Saturday, August 26, 2006

Watch Your Step

8/27/06 Watch Your Step

Barron's Andrew Bary: "Centex, D.R. Horton, Pulte, Lowe's, Whirlpool, Countrywide Financial and other housing-related stocks look reasonably priced -- and could do well if the housing market stabilizes in 2007." Maybe the housing market will stabilize in 2007. I don't know and don't feel comfortable making a prediction. I do know that, for me, the smart and conservative route is to sell Jan. 2007 puts way below present price levels on Centex and Lowe's.

Wal-Mart posted a 2.7% same-store sales gain for August. I strongly suggest that long-term investors consider adding to their positions.

Doug Noland: "To suggest we're facing considerable crosscurrents is today an understatement. Housing and riskier mortgages are deservedly under the radar screen, while market yields at home and abroad are declining meaningfully. For many sectors, markets, and economies these days demonstrating strong inflationary biases, looser financial conditions are undesirable and likely further destabilizing. To what extent this ongoing Monetary Disorder in the near-term precipitates the emergence of latent U.S. Debt Structure fragility is decidedly unclear. But, in the words of Hyman Minsky, "processes which transform a stable system into an unstable system" - having been nurtured for too many years - now grow only more robust and intransigent."

Fifty percent of Americans believe
that the Bush administration should change its stance and support federal
funding for stem-cell research in light of a newly discovered method that
may allow scientists to obtain stem cells from human embryos without
destroying the embryo, according to the latest Newsweek Poll. Thirty-five
percent say that the administration should not change its position and that
this new method does not resolve all of the ethical issues associated with
stem-cell research.
Overall, 48 percent of those polled say they support the use of federal
tax dollars to fund medical research using stem cells; 40 percent say they
do not support it. These results are consistent with the Oct. 14-15, 2004
Newsweek Poll, conducted during the height of the presidential campaign, in
which 50 percent of respondents said they supported funding for stem-cell
research while 36 percent opposed it.
Of those who now favor federal funding for stem-cell research, 77
percent say they do so because they support scientific progress generally;
21 percent support it because they have or know of someone with a disease
that might be helped by the research. Of those who do not support federal
funding, 49 percent say they think it would not be a good use of public
money while 46 percent say it conflicts with their religious or moral
values.
Seventeen percent of registered voters would vote for or against a
candidate in a major election -- like that for U.S. Congress -- based on
his or her position on stem cell research and in vitro fertilization, shows
the Newsweek Poll. Fifty-five percent say the issue is important, but not
enough to determine their vote, while 22 percent say it is not important in
deciding their vote.
Fifty-three percent of poll respondents say they approve of in vitro
fertilization, in which human embryos are created in a laboratory by
fertilizing a woman's egg outside the womb. Thirty-four percent say they
disapprove. In regards to their understanding of issues like stem-cell
research and in vitro fertilization, 75 percent of poll respondents say
they understand them somewhat or very well, while 24 percent say they
understand them not too well or not at all well.
In general, 65 percent of those polled say they are dissatisfied with
the way things are going in the United States at this time; just 28 percent
are satisfied. President Bush's job-approval rating decreased to 36 percent
in the Newsweek Poll, down two points from the Aug. 10-11, 2006 poll.
Forty-nine percent approve of his handling of terrorism and homeland
security, down six points from the Aug. 10-11 poll. Only 37 percent of
Americans polled approve of the way Bush is handling the economy; 58
percent disapprove. And just 31 percent approve of the way he's handling
Iraq; 63 percent disapprove.
If the elections for U.S. Congress were held today, 50 percent of
Americans say they would vote for the Democratic candidate in their
district while 38 percent say they would vote for the Republican candidate.
Sixty-five percent of Americans say they have given November's
Congressional elections little or no thought, according to the Newsweek
Poll. Thirty-four percent say they have given the election quite a lot or
some thought.

Mike Burk: "There are summaries for both the 2nd year of the Presidential Cycle and all years combined beginning with 1963 for the OTC and 1928 for the SPX.
All of the averages are negative and the 2nd year of the Presidential Cycle has been worse than the overall averages. Since 1930 during the 2nd year of the Presidential cycle the SPX has been up 42% of the time with an average loss of 1.88% and the OTC since 1966 has been up half the time with an average loss of 2.49%. Over all years the indices have been up about 60% of the time while their average return has been negative...The rally that began two weeks ago has fizzled and seasonally next week has been treacherous. I expect the major indices to be lower on Friday September 1 than they were on Friday August 25."

