An overbought market that can't rally on good news. that's the story today. New home sales, durable goods, consumer sentiment, all good. We are not going to fall off a cliff on that kind of news though. Look for choppy trade ahead. It definitely seems we have to consolidate the gains, before we decide where to go next.
The euro continues volatile around support at 117. It also is very oversold. As always I feel the dollar will follow the economy, and reflect its strength or weakness.
Bonds sold off on the strength of the new home sales and the fact that it will be hard for the curve to get much weaker without any signs of economic weakness.
Tuesday, November 29, 2005
Friday, November 18, 2005
GOLD
Very interesting action in gold this week. In spite of higher bond yields, lower oil, and a stronger dollar, all traditionally, bearish for gold, bullion kept marching higher. The inflation numbers both PPI and CPI were also pretty good with better numbers to come now that energy prices are receding. BCA research has a good analysis of this on their website today. That's not bullish either, so what's driving the price?
Kitco.com has the World Gold Council report for last quarter on their site and it says that while physical demand stayed strong especially in Asia and the Middle East, supply grew modestly as well. The biggest swing factor was increased investment demand from the growth in ETF's. So why the big rush into them now, after all they have been around awhile. GLD celebrated it's one year anniversary this week.My take is that you may have several bearish factors mentioned above coming to and end. Oil may find support here as it sits on its 50day moving average and cold weather has begun. Bond yields fell after hitting resistance at close to one year highs and their 200 day moving avg. They also may not go higher again if inflation has indeed peaked and the economy slows. Finally, the dollar is testing resistance and may soon begin to fall. The ECB is talking about hiking rates today. That would narrow the interest rate spread currently in favor of the dollar. Also very importantly, the U.S. this week continues to press it's beggar thy neighbor polices, by pushing for a debasement of its currency. First, Greenspan in his latest speech made it explicit that a much weaker currency would have to be a large part of the solution of solving our huge current account deficit. Secondly, tomorrow, President Bush is again going to try to cajole China to revalue against us. In effect, you have the two most important men in the country, telling all the worldwide dollar holders, look out below. No wonder Russia, Argentina, and who knows who else, maybe China, want to double their Gold reserves.
Wednesday, November 09, 2005
SIDEWAYS
We are in our 5th day of sideways trading. A consolidation the bulls say. Never short a dull market says the axiom. Well perhaps, but if a market can"t make headway, it usually tests support. Fading concerns over the economy, pushed the market up and since then we have had a lack of catalysts. Tomorrow we get the trade figures and first look at Univ of Mich consumer sentiment readings, potential catalysts to be sure. The trade deficit could be a record, so it will be difficult to spin that one as bullish. On the other hand, if the consumer sentiment index shows a real bounce, that may be all the bulls need to go to higher ground. If we get a small bounce it will be important to see how the market reacts. A decline speaks for itself.
The dollar has been on a run and is somewhat overbought here. With the trade figures as catalyst, it seems an opportune time to play for a bounce in the Euro, gold or gold stocks. The wild card is how will bonds react. We are close to breaking the April highs in 10yr yields.
The dollar has been on a run and is somewhat overbought here. With the trade figures as catalyst, it seems an opportune time to play for a bounce in the Euro, gold or gold stocks. The wild card is how will bonds react. We are close to breaking the April highs in 10yr yields.
Tuesday, November 08, 2005
MCDONALD'S
MCD hit its lows in the spring of 2003. Same store sales were declining 4% a month. MCD had been a growth stock for decades. In an effort to keep the growth up, they started to diversify into other restaurant concepts in the late 90's as their markets became saturated and expansion opportunities waned. That strategy failed, as their forays into other businesses never reached critical mass to contribute significantly to the bottom line. Meanwhile, tastes were changing as the population aged and they had their eye off the ball and their core business faltered. New management was brought in, cutoff all the expansion and focused on their core business. They introduced new menu items such as salads to cater to older and healthier tastes, extended store hours, allowed credit cards for payment, etc. Essentially pushing more product through existing distribution channels. It worked. Same store sales started to improve peaking at 13.9% growth in the spring of 2004. So from its low of around $14 a share in 2/03, the stock rallied to 34 1/2 in 3/05. But then same store sales started to settle down, as the comparisons grew more difficult and the stock pulled back to $27. June and July SSS were better than April and May and so the stock bounced back a little to $31. The company itself is looking for mid single digit EPS growth. They fixed the business but are now in the same spot the old management was. How do you get growth out of a large, mature business going forward. They are already the biggest in every thing. They have the largest breakfast business, they expanded their menu, expanded their hours to get the late night crowd. By slowing international and domestic expansion, and eschewing other restaurant concepts, they are back to being a one trick pony, i.e. growing same store sales. This can be seen in the convergence of same store sales figures and total sales figures. The CEO has been quoted as saying that same store sales will be the driver of growth.
