking away with a check. They would have still would have lost their house. As a result it would have also helped deleveraged the system. Finally it would have almost guaranteed to cost the government very little bc they are actually getting back plots of land that should appreciate over 10 years. 500 billion investment by the treasury (really small compared to the numbers that have already been done).
Do the math:
250k per house (average loan the bank has would probable be less).
You could buy 2,000,000 houses. Total housing inventory for sale. 3.82 million or 9.8 months supply. You need to get down to 6 months for housing prices to stabilize. Presto. You just accomplished it.
Yes your using the government's balance sheet but it is alot less than the money your spending and the gov gets real estate that it could sell back in 10 years.
This wasn't political feasible than and probably not now but it would sure solve alot of problems. It would allow the destruction size of the equation.
Back to the cash for clunkers thing. It may be suspended but if it isn't, buyer beware. Saw this article in the Guardian. England has been doing something very similar. As the Guardian points out, the benefit to consumer may be negligible.
Consumers were today warned that buying a new car under the government's car scrappage scheme could be a false economy because some manufacturers have raised list prices by up to 14% since last year.
The scrappage scheme offers buyers £2,000 off a new vehicle if they trade in one that is at least 10 years old, but they might get a better deal buying a car that is already a year old, even though those vehicles do not qualify for the scheme according to the magazine
Surprise surprise. I am sure it is going on in the U.S. also.
Friday, July 31, 2009
Thursday, July 30, 2009
Six Observations
I am about to hit the road again heading back to San Antonio but a few thoughts before I do.
First - the General Electric upgrade is ridiculous. Upgraded on the fact that the political pressure is decreasing to break apart GE Industrial and GE Capital. Maybe it increases the option value of the stock, I don't know, but it doesn't impact the future income streams of GE industrial or improve the credit quality of GE Capital. A hallow upgrade that is just absurd.
Second - XLF (the financials etf) is right at $13. This is back to the early May price. Financials did not set a higher price in June and have so far not set a higher price in July even as the S&P 500 has. To the extent that financials break $13 in a meaningful way, it would signal more bullishness ahead. Check out this graph. http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=xlf&sid=0&o_symb=xlf&freq=1&time=7 I am to much in a hurry and to lazy currently to place it in the blog. It is a six month chart of XLF. Notice volume peaked in early July around 11 and has been decreasing ever since even as the the etf has rallied. I don't consider that particularly bullish. Keep an eye on the 13 level.
Third - Today seems to be the normal end of the month ramp. Decently heavy futures volume so far with incredible breadth but very average to low cash market volume.
Fourth - So far commodities have not completely reveresed yesterday's drop. To the extent this holds, it will also be telling.
Fifth - Once we broke 945 in the S&P 500 it was almost guaranteed that we would challenge 1,000. Once again it is interesting we are coming up against this resistance point even as financials are coming up against its resistance point which is not a new high but simply back to the early May highs. There is probably a test, a failure, and then another test coming. That second test is what is important.
Sixth - Lastly, the sentiment is finally starting to change it seems to being uber bullish. CNBC this morning had Steve Liesman and others were barely able to talk out of prospects of the potential for a very strong economic recovery versus a tepid economic recovery. They were falling over themselves. The investor intelligence poll came out and bulls are 42.2% versus 36.7% the prior week. Bears are down to 31.1%. This is shifting rapidly though not at extremes just yet.
First - the General Electric upgrade is ridiculous. Upgraded on the fact that the political pressure is decreasing to break apart GE Industrial and GE Capital. Maybe it increases the option value of the stock, I don't know, but it doesn't impact the future income streams of GE industrial or improve the credit quality of GE Capital. A hallow upgrade that is just absurd.
Second - XLF (the financials etf) is right at $13. This is back to the early May price. Financials did not set a higher price in June and have so far not set a higher price in July even as the S&P 500 has. To the extent that financials break $13 in a meaningful way, it would signal more bullishness ahead. Check out this graph. http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=xlf&sid=0&o_symb=xlf&freq=1&time=7 I am to much in a hurry and to lazy currently to place it in the blog. It is a six month chart of XLF. Notice volume peaked in early July around 11 and has been decreasing ever since even as the the etf has rallied. I don't consider that particularly bullish. Keep an eye on the 13 level.
