Saturday, May 31, 2008

ICE and NYMEX increase Oil margins

Two of the world's largest energy exchanges have forced traders to deposit significantly more money when investing to curb volatility in energy markets and drive out speculators.

The exchanges and related clearing houses have found themselves at the centre of the growing storm over claims that speculators have been behind the recent rise in oil prices to record levels.

The New York Mercantile Exchange (Nymex) and ICE Futures Europe in London, the former International Petroleum Exchange, have now tripled "margin calls" for some contracts. They hope the increased margin calls will reduce volatility and force out some of the more speculative players...

The move, introduced by ICE earlier in the week and followed by Nymex yesterday, has coincided with a fall in the price of oil by around $7 a barrel from last week's record high of more than $135. In London yesterday, a barrel of Brent crude for July delivery was up 88 cents at $127.77 in late trading. In New York, a barrel of sweet crude was up $1.34 at $127.96.

Rob Laughlin, senior energy broker for MF Global in London, said that, as a result of the increases, many "smaller speculators have finally taken their money and run". However, Walter Lukken, acting chairman of the US Commodities Futures Trading Commission, yesterday dismissed the idea that raising margin calls would help long- term, saying it would just force speculators to go elsewhere.

The bell rang on the top for oil when Morgan Stanley touted the $150 barrel for Brent crude. You had that news here under "Flip Flops."

The rally in the refiners Friday, despite the downgrades by Lehman and Citigroup's attribution that the refiners would be lower by the end of the year, marked the low in the refiner stocks also.

Tesoro (TSO 24.85) was the stock up the most on Friday in the entire S&P 500. Ironic that it moved after Lehman downgraded it?

I gave you the news before it happened, and while it happened. The Street has a different agenda.

Look for continual pressure on oil prices next week. Remember last week? Whatever happened to the oil problems in Nigeria? Or the 8.8 million barrel drawdown in gasoline?

CNBC was breathlessly reporting this as "news." It wasn't news. It was just hype.

Oil is going down, and stocks Monday should go up.

It's mutual fund Monday at the beginning of a new month!

Faith Popcorn to work on Wall Street?

She could get a job there. She thinks we are in a depression. Just take a look at her latest column on the movie "Sex & the City."

"Sex & the City: The Movie’ comes at just the right time for a nation exhausted politically, emotionally and financially - and signals a growing desire to escape that idea-strapped marketers can use to their advantage.

‘Sex & the City: The Movie’ joins ‘My Man Godfrey’, ‘The Women’, and other Depression era classics, by providing weary audiences with high- style fantasy relief.

Why think about recession, global warming or Iraq when you can spend some time with Carrie and friends?

Look for Americans to embrace (and buy) pre 9/11 nostalgia like ‘Sex & the City: The Movie’ as a way of weathering these tough times.

We're experiencing a trend rollercoaster. Consumers ride to the top of Stress and Fear Mountain with too much to do and too much to worry about.

Then they find release in the Tunnel of Indulgence, from fast food to fast cars (nobody has stopped coming out with new $50,000 BMW's yet).

Whether by design or coincidence, 'Sex & the City: The Movie’ hits that need for release exactly right.

Smart companies will use their example and stay ahead of the switchbacks - know in advance when consumers want to be 'good' and when they need to be 'bad.",_The_Movie%E2%80%99._A_Depression_era_classic

Take a look at Garmin

The company is debt free.

The company has over a billion dollars in cash.

It's a leader in the Automotive business
It's a leader in the Aviation business.

It's a leader in the Marine business.

It's a leader in the Outdoor Fitness business.

It's return on Invested capital is 39%
It sells at 11x earnings, and less than $11 billion market cap.

And GRMN at 48, is down from 120.

Two weeks ago an analyst at Needham downgraded the stock, since it ralled from 40 to 48. He was concerned about consumer headwinds, and "lack of visibility." Deutsche Bank says their "channel checks" indicate excess inventory.