In August rumors started flying that Vornado the REIT was buying a stake in McDonald's. They had just done a secondary offering of 9 million shares raising about $800 million. It move the stock $4. At the time, I said it sounds like a lot but consider that in the last six months McDonald's bought back 33 million shares of it''s stock, approximately $1 billion dollars without much affect. I also said that they did not need the cash, that spinning them off into a REIT would provide. They have no major expansion plans. Well last week it finally came out that Vornado did indeed purchase a stake but even smaller than the initial rumors. According to AP they purchased a 1/2% stake amounting to 500 million dollars.
In September the stock was coming back down until it received a brokerage upgrade on rumors of it spinning off its Chipolte unit. I wrote at the time that while this was much more likely than spinning off the real estate, spinning off part of a 435 restaurant chain out of 30,000 was not that big a deal. More important I pointed out was the fact that total sales growth has been slowing on a quarterly basis since the 1st qtr of 04.
Today, they reported their Oct sales figures which were lauded for being better that the street expected, but look at the following table:
Finally both the CFO and CEO in the past couple of weeks have thrown cold water on any kind of REIT spinoff or restructuring. The CFO said it would be expensive and a distraction among other things. The CEO in a letter to employees said they had no intention of a spinoff or restructuring, that it would not serve the interest of their franchises or shareholders. I think he is exactly right. Do you want to lose control of your business by doing some financial engineering to get a one time pop. Spinning out the company owned restaurants so they can compete with the franchised one's is about as stupid idea as I've heard.
In August rumors started flying that Vornado the REIT was buying a stake in McDonald's. They had just done a secondary offering of 9 million shares raising about $800 million. It move the stock $4. At the time, I said it sounds like a lot but consider that in the last six months McDonald's bought back 33 million shares of it''s stock, approximately $1 billion dollars without much affect. I also said that they did not need the cash, that spinning them off into a REIT would provide. They have no major expansion plans. Well last week it finally came out that Vornado did indeed purchase a stake but even smaller than the initial rumors. According to AP they purchased a 1/2% stake amounting to 500 million dollars.
In September the stock was coming back down until it received a brokerage upgrade on rumors of it spinning off its Chipolte unit. I wrote at the time that while this was much more likely than spinning off the real estate, spinning off part of a 435 restaurant chain out of 30,000 was not that big a deal. More important I pointed out was the fact that total sales growth has been slowing on a quarterly basis since the 1st qtr of 04.
Today, they reported their Oct sales figures which were lauded for being better that the street expected, but look at the following table:
- Mthly SSS Total Sales Currency adj Total sales
- Jan 5.2 8.3 6.3
- Feb 1.6 4.4 2.7
- Mar 6.8 11.2 5.7
- Apr 2.8 6.7 3.9
- May 1.8 5.9 2.9
- Jun 3.8 6.2 4.9
- Jul 4.3 6.1 6.0
- Aug 3.4 5.7 4.4
- Sep 3.9 6.3 5.0
- Oct 3.4 3.9 4.4
Finally both the CFO and CEO in the past couple of weeks have thrown cold water on any kind of REIT spinoff or restructuring. The CFO said it would be expensive and a distraction among other things. The CEO in a letter to employees said they had no intention of a spinoff or restructuring, that it would not serve the interest of their franchises or shareholders. I think he is exactly right. Do you want to lose control of your business by doing some financial engineering to get a one time pop. Spinning out the company owned restaurants so they can compete with the franchised one's is about as stupid idea as I've heard.
Tuesday, November 01, 2005
STRONG OR WEAK
As we wait for the Fed today, I must say it's been a while since I've read some many strong and contradictory opinions on the market. There is the Bill Gross and Steve Roach camp, that says a significant economic slowdown is just around the corner, which will weaken equity markets keep inflation under control and be good for long bonds. The opposing view, best personified by today's CNBC guest Brian Wesbury, is that GDP growth will remain strong and equities will rally, Inflation is the problem and interest rates will rise.
The big equity selloff in the first half of October certainly seemed to be driven by an inflation scare. Fed heads, one after the other proclaimed their fear of higher inflation and their intention to do something about it. Fears over a weak economy were also present as higher oil prices were seen as driving the consumer into hibernation.
Today, with the biggest two day rally in a year under our belts things look much better. Certainly the GDP report and today's ISM report show no sign of weakness. You have to admit, considering everything that has been thrown at it, high oil prices, plummeting consumer confidence, natural disasters, gargantuan trade and budget deficits, higher interest rates, high debt levels, low savings rates, that the economy can chug along at almost 4% is pretty amazing. You can appreciate the bulls point of view and see why the bears might want to throw in the towel, after all, what's it going to take.
The inflationists fear that inflation is already baked in the cake. Companies are finally raising prices, passing on costs that will find their way through to core price increases.
Which view will prevail? I expected a slowdown last year as the effects of the tax cuts wore off. I'm always too early. Going back to my trading notes, I wrote to myself , economic stats should start coming in weaker. Look for weakness in housing ,autos and retail sales. It never happened, but today, housing is slowing down, sales down inventories up, and Ford just announced a 25% decline in auto sales. That's two months in a row of lousy sales. While we are on the subject of auto sales, a lot of bounce in the 3.8% GDP was attributed to auto sales that occurred early in the quarter. As far as inflation goes, Victor Niederhofer reports that the Goldman Sachs commodity index fell some 10% in October from its Sep close, one of the biggest drops ever. So maybe down the road we will get some moderation in the PPI.
