March 29, 2009

March 29, 2009

“One determined person can make a significant difference; a small group of determined people can change the course of history.” Sonia Johnson

Market
The market continued to rally this week as the S&P 500 rose another 6.2%, peaking at 832 on Thursday before pulling back slightly Friday. Monday was an enormous day with the market surging 7% on the Treasury’s PPIP announcement (see PPIP below). Monday’s move was the largest move in the market since 1938, which is rapidly becoming the favorite year of comparison for 2009. For those of you who aren’t aware, 1938 was a year when the market bounced significantly after a horrid 39% decline in 1937, rising 24% for the year and 55% from the March 31st low.

As I’ve been saying for a number of weeks, I am using the 830 level as a place to start moving my portfolio net neutral/short. Now that the market has tickled those levels, I have begun to move the portfolio in that direction. Where are my concerns? Everywhere!! This market continues to make a fool out of anyone who even sniffs a bit of success, and bear markets typically don’t end until everyone has been wiped out-longs and shorts.



The market action during this bounce continues to be robust and broad based. Financials, industrials, and technology have all been strong, and were the leading groups for the week. During the rally that died out after the New Year I said one of the reasons to doubt the validity of that rally was that it was being led by the late cycle stocks. It is my opinion that a new bull would need to be led by more of the traditional early cycle sectors (financials, consumer discretionary, and transportation). The transports actually performed well during the week, rising over 10%. In my view this current rally could have more staying power, and that makes me nervous given my portfolio positioning.

As always, I continue to keep an open mind when it comes to identifying the end of this bear market. Right now I still believe the market is range bound with a downward bias, and will continue to position as such.

April
According to the Traders’ Almanac, April has historically been a good month for stocks. April is the last month in the best six months of the market. Typically, however, stocks run up into the first half of the month and then fade once earnings for the first quarter are announced.

Bubbles
Last week I asked where the bubbles are forming, and the consensus among readers seems to be in the treasury market. Treasury yields are being artificially held down by Fed buying. The Fed cranking up the printing presses to make these purchases. To me this sounds eerily similar to the housing bust we just witnessed, whereby investors continued to bid up housing prices by using ultra cheap capital-until the underlying asset values wouldn’t support the leverage and the capital went away. What happens to the Fed Ponzi scheme when the world dumps the dollar? Bonds will collapse as well, sending yields and domestic inflation skyrocketing.

Economy
In general the economic releases have still been weak, but have been exceeding estimates. Many feel that beating expectations the first step towards a bottoming in the market as the dire circumstances of the economy may finally be priced into stocks.

Existing home sales came in at 4.7mil vs. 4.45 mil expectation, up 5% month over month. The big driver of growth (43%) was foreclosure sales. Sales of new single-family homes in February 2009 were at a seasonally adjusted annual rate of 337,000, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.7 percent (±18.3%) above the revised January rate of 322,000, but is 41.1 percent (±7.9%) below the February 2008 estimate of 572,000. That range is enormous: 4.7% +/- 18%? That’s a range of -13% to +23%. That’s quite a margin of error, yet the markets jumped on the headline number as a sign the housing market has stabilized.

US durable goods orders rose 3.4% vs. expectations of -2.5%, the biggest increase in a year and a nice bounce after a 7.3% decline in January. New orders were up 3.9%.

Personal consumption (graph below) was down 4.3% vs. expectations of -4.4%.



Initial jobless claims were 652K, again stable around 650K. Continuing claims are now at 5.56 million.

The University of Michigan confidence index came in at 57.3 vs. an expectation of 56.8 and 56.6 in the prior period.

The final Q4 GDP came in at -6.3%, the worst drop since 1982.

PPIP
PPIP is another $1 trillion plan, this one offered by the Treasury, to move toxic assets off the books of the banks by providing funding and guarantees to investors who will buy those assets. I wonder if the private firms considering stepping into this market in partnership with the government are pausing to analyze how much criticism and punitive taxes they will face if they are successful?

The Geithner Giveaway
From Josh Rosner
“While exclusions from TARP compensation limits should exist to protect the public bidders of assets in the Legacy Loan Program they should not exist for the five ‘largest and most sophisticated’ firms that will manage the Legacy Securities Program. This Geithner giveaway to managers that appear to have unlimited access to the Treasury Secretary, and to the White House, appears to be the real scam of the century. Isn’t the unfettered access and unlimited market power these firms wield reason enough to ask if they are being provided “protection” in their bids to grow to become systemically risky and globally dominant?

