Just Another Manic Monday

Can we go on that ride again, can we, pleeease?!?

My kids are at Disney this week giving Grandma and Grandpa sore necks while my wife and I enjoy our cleanest house in 7 years but I can really identify with their excitement as we just got off one of the biggest market thrill rides of this century.

Now imagine you are in China, or Japan or Singapore or Taiwan or Indonesia and you've been on that 2% up day not once this decade, but 12 times in 2007!  Think you might be playing the markets a little more?  We are all gamblers at heart and there's an undeniable rush to getting a big win and, when your market pays off like a broken slot machine, it does tend to get you to keep pumping quarters in.  While China is doing it's best to stop their people from placing too many bets, the voice of reason is being drowned out by the constant clamor of jackpots being paid out, seemingly to everyone who plays the market, which is up over 20% since March with a currency that's GAINING strength.  That's up close to 33% in US dollar terms!

Now imagine you see a machine paying off like that in a casino and all you have to do is open a broker account and you can play next.  Not only that, but there are perfectly good fundamental reasons for the casino to be giving money away like that:  China is on track to pass Germany in GDP this year with $2.9T, up 140% since 2000.  According to the WSJ, "By another measure, known as purchasing-power parity, China is already the world's second-biggest economy. If exchange rates are adjusted to equalize the cost of goods in different countries, then the value of China's total output was $10 trillion last year, according to estimates by the IMF. That eclipses Japan's $4.2 trillion and Germany's $2.6 trillion, and is hot on the heels of the U.S.'s $13 trillion economy on this measure. Purchasing-power parity tends to make developing economies appear bigger than comparisons using current exchange rates, because a dollar can often buy more goods in poor countries than in rich ones."

In other words, when a Chinese factory puts out a sneaker it sells for just $1.25 in Liaoning, a small city in China, whereas that same sneaker selling in a discount store in Detroit is "worth" $15.  As wages rise in China, their quality of living rises much faster than ours does (but they are starting off a pretty low base).

Over the weekend we were discussing a video called "Shift Happens" on the members site and I highly recommend you take 7 minutes and have a look at a summary of the immense changes that are shaping the world around us.  Global growth is a very real thing and we need to think very globally if we are going to have a winning investment strategy for rest of this decade as our position in the center of the financial universe is slipping away from us far faster than you may think.

Speaking of members, congrat's to Optiondragon and the fair Juliet who got us into PKX last week with Dragon making the first call on the 11th.  PKX announced a 56% rise in net profits this morning as they blew sales estimates away by 25% and cut costs, giving them a 33% increase in operating profit and the RAISED their cost reduction target to 616Bn Won from $487Bn Won AND raised profit targets from 4.3T Won to 4.6T won (7%).  How do they do it?  They are INVESTING IN BUILDING THEIR BUSINESS – not in buying back their own stock!!!

PTR, an oil major that actually looks for oil, increased output 3.7% in Q2, adding 1Mb per week to production.  This will not be enough to satisfy investors, who are impatient and expected more as the stock is up 33% since May.  We have Aug $150 puts on them but with oil over $72.50 I will be inclined to take the money and run!  PTR has just passed RDS.A to become the worlds second most valuable oil company at $284Bn, still a far cry from XOM's bloated $508Bn market cap.

With Asia generally down this morning, Europe is flat ahead of our open as Brent crude pushes up past $78 per barrel for the first time since last August when it peaked at $80.  BUT – the dollar was 10% higher then so Brent would have to bust through $88 to make a new high against the Euro.  This is just another way that oil pumpers try to hype the price of crude as they count on the average American investor to be incapable of doing conversions (and, if you watch Jaywalking, you may feel the same way).

This weekend we were discussing the possibility of telcos being in play and I laid out a scenario where AAPL could make a nice run at Q or S but VOD trumped me as they are rumored to be considering a $160Bn bid for VZ which is unlikely to be true but, as I've said, ANYTHING can be driven up by rumors in this market as no deal seems to big or too outrageous to pull off.  VOD already owns 45% of Verizon Wireless, the principal asset of VZ so it's very doubtful they will pay a 33% premium for the other half.  The play here would be to buy VOD on a big sell-off or short VZ on a big run up…

At home, it's all about the S&P this week as they flirt with 1,550 but it's a busy earnings and data week (which we will discuss this evening) so I'm expecting a flat day ahead of news:

ZMan has an excellent report on the state of the energy markets and we are on backwardation watch and I always think that when you get the relentless levels of "bullish" oil news we've been subjected to the past few weeks that a blow-off top is near so I will continue to roll up my puts and keep on top of these guys.  We are also cashing out a little on each dip so we have ammo for the next round.  It's kind of like reeling in a marlin and it's extremely satisfying when you finally haul it in!

We'll keep our eye on rates but as long as gold holds $666 we have no reason to change our outlook.  Everything is in play this week with PPI, CPI and Uncle Ben addressing Congress, anything can happen (and usually does!).

Yet another Free Pick:

The Communications Director of IMB took the time to write an article on Seeking Alpha stating that Indymac's 7/31 earnings will NOT be affected by sub-prime issues and they WILL hit their numbers"

"We have previously made our earnings forecast for the second quarter public, and we’re standing by that forecast. The only exception is that we had included in that forecast the sale/leaseback of a commercial property that we owned, which houses one of our mortgage loan centers, and that sale (which has now closed) ended up occurring in early July. An 8K was filed today describing the $60 million gain on the transaction, $24 million of which will be recorded in Q307 with the remainder deferred over the life of the lease.

"As we have stated time and time again, our subprime volume is very small, less than 4% of our total volume, and therefore our exposure to the ills of the subprime marketplace is relatively small as well. As a well-capitalized thrift, we have all the tools and resources at our disposal to adapt successfully to this new market reality. While we wanted to comment on these recent events regarding the bond downgrades, we will be providing more information on this topic and a thorough review of our business when we release earnings on July 31, 2007.

"P. S. Another positive bit of news is that loan repurchase demands (not actual repurchases, but new demands) are down significantly, as we have previously forecasted, from $527 million in Q107 to $221 million in Q207, with May and June coming in at $44 million and $43 million respectively. In addition to those numbers, the S&P lifetime loss on our current loan production is down materially as a result of our early response to the market corrections described above, including product cuts and credit tightening. Based on the current S&P model, our lifetime loss is down from 85 bps in Q107 to 63 bps in Q207…down further in June to 59 bps. Both of these events are strong signs that the actions we have previously discussed have resulted in our credit quality improving."

Is this inside information or what?  How can we not take the Aug $30s for $1.60 on a stock that was $37.50 before the herd panicked away from the sector?  Worth a gamble I think!

Have a great day!