Usually when I take off, I am filled with regrets as I hate to miss the fun in the markets but I’ve never been happier to lighten up on positions and take a break.
I’ve been talking about fundamentals all week, possibly looking a little like Chicken Little as I’m telling people the sky is falling while the market rallies. I’m not here to win a popularity contest, however, so I’m really pushing the "better safe than sorry" school of investing this month as my best case scenario for the next couple of weeks is that we consolidate around 13,600 and my worst-case scenario is downright depressing!
Not as depressing as working for American Home Mortgage Investment Corp. (AHM) of course, that company announced they would cease "most" operations and will be letting go of 6,250 of their 7,000 employees. If you ever need to be reminded how clueless the market can be, take a look at yesterday’s chart on American Home Mortgage as it went from $1.50 to $4.50 and back to $1.50 in yesterday’s trading. This is real money people, not play money - what the hell are you thinking?!?
According to today’s WSJ, lenders are clamping down on all risky mortgages, that includes "Alt-A" mortgages like no-doc loans that speculators often use (when you have lots of money and no time). Since $1T worth of Alt-A and Sub-prime loans were written last year and the year before, we can assume at least (and boy, am I being kind) half of those deals will die this year, knocking out $500B of home transactions. At a national average of $250K per home and assuming the 1/2 of those loans are refinances (also generous), that’s 1M homes that won’t move, close to 1/4 of a year’s total transactions.
• That’s 1/4 less commissions for realtors
• That’s 1/4 less business for the mortgage industry
• That’s 1/4 less business for movers, decorators, painters….
Overall July employment was up 92,000 in this morning’s report, quite a bit less than the 135,000 expected and LESS THAN HALF of last July’s 220,000 jobs. The "growth" came in health care, hospitality and, surprisingly, financial services, but AHM will certainly fix that! This is pretty bearish for a "Goldilocks" number with unemployment creeping up to 4.6%.
You MUST read this WSJ article entitled "Loan Woes Hit European Bond Fund" detailing AXA (AXA) and other insurer’s problems in their bond funds. AXA lost about 40% of their multi-billion dollar fund last month, while German STATE-OWNED bank, KfW, "said it assumed "expected possible losses" of as much as €1 billion ($1.37 billion) from German midsize lender IKB Deutsche Industriebank AG, which also has been hit by exposure to the U.S. subprime market." Again, I’m not trying to be Chicken Little here, but when the sky is actually falling, acting like an ostrich only means you will get hit in your ass!
Asia was more or less up, but also more or less flat highlighted by our TM coming trough with a 32% rise in net profits, led by demand for fuel efficient vehicles. We called a bottom at $120 and have been picking up leaps for quite a while. Hopefully this will finally get the stock back in gear but guidance remained conservative on the heels of the recent earthquake and uncertainty over currency fluctuations, but that’s fine with us as we like this stock as an income producer with the kicker of being undervalued. Europe has been heading down all morning and our jobs report did nothing to reverse that, nor did a 19% rise in earnings from RBS.LN (Royal Bank of Scotland).
Some people have said that these levels are unfair and I’ve set the targets too high, but they served us very well in the last rally and the fact of the matter is, very simply that we FAILED to reach our goals so - deal with it! On the bright side, we also "failed" to break below the "Must Hold" zone, which does continue to offer me some hope that it really is only 1999.5 and not 1999.995 as much of the data would have me believe so let’s party on while we can (if we can) until the punch bowl is well and truly drained.
Oil continues to have a party and Zman’s top picks for the week (and last week for that matter) of Oceaneering International (OII) and Chesapeake Energy Corporation (CHK) both came in with great earnings and EOG Resources, Inc. (EOG) also gave an excellent report, going as far as raising guidance, a very neat trick with natural gas prices falling but, unlike the majors, they are able to offset declining prices by ramping up production.
Best of luck to everyone while I take my break . I’m already looking forward to a really exciting fall but let’s enjoy the summer, as well as the markets, while we still can!
While I’m gone the site will be in the very capable hands of Happy Trading, ZMan and Options Sage and, of course, I will be checking in as it’s no fun ranting and raving about the markets from my deck chair…
All the best,