Saturday, October 28, 2006

Turning Back The Clock

10/29/06 Turning Back The Clock

I keep a history clock in my brain. It contains all types of thoughts and facts. It helps me to think clearly. Some might suggest I think differently.
Let's turn to thinking about today's stock market. I could care less that the vast majority of investor sentiment is optimistic. That and a buck+ will get you on the bus. I do care that 250 to 260 million shares of stock changes hands on the NYSE in the last 30 minutes of the trading day. I do care that the closing tick number lately has many times been 1000+. Yet, those machinations don't impress the specialists and the floor traders who are not buying on balance and frequently have been selling on balance into strength. That is some of the smart money in my book. I pay attention to the VIX which has trouble getting above 11. I also keep in my mind that the fiscal year end for many mutual funds and hedge funds is Oct. 31.
With more demand for calling buying, it is clearly in your best interest, in my view, to sell some out of the money calls against your holdings. A timeframe with the January 2007 option series is a good starting point. Should the calls get exercised, your profit won't be subject to tax until April 2008. Better you have the money than the government piss it away in Iraq and Afghanistan or on pork programs.
Are you keeping an eye on the insider selling figures? You're buying while insiders are selling. Dumb! To make matters worse, corporations are out buying their stock while the CEOs of many of those corporations are selling their own shares. The directors sit there and look the other way. Meanwhile, you are paying their director fees.

Robert McHugh: "Since August 25th, 1999, the Dow Industrials have formed their most significant tops within one week of a consecutive series of Fibonacci weeks from that date. What is so fascinating here, is the next top is scheduled for the week of November 17th, 2006 +/1 one week, shortly after the coming U.S. elections."

Bob Hoye: "Through the SEC, the Fed controls margin requirements and a recent announcement was described by the deputy director of the SEC as "a very significant change". Remember that this is essentially the same Fed and SEC that argued that no increases were needed during the late 1990s' tech mania. Now they are talking about lowering margin requirements for institutions on stocks, options, and futures. Now ranging from 25% to 50%, the proposal is to drop them to 15%." In my view, lowering margin requirements will be the last nail in the coffin. Should that occur, I suggest hedging your entire portfolio.

Bloomberg: "China's foreign-exchange reserves may double by 2010 should the government not control growth of foreign direct investment, said He Fan, senior economist at the Chinese Academy of Social Science. Holdings may reach $2 trillion, after they surged to $988 billion at the end of September, 28.5 percent higher than a year ago..."

Doug Noland: "It's not only the resurgent corporate debt Bubble that has me recalling 1999/2000. It was no coincidence that NASDAQ went parabolic about the time deterioration in underlying fundamentals was gathering pace. A spectacular short squeeze, flight into perceived safer corporate bonds, and liquidity creating securities/derivatives leveraging were prominent aspects of that period's Monetary Disorder. Today, an extraordinary confluence of factors including the housing downturn, economic vulnerability, destabilizing Credit excesses being "recycled" back to U.S. securities markets, and a major shift of speculation into riskier Credits is fueling a corporate debt Bubble with a present scope and future consequences that greatly exceed anything from 1999. The tech Bubble was only a warm-up... Dr. Issing is absolutely correct: "... Excessive liquidity world-wide is fueling asset prices and is something which has to be taken seriously by central banks." Tonight I've focused on U.S. Credit system dynamics. But our massive Current Account Deficits have as well spurred lending, liquidity and speculative excess around the world. Our degraded currency has certainly unleashed systemic global Credit inflation, with profligate domestic Credit systems no longer disciplined by the (dollar-anchored) global marketplace. It's more aptly described as "Global Wildcat Finance," with Credit and asset inflation readily condoned by a speculating community that has come to wield incredible power and influence."

Every week I get suggestions for changes in my daily format of ideas. I appreciate everyone's suggestions. Readers fail to comprehend that the daily writings are intended first and foremost for me and for me alone. I want to think smart and optimize my risk/reward opportuities. I do not look for praise from others. If I can make you a more successful investor, that's wonderful. I do not want anyone writing about me and I surely am not interested in being interviewed. Those days are in the history books.

