Archive for September, 2008

Baltic Dry Index Turns Down

Tuesday, September 23rd, 2008

A few days ago, I wrote about the Baltic Dry Index being an indicator of China's economic activity. It had turned up coincident with the end of the Paralympics when many factories were going back online. It all made perfect sense.

However, as you can see from the graph above, it has turned down again. I haven't been able to find anything indicating that there is any retreat in China's increasing economic activity, but if I do I will pass it along.

This is an important issue since the world needs China to be the engine of growth to pull it out of its current economic doldrums.

Mark

“The Times They Are a-Changin’”

Tuesday, September 23rd, 2008

Below is an article I was asked to write for a local publication. I thought I'd share it with you as well.

When Bob Dylan sang “The Times They Are a-Changin’” I doubt he had the vision to see the mess that our government and our largest financial institutions have made of our economy and the world’s financial systems. Changes galore are being implemented and debated (often in that order) that are costing an estimated $1.8 trillion so far. There are a number of reasons for which we find ourselves in the current situation, but the purpose of this article is to look at the present and the future but not at the past.

I am philosophically opposed to government intervention, but pragmatically the Keynesian actions were necessary to stave off a worldwide financial disaster. Credit markets had seized up and lending between financial institutions as well as to large corporate clients was near an end as financial institutions were hoarding their cash-on-hand. The world was truly on the brink of financial disaster that would have led to prolonged recessions, escalated unemployment, and hyper-inflation as the value of paper money deteriorated with the world’s banking systems.

The U. S. Treasury and Federal Reserve acted decisively over the past few months to attack the problem. The Fed has taken on all sorts of collateral, including some junk, to provide liquidity to our financial system. The Fed and Treasury engineered the take-over of Bear Stearns by J. P. Morgan to keep the derivatives market functioning. The government assumed Fannie Mae and Freddie Mac so that our housing market could continue to find financing. The government took over AIG so that the Credit Default Swap market could function. The Treasury formed the Resolution Mortgage Trust to acquire the bad debt on the balance sheets of our financial institutions so that the banks could raise equity capital and begin to lend again.

Keynesian government intervention of this magnitude comes at a price: higher inflation, higher taxes, and reduced spending on social programs. The doubling of our national debt from the take-over of Fannie Mae, Freddie Mac, and the sundry other rescues – paired with Social Security and Medicare funding deficits fast approaching – means that the government will need to print a lot more dollars to pay the principal and interest on the bonds they issue to fund the intervention. The only way to service the debt on these bonds is for tax payers to pay more and for recipients of government services to receive less.

Now is the time to utilize the talents of a professional investment manager who understands what is happening in the financial markets and has the vision to manage your portfolio accordingly. Yes, the times they are a-changin’ and if you are not satisfied with your investment manager’s ability to navigate this difficult time, you need to be prepared to change as well.

China Returns To Business

Saturday, September 20th, 2008

Over the years, in this blog and in my Investment Strategies newsletter, I’ve written about the direct correlation between the Baltic Dry Index (an index that tracks the shipping of commodities) and growth in China, with the BDI acting as an early indicator of economic activity in China.

I have also recently written about the fact that China curbed its growth via an increase in the value of its currency, the Yuan, and its shut down of factories to ease pollution for the Olympics and Paralympics.

A few days ago, I noted that the Paralympics were ending on October 16th and that China has ended its currency intervention to raise the value of the Yuan, and that this would bring Chinese growth back and demand for commodities would also be returning. Adding fuel to this fire, China has also instituted a $50+ Billion economic stimulus package designed to increase infrastructure growth and employment.

Not coincidently, we’ve had four straight days of increases in the BDI. If you look at the graph above, you’ll see that the timing of the fall in the BDI also coincides with the “end” of the commodity bull market. I’ve said all along that we were in a typical correction, not a new bear market, for commodity stocks. With the turn positive in the BDI, I believe we will see demand increases for energy and metals, followed by stronger stock prices.