The big equity selloff in the first half of October certainly seemed to be driven by an inflation scare. Fed heads, one after the other proclaimed their fear of higher inflation and their intention to do something about it. Fears over a weak economy were also present as higher oil prices were seen as driving the consumer into hibernation.
Today, with the biggest two day rally in a year under our belts things look much better. Certainly the GDP report and today's ISM report show no sign of weakness. You have to admit, considering everything that has been thrown at it, high oil prices, plummeting consumer confidence, natural disasters, gargantuan trade and budget deficits, higher interest rates, high debt levels, low savings rates, that the economy can chug along at almost 4% is pretty amazing. You can appreciate the bulls point of view and see why the bears might want to throw in the towel, after all, what's it going to take.
The inflationists fear that inflation is already baked in the cake. Companies are finally raising prices, passing on costs that will find their way through to core price increases.
Which view will prevail? I expected a slowdown last year as the effects of the tax cuts wore off. I'm always too early. Going back to my trading notes, I wrote to myself , economic stats should start coming in weaker. Look for weakness in housing ,autos and retail sales. It never happened, but today, housing is slowing down, sales down inventories up, and Ford just announced a 25% decline in auto sales. That's two months in a row of lousy sales. While we are on the subject of auto sales, a lot of bounce in the 3.8% GDP was attributed to auto sales that occurred early in the quarter. As far as inflation goes, Victor Niederhofer reports that the Goldman Sachs commodity index fell some 10% in October from its Sep close, one of the biggest drops ever. So maybe down the road we will get some moderation in the PPI.
Monday, October 17, 2005
OIL OIL OIL
Boy was I wrong. My last post 10/10 the S&P closed at 1186, I expected an oversold bounce, instead we got further selling and didn't bounce until Friday. Here we are at 1186. I was right in pointing out that oil remains the wild card and heavily influences the movement of everything else. Today, another storm and accompaning oil price concerns. Stocks are down, dollar stronger. Oil, however is no longer a one way street. Signs of slower global growth and high prices has raised concerns of what they now call demand destruction. So we will now have tug of war. Economic data showing weakness will exert downward bias while supply disruption news will be positive. Let's not forget the weather which of course can go either way but will have more impact if it's colder than normal.
As I write, we are having an up day thanks to GM and MO which are up on GM's agreement with the UAW re health care costs, and MO's favorable ruling from the Supreme Court on tobacco litigation. Even so, I feel the bears have the upper hand in the intermediate term. As I've outlined before, the things we know augur badly for the market. The Fed will continue to tighten. Inflation continues to march higher as the higher energy prices grind their way through the economy. The budget deficits will continue to grow larger, not only because of the large expenditures lately due to hurricane relief, but now we have to worry that receipts may be lower due to a slowdown, a double whammy. Gas prices will stay high and be a drag on consumer confidence. We just don't have the refining capacity to bring them down. Outside of energy, earning are being squezzed by higher costs. It seems like everyone is blaming higher energy for earnings misses, even some that seem to have no connection. If there is a year-end rally I think we would have to see much lower oil prices for some reason and a friendlier Fed as a catalyst.
I haven't written much about the dollar lately, but we are now at an interesting juncture. The dollar has gained strength this year on higher interest rates. So far it has tested its July highs against the Euro twice at around 119 and held. Today I saw comments from both the ECB and the Bundesbank about higher interest rates down the road. Higher energy is causing inflation targets to be exceeded there also.This would of course be very supportive of the Euro, however, they have the same problem we do. Their think tanks last week lowered economic growth estimates. So the question will be, which economy slows sooner and farther and which central bank blinks first. We will trade back and forth on each data point pro or con. As the Euro is near one year lows and the U.S. capital markets are having problems, the best risk reward trade here is to go long the Euro, at least until support is broken. I like trades where the market doesn't have to move too far to let me know I'm wrong.
As I write, we are having an up day thanks to GM and MO which are up on GM's agreement with the UAW re health care costs, and MO's favorable ruling from the Supreme Court on tobacco litigation. Even so, I feel the bears have the upper hand in the intermediate term. As I've outlined before, the things we know augur badly for the market. The Fed will continue to tighten. Inflation continues to march higher as the higher energy prices grind their way through the economy. The budget deficits will continue to grow larger, not only because of the large expenditures lately due to hurricane relief, but now we have to worry that receipts may be lower due to a slowdown, a double whammy. Gas prices will stay high and be a drag on consumer confidence. We just don't have the refining capacity to bring them down. Outside of energy, earning are being squezzed by higher costs. It seems like everyone is blaming higher energy for earnings misses, even some that seem to have no connection. If there is a year-end rally I think we would have to see much lower oil prices for some reason and a friendlier Fed as a catalyst.
