Friday, February 29, 2008

Market Close 02.29.08

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Thursday, February 28, 2008 11:11 PM

Every now and then you have to get lucky. I recommended EOG Resources several times the last few weeks and on Thursday they had an analyst meeting that blew the doors off. The stock ended up almost $20 to $125 on a very strong production outlook detailed at the analyst meeting. We sold a few shares into the strength since the position became a disproportionate weight in our portfolios. It is still one of our larger positions.
Nice as the gain was, it leads into a bigger discussion of "whither goest the price of oil." (EOG is primarily a natural gas producer, but you get the idea.) Very near term the price of oil is being greatly influenced by Turkey's incursion into Iraq, Iran's nuclear program, Exxon vs. Chavez, violence in Nigeria and the consequent geopolitical instability and nervousness.All of these factors can reverse themselves- but I bet they don't- and oil prices could calm down. Looking beyond the immediate, I see nothing that would tell me oil won't stay high in price and over the longer haul, move even higher.
Supply and demand is in precarious balance.OPEC's spare capacity is limited and non-OPEC supply has continually disappointed.
Oil is priced in dollars and OPEC's income versus the other currencies they want and use is no where near what the dollar price says it is. Saudi oil fields are declining at a faster pace than they will admit. The Saudi's have never had as many rigs drilling with apparently little in the way of incremental production being brought on stream. People who figure such things say the Saudi budget would be balanced if oil were about $65 a barrel. Eighty percent of the population is under the age of 21. There is huge social network that the Saudis don't dare let fray for fear of stirring even more issues with Islamic fundamentalism. Lip service notwithstanding, the Saudis want ever higher prices.
75% percent of the world's oil production is from fields discovered more than 25 years ago. Despite intensive drilling programs, the new fields are significantly smaller than the older discoveries. In other words, the easy stuff has been found. 77% of the known oil reserves are controlled by State Oil companies that, generally speaking, don't like us very much. They have no incentive to do anything but maximize the price.
Demand continues to rise at an inexorable pace. The emerging nations let by the Brics - Brazil, India, Russia and China - are now 30% of world GDP
(the US is 28%). Despite the US housing crisis and the consequent credit crunch, these nations are still growing 5% a year. China, for example, has four times the number of people than the US but only 1/6 the number of cars. Internal growth and the desire for life's comforts, not to say status symbols, will continue to drive demand for oil. The US uses about 25 barrels of oil per person per year. China less than 2 barrels per person. That number will soar as Chinas mddle class develops.
In 2005, the world consumed 31 billion barrels of oil, but the industry discovered only 12 billion. The inability to replace production has been an unfortunate constant the past few years.
My best guess is that the price of oil will back off a bit as growth in the US is, at best, sluggish. Oil averaged $72 a barrel in 2007. If I had to put a number on it, I think oil will average above $85 a barrel in 2008. I do expect seasonal softness as we exit the winter heating season, but for the factors mentioned above, I don't think it will be too many years until we look back fondly at "only $100 per barrel oil."
I'll be leaving Saturday for the UBS Energy Conference. While everything said there is off the record, I will be able to report on the sense of the meetings. There will be over 80 CEOs of energy companies present, and I'm really interested to hear what they have to say.

Thursday, February 28, 2008

Market Close 02.28.08 and Sector Leaders/Laggards

My Two Girls

Here's a picture of my two girls: Macy (l) and Daisey (r). I have a third girl, Chloe, a geriatric poodle, who prefers NOT to hang out with these two.

Institutional Investor Voyeur

I have a new feature for you called "Institutional Voyeurism" (IV). This will be a periodic installment of profiles in institutional ownership. Based solely on my whim you might see the following:

  • Sector breakdown percentage holdings by an institutional investor
  • New holdings by an institutional investor
  • Total holdings by an institutional investor
I'm a huge fan of the NASDAQ site

There's a wealth of information here, and if it is not on your stock research bookmarks, you may wish to include it. It reminds me that I should include it on my info mosaic!

My first entry into this IV category is Soros Fund Management's new positions as of 12.31.07. Why don't you take a look? You can find it here.

Please visit the link of the image above to see more by this artist.

Wednesday, February 27, 2008

The Bad SEED

I've been in and out of SEED. Most recently, I bought it at 7.78 and sold it at 9.55. I rolled my gain into$10 MAR calls. A speculative earnings play. They reported this p.m. for their quarter ended 9/30/07. It wasn't a terribly good report. My loss is essentially "house money" but it does detract from performance.

My USD thesis of strengthening has proved wrong. My thinking that commodity prices has proved wrong. But I've had more rights than wrongs. So I'm not thumping my head against the wall. But I have some vulnerable short (SMN/DUG/WFT puts) and long (WLP/DIA/GE) positions. SEED proved not only to be a vulnerable but disastrous long.

I managed to get through most of the day today without a pain pill. I took one at 8. I'm hope to make it through the night without one. This injury is giving me thighs and arms of steel. I think I've turned the corner on the worst of it. I've found, though, that a fractured cuboid is quite rare.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Wednesday, February 27, 2008 10:44 PM

Let me give a list of reasons why we won't have a recession. Lots of these ideas came from Ed Hyman at ISI, some from Jason Trennert at Strategas, and some I figured out myself. Oh, before I start, my granddaughter Lola Jane, Uncle Dougie Kass' honorary niece, has noticed I have not mentioned her for a few emails, and even at 17 months of age, she is not to be messed with, so Lola Jane, this one is for you. (And it is true that I read Doug's missives to her, but only when she won't sleep.)
1) The four week moving average of unemployment claims- which come out later today- have been bumping around 350,000. At 400,000, we will probably be at 0% growth, so claims are still showing sluggish economic growth. The monthly Bureau of Labor Statistics jobs report is still showing job growth, and the last recession saw over -200,000 job losses per month.
2) There is usually massive inventory liquidation going into a recession and we haven't seen evidence of that yet. Could be the system is that much better in inventory management, but we haven't seen the customary sell down in inventories.
3) Interest rates are historically low world wide and after Ben's testimony today, it is obvious that U.S. rates are going lower. The Fed has been pumping massive amounts of money into the system as shown by the rapid growth in M2. My bet is the ECB (European Central Bank) will also capitulate and lower rates before long. The Fed Funds rate equivalent in the Eurozone is 4% and while I think it needs to be reduced to spur growth, 4% isn't a killer. There is a lot of noise about a stagflation type of environment developing. The last bout of stagflation in the 1970's saw interest rates/inflation at almost 14% and near double digit unemployment, so I think the hysteria is a touch premature.
4) Corporate cash is at a record $1.6 trillion dollars and is at 11% of market capitalization. There are apparently more than two bids for the General Motors building in NYC at better than $3 billion. There is a lot of cash around, a glut of investable funds. Banks have to overcome their trauma and start to lend, but even if they don't, the mountain of cash will find a home which would spur growth.
5) The weak dollar is starting to spur export growth and best guess is that GDP will be bumped by 1% per quarter because of this.
6) Developing economies are growing at better than 5%. Last US recession the growth for this sector rate fell to 2%. The growth rate still could decline, but hasn't yet. The developing world accounts for 30% of world GDP, 2% more than the US (this is a big switch from just a few years ago) and they should provide a good market for our exports.
7) Q4 GDP will be revised up from the originally reported +.6% to +.8%, maybe more. The second quarter is soft, but by all accounts is still positive. The massive Fed rate cuts take a while to kick in, but it seems that time has been bought. I don't think that much of the heralded tax rebates will be spent ( most will be saved or used to reduce debt), but some will which would aid Q3, and then the impact of the Fed cuts will be felt.
8) The overwhelming consensus is that if we are not in recession now, we will soon be. Hoping the consensus is wrong.j

