Tuesday Preview: 2010's Tin Tiger Kickoff

by: Philip Davis

Click to enlargeThe year of the Tiger begins!

Chinese New Year is serious business with tens of millions of migrant workers in China, as well as many from overseas, traveling home to have reunion dinners with their families. In addition to fireworks, celebrants like to wear new clothes from head to toe (preferably red as it drives away evil spirits) and they exchange red envelopes and red packets called “Ang Pow.” These Ang Pows are usually passed out during the Chinese New Year’s celebrations, almost always containing money (from a couple of dollars to several hundred). Per custom, the amount of money in the red packets should be of even numbers. The number 8 is considered lucky (for it is a homophone for “wealth”). In addition to the red envelopes, which are usually given from elders to the younger generation, small gifts (usually of food or sweets) are also exchanged between friends or relatives. Gifts are usually brought when visiting friends or relatives at their homes. Common gifts include fruits (typically oranges, and never pears), cakes, biscuits, chocolates, candies and some other small gifts.

The Year of the Tiger is considered lucky and 2010 is the year of the Metal Tiger, which explains all the commodity hoarding, as the tiger is also considered auspicious for risk-taking and bravery. Traditionally, all debts are paid by New Year’s and there is much emphasis on looking forward and letting go of the past. The Chinese markets will be closed all week but we can expect a lot of forward-looking behavior when they come back, so I’m liking FXI March $40 calls for $1 as long as our markets hold positive as we could get a nice pop next week as China plays catch-up.

Barclays (NYSE:BCS) will be popping the financials this morning with some great LOOKING earnings, but much of it came on the sale of its Global Investors unit to BlackRock for a $9.9 billion gain, so nothing at all to get excited about. Impairments were up 49% but slowed in the second half as guidance indicates the worst is over. Also goosing the market this morning is Simon Property (NYSE:SPG) offering $10 billion for GGWPQ, General Growth (GGWPQ.PK), the bankrupt version of what was GGP. This works out to about $9 for shareholders who hung on -- we had taken a flier on them in the spring under $1 but got the heck out at $5 as THAT seemed high, but I guess not. I'm now very glad our IYR shorts got stopped out last week because IYR should be flying today.

We were making more cautious choices this weekend with a review of dividend paying stocks we like as well as looking at several strategies to knock $100,000 off of home mortgage payments. The two go hand in hand as the idea is to take the money you save on your home mortgage and invest it in strong dividend-paying stocks to start insuring your own retirement nest egg, because goodness knows we sure can’t count on the one the government promised us! There was a lot of strategic discussion as well in the comments section of both posts, so make sure you read these two articles as they are going to be very relevant if we continue to have a choppy, consolidating kind of year.

Back on Feb 8th, I resolved to be done with Greece as I decided (after much research) that it was a non-factor and that very correctly guided us to shift bullish last week while our fellow investors were selling. While I’m not willing to say I’m not going to worry about Debt, I do agree with a new report from the Center for Economic and Policy Research (CEPR) that concludes that it’s the deficit hawks that are the real problem at this point as they threaten to derail efforts to turn around the economy and spur employment.

"There would be no short-term or long-term benefit from reducing the current deficit," said Dean Baker, co-director of CEPR and the author of the report. "If the budget deficit were smaller we would see higher levels of unemployment." The report, "The Budget Deficit Scare Story and the Great Recession," shows that the most-cited claims of leading deficit hawks are driven by unfounded fears and misrepresentations of basic economic relationships. One such example cited in the report is that the worsening of both the short- and long-term deficit picture was driven not by a spendthrift Congress, but almost entirely by the economic crisis brought on by the collapse of the housing bubble. The small portion of the budget deterioration driven by legislative actions was primarily the result of increased defense spending associated with the wars in Afghanistan and Iraq.

As well, the study demonstrates that the true long-term deficit problem is skyrocketing health care costs and any meaningful attempt to deal with deficits would start with reining in health care. "The nation does not really have a long-term deficit problem," Baker writes. "What we have is a long-term health care problem." The study also refutes the notion that the budget deficit is the source of concern over the threat of foreign government ownership of U.S. debt. It’s not wrong to be concerned about the deficit - it’s the timing that stinks. I was a deficit hawk from the days of Al Gore’s broken lock box all the way through the insane idea to eliminate the "death tax," but once the economy breaks (and we can finger point some other time) you HAVE to fix it!

