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Friday, August 8, 2008

Jobs Jobs Jobs, It's All About Jobs

"Yippee. Oil went down... now we can party party party. Who cares we have no jobs, who cares we lost our houses, who cares we don't have cars left to put gas into."

I lifted that off a comment thread somewhere, but it pretty much captures current sentiment. Equities have ripped higher as hedgies furiously unwind the 'equity crack trade' (short financials, long energy).

Oil is done and that is NOT nearly as GOOD as you'd think. You have to ask yourself, WHY is oil down? The answer of course is that global economic growth has completely stalled out. Japan is now officially in a recession and the U.S. will be shortly. Europe is diving right in and China is down shifting from super hyper growth.

For example:

Canada hit by biggest monthly job loss in 17 years: "A surprisingly large 55,000 jobs were lost in Canada in July, the biggest monthly job loss since the 1991 recession.

The Canadian dollar dropped immediately and bonds rose in reaction to release of the Statistics Canada employment report on Friday morning. Economists called the figures "extremely ugly" and "stunningly bad."

Most of the losses, 48,000, were in part-time work and overall employment remained 227,000 higher than it was a year earlier. The jobless rate dropped to 6.1 percent from 6.2 percent as youth and some older people left the work force."

It would appear that in Canada the 'powers that be' don't fudge the numbers the way they do in the U.S.. Job losses in Canada, a much stronger economy, were the same 55 000 that were lost in the U.S. on the last non-farm payroll report. One thing, Canada has 10% of the population of the U.S., never had as massive a housing bubble, exports commodities and has a budget surplus.

Use this oil inspired bounce in equities to exit longs and reposition short. In the end, this is a global consumer lead recession and the single most important variable will be JOBS JOBS JOBS.

War: Russia and Georgia

Heads up.

Russia and Georgia are at war, with South Ossetia absolutely crushed in the middle.

Putin is at the Olympic opening ceremonies... while peace and love breaks out everywhere.

The separatist President (of South Ossetia), Eduard Kokoity, said “the storming of Tskhinvali has started” and said that separatist forces were engaged with the Georgian army on the roads into the city. A statement on the separatist government's website said: “The assault is coming from all directions.”

A Russian General has said the Georgians have bombed the capital of South Ossetia (Tskhinvali).

This could end quickly or spiral out of control.

Russian “heavy equipment” (apparently 150 tanks) are now in Tskhinvali. The Russians have a “peace keeping mandate” in South Ossetia. Also, South Ossetia linked up with North Ossetia in a referendum years ago. North Ossetia is part of the Russian Federation. Already late last night there were reports that hundreds of volunteers were on their way from North Ossetia, through the Caucasus Mountains to join their ethnic kin in South Ossetia. The leadership of Abkhazia, Georgia's other breakaway state, said that 1,000 volunteers from Abkhazia were also on their way.

FACTBOX - Scenarios for Georgia's South Ossetia crisis: “Fighting raged in and around the capital of Georgia's breakaway South Ossetia region on Friday as Georgian troops, backed by tanks and warplanes, pounded separatist forces in a bid to re-take control of the territory.

The following are possible scenarios:

* Georgia, whose army and reservists total around 18,000 soldiers, swiftly completes its assault on breakaway South Ossetia before Russia can mobilise a major military response.

A Georgian victory could spark an exodus of non-Georgians to Russia. The majority of the breakaway region's roughly 70,000 population feel close to Russia and are ethnically distinct from Georgians.

Should Georgian troops quickly establish control over the territory it could prove more difficult for the Russians, diplomatically, to seize back control of the province by sending in its own forces.

* Failure by Georgia to quickly establish full control over South Ossetia could allow Russia, which has a peacekeeping mandate in the region, time to launch a counter-offensive, arguing that it needs to protect its own peacekeeping forces as well as civilians, most of whom have Russian passports.

Georgian officials say Russian armour is already pouring into the region from across the border. Hundreds of volunteers from Russia and another Georgia's breakaway region of Abkhazia, were reported to be making their way to South Ossetia.

* If Georgian troops fail to retake South Ossetia, Tbilisi could be vulnerable to political and diplomatic pressure from the United States and Europe to halt its offensive. The European Union is wary of antagonising Russia, one of its main sources of energy. Some European members of NATO, also wary of President Mikheil Saakashvili's record in clamping down on opponents, have resisted moves to put Georgia on a fast track to membership. Russia fiercely opposes NATO membership for its former Soviet satellite.

* Outright defeat for Georgian forces, with a retreat to pre-conflict positions, would be a humiliation for Saakashvili. He has made it a priority to win back control of South Ossetia and Abkhazia, another rebel region on the Black Sea. Defeat could also boost his domestic opponents and raise doubts about Georgia's pro-market reforms and drive to align itself more closely with the West.