Vince Farrell of Scotsman Capital

From: vince farrell
Sent: Wednesday, February 27, 2008 12:49 PM

More bad news today (so of course the market is up.) The durable goods report was bad at -5.3%, but this number is notoriously volatile and keep it in that context. The new home sales report was abysmal falling to a level not seen since February of 1995, and Fannie Mae reported a worse than expected quarter. FNM is up at this moment which shows that bad news can be overly discounted in a stocks' price.
The WSJ reports that 2.2% of prime mortgages are at least 60 days past due up from 1.5% a year ago. More than 20% of sub-prime loans are at least that late. Since FMN doesn't deal in sub-prime, the higher loss at FNM shows the deteriorating levels of credit have spread into the prime arena. Moody's figures that $1.75 trillion in mortgage debt is under water and the growing issue of "negative equity" will plague us for a while, especially if underwater homeowners choose to walk away.
While the Fed has cut rates 225 basis points and looks ready to do more as evidenced by Benanke's dovish House testimony today, mortgage rates have not moved down.The average interest rate on a 30 year fixed rate loan was 6.38% yesterday (WSJ), which is actually up from 5.61% in September. "Jumbo" loans, greater than $417,000, were a full point higher at 7.35%. It's obvious banks are unwilling to lend and will do so only under very favorable terms to themselves. Kind of negates the Fed's attempt to introduce some stimulus into the system. Applications for refinancings initially moved up when the Fed started cutting, but have since slowed markedly as banks have raised mortgage terms.
There is good news however. The best news is that stocks are going up in the face of unrelenting bad news. It could be a rally in a bear market, but I think we have seen the lows for the year and, while corrections are always likely, indeed necessary, the current action is heartening. It will be necessary for any large volume decline to be short (if steep) and tp be met by a sudden buying surge as buyers move in.
There is also a ton of cash on corporate balance sheets. Witness Microsoft's bid for Yahoo and yesterdays announcement that IBM has authorized another large share repurchase. Jason Trennert at Strategas notes that cash is at a high not seen in some time. Cash as a percent of total market capitalization is 11% for the S&P 500 (a total of %1.6 trillion!) It was 9% in 1995. Cash as a percent of market cap for the tech sector is a remarkable 24.7% vs 14.2% in 1995. Buybacks and special dividends are likely.
Speaking of IBM, the company raised its guidance yesterday to $8.25 to $8.35. The lower number would be an earnings gain of 16%. With the stock at $116, the P/E ratio on 2008 estimate is 14X. Fourteen times for 16% growth sounds ok to me. Th company reported free cash flow of $12.4 billion last year so the buback can be done with cash on hand ($16 billion) and free cash flow.

Market Close: 02.26.08

Tuesday, February 26, 2008

Celebration, Complaining and the Pootie-Wootie Mobile

Celebration. Yesterday was a bit of a milestone day. My pain pills can be taken every 4-6 hours. I generally have a pretty high tolerance for pain--married with children explains that! But since my injury, I've essentially required staying on my pain regimen every four hours. I would wait until 11 p.m. to go to bed. When my husband (who falls asleep in front of the TV nightly) would come up at 2 a.m., he would fetch water for my 2 a.m. pain pill. Each morning, I would wake with my foot in searing pain. So there was another at 6 a.m. Take, repeat. At hour three the discomfort would come gnawing back. I'd wait for hour four. Tick, tock--counting every minutes. I felt like a drug addict waiting for my next hit.

Yesterday, though, I was able to extend the period between dosing. It was a welcome respite from the clock watching. I had no 2 a.m. pill, but at 6 a.m. I was in agony. I was able to wait until 1:30 p.m. to take my next pill. Here it is almost 6:30, and I think that I might be able to wait until later. I know that sound like a lot about nothing, but it was a happy milestone for me.

Complaining. I continue to find this cast thing very uncomfortable. Trust me that when I say uncomfortable, that is an understatement. I'm a shoeless gal. I don't wear shoes inside. I'm always barefoot in the house. At work, I would always slip my feet out of my shoes (under my desk of course). I drive with shoes. I walk outside or in an office with shoes. Otherwise, my home is a nudist camp for my feet. One I dropped a knife on my toe in the kitchen--so if I'm cooking, I do slip shoes on. Slip ons. I love them. Slip on shoes were the root of my current demise. They are not made for precision--and when you are fooling with dogs, you need precision.

My foot in a cast, then, is like a claustrophobic in an elevator. I never had much empathy for that feeling only because I could never understand it. I understand it now. In spades. That having a cast on my foot is causing anxiety seems strange to me. I'm not a a worrier nor am I an anxious person. But, my foot was very swollen, and I suspect that some of the tightness is from my foot swelling from gravity. So tightness, pressure points from the cast, heat and itching are all discomforts that I must endure for another 5 weeks. I have found a metal shishkabob holder to be a perfect tool for getting to those hard to reach places. Ice helps with swelling and hotness. Listen to me sounding like a whiney-baby. WAHHHHHHHHHHHHHHHH!!!!!

Pootie-Wootie Mobile. Thank goodness for my Craftsmen rolling mechanic's bench. When my kids were young they had "walkers"....those need little seats you could put them in so they could walk, before they could really walk. It had a tray for toys and Cheerios, and bumpers all around. They could really move around in those things. I called it the "pootie-wootie mobile". When our kids had a full diaper, I would talk to them and ask them "are you pootie-wootie."

In general, I did not baby-talk to my kids. But poopy diapers meant that they were pootie-wootie. When they nursed, I asked them if they wanted some wink-wink. When it was bed time, they went to winkie land (from a baby song). My daughter's nickname for along time was "Wink". I still call going to bed, "going to winkieland."

Well here I was rolling around on my Craftsman bench and Hannah, the original pootie-wootie rider now 20, asked "Do you like your pootie-wootie mobile". I laughed so hard I almost fell off. It just rolled off her tongue. She wasn't trying to be smart or cute, she was calling my Craftsmen rolling bench very matter-of-factly a "pootie-wootie mobile". So you can imagine me rolling around in my p-w mobile in my home. No shoes. At least I don't wear diapers--but that might not be too far off in the future.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Monday, February 25, 2008 10:29 PM

Meridith Whitney of OPCO has struck again. She feels (and ignore her at your own risk in that she has been so right) that Citi has a lot of writeoffs yet ahead of itself in the CDO market, the leveraged loan market (loans made to finance buyouts that they still have on their books), and in consumer credit. If so,she says C will have to sell up to $100 billion in assets to reliquify its balance sheet and bring much needed cash back onto its books. The problem is, of course, in times like this the only stuff you can sell is the good stuff, which you would much rather keep.
The question that pops up is if Citi is in such a precarious state, what is it doing providing a back up to inject capital into the troubled bond insurance business? The answer is deceptively simple. If Citi and/or a group of banks underwrite a several billion "bailout" of the monolines, the insurers keep their AAA rated credit. Without that, tens of billions of bonds, mostly subprime mortgage things,the banks now hold would have to be written down and the resulting mark-to-market loss would total far more than the money needed to bail out the insurer.
The state regulatory bodies know this and their job is to regulate the insurer, not the bank. To protect the integrity of the AAA that is used by many municipalities to issue debt at lower interest costs than without it, the regulators have threatened to make the insurer break themselves up into two pieces. One Newco would do the traditional muni bond insurance, and the other would "guarantee" the toxic waste. Without the cash flow from the stable muni business, no one can accurately guess the worth of Newco-B's guarantee. Clever, hard ball, but clever.

