Archive for September, 2008

Entry for September 30, 2008

Tuesday, September 30th, 2008

Below I've cut/paste an article by Gary Dvorchak on The Edge today. His analysis clearly mirrors my own, so I thought I'd share his thoughts with you.

By Gary Dvorchak

One group I just can't figure out is the fertilizers, notably Mosaic (MOS) and Agrium (AGU). OK, OK, I know the story — commodities are over, the bubble has burst, the economy is collapsing, blah, blah, blah. The thing I can't figure out is if these things are so obvious, why is there not a single analyst willing to cut estimates on these stocks even a bit?

Blithely ignoring all the erstwhile evidence, not only are analysts not cutting estimates, they have the gall to raise them!

Look at the contrast of stock action vs. estimate changes:

Mosaic Price Performance vs. 2008 Estimates
Click here for larger image.

Agrium Price Performance vs. 2008 Estimates
Click here for larger image.

Source: Aviance Capital Management

Perhaps the industrial economy is at risk, but is the farm economy? Are all those hungry Chinese and Indian middle-class consumers suddenly going to stop eating? Corn, wheat and soybeans are off their highs, to be sure, but they are far above year-ago levels.

Soybeans, Corn and Wheat
Click here for larger image.

Source: CIBC World Markets

Similarly, prices for the principal products are up massively this year; presumably, a meaningful decline would still leave prices far above year-ago levels and long-term averages.

Potash, Ammonia and Urea
Click here for larger image.

Source: CIBC World Markets

The farm economy is flush and farm land prices are firm, so farmers can afford to pay higher fertilizer prices. Right now, Mosaic is trading at 4.6 times the forward 12 EPS estimate; Agrium is trading at 4.8 times. Clearly, the buy side is saying there will be massive cuts in estimates, but the sell side is not cooperating. Absent a total collapse in fertilizer prices, these stocks will not stay at these valuation levels.

I have been wrong on these stocks over the last few months, yet my discipline says these are screaming buys. I completely respect the charts and the bear story. Perhaps they are not "back up the truck" buys, but worth dipping a toe in.

S&P 500 Vs. VIX (Volatility Index)

Monday, September 29th, 2008

The graph above is of the S&P 500 since 1987 compared to the VIX Volatility Index. The VIX is a graphical representation of fear in the market based upon option activity.

The VIX today got over 47, which we haven't seen since the height of the post-911 & Nasdaq Crash.

Every time that the market has reached this level of fear, it has been a buying opportunity as the market moved higher. You can see this in the 2002 / 2003 time frame that as volatility eased up and fear left the market, the market moved up as earnings moved up.

We stuck our toe in the water today with some of the significantly hardest hit stocks that have strong earnings and balance sheets. Today was very much an overreaction to the news that Congress did not pass the rescue bill. Tomorrow may be an ugly day as well given that the overseas markets are currently closed and will undoubtedly react badly to this news. These markets are our creditors, so it could get hairy before it gets better, and if it does we will make additional selected buys.

Buying when the VIX gets to extremes has always paid off, if not immediately, then within a few weeks. During a bear market like this one with violent market swings, emotions rule. It is always important to invest contrary to the emotions because they always swing back to fundamentals. By taking some oversold positions, and setting target sales prices 7% to 15% above your purchase price, you are able to offset some of the impact of the broader market decline.

We have used this strategy extensively this year, particularly during September, to much success. I anticipate that we will likely have to continue to employ this strategy until the bear market ends.


Israel Seeks Permission to Bomb Iran

Saturday, September 27th, 2008
From the UK Guardian:

Israel asked US for green light to bomb nuclear sites in Iran

US president told Israeli prime minister he would not back attack on Iran, senior European diplomatic sources tell Guardian

nuclear enrichment plant of Natanz in central Iran

A view of the nuclear enrichment plant of Natanz in central Iran. Photograph: EPA

Israel gave serious thought this spring to launching a military strike on Iran's nuclear sites but was told by President George W Bush that he would not support it and did not expect to revise that view for the rest of his presidency, senior European diplomatic sources have told the Guardian.

The then prime minister, Ehud Olmert, used the occasion of Bush's trip to Israel for the 60th anniversary of the state's founding to raise the issue in a one-on-one meeting on May 14, the sources said. "He took it [the refusal of a US green light] as where they were at the moment, and that the US position was unlikely to change as long as Bush was in office", they added.

The sources work for a European head of government who met the Israeli leader some time after the Bush visit. Their talks were so sensitive that no note-takers attended, but the European leader subsequently divulged to his officials the highly sensitive contents of what Olmert had told him of Bush's position.

