Friday, March 11, 2011

Consumer Sentiment Collapses as Gas Prices Soar

From Haver:

"Consumers don't like it when they lose money. And the rise in oil prices reduces their spending power. The mid-March reading of consumer sentiment, from the University of Michigan, reflected that concern and declined 12.0% to 68.2 from 77.5 in February. A reading of 76.4 had been expected. During the last ten years there has been an 83% correlation between the level of sentiment and the y/y change in real consumer spending."

Now lets take a look at the consumers expected price inflation:

My Take:

These charts tell you all you need to know about where we are heading economically.  As Haver explains, there is an 83% correlation to real consumer spending and consumer sentiment.

Today's consumer sentiment number was a huge miss and you can thank soaring gas prices for it. The way I see it, anyone that doesn't think $4-5 gas over the summer isn't going to stop the consumer in it's tracks needs their head examined.

I also thought it was important to highlight the consumers soaring price inflation expectations(as seen in chart 2).  This means the consumer thinks things are going to get worse which means they will likely reign in spending in anticipation of having to be forced to pay more for things down the line.  This does not bode well for things moving forward.

The Bottom Line

Anyone notice what happened the last time prices soared?  The year was 2008...Need I say more?

I don't think we''ll see $140 on oil this go around unless something drastic happens in the Middle East.  I say this because the consumer is in way worse shape than in 2008.  The unemployment rate is almost double what it was back then, and millions of Americans have been forced to dip into their savings over the last 2 years in order to pay the bills.  This means their own personal balance sheet is in much worse shape.

That $1500 in monthly unemployment check only goes so far when you are forced to use just about all of it to pay your bloated mortgage payment on your underwater home.

I think we are nearing a tipping point for the consumer.  Our economy cannot handle $100 oil. 

I wouldn't read to much into today's move in stocks.  The market is simply a lottery at this point because there is so much going on right now.  Just think about it:  We have the European debt crisis, the Middle Eastern Revolution, Japan's earthquake, US debt issues.

These are unprecedented times.  The market is highly vulnerable to violent swings as all of these events play out.  I am starting to sniff a little deflation out there which is forcing me to contemplate selling off some metals.  I have already sold some into this recent strength.

A short term dollar rally wouldn't surprise me here after today's USD sell off.    Don't think for a second that I believe in the dollar over the long term.  My thesis here is risk is relative, and Europe is in a lot worse shape then we are over here as Spain and Portugal hang by a thread.  This should be bullish for bucky.  The Middle East craziness should also support the dollar's case.

These are my thoughts for now but please note that they can change at the drop of the hat because the sudden shocks that we are witnessing in this crazy world are occurring at an unprecedented pace.

Be safe and stay diversified.  I am sitting mostly in cash right now(about 80%).  The balance of my portfolio now sits in GLD, SLV, SDS, QID, and TBT.  I also have a spec play in biotech ADLR but please realize the risk here is HUGE.  I will patiently wait for cheaper prices before buying stocks.  There are some divedend plays that I have been watching but it's still too early.  Stay tuned. 

Thursday, March 10, 2011

China Trade Worries Rattle Wall St

In the end the numbers never lie:

"Exports rose 2.4 percent in February from a year before, the least since 2009, as Lunar New Year holidays disrupted shipments, and imports climbed 19.4 percent, customs bureau data showed yesterday. Central bank adviser Li Daokui said that the full-year trade surplus will shrink from the 2010 level."

My Take

The wizards of Wall St hate it when the math reveals itself because it makes things much harder for them as they try to sell us boatloads of worthless stocks.

We all know that pretty much everything we consume comes from China.  Just about every other country can say the same thing.  Just take a look at the chart from The Wall St Journal:

As a result of this shift in trade, you must focus in China's trade data if you want to gauge how the consumer and the economy is doing globally.

Wall St took a look at the numbers today and puked when they realized that Chinese exports rose only 2%. 