Monday, February 25, 2008

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Monday, February 25, 2008 11:51 AM

I have written about EOG Resources before. It has the best name change ever to its credit, having been Enron Oil and Gas, but it's also one of the premier natural gas plays in the market today. It's at a 52 week high right now-well over in fact at $103- but I feel it is still attractively priced. There was an article in Barron's over the weekend that mentioned a little known oil play in North Dakota called the Bakken Shale. EOG is a major participant in this area. The field has yet to be fully delineated, but something with this potential is what EOG needs.
The stock has done well on the strength of its success in the Barnett Shale play in and around Fort Worth, Texas. They still have years of drilling ahead of them in this area, but to get a premier valuation, an energy stock has to have multiple follow on opportunities. The Bakken might be that opportunity.
Also, the price of natural gas has been very strong. I mentioned before that the heat equivalent between gas and oil is 6 to 1. If oil is close to $100, that would imply natural gas should sell for about $16 per mcf. The 10 year average price exchange is closer to 8 to 1, implying a fair value of around $12. Gas closed Friday at $9.15 and the February 2008 contract was at $10.19. This morning, Morgan Stanley raised its price forecast to $8.50 for this year and said the consensus was $7.63. I think both are too conservative, but the stock is trading as though gas was even lower than these guesstimates.
Sustained cold has caused the price of gas to rise, but from a bigger picture view, the decline in Canadian gas imports is of more importance. I don't think Canada will be able to increase its flow of gas to the U.S. because of lack of drilling and an increase in their own domestic demand. There has been a lot of talk about imports of Liquefied Natural Gas (LNG) but the cost and complexity of building facilities for such imports is environmentally daunting, expensive, and not likely to happen soon.
As an aside, the price of gas is in "contango" with the further contract price richer than the near one, but the price of oil is still in "backwardation" since the near contract is more expensive. I think the price of oil corrects a bit, but the price of gas might stay strong.

Vince Farrell of Scotsman Capital-Verbatim (2 posts)

From: vince farrell
Sent: Sunday, February 24, 2008 8:27 PM

The Federal Reserve was established in 1913 after a series of bank failures brought the economy to its knees. It was given the dual charter of promoting growth and maintaining price stability. The European Central Bank (ECB), a much later creation, is focused on price stability alone, and, thus, its maniacal preoccupation with inflation. The Fed is actually 12 banks across the U.S. and its importance to the economy comes from its ability to make money available, or not available.
The Fed Funds rate is the interest rate the Fed can control. It is the rate that banks borrow from one another on an overnight basis. Such loans are needed since a banks daily operations requires a certain amount of liquidity on hand to stay within federal guidelines. The Fed Funds rate is now 3%, down from 5.25% a short while ago. Not so many years ago the Fed didn't announce its target and we were left to figure it out by watching the Fed in its "open market operations."
When the Fed wants to lower the Fed Funds rate it goes into the market and buys govenment bonds from banks that hold them. The Fed "makes an offer they can't refuse" in that the price they are willing to pay is a touch better than otherwise existed before they entered the market. The Fed creates money by writing a check for the purchase of the bonds and the bank that was the seller is now left with cash to invest. As the Fed keeps buying, cash builds up and because there is more cash to be let out, interest rates come down. When the Fed wants to raise rates it does the opposite. It sells bonds at an attractive enough price to attract demand and takes the cash tendered in payment for the bonds out of circulation, thereby making fewer dollars available for loans and raising rates.
As mentioned, the Fed has been lowering rates by buying bonds and pumping cash into the economy. The supply of money has been growing. One measure of money is a thing called M2. It measures cash and money in demand accounts, like checking accounts. M2 has grown by $140 billion in the last four weeks, which is a lot. The growth rate for M2 is up to 11%. MZM, which is "money with zero maturity", or cash (why not just call it cash?) is growing at a 20% clip.
One fly in the ointment is the Fed cannot force banks to lower rates in line with the decline they have architected in the Fed Funds rate. Banks are quick to pass along higher rates, but notoriously slow to lower rates as rapidly. Since the Fed started this round of cuts, some rates have actually increased as banks are taking advantage of the lower cost of funding to loan out at more favorable terms and attempt to repair the damage created by all the writeoffs. There is nothing the Fed can do about that. Also, if lowering rates doesn't stimulate demand by potential borrowers, the Fed is said to be "pushing on a string."
Generally, the process works. The Fed tends to move gradually and tries to gauge the reaction to each step in the process. Right now the emphasis is on stimulating loan demand, but the second mandate, price stability (inflation) is never far from the Fed Governors minds, thus the generally cautious approach.
So sorry to have done this to you on a Monday morning. As a reward for having read all of this eye-glazing stuff, let me tell you a true story. I am not clever enough to make this up. I was at the gym, and a pal named Biff came up. The conversation:
Biff (to Farrell): Do you write a lot ?
Farrell: Well, I write some.
Biff: Well, do you have to use a lot of verbs? I have to write an article and I don't know a lot of verbs.
Farrell: (increduously) Verbs come in real handy some times, Biff.
Voice from the back of the locker room: Biff, just put "ing" on any word and it's a verb.
Biff: I can do that. (and off he went as happy as a man could be)
And I pay money to belong to this gym.

From: vince farrell
Sent: Monday, February 25, 2008 7:14 AM

Fannie and Freddie report earnings this week and, hopefully, we will get a better fix on the sub prime crisis.Both are expected to report big losses and Merrill downgraded both to a "sell" on Friday.These companies acquire mortgages and keep some, sell some, and guarantee the payments on those they package and sell as Collateralized Whatever's. I doubt we will see any relief but let's pull the results apart when we get them.
American International Group also reports this week and the company already said there would be a 5.2 billion dollar accounting write-off. Investors will be watching to see if that's all.
Gentle Ben testifies Wednesday before the House Financial Services Committee. The January Producer Price Index is reported Tuesday and a gain of .4% for the headline number is expected ,and +.2% for the core (ex food and energy.) On Thursday, the Q4 GDP will be revised and look for the original gain of +.6% to be raised a little due to the better export number that was reported with the trade deficit a short while ago.
The point to this list is that there is very little hope for meaningful good news this week, BUT, if stocks decide to do well without good news, then that is the good news.
Another way of looking at things was detailed in a very interesting article in Sundays NY Times business section. The author, Mark Hulbert, quoted a study by Owen Lamont of the International Center for Finance. Lamont has constructed a gauge that measures the percent of all publicly traded shares that began their life in the last 36 months.The proportion increases as new issues come to market, a sign of enthusiasm. The all-time high was 15% in 1929, at the beginning of the Great Depression. The second highest was 11% in March, 2000, just as the Internet bubble burst.
The ratio is now 5.1%, in line with the long term average. When the market was at its recent high in October of last year the percentage was 5.6%. This level has generally allowed above average returns in the subsequent years. Hopefully, that is correct, but at least by this measure the market is far from exuberantly valued.

Sunday, February 24, 2008

New Addition

I've added a new element to my blog--RSI values. These values are helpful to identifying trend changes as well as helping you find more advantageous pricing for stocks that you wish to begin a position in.

I hope that you find it useful.

Keeping a Leg Cast Dry during Bathing

Okay, this is off-topic, but this is my contribution to the leg cast comfort that does not point one to an unseemly place of naked women in casts. There is an unbelievable dearth of information in this regard. Here is my small contribution.

Apparently there are covers that you can get at the store to keep your cast dry. I've been housebound since I've been bound, so I've not seen these. Here is my home-made remedy. What you will need:

  • Plastic trash bag. A tall trash bag works fine for a leg cast that comes to just below the knee (as does mine). If you are protecting an arm cast, you might want to use a smaller sized bag.
  • Compression bandage--about 6 ft worth.. (You should always have this on hand in the event that you suffer a sprain and need to put compression on it. Why not take a moment to check your first aid kit and update it as needed.)
  • Tape, if your compression bandage does not have velcro on it. You could also use safety pins.

Slip the bag over your leg cast. I'm 5'5--tall kitchen garbage bag comes over my knee. Take your compression bandage and begin wrapping (taking care that you end up with velcro on the final end and on the inside) at the point of the top of your cast. Overlap each revolution by about 1/2 to 1/3 width of the bandage. Continue around your knee until you've completely covered up the end of the bag and you have a couple of revolutions of just plain bandage with no bag underneath. The bandage should be snug, but not tight.