Some background info on South Ossetia here.

Thursday, August 7, 2008

Wal-Mart: Weak Sales, Despite Stimulus and 'Slumming It' Effect

U.S. July Retail Sales Slow, Threatening Back-to-School Season: “U.S. retailers' sales in July rose at the slowest pace in four months as higher fuel and food costs discouraged consumers from visiting malls. Wal-Mart Stores Inc. said August sales won't grow as quickly as last month.”

Uh oh. As the economy deteriorates, the theory was that Wal-Mart would come out on top as middle class folks are forced into moving down the retail food chain. The theory was that the middle class would have to go ‘slumming it for a while’.

Don’t forget, those ridiculous stimulus checks are part of these numbers. So you have stimulus checks and the ‘slumming it effect’ STILL resulting in weak sales for July. This just can’t be good.

I have privately heard from retail analysts and those in the ‘export development’ arena of finance that they have started to see signs that several larger retailers are set to bite the dust in both Canada and the U.S.

Wal-Mart (WMT) looks to have failed to break out above resistance at $60.00. Poor earnings were the catalyst that put prices back “into the box”. WMT could be "dead money" and consolidate between $56 and $60 for any length of time. Failure to hold $56 and then again $55 would result in a fairly quick drop to the $50 area. This would signal a weak consumer economy indeed...

Wednesday, August 6, 2008

Ninjas: They're Everywhere

Freddie, Ambac, Morgan: This is the Sound of Credit Crunch

This is the sound of CREDIT CRUNCH

Morgan Stanley Said to Freeze Home-Equity Credit Withdrawals: “Morgan Stanley, the second-biggest U.S. securities firm, told thousands of clients this week that they won't be allowed to withdraw money on their home-equity credit lines, said a person familiar with the situation.

Most of the clients had properties that have lost value, according to the person, who declined to be identified because the information isn't public. The New York-based investment bank will review home-equity lines of credit, or HELOCs, monthly from now on, the person said yesterday.

Wall Street firms including Morgan Stanley are ratcheting back on risks after the collapse of the subprime mortgage market and ensuing credit contraction saddled banks and brokerages with almost $500 billion of writedowns and losses. Consumers fell behind on home-equity credit lines at the fastest pace in two decades in the first quarter, the American Bankers Association reported last month.”

I really love how these guys are cutting back AFTER the bubble has burst and residential real estate prices have plunged. Go RISK MANAGEMENT!

“JPMorgan Chase & Co., the second-biggest U.S. bank by market value after Bank of America Corp., has notified 150,000 customers about changes in their home-equity lines of credit since March, said Christine Holevas, a Chicago-based spokeswoman.

Bank of America and Washington Mutual Inc. are among the other lenders that have frozen home-equity credit lines this year.”

I also really love how the Fed is flooding the financial system with liquidity as the banks are draining the system of liquidity. Everything is being scaled back or outright suspended, from credit cards to mortgages and business loans. With net credit rapidly contracting, there can’t be an economic recovery of any significance. Considering that this last ‘boom’ cycle was fueled almost entirely by cheap access to credit, expect the GLOBAL economy to deteriorate rapidly over the very near future.

A rapid credit contraction will translate into a continued ass kicking over at Fannie Mae (FNM) and Freddie Mac (FRE).

Freddie Mac Posts Fourth Straight Loss, Cuts Dividend (Update2): “Freddie Mac, the U.S. mortgage-finance company hobbled by record foreclosures, will slash its dividend at least 80 percent after posting a quarterly loss that was three times wider than analysts' estimates.

The second-quarter net loss of $821 million, or $1.63 a share, compares with the 54-cent a share average estimate of nine analysts in a Bloomberg survey. The common-share dividend will be reduced to 5 cents or less from 25 cents, McLean, Virginia-based Freddie said today in a statement.

Freddie had credit-related expenses of $2.8 billion, double the first quarter, and wrote down the value of subprime and low- quality mortgage securities by $1 billion as the biggest housing slump since the Great Depression increased delinquencies.”

Does a write down of $1 billion on “low quality mortgage securities” seem small to anybody else? Freddie owns or guarantees $2.2 trillion in mortgages…

I guess Freddie is super hedged, or has the best low quality mortgages ever. OR, they wrote everything down already because they were super honest and super conservative.

Freddie Mac (FRE) reported crappy earnings.

This last short covering bounce on the whole "no more naked shorts" scare closed the gap. Prices are hovering around support around $7.50. Failure here (likely) will result in a test of the lows where Paulson will step in nationalize the whole damn thing...

Fannie Mae reports tomorrow…

Ambac Posts $823 Million Net Income; CDO Losses Rise (Update1): “Ambac Financial Group Inc., the bond insurer that lost 92 percent of its stock market value in the past year, posted second-quarter net income after recording a gain related to its debt securities.

