Well, that was an interesting day…
Corey at Afraid to Trade points out (over at Phil’s Favorites) that it was a rare day when the Nasdaq went up 1%, the Dow went down 1% and the S&P split the difference and had a flat day. We’ve been looking for rotation into the Nasdaq for quite some time and the QLD (Nasdaq) and UWM (Russell) are our index ultra-longs of choice and, indeed the Russell did also have an up 1% day so – yay, I guess…
It’s hard to feel celebratory with the Dow down at 7,936 and (as Trader Mike’s chart points out) the S&P squeezing into a triangle that could go either way. Can the Dow, which is a silly index, blow 8,000 while the S&P holds 800? Possibly, but we still haven’t seen the capitulation in the energy sector that we’d like to put in a firm bottom and get people to move their money out of that sector and into something that’s a positive for America when they make profits – like many of our small caps!
Not to go off on a rant but XOM made $7Bn this quarter vs. $12Bn last quarter and the difference was oil dropped from $110 per barrel on average in Q3 to $55 in Q2 so, at 20Mb/day of US consumption, it costs US consumers $55 x 20M x 90 days = $99Bn in order for XOM to make $5Bn extra dollars in a quarter. That, of course, ignores the refining mark-ups etc… XOM is really about 20% of the energy industry in America so let’s be generous and say that they only took $20Bn out of our pockets to drop $5Bn to the balance sheet. That being the case, wouldn’t it simply be more efficient for them to charge $1.50 a gallon at the pump and we just give them a dollar tip rather than rape us for $3.50 per gallon in order to shake out the same dollar? The point is, there is NO NET BENEFIT to the consumer when they are forced to pay 100% more for the same consumable commodity and, unless we can engineer a recovery WITHOUT re-flating the commodity bubble, it is very likely doomed to failure.
We learned yesterday that Cambridge University has developed a $3 lightbulb that has a 100,000 hour lifespan (not good for GE!) that cuts electrical usage for lighting by 75%. Let’s say that saves the average US consumer $50 a month. Well, if we give that company just $9Bn that would pay for 3Bn light bulbs – 30 bulbs for every home in America and that would save 100M US households $50 a month for 11 years (about 100,000 hours) or $660Bn – not to mention saving the US roughly 10% of its total fuel consumption (20% of our imports). Now THAT’S the kind of company we want to see doing well! This country (and I’m ignoring the fact that Cambridge is actually in England) has a legacy of creating innovative solutions that solve problems through a combination of hard work and technological advancement – it’s time to get back to valuing and rewarding THAT behavior, rather than the behavior of those who exploit the production of others and yes, I know that is communist talk but extreme capitalism has brought us to the abyss so a little socialism may be just the thing to pull us back.
We NEED to move back into a cycle where we reward the inventors and the innovators, where a kid going to business school does so hoping to one day run a business that employs people, rather than take over a business and lay people off, so he can squeeze out more profits, or short selling someone else’s business and praying for it to fail. Competition is healthy but – would it be healthy if other parents ON YOUR OWN TEAM were placing bets that your kid would strike out or fumble the football or fall on the ice? There is a significant portion of the best and brightest financial minds in this country rooting for its failure. We may all "be in this together" but certainly there are many in here "together" with us who pray that THIS gets much, much worse. Who are these people? There was $62 Trillion bet AGAINST our home values and AGAINST our ability to pay for them in the CDS market (invented by JPM, by the way) – follow the money, and watch your back!
Also in Phil’s Favorites today, Jim Kunstler writes about Montgomery Alabama: "They say that the banks have stopped calling in their loans on the commercial real estate, even though the owners of the malls and strip malls have arrived firmly in default. Calling in the loans would only pin another horrifying liability on the banks’ balance sheets. So all parties join in a game of "pretend," that nothing has really happened to the fundamental equations of business life. Something similar goes on at the next level down, where the tenants of the malls and strip malls sink deeper into rent arrears every month, and the eviction process is simply postponed, while the stores themselves put off paying their vendors and suppliers – as the whole system, the whole way of life, enters upon a circle-jerk of mutual denial in a last desperate effort to forestall the mandates of reality." Damn that is great writing! I want this guy to be the poet laureate of the New Depression… It’s a great article but take the bullets out of your gun before reading.