Friday's Reports

10/28/06 Friday Reports

UMICH OCTOBER CONSUMER SENTIMENT 93.6 VS. 85.4: REPORTS. The current conditions index rose to 107.3 in late October from 106.1 earlier in the month. This is up from 96.6 in September and is the highest since April. The expectations index rose to 84.8 in late October from 83.4 previously. The index is up from 78.2 in September. It's the highest since July 2005.

Third quarter GDP rose a slim 1.6%. Meanwhile, core consumer prices increased at a 2.3% rate in the quarter, raising the year-over-year increase to 2.4% from 2.2% in the second quarter. A weakening housing sector and a drop in business inventories pulled GDP down in the quarter. Real final sales increased 1.7% annualized, down from 2.1% in the second quarter.

Chevron Corp. reported third-quarter earnings of $5.02 billion, or $2.29 a share, up from a year-ago profit of $3.59 billion, or $1.64 a share. Total revenue, including the contribution from equity affiliates and other income, reached $54.21 billion in the latest three months, down slightly from a year-ago equivalent total of $54.46 billion.

Ingersoll-Rand Co. said its third-quarter net income fell 4% to $243.8 million, or 76 cents a share, from $254.2 million, or 75 cents a share, in the year-earlier period, when there were 20 million more shares outstanding. Revenue rose 6% in the three months ended Sept. 30 to $2.77 billion from $2.62 billion. Ingersoll-Rand forecast a 3% rise in fourth-quarter revenue and earnings of 70 cents to 75 cents a share, making its full-year forecast $3.16 to $3.21 a share.

World leaders need to resolve massive imbalances in international trade to avoid the risk of global financial market and economic instability, former U.S. Treasury Secretary Lawrence Summers said on Thursday. "These imbalances have had people crying 'Wolf' for several years. They stand as a real risk," Summers said in a speech.

John Crudele: "Stocks have been moving steadily upward since July, when Paulson took over the Plunge Protection Team (and the Treasury). And one of the reasons could be that - as I mentioned back then - there is less risk in stocks if the government is providing a safety net. Less risk, that is, until something bad happens." It would be interesting to know why Paulson feels a need to have the Plunge Protection Team now meet every six weeks. Is there
a huge problem on the horizon?

U.K. inflation will accelerate to the fastest pace in at least nine years this quarter, requiring two interest-rate increases to bring it back down to target, the National Institute for Economic and Social Research said.

Rigzone reported " EnCana Oil & Gas, the third-largest producer of natural gas in the Barnett Shale last year, Wednesday became the first producer to announce a cutback in drilling because of rising expenses.
EnCana, which is based in Alberta, said it will pull four of its 12 rigs out of Barnett Shale production because of high costs. In 2005, EnCana produced 35 billion cubic feet of natural gas in the Barnett Shale, about 8 percent of the field's total production. It trailed only Devon Energy and XTO Energy among Barnett Shale producers.
"Rigs are costing between $20,000 and $22,000 per day," said Randy Eresman, EnCana's chief executive. "We think it is prudent for our shareholders to reduce our costs."

November natural gas fell 34.4 cents, or 4.6%, to close at $7.153 per million British thermal units. December crude climbed 39 cents to close at $60.75 a barrel, up 2.4% for the week.

December gold closed at $601 an ounce Friday, up $1.20 for the session and up 0.8% for the week.

The AP-AOL News telephone poll of 2,000 adults, 970 of whom are likely voters, conducted by Ipsos from Oct. 20-25, revealed 56 percent of likely voters said they would vote to send a Democrat to the House and 37 percent said they would vote Republican — a 19-point difference. Democrats had a 10-point edge in early October. However, this does not mean the Democrats will take control of the Senate.
Kean of NJ could win, so could George Allen of Virginia, and others.

Even though the Dow had a bad day, the VIX barely managed a small gain. There is so little fear of even a 10% correction.