Net income rose to $823.1 million, or $2.80 a share, from $173 million, or $1.67, a year earlier, New York-based Ambac said in statement today. Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53 a share because of expected claims on collateralized debt obligations, compared with an average estimate for a loss of 61 cents from five analysts surveyed by Bloomberg.”

Wait! What? Ambac (ABK) reported an INCREASE in net income? WTF? Lemme take a closer look.

Oh wait. It’s just another accounting scam. Phew! For a second there I thought there was real cash flow going on…

“A rise in the risk premiums on Ambac's own debt in the second quarter lowered the value of bond guarantees the company has outstanding, which was allowed to be reflected as a gain under accounting rules introduced in the first quarter.”

So, this is what REALLY happened: “Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53 a share because of expected claims on collateralized debt obligations…”

Ambac (ABK) has bounced almost 500%. Talk about short squeeze. This bounce should just about be done here at resistance around the $5.00 area. I don't advocate shorting stocks like these. Trading them intraday is one thing. Holding positions overnight on 'crack stocks' like ABK is quite another.

Tuesday, August 5, 2008

From Commodity Bubble to Commodity Bear

Oil Falls to $118 as Storm Danger Abates, Demand Concern Grows: “Crude oil fell to $118 a barrel on speculation Tropical Storm Edouard will leave U.S. oil rigs and refineries undamaged and as commodities prices tumble because of the slowing U.S. economy.

Oil dropped to its lowest since May 5 as Edouard's wind speeds remained below hurricane strength. Gold, platinum and wheat dropped on speculation slower growth will curb demand and as a stronger dollar dulled the appeal of commodities as an inflation hedge.”

Oil lost the critical $120 area, and is now in danger of cascading straight down to $100 as the margin clerks furiously man the phones demanding more bling…

Commodity Shares in Bear Market as Oil, Copper Slide (Update2): “Global energy and raw-materials stocks fell into bear markets after plunging oil, gold, copper and wheat prices spurred declines in last year's best-performing industries.

A gauge of energy producers in the MSCI World Index slipped 1.2 percent as of 9:49 a.m. in London, bringing its drop from a May record to 21 percent. The measure of mining, farm and chemical companies lost 1.6 percent, extending the retreat from an all-time high to 22 percent. Bear markets are commonly defined as a slump of 20 percent or more.

Exxon Mobil Corp., OAO Gazprom, and StatoilHydro ASA all sank more than 19 percent from records as crude prices tumbled. Slumping sales of houses, cars and airplanes sent copper and aluminum producers BHP Billiton Ltd. and Alcoa Inc. lower. The Reuters/Jefferies CRB Commodity Index last month posted its biggest slide since March 1980 as a global economic slowdown threatens to cut demand.”

The commodity bubble has ever so rapidly morphed into the commodity Bear. Like I keep saying, the Global Decoupling Theory is Garbage. Get short everything commodity related on strength. In Global Decoupling, Correlation Contagion I argued:

“Understand this: The last few years have been nothing but a liquidity (read DEBT) driven party. Financial innovation, such as mass securitizations and the mass embrace of derivatives resulted in the development of what is now termed ‘the shadow banking system’. This resulted in flood of liquidity, which is characterized by easy access to cheap debt. This pushed up ALL risky assets over the ENTIRE globe. Now with liquidity circling the drain as financial institutions try desperately to digest their suddenly swollen and impaired balance sheets, the correlations of ALL risky assets are approaching ONE.

There is now no such thing as diversification within the risky asset class.”

Oil was done when the heavily subsidized emerging economies had to start moving closer to paying real market rates. I say ‘closer’, because they are still ridiculously subsidized, and still have a long way to go. I present the consequences in Oil Drops on Subsidy Cuts in China, India, Malaysia, Taiwan.

While everybody is worried about the U.S., don’t forget: The Other Bigger Shoe: The Rest of The World

In Commodities Seeing Demand Destruction, Canada Rolls Over I went over some short commodity ETFs. In Time to be Short Commodities I went over those trades in detail. These trades were profitable even BEFORE the various commodities themselves broke down as can be seen in Oil and Gas: Will They Break Down?

Commodities really were THE FINAL BUBBLE.

DUG has broken OUT and UP. (Again)

Original profit target hit. A pullback to $32 is healthy. Any pullback needs to stay above $30 before another test of the declining 200 day EMA (green line).

SMN has broken OUT and UP. (Again)

Any pullback to $32 is healthy. Any pullback needs to stay above $30. Prices are likely to consolidate around the 200 day EMA (green line) before moving higher.

Some interesting Canadian commodity plays include: HXD.TO, HED.TO, HOD.TO.

