Weekender: “Simplify, Simplify”

October 3, 2010

There is lots of juicy stuff in the links roundup as usual.

But for this weekender we are going to heed classic advice from that famously cool cat, Henry David Thoreau, and try to “simplify, simplify” the bull and bear cases.

The Bull case, in a nutshell:

  • Broadly accepted earnings estimates put the P/E ratio of the S&P 500 around 12.
  • Assuming nothing blows up and things continue to muddle along, it’s not unreasonable to envision an S&P multiple of, say, 14 or 15.
  • There’s bad stuff on the horizon, but there’s always bad stuff on the horizon. The pessimists are overplaying their hand. And bond yields are stupid low.
  • Ergo, it’s not at all nutty to envision U.S. equities trading 15 – 20% HIGHER, in accordance with a modest multiple expansion to 14 or 15.

The Bear case, in a nutshell:

  • The first round of QE saved the banks, but it didn’t do squat for the real economy.
  • Temporary stimulus tailwinds are now becoming headwinds. We are coming off a “sugar high” and headed for an adrenaline crash. QE2 is “Coals to Newcastle” and already priced in.
  • The top down environment is U-G-L-Y. Consumer deleveraging, housing double dip, bankrupt states and pension funds, foreclosure snafus, trade war, sovereign debt crisis, you name it. (Just look at this week’s links for cryin’ out loud!)
  • Mr. Market is tap-dancing through a minefield… and even if he doesn’t step on one, earnings are gonna get whacked. Plus the bulls’ P/E methodology is sketchy in the first place.
  • Ergo, stocks should be trading 15-20% LOWER in accordance with the harsh reality of this fake recovery, artificial stimulus, extend-and-pretend environment.

And there you have it. So who is right? Only the shadow knows.

As long as nothing blows up, the bulls have an edge… but there are plenty of tremors in the market, and itchy trigger fingers abound. Will the longs risk the accumulated gains of their sweet September bump on hopes of a repeat ‘miracle month’ in October? Or will they hit the bid and head for the hills? Stay tuned…

What’s a trader to do? We would say, keep it light and nimble and wait for a definitive “tie breaker” to emerge. That tie breaker could be a bullish all-clear from earnings season numbers. It could be a macro data point or geopolitical flare-up so fugly that the bears roar back into pole position. Or it could be something else entirely that neither side expected.

So let’s stay vigilant and play it as it lays. To the links!

Pitch Black Macro

  • Confidence declines to lowest since February (Reuters). “U.S. consumer confidence fell to its lowest level in seven months in September, underscoring lingering worries about the strength of the economic recovery.”
  • Meredith Whitney’s new target: The states (Fortune). “The housing crash not yet realized its full impact on budgets in the most vulnerable states. It’s the banking crisis all over again – and it’s time to stop ignoring it.”
  • Goldman Releases Most Bearish 2011 Outlook Presentation Yet, Sees S&P In 725-800 Range In QE2 Case (ZRH). “Goldman’s Investment Strategy Group has just circulated the most bearish 2011 outlook presentation, detailing why the US economy in 2011 will likely stall and post negative growth.”
  • Fed officials clash over efforts to aid economy (Yahoo). “Divisions within the Federal Reserve over how to pump up the economy and lower unemployment came into sharper view Wednesday. Three Fed officials squared off in competing speeches over how much help would come from one likely next step — buying more government debt.”
  • Brace Yourselves For Disappointing Quarterly Earnings (Forbes). “In what has appeared to be a conundrum for several months, Wall Street has been raising its earnings estimates for the third quarter while at the same time economists and even the Federal Reserve have been bringing down their estimates of economic growth quite dramatically.”
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Freight Fright

  • Truck Tonnage Index “Plunged” 2.7 Percent in August (CR). “The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 2.7 percent in August, which was the largest month-to-month decrease since March 2009.”
  • FedEx to Raise Shipping Rates (WSJ). “FedEx Corp. said Wednesday that it plans to increase shipping rates for U.S. domestic and export services. The package-shipping company said the full average rate will increase 5.9% for U.S. and export services early next year.”