Thursday, October 26, 2006


10/27/06 Results

Officials at Microsoft said they expect second-quarter revenue between $11.8 billion and $12.4 billion and diluted earnings per share of between 22 and 24 cents per share.
The next quarter will be affected by deferral of $1.5 billion in revenue related to the software maker's Vista guarantee program announced on Tuesday. In an effort not to slow down personal computer sales over the holidays, Microsoft said it will offer coupons that will allow computer buyers to upgrade to its upcoming Vista operating system for free or at a big discount when it becomes available to consumers after the first of the year.

General Motors was downgraded two notches to sell from buy at Merrill Lynch, citing disappointment over third-quarter operating results in North America and valuation.

December crude fell $1.04 to close at $60.34 a barrel.

The 10-year benchmark note closed up 10/32 at 101-6/32 with a yield of 4.717%, down from 4.769% in late trade on Wednesday.

For 2007, Lockheed Martin sees per-share earnings of $5.60 to $5.80, on revenue of $41 billion to $42 billion.

December gold climbed $9 to close at $599.80 an ounce Thursday. December silver added 35 cents, or 2.9%, to close at $12.24 an ounce. December copper closed down 0.45 cent at $3.40 a pound.

Demand was weaker than normal for the Treasury's auction of $14 billion in 5-year notes on Thursday. The notes were sold at a high yield of 4.694%.

Richard Dugas, CEO of Pulte Homes Inc, said although some evidence points to flattening inventory and stabilization in some regions, management will wait for the trends to continue and to broaden before concluding the housing market has hit bottom. "Given our expectations that market conditions will remain challenges for the foreseeable future, we continue to throttle back, consistent with operating a slow demand environment," the CEO said. During the call, Pulte management said it cut just under 800 employees in the third quarter, and about 1,400 positions during the first nine months of 2006.

The policy of many emerging market governments, including China, to accumulate large official reserves, is distorting market signals and adding to the considerable degree of uncertainty the Fed faces about the longer-term outlook for the U.S. economy, said Timothy Geithner, the president of the New York Fed bank on Thursday. "And the forces that have produced this constellation of capital flows and market conditions will evolve in ways we cannot anticipate," he said.

The median sales price of a new home fell 9.7% in the 12 months ending in September, the fastest price decline in nearly 36 years, the government said Thursday. The government reported that sales of new homes unexpectedly rose 5.3% in September to a seasonally adjusted annual rate of 1.075 million, the most in three months and well above the 1.05 million expected by economists. New-home sales are down 14.2% in the past year. Inventories of unsold homes fell 1.9% to 557,000, representing a 6.4-month supply at the September sales pace. It's the second consecutive decline in inventories.

The volume of help-wanted advertising in major U.S. newspapers held steady in September, the Conference Board said Thursday. The help-wanted index stood at 30 in September. A year ago, the index was 37.

The dollar slid to a three-week low versus the euro.

Demand for U.S.-made durable goods soared 7.8% in September. The increase was almost entirely due to a jump in orders booked by Boeing.

Exxon Mobil Corp. reported third-quarter earnings of $10.49 billion, or $1.77 per share, up from a year-ago profit of $9.92 billion, or $1.58 per share. Excluding items in the year-ago period, the Dow component earned $8.3 billion, or $1.32 a share. Revenue slipped in the latest three months to $99.59 billion from $100.72 billion in the same period a year earlier.

Shares in Industrial & Commercial Bank of China , which raised US$19 billion in the world's largest IPO, rose as much as 18 percent in their Hong Kong debut on Friday.

"We're beginning to see some move from the dollar to the euro, both from the private sector ... but also from monetary authorities and central banks," Greenspan told a conference sponsored by the Commercial Finance Association. Actually, this move has been going on for some time. Greenspan must have been in a cocoon.

