David White

Equities Update: Upward Mobility

Hard to say where the market will go. It keeps bouncing off support on the SPY at about $103.40. It could break through; or it could keep going down. Virtually all of the economic news was good today, yet the we still retested this support point. That was not really a good sign.

Many experts believe that fair value for the SPY currently is at about the $86 level. We are still a long ways above that. The SPY could easily fall a long way. Still some reports have been good. The manufacturing numbers to day were great (55.7 vs an expectation of 53.0). The pending sales numbers were far above estimates (+6.1% vs an expectation of 0%). The construction spending was a big plus (+0.8% vs an expectation of -0.2%). Add the Ford result (about $1B profit), AMZN, AAPL, and some others. Then you may be looking at some real growth in specific areas. If you consider the bulk of the stimulus package monies have yet to be spent, you might think the US economy could be in for quite a near term surge. This kind of thinking could send the markets up.

The problem is that there are also very definite problems. There is the CIT bankruptcy. No matter how you look at it, this is bound to cause credit constriction problems for many small and medium sized businesses, especially those in the retail business. This could put a big damper on Xmas profits for these companies. If they can't borrow enough short term to adequately stock their stores or pay their temporary workers, they will not have a big Xmas season. Often most of their profits are made at this time of year. If they don't make those profits, we will likely see more and more failures next year.

In addtion the commercial mortgage market is in real trouble. Both banks and businesses will be hurt by the commercial mortgage problems over the next two years. The residential real estate market is still far from healthy. The credit card businesses (not the services such as Visa and MA, but the loaning banks such as BAC, etc) are losing money. The credit card charge off rate is rising with the unemployment level. That situation is likely to get demonstrably worse over the next year. This will cut into banks' profits. Some are predicting that 1000 or more banks will fail in the next two years. We were at 115 this year, when last I looked. If the 1000+ number is accurate, it will have a severe impact on credit. The US economy functions much less well with tight credit. This could lead to that double dip people are talking about.

All told my inclination is to let the markets fall back on fundamentals -- fair value on the SPY. There will likely be some kind of surge on stimulus spending, but it is not likely to last. There are too many negatives. People are beginning to realize this. I am hoping that the surge will allow enough businesses to sustain themselves through the hard times. I am hoping that it is enough to start a "real" recovery. However, I am more sanguinely thinking that I do not want to bet much more than fair value on that. The recovery could easily fail.

It is hard to say what the market will think. It seems to be getting tired after a long run up. Perhaps the tipping point will be the USD. The Fed already ended its Treasury buying program at the end of October. It will slowly withdraw other stimuli soon. It has been slowly lowering the money supply since June. When it starts talking seriously about raising rates, that could spell the end of the US carry trade. When people start exiting that trade, they will have to sell other investments to repay the USD's. That seems almost pre-ordained to start a big down move in equities. We saw some of that with the recent bounce upward in the USD. We will see more. The Fed has been curbing its simuli. It is not pushing the markets up as strongly as it had been for the previous months of the rally. Eventually this will have a telling effect.

Wall Street Breakfast: Must-Know News

The SEC made the rule against naked short selling permanent today. It was set to expire on July 31. This should keep the markets from going down quite so quickly when they retrace. This means that brokers have to have (or buy) stock that they are lending for short selling.

We are still in a very volatile time.

Wall Street Breakfast: Must-Know News

Vickers Weekly Insider Report reported Monday that the ratio of insider selling to buying last week was 4.16 to 1 (the highest the ratio has been since Oct. 2007). The more stable 8-week average was 2.69 to 1 (the highest since Nov. 2007).

Of course, insiders are sometimes early, and occaisionally they are wrong. Still this does make one think that the current market rally may be facing strong headwinds in the near future.

If you combine this with the news from BofA that they are now planning the closure of 10% of their branch offices, you get an ugly picture.

Wall Street Breakfast: Must-Know News

GS raised its target for the S&P 500 to 1060 by the end of this year from 940. GS did couch their prediction by mentioning the possibility of a double dip recession. However, this type of news tends to lift the markets, just as the $85/barrel year end oil price prediction did for oil prices not long ago.

We still need a leader to move up though. Some are suggesting that leader may be tech. It might be smart to watch the tech results closely this week and next. If they aren't good, GS's prediction for the possibility of a double dip recession may be closer than the 1060 target. TXN may be a key stock. It reports this afternoon after the market closes.

Wall Street Breakfast: Must-Know News

"The world's biggest miners and steelmakers are on the brink of forging a new system for setting iron-ore prices that is expected to increase the volatility of steel prices but perhaps make the process more transparent, according to a published report Monday.

The new system would set iron-ore contract prices on a quarterly basis -- rather than annually as it is now, the Wall Street Journal reported on its Web site.

The agreement could be in place as early as year's end, the report said, citing unidentified miners and steelmakers involved in crafting the deal. "

This is important to Dry Bulk Shippers as well as both the miners and steelmakers. As recently as the end of last year, shipping dried up at least partially because the steelmakers did not want to pay the estimated 40% more for the year old prices on iron ore. Negotiating these prices quarterly may smooth out some of these huge swings in business for all of the participants.

Swine Flu Vaccines Will Have to Wait

If Andy Burnham's worries actually come to pass, this "real pandemic" will have a devastating effect on the airline industry. The travel and public entertainment industries will be adversely effected.

FDA Calendar Updates: BioDelivery Sciences Worth the Wait

Some more good news on BDSI today. According to DJ it will soon join the Russell 3000 Index. Generally inclusion in an Index (or movement to a more highly thought of index) makes some mutual funds,etc. buy the stock. Others follow along. This should be a positive for the BDSI share price.

FDA Calendar Updates: BioDelivery Sciences Worth the Wait

Lidenburg Thalmann reiterated their buy rating on BDSI yesterday. Usually analysts are wary of taking risks, especially when there is a one time news event involved. The fact that Lidenburg Thalmann reiterated their buy rating yesterday tells me two things. First they strongly believe that onsolis will be approved by the FDA. Second there is excellent upside to the stock, even given its recent run up. If there were not excellent upside, no analyst would reiterate a buy rating on a stock awaiting a binary event. This leads me to think that BDSI may double or more on positive news.

China Biopharma: What’s Not to Like?

That was an interesting article. Those stocks are fairly big players. However, they don't seem to have as much potential as some of the smaller Chinese Biotechs. What do you think of such stocks as SOBM, HFGB, CKGT, RHGP, SVA, CPHI, and CHBT? I actually like SOBM. It has a block buster malaria vaccine in clinical tests (promising so far). This is currently scheduled to complete (hopefully successfully) clinical trials in 2012. Meanwhile it has other drugs that are doing well. Apparently a not-quite blockbuster drug is due out in April 2009. It is currently selling several newly released drugs. Perhaps it will be profitable for the first time this year??? Next year is supposed to be even better. It is getting money from the W.H.O. and the Chinese government, so you know its science is respected.
Many of the other companies I have listed are in similar circumstances. Some are already substantially profitable. What do you think about investing in these??