Bush's decision to refuse to offer any support for a strike on Iran appeared to be based on two factors, the sources said. One was US concern over Iran's likely retaliation, which would probably include a wave of attacks on US military and other personnel in Iraq and Afghanistan, as well as on shipping in the Persian Gulf.

The other was US anxiety that Israel would not succeed in disabling Iran's nuclear facilities in a single assault even with the use of dozens of aircraft. It could not mount a series of attacks over several days without risking full-scale war. So the benefits would not outweigh the costs.

Iran has repeatedly said it would react with force to any attack. Some western government analysts believe this could include asking Lebanon's Shia movement Hizbollah to strike at the US.

"It's over ten years since Hizbollah's last terror strike outside Israel, when it hit an Argentine-Israel association building in Buenos Aires [killing 85 people]", said one official. "There is a large Lebanese diaspora in Canada which must include some Hizbollah supporters. They could slip into the United States and take action".

Even if Israel were to launch an attack on Iran without US approval its planes could not reach their targets without the US becoming aware of their flightpath and having time to ask them to abandon their mission.

"The shortest route to Natanz lies across Iraq and the US has total control of Iraqi airspace", the official said. Natanz, about 100 miles north of Isfahan, is the site of an uranium enrichment plant.

In this context Iran would be bound to assume Bush had approved it, even if the White House denied fore-knowledge, raising the prospect of an attack against the US.

Several high-level Israeli officials have hinted over the last two years that Israel might strike Iran's nuclear facilities to prevent them being developed to provide sufficient weapons-grade uranium to make a nuclear bomb. Iran has always denied having such plans.

Olmert himself raised the possibility of an attack at a press conference during a visit to London last November, when he said sanctions were not enough to block Iran's nuclear programme.

"Economic sanctions are effective. They have an important impact already, but they are not sufficient. So there should be more. Up to where? Up until Iran will stop its nuclear programme," he said.

The revelation that Olmert was not merely sabre-rattling to try to frighten Iran but considered the option seriously enough to discuss it with Bush shows how concerned Israeli officials had become.

Bush's refusal to support an attack, and the strong suggestion he would not change his mind, is likely to end speculation that Washington might be preparing an "October surprise" before the US presidential election. Some analysts have argued that Bush would back an Israeli attack in an effort to help John McCain's campaign by creating an eve-of-poll security crisis.

Others have said that in the case of an Obama victory, the vice-president, Dick Cheney, the main White House hawk, would want to cripple Iran's nuclear programme in the dying weeks of Bush's term.

During Saddam Hussein's rule in 1981, Israeli aircraft successfully destroyed Iraq's nuclear reactor at Osirak shortly before it was due to start operating.

Last September they knocked out a buildings complex in northern Syria, which US officials later said had been a partly constructed nuclear reactor based on a North Korean design. Syria said the building was a military complex but had no links to a nuclear programme.

In contrast, Iran's nuclear facilities, which are officially described as intended only for civilian purposes, are dispersed around the country and some are in fortified bunkers underground.

In public, Bush gave no hint of his view that the military option had to be excluded. In a speech to the Knesset the following day he confined himself to telling Israel's parliament: "America stands with you in firmly opposing Iran's nuclear weapons ambitions. Permitting the world's leading sponsor of terror to possess the world's deadliest weapon would be an unforgivable betrayal of future generations. For the sake of peace, the world must not allow Iran to have a nuclear weapon.''

Mark Regev, Olmert's spokesman, tonight reacted to the Guardian's story saying: "The need to prevent Iran from obtaining nuclear weapons is raised at every meeting between the prime minister and foreign leaders. Israel prefers a diplomatic solution to this issue but all options must remain on the table. Your unnamed European source attributed words to the prime minister that were not spoken in any working meeting with foreign guests".

Three weeks after Bush's red light, on June 2, Israel mounted a massive air exercise covering several hundred miles in the eastern Mediterranean. It involved dozens of warplanes, including F-15s, F-16s and aerial refueling tankers.

The size and scope of the exercise ensured that the US and other nations in the region saw it, said a US official, who estimated the distance was about the same as from Israel to Natanz.

A few days later, Israel's deputy prime minister, Shaul Mofaz, told the paper Yediot Ahronot: "If Iran continues its programme to develop nuclear weapons, we will attack it. The window of opportunity has closed. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear programme."

