Pre-Market we’re hearing from BLK, CAT (are we building stuff?), EXP, HTZ, HUM, LO, TUES and TZOO and later we will hear from BSX, CHH, OLN, RSH, RCII, TXN (major) and my "friendbuddypal" Cramer’s TSCM (if they are not delayed). Revenues at The Street have crept back up this year in a recovery that pretty much mirrors the market. The company does pay a nice 2.6% dividend, which works out to a nice $200,000 bonus on Jimmy’s 2.1M shares (6.7% of the company) so you know that bonus will be a priority for the company. Cramer was BuyBuyBuying his own stock at $2.41 in January but sadly they have no options to hedge… They might make a nice pick-up after earnings if they disappoint and head back to $3 or less.
I’m full of useful information on hundreds of stocks right now because I’ve been researching our new Buy List but I’m not pleased with what I’ve been seeing so far and this week’s tidal wave of earnings, with 1,000 companies reporting means we’re in no hurry to dip our toes in the water. I told Members this morning I should probably be working on a Sell List, as it’s much easier to find companies I want to short than ones I want to buy. Even in the Weekly Wrap-Up, we featured a 1,900% downside hedge on the Russell to offset the 566% plays and other bullish plays we’ve begun to reluctantly take, just so we don’t feel too silly in this runaway market.
If you have never watched Jim Cramer discussing the sleazy, manipulative ways he used to game the markets - you really must take 10 minutes and watch this video, where Jim explains how any immoral bastard with $10M can yank the entire futures market around at will. He prefaces one of his favorite strategies with "this is blatantly illegal but.. I think it’s really important… these are things you MUST do on a day like today and if you are not doing it, maybe you shouldn’t be in the game." Are you playing the game or are you being played?
The biggest game ever played may be unwinding as we speak. Bloomberg reports that foreign-exchange profits from carry trades are disappearing as differences in central bank interest rates fail to increase fast enough to compensate for swings in currency rates, threatening to crash (oops, don’t say "crash") a 20-year run in money movement that has fueled dozens of global bubbles. Royal Bank of Scotland Plc’s index tracking the strategy of tapping cash where borrowing costs are low and investing where rates are higher, rose 0.57 percent in the first quarter, the smallest amount in a year, and down from 9.8 percent in all of 2009.
“There is no easy money left in the carry trade,” said Henrik Pedersen, the London-based chief investment officer at Pareto Investment Management Ltd., which oversees $45 billion in currency assets. “Most of the high-yielding currencies are overvalued and the low-yielders are undervalued,” he said. “The gains you can make on the interest-rate differentials are not going to make you 20 percent a year, it’s probably only going to make you about 2 or 3 percent.”
As you can see from this chart, cheap Fed funds are Free Money which is used to pump up emerging market bubbles and then (and this would be so funny if not so mind-bogglingly dangerous) the pumped-up emerging market stock is used as collateral for the banks to get More Free Money to buy more emerging market stocks at even higher prices. And it’s not just stocks that are bubblicious to carry traders - bonds and commodities get their love too. No more free money could set off a chain of events that skyrockets global borrowing rates and initiates a mad cash scramble between governments that need to borrow a dwindling supply of cash (that would be pretty much all of them).
We’re already seeing the effect in the energy markets as oil futures have gone into deep "contango," where longer month contracts are getting much more expensive than front-month contracts, reflecting an increased storage cost as carry traders attempt to cash in their oil tankers and have pushed global storage to their upper limits. This makes oil storage hellishly expensive for speculators and if a rising dollar forces them to cash in at front-month prices, they force the price even lower as the full storage means the oil must be pushed out into the consumer market and the only way to do that is to drop prices far enough to actually influence demand - and that has not been working lately. It is also murder on ETFs that must keep buying oil futures every month:
Refineries are already running at just 85.9% of capacity, well below the 10-year average at 88% and total U.S. fuel demand, averaged over four weeks, fell 1.1 percent to 18.9 million barrels, the biggest decline since the week ended Jan. 8th. All the speculators’ hopes are currently pinned on the summer driving season - I think if we organize a motorist strike on Memorial Day weekend we can wipe these guys out! Would that be wrong? Let’s ask Cramer…
Cramer’s old firm, Goldman Sachs, is still in hot water as the Senate held hearings this weekend with key witnesses and more documents came to light, like an Email showing that, as the U.S. housing market began its epic fall nearly three years ago, top executives at GS cheered the large financial gains the firm stood to make on bets it had placed (allegedly!). After making nice on Thursday last week, Obama went back to being the bad cop and sharply rebuked Wall Street in his radio address Saturday. "In the absence of common-sense rules, Wall Street . . . hurt just about every sector of our economy," he said. After a weekend of testimony, Senator Carl Levin was able to sum things up nicely:
Investment banks such as Goldman Sachs . . . were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis. They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities and sold them to investors, magnifying and spreading risk throughout the financial system and all too often betting against the instruments they sold and profiting at the expense of their clients.