I haven't written much about the dollar lately, but we are now at an interesting juncture. The dollar has gained strength this year on higher interest rates. So far it has tested its July highs against the Euro twice at around 119 and held. Today I saw comments from both the ECB and the Bundesbank about higher interest rates down the road. Higher energy is causing inflation targets to be exceeded there also.This would of course be very supportive of the Euro, however, they have the same problem we do. Their think tanks last week lowered economic growth estimates. So the question will be, which economy slows sooner and farther and which central bank blinks first. We will trade back and forth on each data point pro or con. As the Euro is near one year lows and the U.S. capital markets are having problems, the best risk reward trade here is to go long the Euro, at least until support is broken. I like trades where the market doesn't have to move too far to let me know I'm wrong.
Monday, October 10, 2005
BOUNCE
The market was oversold. The payroll data was better then expected. Oil prices were dropping. Rally, rally, rally. The bullish argument to take away from the payroll numbers, where the previous two months were revised significantly higher, is that going into the hurricanes the economy was strong, strong , strong. With hurricane season almost over, and reconstruction money pouring into the gulf, it may have all been just a bump in the road with sunny skies ahead. Only a hawkish Fed and higher inflation are restraining prices.
Bears point out, you don't fight the Fed, much higher heating bills lie ahead, and Mutual Fund cash levels are at record lows.
I believe we are now going to test the upside. How far will this rally carry and with what kind of volume. 1210 seems like the first line of resistance in the S&P. Energy is still the wild card and the market will remain sensitive to it. This week we will have higher inflation readings and retail sales, continuing the worry over interest rates. Cold weather or large drawdowns of distillate inventories this week could halt the slide in energy.
Bears point out, you don't fight the Fed, much higher heating bills lie ahead, and Mutual Fund cash levels are at record lows.
I believe we are now going to test the upside. How far will this rally carry and with what kind of volume. 1210 seems like the first line of resistance in the S&P. Energy is still the wild card and the market will remain sensitive to it. This week we will have higher inflation readings and retail sales, continuing the worry over interest rates. Cold weather or large drawdowns of distillate inventories this week could halt the slide in energy.
Tuesday, October 04, 2005
WHAT NOW?
Yesterday the S&P finished down by 2 pts, the first down day in eight trading sessions.
True nothing much has happened in most of the last eight trading sessions, with the exception of the month-end window dressing rally. The bulls are looking for a year-end rally. Their argument is:
True nothing much has happened in most of the last eight trading sessions, with the exception of the month-end window dressing rally. The bulls are looking for a year-end rally. Their argument is:
- The uptrend from the 03 low is intact.
- The market has absorbed all the bad news and remained resilient.
- Fiscal policy will support the economy and generate corporate profitability on Katrina spending. Yesterday's ISM index, certainly supports this.
- The Fed is almost done.
- We've seen the worst on oil prices.
- The higher oil prices of the past year are working their way through consumer and corporate pocketbooks and will hurt spending and profits for the rest of the year.
- The Fed will continue tightening until they get mortgage rates up and slow housing. Greenspan is now concerned about inflating asset prices.
- Corporate profits while good, are slowing and are on a downward path. Earnings misses will be blamed on energy and Katrina.
- Inflation is in the pipeline.
- Energy prices will stay high particularly natural gas. This will significantly slow consumer spending which accounts for 70% of GDP. Evidence of stress is starting to show up in the higher percentage of consumers who are charging their gas purchases rather than paying cash. Also the percentage of consumers who are late on their credit cards has been increasing.
Friday, September 23, 2005
HALF FULL HALF EMPTY
Well, it's been crazy. Good news is bad news, bad news is good news. Many counter-intuitive moves in the market. In times like these I find it;s best to step back, reassess and try to find some anchors. For only with strong conviction can you ride out the short term swings. Some anchors or truths are:
The question is, do current prices reflect optimism or have they priced in the worst? One thing seems obvious, the market likes deficit spending. The increased fiscal spending, means and economic boost now, while payback is down the road. The budget deficit is going to be huge, but the market will worry about that later. Both politicians and corporate America live in a current quarter mentality. Nothing gets done without a crises, and planning does not look far ahead. Whatever happened to the Social Security crises.
The dollar has been strengthening lately. A German political crises has helped. The increased fiscal spending, which I have read could amount to 1 1/2% of GDP has provided even more support. With no fiscal discipline, the Fed has to continue tightening. As I've said many time before though, any economic weakness will quickly spill over to the buck. We could see the economy weakening despite the fiscal laggress because of the housing bubble bursting, the consumer being tapped out, higher rates, loss of confidence by foreigners in our financial markets.
The bonds will be important to watch over the next few months. Before this all started, we were already borrowing 80% of the worlds savings. Should their supply or preferences change where will the money come from? Even if we print it long rates will rise. Like the 70's we could have weak growth and higher inflation ahead.
- Gas prices are going to stay high. Even if Rita does minimal damage, we have enough production closed to keep things tight for some time.
- Budget deficits are going to grow significantly.
- Corporate earnings are being impacted by higher energy prices. AA today is only the latest.
- Inflation is in the pipeline
- Fed tightening will continue.
