China Slow Down

Expect China to slow down its growth trajectory as it heads in to the Olympics? Counterintuitive perhaps, but all the supplies China needs to build the facilties for the games are already in the country. Maybe food and fuel will remain unscathed, but a drop in other materials is likely as China shuts down some of their toxic polluters to 'clean up the air' for the games. Coal is obviously a suspected loser as is iron ore.
However, after the games, expect a renewed surge as the need for China to rebuild the Sichuan area after the earthquake and house the migration of 250mm rural citizens into the cities over the next decade continues.

June 30

June 30 is qtr end for the fast money crowd. There is 3 trillion sitting in mmkt funds-part of that is retail and part is fast money hiding. Watch for the money to gravitate towards the qtrs winners. GOOG, AAPL, RIMM could trade up on money flow. I suspect the sp500 trades higher into q2 end, but fails to break to new intermediate highs. We will see.

Also I suspect the mutual fund side will continue to see redemptions as the lifestyle of many consumers is going to see savings eaten into.

Watch the Bond Mkt

Long term yields are starting to move higher. Technicals have confirmed a downtrend in Price, possibly a 75 to 100 bp back up in long term yields. Either the mkt is sniffing inflation ( possibly) and/or foregn buyers of US debt paper are not as interested. This weeks bond auctions were not well received.
The stock/bond model still suggests stocks should outperform bonds. Not entirely true as the writedowns in the financial sector are not included in estimated SP500 earnings. Bonds are expensive given the inflation picture, stocks are still expensive, but just not as expensive.

Oil/Gold and other commodities.

The commodities complex is enduring a bout of profit taking. There is no doubt that 4$ gas and 130 oil is starting to destroy demand. In any bull market, it is not the peaks that are important, it is the valleys-how much of a pullback can we expect. Taking the standard 20% from 135 gives us a 108 target.
As for gold, 20% of 1030 is approx. 830. The mkt needs to wash out the johnny come lately, weak handed momentum players who chase performance. This will happen and I look for the mkt to consolidate through the summer, before the late q3, early q4 move higher. Risk is being pared back, and even more important is credit/leverage is being reduced.

Another one bites the dust

Fed Governor Mishkin-a close confidant of Bernanke- has resigned. That leaves only 4 Fed Governors since Senator Dodd is in stall tactic mode to get Democratic supporters nominated for the FED. This could become a problem, especially if the need arises for 'emergency Fed action'. If Bernanke is as good as the financial media say he is, then why is his closest confidante leaving? Way to help out your friend. It smels like Bernanke has sold his soul to the bankers-just like Greenspan-and is about to emabark on another bubble blowing mission.

What is happening?

The world is in flux once again. The US inflation trade is running out of steam as the media is in an all out blitz to heap praise onto Bernanke for his bold action in responding to the subprime problem. Financial executives are all over the media talking about the end of the sub prime credit issue. On that point, I could agree that subprime has largely been accounted for, but the full effect of the subprime issue has yet to pass through the economy. In addition, the next leg in the credit down cycle is about to hit-starting in Oct.-that being Alt-A ARMS. This section of the mtg mkt is just as big and expectations are not built in for the train coming down the track.

Oil Supply Peak

Taking the supply peak further, what does that mean. Recently their has been talk of oil pushing the 3rd standard deviation from its 200 dma and hence on a statisitical basis, it should correct to at least 1 std dev. In addition, the oil/gold ratio was pushing multi year lows. However, as with the great sub prime model, everything works fine until one of the variables becomes in accurate. The concept of supply peaking is going to result in all sorts of model distortions.