Tim W. Wood: "The “Summer Rally” that began back in June is thus far still alive, but it is not at all well. According to Dow theory, the “Stock Market Barometer” has been telling us since late July that stormy conditions lie ahead. I will add that this is consistent with our expectations from early this year when we first said that the early part of 2006 would see the gain and that the pain should then follow. Until July, both the Industrials and the Transports were in gear on a Secondary level. This changed in late July and it is for this reason that the “Stock Market Barometer” is now sending its warnings of changing conditions."

Friday, August 25, 2006

Storm Clouds

8/26/06 Storm Clouds

Only one in one hundred U.S. adults think there will be peace in the Middle East in the next year, while
one in ten feel that there will be peace in the next ten years. This deeply pessimistic view of the future is based on a sense that none of the parties involved are willing to compromise to secure a lasting peace.
These are the results of a nationwide survey of 3,685 U.S. adults conducted online between August 8 and 17, 2006 by Harris Interactive(R).

Ian Mathias: "The Russian Financial Ministry announced yesterday that they had successfully repaid $3.6 billion of debt in the first half of 2006. Compared to the U.S., which accrues, on average, well over a billion dollars of debt per day, Russia’s dedication to repay debt is as impressive as it is telling. The Russian ruble, which utterly collapsed less than a decade ago, is beginning to challenge the once reliable dollar as the next foreign reserve currency."


The Honorable Victor Marrero of the United States District Court for the Southern District of
New York today granted Northwest Airlines' request for a preliminary injunction to prevent a threatened strike or work action by the company's flight attendants, represented by the Association of Flight Attendants-CWA (AFA).

Rigzone noted the fifth tropical depression of the 2006 Atlantic storm season likely will become a hurricane as it moves into the U.S. Gulf of Mexico early next week, a private weather forecaster said Friday.
"A strong consensus from hurricane tracking models indicate this storm will become a hurricane as it moves into the Gulf early next week and could threaten the Gulf production and rig infrastructure during the later half of next week," Jim Rouiller, senior energy meteorologist at Planalytics, said in a note.

Antal E. Fekete: "Government bonds today are not a legitimate instrument of saving as gold bonds of yesteryear were. They are supposed to have value because they are payable in FR notes at maturity. But what gives value to the FR notes? Why, it is the fact that they are liabilities of the issuing FR bank, backed by assets such as government bonds. Thus, then, there is an official check-kiting between the US Treasury and the Federal Reserve. The former issues bonds with which FR notes are backed; the latter issues notes used to pay off the bonds at maturity. This is no free market. It is a parody of the free market or worse. It is a charade designed to fool and defraud people. In effect the government bond is irredeemable, no less than the FR note. If the bond appears to have value it is solely because bond speculators are, for the time being, willing to bet that producers will continue to accept it in exchange for real goods and services, and that there will be a demand for the notes by taxpayers anxious to pay their taxes. But don’t take this willingness for granted."

Rather than one best idea today, I give you a two-fer.
I would suggest you consider the sale of Ingersoll Rand Jan 07 puts with a strike price of $30 for 40 cents. The stock is now selling at $37 and represents excellent value at this price.
The second half of the two-fer is for you to consider the sale of Chico's Feb. 07 puts witha strike price of $12.50 for 40 cents. The stock is about $18 and down from $49. It is down sharply due to reduced guidance for this year's second half. To purchase shares at $12.50 would be getting a deeply undervalued asset.

Thursday, August 24, 2006

Selective Put Selling

8/25/06 Selective Put Selling

British Petroleum's crude production in the Prudhoe Bay oil field in Alaska was cut 90,000 barrels to 110,000 barrels per day.

The September fed funds futures contract now implies no chance of a September rate hike. Meanwhile, the October fed funds futures contract implies a 72% chance the Fed will hike rates after its two-day meeting ending Oct. 25. The December futures contract is currently pricing in a 46% chance that the fed funds rate will be at 5.50% after the Fed's Dec. 12 meeting.

A Commerce Department report showed sales of new homes dropped 4.3% in July to a seasonally adjusted annual rate of 1.07 million. Inventories of unsold homes rose to an 11-year high to a record 568,000 in July, representing a 6.5-month supply at the July sales rate. The median sales price in July was up 0.3% year-over-year to $230,000.
New-home sales are down 21.6% in the past year.

Durable-goods orders fell 2.4% in July on a big decline in orders for transportation goods, the Commerce Department said. Excluding the 9.6% decline in transportation goods, durable-goods orders rose 0.5%

Ford Motor Co. is considering going private, USA Today newspaper reported on Thursday, citing a "source with direct knowledge of the discussions."