M&A Baby!

  • M&A Snaps Back as BHP, Intel Drive Busiest Quarter in 2 Years (BB). “Dealmaking staged a comeback in the third quarter, with a jump in multibillion-dollar takeovers putting this year on pace to surpass 2009.”
  • Southwest, Determined to Expand, Buys AirTran (NYT). “Southwest Airlines, the nation’s biggest low-cost carrier, said in a surprise announcement on Monday that it had agreed to buy its smaller rival AirTran Airways for $1.4 billion.”

Fraud and Shortage

  • Green Mountain Roasted: 8-K Footnote Sends Stock Down 15% After Hours (ZRH). “Could it be possible? A company that has ramped about 1,000% from its lows if not more, having done so on allegedly misrepresented financials?”
  • Charting Statistical Fraud At The BLS: 22 Out Of 23 Consecutive Upward Revisions In Initial Jobless Claims (ZRH). “For all those who continue to doubt the statistically quetionable methods of our Labor Department, as well as for all others who mock those who doubt the veracity out of anything coming out of the BLS, the following chart should provide much needed closure.”
  • Health reform to worsen doctor shortage (Reuters). “The U.S. healthcare reform law will worsen a shortage of physicians as millions of newly insured patients seek care, the Association of American Medical Colleges said on Thursday.”

Foreclosure Clusterf–k

  • JPMorgan Suspending Foreclosures (NYT). “In a sign that the entire foreclosure process is coming under pressure, a second major mortgage lender said that it was suspending court cases against defaulting homeowners so it could review its legal procedures.”
  • Bank of America delays foreclosures in 23 states (Yahoo). “Bank of America is delaying foreclosures in 23 states as it examines whether it rushed the foreclosure process for thousands of homeowners without reading the documents.”
  • Foreclosure Flaws May Delay Recovery by Slowing Home-Price Fall (BB). ““Until we find the actual level of proper pricing, housing problems will persist. Dragging out foreclosures doesn’t help.”

Housing Sux

  • Housing Short Sales: Walking away with less (WaPo). “The last time, banks seized nearly every fourth house on the street through foreclosure. This time, homeowners are going another route: a short sale.”
  • Home Prices Edge Up But Outlook Darkens  (WSJ). “Home prices rose for the fourth-straight month in July, but at a slower pace than in previous months, and they could start falling again as the expiration of government home-buying incentives has put a brake on sales.”
  • Strategic Defaults Threaten All Housing Markets (TPC). “The problem of strategic defaults goes far beyond those homeowners who put nothing down when they bought their home.”
  • Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading! (ZRH) “…the Case Shiller is an econometric marvel, and is actually rather sophisticated. Despite this, it is also a tad bit unrealistic, particularly where this particular housing crash comes into play.”

Vegas is Jacked

  • Las Vegas suffering like never before (StarTrib). “Gambling revenues have hit the skids, accompanied by the collapse of the construction industry. Confidence that the return of tourists will revive the city and the state is absent.”

  • Lenders gaining speed in going after commercial foreclosures (LVS). “Lenders are picking up the pace of foreclosing on commercial properties in Las Vegas in a move that could further reset prices and prompt rents to fall even further, analysts said.”

Brother Can You Spare a Dime?

  • These Families Shop When Aid Arrives (WSJ). “At midnight on the first of the month, a scene unfolds at many Wal-Mart Stores Inc. sites that underscores the deep financial strains that many low-income American consumers still face.”
  • Almost 3,000 Millionaires Claim Jobless Benefits, IRS Data Show (BB). “After the economy slipped into recession in 2008, millions of Americans received unemployment benefits to make ends meet — including almost 3,000 millionaires.”

Africa Go!

  • Wal-Mart Bids for Massmart to Expand Into Africa (NYT). “Wal-Mart Stores announced plans on Monday to enter the African market, with a preliminary offer to buy the Johannesburg-based retailer Massmart Holdings for about $4.2 billion.”
  • Wal-Mart’s Africa Ambitions May Spark S. African Takeover Spree (BB). “In the race for Africa, companies from the U.S., China, Japan and the U.K. are scrambling to buy the continent’s best assets, tapping into its growth potential and its 1 billion people in a world where returns from developed nations are faltering.”