Chuck Butler: "Yesterday, I was reading a report from the Sydney Morning Herald that quoted Australian Treasurer, Peter Costello, calling for an “orderly withdrawal from the U.S. dollar by Asia's Central Banks.” WOW! Costello also said, “the strategy had changed, and Central Bankers were now looking for alternative investments.” Butler when on to point out that Gabor Steingart, who heads Der Spiegel’s Berlin office and was chosen as “The Economic Writer of the Year” in 2004, stated “These days, the dollar is making a lot of people uncomfortable. One morning many dollar-owners will wake up and look at the facts about the U.S. economy without their rose-colored glasses - just as private investors woke up one day and took an unflinching look at the New Economy, only to see companies whose market value couldn't be justified by even the most dramatic of profit increases. Some of the revenue forecasts that had been issued far exceeded the total value of the market. The NASDAQ presented the spectacle of a stock market whose added value increased by 1,000 percent in just a few years, when the nominal growth of the U.S. economy during the same period was only 25 percent."

Wednesday, October 25, 2006

For Real

10/26/06 For Real

"Saudi Arabia has already informed its customers in Asia and North America of its plan to cut 380,000 bpd from the beginning of November," a senior OPEC delegate said. "Other OPEC producers will cut their designated volumes from their actual production regardless of how it is being estimated."

Centex Corp. CEO Tim Eller: "Buyers are either waiting on the sidelines for conditions to improve or canceling their purchase all together, believing they will be unable to sell their existing home for their expected price."

Sales of U.S. existing homes fell for the sixth month in a row in September as median sales prices fell for the second straight month, the National Association of Realtors said Wednesday. Inventories of unsold homes fell for the second straight month, a sign that the market is correcting, said Laurence Yun, a senior economist for the realtors group.

It was back in July that Yankee Candle was exploring alternatives. The stock was selling for $24+. I looked at it and thought a sale price of $28 might be possible. So much for my analysis. The company reached an agreement at $34.75.

U.S. crude supplies fell by 3.3 million barrels in the week ended Oct. 20, the Department of Energy said Wednesday. Motor gasoline supplies fell by 2.8 million barrels and distillate fuel supplies fell by 1.4 million barrels. Separate data from the American Petroleum Institute showed crude supplies down by 3.7 million barrels, gasoline supplies down by 2.3 million barrels and distillates down by 588,000 barrels. Futures prices rallied with crude for December delivery up just over $2 at $61.40 a barrel after the data were released.

Altria owns 88+% of Kraft and will finalize its plans to distribute Kraft shares at their Jan. 31 board meeting.

Pulte Homes Inc. reported third-quarter net earnings of $190.2 million, or 74 cents a share, compared with $395.4 million, or $1.50 a share, during the year-ago period. The backlog as of Sept. 30 was valued at $5.8 billion, compared with a value of $8 billion last year. The company said it continues to expect that business conditions will remain difficult for at least the near term, and that additional charges are possible if conditions erode further.

Meritage Homes said that more cancellations have caused the percentage of unsold homes in inventory to more than double from historic levels, and it has had "to shrink" its employee base in certain markets.

Gold for December delivery closed up $3.20 at $590.80 an ounce. Silver futures added 4 cents to $11.89 an ounce, platinum was up $5.90 at $1,069 an ounce and palladium rose 10 cents to $323.10 an ounce. Copper fell 1.35 cents to $3.4045 a pound.

Tuesday, October 24, 2006

More On Housing

10/25/06 More On Housing

According to Moody’s, the percentage of home loans
that are late on their payments for more than 60 days
rose to 7.23% in July from 5.9% the year before.
That’s the fastest rate of increase since 1998, says

Freddie Mac, which buys mortgages and packages them
into mortgage-backed securities, expects sales of new
and existing homes to drop 9.4% in 2006 after five
consecutive years of increases, says Bloomberg.

December crude climbed 54 cents to close at $59.35 a barrel Tuesday. November natural gas gained 21 cents to end the session at $7.091 per million British thermal units. November unleaded gasoline added 6.45 cents, or 4.4%, to close at $1.536 a gallon and November heating oil rose 2.62 cents to end at $1.6952 a gallon.

December gold climbed $4.70 to close at $587.60 an ounce Tuesday. December silver recovered from a low of $11.35 an ounce to close at $11.85, up 18 cents for the day. December copper, however, continued lower to end at $3.418 a pound, down 3.3 cents. Gold stocks did not follow in the path of a rising gold price.