Oil Prices-why the 20$ move

As always the news is now out why the back dated oil contracts have outperformed the near contracts. The IEA has drastically cut its supply forecast for oil. Instead of forecasting 116mm barrels a day in 2030 of supply, it is now only forecasting 100mm. Matt Simmons seems to be vindicated. What does that mean for the various equities. Oil service stocks strangely ehough may suffer as the current producers who have in the past rushed to produce as much as possible, may now actually curtail spending as the resources they seek are finite. Oil is not an ipod. Hence, rationing supply in a tight mkt is what a long term mgr may consider. Alternative energy stocks should benefit as would coal. If the amount of energy to be supplied by oil declines, the slack will be taken up by other forms of energy-solar, wind, nuclear, geo thermal, etc.

Recent oil spike has claimed more victims-namely the airlines and truckers. Airlines are based on a terrible model-they will merge to make a giant money losing business as opposed to several money loing businesses.

Oil Prices

Nothing but commentary on 134$ oil this morning. All the signs of a short term top in place. Main evidence is an underperformance of the oil/energy shares vs the underlying commodity. I suspect the oil chart is going to resemble the gold chart from March 20 to May 8-a quick 15-20% drop. The only evidence of a top not being in is that everybody is calling a top. Talk of oil bubbles and commodity bubbles usually do not occur at turning points. This could be like the Nasdaq in 1998 where the top callers were right for 6 weeks only to watch the index rocket higher 50% into Jan. 2000. Plenty of shorts in oil and maybe the squeeze runs until it is not just overbought, but ridiculously overbot.

Ron Rosen Comments

Ron has an interesting commentary today:
http://www.kitco.com/ind/rosen/may212008.html

The comparison of the 1978 to 1981 period of rapidly rising commodity prices to the present ramping up of commodity prices. In short he predicts a top in gold and silver in the first qtr of 2009 (Feb 18/09 for gold, Jan. 14/09 for silver) . In terms of equities he is anticipating a March 2009. He looks for low below the 2002 level in the SP500. The quarterly MACD has turned negative and that does not happen often-a longer term early warning sign. Selling rallies is probably the correct strategy and buying only oversold dips.

Moody's- You have to be kidding

There is a story circulating that Moody's has 'discovered' a computer glitch that incorrectly rated some debt securities-most likely CDOs got rated AAA. You have got to be kidding. That mismarking of debt securities was due to payola from the Wall Cheat rocket scientists. That story is going to get blasted along with the dog ate my homework excuse. Moody's is going down not because of a 'computer glitch', but because they are going to get sued to death by angry toxic waste holders-namely the pension funds.

Is the Oil elevator full yet?

Headlines in all the major business sections lead off with the price of oil. Currently trading at 129 for July. On top of that, the talking heads on the financial stations are now talking of the contango in the oil futures mkt. Dec. 2016 now at 140$ with increasing open interest. This could be the beginning of the super spike that eventually crushes demand-just like gold and silver in 1980. I expect margin requiremnts for future contracts to start increasing.

Related news. Petrobras is ordering $30 billion in deepwater rigs for their recently discovered off shore oil firelds. In addition, PBR has locked up 80% of the deep water rigs (16 of 21) for the next several years. Looks like future oil is going to be more expensive that oil 5 yrs ago. The oil mkt is trading similar to the gold mkt as it breached the 1000$ level. Once the upward momentum wanes, it will crater and find its true level around 105 to 110. 95 to 100 is the max downside I see.

Refiners are starting to trade better. Either gas prices are going higher, or the cost of crude is going lower. WTIC is trading at a discount to its normal relationship with Brent.

Tech Upgrade by several Analysts

Tech Stocks are about to sold by the Wall Street and Conn. crowd. A plethora of upgrades by the Wall Cheat analysts will more than likely result in the blind, underperforming mutual funds buying positions in tech. TECH is cyclical and the US economy is heading South and at best, heading East(ie flatlining). What the BRICs buy in terms of tech is up for discussion, but tech spending in the BRIC nations is not close to tech spending in Europe and North America.
Tech is cyclical, not secular. Tech is cyclical repeat and repeat again. As Don Coxe states-INTC sold at 11X earnings in 1994, before it morphed into a hyper growth stock to trade at 50+X peak earnings. It will trade at 11X earnings again. same with the rest of tech.