Bummed Boomers, Busted Banks

  • Baby Boomers committing suicide at unprecedented rates (Register). “The suicide statistics on the Boomers are bizarre, as Westerners in the 40-59 age bracket (as the Boomers now are) hadn’t previously tended to kill themselves a lot.”
  • Banks Keep Failing, No End in Sight (WSJ). “The largest number of bank failures in nearly 20 years has eliminated jobs, accelerated a drought in lending and left the industry’s survivors with more power to squeeze customers.”
  • Banks and Insurers Face the Killing Yields (WSJ). “The financial-services industry is built for speed. But while superlow interest rates are meant to be high-octane fuel for the economy, they are gumming up financial engines.”

When Pundits Smoke Plastic

  • Jeffrey Hirsch: Dow ‘Super Boom’ to Send Gauge to 38,820 (BB). “The Dow Jones Industrial Average will surge to 38,820 in an eight-year “super boom” beginning in 2017, according to Jeffrey A. Hirsch, editor in chief of the “Stock Trader’s Almanac.”
  • Ken Fisher Dubs Pimco’s New Normal Concept ‘Idiotic’ (BB). ““We are chimpanzees with no memory,” Fisher said at the Forbes Global CEO Conference in Sydney. “The next 10 years are going to be just as good as the 1990s.”

Cruisin’ For a Bruisin’

  • China Imposes a Steep Tariff on U.S. Poultry (NYT). “Days after it flexed its economic muscle in a diplomatic dispute with Japan, China  continued to display a more assertive international economic policy on Sunday as it imposed steep tariffs on poultry imports from the United States.”
  • US and China battle over the trade policy that dare not speak its name (Telegraph). “At the moment, the dispute is conducted by what Churchill called jaw-jaw. But before too long, if nothing is done, it will degenerate into trade war-war.”
  • China’s aggressive posture stuns Japan, experts (USAT). “A two-week standoff between Japan and China over a boat collision shows the communist state is adopting a more aggressive stance against rivals and U.S. allies in Asia and there may be more tension to come, experts say.”
  • China‘s quiet power grab (WaPo). “Over the past decade, China has kept silent, lain low and behaved more like a multinational company than a global superpower — and garnered enormous political influence as a result.”
  • Geithner Plays Down Risk of Trade Battle With China Over Yuan (BB). ““We’re not going to have a trade war,” Geithner said in remarks to a Washington conference yesterday hosted by The Atlantic magazine and the Aspen Institute.”

This Means War

  • Brazil in ‘currency war’ alert (FT). “An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness.”
  • Currency Wars: A Fight to Be Weaker (WSJ). “Tensions are growing in the global currency markets as political rhetoric heats up and countries battle to protect their exporters, raising concerns about potentially damaging trade wars.”
  • Martin Wolf: Currencies clash in new age of beggar-my-neighbour (FT). “I would like to be optimistic. But I am not: a world of beggar-my-neighbour policy is most unlikely to end well.”
  • U.S. Dollar Is ‘One Step Nearer’ to Crisis, Yu Says (BB). “The U.S. dollar is “one step nearer” to a crisis as debt levels in the world’s largest economy increase, said Yu Yongding, a former adviser to China’s central bank.”
  • China Says U.S. Yuan Legislation Will Hurt World Economic Growth (BB). “China said a measure passed by the U.S. House of Representatives yesterday aimed at pushing up the value of the yuan will hurt the global economy if it becomes law.”

Hot Dragon

  • Chinese Manufacturing Growth Accelerates, Survey Shows (BB). “China’s manufacturing expanded at the fastest pace in four months in September, adding to signs that economic growth is stabilizing even as the government curbs energy use and tries to cool the property market.”
  • China Takes Further Measures to Cool Real Estate Boom (BB). “China will speed up the introduction of a trial property tax in some cities and then expand the levy to the whole country to curb rising real estate prices, the government said, without giving a timetable.”
  • China to Spur Domestic Demand to Stabilize Economy, Wen Says (WSJ). “he global financial crisis has shown the need for China to focus on “structural problems” in its economy including taking steps to encourage more domestic demand, Premier Wen Jiabao said.”