The compression bandage will serve as a comfortable moisture absorber and will keep water from dripping inside your cast. Nevertheless, you should take some care to not encourage too much saturation. The trash bag will keep your cast perfectly dry. Now, I buy pretty decent bags. If you buy cheap stuff that might tear, you might consider the risk of tearing and watch for that. When you are done with your bathing, dry off. If you are a woman like me, put your hair i a towel so you don't drip on your cast. Unwind the bandage which will be wet. Hang it up for next use.

I've done this twice already, and it has worked beautifully.

Now I've been bathing in my kids' bathroom which has a shower head that detaches and serves as a hand held. Therefore, I can sit down and manipulate the shower head so as to avoid undue moisture. If you are in a stand up shower, you will want to ensure that you can distribute your weight wither on a crutch, a sturdy shower bar should you have one or a sturdy chair.

If you've searched this out because you are suffering from a break--I wish you speedy healing, and I hope this contributes a bit to your comfort during this awkward time.

Sector Update: 02.22.08

Click on the graphic above to view the Excel file.

Saturday, February 23, 2008

Financial Sense Online Interview today

Financial Sense Online features three technicians: Tim Wood, Frank Barbara and Bob McHugh. They rotate through the weeks. FSO used to feature Tim Wood and Frank Barbara together. I always enjoyed hearing their interplay. They were together today because Tim Wood was stepping in for Jim Puplova:

I'll share a few things, but I would encourage you to listen to the broadcast. Also, watch for the transcript and print it out.

  • S&P:
    • may go up to 1380-1400 area where there is resistance;
    • currently thinks we are in 'no-man's' land;
    • 1320 is important support. A break here would yield a quick test of 1270
    • If the European led the move, he would think the next major leg down is underway.
    • 1320-1400--lots of noise
    • If 1270 breaks, could see bottom objective of 1100-1150--may see an important bottom forming here.
  • DOW downside objective: 9500-1000
  • Nasdaq
    • Support = 2300
    • Resistance = 2400
    • Capex will not save. All data points point to recession; Tech is dead in the water'
    • Small caps do not do well when banks tighten credit.
  • Stock market in a strong bear market
  • Neither believe worst is over--at the very least a re-test of the January low.
  • The way the financial system is imploding. . . a one off event that is pretty scary.
  • Four year cycle (the second longest in stock market history) has topped
  • 2008 a critical, critical juncture for determining if the upcoming cycle will be inflationary or deflationary (Wood):
    • USD is moving into an opportunity to put in an important low.
    • Commodities putting into an opportunity for an important top
    • Depending how resolved will depend on whether we go into an inflationary vs. deflationary.
  • CRB: CRB is putting in a blow off move. Only once in 40 decades has the CRB had back to back weeks of +90 RSI (weekly).
  • Economic indicators around the world are declining. There is no decoupling.
  • Wealth deflation: bear market in housing; bear market in stocks; difficult credit market--all are contractionary.
  • Runaway inflation will be the easy out for countries (pay off debt with less costly money).
  • Ed Hyman's emerging market economies had the biggest downswing ever.

These guys have been right on the money through out. Neither are perma anything. They are very smart technicians that also keep the macro-economic in view.

It was interesting for me to hear this given my earlier posts that have mentioned the concept of USD strenghthening, and the commodities in its last throes. I thought Wood's thought about the juncture of USD/commodities and how that is resolved in determining inflationary v. deflationary period to be very cogent. I've not heard it distilled so elegantly has he stated it. Do take time to listen.

Friday, February 22, 2008

Friday Musings

Today's market data is posted under separate cover. The market for me today was quite interesting.

OCR: I bought some calls on this stock last week. This was in my retirement account. I've owned it in the past; both successfully and unsuccessfully--but on a net/net basis I'm green. It is currently in a turnaround. When I sold my last position, I decided that this was a stock that I would be dismayed to see an updraft without me, but I did not want quite the exposure of owning the common. Therefore, I bought calls. I only had 8 as I did not get filled at my designated price. Today, with the market performing poorly, it was doing quite well.

Essentially an activist shareholder was appointed to the BOD. His firm, Valueact owns about 16% of the company. He had to agree not to make a tender offer, etc for a while. There are many shorts in this position, so clearly they were spooked. I sold my calls. Good news is good news and a 50% gain is a 50% gain. I left money on the table, but I didn't want someone else to be sweeping my money into their pockets!

DIA/UYG: The market trickled steadily down. I was looking at UYG, and thinking that it should make a double bottom before I entered it. With so much ugly news regarding financials, this seemed prudent. I thought that getting some DOW exposure would be worthwhile. I bought just a few calls in my retirement account: MARC 125's.

My son came home and switched the TV to Braveheart (from CNBC). All of a sudden I noticed that my scrolling tickers were flickering like crazy. I wondered what news had hit the wires to cause such a surge of buying. As it turns out there may be a "fix" for AMBAC, one of the bond guarantors. Clearly shorts were covering, but I'm sure that this "news" (and it is not really news as they've been in discussion with the NY regulators for a while, and it is expected that 'something' will get done) is giving the market a toehold in this wall of worry that it has been climbing.

I have enough long exposure to enjoy the enthusiastic response. My DIA calls went from 1.62 to 2.35 in just a matter of 30 minutes. It could have gone the other way. I just happened to be lucky.

I'm still holding a position in SMN. Of course, that went down with the market going up. I'm trying to straddle the right line between conviction and stupidity. The holding is in my spec account, and I was willing to let it go down to 20K with this position. I'm not far from it..

And finally, here is the Lucky 13 that we've been tracking since the beginning of the year.

Today's Market Close

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell

Sent: Friday, February 22, 2008 9:01 AM

Headlines this morning include news from the Balkans that following Kosovo's declaration of independence from Serbia, rioting and unrest are widespread. The 2 million ethnic Albanians that live in Kosovo have long bristled at the Serbs domination. This area was the scene of horrific ethnic cleansing in the 1990's, ended only after American intervention. If this brings back foggy memories of what can best be described as a mind-boggling maze of confusing national boundaries formed after the collapse of the Yugoslav Republic, you are not alone. Read David Halberstam's "War in a Time of Peace" if you want the best, clearest explanation of the lay of the land. Halberstam was a national treasure who died earlier this year. I once mentioned his most recent book "The Coldest Winter" about the Korean War. I have enjoyed everything he has written and "War in a Time of Peace" is worth the effort.
Another headline this morning comes from the European Union. The EU cut its growth forecasts saying the weakness in the U.S. is spilling over and hitting their economies harder than they had expected. A slowdown in the U.S. impacts exports especially from Germany which is the largest economy in the EU. France and Spain are also showing pronounced signs of weakness. The inflation rate in the EU is 2.6%, above the 2% target and they are almost paranoid about inflation. The U.S. Federal Reserve bank has cut interest rates 5 times in the last five months, but the European Central Bank hasn't cut rates in five years. I believe the ECB has no choice but to cut rates and remember that inflation is a lagging indicator.

Oil shaman gourds and Paradoxes

T. Boone Pickens was out yesterday shaking his oil shaman gourds. In the past, whichever position he has espoused in that ritualistic shaking, the market has made a U-turn. Specifically, in the past, he has stated that we'd see higher prices prior to lower. We got lower. Granted, my n= (sample size of observations) is not very large. But yesterday, T. Boone stated that he was short oil. My expectation, then, is that it will go up!

I say that half kiddingly. As this market has gone down, we've seen it as a sector by sector smackdown. Do you remember the first sector to top and then fall? I believe that it was REIT's. Gary K and Doug Kass were the first two folks that I heard warn of these sectors topping, then of course falling. That event was almost a year ago.