I recently told the investment committee of the local Community Foundation that it was likely that the emerging markets, particularly China, would lead the world equity markets to recovery. Many pundits on TV are saying that the recent rally in the value of the dollar indicates that since the US led the world into recession it would lead the world out of recession. That may very well come true, but in terms of equity markets, we still have a long way to work our way out of the financial crisis – so our markets will be facing headwinds longer than the markets that did not participate in the mortgage mess.

Emerging markets and commodity stocks, contrary to popular belief, are less risky than blue chips based upon demand and earnings growth. Yes, they are more volatile, but you will ultimately have strong portfolio returns. Large cap stocks are, as a group, worth less than they were 10 years ago – that is not the way create wealth and retire comfortably.

Mark

Big Rally Today – More Tomorrow?

Thursday, September 18th, 2008

We had a big rally today once England banned short sellers in financial stocks, and a rumor got started that the Fed and Treasury were organizing a Resolution Mortgage Trust similar to the old Resolution Trust Corp that got us out of the savings and loan crisis.

Tomorrow will bring more news and rumors, but today, we made a lot of money – particularly on our Goldman Sachs and Morgan Stanley initial positions discussed yesterday.

Mark

Israel To Make Preemptive Strike on Iran?

Thursday, September 18th, 2008

Below is an article from the Jerusalem Post discussing Israel’s purchase of bunker buster GBU-39 smart bombs. These bombs seem perfectly suited to destroy Iran’s nuclear facilities that have been reported to be deep inside bunkers. I saw this story and just wanted to give you a heads up that, as always, we live in a dangerous world and while most of us have been paying attention to the markets, other things are happening that have a big potential impact on our lives.

The Jerusalem Post Internet Edition

Israel slated to buy US smart bombs

Sep. 14, 2008
Yaakov Katz , THE JERUSALEM POST

The US Department of Defense has notified Congress of a potential sale to Israel of 1,000 smart bombs capable of penetrating underground bunkers, which would likely be used in the event of a military strike on Iran’s nuclear facilities.

The notification to Congress was made over the weekend by the Defense Security Cooperation Agency, the branch of the Pentagon responsible for evaluating foreign military sales. Congress has 30 days to object to the deal.

The deal is valued at $77 million and the principal contractor would be Boeing Integrated Defense Systems.

The bomb Israel wants is the GBU-39, developed in recent years by the US as a small-diameter bomb for low-cost, high-precision and low-collateral damage strikes.

Israel has also asked for 150 mounting carriages, 30 guided test vehicles and two instructors to train the air force in loading the bombs on its aircraft.

The GPS-guided GBU-39 is said to be one of the most accurate bombs in the world. The 113 kg. bomb has the same penetration capabilities as a normal 900 kg. bomb, although it has only 22.7 kg. of explosives. At just 1.75 meters long, its small size increases the number of bombs an aircraft can carry and the number of targets it can attack in a sortie.

Tests conducted in the US have proven that the bomb is capable of penetrating at least 90 cm. of steel-reinforced concrete. The GBU-39 can be used in adverse weather conditions and has a standoff range of more than 110 km. due to pop-out wings.

In its recommendation to Congress, the Defense Security Cooperation Agency wrote that Israel’s strategic position was “vital to the United States’ interests throughout the Middle East.”

“It is vital to the US national interests to assist Israel to develop and maintain a strong and ready self-defense capability. This proposed sale is consistent with those objectives,” the statement read.

The agency’s announcement came amid growing concern that the Pentagon was not willing to sell Israel advanced military platforms such as bunker-buster missiles in an effort to dissuade Jerusalem from attacking Iran’s nuclear facilities.

Bunker-buster missiles would be a fundamental component of an air strike against Iran, since many of the nuclear facilities, such as the Natanz uranium enrichment complex, have been built in underground, heavily fortified bunkers.

During the Second Lebanon War, Israel reportedly received an emergency shipment of bunker-buster missiles from the US to use against underground Hizbullah facilities.