Most U.S. banks tightened lending to consumers and businesses in recent months, an ominous sign for an economic recovery pegged to easing the flow of credit to borrowers. In a survey of banks released Monday, the Federal Reserve said about two-thirds of banks’ loan officers reported that they tightened terms for business loans over the past three months as they attempt to assess the damages from the easy lending frenzy that peaked out in 2007. From October through December of last year, Bank of America said it took permanent losses on about 2.9% of its outstanding small-business loans, an annual loss rate of almost 12%. As of one year ago, the Charlotte, N.C., bank’s permanent loss rate on small-business loans was about half its current level, or about 6%. Let’s hope that’s a blip and not a trend!
The trend in Asia is still generally down and the Nikkei finished down 0.6% after running up to the 2.5% rule on news that the BOJ would buy 1 Trillion Yen worth of stocks from Japanese banks in order to shore up their balance sheets without putting more pressure on the markets. The Nikkei gained 250 points in lunch but then investors realized that 1Tn Yen is only $11.9Bn, and the Nikkei fell 300 points in the afternoon, retesting lows of 7,800 as property stocks led the declines. Contrary to popular opinion however – somebody, somewhere is buying something as the Baltic Dry Shipping Index gained another 5.2% today, up almost 15% from the 1,000 mark we considered a good sign last week. Perhaps that someone is in China, as the Shanghai Composite run up 2.5% this morning although a lot of that is due to the general consensus that additional stimulus is coming soon. We’re in on FXI for the same reason and they still make a nice, hedged entry here with the index at $25 and the sale of the March $23 puts and calls at $5.05 netting you in for $21.48 if it is put to you (a 14% discount) and a profit of 15% if FXI holds $23 through March 20th.
Over in Europe, VOD had a great earnings report this morning but a lot of it was due to the very poor performance of the pound. MOT, on the other hand, was so bad the CFO quit after just one stressful year. The FTSE is struggling to hold the 4,050 line but is positive this morning (8 am) and 4,000 is our line in the sand over there. The CAC is holding 2,900 but we really need to see 3,000 there and they have 31 points to go in a choppy session. The DAX is also holding above our 4,200 problem area and testing 4,300 this morning and I’m liking the action in Europe because BP was awful and tanked the entrie energy sector.
As I warned last week, rotation is a painful thing but nowhere near as painful as paying an extra $15Bn a month ($60Bn globally) just so XOM can make $1.5Bn. That is what Marx would call an inequitable distribution of capital, from the hands of the many into the pockets of the very few! We need capital to flow to the lighbulb guys who are going to save the world $70 for every $10 invested in their product rather than tossing those dollars into the gas tank and lighting them on fire. It is UP TO THE GOVERNMENT (and, yes, you can force me to name my associates later) to redirect misallocated capital and put this country back on a more productive track.
40 years of naked capitalism led us into a economy where $2Tn of the $6Tn in total GLOBAL corporate profits were made by bankers and another $1Tn was made by oil companies and another $1Tn was made by commodity producers with just 1 out of every 3 dollars finding their way to the people who actually built the sort of things that last. So it should be no surprise that we have a nation with more business schools than medical schools and more law schools than both combined as the business of America is indeed business and, at the moment, business is not good!
If we are going to "fix" the economy, perhaps we first need to step a little further back and look at what it is we need to fix. Do we really want to plow this country another $5Tn in debt in order to help the money changers and the commodity pushers get back to business as usual or should we perhaps work towards a world where the set of 20 of the World’s top 500 most profitable companies pictured above contain more than 5 companies who make something people want, rather than NEED to survive (commodities and the money to pay for them). In fact, included in the 5 are GE, who are heavy into finance, and PFE, who could be argued produce a necessary commodity (medicine) – but that’s an issue for a different day.
During the day today we will get reports on Auto Sales (and TM is now much further down that list after last year’s performance), which are unlikely to be good but tomorrow morning is the dreaded ADP report where we are likely to lose another half a million jobs but possibly some good news from ISM Services at 10. Oil will test $40 today ahead of tomorrow’s inventory report and I still expect us to flat-line for 7 more days but if we violate that lower wedge in Mike’s S&P chart – it’s going to be time to be one of those people betting on the demise of this market.
Meanwhile, until then, we are still shopping our Buy List, staying well-hedged and playing for that rotation!