Death of the Euro

  • Joseph Stiglitz: the euro may not survive (Telegraph). “Joseph Stiglitz, one of the world’s leading economists, has warned that the future of the euro is “looking bleak” and the fragile European economic recovery could be irreparably damaged by a “wave of austerity” sweeping the continent.”
  • Merkel Straddles Fences After Euro’s Near-Death Experience (BB). “For a fleeting moment last spring, it was possible to believe that Europe’s economic crisis had turned Angela Merkel into a true believer in the European cause.”
  • Currency Union Teetering, ‘Mr. Euro’ Is Forced to Act (WSJ). “It was perhaps the worst of many stomach-churning moments that spring for Mr. Trichet, an urbane 67-year-old Frenchman known as “Mr. Euro” for devoting much of his 40-year career to building the common currency.”

Austerity Backlash

  • Austerity Whips Up Anger, Protests Mount in Europe (CommonDreams). “Painful cuts by overspending EU countries come head to a head with mounting social anger on Wednesday when labour leaders call angry workers onto streets right across the continent.”
  • Europe‘s austerity anger grows (Telegraph). “More than 100,000 marchers converged on Brussels from across the EU to protest austerity measures on Wednesday, while Spanish unions took the extraordinary step of breaking ranks with Spain’s socialist government by launching a general strike.”

March of the PIIGS

  • Investors Were Heard Making Chimp Sounds And Yelling “Short Ireland” On Disastrous Conference Call With Finance Minister (BizInsider). “Some traders began making what one banker on the call described as “chimp sounds”, while another cried out “dive, dive”. A third man said “short Ireland” before adding “why not short Citi too?””
  • Irish Crisis Shakes Europe (WSJ). “Ireland scrambled to contain its financial crisis—and convince investors it won’t need an emergency bailout by its European peers—by promising to pump billions more into its hardest-hit lenders.”
  • Hedge funds hold Ireland to ransom over Anglo Irish Bank bail-out (Telegraph). “Hedge funds are holding the Irish government to ransom over its €30bn (£26bn) bail-out of one of the country’s biggest lenders, Anglo Irish Bank.”
  • Moody’s Joins Others in Downgrading Spanish Debt (NYT). “Moody’s Investors Service  on Thursday joined the other two major ratings agencies in depriving the Spanish government of its prized triple-A credit rating, citing a weak growth outlook and deteriorating public finances.”
  • China‘s Wen offers to buy Greek debt (Reuters). “China offered on Saturday to buy Greek government bonds when Athens resumes issuing, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout.”

Anarchy in the U.K.

  • House prices fall across all of Britain (Telegraph). “House prices fell across all regions of the UK for the first time since April 2009, a new survey has warned.”
  • U.K. mulls breaking up big banks (marketplace). “A government probe in Britain is looking at whether some of the country’s biggest banks should be broken up.”
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Scapegoating the Flash Crash

  • Flash Crash Is Pinned on One Trade (WSJ). “Regulators investigating the causes of the May 6 “flash crash” singled out a Midwestern mutual-fund company’s computer-driven trade as the catalyst that sent a shaky market into an unprecedented tailspin.”
  • How a Trading Algorithm Went Awry (WSJ). “The eagerly awaited report on the causes of the May 6 “flash crash” portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral.”
  • Caveat Investor: One-Day Options (WSJ). “Options designed to expire in a single day could be coming to U.S. markets next year. Strategists are already warning that investors’ money could be here today and gone tomorrow.”

