Saturday, September 09, 2006

Be Careful Out There

9/10/06 Be Careful Out There

John Mauldin: "If the economy is slowing down, it is not good for the stock markets. If the economy is not slowing down, that means inflation is not slowing down either. The clear implication from every Fed speech we hear is that they will raise rates in the face of rising or problematic inflation. That will not be good for the stock market. I think we are going to get a chance to buy the market at a (probably much) lower price than it is at today. Be careful out there."

Standard Pacific said net new home orders for the first two months of the third quarter were down 58% from the same period last year, driven mainly by an increase in the company's cancellation rate and further weakening of demand in many of its larger markets. The company's gross orders for July and August were off 30% from last year. The backlog at Aug. 31 stood at 4,837 pre-sold homes valued at $1.8 billion.

Much is written on a daily basis regarding the concern investors have with risk. I believe there is discussion but little concern. The VIX trading between 13 and 14 paints a very different picture, one of complacency.

Mike Burk: "Next Friday is one of four annual "triple witching" Fridays that occur then stock options, index options and futures expire on the same day...The coming week during 2nd year of the Presidential Cycle has been up nearly 70% of the time while the averages for all years has been about 10% less. All of the average returns have been positive.

Doug Noland: "It is my view that ("inflation") expectations have changed rather dramatically. Workers in an increasing number of sectors, industries and skill levels (unlike the late-90's boom largely isolated within the tech industry!) have come to demand more pay, while businesses are able and increasingly willing (because of expectations for ongoing profit Inflation) to aptly accommodate. When it comes to "anchored inflation expectations," the Fed should pay less heed to Treasury yields and devote more attention to salary and Income trends. But, then again, I've seen no indication that the Fed appreciates the nature of, nor ramifications for, today's Income Inflation."

Bill Bonner is one of the more astute observers. He notes "in the last two years, homeowners in America took out $1.3 trillion from their house price gains, an amount greater than the GDP growth figures for those years.
While prices rose only 0.4% per year from 1890 to 2004, they soared by 6.2% from 1997 to 2005. According to Shiller, it would take a 22% drop in residential real estate prices to bring house prices back to their long-term trendlines. Other experts have predicted a 40% retreat. Falling prices in the housing sector mean that homeowners no longer have any "equity" to take out. Instead, the flow of liquidity reverses...mortgage resettings, taxes, maintenance, debt restructuring, foreclosures - all of a sudden money must be put back in! A 5% fall in house price takes $1 trillion out of the net worth of American homeowners. A 40% drop would probably set the economy back about as much as the Great Depression."

Tim Wood: "First, I have to begin with a chart of the Industrials and the Transports. At this level we still have two non-confirmations. The first non-confirmation occurred when the Transports moved below their June lows. When the Industrials refused to confirm this downside break, the first short-term non-confirmation came to be. This non-confirmation is noted in blue. As the Transports continued lower into August, the Industrials moved higher and this price movement has created a second short-term non-confirmation, as is noted in red. Therefore, we have both a short-term downside and a short-term upside non-confirmation in place today. The bottom line here is that, according to Dow theory, when the two averages are not in agreement, they are “shouting be careful.”

Friday, September 08, 2006

Facts And Thoughts

9/9/06 Facts And Thoughts

December gold closed at $617.30 an ounce, down 2.4% for the week. December silver finished at $12.295 an ounce, down 40 cents for the day and down 5.9% for the week. December copper fell 8 cents to close at $3.568 a pound Friday, but that's up 3.1% from a week ago. Crude broke below the $67 dollar level and traded down eacg day this past week. Meanwhile, gas at the pump has dropped about 30 cents a gallon over the past 5 weeks.

Lennar, the country's third largest homebuilder, joined Beazer and KB Homes by sharply lowering their profit outlook for the current quarter. The shares held up well.