What happened to our glorious global recovery?  Wall St's job of pumping stocks just got a whole lot tougher.  As I have warned before, stocks are priced for PERFECTION with P/E's at 24 versus the historical average of 16.

This means the market can't remain lofted at such high levels without mind numbing growth.  2% growth just isn't going to cut it, and stocks reflected this today.

The Bottom Line

The S&P 500 sold off by almost 2% on the trade data.  The deflation trade is now back on as Wall St begins to worry about slower global growth.

As a result, commodities got clobbered as bonds and the dollar both rallied. 

I find these violent reactions to be quite amusing.  The market acted like it was shocked at today's news of slower economic growth.  My reaction to this is how could you not see this coming?

I am amazed at how mesmerized investors get when the market rallies.  The reality here is stocks rallied but the economy never really did.  Government spending soared after the recession and was used as a replacement for the the collapsing private sector.

In other words the US government was able to hide this economic disaster for a couple of years by printing and spending money like drunken sailors.  We would have seen a depression in this country without all of the stimulus.

I still think were going to see one because nothing has been fixed. 

The banks are still bankrupt.  The housing market remains in tatters.  Americans continue to lose jobs, and the people that manage to find new ones are usually making considerably less money. 

SAdly, the stimulus was spent in all the wrong places.  Most of it ended up going right into the pockets of the uber wealthy of this country as the financial system got bailed out.

What's scary moving forward is the public sector is about to slammed as the Republicans begin to cut spending.  Just take a look at Wisconsin if you want to see what that looks like.  I say more power to the Republicans on this issue.  The union thugs had this coming, and it's about time they get treated like the rest of us in the private sector.

I don't know about all of you, but I am tired of working like a slave in order to finance my local toll booth collector's six figure annual pension.

Watching these union idiots up flip out up in Wisconsin over slight pay cuts is a complete joke.  Are frickin kidding me?  I am just happy to be employed at this point, and these nimrods are whining about pay freezes.  Go grab yourself a 401k and start saving like the rest of us.  There is NO FREE lunch!  Grrr...This gets me so mad.  Unbelievable!

There were other reasons why we sold off today that I will get into that later.  Go Google "Spain downgrade" and "Saudi Arabia" and you will see why Wall St is worried.  Until next time!

Wednesday, March 9, 2011

Are REIT's the Next Bubble?

The way I see it the answer is a resounding YES!

I thought it was important to discuss this sector because many investors(especially fixed incomers) are desperately chasing these stocks in order to find yield which allows them to avoid eating into their nest eggs. 

Finding yield was much easier 5 years ago when yields were at 5% on bonds. 

Back in those days if you saved $1 million dollars and threw it into treasuries your were guaranteed $50,000 a year in interest.  Throw in an additional $20,000 of social security and it's not a bad living for most folks after they retire.

The problem today is this treasury investment no longer exists thanks to the Fed's zero interest rate policy.  The only treasuries that offer anything close to 5% is the 30 year bond which will give you about 4.5%.  The problem with buying these is you are locked into an investment for 30 years!!!  It's almost like buying a house.

The risk of owning bonds at the longer end of the curve is inflation.  If you buy these bonds and inflation rises above 5% annually(which seems highly likely at this point) then you are losing money in real terms on an investment that yields only 4.5%.  Additionally, the value of these bonds in an inflationary world would drop which means you would also take a huge hit on your principal.  Essentially you get screwed twice!

As a result, many investors and investment advisers are avoiding these long bonds like the plague.  They have decided instead to look elsewhere for yield and one of the areas they ran to was the REIT's.  

This was all well and good early on when these stocks were fairly valued.  The problem is these stocks have become grossly overvalued as investors continue to gobble up anything that offers a decent return.  As these stocks started to rise the speculators got into the game and before you knew it it was "Bubblemania" in the REIT sector.

Of course this is not going to end well.  I mean haven't we seen this game before?  Do the words "triple A mortgage backed securities" yielding 8% ring a bell?  How did that one work out?