See, not too complicated, is it? Also going badly for GS this weekend is testimony by former Moody’s analyst Ted Kolchinsky, who said he didn’t know about hedge- fund titan John Paulson’s involvement in engineering the deal. "It just changes the whole dynamic of the structure," Kolchinsky told the Senate subcommittee about not knowing that Paulson helped put together the collateralized debt obligation in question. It was "something that I would have wanted to know." In addition to Kolchinsky’s testimony, the subcommittee released e-mails showing how analysts at both Moody’s and Standard & Poor’s had misgivings about the CDO involved in the SEC’s case, but faced pressure by Goldman to put those reservations aside.
I know - Blah, blah, blah, Goldman is evil, blah, blah. As I said in the wrap-up, I’m sick of it myself but I see a lot of Members trying to bottom-fish GS and I’m still more in favor of shorting them at least down to $140 and, of course, last week we highlighted some plays that will do very well if we break below that mark. If this GS case does blow up, that affects the financials which then affects the entire market and we’ve all seen this movie before so, tedious as it is, we will be following the GS news in progress. We are also long on GS and the Financials in case it turns out to be business as usual and they end up with a slap on the wrist or maybe even another bailout!
Asia rallied with the Hang Seng jumping 1.6% (mainly a gap up at the open) but we’re not impressed with any move under 22,000 (now 21,587) and we expected a good reaction from China to our fabulous Friday rally. What’s surprising is that the Shanghai fell half a point, dropping 25 of the 14 points it lost for the day right into the close. The Nikkei flew up 2.3%, also pretty much all on a gap open and finished their day back at 11,165, still another 250-point day off the April 5th highs. We’re trying to get bullish this week so I will refrain from comment and pretend everything is real, like TM’s 3.4% gain that led the Nikkei based on the dollar testing 95 Yen again and the Nikkei English News reported that the company the carmaker "probably" had a profit of $50Bn Yen, despite the company’s Feb. 4 forecast for an operating loss of 20 billion Yen. This is what Mr. Cramer calls fomenting a stock by playing the media, which is very effective (as Jim explained) when you do it with a key stock like TM that drives the indexes.
Greece is still the word in Europe and Greek bonds are out of control this morning on speculation that Germany may refuse to guarantee an early release of bailout funds. I can just picture Jim Cramer on the phone spreading this story to his media buddies while he shorts the 9.5% ten-year rate this morning. Not Jim himself, of course, he’s retired now and only "influences" 20 or 30 stocks a night now and I’m sure he’s completely reformed and only has his viewers’ best interests at heart and would never mislead them in order to do favors for his hedge fund buddies or his former masters at GS.
Europe, on the other hand, firmly believes Greece will be bailed out and the markets there are up about 1% led by miners as BHP raised its metals prices in London. “We remain bullish,” Gang of 12 Member JPM’s head of European equity strategy Mislav Matejka wrote in a report to clients today. “The recovery will prove sustainable.” He maintained an “overweight” stance on European stocks relative to U.S. equities. Per-share earnings at western European companies have topped analysts’ estimates by an average of 14 percent since the U.S. earnings season began on April 12, according to data compiled by Bloomberg.
It’s all earnings, earnings, earnings this week but we also have a Fed Meeting tomorrow and Wednesday with the rate decision at 2pm on Wednesday and that’s our big data-point for the week. Tomorrow morning we have Case-Shiller (which is always painted positive no matter what the numbers are) and Consumer Confidence (which will probably come off all-time lows) and Thursday we get our first look at the Q1 GDP, which I think will miss the 3.2% expected by expert economists as I think we’ll be more likely in at about 1/2 last Q’s 5.6% pace on inventory changes.
We shall see what’s what and, meanwhile, we have our levels to watch and our upside plays to ride but I’ll be looking for some shorts into the 10 am top. The 1% move in Europe is simply a catch-up play to our own big move on Friday so it will take more than that to impress us. Once the EU markets close, the excitement may fade for US equities as the S&P hits the 5% rule for the month (meaning we’re looking for a 1% pullback).
Be careful out there!