Have you noticed the change in group leadership this year -- from the transports, small caps, and energy stocks to utilities, and names like Dean Foods, Ralcorp, Conagra, Walgreen's, and CVS? In other words, the by-word is to be more defensive. Yet the VIX has trouble staying above 14. Meanwhile, the economy is slowing but the dollar index hovers close to 86. This is all food for thought.

Baker Hughes Inc. announced that the U.S. rig count for the month of August rose 57 to 1,738 compared to July, and was up 303 from August 2005. Yet, in the past few weeks, Baker Hughes shares have declined from $78+ to $68+. In addition, UBS raised its raising on Schlumberger to a buy from a neutral and the stock rallied a $1.50, but then quickly turned negative. ConocoPhillips traded at $60+, but there is nervousness. A total of 2,600 Jan. 2007 puts with a $50 strike price traded at 75 cents.

HSBC has revised downward its forecast for 2007 economic growth and cautioned that the risk of an outright recession is growing as a retreat in housing threatens household balance sheets. The company argues that while corporate profits have remained sky-high, the incomes of most Americans have effectively fallen over the last 18 months.

China's trade surplus widened to a record $18.8 billion last month as exports soared the most in a year, Dow Jones Newswires reported, citing a person it didn't identify. The gap, if confirmed, is more than a quarter bigger than the previous record of $14.6 billion, set in July.

Crudethoughts.blogspot.com: "Looking at the 20 year history of oil production, oil production has either declined or stayed flat during 3 periods, represented by R1, R2 & R3.
The period marked as R1 was the first Gulf war and the recession in US and the beginning of deflation in Japan.
R2 is when the Asian currency crisis and the subsequent meltdown in the high growth economies of Asia.
R3 is the implosion of the dot com bubble in the US.
Now oil production is flat to down (X1) amidst record high prices and we are told by economists that the US economy as well as the economies of the world are soaring. Are we at peak oil ? It's worth asking isn't it?"

Zig Ziglar: "If you treat your wife like a thoroughbred, you'll never end up with a nag."

Thursday, September 07, 2006

What's The Trend?

9/8/06 What's The Trend?

Retail sales growth is expected to moderate during this holiday season, consultants Retail Forward said on Thursday, hurt in part by weakness at department stores. Retail Forward's forecast is for 5.5% year-over-year growth in the fourth quarter. Not too bad- just moderating growth.

Eduardo Castro-Wright, chief executive of Wal-Mart Stores' U.S. division, told investors Thursday that second-quarter sales were helped by the important back-to-school shopping season. "We were very pleased with back-to-school performance," he said.

Crude prices closed lower Thursday to register a four-session decline of over 4%. October crude fell 18 cents to close at $67.32 a barrel. October gasoline futures rose 0.17 cent to end at $1.6417 a gallon -- just above Wednesday's nearly seven-month low. October natural gas fell 27.6 cents, or 4.6%, to close at $5.718 per million British thermal units, its weakest closing level since late September 2004.
Is this simply a long overdue correction in the energy complex? The big stocks like ExxonMobil and Chevron are holding up well.

Economists believe the slowdown in the housing market will extend into 2007, and many predict no change or a decline in home prices next year, according to a WSJ.com survey posted Thursday. Despite lowered forecasts by Beazer and KB Homes, the group held up well on Thursday. Is the forecast for a weaker housing market going into 2007 baked into the price of the group? It's a bit too early to tell. You might consider selling Jan. 2007 puts on Ryland with a $25 strike price. On the next dip a good level might be 40 cents for those puts.

Janet Yellen, Pres. of the SF Fed: "The bottom line is this. With inflation too high, policy must have a bias toward further firming." I don't believe the current Treasury market reflects this thinking and the same can be said for stocks. The VIX is beginning to gain some traction. At the same time, so is the dollar. The latter is starting to make the shorts nervous.

December gold dropped $16.90 to close at $624.90 an ounce. December silver dropped 50.5 cents to close at $12.695 an ounce after closing Wednesday at its highest level since May. The strengthening dollar is poison for gold and silver.