Third - Today seems to be the normal end of the month ramp. Decently heavy futures volume so far with incredible breadth but very average to low cash market volume.
Fourth - So far commodities have not completely reveresed yesterday's drop. To the extent this holds, it will also be telling.
Fifth - Once we broke 945 in the S&P 500 it was almost guaranteed that we would challenge 1,000. Once again it is interesting we are coming up against this resistance point even as financials are coming up against its resistance point which is not a new high but simply back to the early May highs. There is probably a test, a failure, and then another test coming. That second test is what is important.
Sixth - Lastly, the sentiment is finally starting to change it seems to being uber bullish. CNBC this morning had Steve Liesman and others were barely able to talk out of prospects of the potential for a very strong economic recovery versus a tepid economic recovery. They were falling over themselves. The investor intelligence poll came out and bulls are 42.2% versus 36.7% the prior week. Bears are down to 31.1%. This is shifting rapidly though not at extremes just yet.
Wednesday, July 29, 2009
Chinks In The Armor
Been very busy the last couple of days. Was in San Antonio all day today and may be in San Antonio tomorrow. Working on taking a company into bankruptcy and then acquiring it as it comes out. Learning alot and get the normal adrenaline rush with such deals.
The last couple of days was very interesting. Some chinks in market armor may finally be showing. China has been the leading indicator. It broke down almost six months before the U.S. markets broke down back in 2007 and it set a November bottom never making the March bottom the U.S. made. Last night China was down 7.5% at one point before finishing down 5% (anyone remember the February 2007 drop). Then you have the dollar. Could not break resistance and has been a little stronger the last couple of days. To the extent this continues, this should mean weakness for the equity markets. The 5 year treasury auction was horrific. So much supply hitting the market that it is starting to flatten the yield curve. This supply will just keep coming. Higher yields means more problems. Commodities - oil was obliterated today. If copper and oil continue on this path it will be telling you something also. Early indications of June foreclosures is that they surged massively. I have been warning about this headfake in housing. I believe strongly there is another big wave down for housing prices coming.
Not saying the market is done going up. I said in my post a few days ago, let the market declare that all good news is priced in or if you want to go short average in. I think we are in the last sixty days of the market topping (i could be very wrong and the market will continue to rally) as the government stimulus hitting the markets subside, housing problems start to reemerge, and global activity slows down. The last couple of days we may have just started to see the chinks. The market could very easily continue higher over the next month or two but be watching Asia, the dollar, and commodities.
The last couple of days was very interesting. Some chinks in market armor may finally be showing. China has been the leading indicator. It broke down almost six months before the U.S. markets broke down back in 2007 and it set a November bottom never making the March bottom the U.S. made. Last night China was down 7.5% at one point before finishing down 5% (anyone remember the February 2007 drop). Then you have the dollar. Could not break resistance and has been a little stronger the last couple of days. To the extent this continues, this should mean weakness for the equity markets. The 5 year treasury auction was horrific. So much supply hitting the market that it is starting to flatten the yield curve. This supply will just keep coming. Higher yields means more problems. Commodities - oil was obliterated today. If copper and oil continue on this path it will be telling you something also. Early indications of June foreclosures is that they surged massively. I have been warning about this headfake in housing. I believe strongly there is another big wave down for housing prices coming.
Not saying the market is done going up. I said in my post a few days ago, let the market declare that all good news is priced in or if you want to go short average in. I think we are in the last sixty days of the market topping (i could be very wrong and the market will continue to rally) as the government stimulus hitting the markets subside, housing problems start to reemerge, and global activity slows down. The last couple of days we may have just started to see the chinks. The market could very easily continue higher over the next month or two but be watching Asia, the dollar, and commodities.
Tuesday, July 28, 2009
Monday, July 27, 2009
Up and Up and More Up
Another day, another push higher. The indexes really haven't been telling the story the last several days. Even on slightly down days like Friday the breadth was very positive. Tomorrow will be very interesting with the home price index which I would not be surprised to see as positive on a non seasonality adjusted basis. It feels like the market is consolidating getting ready to push to 1000 on the S&P. The financials were up all day today which may be in anticipation of the housing number. It may be priced in this point. Day after day it would seem like the market is ready to roll over and day after day the market powers higher. So to guess it is priced in seems like a fools errand. Let the market show it is priced in. Until then better to just have your head in the sand.