The question is, do current prices reflect optimism or have they priced in the worst? One thing seems obvious, the market likes deficit spending. The increased fiscal spending, means and economic boost now, while payback is down the road. The budget deficit is going to be huge, but the market will worry about that later. Both politicians and corporate America live in a current quarter mentality. Nothing gets done without a crises, and planning does not look far ahead. Whatever happened to the Social Security crises.
The dollar has been strengthening lately. A German political crises has helped. The increased fiscal spending, which I have read could amount to 1 1/2% of GDP has provided even more support. With no fiscal discipline, the Fed has to continue tightening. As I've said many time before though, any economic weakness will quickly spill over to the buck. We could see the economy weakening despite the fiscal laggress because of the housing bubble bursting, the consumer being tapped out, higher rates, loss of confidence by foreigners in our financial markets.
The bonds will be important to watch over the next few months. Before this all started, we were already borrowing 80% of the worlds savings. Should their supply or preferences change where will the money come from? Even if we print it long rates will rise. Like the 70's we could have weak growth and higher inflation ahead.
Thursday, September 15, 2005
DOUBLE TOP?
The market has started to give back some gains it made, if you recall, first on Katrina not expected to be as bad as feared and then when it was actually worse, on the bump from rebuilding. The 40 pt rally in S&P is a perfect example of the old sayings, that the market can do anything, the market can stay irrational longer than you can stay solvent, the market cannot be predicted using rational means, etc. The rally looks like it was a bull trap, short and powerful. No volume on the downside yet, so they all got em. The market is supported by fiscal spending on Katrina, lower oil, and hope the Fed is done or close to it.
The bonds are coming under pressure. Last week's manufacturing surveys showed very large increases in the inflation indexes. We have also had many companies start to raise prices as their energy costs increase. Oil prices are starting to pass through. If the Fed blinks they may be seen as falling behind the inflation curve. That of course would be very negative for bonds and the dollar as well.
The dollar keeps getting bailed out. First there was the failure of the referendum on the European constitution and now the deadlocked German elections. The talk is, we won't know the election results for weeks. Eventually it will recede from the headlines and since nothing has dramatically changed the dollar will resume its underlying downward move. It's a choice between the lesser of two evils.
Gold is reflecting slower growth, higher inflation, increased demand from China and India, and lower production. Back to the 70's.
Wednesday, September 07, 2005
OOOPS
You can see from the action of the bonds and the dollar today that the idea of the Fed blinking and not raising rates has reversed. Chicago Fed Pres helped that idea along with his midday comments where he voiced more concern over inflation. So it seems Greenspan will continue his mission to take away the punchbowl. I guess he wants to go out with his reputation as an inflation fighter intact. If they go ahead and raise rates, I think it will be the last time this year. Even the Treasury Secretary this morning acknowledged that the economy would slow. The political outcry that is already beginning will overwhelm the Fed's desire to raise rates if the economy fades.
A lot more news of higher spending today and higher costs. Higher transport costs from using alternate ports and methods of transportation and higher spending on everything from unemployment benefits surge to various relief expenditures. Not to mention lower tax revenues due to less people working and slowing economic activity.
A lot more news of higher spending today and higher costs. Higher transport costs from using alternate ports and methods of transportation and higher spending on everything from unemployment benefits surge to various relief expenditures. Not to mention lower tax revenues due to less people working and slowing economic activity.
THREE QUICK THOUGHTS
- Yesterday was a low volume rally, only 1.42 B shares. Today's volume doesn't seem much better. Breadth was good.
- We are seeing a divergence between the S&P and the transports. Obviously this can go on for a while. It is not a timing tool but like volume it tells you something about the character of the advance.
- McDonalds is up over a dollar on a broker upgrade. I wrote about this stock a while back when it was under the influence of rumors on it spinning off its real estate. I thought that was highly unlikely and the stock started to come back down until it came under rumors about a spinoff of its Chipolte unit. While I think that is more likely, spinning off 435 restaurants out of 30,000 is not that big a deal. European sales are improving, but total sales have been slowing on a quarterly basis since the 1st qtr of 04.
- 1st 04 - 17.8%
- 2nd04 - 11.7%
- 3rd04 - 9.8%
- 4th04 - 10.3%
- 1st05 - 7.97%
- 2nd05 - 6.3%
- Doesn't look like the receipe for a 20% gainer since 7/7.
Tuesday, September 06, 2005
Maybe we should have a natural disaster more often. Stocks are higher now than a week before we ever heard of Katrina. The U.S. govt spending machine is revving up and that is what the market likes. We're going to spend another 100 billion we don't have and that means a pretty hefty boost to GDP in the short term. Destruction of wealth does not show up in GDP but replacing that destruction does. With Europe sending us some of their product reserves of oil over the next 30 days, that should keep oil prices relatively quiescent. Inventory numbers will be released Thursday and will probably show big draws so we will be able to see the price response then. Everyone is always eager to shout the good news, the bad news will dribble out.
Energy supplies will remain tight. We will remain short of refining capacity for some time to come. Oil is still $3 bucks a gallon and along with high natural gas prices will grind away at the consumer and the economy. Most of the government spending is going to security, housing, clean-up, repair etc. Relief spending does not increase productive capacity or profitability, regardless of how necessary it is.