If budget hawks were truly worried over the prospect of foreign ownership of debt, they would focus on the trade deficit, which is driven by ridiculous commodity prices, especially oil, which, at $75 per barrel, makes up 75% of our trade imbalance ($300 billion at 11Mbd imported). According to the report: "In a time when cogent, effective policies are needed to address the suffering stemming from the economic downturn, the tactics of the deficit hawks distract the public and policy makers from the policies necessary to bring the economy back to full employment."

So that was some fun weekend reading, along with Obama’s 451-page Economic Report of the President, which I found both encouraging and disturbing (my comments on the first 85 pages are under Saturday’s post so I won’t get into it here). Asia was, of course, pretty much closed this morning but the Nikkei was up a little and got back over 10,000 while the BSE had a nice up 1.2% day.

Click to enlarge

Europe is up about half a point at 9am but led, unfortunately, by surging commodies as that kind of trading was the key to BCS’s success. Also boosting the sector was another Gang of 12 member, JP Morgan (NYSE:JPM), consolidating its stranglehold on our neccessities by purchasing RBS’s (NYSE:RBS) Sempra Commodities unit for $1.7 billion in order to expand its energy and metals trading unit.

News of a shameless commodity pimp like JPM making a move like this shot copper prices up .14 off of Friday’s lows to 3.18 (up 4.4%) with gold flying $42 to $1,120 (3.8%). Oil jumped a whopping $3.50 (5%) all the way to $76 at the NYMEX open, so kudos to JPM - may your floating tankers full of oil never have to find a port!

Still we are now on the bull side of the market so we should be thrilled that the Gang of 12 is ready, willing and able to put the screws to the bottom 90% and squeeze another quick 5% out of them in the form of forced commodity spending. They may be able to turn down that new sweater or put off getting a sofa but they damn well have to eat and use electricity so we’ll pump up some consumer spending one way or another. Pay up suckers... we already have Barrick Gold (NYSE:ABX) and we’ll add Freeport-McMoRan Copper & Gold (NYSE:FCX) if they can break over resistance at $77.50!

$1,700,000,000 is, of course, absolute peanuts to JPM as they, along with other US lenders, are sitting on $1,290,000,000,000 in cash, a record 98 cents for every dollar of existing business loans. The ratio of cash to corporate loans has more than quadrupled from 21 cents in June 2008, according to Jan 13th Federal Reserve data compiled by Bloomberg. Corporate loans shrank 14% to $1.32 trillion during that period as bankers tightened standards to curb record defaults and meet demands by regulators for more liquidity.

Cash piled up even as Obama beseeched bankers to lend more and drive down the 9.7% jobless rate. Among the three biggest U.S. banks, the one with the highest ratio of cash to corporate loans is New York-based Citigroup Inc. (NYSE:C) — whose biggest investor is the U.S. government with a 27% stake. Citigroup’s $193 billion in cash and deposits with other banks as of Dec. 31 stood at $1.15 for each dollar of existing corporate loans, which totaled $167 billion, according to data compiled by Bloomberg. That’s double the ratio in June 2008, when cash totaled $113 billion against $222 billion of corporate loans.

The unused cash is a drag on profit, reflecting a shift toward safety by lenders and less demand from borrowers because of the slow economy, said Frederick Cannon, associate director of research at New York-based KBW, which specializes in financial firms. When the economy and finance get back to normal, KBW predicts bank returns on equity will be 10% to 14% instead of the 18% to 20% that prevailed in the two decades before the bust. “Banks have to invest some of their excess liquidity and they have to figure out ways to grow loans,” Cannon said. Citigroup Treasurer Eric Aboaf told bond investors during an Oct. 18th conference that stockpiling cash and reducing loans was creating “a deliberately liquid and flexible balance sheet here at the company.” Spokesman Stephen Cohen declined to elaborate.

So a commodity rally is my least favorite kind of rally and we will quickly take bullish profits if we can’t retake our levels. It’s options expiration week, so things will be crazy, but we have had some encouraging economic data including this morning’s Empire State Manufacturing Survey, which jumped to 24.9 vs. 15.9 in January with employment up to 5.6 vs. 4 but, thanks to commodities, prices were up to 4.2 vs. 2.7 and, strangely, new orders dove to 8.8 from 20 so take it with a grain of salt overall.

It’s going to be a wild week but we will likely be shorting oil at $76 and gold at $1,120 unless we get a serious break-out. A commodity rally is the last thing we need as our "recover" such as it is, is still way too fragile to withstand having our pockets picked to the tune of 5% increases on neccessities.