The exercise and Mofaz's comments may have been designed to boost the Israeli government and military's own morale as well, perhaps, to persuade Bush to reconsider his veto. Last week Mofaz narrowly lost a primary within the ruling Kadima party to become Israel's next prime minister. Tzipi Livni, who won the contest, takes a less
hawkish position.

The US announced two weeks ago that it would sell Israel 1,000 bunker-busting bombs. The move was interpreted by some analysts as a consolation prize for Israel after Bush told Olmert of his opposition to an attack on Iran. But it could also enhance Israel's attack options in case the next US president revives the military option.

The guided bomb unit-39 (GBU-39) has a penetration capacity equivalent to a one-tonne bomb. Israel already has some bunker-busters.

Iran nuclear map Map showing nuclear activity in Iran



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About this article


Israel asked US for green light to bomb nuclear sites in Iran

This article was first published on on Thursday September 25 2008. It was last updated at 19:02 on September 25 2008.

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Related information

anti US mural in Tehran

Relations between Iran and the United States since 1979

Jul 17 2008: The US plans to establish a diplomatic presence in Tehran for the first time in 30 years as part of a remarkable turnaround in policy by president George Bush

Bush in Israel

Bush in Israel

Jan 9 2008: George Bush says he sees 'a new opportunity for peace here in the holy land' as he begins his first visit to Israel as the US president

  • © Guardian News and Media Limited 2008

An Opinion Worth Reading

Friday, September 26th, 2008

International Monetary Fund Commodity Projections

Thursday, September 25th, 2008

The IMF published a report a few days ago on Food and Fuel Prices. Below is an excerpt of their findings from Research Recap by Alcara:

Key points:

  • Both supply and demand factors have contributed to the recent softening in commodity prices, while global growth prospects are somewhat weaker than expected at the time when the June paper was released.
  • In the oil market, easing market conditions have led to a turnaround in prices. OECD consumption has suffered by more than expected (particularly in the U.S.), and the weakening of economic activity has been sharper-than-anticipated, especially in Europe and Japan. The almost 1 million barrel a day increase in OPEC production, mostly from Saudi Arabia, as well as a recovering dollar, have also contributed.
  • In food markets, the price impact of recent temporary supply shocks has waned. A bumper wheat crop this year, together with a substantial reduction of rice and wheat export restrictions, has fostered large price declines in these two grains since May. Moreover, some of the unexpected upturn in corn and soybean prices has been reversed, as the damage from the June floods in the U.S. Midwest was smaller than expected.
  • Part of the price decline reflects the recovery of the dollar: in Euro terms, oil prices have fallen by about a third less than in dollar terms from their July peak. Nevertheless, many of the fundamental forces behind the price surge are still in effect and are likely to keep prices high in the absence of a sharp global downturn.
  • Demand from emerging and developing countries is expected to remain robust. In the oil market, the constraints underpinning the sluggish supply response to high prices should persist amid limited buffers. Moreover, continued strong demand for corn for ethanol use and high fuel and fertilizer costs will also keep up pressure on food prices.

Based upon these findings, our core commodity strategy continues to have fundamental support stronger than most other areas of the investment market. When the markets finally turn the corner, these fundamentals should drive prices in the energy and ag areas higher than the broader market.


TED Spread Remains Elevated

Thursday, September 25th, 2008

One indicator that has me worried is the TED Spread. The TED Spread is an indication of the difference in rates between 3-month treasury bills and 3-month LIBOR. It is important because it indicates risk in the financial system – the banking system borrows within itself through LIBOR.

The normal difference is around 0.75% (or in other words banks generally borrow from each other at 0.75% above the rate of the 3-month treasury bill). When it increases above that, it is an indication that there is stress in the financial system. It currently stands at 3.19%.

The TED Spread has only been above 3% twice in its history: immediately prior to the 1987 stock market crash and again last Thursday when the credit markets froze up.

Caution is the name of the game – we've used rallies to reduce equity positions or to take short-term profits on positions that we bought at severely depressed levels. Until we know that our financial system will have adequate liquidity and capital, the risks are pretty high.


NY Times Weighs In on TARP

Wednesday, September 24th, 2008

Interesting article from the New York Times opinion pages:

September 24, 2008

An Inadequate Case for the Bailout

Under skeptical questioning in the Senate Banking Committee on Tuesday, Treasury Secretary Henry Paulson and the Federal Reserve chairman, Ben Bernanke, gave no ground in defense of their $700 billion proposal to bail out the financial system.

They also gave little reason to believe that their proposal would protect taxpayers from huge losses. Instead, they said that any eventual loss would be less than the losses that Americans would endure if lending froze up, as it did briefly last week in the panicked aftermath of the failure of Lehman Brothers and the near-death of the American International Group.