Over the past year, wholesale inventories are up 8.8%, while sales have gained 12.6%.

Pauline Trigere: "Fashion is what people tell you to wear. Style is what comes from your own inner thing."

The number of people collecting state unemployment benefits over the past four weeks rose to the highest level since February, the Labor Department said Thursday.

Remember Vera Sun, the hot ethanol IPO that came out at $20 and quickly rose above $30? Don't look now but the stock is selling at $18-19. I have stated frequently that these ethanol plays are an accident waiting to happen.

National Semi said it expects second-quarter revenue to fall about 2 percent to 5 percent from the first quarter, mainly because of lower revenue from foundries, or chip fabrication operations. The decline would result in second quarter revenue of $514 million to $531 million, missing analysts' average estimate of $553.3 million. Analysts expect second-quarter profit excluding items to be 34 cents.

Wednesday, September 06, 2006

Listen To The Smart Money

9/7/06 Listen To The Smart Money

There are several capable economic forecasters. For my money, I prefer Nouriel Roubini and frequently quote him. When you have the time, I would suggest going to rgemonitor.com. There is a good deal of valuable information. In the meantime, here is a recent comment from Roubini: "The issue is whether hard landing and beginning of recessions are associated with sharply falling stock prices. And the simple and unequivocal answer is that recession lead to bearish stock markets where the peak in the economy to the trough in the stock market (as separate from the economic peak-to-trough that lags the one of asset prices) is about 17.5% and where the peak-to-trough in the stock market (i.e. the pre-recession peak to the into-recession bottom of the stock market) is about 28%, i.e a very clear, sharp and deep bear market. So, factually hard landings and recessions do lead to falling stock prices and bear stock markets. So, the recent market buzz and chatter about hard landings and recessions being good for the stock market is utter nonsense based on actual data from decades of US business cycles and repeated recession episodes."

One can always find data to support an increase or decrease in equities. Yesterday, we saw the productivity rise of a less than stellar 1.6% on the back of rising unit labor costs at a 5% rate, the highest in 16 years. Thus, the concern with inflation and the lowering of expectations for corporate profits as we move into 2007.

Jas Jain: "To add insult to the injury, 70-90% more homes are being built RIGHT NOW due to the pipeline of the bubble period. During June 2006 more single-family homes were completed than at any other time prior to 2006! This will continue for another year or so and the supply situation will keep on getting uglier and uglier...Soon, the US will have 20,000,000 "empty housing units year round." Construction industry will be in a depression for a very long time once the current pipeline is finished (some will not be finished, though)."

Stephen J. Church: "Our research indicates that inflation is approximately 3% to 4% per year higher than the CPI."

The ISM nonmanufacturing index rose to 57% from 54.8% in July.
New orders fell to 52.1% in August from 55.6%. This is the lowest level in 40 months. The employment index fell to 51.4% in August from 54.5% in the previous month. Order backlogs fell to 49.5% in August from 56% in the previous month. This is the first time the index has been below 50% in 19 months.The price index slipped to 72.4% from 74.8% in the previous month.

According to the head of Johnson & Johnson's (JNJ) medical technology business, Michael Dormer, the company expects the division's growth to be in the "high single-digits" for 2006 through 2010. He also mentioned that division spends $1 billion a year on R&D and they also would consider an acquisition that makes sense. I would not be surprised to see the company strongly consider the purchase of Medtronic.

Crude closed at $67.50 a barrel, and it was the first close below $68 since March 27.

According to a Federal Reserve Beige Book survey of current economic conditions released on Wednesday, five of the 12 Fed districts reported a "deceleration" in growth in their regions, while the other seven reported continued moderate growth. The reports of slower growth were clustered in the Northeastern region and in Kansas City.

December silver rose 6 cents to close at $13.20 an ounce, marking the contract's highest close since May 23. I continue to believe that supply/demand issues work in favor of silver moving higher on a long-term basis.