Watching this market both crest and fall has been a privilege for me. While I've no insights or experience regarding this process, I know that I will be served well in the future by having watched, and more importantly, THOUGHT, about this process. I'm less concerned with my thinking being right in as much as I'm concerned about whether I'm thinking about the right things.

If I were on an elevator, and someone asked me, "Leisa, what do you think is the most important thing that an individual investor should know?". I would give this answer: "Every individual investor should have a basic understanding of the economic cycle and the sectors which do well or poorly in the phases of those cycles." I would then point them to George Dagnino's blog and ask them to print out and read his brief article on same.

I've referenced this graphic and George's commentary several times on this blog. I continue to believe it to be the single most important article on the web. If you click on the graphic, you will be transported to the article. I hope that you'll take a moment to print it out and read it. If you have an investment in a terrific company that is in a sector that has peaked the probability of your losing money is quite high. I think that buy and hold is so widely touted in that it is the easiest methodology to communicate to the masses--that means you and me. For this to be a singular strategy without some periodic rebalancing makes no sense to me.

In my view, why would I want to buy (commit new money) a good company in a peaking sector only to lose 15-30% when it moves down? The Hirsch brothers have a simple mantra: Always sell half on a double. I've followed this advice religiously, with never a regret. It allows one to generate 'new' money within a low turnover portfolio. It protects past profits and commits 'new' money to sectors/stocks that have a higher probability of doing well. But everyone has to find an investing modality that makes sense to them. This is my modality.

Models serve to give our thinking structure. It does not mean that the models are infallible; but rather, it means that models give our critical thinking process particular points of traction. What are we analyzing? We are analyzing whether or not current observations converge with divergence with the model. In general, points of divergence between empirical (what we observe) data and models is the genesis of all progressive thought. The model of the Earth being the center of the universe worked until Copernicus posited an alternative theory.

You're probably wondering if I have some point to make. I do, and it relates to commodities. Commodities decline in an economic slowdown. We have a point of divergence between commodities rising v. data that our economy in addition to the European economy (as well as some Asian economies) are slowing.

I know the arguments that Jim Rogers and others make that we are in a supra-cycle for commodities. I don't disagree. But even within supra-cycles there are relative points of decline, and there is volatility. I'm trying to understand if the current strength in the non-ag commodities is due to traders goosing the last golden egg of the economic cycle, or if this strength is due to something different.

I believe that relative to where we were a year ago, the demand for commodities has declined. Even China's growth is slowing down a bit, albeit it is in high gear. I also must wonder if many were short commodities as it is the natural place to be in a slowing economic cycle and the recent increase in iron ore prices took many by surprise.

I believe that the world economy is slowing. But I also believe that there are a few paradoxes.

Paradox 1: Resolution of the USD direction. If the USD strengthens against other currencies, then I believe that commodities will fall. The USD likely will not strengthen due to our resolving our economic issues, but rather because our markets and systems (despite the flaws) are more transparent and better regulated than other markets.

Paradox 2: Specter of Stagflation. That despite a slowing in the global economy, the strain on commodities will keep prices high. This becomes the dreaded stagflation. There seems to be an even mix of proponents and opponents to this view. I've not formed an opinion, but I'm watching it.

Paradox 3 (perhaps a Past Paradox!): Liquidity/carry trades. With the Yen strengthening against other currencies combined with its contribution to the carry trade, we've probably seen the effect of this unwinding already. It's been dramatic. But I think that with the reduction of this carry trade effect, there is less cross current noise. I think that this is a past Paradox (meaning markets going up due to the effect of carry trade though future economic picture also showed some slowing.

Paradox 3.1: Fed liquidity. Despite the Fed's lowering of interest rates and increasing liquidity, it is still not enough to create incremental liquidity (meaning liquidity that makes its way into YOUR hands rather than staying within the boundaries of financial institutions with severely impaired capitalization issues). I've mentioned this paradox several times over the last few months. It flies in the face of the aphorism of don't fight the Fed. Nevertheless, there is credible evidential matter that traditionally created liquidity pales in comparison to the synthetic liquidity created by the credit markets. I believe this Paradox to be one of the single most important things to watch. I believe that the amount of liquidity needed to shore balance sheets of credit market players is huge--and the Fed cannot provide all of that. Additionally, one has to consider the effect of tightening lending standards.

Paradox 4: If the magnitude of the credit debacle is as great as they say (and I believe that it is and more), where are the dead bodies? We are not out of the woods until you see more dead bodies. I think that there will be a floater or two that will surprise us. If there are no dead bodies, then IN RETROSPECT, we will know that the issue was never as deep and wide as believed. I do not believe that to be the case.

These are a few of my favorite things to keep in mind as events unfold.

I sold my HERO calls for a 50% gain. Looked like this area was getting a bit weaker--and it was a good decision with the information that I had available. I still like this stock, and I'll look to re-enter.

Anais Nin

(click on book image to be transported to Amazon)

I'm in the camp of not knowing who Anais Nin is as Vince Farrell professed in his last missive. But we are committed to DaVincian principles here--Corporalita, , Curiosita and Erotica---oops! Erotica is not one of them, but certainly a category Nin explored. Here's a brief excerpt:
"Anaïs Nin is perhaps best remembered as a diarist. Her journals, which span several decades, provide a deeply explorative insight into her personal life and relationships. Nin was acquainted, often quite intimately, with a number of prominent authors, artists, and psychoanalysts and other prominent figures. Her journals portray these persons in a profound depth of analysis and frankness of description. Moreover, as a female author describing a primarily masculine constellation of celebrities, Nin's journals have acquired importance as a counterbalancing perspective." Please visit Wikipedia for the full entry here.

I still marvel at our ability to have so much instantaneous factual information at our fingertips. I've tried to cultivate the habit of looking up "stuff" that I'm not familiar with. Words are generally the category that "stuff" most generally falls into. I learned that Nin's second husband (with whom she was married while still married to her first husband) had her unexpurgated journals. 'Unexpurgated' was a new word for me. Though I inferred the meaning, I did look it up to be sure. You can too by clicking on the link.

With the exception of typos that I may later see (or have pointed out to me by my quality control panel), you can be assured that you get unexpurgated posts here.

Thursday, February 21, 2008

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell []
Sent: Thursday, February 21, 2008 4:25 PM

This is an update I circulated to my partners re. Transocean. It's an update on new rigs

I might not be on the call tomorrow, so I wanted to get this to you. A Norwegian company, Ocean Rig, signed a 10,000 foot semi to a 3 year contract starting mid-2008 for $617,000 a day with a two year option. Like I said, RIG has three similar rigs that would be available 2009 and will probably get a similar rate. $600,000 a day is an alltime wow record.
RIG has 8 rigs under construction. 4 deep water drillships will be delivered in March '09, April '09, and two in April 2010, all of which have long contracts. A semisubmersible will be delivered in Q1 '09 and will enter a seven year contract. The company has a 50/50 joint venture in two newbuild drillships with delivery in the second half of '09. One has a $530,000 a day contract and the other is close to a similar deal. The only spec rig comes from the Global Santa Fe side of the merger, and that's a $740,000 cost drillship with a second half of '09 delivery date and no contract.
There is very strong interest in new builds from a variety of companies and locations. The company sees an "urgent requirement" for deepwater rigs offshore India, and offshore Brazil where Petrobras is negotiating renewals for existing rigs. Transocean sees strong demand offshore West Africa, Asia, and, as I have mentioned before, Pemex (Mexico) is woefully behind its exploratory needs and there will be, in my opinion, desperate demand for deep rigs in the Gulf.
I expect the company to announce several new builds vs. contracts over the next couple of years, with one probably this year. These new rigs at the current day rates will propel earnings estimates upwards. I continue to think this is a core holding.
Lehman and Bear Stearns provided most of the data. The opinion is mine.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Thursday, February 21, 2008 3:52 PM