Anyways, the best example I could find to show how you insane the "REIT Mania" has gotten was Simon Property Group(SPG).   Simon has essentially risen about 400% from the high $20's up to $106 since the 2009 lows despite the fact that commercial real estate has plummeted in value at the same time.  This puts it near it's all time high of 123 which was seen before the real estate bubble collapsed.

Here is a chart of SPG's amazing performance:

I chose the "best in class" REIT to make my point although I must admit this is similiar to looking for the nicest horse in a glue factory.

The Case

Let's start with their balance sheet.  Simon(SPG) currently has a whopping $17.49 billion in debt on revenues of $3.96 billion.  They currently hold $796 million in cash.

What was first startling to me when I first looked at this was the P/E values.  The trailing P/E on SPG is a whopping 50.  Meanwhile the forward looking P/E for year ending 2012 is only 15. 

Ummm...How do these numbers work?  Are earnings going to rise 400% this year while unemployment remains at 10% and commercial real estate prices continue to fall?    This is a joke right? 

Perhaps they going to make up these losses on their malls that continue losing tenants month after month?  Good luck with that!

It gets better:

Simon's cash level is disturbingly small when you look at how much cash SPG raised in the debt markets the last 2 years:

"The company maintains significant financial flexibility and has demonstrated access to a wide variety of capital sources through cycles. At June 30, 2010, Simon had approximately $2.3 billion of consolidated cash and cash equivalents on its balance sheet as well as approximately $3.35 billion of availability under its unsecured revolving credit facility. Additionally, Simon has raised $3.15 billion of long-term, unsecured bonds year-to-date to fund tenders of bonds due between 2011 and 2014. Simon also raised over $3.5 billion of external capital in 2009 through unsecured bonds, mortgage debt, and common stock during volatile financial market conditions."

My Take:

Where did all this money go?  They only have about $800 million in cash after raising billions in the debt markets.  Did they decide to "double down" and pile it into more worthless commercial real estate or did they need all of this money to pay their 3.2% dividend?

Perhaps the capital was needed to manage the losses they have been forced to take on their commercial properties?  

Let's think about that for a second:  Can you imagine what the total losses are on their massive commercial loan portfolio?

Let's get real here:  SPG would likely not be around if the Fed didn't allow the REIT's to roll over their commercial loans at "fantasy" values.  Remember folks, commercial loans are not like home loans.  They are refinanced ever 2 years or so.  If these companies were forced to eat their commercial loan losses they would have gone the way of Lehman Brothers.

The Bottom Line

Needless to say SPG is not a buy at $106.  In fact if anything it's a darn good short the way I see it. 

REIT's like SPG have more than quadrupled in value for two reasons:  Dividends and specualtion.  These not a sound fundamental reasons to own a stock.   If anything it's a recipe for disaster.

Don't get me wrong on the dividend part, 3% dividends are nice as long as the risk is relative to the return you are receiving.This is clearly not the case anymore when the trailing P/E's on SPG sits at 50!  The earnings growth expected in 2012 is nothing but a fantasy.

Remember folks, there is a reason why SPG continues to suck billions out of the debt markets.  They obviosly need the money in order to survive and pay their dopey dividend.

Bubbles never end and the price action that has recently been seen in the REIT sector is clearly Ponzi style investing.  Buying insolvent companies for a dividend is never a smart approach towards investing.   A 3% yield doesn't work out so well if the stock drops by 30% or more.

There will come a time where all commercial real estate will be forced to mark to market because the banks are going to need the money and they will start to foreclose on these properties in order to get it.   If this doesn't finish off many of the REIT's then the collapsing retail markets most assuredly will.

Disclosure:  No position long or short on SPG.