The candor is appreciated, but it is not a good enough answer for Congress or the American people. Rather than rushing to approve the $700 billion bailout, lawmakers need to examine alternatives. They should look for one that ideally would let taxpayers share in the gains from any postbailout revival, along with the bankers and private investors who will make money if the bailout succeeds. Several ideas have been advanced that Congress should examine.

Prominent among them is a plan to make a direct investment of taxpayer dollars into financial firms, rather than buying up their bad assets. With that money, the firms could absorb the losses that they are bound to take as their investments go sour and avert failure and panic. Once the firms begin to recover, taxpayers would earn a return. Such equity investments are risky, however, and careful analysis is needed to show if they would be riskier than what the administration has proposed.

Another proposal, advanced by Senator Christopher Dodd, would buy up bad assets, as proposed by the administration, but would give the government the option to acquire stock in the firms receiving help. The danger is that private investors, fearful of seeing their ownership stakes diluted if the government becomes a shareholder, might be reluctant to invest money. That would deprive the firms of investments they need to recover.

There is time to clarify that sort of uncertainty. The financial system is vulnerable to more severe problems, but the credit squeeze has eased a bit since the administration’s bailout was proposed. That’s partly because of the expectation of a bailout, so Congress should be clear that it is working on a plan with appropriate speed.

Credit markets have also been helped by emergency measures that have shored up the system, including a $50 billion government guarantee of money market mutual funds. The bailout of Fannie Mae and Freddie Mac has helped to keep mortgage rates on the low side.

One thing is certain. If taxpayers do not share in the potential profits from a bailout, someone else will. On Tuesday, the Federal Reserve announced that it was relaxing rules that require investors who take large stakes in banks to submit to longstanding regulations on transparency and managerial control. Private equity firms have pushed for the changes because they would like to become big investors in beaten-down banks but do not want to be regulated.

Relaxing the rules invites more of the same type of opacity and risk-taking into banking that caused many of today’s financial problems. Politically, the Fed’s timing could not have been worse. Taxpayers are being asked to buy up banks’ junky assets, with little expectation of return. At the same time, private equity firms are being invited to make what are likely to be highly profitable investments in the same banks.

That’s not a plan that lawmakers and voters can support. Congress has more work to do.

Unintended Consequences To Government Legislation

Wednesday, September 24th, 2008

Below, I've cut/paste the beginning impetus for the whole sub-prime lending industry. Lenders were under pressure from the government to make more loans to low income individuals, so the Fed came out with the following guidelines for mortgage lenders to follow that lowered the underwriting standards in making loans.

This was from 1993 report issued by the Boston Fed.

Initially, this was an effort to get everyone into a home of their own. A very noble and caring hope. But even noble legislation can have unintended consequences – like our current financial meltdown.

The far reaching power within the TARP legislation (troubled asset relief program) currently being debated in congress will undoubtedly cause problems that no one is currently envisioning. The government needs to act to shore up our financial system, unfortunately we will be paying for this (in dollars and maybe otherwise) for generations to come.

Even the most determined lending institution will have difficulty
cultivating business from minority customers if its underwriting standards
contain arbitrary or unreasonable measures of creditworthiness.
Consistency in evaluating loan applications is also critical to ensuring
fair treatment. Since many mortgage applicants who are approved do not
meet every underwriting guideline, lending policies should have mechanisms
that define and monitor the use of compensating factors to ensure
that they are applied consistently, without regard to race or ethnicity.

The Board of Directors should establish a policy to detect and
eliminate biases in underwriting standards and practices. As part of this
policy, management should be directed to review existing underwriting
standards and practices to ensure that they are valid predictors of risk.
Special care should be taken to ensure that standards are appropriate to
the economic culture of urban, lower–income, and nontraditional
consumers. The Board should require management to define acceptable
compensating factors and to monitor their use by loan production staff.

The Board may also wish to establish a written policy on equal
opportunity lending, in which its underwriting guidelines are explained.
This policy can describe the institution’s commitment to the community
and to minority and lower–income consumers and explain how its
products can meet homebuyers’ needs.

Management should review both underwriting standards
and practices. (See also the sections on Second Review
Policies and Testing Fairness in Lending Practices.)

Underwriting Standards
Property Standards and Minimum Loan Amounts:
These standards should be checked for arbitrary rules as to
the age, location, condition, or size of the property. Such
standards could negatively affect applicants who wish to purchase
two– to four–family homes, older properties, or homes
in less expensive areas.