Ethan Allen Interiors Inc. said Wednesday it would close two manufacturing facilities, affecting 465 employees. The company will close its Spruce Pine, N.C., case goods manufacturing facility and convert its Atoka, Okla., upholstery manufacturing facility into a regional distribution center.

Option ARMs provide the buyer an ultra low initial rate for a short time period, then significantly adjust the rate higher for the rest of the loan. There have been widespread warnings relating to this product. Will a large fallout occur with the upward adjustment in rates?

Late Wednesday Hovnanian Enterprises, a homebuilder, reported net income available to common stockholders was $74.4 million for the third quarter, or $1.15 per fully diluted common share, compared with $116.1 million, or $1.76 per fully diluted common share, in the same quarter last year. Total revenues increased 18% over the prior year's third quarter, to $1.6 billion. Management is reaffirming its earnings projection for the fiscal year ending October 31, 2006 of between $5.00 and $5.75 per fully diluted common share, compared to fiscal 2005 earnings of $7.16 per fully
diluted common share. Earnings for the trailing twelve months ended July 31, 2006 represent a return on beginning common equity (ROE) of 28.3%, and a 17.5%
after-tax return on beginning capital (ROC). Contract backlog as of July 31, 2006, excluding unconsolidated joint ventures, was 10,313 homes with a sales value of $3.6 billion, a 12.5% increase from the sales value of contract backlog at the end of
last year's third quarter. After the close, the stock rallied from $25+ to $26+.

The Dow Jones Industrial Average declined 62 points. The Nasdaq Composite Index was down 38 points at 2,167. It's the biggest one-day point decline for the index since July 20 when it fell 41 points. The S&P 500 Index dropped 13 points to 1,300.27.

For the next four quarters, Chico's CEO Edmondson said he expects same-store sales to be flat to up slightly. As you may recall, not too long ago my best idea for the day was selling the Feb. 2007 Chico's puts with a strike price of $12.50 for 40 cents. I continue to like that strategy-- should it become available again.

Tuesday, September 05, 2006

Commodities

9/6/06 Commodities

December gold climbed $14.30 to close at $646.90 an ounce Tuesday, marking its strongest closing level since Aug. 9. December silver added 7 cents to close at $13.14 an ounce and December copper tacked on 16.35 cents to close at $3.6245 a pound.

October unleaded gas prices fell 3.44 cents to $1.70 a gallon, its lowest level since March 20. October crude was down 59 cents to $68.60 a barrel, after falling to a five-month low of $68.25. The average price for regular unleaded gasoline at the retail level fell to $2.732 a gallon, down from $2.74 on Monday and down 9.9% from a month ago, according to AAA's Daily Fuel Gauge report.

U.S. major corporations announced 76% more job reductions in August, according to Challenger Gray & Christmas. Offical announcements of layoffs rose to 65,278 in August from a six-year low of 37,178 in July, the firm said. The figures are not seasonally adjusted.

Intel cut 10,500 jobs and slashed capital spending by $1 billion.

The first trading day after the long Labor Day weekend was somewhat uneventful except for the large oil find in the Gulf of Mexico by Chevron, Devon, and Statoil. Devon had a huge day and climbed over $8 a share. With the raising of prices, Caterpillar was a standout in the Dow and rose by better than 2 points. Apple continued to shine on the Nasdaq and climbed over $70 a share as it rose by over 3 points.

Ford had a good day as it climbed to $8.76. It's now up $2.70 from the year low and is even 3/4 of a point higher (more than 9%) than when I first suggested accumulating shares. Bill Ford is going to remain the executive chairman of Ford, but he is being replaced with Boeing's Alan Mulally as President & CEO of the day to day operations. Mr. Mulally will also be on the Board of Directors.

Will Volatility Return?

9/5/06 Will Volatility Return?