Oil Prices

What is up with oil prices. 125 and tight despite dropping US demand and now increased Saudi output. Saudi increasing production 300k bpd starting June 1. No impact. Mkt is realizing that BRIC demand will outpace US and European demand destruction.

Gas at the pump must rise in order to slow demand growth even more.

Fannie and Freddie being sacrificed

Here we go again-US politicians creating more problems by trying to solve existing ones. The US Congress is meddling in the housing mkt trying to stop the tidal wave of foreclosures. It wil not help until prices drop to levels where real buyers emerge. In the latest move, FNM and FRE are allowed to buy larger loans with only 3% downpayment. Isn't that how the mkt got in this mess. BAD BANKING practices. God help the US taxpayer. Once again the profits are privatized and the losses are socialized.
FNM and FRE are going to lose money hand over fist as the toxic waste get rammed down their throat. The taxpayer eventually finances these GSEs and it is another round about way of the PTB unloading the problem onto the US taxpayer, and in particular the middle class.

April CPI-the joke continues

April CPI released- +.2%, core +.1 %

Food up.9%. energy flat in April vs March. Are you kidding me. Oil is has gone from 110 to 125. Nat gas is pressing 12. I guess all those cheap wind and solar farms are producing cheap energy.
I suspect the Owners equivalent rent and car prices dragged the index lower.
Given that number, any suspicion of higher rates from the FED just went out the window.
So what do we have-a FED giving credit away-that sets the stage for problems down the road. Bernanke is trying to save his job and his Republican masters. Full speed ahead into November.

Deer in the headlights

Fed Chair Bernanke looked like a deer in the headlights y'day as he spoke to the Atlanta Fed. He was either suffering from a severe case of gas, or he was lying through his teeth. Terrible poker player. (still looking for video)
His suggestion of an increase in the TAF auction coupled with comments about the financial mkts being far from normal indicate that there is more pain to come. Expect rates to remain low for a while-even if inflation kicks up. Fed can always stop inflation-crank up rates, but stopping a Japanese style deflation is much more difficult. So far devaluing the USD and making money free is delaying the process. Time will tell if this strategy works. The US financials remain on life support. More equity raising coming from both Freddie and Fannie. Citi will be back as will MER and LEH.

Deleveraging

Hedge Funds are being targeted by the prime brokers. The prime brokers are forcing the hedge funds to reduce their leverage ratios as the need for capital continues to intensify. FED Chair Bernanke stated that he is prepared to raise the TAF auctions. I thought things were getting better, but that announcement indicates things are getting worse. The traditional ratios are all breaking down. Gold/USD, Gold/oil, yield curve, carry trades. The mkts are being dislocated as the hedge funds all switch from one side of the boat to another. The old boys club is all trying tosqueeze through the same fire exit. Despite record short interest, the equity mkts trade well. Either there is a pile of pairs trade, or the mkt is setting up for a fall. With the Fed and other central banks forcing credit down the banks throat and then not giving them any benefit to sit in cash, it is flowing to the most liquid asset-stocks.

China's Paul Volcker

There is no doubt that the Chinese are masters in studying history. It is a sad day for the global economics of the Western World when the most respected banker is from a communist country. The Chinese central bank has raised reserve requirements again as it tackles inflation. O/n rates are at 7.47 % and reserve requirements will rise to 16.5% from 16%. Talk about constraining the banks. Consider the US banks that have 8.5% in tier 1 capital ( of what we know). In addition, US banks have been exposed for their off balance sheet entities-who knows what is out their in numbered company land.

