David White

The Worst Isn't Over Yet

I agree with Larry House above, the market does need to pull back here. My original target for this rally was $87 on the SPY. Now I am not sure if we are going to reach it. Alcoa reports Tueday afternoon. That report has to be ugly. They have had huge layoffs. Those alone will likely cause the GAAP numbers to be terrible. That is without even considering the reasons for those layoffs. There will likely be many more ugly reports to follow. The reality of Q1 earnings will almost certainly bring an end to this market rally.The mark to market changes don't take effect until Q2. As good as much of the news about government actions has been lately, the broader news has still been atrocious.
1) ADP's roughly 750,000 jobs losses.
2) GM and Chrysler remain a huge problem.
3) Residential real estate lost 19% in value year over year. This almost ensures that there will be lots of future foreclosures as more and more people are underwater and out of work.
4) The unemployment rate is at 8.5%, and it is predicted to go up to more than 10% within just a few months. I have seen estimates as high as 12% so far.
5) The commercial real estate market is supposed to implode this year.
6) The credit card debt defaults are rising quickly.
7) The ISM manufacturing numbers and the services numbers are still horrendous.

I could go on, but you get the general idea.

The change to mark to market will likely decrease the depth of the recession. However, it will just as likely broaden the bottom of the recession as actual losses are spread out further. Obama is a great communicator. The government has taken some positive actions, but we are still very much in trouble. It is hard to believe this market can keep going up the way it has been.

I should also point out that I thought the late December to early January rally would go to $100 on the SPY. I was a little overly optimistic about that rally. Chances are I may have overestimated the upward push of this one too.

Four Reasons We're Headed Even Higher

(MarketWatch) -- "Guess what? The Federal Reserve has not only stopped depositing copious amounts of liquidity into the economy -- it now appears to be in the process of making a sizable withdrawal.

For example, the monetary base -- the raw material for the money supply -- has fallen at a seasonally adjusted annual rate of 8% from early April of this year through mid-August, after soaring at a 187% pace during the previous eight months.

And after ballooning from $100 billion to nearly $1 trillion between September 2008 and mid-May, adjusted reserves have since declined at a 43% clip, to just over $800 billion.

As a result, the Fed's two measures of the money supply, M2 and MZM, have begun to contract. M2 has shrunk at a 3% pace since the middle of June, while MZM, the St. Louis Fed's measure of liquid money, is down by 2% over the same period. "

All of this money is coming out of the markets. they have been going up on very low volume, but they almost have to fall soon. Your market cheerleading is just that. It has little or no basis in substance. Eventually the stock market will head higher. However, it will likely take some time. Over time fundamental analysis makes itself felt. The US markets are over valued now. The S&P500 was trading at 11 X earnings at the March lows. Now it is trading at about 18 X earnings. 15 might be termed fair value. It is over bought.

There has been very little revenue growth. Most earnings wins have come through efficiencies. There is only so much you can do there. The unemployment keeps rising. Unemployed people buy less. Revenues are not likely to go up dramatically soon.

Prechter has called a bottom on the USD due to there being only 3% bullish sentiment (the same as that of the stock markets at the March lows). If the USD rallies, commodities will fall and the US stock markets will fall.

To substantiate, Art Cashin (UBS) recently said fair value for the S&P500 was in the 850 to 880 range. That is a long way from where we are now.

The above are just some of the "real" factors that may mean the US equities markets are in line for a good sized retracement. The kind of unreasonable exuberance you are touting is a lot of what got the housing market in the mess it is in now.

If you by chance happen to be correct, it will only mean that the markets will be in for another horrendous fall. You know the old saying, "the bigger they are the harder they fall".

25 Reasons We Will Not Have a Depression

You make some good points, but your accuracy is spotty at best. The US GDP growth was a healthy 3.5% last quarter. The Fed governors would be thrilled if they could get that every quarter. The GDP for Q4 is also supposed to be good.

You mentioned the credit availability. However, you seem to have completely neglected to mention that small to medium businesses actually have much lower credit availability now. In fact it has been going consistently down hill. I would point out the CIT situation (bankruptcy) as a good indicator of this. Only the larger companies are getting good access to credit. This situation is likely to make itself more prominently known in the near future. Many have been talking about the severe problems in commercial real estate. We are likely to see this get much worse before it gets better. The US economy relies on small and medium businesses. Many of the jobs are there. If they cannot get money, they cannot recover. They cannot produce jobs. The economy cannot recover.

I could go on. There is some merit to your article, but overall it is much too much like syrupy rhetoric than a well researched article. I hope your readers will be doing their own research.