The Philidelphia Fed Index, a manufacturing measurement, was "shockingly poor" says Merrill Lynch, and we are in a recession now. The unemployment claims say otherwise. Claims were down a bit this week and the four week average moved up the fourth week in a row to 360,500. That is still below the 400,000 or so that would indicate no growth and we drop off a big number next week (378,000), so chances are this statistic will tick down. Who knows?
There is a growing level of noise about stagflation (sluggish growth and rising inflation.) The last time we had stagflation was the late 1970's when inflation was 15% and unemployment was 9%. Headline CPI inflation is now 4.3% and core (ex food and energy) is 2.5%. Unemployment is 4.9%. We need to be aware of the potential for bad news, but let's keep a perspective. If Merrill is right and we are in recession, inflation will ebb. The last commodity boom we had was in the 1970's and headline inflation was 14.8% and the core was 13.6%. At the start of the 1990 recession the core inflationary measurement was 5%, and at the start of the 2001 recession 2.7%. Remember, inflation is a lagging indicator. The Fed knows that and that's why they will continue to cut interest rates especially since we are at such a low level to start.
That doesn't mean the Fed won't be concened about inflation. The Fed doesn't use the Consumer Price Index prefering a different measure, but for simplicities sake, let's interpret the Fed's targeted rate of core inflation to be 1.5-2%. We are at 2.5%. Inflation falling in a slowdown/recession will take care of that difference. If it doesn't correct, the Fed will err on the side of stimulating the economy and attack inflation later.
On to politics for a second. McCain has a new issue with a lobbyist, but Clinton is in some trouble at home. She trashed bankers and hedge fund managers as people that don't do real work (damn, she found out!) Last I checked daughter Chelsea works for a NY based hedge fund, Avenue Capital Group (Motherrrrr, Really!!!)
On this day in 1903, Anais Nin was born. I have no idea who she/he was, but the name is in the New York Times crossword puzzle a lot, so make note. It was also this day in 1975 that Mitchell, Haldeman, and Erlichman were sentenced to prison. That brings back memories.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Wednesday, February 20, 2008 6:20 PM

Rich Bernstein is Merrill's chief strategist and thinks energy shares should be sold. He has a bunch of reasons. Among them are 1) sentiment towards the group is overly bullish and there is too much speculative froth in the prices, 2) the companies are reporting negative earnings surprises, 3) Merrill is forecasting lower oil prices for the year, 4) inflation is a lagging indicator and will come down as the year goes on , and commodity type plays will lose their attractiveness, and 5) oil is priced in dollars and the dollar looks to be bottoming.
All good points and I won't address each one since I don't know how you really measure bullish sentiment and speculative froth. I find that both bulls and bears use such terms to augment their positions. The companies have surprised on the earnings front but mostly because of weak refinery results which always occurs when the price of crude spikes. It is tough to pass such costs on in a timely manner. This is well known but hard to estimate the impact in any quarter, so the magnitude can be a surprise but not the direction.
Where I would disagree with Rich, and he is some smart guy and being on the other side of a debate form him is a cold and lonely place, is on the price of crude being down this year. For 2007, the average price of a barrel was $72. We got used towards the end of the year to talking about $100 oil, but for the full year it averaged $72. If it were to average less than that this year, than I'll be wrong and we should reduce our energy exposure. We are near the end of February and the average is in the mid to high $90's, so my guess is the average this year will be $80 plus, and it could be plus a lot. Also, as I mentioned in an earlier email, the consensus guess for this year is $79, so the stocks reflect a negative bias to the current price and surprises might come on the upside.
Inflation is a lagging indicator, and if inflation quiets, central banks will feel free to cut rates to stimulate growth and drive the demand for oil up. I feel there is a basic supply/demand imbalance in the oil world. 77% of the worlds reserves are held by governments or National Oil Companies (NOC's) and they tend not to like us and will squeeze every penny out of us they can. There have been no new major fields found in a long time and even the Saudi fields are in decline. The Saudis have never had more rigs working, yet their production is stable, not growing. In any year the price of crude can do whatever, but I think the trend is up. The companies themselves are trading as though the price of oil were around $55-$60. I say that because Exxon, the biggest, usually trades around a market multiple. For this current price to be equal to a market multiple, the price of crude would have to be $55-60 to generate the earnings for my little equation to work. Using current oil prices and current earnings, XOM is at a big discount to a market multiple.
We are staying long the energy stocks.

Market Close 20_FEB_08

Wednesday, February 20, 2008

A Rant

I'm having some difficulties with my cast and my comfort. I Google things frequently, and I figured that I could Google myself into a solution.

While I did not find an answer to my question, I did find that there is a bit of porn out there that involve women in casts. I did not visit any of these sites, nor even pause to think how I might be able to capitalize on this. However, I was more than mildly irritated that porn insinuates itself into some of the most innocuous searches.

I'm not prude. If people want to see porn on the internet, I've no objection. However, if one is searching for something that does not include the names of sexual parts or explicit verbs of sexual or other parts in action, then one ought to be spared being shown porn sites unrelated to one's search.

Did you know. . . .?

about Mercury retrograde? More in a moment.

Today the market behaved decently despite bad news on many fronts. Many perceive that as bullish.

In paying more attention to the market, I find that having a better understanding of market technicals has gone a long way toward explaining some of my previous 'perplexions'. That's not to say that I don't scratch my head at times, but not so much.

Oftentimes, markets (or stocks) respond to technicals--overbought (no more buyers) or oversold (no more sellers) that cause reflexive actions. The market has been oversold and due for a reflexive bounce. Yesterday I cited one of Barry's posts about the number of stocks that were trading above their 200DMA. That statistic is an inverse indicator--meaning that when the number of stocks trading below their 200DMA is high, that is bullish for the the market.

On Tuesday, Kevin Ferry, a trader who appears on Squawk Box on CNBC, mentioned that one of the reasons that the market was opening strongly had to do with the end of Mercury retrograde. At first I thought that he was joking (though I knew that the Mercury was stationing direct that day). He was not. In fact, he said that many traders followed this. I was just surprised to hear this on national television. So that you can have access to the same information that traders do, I've prepared this table for Mercury

Mercury (the sign represented by the glyph in the first column) rules communication (think of the RIMM communication failure which would be a classic Mercury retrograde event. In fact, if one 'followed' astrology, one would not do switch overs of communications equipment during a Mercury retrograde!). Signing of contracts, even short term travel can be problematic. I had a short-term travel accident on Saturday!

Anyway, I'm not trying to espouse Astrology, though I've always had an interest in it due to my interest in mythology. But I did want to point out that traders watch Mercury's stations. If people who trade "think" that such movements will cause the market to give fake-outs and unexpected technical breakdowns, then those folks will certainly make it a self fulfilling prophecy.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell [
Sent: Wednesday, February 20, 2008 5:27 PM

Despite worse than expected inflation readings on the CPI today, lackluster housing data, the high price of oil, and a dismal op-ed piece in the WSJ by Martin Feldstein, a respected economist who said in effect the Fed is hamstrung in its efforts to turn the economy cause it's different this time, the market had a respectable day. When stocks don't go down on bad news, that's good news.
I think players focused on the release of the minutes of the Fed's meeting that gave a downbeat forecast on growth, but said inflation is expected to slow in 2008. A 50 basis point cut in the Fed Funds rate at the next meeting on March 18th seems likely which is what the market wants to hear. But beware, volume was light and that's not good if the market is to go higher. Volume is a weapon of "the bull."
Transocean reported a very good quarter that exceeded estimates and the stock was strong, closing up $9 to $138.73, or almost 7%. Consensus earnings estimates for 2008 are $14, and by 2010 the consensus rises to almost $20 per share. With $14 in earnings this year the P/E is less than 10 times and, if $20 is accurate, the multiple on 2010 is less than 7 times. I think it's ok to look so far out since many of their deepwater contracts are long term in nature and the eps are visible, and depend, of course, on execution, which management seems capable of delivering if this quarter is a guide.
Another driller I have talked about is Rowan. The stock was up in harmony with RIG today, rising $1.53 to $40.12. While they have a lot of equipment in the Gulf of Mexice, the company has rigs offshore Saudi Arabia, an admirable oil service manufacturing business, and some land rigs. Consensus for 2008 is $4.62, so the p/e is 8.6 times, a discount to RIG, but appropriate in my opinion. Consensus rises to $6.41 for 2010, or barely 6 times. I continue to like both names.
The consensus (my big theme today) for oil and natural gas is that oil will average $79 a barrel this year, and that natural gas will average $7.50 per mcf (million cubic feet.) But the 12 month strip (average) for gas is well over $9 and the price of oil is $100 and the 12 month strip is close to that. I think price estimate will go up during the year, although I'm still guessing that oil will have a correction as soon as the winter fades. Goldman Sachs, for what it is worth, is estimating an average of $95 for oil this year.