The new home sales numbers came out today which was supposedly a great number. It increased from 33k sold in May to 36k in June. 3k. That many properties either got a notice of default or were foreclosed upon in CA today alone. This stuff is just stupid on how it gets twisted.
Anyway, it will be very interesting to see how homebuilding stocks and financials perform after the housing price number comes out. Be watching it.
The new home sales numbers came out today which was supposedly a great number. It increased from 33k sold in May to 36k in June. 3k. That many properties either got a notice of default or were foreclosed upon in CA today alone. This stuff is just stupid on how it gets twisted.
Anyway, it will be very interesting to see how homebuilding stocks and financials perform after the housing price number comes out. Be watching it.
Thursday, July 23, 2009
You Can Run But You Can't Hide
More thinking - I am a glutton for punishment.
Amazon reported after the bell. Down over 6% now. No worries, just need to over pay for another company.
Anyway - lets look at some more math.
In the press release they lead with free cash flow (you know they are in trouble if a "growth" company leads their press release with free cash flow) proudly proclaiming they produced 1.54 billion in free cash flow. That would mean 22X free cash flow. Expensive in anyone's book but especially expensive for what comes next.
Net sales grew 14% yoy but down 4.9% from Q1!!! This for a company that is trading 60X trailing earnings and 45X supposed "forward" earnings.
Oh it gets better. Operating earnings down 27% yoy. There is some noise in the operating earnings but it is a wash. $51 million one time loss but also a $53 million one time gain. Also some currency issues. You also had the earnings down 34% from Q1.
Then you have other "highlights" - Reduction of price for the Kindle, Customers saved $900 million on free shipping offers, and something about some new MP3 service in France (boy that sounds promising).
Then you get to guidance. Net sales between $4.75 billion and $5.25 billion. Talk about a wide range. Then the question has to be asked, does that include Zappos? Operating income between $120 million and $210 million. So will we see headlines, "Amazon raises guidance to $210 million?" Then three months later when they report earnings of $150 million the new headline reads "Amazon beats guidance of $110 million."
Other stuff is going on also. Microsoft, ugly earnings. Down 8%. American Express down 4% and now as I wrap up this post, Amazon down 9.5%.
I am willing to guess, though who knows, that the winning streak for the NASDAQ will finish at 11 days. Tomorrow we actually may see red.
I am about to hit the road. Houston tonight and then wedding dinner rehearsal tomorrow and wedding on Saturday (not my own just to be clear). I may post I may not. If not, have a great weekend.
Amazon reported after the bell. Down over 6% now. No worries, just need to over pay for another company.
Anyway - lets look at some more math.
In the press release they lead with free cash flow (you know they are in trouble if a "growth" company leads their press release with free cash flow) proudly proclaiming they produced 1.54 billion in free cash flow. That would mean 22X free cash flow. Expensive in anyone's book but especially expensive for what comes next.
Net sales grew 14% yoy but down 4.9% from Q1!!! This for a company that is trading 60X trailing earnings and 45X supposed "forward" earnings.
Oh it gets better. Operating earnings down 27% yoy. There is some noise in the operating earnings but it is a wash. $51 million one time loss but also a $53 million one time gain. Also some currency issues. You also had the earnings down 34% from Q1.
Then you have other "highlights" - Reduction of price for the Kindle, Customers saved $900 million on free shipping offers, and something about some new MP3 service in France (boy that sounds promising).
Then you get to guidance. Net sales between $4.75 billion and $5.25 billion. Talk about a wide range. Then the question has to be asked, does that include Zappos? Operating income between $120 million and $210 million. So will we see headlines, "Amazon raises guidance to $210 million?" Then three months later when they report earnings of $150 million the new headline reads "Amazon beats guidance of $110 million."
Other stuff is going on also. Microsoft, ugly earnings. Down 8%. American Express down 4% and now as I wrap up this post, Amazon down 9.5%.
I am willing to guess, though who knows, that the winning streak for the NASDAQ will finish at 11 days. Tomorrow we actually may see red.