Energy supplies will remain tight. We will remain short of refining capacity for some time to come. Oil is still $3 bucks a gallon and along with high natural gas prices will grind away at the consumer and the economy. Most of the government spending is going to security, housing, clean-up, repair etc. Relief spending does not increase productive capacity or profitability, regardless of how necessary it is.
BACK TO WORK
It looks like we will start post Labor Day trading with a bounce. The market seems to be taking heart from lower oil and gas prices as a result of crude coming out of the SPR and products coming from IEA reserves. Also progress is finally being made in Louisiana. So the glass is half full at the moment.
The volatility in perception will continue for the next several months at least. The data will be lousy, but if you wish to view the glass as half full you can ignore it as temporary, due to Katrina. The bears will view it more ominoulsy of course, as undermining the fabric of economic growth. I continue to lean toward the bears and view this shock as one pushing and economy that was already slowing toward stall speed and a recession next year.
The volatility in perception will continue for the next several months at least. The data will be lousy, but if you wish to view the glass as half full you can ignore it as temporary, due to Katrina. The bears will view it more ominoulsy of course, as undermining the fabric of economic growth. I continue to lean toward the bears and view this shock as one pushing and economy that was already slowing toward stall speed and a recession next year.
Wednesday, August 31, 2005
THE DOLLAR- WATCH OUT BELOW
On Aug 19, I said "We have had our first small whiff of possible economic slowdown and the buck was non-plussed. When the market gets stronger evidence of this possibility and starts to look forward to the day the Fed blinks, put a fork in it, the dollar rally is done.". Well, I think we are there. The fallout from hurricane Katrina will slow the economy. This will reduce the growth differential between us and Europe and stop the interest rate difference from widening further. Yes this will slow global growth but Europe will be seen as being less leveraged than the U.S. and of course they are not pursuing a Mideast war that is going badly. Can you imagine what our trade deficit is going to look like.
A weakening dollar and high oil prices should also be bullish for gold. I worry about gold stocks though, because they use so much energy in their operations and the gold price has not gone anywhere since year-end while oil is up 65%. Their margins are getting crushed.
The S&P topped out at 1246. If it could have made it to 1253, that would have been a .618 retracement from the 3/24/00 high of 1553 and the 10/10/02 of 768. Close enough for me . Take a look at a weekly chart and you can see this may have just begun.
Finally, the law of unintended consequences is at work. The ramifications of the hurricane and our responses have just barely been scratched. This will be a story with staying power.
Their will be negative news flow from these consequences for some time.
Friday, August 26, 2005
LIQUIDITY
Throw out yesterday because the range was so narrow and stocks have finished near the lows of the day for 7 days running. I wonder when the last time that occurred? Ever since Walmart said gas is affecting sales 8/16, we have been in a funk. The homebuilders, retailers and banks are taking the brunt. We have rolled over. How far and how fast do we go. Think about this. Short term CD rates, 6mth, are almost 4%. That's beat a lot of asset classes lately, RISK FREE! I mean stocks, gold, bonds, etc have been mostly sideways. With all the uncertainty over oil prices effect on asset values and all bubble talk over real estate, these kind of short rates are going to start draining liquidity out of risk assets. In three weeks the Feds going to give you another 1/4%.
The CEO of DRD gold commented that the oil/gold ratio was at historical lows and had a long way to go up to catch up. That can be said just about everything. The price of oil is outstripping everything, and either prices rise or profits fall, particularly amongst heavy energy users like airlines, mining and chemicals to name a few. It doesn't look like prices are rising.
The CEO of DRD gold commented that the oil/gold ratio was at historical lows and had a long way to go up to catch up. That can be said just about everything. The price of oil is outstripping everything, and either prices rise or profits fall, particularly amongst heavy energy users like airlines, mining and chemicals to name a few. It doesn't look like prices are rising.
Thursday, August 25, 2005
AUGUST 25, 2005
The bond market has retraced about 1/2 of it's losses from July highs to August lows. This is where the rubber meets the road. The yield curve shouldn't flatten any further especially after hawkish statements by the Chicago Fed Prez yesterday, unless the economy is really rolling over, which may well be the case. But one would think that we would really have a battle here for days if not weeks.
Pre opening it looks like stocks could get a bounce today. They are oversold. The hurricane looks like it will miss oil installations so crude is of its highs. But if your going to play the rallies in this type of environment, remember they are most likely going to be sharp and short.