Overbought Stocks (7/21/09)

radicall: I believe the implication was that the stocks that were far under their 50-dma's were possibly oversold.

DryShips: The Time to Buy Is Now

DRYS announced a preliminary agreement with Nordea Bank today for a covenant waiver on its $800M Primelead Facility. Assuming this goes through as proposed, this effectively puts at least a temporary end to DRYS's loan covenant breach problems. DRYS reached agreement with Piraeus last week.

The BDI is up strongly again today to 1815. The capesize spot price is now at $34,101. The BCI is at 3344.

DRYS stock is up in pre-market trading. The technicals indicate the first strong support is at about $3.60. The first strong resistance is at $9. The stock is currently trading at approx. $7. It seems much more likely that the stock will move up to find new support at $9, especially given that the financial problems seem to have been resolved at least temporarily.

Further investors should take into account that the consistent rise in the BDI lately will likely mean that the market prices of old ships will be going up also. DRYS has one of the best price to book ratios in the industry. If the used ship prices go up, DRYS should soon have no problems with covenant violation, as these problems have largely arisen due to mark-to-market accounting rules.

CIT's Failure Could Threaten Financial Sector's Overall Recovery

Good article. I have my doubts the proposed deal will go through. First the stock holders will not like it. Second some bond holders might prefer to enter bankruptcy now, while they may still be able to get some money in the closure. At the rate CIT has been bleeding money, it seems likely their bonds will be worth less with time. Finally some of the bond holders are likely also holders of CDS's. Those bond holders may want CIT to enter bankruptcy because that will activate their CDS's (i.e. they will get more money that way). They will vote against the deal.

I hope the government has some plan to rescue CIT. If it fails, it seems likely to be an even bigger disaster to the financial system than Lehman. CIT has their fingers in many more pies as they are an SMB lender. A CIT failure would be a harsh blow to the SMB world. It would have terrible repercussions. Bernanke et al, where are you?

Tire Trade War Escalates

Interesting thoughts Ray. However, I disagree with some of the premises. For instance, you say, "we need them more than they need us as they fund our deficit spending and provide us with cheap products, that we really don’t need, but hey we like to buy stuff."

The shoe is really on the other foot. We are funding the Chinese expansion by buying their products. You say yourself that we do not need many of these products. A lot of the trade deficit (US foreign debt) is due to a huge Chinese trade deficit. If we were not buying their products, we would not have to borrow as much to fund our debt.

You have also overlooked perhaps the most salient point in this whole situation. The economic data from China last week show that the Chinese are going to experience deflation soon if not now. The Chinese exports were down 23% y-o-y. The Chinese trade surplus was down 45% y-o-y. The Chinese industrial production was up 12.3% y-o-y. The Chinese consumer has been buying more products recently (retail sales up 15+%). However, most economists believe this extra buying is stimulus driven (vouchers, etc.). When the stimulus period is over, the Chinese will be left with much increased production but a smaller foreign market to sell it too. The world economic recovery is supposed to be very slow and very long. This means that the Chinese will be forced to dump their products en masse to the US and the European markets. Otherwise their economy will likely go into recession. There might be civil unrest if that occurred. The Chinese government will be forced to support dumping. The US will have to act against it. Otherwise US businesses will be put out of business by unfair trade practices. Namby pamby actions by the US government will suffice. I applaud Obama for his action. I am sure it will be the first of many such actions. The economic numbers from both China and Japan indicate dumping by them is inevitable. You can think they will play nice, but they won't. They are out for themselves. The US has to be aggressive, or it will be hurt irrevocably.

Why This Rally Will Continue

You are neglecting some important facts.
1. Retail sales have been doing badly lately. Many think the back to school sales will disappoint.
2. Foreclosures were up by 7% in July from June. Up 32% from July of 2008. This is very bad for banks.
3. The FASB is thinking of expanding the mark to market rules to include more types of assets. This would cause banks to have to take further write downs. Again bad for banks.

In other words it looks like retail and banking are in trouble. Airlines are also in trouble. China is supposed to ease its buying in 2H, so China will not lead higher as dramatically. China Construction Bank said they will make 70% fewer loans in 2H.

We are also seeing a topping pattern in the market. We have reached the Oct-Nov. 2008 levels of the stock markets. These are providing heavy resistance to further movement up in the short term. A retracement seems likely before any further move up. Since this week is really the end of earnings season, we may begin to see the retracement next week. I suspect GS et al may try to hold the market steady next week, so they don't have to pay off too much on options. After that all bets are off.