Walter Ruether where are You

Back in the 1930s when Henry Ford was boasting to Walter Ruether (head of the auto workers union) that his new automated assembly line would reduce the need for his unionized workers and may even eliminate them, Walter replied (to paraphrase) 'That is great Henry, but who are you going to sell your cars to?' That same situation is currently the US and the Western worlds problem. But outsourcing their production to low cost countries, Western companies have destroyed their buying base. Profits have risen tremendously in the past 10 yrs, but the slow deterioration of the consumption base has finally caught up to the process. There is a massive time lag as the developing world catches up to the living standards of the West. They need basic necessities, not luxury items. They will buy a Chevy and not a Cadillac. They will buy food and fuel, but not Cartier watches.

Where the Rot IS

Fannie Mae (FNM) just reported earnings and to say the least, they were terrible. 2.57 loss per share for the quarter, and the need to raise another 6 billion in capital. Expectations were for a .81 loss-the spin from the media will be interesting. More important, they state in the release that 2009 credit losses will be higher than 2008 losses. Hello Alt-a and Prime and ARM resets. Dividend to be cut. Once again the US taxpayer is going to get the short end of the stick while the Wall Cheat Fat Cats keep their ill gotten gains.
UBS just annoubnced another massive qtrly loss-10.9 bln, cutting 5500 jobs. The rot continues. The one bright spot is that they managed to sell 21 billion of subprime and Alt-a mtgs to Blackrock for 15 billion. So at least we know a reasonable valuation for some of these assets. Lazard reports a loss as does Legg mason. The bottom for financials is not in, it will be in when housing prices stop going lower or when US workers wages rise to a level to afford a house.
Speaking a covering their assets, SP had an announcement on Friday stating the expected recovery rates for the various tranches of CDOs. Even the highest rated tranches of the CDOs are expected to return 60-70% of the principle amount. That means the majority of the lower rated tranches are worth 0. There is more pain in financial land to come. Deleveraging and hedge fund blow ups will be commonplace.

Oil testing 120 and all the commentators are busy top calling. Nobody seems to believe the move. Even myself consider oil to be ahead of itself, but I am not short, but reduced long. If oil stays above 105 for the 2nd qtr, oil company profits are going to be ridiculously large.
Gold holding above 850, but it seems to lack any buying power-more likely short covering. It is dead money for a qtr or two.

CNBCs Steve Liesman is part of the hedge fund crew. Very opinionated-not reporting the news, but interpreting the news and part of the happy go lucky crowd. Lies Man is appropriate.

The circle of credit

Here is an interesting article regarding the price of oil

http://www.financialsense.com/editorials/engdahl/2008/0502.html

Very interesting, especially if you take it one step further. What if the US gov't in collaboration with the Saudis have been holding the price of energy high to pay for the US Gov't deficit. One can not just raise taxes in the US to pay for the spending of the US Govt, no, one just puts an indirect tax on the entire globe, but in particular the relatively poorer emerging giants China and India. Is oil worth 115/barrel, not likely but more like 80-90 given the cost of the marginal barrel. The Saudis in turn take their windfall profits and then buy USTs to complete the circle of credit. Unfortunately this arrangement will eventually break down as all price fixing schemes do-eventually more supply hits the mkt and the pyramid collapses-more than likely once George and Dick leave office. In addition, the Mid East oil producers are busy building the 21st century edition of the Great pyramids. Check out this website:
http://burjdubaiskyscraper.com/

With gas pushing 3.50 a gallon, and WTIC at 115/ barrel, the refiners are getting hammered. Also Nat gas is @ 10.60 , the ratio of oil to gas is North of 10, when it should trade at 8. However, one has to look at Nat Gas to refined products, and that is not quite as dramatic in the ratio, as that Nat Gas to gasoline ratio has ranged from 9.0 to 2.5-currently at 3.6.