I am about to hit the road. Houston tonight and then wedding dinner rehearsal tomorrow and wedding on Saturday (not my own just to be clear). I may post I may not. If not, have a great weekend.
The Fruitless Excercise of Thinking
I am not exactly sure what the point of blogging anymore is. Logical thinking need not apply right now and to the extent that anything written is actually logical, the current value is next to zero.
Let's take Amazon, shall we. They announce last night they are buying Zappos, an online retailer of shoes. Usually, when a company acquires another company, the acquiring company stocks price goes down and the acquired company goes up. Alot of things that can go wrong in an acquisition not to mention the potential for acquirer to be overpaying. Not so with Amazon. Up 5.5% today. Wow must be a great deal right? Umm, nope. My understanding is it values the company at over 30x earnings (remember we are talking about an online shoe retailer, not the cure for cancer). So really driving shareholder value there. Oh but not only that. It is almost 100% stock deal with total value of $847 million (probably a 500 million impairment charge coming in 3 years). Let's take the math a little further shall we? Amazon at the beginning of today had a market cap of approximately $38 billion. After the announcement of this superb deal the market cap is now $40 billion. WOW!! $2 billion in market cap added. Wait a minute. The entire deal was only worth $850 million. So is the market saying Zappos is such an incredible deal that it automatically created $2 billion in value for Amazon? Basically just the fact that the company is now part of Amazon it is now worth 2.850 billion?
Dang it!! See here I go again trying to think logically. No no no. Worthless exercises. The truth is in today's market the very act of making a press release means you will get buyers.
Hypothetical Trader Exchange:
Trader - Ewww Company x just issued press release. Put an order to buy 100,000 shares at market. Buy buy buy.
Passing cleaning lady (confusion clouds face) - The press release from the company says "Blood sucking Amoeba enters headquarters and kills every salesman at company x." How is that good?
Trader (with look of disgust at someone obviously below him) - And that is why you are cleaning toilets and I am making a fortune on company x. Guaranteed millions and if something goes wrong Bernanke got my back.
If your laughing you would be mistaken. It isn't that far off right now.
Email from a friend today:
Press release: We destroyed $1B of shareholder value today.
Market response: Up 10%
Press release: We destroyed $10B of shareholder value today.
Market response: Up 20%
Let's take Amazon, shall we. They announce last night they are buying Zappos, an online retailer of shoes. Usually, when a company acquires another company, the acquiring company stocks price goes down and the acquired company goes up. Alot of things that can go wrong in an acquisition not to mention the potential for acquirer to be overpaying. Not so with Amazon. Up 5.5% today. Wow must be a great deal right? Umm, nope. My understanding is it values the company at over 30x earnings (remember we are talking about an online shoe retailer, not the cure for cancer). So really driving shareholder value there. Oh but not only that. It is almost 100% stock deal with total value of $847 million (probably a 500 million impairment charge coming in 3 years). Let's take the math a little further shall we? Amazon at the beginning of today had a market cap of approximately $38 billion. After the announcement of this superb deal the market cap is now $40 billion. WOW!! $2 billion in market cap added. Wait a minute. The entire deal was only worth $850 million. So is the market saying Zappos is such an incredible deal that it automatically created $2 billion in value for Amazon? Basically just the fact that the company is now part of Amazon it is now worth 2.850 billion?
Dang it!! See here I go again trying to think logically. No no no. Worthless exercises. The truth is in today's market the very act of making a press release means you will get buyers.
Hypothetical Trader Exchange:
Trader - Ewww Company x just issued press release. Put an order to buy 100,000 shares at market. Buy buy buy.
Passing cleaning lady (confusion clouds face) - The press release from the company says "Blood sucking Amoeba enters headquarters and kills every salesman at company x." How is that good?
Trader (with look of disgust at someone obviously below him) - And that is why you are cleaning toilets and I am making a fortune on company x. Guaranteed millions and if something goes wrong Bernanke got my back.
If your laughing you would be mistaken. It isn't that far off right now.
Email from a friend today:
Press release: We destroyed $1B of shareholder value today.
Market response: Up 10%
Press release: We destroyed $10B of shareholder value today.