Obama Is Wrong to Impose Punitive Tariffs on Chinese-Made Tires

I don't know the specifics of the tire industry. However, the latest economic data from China indicate that they will likely start dumping their products in the US (if they haven't already) as an across the board strategy. The Chinese government has to support this, or it has to tell its people the economy has to dramatically slow down or shrink. Chinese exports were down 23% in August. The trade surplus was down 45%. However, industrial production was up 12.3%. Roubini says the character of the Chinese consumer is unchanged. All extra buying has been driven by stimulus measures.

When Chinese stimulus measures disappear, the Chinese will have lots of new production, but they will have no one to buy the products unless the world economy makes an extremely rapid recovery. Most economists believe that the recovery will be a very long and slow process. This means China will have to dump, or it will be faced with even worse economic problems. It may in fact have set itself up for a recession through its huge growth this year. It has definitely set itself up for deflation (as Japan is now stating Japan is experiencing). China an Japan are both industrial export driven economies. If Japan is having a deflation problem, it is likely China is or will. The above cited numbers would tend to substantiate this. Huge dumping by China in the US and Europe seems an inevitable strategy.

Obama may simply have decided he wanted to send a message. I think he did. We simply cannot let China dump their products here to their benefit, while the US companies get hurt because they are playing by the rules. China will simply produce more and more to swamp out all US companies they can. From their perspective that is a good strategy. However, if the US is not willing to buy at prices commensurate with production cost, selling at below cost to keep the growth in China going is an unfair trade practice. It will cause US economic shrinkage if allowed. Obama is sending the correct message. He really has no better choice. China is not going to behave nicely. China is not going to arrest its development so it can "play by the rules". It has to be forced to.

DryShips: The Time to Buy Is Now

dawase: You have to go by their press releases. They can be sued if they are demostrably misleading. According to those, 75% of the Ocean Rig value will go in stock shares to the owners of DRYS shares at the ex-dividend date.

As I tried to point out, Mr. Economou owns some DRYS shares himself. Plus he has interests in companies that have DRYS shares. It is in his interest to make the dividend distribution of Ocean Rig (i.e. give shares in Ocean Rig to owners of DRYS shares) before he allows the DRYS shares to be diluted very much. The new agreements with the two banks DRYS was in default to should allow him to do this. Once the distribution takes place, selling DRYS shares (from the shelf registration) will not depreciate his new holdings in Ocean Rig. Therefore Mr. Economou will sell very few DRYS shares (or as few as possible) until after the dividend distribution. I also tried to point out that the dividend distribution would likely make the DRYS share value go up because DRYS is retaining 25% of the Ocean Rig stock. That stock will then have a defined value that will likely be much higher than the value Ocean Rig currently consitutes on DRYS books. Plus with the BDI going up consistently, dry bulk shipping stocks should go up generally in lock step.

Equities Update: Housing Data Raises the Roof

Yes. The existing home sales were great, but there are a few gothchas about the number. First the October number was revised downward, so the overall number of sales for the last two months is less than the headline number indicates. Second approx. 1/3 of the homes were bought by flippers (i.e. buying foreclosures). Since they intend to resell them immediately, they are not really reducing the inventory of unsold homes. Third 5 mortgage insurers got downgraded by S&P. This should make credit less available. Fourth Nov. was the original expiration date of the tax credit for first time home buyers. Most think there was a blip up in home sales due to this. This may mean a post CFC's like move down in coming months. The caveat is that the new tax break includes all buyers. We will have to see.

The GDP coming far below the estimated 2.8% at 2.2% is actually a huge factor that was not acknowledged today. A lot of the big ticket items (durable goods) will likely have their earnings and revenue estimates downgraded based on this miss. It also means unemployment will continue to be a problem for a longer period. Lower growth means lower manufacturing, esp. durable goods. This means steels, auto makers, etc. should have their EPS estimates reduced soon. Usually it takes a few days for analysts to do this.

Then too it is important to remember that many of the materials companies' earnings and revenue estimates were very much pulled out of thin air. AA is on watch to have its debt downgraded to junk. Plus Fitch put the steel makers in general on watch recently. Fitch thinks there is considerable doubt about the steel makers earnings and revenue estimates. These companies have had huge run ups recently. My feeling is that the analysts are about to turn on them. X seems especially over priced to me.

While Goldman CEO Lloyd Blankfein understands that "people are pissed off" with bankers, he says everybody should be happy: "Companies are looking to grow again and raise money. That's where we come in. The financial system may have led us into the crisis but it will lead us out."