Bombardier said on Tuesday that it was planning to cut about 1,330 jobs, including management positions, at its facilities in the Montreal area and at its plants in Belfast, Northern Ireland, during the next nine months from a total workforce in the aerospace division of 26,900. The overall workforce has remained at a similar level since January 2004.

Countrywide Financial Corp., the largest U.S. mortgage lender, on Tuesday said it expects to cut staff by more than 2,500 employees to help save more than $500 million as demand for home loans slumps.

Monday, October 23, 2006

Some Surprises

10/24/06 Some Surprises

December gold fell $13.50 to close at $582.90 an ounce and December silver lost 29.5 cents to end at $11.67 an ounce Monday. Those are the weakest closing levels for the contracts since Oct. 12. December copper fell by 1.1 cents to close at $3.451 a pound.

November natural gas fell 26.1 cents, or 3.6%, to $6.98 per million British thermal units in afternoon trading, reversing course after touching a nearly six-week high of $7.36. December crude lost 78 cents to trade at $58.55 a barrel.

Quite a surprise to see Wal-Mart spike from 49 to 52 in one day. Quite a surprise to see GM trading above 35.

John Hussman: "I personally don't trust this market at all, but with the Fund well hedged against the impact of substantial market losses, prevailing market action compels us to give a carefully limited benefit of the doubt to the investors passing out the Dow 12,000 party hats. The hedges, however, are essential."

From Richard Daughty: Richard Russell’s Dow Theory Letter says, “At times...the stock market is unclear about what lies ahead, and this is one of those times. I say that because the D-J Industrial Average and the D-J Transportation Average are at extreme odds. They just don't agree at all. The Industrials are saying that the situation is probably OK. The Transports are saying, ‘Don't you believe it, there's something very wrong going on.’”

While the price of gold bounces in a $35 an ounce range, gold stocks are beginning to find their footing.

The Mozilla Foundation will release the Firefox 2.0 browser on Tuesday, Mozilla Foundation officials confirmed Monday.

In recent weeks Iranian nuclear experts had started up a second pilot enrichment facility, diplomats in Vienna told The Associated Press Monday on condition of anonymity because they were not authorized to divulge the information to media.

The Motley Fool: "I believe that the larger worldwide perspective involves an ongoing need to replace and develop crude oil reserves. It's a need that clearly was important to Schlumberger's most recent quarter. It also renders a number of other service industry participants worth monitoring, including Halliburton, Baker Hughes and BJ Services."

Daniel Patrick Moynihan: "Everyone is entitled to his own opinion, but not his own facts."

Interest Rates

10/23/06 Interest Rates

"We are getting growth that is very close to potential, and that is the important point for monetary policy,'' says John B. Taylor, a Stanford University economist who was Treasury undersecretary for international affairs from 2001 to 2005. ``There will be increased tightening'' if the ``core'' inflation rate -- which excludes food and energy costs -- ``remains in the 2.5 percent range,'' he says. The economy will grow 2.5 percent over the second half of 2006, accelerating to a 2.9 percent rate by the third quarter of 2007, according to the median estimate in a Bloomberg survey. While a 25 percent decline in oil prices since July will reduce the overall rate of inflation, core measures may remain above the Fed's comfort zone. ``There's no reason to expect any rapid decline in core inflation from an economy that grows in a 2.5 percent range,'' says Allen Sinai, president of Decision Economics Inc. in New York. ``The Federal Reserve will make that conclusion."

There has been a significant momentum change in the U.S. treasury bond market. In recent weeks, the yield on the 5-year has risen from 4.50% to 4.82%. This yield remains very low on an historical basis-- especially if GDP grows 2 to 3 percent over the next several quarters. With that growth and 8 to 10 percent growth in China and India, demand for commodities will grow and there is a potential that prices could move much higher over the next eight to ten months. Such an event is not priced into current interest rates nor is it priced into the outlook for equities.