Please take note: according to OPEC, in June 2006 Russia extracted 9.236 million barrels of oil, which is 46,000 barrels more than Saudi Arabia. The statistics also showed that Russian production in the first half of this year increased to 235.8 million tons, a year-on-year improvement of 2.3 percent.
I have written dozens of times on the growing relationship between China and Russia as it relates to oil and gas. It is no secret that the U.S. is once again left sucking the hind teet. You can thank Cheney and his remarks made about Putin while in Kazakhstan.

"Even in China, with its growing manufacturing base and large pool of labor, some indicators are showing upward pressures on export prices," Mervyn King, the governor of the Bank of England, said in a recent speech. "And in turn that is raising our import prices, over and above the increases resulting from higher energy costs."

Full-year profit will be hurt by weaker sales at home-furnishings chain Pottery Barn, San Francisco- based Williams-Sonoma said in a statement Thursday.

I would like to once again discuss put selling. For many months earlier in the year I outlined a strategy for selling GM puts with a strike price of $15 and $17.50. I mentioned that, if the purchaser of the puts had elected to sell me the stock at those strike prices, I would have been more than pleased to buy the shares. No one elected to sell me the shares at those prices. As such, I simply pocketed the premium that I received for the puts.
My best idea at this time is to sell January 2007 puts on Centex Corp. with a $35 strike price. I sold some on Thursday at 79 cents as well as some Centex January $30 puts at 30 cents. I will continue to sell both. Why?
In my view, Centex Corp is the best big homebuilder in the U.S. They are projected to earn $7 a share in 2007 with free cash flow of at least $500 million. As such, if the stock traded down to $35 from its present $49 (the high is $79), it would be selling at 8 times free cash flow. I would be pleased to buy the stock at $35 and more so at $30. This strategy is not for everyone. I believe it is a conservative way to purchase shares in companies you want to own.
Let me remind you of the situation in the dotcom heyday. Big tech companies sold hundreds of millions of dollars of puts in their own company in an effort to buy inexpensive shares for their stock option plans. In many cases, the puts were not exercised and the companies pocketed the cash premiums. They went into their income statements and buoyed their earnings per share and their stock price.
If Lowe's continues to make new lows, I may entertain selling some of the puts on those shares. I try to pick the leaders in their respective industries with the strongest management team. This has been a winning game plan for me for several decades.

Tuesday, August 22, 2006

Reality And Expectations

8/23/06 Reality And Expectations

David Gergen: "George Bush would like to tell the truth."

Medtronic Inc. said it now sees fiscal 2007 revenue of $12.2 billion to $12.6 billion, and earnings per share of $2.30 to $2.38. In May, the company had said it expected annual revenue of $12.5 billion to $13 billion, and per-share income of $2.52 to $2.60. Also Tuesday, the company said it now sees fiscal 2008 revenue of $13.7 billion to $14.5 billion, and per-share income of $2.65 to $2.75. Previously, the company had expected revenue of $14 billion to $15 billion, and per-share income of $2.78 to $2.88.

German investor confidence is at a 5-year low.

National Semiconductor Corp. late Tuesday lowered its quarterly sales target due to lower shipments, particularly those for chips used in mobile phones.

Most homes sold in the United States in the second quarter were not affordable for a family earning the median income, the National Association of Home Builders said Tuesday. The NAHB-Wells Fargo housing opportunity index inched down to a record low 40.6 in the second quarter from 41.3 in the first quarter. Just 40.6% of the homes sold were affordable for a family earning $59,600.

Michael Moskow, the president of the Chicago Federal Reserve Bank, said on Tuesday "that the risk of inflation remaining too high is greater than the risk of growth being too low. Thus some additional firming of policy may yet be necessary to bring inflation back into the comfort zone within a reasonable period of time."

Outgoing Atlanta Fed president Jack Guynn said "the consequences of high inflation were and remain economically poisonous: increased uncertainty and risk, the added incentive to consume rather than invest, cost of living adjustments, and other marketplace distortions."

A majority of U.S. home builders believe the condominium market is weakening, according to a quarterly survey conducted by the National Association of Home Builders released Tuesday. The condo supply index fell to 32 in the second quarter from 61.3 a year ago. The traffic index fell to 26.8, while the prices index fell to 46.3. In response to a special question, 82% of developers said they noticed buyers' resistance to prices, with a fourth dropping prices. About three-fourths of developers said they are offering non-price incentives to buyers, including offering upgrades for free, or paying closing costs.