The “hunting license”, as the Legacy Securities Program has been termed, allows giant “F.O.T.” firms (“Friend’s of Tim”) to buy the assets anywhere they can find them (not just from banks - perhaps even from each other or their own separate funds). The details are scant. Is it dollar for dollar matching private/public funds? It appears but isn’t clear that it may include UST debt financing as well as equity. It seems to allow the winning firms time to present a plan to UST, take time to raise money, time to identify securities, try and buy back pieces of ARM and CMBS to reconstitute CDOs and “add value”. The program requires RMBS to originally have to have been AAA rated and ABS and CMBS to currently be AAA. Are they able to use this as a mechanism to bid up the value of their own separate portfolios?”

Treasury Market Woes
The UK failed to complete their bond offering this week, the first time in seven years, a sign investors don’t agree with their plans to halt the economic crisis there. Interestingly, the UK has been pursuing a similar strategy to the US-buying their own debt in an effort to manipulate yields downward.

In the US treasuries continued to fall after an auction of 5 year notes drew a yield of 1.849% vs. the 1.801% forecast. In the understatement of the week, Bulent Baygun, head of interest-rate strategy at BNP Paribas said “Prior to the auction the Fed conducted its purchases of Treasuries, which may have compressed interest rates below where they would have been otherwise.” Duh!

Taxes
It appears that Paul Volcker, who has voiced his frustration at not having enough input into the economic bailout plans, will be named to head a review panel of the tax code. An administration official said the purpose was to “rebalance the federal tax code.” My only comment is “look out!”

Oil and Taxes
The Wall Street Journal reports the Obama administration's push to raise taxes on the oil industry is reigniting a battle the industry fought and won last year. Under pressure to narrow projected deficits of almost $10 trillion over the next decade, President Barack Obama's 2010 budget proposal calls for raising more than $31 billion over the next decade by eliminating the oil and gas industry's eligibility for various tax breaks. The plan would slap companies with a new excise tax on production in the Gulf of Mexico worth $5.3 billion between 2010 and 2019, and repeal the industry's eligibility for a manufacturing tax credit worth $13.3 billion in that period. The industry says the final cost of Mr. Obama's proposals on petroleum production could top $400 billion, once his plan to put a price on greenhouse-gas emissions is factored in. The Obama administration has generally justified its proposals by arguing that taxpayers deserve a better deal. Speaking to the American Petroleum Institute this month, Interior Secretary Ken Salazar cited a recent report by the Government Accountability Office that said the U.S. receives a low share of revenue for oil and gas resources compared with other countries. In an interview, Mr. Salazar signaled that the administration might reconsider some proposed tax increases on small, independent producers.

Did I read that correctly? We are now comparing our corporate taxes to countries such as Argentina, Brazil, Russia and Nigeria?

Dollar
The dollar dropped against most major currencies after U.S. Treasury Secretary Timothy Geithner made comments that raised concerns about the currency's status. In response to a question about China's proposal regarding special drawing rights, Geithner said he is "open" to the idea. He quickly clarified that the dollar is still the world' premier reserve currency. I’m not sure if the Secretary qualified for his current position or not, but it is very apparent that he shouldn’t make any more public statements.

Gasoline
Regular gas rose to over $2 a gallon for the first time since November 20th. US refiners have cut production rates to the lowest level since 1992 due to low consumption. Consumption of gasoline was up 1.6% last week vs. the prior week and down 0.2% from a year ago.

Inflation
From Peter Boockvar:

“Fed Pres Lockhart in a speech a few hours ago in Paris is summing up well what is the growing angst in the markets that the Fed is sowing the seeds for big inflation with their aggressive steps by saying, “there’s reasonable concern related to the growth of the balance sheet of the central bank in response to the economic difficulties we’re having, that this could over the long term fuel inflation if the monetary aggregates are not managed well and if the Fed doesn’t react at the right time to remove some of the stimulus.” We are thus relying on a Fed that thought subprime was contained at a loss of maybe $150b in 2007 to somehow reverse their massively aggressive initiatives at the exact right time.”