Market response: Up 20%
Wednesday, July 22, 2009
2nd Quarter Letter
My 2nd quarter letter has been sent out. If you are reader of this blog and would like a copy, post your email address in the comments section and I will send it your way (sorry for any previous requests where I sent it but failed to add you to the distribution list).
As a side note when I printed from Microsoft Word to Adobe for some reason the graphs became all blurry. My apologies. If anyone would like the charts used please let me know.
As a side note when I printed from Microsoft Word to Adobe for some reason the graphs became all blurry. My apologies. If anyone would like the charts used please let me know.
Tuesday, July 21, 2009
More Truth Disseminated
Yesterday it was one eyed Moody's calling the banks out for under reserving for future losses. Today Barclays actually takes a stab at the truth pointing out that GE Capital has inadequate reserves. Of course if this was believed widely on the street, General Electric would not be alive. This is the primary reason I actually believe it is a zero. Of course they have more flexibility to play accounting games than most because of their unqiue setup. They could, like others are trying to do, grow their way out of a negative net worth. Time is their friend.
From Bloomberg
General Electric Capital Corp. bonds were cut to “underweight” because the finance company’s $6.6 billion of reserves to protect against losses on its loans are “inadequate” compared with large banks such as JPMorgan Chase & Co. and Citigroup Inc, Barclays Capital said.
and
GE Capital’s loan-loss reserves as a percentage of finance receivables is 1.8 percent, among the worst in the financial-services industry, Glionna wrote.
From Bloomberg
General Electric Capital Corp. bonds were cut to “underweight” because the finance company’s $6.6 billion of reserves to protect against losses on its loans are “inadequate” compared with large banks such as JPMorgan Chase & Co. and Citigroup Inc, Barclays Capital said.
and
GE Capital’s loan-loss reserves as a percentage of finance receivables is 1.8 percent, among the worst in the financial-services industry, Glionna wrote.
Caterpillar...Typical Story
You have to wonder what spot in NYC the head dogs of all the firms meet to decide what will be the company / news item that everyone is going to pump to send the stock market soaring the next day.
What ever location was selected last night, the stock today was Caterpillar.
Typical story. Revenue miss, earnings beat.
Revenue expected by analysts were $8.7 billion with earnings of 19 cents. Caterpillar manages only $7.98 billion in revenue (that is a hefty 10% miss) but beat earnings expectations coming in at 60 cents a share.
For some comparison purposes revenue is down 41% from last year this quarter. Revenue came in at 13.62 billion last year for Q2 and earnings is down from $1.1 billion or $1.74 a share to $371 million or $.60 a share.
Okay, fair enough, maybe the stock is cheap?? Umm at $40 a share let's just annualize the $.60. That isn't being fair I realize but if you were to do that you would be paying 16.7X earnings. This for a very cyclical name.
In actuality for 2009 Caterpillar said it now expects 2009 profit of $1.15 to $2.25 a share excluding severance costs.
This is being touted as by Wall St. as raised guidance. It seems they just massively raised the range. Previously they had targeted $1.25. Now it is $1.15 (that is lower that $1.25 if my first grade math is still correct) to $2.25.
Hopefully we can all be fooled together.
What ever location was selected last night, the stock today was Caterpillar.
Typical story. Revenue miss, earnings beat.
Revenue expected by analysts were $8.7 billion with earnings of 19 cents. Caterpillar manages only $7.98 billion in revenue (that is a hefty 10% miss) but beat earnings expectations coming in at 60 cents a share.
For some comparison purposes revenue is down 41% from last year this quarter. Revenue came in at 13.62 billion last year for Q2 and earnings is down from $1.1 billion or $1.74 a share to $371 million or $.60 a share.
Okay, fair enough, maybe the stock is cheap?? Umm at $40 a share let's just annualize the $.60. That isn't being fair I realize but if you were to do that you would be paying 16.7X earnings. This for a very cyclical name.
In actuality for 2009 Caterpillar said it now expects 2009 profit of $1.15 to $2.25 a share excluding severance costs.
This is being touted as by Wall St. as raised guidance. It seems they just massively raised the range. Previously they had targeted $1.25. Now it is $1.15 (that is lower that $1.25 if my first grade math is still correct) to $2.25.
Hopefully we can all be fooled together.
Subscribe to:
Posts (Atom)