Yiftah Shapir, from the Institute for National Security Studies in Tel Aviv, said the GBU-39 is one of the most advanced in the world and would improve Israel’s standoff fire capabilities.

“The bomb is extremely accurate,” he said. “All you have to do is punch in the coordinates, fire and forget.”

He said they could be used to attack Iranian underground facilities like Natanz but that they could only penetrate a few meters.

“Hundreds of these would have to be used in an attack on Natanz for it to be successful,” Shapir said.

VIX – Volatility Index Hits Key Level

Thursday, September 18th, 2008

The VIX volatility index – a measure of fear in the market – has crossed the 40 level. The last time this happened was after the September 11th terrorist attacks.

Extreme levels of fear generally provide a turning point for markets and point toward higher returns.

This is a good technical sign for what the market action might look like going into year-end. Maybe a rally led by the most oversold sectors, financials and commodities? Stranger things have happened.

Mark

Financials Hit Key Level

Thursday, September 18th, 2008

Over the past 18 months, whenever someone has asked me about the financials and when it might be time to buy, I’ve told them that when the leaders hit 80% to 90% of book value, then that is the time to start building positions.

In past bear markets that have been led by the financials, they ( those with strong balance sheets and earnings ) have historically bottomed when they hit the 80% to 90% of book value level.

Goldmans Sachs is trading at 90% of book value.

Morgan Stanley is trading at 60% of book value.

We are in a historic period where the short sellers in the hedge funds are doing the best to drive down the share price of these companies so that they can flip their positions, buy shares into a long position, and see significant gains over coming months as share prices return to historic price-to-book ratios. Now, this only really works on the solid companies with strong balance sheets and earnings – both Goldman and Morgan Stanley reported earnings this week and confirmed their balance sheet strength and earnings above analyst estimates.

We’ve started to build positions in these two financial as the bear market raids have been playing out, along with Northern Trust and Annaly Mortgage. These positions will be volatile for the near-term, but with a two year perspective they should provide strong gains for client portfolios based upon past bear markets led by financials.

Mark

Monsanto Raising Earnings Guidance

Tuesday, September 16th, 2008

Below is another story of a commodity company increasing earnings estimates for the year. Global growth is not dead…

Monsanto Tries Raising Guidance (MON)

Monsanto_logo Monsanto Company (NYSE: MON) has come out and raised Fiscal-2008 earnings estimates. The crop and agriculture player now sees earnings at $3.58 to $3.60 EPS. It also put its reported guidance to a range of $3.49 to $3.51 EPS. Its prior guidance was listed as $3.37 EPS on an ongoing basis, and $3.63 EPS on an as reported basis. First Call has estimates pegged at $3.45 EPS.

CFO Terry Crews will be presenting this data to investors today as part of a presentation at the Bank of America 38th Annual Investment Conference. The company noted that this change in guidance reflects higher sales and gross profit in the seeds and traits business. It also sees its Roundup and other glyphosate-based herbicide business going strong. This guidance now reflects the effect of income from discontinued operations, the Solutia settlement. and in process research and development from the De Ruiter acquisition.

If you think growth has disappeared entirely from the economy, that might not be true as far as this company is concerned. This is representative of roughly 80% earnings growth.

Monsanto now sees its seeds and genomics segment generating over $3.8 billion in gross profit for its 2008 fiscal year. This is above its prior expectations of $3.7 billion on higher than expected sales from the company’s corn, soybean and vegetable platforms. Monsanto’s Roundup and other glyphosate-based herbicides business is on track to be above $1.9 billion of gross profit for the 2008 fiscal year, which is also ahead of the previous forecast. The company said that its fundamentals of agriculture and in its businesses are “strong and getting stronger.”

Unfortunately, this is also falling on deaf ears as the market is selling even the growth spots again after yesterday’s market tank. Shares are down over 3% at $101.50 right before the open and its 52-week trading range is $74.84 to $145.80.

This story is by Jon C. Ogg at 24/7 Wall Street