Obligation Ratios: Special consideration could be
given to applicants with relatively high obligation ratios who
have demonstrated an ability to cover high housing expenses
in the past. Many lower–income households are accustomed
to allocating a large percentage of their income toward rent. While it is
important to ensure that the borrower is not assuming an unreasonable
level of debt, it should be noted that the secondary market is willing to
consider ratios above the standard 28/36.

Down Payment and Closing Costs: Accumulating enough savings
to cover the various costs associated with a mortgage loan is often
a significant barrier to homeownership by lower–income applicants.
Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit
organizations, or municipal agencies to cover part of these costs. Cash–
on–hand could also be an acceptable means of payment if borrowers
can document its source and demonstrate that they normally pay their
bills in cash.

Credit History: Policies regarding applicants with no credit history
or problem credit history should be reviewed. Lack of credit history should
not be seen as a negative factor. Certain cultures encourage people to “pay
as you go” and avoid debt. Willingness to pay debt promptly can be
determined through review of utility, rent, telephone, insurance, and
medical bill payments. In reviewing past credit problems, lenders should
be willing to consider extenuating circumstances. For lower–income
applicants in particular, unforeseen expenses can have a disproportionate
effect on an otherwise positive credit record. In these instances, paying off
past bad debts or establishing a regular repayment schedule with creditors
may demonstrate a willingness and ability to resolve debts.

Successful participation in credit counseling or buyer education
programs is another way that applicants can demonstrate an ability to
manage their debts responsibly. (See the section on Buyer Education.)
Property Appraisal/Neighborhood Analysis: Terms like “desirable
area,” “homogeneous neighborhood,” and “remaining economic life” are
highly subjective and allow room for racial bias and bias against urban
areas. The same holds true when lenders evaluate properties based on
their market appeal or compatibility with the rest of the neighborhood.
(See the section on Third Party Involvement in the Loan Process.)
It should be noted that the Federal Home Loan Mortgage Corporation
(Freddie Mac) has stated that neighborhoods undergoing revitalization
should be assessed on their potential as well as their existing condition.
Also, the Federal National Mortgage Association (Fannie Mae) will
accept block–by–block underwriting analyses in urban neighborhoods
being rehabilitated.

Employment History: It is important to distinguish between
length of employment and employment stability. Many lower–income
people work in sectors of the economy where job changes are frequent.
Lenders should focus on the applicant’s ability to maintain or increase his
or her income level, and not solely on the length of stay in a particular job.

Sources of Income: In addition to primary employment income,
Fannie Mae and Freddie Mac will accept the following as valid income
sources: overtime and part–time work, second jobs (including seasonal
work), retirement and Social Security income, alimony, child support,
Veterans Administration (VA) benefits, welfare payments, and unemployment

Underwriting Practices
Review and monitoring of the mortgage origination and underwriting
process will help determine whether the institution is treating all
potential and actual applicants fairly, and whether it is communicating
its lending policies clearly to the public.

To ensure fair treatment, it is important that the lending
institution document its policies and practices regarding acceptable
compensating factors. If an institution permits flexibility in applying
underwriting standards, it must do so consistently. Management should
consider developing a checklist for loan production staff to ensure that
all allowable compensating factors are requested of the borrower (such
as explanations of late debt payments or a demonstrated ability to carry
high housing costs). The checklist will also make loan production staff
aware of the institution’s commitment to serving borrowers who may not
meet traditional underwriting standards.

One way to help ensure that compensating factors are applied
consistently among racial and ethnic groups is to document and monitor
their use. Debt–to–income ratios and credit history are two areas in
which lenders frequently allow for compensating factors.
Informed borrowers are more likely to ask
loan production staff
about ways to enhance their applications. Thus, another way to encourage
consistent treatment is by clearly communicating the institution’s lending
policies and underwriting standards to the public. The lender’s commitment
to the community and to minority and lower–income consumers
can be described in mortgage–related documents, including marketing
materials, pre–qualification worksheets, and applications. These documents
could also explain the institution’s credit evaluation and underwriting

Loan Production Staff must review their practices to ensure
that they use compensating factors consistently. If a formal checklist
does not exist, loan production staff should have a mental checklist
of compensating factors that they should request from borrowers.
Loan production staff can also draw on their experience with minority
applicants, particularly lower–income or first–time homebuyers, to help
determine how the institution can improve its loan products. They may
wish to note which compensating factors they frequently record during the
application process. They can also inform management of any vague or
unclear wording in loan application documents that could present a
stumbling block for first–time mortgage loan applicants.