Dollar Part Deux
This week the G-20 will be meeting, and the two key topics will be how to deal with some of the really weak countries and discussions on a new global reserve currency. The Chinese (and apparently our Treasury secretary, see above) are pushing for a basket of currencies to move the world away from having the dollar serve as the global reserve currency. If this happens, watch out below! The dollar will collapse, resulting in skyrocketing prices for any product with foreign inputs.

Bailout
Is anyone else bothered that the government’s solution for getting us out of this recession is the same factors that got us into this recession? It seems to me that if deficit spending and cheap capital were the cause of our present economic problems, then it seems unlikely deficit spending and cheap capital are the cure. Are we trading today for tomorrow? Why don’t we just swallow our medicine as opposed to throwing the burden onto our kids? This definitely won’t go down as “the greatest generation” as our parents and grandparents did.

Smart PM
From a recent email: “I remember giving a presentation at a Merrill conference in October of 2002, when the Nasdaq was at ~1,500, and I predicted then that it would take at least twenty years before the Nasdaq sustained itself above the old high of 5,000. Well, it is going on seven years and the Nasdaq is below 1,500 today. Thus, the Nasdaq needs to compound at more than 10% for the next 13.5 years to reach the March ’00 high. I believe the odds are rising that it may take the S&P 500 a decade or longer before sustaining itself above the 1,560 high in October ’07. Sure, there will be large and exciting rallies that get people optimistic again, but the reality is that corporate margins are going to be under duress for a number of years. And if inflation rears its ugly head in a couple of years, like I expect, P/Es are going to be suppressed. I will change my mind when I see lower U.S. income and cap gains tax rates, an emphasis on savings and investment, and our mercantilist trading partners stimulating a more internal-consumption oriented economy rather than an export-led economy…I know, wishful thinking.”

Conspiracy Theory
From yet another reader:

“Ten minutes before the market close yesterday afternoon some entity put in a huge S&P buy order. I'm now absolutely convinced that the trading desk at the Fed is playing games. The repercussions for this are going to be severe and terrible. In their zeal to put lipstick on this pig they are going to draw investors into a fake that is eventually going to cost them very dearly.

All eyes are also on the dollar as China and Russia seek to end its dominance as the world's reserve currency. People who dismiss this are missing the point. We have entered a new kind of cold war and it will involve trade and our currency. The games that they are playing in Washington to spend gigantic amounts of money are leading us down a very scary path and to sure confrontation with the rest of the world. I fear that Washington in their arrogance doesn't really appreciate the gravity of the situation. It would not take much for the rest of the world to send us a fiscal message, e.g., like the one that was just sent to the British. I'd watch the next auction of long Treasury bonds very carefully. I going to bet that a message is going to be sent loud and clear.”

The Big Three
From The Big Picture---“The Obama administration asked Rick Wagoner, 56, to leave the company (General Motors) and he agreed, an administration official said. Wagoner had said March 19 that he didn’t plan to resign. The likely replacement, unless the government hires from outside the company, would be Chief Operating Officer Fritz Henderson, said John Casesa, managing partner at New York-based consulting firm Casesa Shapiro Group.

The departure of Wagoner comes as President Barack Obama prepares an address tomorrow morning on his plans for the future of the U.S. auto industry. GM is surviving on $13.4 billion in U.S. loans and is asking for as much as $16.6 billion in additional aid to survive. Wagoner was asked to step down as part of the company’s restructuring, the official said.

“It’s very hard for the government to write a big check without giving some evidence of change,” Casesa said. “This will also give the government moral authority with the other stakeholders to make them sacrifice.”

Really? Heads will roll before writing big checks? Funny, I kinda remember a trillion dispensed without so much as a peep.

I am no fan of Wagoners, but I have to ask the geniuses behind the bank bailouts: When are you going to ask the TARP and bailout recipients to step down? Ken Lewis being asked to step aside after many years of running BofA ? How about Blankfein? Pandit? And the rest of the TARP recipients?

This inconsistency from the new administration is very disappointing.”

Thanks comrade
Czech prime minister (and EU president) Mirek Topolanek was somewhat critical of the Obama stimulus package when he described it as “a way to hell” and that it would “undermine the stability of the global financial market.”

Conclusion
The first quarter ends on Tuesday, and I wouldn’t be surprised to see the market run up late in the day as manager’s try to “window dress” their portfolios. Asian markets were extremely weak overnight, with the Nikkei and Hang Seng both down around 4.5%.

Have a great week and good luck.

Ned