vince farrell
Sent: Wednesday, February 20, 2008 8:54 AM

Jan Hatzius, the head economic honcho at Goldman, had some dismal forecasts the other day. He figures that home prices are going to drop another 10% this year and that would mean 15 million mortgages, or 30% of total mortgages, would be on homes where the owner had "negative equity" in the house. Hope he's wrong. And I think he might be. The number of applications for refinancing of mortgages has tripled in the last four weeks which means that lower interest rates are starting to help. M2, a broad measurement of money in the system, is up $130 billion the last three weeks. This can be convoluted to explain, but accept that the Fed is pumping money into the economy and it seems to be welcomed. Let's see how this plays out.
I read in the paper the other day that BBB rated Collateralized Debt Obligations (CDO'S), which are collections of subprime mortgages, are 10 times more likely to default than BBB rated corporate bonds. Moody's Rating Agency says no, no. They are only 8 times more likely to default (Saturday's Wall Strret Journal.) What gives ? What are the alleged rating agencies up to ? Are they totally incompetent, corrupt, or what? How can you give something 8-10 times more likely to default the same rating ? Enraging !
With the back up of leveraged loans on bank balance sheets, financial M&A is not likely to come back anytime soon. Those heavy loans will have to be moved to clear the way for lending activity to resume. The only way to move them would be to sell at a loss, which estimates figure to be 5-7%. The banks can keep them and probably will get all the money back at maturity, but then they won't be able to make new loans.With $1.6 trillion in cash on corporate balance sheets, however, expect a lot more of Strategic M&A, like the Microsoft bid for Yahoo.
The Consumer Price Index was just released and it was "hotter" than expectations at +.4 on the headline and +.3 on the core, which excludes food and energy. Year over year the headline is +4.3% and the recent high was in 2005 at +4.7%. The core year over year was +2.5%, stronger than the 2% upper end of the Fed's target. Before we get overly excited, remember that inflation is a lagging indicator and before we start with doom-type forecasts of "stagflation", remember that the stagflation of the late 1970's and early 1980's had both inflation and unemployment in the double digits.The numbers released today along with oil near $100 will cause the market to sell off. I still think we need to test the January lows of arond 11,600 on the Dow vs. 13,400 now.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Wednesday, February 20, 2008 8:54 AM

Jan Hatzius, the head economic honcho at Goldman, had some dismal forecasts the other day. He figures that home prices are going to drop another 10% this year and that would mean 15 million mortgages, or 30% of total mortgages, would be on homes where the owner had "negative equity" in the house. Hope he's wrong. And I think he might be. The number of applications for refinancing of mortgages has tripled in the last four weeks which means that lower interest rates are starting to help. M2, a broad measurement of money in the system, is up $130 billion the last three weeks. This can be convoluted to explain, but accept that the Fed is pumping money into the economy and it seems to be welcomed. Let's see how this plays out.
I read in the paper the other day that BBB rated Collateralized Debt Obligations (CDO'S), which are collections of subprime mortgages, are 10 times more likely to default than BBB rated corporate bonds. Moody's Rating Agency says no, no. They are only 8 times more likely to default (Saturday's Wall Strret Journal.) What gives ? What are the alleged rating agencies up to ? Are they totally incompetent, corrupt, or what? How can you give something 8-10 times more likely to default the same rating ? Enraging !
With the back up of leveraged loans on bank balance sheets, financial M&A is not likely to come back anytime soon. Those heavy loans will have to be moved to clear the way for lending activity to resume. The only way to move them would be to sell at a loss, which estimates figure to be 5-7%. The banks can keep them and probably will get all the money back at maturity, but then they won't be able to make new loans.With $1.6 trillion in cash on corporate balance sheets, however, expect a lot more of Strategic M&A, like the Microsoft bid for Yahoo.
The Consumer Price Index was just released and it was "hotter" than expectations at +.4 on the headline and +.3 on the core, which excludes food and energy. Year over year the headline is +4.3% and the recent high was in 2005 at +4.7%. The core year over year was +2.5%, stronger than the 2% upper end of the Fed's target. Before we get overly excited, remember that inflation is a lagging indicator and before we start with doom-type forecasts of "stagflation", remember that the stagflation of the late 1970's and early 1980's had both inflation and unemployment in the double digits.The numbers released today along with oil near $100 will cause the market to sell off. I still think we need to test the January lows of arond 11,600 on the Dow vs. 13,400 now.

Tuesday, February 19, 2008

Today's Market Close

Today while drinking morning coffee on the sofa, I had the most wonderful epiphany. I remembered that Mark had this little red Craftsman rolling mechanics bench. It has a padded seat about 15' x 7: and a tray below it (where you'd put nuts, bolts and the like). I figured that would be a perfect thing to scoot around on.

My mobility improved greatly. My left hip flexor is very sore from lifting my leg leadened with a cast. I'll have to curb my enthusiasm for scooting around, though I found I could flex my knee and rest my heel on the tray. However, I also realize that position is an accident waiting to happen. Of course I'll share it with you with pictures even.

Did you think that you had somehow missed a party this a.m. when the futures went up double digits? On Monday, when I read about the iron ore prices going up, I had large pangs about SMN. I took a largish position in my spec account last week, and it bit me! I sold half my position. HERO continues to do well--largely due to natural gas doing well and oil going over $100.

Barry Ritholtz has a good article here on the % of stocks below their 200DMA. Essentially when this happens, there is generally a rally.

I found a very nice industry snapshot at Morningstar. You can access it here.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Tuesday, February 19, 2008 5:59 PM

There was certainly enough in the way of bad news in the papers Tuesday if you wanted to be bearish. The WSJ reported that Lehman might take a billion plus hit in the commercial real estate lending market. There are $200 billion in "leveraged loans" on banks balance sheets. These are loans made to facilitate leveraged buyouts and since the market has fallen, they can't be sold without taking a loss. Citi is thought to have $43 billion, Goldman Sachs $36 billion, and J.P.Morgan another $26 billion. The guessing is that the loss ranges from 5-7%, but that's a guess. The banks could hold them to maturity and most probably get paid. It's the low interest rate relative to prevailing levered deals that makes these loans unattractive at the original terms, but then the lending capacity of the banks is reduced since capital is tied up on the balance sheet supporting these loans.
UBS also speculated the additional losses of between $123 and $203 billion could be taken on additional subprime losses, the above mentioned levered loans, commercial real estate loans gone bad, and the hit that would be taken by banks if the monoline insurance companies failed and they lost the guarantee on some CDO's that are part of that guarantee package. Wow ! Enough to make you run away.
Yet the market started out on a strong note powered by a good report from WalMart and it wasn't until oil soared towards the magic $100 per barrel price that the market lost ground. By the close, the averages were off a touch. All-in-all, a good day. As I have said, when stocks don't go down on bad news, there is hope for mankind.
WMT had a good report. Cost controls were evident so it looks like the company can maintain/cut prices to attract consumers and maintain margins. The growing overseas presence helped (especially in Cnada, Brazil, and the UK) and about 40% of the U.S. segments' total comes from groceries, a notoriously low margin business, but WMT seems to have its groove in that field. The stock trades at about 14 times next twelve months earnings estimates, which is the lowest multiple in memory. We/I own it and feel its a solid play in this type of economic environment where the consumer is challenged.
I wrote about America International Group (AIG) last week. Over the weekend Barrons highlighted the stock and strongly recommended it. The analyst quoted said "most if not all of the charges will be reversed back into AIG earnings over the next few years...... The portfolio has a weighted average life of just over four years." I continue to recommend AIG and I'm very glad to have some company.
Hell hath no fury like a woman scorned. A British man obtained a restraining order against a bitter ex-girlfriend who sent him 10,000 phone text messages in two months. That's an average of one every eight minutes ! And the idiot didn't get a new cell number ?
Berkeley, California rescinded its decision to tell the U.S Marines they were "unwelcome intruders" for running a recruiting center in the city. The rebuff to the Marines caused a national furor, and protests in Berkeley itself. It's not called the "Peoples Republic of Berkeley" for nothing.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Tuesday, February 19, 2008 8:52 AM