Blankfein has a point that most companies do not have the "in house" knowledge or capability to raise money for themselves. A lot of companies still need to do this. However, this is by no means GS's sole function. Should we really be grateful to GS for the high frequency trading they use to skim money from the financial system? Should we be grateful for the complex risk derivatives they have developed, which have helped to feed the housing crisis (i.e. the increased demand for MBS's, created and touted by GS et al, contributed greatly to mortgage lenders willingness to make questionable loans)? Should we be grateful they created a bubble, that is now popping very unpleasantly on us? Should we be grateful that GS's trading in oil futures may have contributed to oil prices being pushed up to $145/barrel last year? Many think this price was one of the main causes of the recession.
I don't think even Mr. Blanfein believes his rhetoric.

Positioning for a Bond Rally

The UUP also made a huge move up yesterday on mostly increased premium as the USD Index barely moved yesterday or today. Some of the premium disappeared today, but a lot is still there. UUP requested registration for 100M more shares.

The people buying the long bonds are probably not planning on holding the bonds too long. If we get a rise in the USD, which many are predicting short term (especially Prechter). It would push commodities and equities downward. People would want to get out of the USD carry trade on a USD rally. They would have to sell other assets in order to repay the USD's. This would push commodities and equities (many of which are commodity based) downward. When equities and commodities fall there is usually a flight to quality (bonds). This drives the price of the bonds upward. If the investor then sells those bonds at the near term bottom of the market, the investor earns extra money from the appreciation of the bonds. This is a plan that could work. Of course, the timing would have to be good. Plus you have to sell near the bottom. You also want to sell before the Fed starts pressuring the market with interest raises. Bonds would go down with a rate increase by the Fed (or perhaps even with the expectation of one in the near term).

The USD going up is not definitely necessary for this scenario. One could just figure the markets are tiring. Plus oil was at about $80. Both looked like they were poised to make a move downward. With the higher than expected unemployment it would seem likely that oil prices would move down on the expectation of a cooler economy. With higher unemployment people will spend less on gasoline, etc. Decreased demand should lead to a decrease in the price. Ditto for many other commodities. Equities would follow. Equities markets are already showing signs of being tired. They are ripe for a retracement.

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

This play by Buffet is completely in line with his long term strategy thesis. You can virtually no longer build railways in the US. It is too expensive. The only real way to build new railways is to build them next to the current ones. Apparently there are some plans for this.

Oil will become more expensive. China and India will use a lot more soon, driving up the price. They currently use only a small fraction of what the US uses per person (less than a tenth). We will shift to solar, etc. to power our homes, but the problem of transport will still exist. Trains will be the cheapest way to accomplish this for long hauls. Long term BNI will be a great acquisition.

As for making BH share price cheaper through the split, I think that was a great idea. It makes BH more available to the masses. It makes it easier for BH to raise cash by issuing more stock. A huge buy like BNI probably put BH in a worse cash position than Buffet would like. He may be old, but the guy still has it. He's got guts too!

U.S. vs. China: Has Trade War Begun?

You make soem interesting points Jeff. I enjoyed the read. However, you have neglected the economic aspects of this "trade war" almost completely. At the end of last week China released the following economic information:
1) China exports were down 23% y-o-y.
2) The Chinese trade surplus was down 45% y-o-y.
3) The Chinese industrial production was up 12.3% y-o-y.

If undustrial production is going up dramticially and exports are going down dramticially, the Chinese consumer has to buy all of these products to make the growth sustainable. However, Roubini says the Chinese consumer's behavior is essentially unchanged. Some extra buying has occured due to stimulus actions (such as vouchers). However, these will end soon. That will leave the Chinese with huge productions increases, but no markets to sell these extra products in. The world markets are supposed to recovery only very slowly according to current forecasts. The Chinese will have to sell their products somewhere, or they will likely face a recession. The Chinese government will not want to countenance that. Neither will the Chinese people. They will happily dump their products on the US and Europe in order to avoid that. The US will have to impose tariffs in order to save its businesses. Otherwise China will simply take over markets by being willing to sell at a loss for an extended period of time. After all that is better than a recession, isn't it? Plus they would get to increase market share.

The US cannot allow this. "Namby pamby" actions by the US government will not cut it. There will have to be tariffs. There will have to be vigilance. Otherwise the US will simply lose a trade war without firing a shot. it is nice to think that everyone plays by the rules. However, the fact is that many countries do not. China is not about to, given the economic problems they are now facing. I applaud Obama for his actions. US businesses will need protection. The Chinese will not play fair.