You can almost feel the consensus build on CNBC one by one that oil is finally going to hurt the economy and markets. I might go one further and say its baked in the cake. Past price increases are now working their way through the economy and profit chains and we will see negative news flow continue to grind away. Local news yesterday reporting on the impact on local governments that operate huge fleets of school buses bracing for huge budget shortfalls as a consequence of higher gas. Isn't school just about to start
It is amazing how quickly the perspective on oil has changed. It was only 2yrs ago that oil was trading at $30 a barrel midway between its decade range of $20-40. That's when OPEC was concerned about losing market share, limiting production output, afraid of high prices causing a drop in demand, concern over alternative fuels etc. Today an analyst on CNBC is concerned over Venezuela or Iran withholding a measly hundred thousand barrels of oil for political purposes. To punish the U.S. and display their power, which they could easily do as they are awash in oil riches. It almost seems like any place that produces the stuff has potential geo political issues so that we will never return to the placid world we knew before. As I've said before price will ration supply
Wednesday, August 24, 2005
AUGUST 24, 2005
Is it me or does the market feel really really heavy. About week ago I wrote about the correlation between strong stock closings with strong bond closings with oil having little influence. The past 5 trading sessions has seen a complete reversal of that correlation. For the past 4 trading sessions bonds have closed near the highs of their daily range while stocks near the low of their daily range. More importantly, every trading session since Walmart reported earnings 8/16 and said they were concerned about gas prices hurting sales, stocks have closed at low end of the trading range for the day. Bonds started their rally shortly thereafter
. Data showing the housing boom may be slowing hurt the homebuilders that even the bond rally couldn't help. To ice the cake, a couple days after the Walmart news, oil after trading as low as $62.25 started moving back up dashing hopes of an intermediate correction.
So here we sit. Our leadership of retail and homebuilders has rolled over, oil is close to threatening the highs again. Google the poster child of the bulls, may be rolling over. It will be interesting to see if their news today about introducing instant messaging lifts the shares back over $300 the next few days. Anecdotal stories about higher gas prices inflicting pain are now every where and multiplying. Airlines are getting killed, farmers are getting hurt, delivery companies, big energy users off all types and stripes. It's becoming the lead story on the evening news and that can't be good for confidence. The worst month for the market is around the corner and the big boys will be back from vacation soon.
. Data showing the housing boom may be slowing hurt the homebuilders that even the bond rally couldn't help. To ice the cake, a couple days after the Walmart news, oil after trading as low as $62.25 started moving back up dashing hopes of an intermediate correction.So here we sit. Our leadership of retail and homebuilders has rolled over, oil is close to threatening the highs again. Google the poster child of the bulls, may be rolling over. It will be interesting to see if their news today about introducing instant messaging lifts the shares back over $300 the next few days. Anecdotal stories about higher gas prices inflicting pain are now every where and multiplying. Airlines are getting killed, farmers are getting hurt, delivery companies, big energy users off all types and stripes. It's becoming the lead story on the evening news and that can't be good for confidence. The worst month for the market is around the corner and the big boys will be back from vacation soon.
Friday, August 19, 2005
AUGUST 19, 2005
Yesterday's low in oil $62.25 was 8/1 high. So we are basically unch in oil for the month. Bond yields on the other hand, after falling most of the month have rallied over the past few days and are lower around the 4.20 level from 4.30 at the start of the month. So why is the S&P 20 pts lower. The DOW by the way has fared better, as a series of individual stories helped propel individual stocks. We had the MCD rumors of a real estate play. MO got a favorable court ruling, HPQ reported good earnings and popped $3 bucks. I think higher gas prices and WMT's warning have spooked the market. No knockout blow has been delivered by either bull or bear, but we are starting to tilt lower.
The bond rallied as oil prices hit $67 indicating the vigilantes do not see inflation and are more concerned about a consequent economic slowdown. Each major bond rally has been accompanied by a spike in refi's that kept the economy going. But each refi spike has been smaller than the last. The psychological effect of these gas prices may curtail refis even more this time, even if the bonds continue their economic weakness rally in the face of Fed tightening. The consumer may flinch about borrowing more. Then we will have arrived at the proverbial pushing on a string.
The dollar has had a nice rally this week on the back of data showing greater inflow of funds into Treasuries from abroad and the outlook for further Fed tightening continuing to add to our yield advantage. We have had our first small whiff of possible economic slowdown and the buck was non plussed. When the market gets stronger evidence of this possibility and starts to look forward to the day the Fed blinks, put a fork in it the dollar rally is done.
The bond rallied as oil prices hit $67 indicating the vigilantes do not see inflation and are more concerned about a consequent economic slowdown. Each major bond rally has been accompanied by a spike in refi's that kept the economy going. But each refi spike has been smaller than the last. The psychological effect of these gas prices may curtail refis even more this time, even if the bonds continue their economic weakness rally in the face of Fed tightening. The consumer may flinch about borrowing more. Then we will have arrived at the proverbial pushing on a string.
The dollar has had a nice rally this week on the back of data showing greater inflow of funds into Treasuries from abroad and the outlook for further Fed tightening continuing to add to our yield advantage. We have had our first small whiff of possible economic slowdown and the buck was non plussed. When the market gets stronger evidence of this possibility and starts to look forward to the day the Fed blinks, put a fork in it the dollar rally is done.
Monday, August 15, 2005
AUGUST 15, 2005
An interesting correlation last week, well actually since 8/2, is that every day the bond market closed near the high of its range for the day, so did stocks, regardless of what oil prices did. The opposite was true as well. Every day bonds closed near their lows of the range of the day, so did stocks, even if oil fell like it did 8/4. So oil didn't matter or its rise was compensated for by lower interest rates. Friday, however stocks closed neutral, about the middle of their range for the day, even though bonds had a big rally and finished strong. Oil might finally be exerting some influence as it broke the $67 barrier with fears of $70 around the corner. Inflation measures this week and gas pump prices will be negative, as will lingering concerns over tech stocks in light of DELL and CISCO. Earnings from retailers should be good, but it will be their guidance that matters most.