Monday, August 4, 2008

US Treasuries, US Dollar and Commodities

An avalanche of new debt is about to hit the treasury market. Not just this week, but for months and possibly years to come as the U.S. economy plunges into a deep, prolonged and nasty recession full of government sponsored bailouts and stimulus packages. This massive new supply of debt will hit the markets just as demand begins to wane. The rest of the world is now much less able and willing to support both the reckless U.S. consumer and government.

As equities (S&P 500, grey area) slid into the abyss thru June and July, fixed income couldn't find the usual safe haven bid. Instead, yield consolidated using the 4% area as support. Expect a break out to higher yields as supply overwhelms demand.

The US dollar will continue to stabilize as it becomes apparent the rest of the world hasn't in fact 'decoupled'. With the Fed done cutting, the 'dollar down bubble' may abate. This will help crush commodities...

The oil price insanity is probably over. Oil may rally, but fail at the old high before plunging below even $50 or $30 a barrel.

Should commodities collapse, and they will, the single major source of funds propping up the U.S. debt markets will suddenly slow to a trickle. After some lag, this would translate into less demand for U.S. government debt as the flow of 'recycled' petro-dollars slows, resulting in an agonizing spike in yields...

Fewest Treasury Traders Since 1960 Hit Taxpayers (Update4): “For the first time since 1960, when it created the network of securities firms obligated to buy and sell Treasury bonds, the U.S. government has the fewest bond traders making markets in its debt and a bigger burden for American taxpayers financing record federal deficits.”

That can lead to only one thing: Higher interest rates and greater volatility…

“Fewer firms bidding for U.S. bonds means “you're going to have sloppier auctions,” said Mark MacQueen, a money manager in Austin, Texas, at Sage Advisory Services, who traded Treasuries at dealer Merrill Lynch & Co. in the 1980s. “The taxpayer and the government are paying more no matter what happens.”

While the interest rate on the benchmark 10-year Treasury note today is less than half the 9.14 percent yield of 20 years ago, the dwindling number of dealers and contraction of credit markets means that yields on 10-year notes sold this year have averaged 1 basis point higher than in pre-auction trading, compared with no difference in 2007, data from Stone & McCarthy Research Associates in Skillman, New Jersey, show. In the three years before 2007, such sales drew a yield just below the pre- auction rate. One basis point, or 0.01 percentage point, spread over $171 billion -- the amount the Treasury said it may borrow this quarter -- represents $17.1 million in interest.

Traders refer to yields that are higher at auction than typically forecast as a tail. The Treasury's July 22 sale of 20- year Treasury Inflation Protected Securities, for example, drew a tail of 5 basis points, or 0.05 percentage point, according to RBS Greenwich Capital in Greenwich, Connecticut.”

With all sources of tax revenue, from corporate profits to residential property taxes and retail consumption taxes, and with government obligations sky rocketing as bailouts and stimulus packages are crafted, expect some of the largest deficits in U.S. history.

“The paucity of primary dealers coincides with the largest borrowing requirement in American history and the acknowledgment by the administration of President George W. Bush that the U.S. will finance a budget deficit totaling a record $482 billion next year. When the dealer system began 48 years ago with 18 firms, the U.S. had a $300 million surplus. The group has shrunk from a peak of 46 in 1988.”

Most important are INDIRECT BIDDERS.

“The Treasury this week will sell $17 billion of 10-year notes in its quarterly sale of the securities, the most since 2003. It will also auction $10 billion of 30-year bonds, the most in two years. The government said July 30 that it's considering more frequent auctions of both securities, and will announce a decision in November.

Dealers are just one category of participants at auction and a smaller number doesn't automatically doom the government to higher rates or guarantee profits for firms.

Indirect bidders, a class of investors that includes foreign central banks, bought 27 percent of the two-year notes that sold in the past year. That compares with an average of 34 percent in the preceding 12 months.”

The rest of the world has financed the U.S. lifestyle. It does look like they are less able or less willing to do so now. The effect on interest rates could be catastrophic.

The era of low interest rates in the U.S. may soon be over…

U.S. Treasuries Decline Before Auctions of 10-, 30-Year Debt: “Treasuries declined as some traders speculated last week's rally was overdone given the U.S. government's plan to increase sales of long-term securities and investors became more bearish on the debt.

The decline pushed the yield on the 10-year note up from near the lowest level since July 17 before the U.S. sells $17 billion of the securities on Aug. 6, the largest amount since 2003. It will also auction $10 billion of 30-year bonds the next day, the most in two years. An index of sentiment showed investors were bearish on Treasuries for a fourth week.

“There's a lot supply coming this week and the market may well find it difficult to digest it all,” said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “The market is looking increasingly vulnerable at these levels.””