I believe it will. Therefore, my best idea for the day involves the volatility index for the CBOE, namely, the VIX. I suggest buying a May 2007 call on the VIX with a $10 strike price and selling a May 2007 call with a strike price of $15 with a $3 debit. Your breakeven (without commissions becomes $10+$3 or $13. The VIX now sits at $12.66. You have 9 months for the VIX to come alive. I believe that will take place within this timeframe and I consider this a conservative assessment.

Jas Jain: "Peak Debt, unlike Peak Oil, is not a theory but an observed reality of our economic system. What happens at the Peak Debt is that the Total Debt of the economy, as a percent of the GDP, or nominal debt in current dollars, or both, stop going up and start to go down. The last time that the Peak Debt occurred in the US was in early 1930s and I can confidently predict that the next Peak Debt will occur within this decade, because the forces pushing debt higher and higher are reaching a point of exhaustion. The rising Consumption Debt exerts a depressionary effect on future consumption and at some point the debt service reaches a high enough portion of the income that the current consumption must be cut down...The most immediate impact of the falling debt would be a collapse in corporate profits, hence, a sharp fall in the stock market, either crash-like, or over a period of 1-2 years. The second would be fall in inflation rate to level significantly below the level preceding the Peak Debt. Demand Destruction is what is going to kill inflation in the US, as has been the case in the past time after time, and when inflation starts to fall it doesn't stop readily and keeps falling all the way into the next economic recovery. You can count on the inflation rate going down below zero because the rate wouldn't be very high to begin with when it starts to fall."

Do you believe inflation is muted? Allstate filed for a 12.2% homeowner insurance rate increase in California. Caterpillar is raisng prices between 5% and 7%. Congress may pass a tax increase where the average American family with children would see its tax payment rise by $2,084 a year.

John Hussman: "By most measures of valuation, the stock market has been persistently overvalued during the past 6-8 years, and did not revert to avergae historical levels of valuation even at the 2002 market lows. Perhaps not surprisingly, the total return on the S&P 500 has lagged the return on risk-free Treasury bills over the past 8 years."

Sunday, September 03, 2006

On The Horizon

9/4/06 On The Horizon

Ford's CEO in a memo to all employees stated "We must change to a new business model" through a bigger contribution to profits from passenger cars and crossover vehicles; continued leadership in north American pick-up trucks; healthier profits from all other business units; growth in Asia; greater integration of global operations; and "an evaluation of strategic alliances."

From the Detroit Free Press: "Anyone who assumes that General Motors Corp., Renault SA and Nissan Motor Co. are merely going through a charade of a 90-day study before nixing the notion of a three-way alliance among the American, French and Japanese automakers may well be in for a surprise."

Robert McHugh: "The probability of a decline -- often significant -- is high whenever the percent of Dow Industrials stocks above their 30 day moving average rises above 80.00 percent. We show every instance this happened over the past two years. There were 8 occasions when this occurred and 11 prior occasions if you include three that got close to 80.00 readings. All but one generated declines of several hundred points shortly thereafter. The one that did not resulted in a smaller decline, yet still a decline, and 60 days later we got a sharp decline. We sit Friday, September 1st, 2006 at 83.33, a twelfth occasion. So, if history is any lesson, we have a 91 percent chance of a sharp decline occurring over the next several weeks...It takes being a cock-eyed optimist, or having full faith in government intervention, to see a long-term Bull market rally continuing from where we stand today. That said, there is an important election coming in November, and M-3 is hidden, so mischief can reign for an hour."

Medtronic Inc's cardiac resynchronisation therapy (CRT) is equally effective for heart patients whether or not they have diabetes, researchers said on Sunday.
CRT, an implantable device, resynchronises the contractions of the heart's ventricles by sending electrical impulses that help it pump blood more efficiently.
More than 200,000 patients with heart failure around the world have been fitted with a CRT device manufactured by either market leader Medtronic or one of its competitors. The latest findings, which come from a sub-analysis of the large CARE-HF clinical study, were presented at the World Congress of Cardiology.

Thomas Paine: "When men yield up the privilege of thinking, the last shadow of liberty quits the horizon."