I don't usually comment a lot on individual stocks but the action in McDonald's last week, is to good to pass up. Rumors of a big REIT like Vornado buying a stake in the company to monetize it's real estate values sent the stock and its call options flying last week. MCD started to hit its lows in the spring of 2003, as same store sales were declining 4% a month. MCD had been a growth stock for decades and old management in an effort to keep that up started to diversify into other restaurant concepts in the late 90's as expansion opportunities waned and competition increased for their burger joints. That strategy failed, as their forays into other businesses never reached critical mass to contribute significantly to the bottom line and meanwhile tastes were changing as the population aged and they had their eye off the ball of their core business and it faltered. New management was brought in, cutoff all the expansion focused on the core business, introducing new menu items to cater to older and healthier tastes, extended store hours etc. Essentially pushing more product through existing distribution. It worked. Same store sales started to improve peaking at 13.9% growth in the spring of 2004. So from its low of around $14 a share in 2/03 the stock rallied to 34 1/2 in 3/05. But then same store sales started to settle down, as the comparisons grew more difficult and the stock pulled back to 27. June and July were better than April and May and so the stock bounced back a little to 31. The company itself is looking for mid single digit EPS growth. They fixed the business but are now in the same spot the old management was. How do you get growth out of a large, mature business going forward. They're already the biggest in every thing. They have the largest breakfast business, they expanded their menu, expanded their hours to get the late night crowd. By slowing international and domestic expansion and eschewing other restaurant concepts, they are back to being a one trick pony. Grow same store sales. This can be seen in the convergence of same store sales figures and total sales figures.
That brings us to the present. Up pops the rumor of Vornado, perhaps helped by the fact that they just recently raised some money in a secondary offering. Roughly 9m share at their current price, lets say 90 equals about 800M, sounds like a lot. Could it pop the stock $4? Sure, but consider this. MCD bought back 33M of its share in the last 6 months, approximately 1 billion dollars without much effect. Not to mention several analysts pointed out on Friday that MCD is not like Kmart. Though they have some nice parcels, most McDonald's are located on major streets next to gas stations and dry cleaners and the parcels are not that large if you are considering re-development. McDonald's picks their sites for a reason, so I don't think they want to go anywhere in the first place. Do they need the cash, that spinning them off in a REIT might provide. They have no major expansion plans, just the opposite.
Maybe someone should look into who benefited most from these rumors.
I don't usually comment a lot on individual stocks but the action in McDonald's last week, is to good to pass up. Rumors of a big REIT like Vornado buying a stake in the company to monetize it's real estate values sent the stock and its call options flying last week. MCD started to hit its lows in the spring of 2003, as same store sales were declining 4% a month. MCD had been a growth stock for decades and old management in an effort to keep that up started to diversify into other restaurant concepts in the late 90's as expansion opportunities waned and competition increased for their burger joints. That strategy failed, as their forays into other businesses never reached critical mass to contribute significantly to the bottom line and meanwhile tastes were changing as the population aged and they had their eye off the ball of their core business and it faltered. New management was brought in, cutoff all the expansion focused on the core business, introducing new menu items to cater to older and healthier tastes, extended store hours etc. Essentially pushing more product through existing distribution. It worked. Same store sales started to improve peaking at 13.9% growth in the spring of 2004. So from its low of around $14 a share in 2/03 the stock rallied to 34 1/2 in 3/05. But then same store sales started to settle down, as the comparisons grew more difficult and the stock pulled back to 27. June and July were better than April and May and so the stock bounced back a little to 31. The company itself is looking for mid single digit EPS growth. They fixed the business but are now in the same spot the old management was. How do you get growth out of a large, mature business going forward. They're already the biggest in every thing. They have the largest breakfast business, they expanded their menu, expanded their hours to get the late night crowd. By slowing international and domestic expansion and eschewing other restaurant concepts, they are back to being a one trick pony. Grow same store sales. This can be seen in the convergence of same store sales figures and total sales figures.
That brings us to the present. Up pops the rumor of Vornado, perhaps helped by the fact that they just recently raised some money in a secondary offering. Roughly 9m share at their current price, lets say 90 equals about 800M, sounds like a lot. Could it pop the stock $4? Sure, but consider this. MCD bought back 33M of its share in the last 6 months, approximately 1 billion dollars without much effect. Not to mention several analysts pointed out on Friday that MCD is not like Kmart. Though they have some nice parcels, most McDonald's are located on major streets next to gas stations and dry cleaners and the parcels are not that large if you are considering re-development. McDonald's picks their sites for a reason, so I don't think they want to go anywhere in the first place. Do they need the cash, that spinning them off in a REIT might provide. They have no major expansion plans, just the opposite.
Maybe someone should look into who benefited most from these rumors.
Subscribe to:
Posts (Atom)