It's amazing what experiences some people have had. A friend emailed me to say that she has first-hand knowledge that General Galliteri, the head Argetinian honcho who launched the Falkland invasion, was on the phone with President Reagen for three hours as Reagan tried to talk him out of the stupid decision he was making. The good General was drunk the whole time. Hard to believe that such insanity exists and that people lose their lives because of it.
I wrote about Transocean and Rowan Drilling last week. RIG announced the sale of three commodity type jack-up rigs to Hercules Offshore for $320 million and a contract for a deepwater drillship at the rate of $510,000 a day. Both pieces of news are welcome. The sale of the jack-ups is an indicator of strong demand for this type of equipment and that the bearish sentiment around the Gulf of Mexico is overdone, so I repeat my positive view on RDC which has a lot of equipment in the Gulf. RIG recently had a big merger and paid out a $33 a share special dividend and this sale allows them to accelerate the debt paydown that is underway. RIG remains my favoritein this group.
More later. Need to get to the studio for "The Call" at 11 AM eastern.

Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Monday, February 18, 2008 4:51 PM

I haven't owned an airline stock in years. I'm not likely to any time soon. The airlines have very high fixed costs (the planes), a crazy variable cost (the fuel), and have managed to make up for these problems by developing the worst imaginable labor relations since Rome enslaved the world. We might hear an announcement this week that Delta and Northwest are going to merge. There have also been rumors surrounding a potential combination between UAL and Continental and American and U.S.Air, or American and any number of others. What's up?
Glenn Tilton, UAL's CEO, has been a proponent of consolidation for a while. He's quoted in Saturday's WSJ saying the U.S. industry is too fragmented to compete against the powerful international rivals starting to encroach on U.S. soil. Lufthansa bought 19% of Jet Blue to gain access to valuable landing slots at N.Y's JFK airport (my interpretation.)
The arguments against consolidation have centered around fears that lack of competition would raise prices and cut service (what? service could be worse?) Politicians can be counted on to weigh in about job losses with combinations.But consider this. Recently, four out of the six major U.S. based carriers have operated in Chapter 11 bankruptcy, and as late as 2006 half the seating capacity was in Chapter 11 (Economist Magazine 2/16/08.) Since the bankruptcies wages are off -30%, the work force has been drastically reduced by -39% and there was a $20 billion default on pensions (also from The Economist.). This is not a viable business model. The low cost airlines have eaten away at the short haul traffic and now control 30% of seat capacity. The only area for profitable growth for the big guys are the lucrative overseas routes where they will go head to head with the well-off international carriers. Because of home court advantage type rules, the low cost short haul start-ups are not as prevalent overseas and have not been around to eat the crumbs off the cake of the bigger airlines. It's inevitable that for our domestic carriers survival, combinations have to occur. The bargaining power of larger firms is needed and the future of these household names depends upon developing long haul business where there is greater scope for savings and where premium traffic continues to grow.
If UAL/Continental or Delta/Northwest were to occur, only 5% of total seats would overlap which should ease fears about predatory pricing. But one never knows when government agencies are involved. The fireworks should start this week and I'll watch from the sidelines. I need to care about a company to invest in it. I need to root for success. I will never own a tobacco company. I'm not holier than thou, but I would hate it if Lola Jane smoked when she grew up. Why would I root for that? I really can't own an airline since in my 35 years in the investment business, I have flown so many miles I would be embarrassed if you found out the total. I really hate the airlines, but I think they should be allowed to merge
Have I mentioned I really hate the airlines ?

From: vince farrell
Sent: Monday, February 18, 2008 11:54 AM

Television history was made Friday night ! Sir Larry Kudlow, Lola Jane's honorary Uncle Dougie Kass, and yours truly held forth on Larry's show about all manner of things. Witty repartee and pithy insights ruled the airwaves. We, of course, disagreed on most things. We did all come together for one moment ,however, as we somehow started to fondly remember the Moody Blues. Days of youth when we were kings flashed through our memories only to be halted when someone said if we really could remember the Moody Blues, we weren't having as much fun as we could have. Probably should have inhaled.
One substantive and important issue discussed was The Lord High Governor of New York, Eliott Spitzer, and his puzzling order that the monoline municipal bond insurance companies come up with a solution in the next 3 to 5 days or else. Or else what I don't know, but this is deeply troubling to me. We all remember Attorney General Spitzer and his assault on the deplorable research practices on Wall Street of recommending crazy internet stocks publically while trashing them privately. In my opinion, the punishment meted out was deserved. What was not deserved, in my view, was the methodology. No one ever had a day in court. Threats of indictment and sharp elbowed tactics ruled. A.G. Spitzer demanded resignations or he would issue indictments. Wall Street caved as being indicted is tantamount to closing shop. Former head of the NYSE, Richard Grasso, is not a sympathetic figure, and was assaulted for his compensation and sued, but the compensation committee was given a pass. Carl McCall, an influential former NYS Comptroller and leading Democrat, headed that committee.The Comp committee awarded the money, so where was their indictment? Read Charlie Gasparino's excellent book, "The Club" to get a good insight.
We debated why this move by the Lord High Governor (LHG.) I likened it to the Argentine Generals at the start of the Falkland Island war in 1982. Argentina's economy was crumbling under the junta's idiotic economic policies. Inflation was raging and hundreds of protestors had disappeared never to be seen again. Society was on the brink when the leadership figured a diversion to rally the country was needed. So, they occupied the Islands, and triggered a war with Great Britain, who had long claimed the Islands. The Argentine Navy was sunk and some 800 lost their lives and the junta eventually disappeared into the sands of time. Likewise, Venezuela's Chavez is bankrupting his country, oversees soaring food costs, and is facing mounting unrest. So, he is picking a fight with Exxon to rally the folks against the evil imperialists who are really to blame for the ills plaguing the country. This will not work. Such "diversionary" tactics never do. Those that ignore the lessons of history are condemned to repeat them.
What has this to do with the LHG Spitzer? He rode to the office of Governor on the strength of his populist trashing of Wall Street. Once there, he acted as though he still had the power of indictment and promised publicly to run "roughshod" (his word) over entrenched Albany interests. Didn't work. A couple of very public miscues later and the LHG's political standing has sunk and is going lower. Thus, in my opinion, the diversionary tactic of bullying the insurance companies to show the world he still has it. Does he want to resurrect his political career to be a Vice Presidential possibility ?
The issues facing the monoline insurance companies are deep and complex, but they are understandable and best left to the private sector for resolution. There will be pain, but that's the discipline the market eventually applies to those that stray beyond their core competency. To impose a 3-5 day limit is lunacy. Calm down Eliott. Those that legislate in haste, repent for a long time.