Toll Bros. expects deliveries of between 8,600 and 8,900 homes for 2006. Fourth-quarter net income is expected at between $218 million and $250 million, or $1.33 to $1.53 per share, while 2006 net income is expected at between $727 million and $763 million, or $4.41 to $4.63 per share. Previously, the company was forecasting 2006 earnings per share in a range of $4.69 to $5.16 a share. The revision is due to reduced deliveries and a third-quarter write down of $23.9 million. In 2007, Toll Brothers expects to deliver between 7,000 and 8,000 homes at an average price of $635,000 to $645,000. (With underlying demand continuing to decline and inventory of unsold homes on the rise, I believe prices need to adjust lower. Thus, I expect further downward revisions in the sales and earnings for Toll Bros. for 2007.)

Rob Peebles: "One out of three Americans worries that rising monthly payments will force them to sell their home and buy a less expensive one. One-third!"

Keep your eye on the dealings between China and Venezuela. Analysts will downplay the news. It will mean less oil for the U.S. from Venezuela. Despite what many believe, fewer and fewer countries will depend on the U.S. for their economic well-being. Tough to swallow? Get use to it.

My best idea: go long 3-month treasury bills and short 30-year treasury bonds.

Monday, August 21, 2006

Absorbing The News

8/22/06 Absorbing The News

With the stampede into treasury bonds, my best idea is to go long 3-month treasury bills and to go short 5-year treasury bonds yielding 4.76%. I think the risk reward is clearly headed in a winning direction.

The U.S. dollar index continues to weaken and traded at 84.42.

I noticed that Lowe's is projecting same-store sales for the 3rd quarter at flat to up 2% and the full-year earnings have been pared somewhat to a range of $2- 2.07. If Lowe's is having trouble, how about Home Depot?

I also noticed that Dollar General reported lower margins and guided lower for the year. The stock traded down to a new low at $12.91.

The NY Times reported that rents increased by 3.5% for June and July.

Gold Kist, of Atlanta, said it has rejected two offers from Pittsburgh, Texas-based Pilgrim's Pride since February.

Ford's hourly employees at selected factories now are eligible for one of five buyout plans, two of which Ford calls non- traditional. One gives workers $15,000 annually for four years of college, full medical benefits and half their pay while attending school. The other, aimed at younger employees, is a $100,000 payout without health benefits. This plan will probably be expanded to include all the company's factories.

Crude rallied back up to $72.45 a barrel.

The Chicago Mercantile Exchange will begin trading renminbi futures contracts and options on futures. The trade date is August 28. I strongly suggest one investigates these contracts.

John Hussman: "Over the past year, consumer price inflation has clocked in at 4.15%. Producer price inflation (finished goods) has been a similar 4.12%. But if you look at intermediate goods, we're currently at an inflation rate of 8.83%. That's the most abrupt widening in the spread between intermediate and finished goods since the 1973-74 oil crisis. Moreover, if we look at points in history when prices for intermediate goods have outpaced prices for finished goods over a 6-month period, we've also seen, on average, an acceleration in the PPI finished goods inflation rate over the following 6 months."

There was only a .41 range in the VIX for the day. It had a small rally. We need to watch the VIX carefully in the coming days. If the volume were to pick up, the market decline could accelerate.

Sunday, August 20, 2006

Careful As You Go

8/20/06 Careful As You Go

Mike Burk: "There were 78 NASDAQ new highs on August 4 when the index was at 2085.
On Friday the number of NASDAQ new highs declined to 53 from 80 on Thursday with the index at 2163...During the 2nd year of the Presidential Cycle, in the coming week is a surrogate for the entire month, both the OTC & SPX have been up about 60% of the time, but the average return has been negative. Over all years both indexes have been up about 60% of the time but the OTC return has been modestly positive while the SPX return has been modestly negative...Because of the lack of new highs it is likely the move last week was a bear market rally rather than the beginning of a new bull market. I expect the major indices to be lower on Friday August 25 than they were on Friday August 18."

Between Aug. 22 and Aug. 31 a good deal of attention will be on Iran. The news from that front can, in my view, only be a negative for the market.

Anglo American PLC is the target of a possible $80 billion break-up bid being considered. Brazil's Companhia Vale do Rio Doce, along with the U.K.'s Xstrata PLC and Rio Tinto PLC (RTP), of Australia, are mulling a potential bid and have hired financial advisers, The Observer newspaper reported, citing unnamed sources in London's financial community.

Iran said it would not stop enriching uranium, rejecting the main condition attached to a package of incentives proposed by six western nations, Reuters reported.

Harry S. Truman: "Never kick a fresh turd on a hot day."