Oil Wakes Up

  • Arctic Grab Is Mad Fight for Last Oil Frontier (BB). “If we didn’t already have the phrase Cold War, we’d have to invent it to describe the power struggle taking place for Arctic Ocean resources.”
  • Crude Oil Rises on Economic Data, Caps Best Week Since February (BB). “Oil rose, capping its biggest weekly gain since February, after economic data from the U.S. and China bolstered optimism that demand is growing in the world’s two largest energy-consuming countries.”
  • Stockpile of Dollars Drives China’s Energy Strategy (WSJ). “Investing in energy allows China to recycle its enormous stockpile of dollars and acquire more tangible assets. That means that energy assets around the world are fair game for Chinese dollars, whether the oil is bound for Beijing or Boston.”

Grain Drain

  • Soybeans Plunge as Weather Aids U.S. Harvest, Brazil Planting (BB). “Soybeans fell the most in more than 14 months as dry weather allows U.S. farmers to accelerate the pace of the harvest, while rain in Brazil and Argentina improves crop conditions.”
  • Food Prices Rise as Asia Projects Stall (WSJ). “Failure to boost farm investment in poor countries after a global food crisis in 2007 and 2008 could prolong a recent jump in food prices, contributing to inflation in the developing world.”
  • Fears of Chinese land grab as Beijing’s billions buy up resources (Independent). “China is pouring another $7bn (£4.4bn) into Brazil’s oil industry, reigniting fears of a global “land grab” of natural resources.”

Calling 007

  • Worm hits computers of staff at Iran nuclear plant (AP). “A complex computer worm capable of seizing control of industrial plants has affected the personal computers of staff working at Iran’s first nuclear power station weeks before the facility is to go online…”
  • Accounts Raided in Global Bank Hack (WSJ). “More than 100 people have been arrested or charged in the U.S. and the U.K. as part of an alleged global cybercrime ring using computer viruses to steal bank-account information and loot money from unsuspecting victims.”
  • Concern That Terror Teams Have Selected Targets, Ready to Strike (ABC). “Strong concerns that terrorist teams in Europe have selected their targets, completed their surveillance, eluded capture and are now ready to strike at airports and tourist attractions have prompted the State Department to ready a highly unusual travel advisory for Europe, multiple law enforcement and intelligence sources tell ABC News.”
  • CIA Escalates in Pakistan (WSJ). “The U.S. military is secretly diverting aerial drones and weaponry from the Afghan battlefront to significantly expand the CIA’s campaign against militants in their Pakistani havens.”
  • Kim Jong-un appointed as general by North Korea (guardian). “North Korea [recently] heralded a “crucial” announcement as its biggest political gathering for three decades began with the clearest signal yet that Kim Jong-il has picked his youngest son as his heir.”

Rich Hedgies

  • Hedge fund stars shine above the crowd (FT). “…the top 10 most successful managers have between them generated almost $154bn since they were founded, with even the number 10 – Eddie Lampert’s ESL – making more than British Airways earned over the same period.”
  • David Tepper: Ready to Be Rich (NYMag). “David Tepper—whose hedge fund made a killing during the crash by betting the government wouldn’t let the big banks fail—is coming out of the billionaire closet.”
  • Hedge fund chief David Harding earns £54m from predicting swings in commodity prices (Telegraph). “David Harding, a Cambridge science graduate who runs a hedge fund that predicts swings in commodity prices, has emerged as one of the City’s highest earners, with a pay packet of more than £54m last year.”
  • D.E. Shaw cuts about 10% of staff (MW). “The D.E. Shaw Group cut roughly 10% of staff on Tuesday as the hedge-fund firm adjusts to a drop in the amount of assets it oversees.”

Like, Far Out, Man

  • US scientists find potentially habitable planet near Earth (Yahoo). “US astronomers said Wednesday they have discovered an Earth-sized planet that they think might be habitable, orbiting a nearby star, and believe there could be many more planets like it in space.”
  • Prop. 19 About Much More Than Getting High (LAT). “Pot growers have opposed it. Some police have favored it. Polls show the public is deeply divided. Only politicians have lined up as expected: Nearly all major party candidates oppose the measure.”
  • Squirrels masturbate to avoid STDs (ZME). “The Cape ground squirrel takes sex very seriously.”

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