Fed doing what it always does

The Fed is busy helping out its owners-the Banks that use its discount window. Rate cuts and TAF are only helping out the banks-not the citizen on the street.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a1ctn1Xfq5Do&refer=home

Check out the rates from Bloomberg May 2 2008
Current 1 mth Prior 6 mth Prior

Fed Funds 2.00 2.25 4.50

3 month Libor 2.77 2.70 4.86

5 yr AAA Bk & Fin 4.59 4.30 4.79

10yr AAA Bk 5.56 5.50 5.38

15 yr MTG 5.29 5.29 5.54

30 yr MTG 5.72 5.75 5.91

1 yr ARM 5.90 5.55 5.65


So, despite rate cuts of 250 bps in the FF rate, mortgage rates have not dropped and in fact have gone up. The FED is holding up the banks by taking their crap in repo collateral, but the banks are not lending-Because they have no capital. This charade can go on for a while -Just like Japan. The US consumer needs capital and they are not getting it from the banks-look for credit card balances to increase as the desparation sets in.

Just buy anything not fixed income

The money masters are at it again. The FED succumb to the mkts and cut rates by 25 bps and then spun the move as hawkish on inflation. Then the Treasury Sec. says the worst of THIS crisis is almost over (I agree, but there are more crises around the corner). Things are so good that the FED has expanded the liquidity at the TAF to 75 bln and by expanding the list of permissible collateral. As explained earlier, by allowing the Wall Street Banks to borrow USTs which can be margined at at least 20:1, and giving the FED toxoic junk which has no margainable quality (maybe 3:1), the FED has stopped the forced selling. On top of that, the pile of cash in FI is getting forced into the mkt since rates are so low. The game continues again.
Maybe the mkt will wake up and realize what is going on, but right now the bears are getting a margin call. 1420 on the SP500 was the bounce back retracement and 1450 maybe the outside objective. Remember the Wall Street and the monkeys story. The big money has been buying for the last 4 weeks and now the marketing campaign accelerates to bring in the retail buyer. The only question is how much money does the retail investor have given their credit card is bulging and their mortgage needs to be refinanced.

Even the Las Vegas casinos are struggling-they need to find some new marks-same with Wall Street. Wall Streets' reputation is in tatters across the globe as the garbage they produced on these securitized instruments spread. As the saying goes-u can buy anything you want, but selling it to someone else at a profit is the trick.

The mkt tone is good as the flood of new liquidity finds its way into the mkt. Housing is dead, so the money will find its way into more liquid assets. Oil needs to correct to 100-105, but gold is back to its break out level of 850. All sorts of media talking of the commodity bubble being over, while it is time to buy financials. Don Coxe thinks otherwise. Lets see what the real money-ie foreign money mgrs think. China and India need to feed and house their citizens, not support Wall Street execs pay packages.

US Dollar

The Fed cut rates to 2% from 2.25% y'day and the spin from the media was that this is it for rate cuts. The futures mkt is predicting a rate rise by the end of the year-15%, while 13% indicate one more cut by yr end. Makes no difference as the shadow financial system has disconnected from the official rates. The Fed is trying to regain control of the system-first by eliminating Bear Stearns and then by legislating broader powers.
The USD failed y'day to rally, but the overnight crowd got the call and has pushed the USDX up .36 to 72.94. I fully expect a rally in the USD to 75 to 76, before the bear trend reserts itself. What is likely to happen now is that other central banks will be pressured to cut their interest rates as the local economies stall. US real rates are negative-helps the borrowers and punishes the savers-funny how the US gov't is going to need to borrow 400+bln this FY. Also interesting how it is an election yr. Negative real rates lead to consumption as saving is punished, unfortunately the borrowing capacity of the US consumer is stretched to say the least. The Fed has to be aware that the US mkt may become the carry mkt of choice for the shadow banking system-hedge funds borrow in USD and then sell the USD to buy assets in other currencies and mkts.

Gold and oil are unlikely to break higher in this scenario, but oil and gold companies may benefit as they have been handicapped by the rising domestic currencies. Brazil and Canada are the prime examples. Lately the C$ has retreated, but the Brazilian Real has rocketed higher, especially after SP upgraded the local debt to investment grade.