Tuesday, March 8, 2011

Help Wanted: Only Jugglers and Bubble Blowers Need Apply

Ever wonder what goes on at the Fed behind closed doors?  Here is an exclusive behind the scenes look at Tim Geithner and his crew managing the US economy each day:

My Take:

I commented yesterday that I was curious to see what the markets would look like if things settled down in the Midde East.  Well.... We got a sneak peak today as the market soared higher as things quieted down and oil prices pulled back a bit.

The move means nothing IMO.  In today's world of speedy robot trading a quiet day means the market can take quick advantage and move higher. 

The interpretation by the markets is pretty easy at this point:  As long as Bernanke and Geithner can keep all of the juggling balls in the air and keep printing then the big boys will stay long.  The question they will eventually askthemselves  in the next few months is how long is this sustainable as the ending of QE rapidly approaches?

As you can see above, it becomes increasinly more difficult to keep all of the balls moving when more and more balls keep getting thrown into the mix.

When QE first started in late 2008 the juggling was easy.  Inflation was low, gas prices had collapsed after 2008's brutal recession, and the rest of the world was relatively quiet.

Today is a different story: Soaring food and gas prices, political unrest in the Middle East, and the European debt crisis have all been added to the mix.  This means there are many more balls that now need to be juggled which makes the game much tougher.

The Bottom Line

The ridiculous price action that we saw today given how dire things are in the real world validate the theories that our markets have been over taken by trading robots that no longer trade on fundamentals. 

IMO, the game is now all about speed.   Positions are held for seconds and the large algos all compete to see the stock quotes before everyone else.  They are also becoming increasingly obsessed with speed when it comes to information. They know that the ability to access and process information in a timely manner gives them a competitive advantage.

AS a result, algo's are now reading Twitter accounts in order to find instant information that might give them an edge in the markets. 

 a little tough love before I move on:  If you are day trading you need to accept the fact that you are outmatched and outgunned by these guys.  If your account has been getting hammered as the markets trade like a bi-polar teenager then I suggest you re-evaluate your approach to investing.

We live in a different world today folks.  The markets will likely never be the same as long as it only looks 2 feet in front of itself thanks to these speed obsessed little black boxes.

We are rapidly approaching an economic cliff, and there will be no turning back once we get there.  Our ADD markets will have no time to react once we start to fall over the edge because the players are all too focused on whats going on 10 seconds from now in the stock market instead of doing the smart thing and preparing for the longer term.

Our financial markets were not designed to act like this.  They were supposed to be a place where you could safely invest and grow the capital that you worked so hard to build over your lifetime. 

Today our markets are nothing of the sort.  The stock market has morphed into a high speed casino where you can win or lose it all in a matter of a few months.

Just look at the past 11 years.  We have seen 4 moves of greater than 40% in the S&P 500 over this time.  The bulls and the bears are tied at 2 each. 

Here is a chart of the insanity since 2002:

Ummmm...And you call this investing?

Who on earth wants to see their life savings go up or down at a 40% clip every few years when they are investing for their retirement???

One day the stock market will be filled with nothing but speculators and fools.  It's going to resemble the same group of people that got stuck holding tech stocks in 1999 and houses in 2006.  I can't tell you when it's gonna happen.  I can only tell you that it will.

Let's hope that the Fed and our government finally end their bubble blowing ways that always end up with millions in tears.   

It's time to stabilize the stock market casino and turn it back into a place where capital is appreciated and rewarded instead of being repeatedly raped and pillaged by a bunch of predatory robots.

Enough already.  People are tired of this nonsense.

Monday, March 7, 2011

Is QE3 The Next Black Swan?

One has to wonder.  I thought these folks were smarter than this:

"Arlington, Va. (CNNMoney) -- If oil prices continue to climb, it could force the Federal Reserve to make a new round of asset purchases, according to Atlanta Fed President Dennis Lockhart.

Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn't think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb.

"If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation," Lockhart said at the conference."

My Take:

Please hold on a sec....HAHAHAHAHA!  Let me stop laughing first before I go on. 

Ok, on a serious note:

Let me start by taking a look at the bond markets since QE2 was announced in early November.   Let's take a refresher course first.   QE2 was implemented in in order to keep interest rates low.  This was intended to help stabilize the housing market which would then help prop up the economy.

Let's look at the 10 year since and see how that worked out:

Oh it worked all right...In the opposite direction!!!  As you can see above, bonds have tanked since QE2 was announced.  We are up over a full percentage point in yield since QE2's inception. 

So much for that idea!

QE3=Lower Gas?

So let me get this straight. Lockhart believes that QE3 will help keep gas prices lower?

Let's take a look at the dollar and crude oil since QE2 was announced:

Hers is the dollar first:

Now let's take a look at crude:

Take Continued:

As you can see above, the dollar tanked on the original QE2 news in early November, and we are once again about to retest the lows that we saw when it was first implemented. 

This price action is pathetic considering the fact that we have seen total geopolitical chaos in the last month.  The dollar is supposed to be the "safe haven" during times of crisis like these.  Not anymore I guess!

Now let's take a look at oil.  Oil stood at $80 when QE2 got started.  Crude responded to the news by rising up to $90 in the first month following the Fed's announcement.  Crude has done nothing but move higher ever since.  It now sits at $105 a barrel.  I will give the Fed a pass on the recent spike due to the Middle East chaos.  However, minus these events, oil still rose 20% following QE.

The Bottom Line

A quick question for Lockhart.  How does weakening our currency via QE3 help lower the price of oil?  Wouldn't it have the opposite effect?   How could you not come to this conclusion?

I mean look at what has happened to food prices since the announcement of QE2!  In case you have been hiding under a bridge they are soaring!!! In fact, food prices have passed the highs seen back in 2008!!!

This rise in the cost of food thanks to your inflationary policies are why we are seeing the Middle East blow up right before our very eyes.   People don't risk their lives fighting well armed government armies with rocks unless they have nothing to lose because they are starving, broke, and desperate.

Everyday I read things that absolutely blow my mind.  The stupidity and greed we are witnessing at the Federal Reserve is just breathtaking.

Mark my word...This is all going to come home to roost one day, and we may be very well seeing it happen right now.  The market looks sick but it's too early to call this a correction.

The market is trading on oil prices for now.  I am curious to see what the market does once(or should I say if?) things start to settle down in the Middle East.  I thought it was interesting that the market didn't rally more at the end of the day when crude prices slid back a tad near the end of the session.

The bulls tried to rally it back, and the DOW at one point was only down 49 points before the sellers took over into the close.  We ended the session down 80 points.

It will be interesting to see if this geopolitical chaos continues into April/May which is when the Fed will begin contemplating the end of QE in June.  This could be a potential disaster for the Fed because oil could very well rise into the $150's by then if the Arab world remains in tatters.

The Fed at that point may very well feel that they have no choice but to press the QE3 button which means they will be playing with some serious fire.

They will have no idea how the markets would react to such a move.  The dollar could get destroyed by the currency traders on such a policy decision.  This would then force oil prices even higher.

Will this be the Black Swan?  Probably not because Black Swans usually come out of left field.  Is the Middle Eastern revolution developing into a Black Swan?  This could very well be because NO ONE saw this coming, and things seem to be getting worse by the second over there. 

Enjoy the rest of winter folks.  Things are going to be heating up faster than usual this spring.  Fill up your oil tanks as winter ends before the fun starts.  This is going to get interesting.

Sunday, March 6, 2011

Tough Times for our Children

If this doesn't bring a tear to your eye then I don't know what will.   This is the side of America that your rarely ever hear about thanks to our pathetic media.  Our trillion dollar bailouts have come at a price, and our future generations have been scarred for life because of them.

I hope everyone on Wall St sees this as they gorge on their 2010 billion dollar bonus checks that they received a couple of months ago.  Perhaps it will put a few things in perspective for them.

Recovery?  I think not.