The stock is down from 120 but now the chart shows decent accumulation. None of this analyst poppycock is new news, as there is no value added with their research. All of this is known. The short interest is over 20 million shares, up from 16.5 million just two weeks ago. So if the stock is moving up while the shorts are laying out another 3.5 million shares, and the analysts are staying negative, what would happen to the stock if it did get some good news?

With apologies to "The Who" and the traders who have been just going in and out of this stock, I think Garmin has a squeeze box, and soon the shorts won't be able to sleep at night!

Friday, May 30, 2008

Beat the Bookies!

Last night, the Lakers were beating the Spurs 97-92, and with a second left, Laker guard Sasha Vujacic drains a three, giving the Lakers the victory by 8, covering the 7.5 line.

The story was picked up by CNBC.

The Los Angeles Lakers were up 97-92 as the clock was winding down in last night’s Game 5 of the Western Conference Finals.

The Lakers were guaranteed a victory and thus a spot in their first finals in four years.

But as the final seconds ticked off, Lakers forward Vladimir Radmanovic passed the ball to back-up guard Sasha Vujacic.

Instead of dribbling out, Vujacic squared up and threw up a shot from outside the arc towards the hoop.

The shot went in as time expired. The Lakers had prevailed by eight points, instead of five.

I don’t bet, but I cover the industry. So I started to look into this as soon as I got a note at 2:31 am from reader Erik Schuman.

While Vujacic’s taking of the shot was a joke in the Lakers locker room, it turns out it was hardly a laughing matter for people that had bet on the Spurs to cover the spread. The line opened with the Lakers being eight-point favorites, but quickly moved to 7.5 points, meaning that Vujacic’s heave either cost people money (who bet on the Spurs) or turned their winning bet into a push.

So I called R.J. Bell of who is really good at number crunching, to ask him how much Vujacic cost those that took the Spurs. Bell said that, from looking at betting data he had access to, that 66 percent of people took the Spurs and the 7.5 points or 8 points.

Bell estimates that the game did about $3 million in bets in Las Vegas, but he estimates that worldwide, the game did about $300 million in action. Bell said that, when considering the line move, that shot swung at least $100 million in bets.

Laker fans cared. Listen to how much they cheered when he drained it!

And that shot is like the market. The bears are trying to make a stand, talking about a housing depression and financial destruction of homeowners and banks balance sheets. They warn us that higher gas prices coupled with all time low consumer confidence will sap the consumer.

But the world doesn't care. This news isn't new! So why is short interest at an all time record? It'll be at all time highs when we hit new all time highs in stocks! They'll never cover! They believe their own baloney after drinking their own Kool-Aid!

They world economy is now calling the shots, and the rules that the bears play by, aren't followed in this market.

Last night, Spurs players felt they had their bet sewed up, just like those that shorted the refiners on Lehman's call Thursday, and Citigroup's today.

But the stocks went up, just like the Spurs bet went down!

It's a new game, and the bears haven't learned the new rules!

Piper Jaffray-Cover your solar shorts!

Piper Jaffray notes according to German news agency DPA, and supported by contacts close to the Social Democrat Party, the German Government reached final agreement on feed-in tariff reduction for Solar and Wind at 02.00 AM this morning. They understand that the agreement will be incorporated in the E.E.G bill on Monday by which time the feed-in tariff reduction will be made public. The firm says they also understand that the bill will be voted through parliament as early as Friday next week rather than end of June. They welcome this initiative. The firm says the feed-in tariff reduction is said to be 8% for 2009 (previous 9.1%), 8% for 2010 (previous 7%) and 9% for 2011 and onwards (previous 8%). The firm concludes that further changes are highly unlikely and would recommend investors to buy the sector.

So they sell the solar plays the last few days, and now we buy 'em! Hah!

Planting your own garden

Close to half of oil prices are subsidized by governments around the world. That's about to change:

One by one, countries across Asia and the Middle East are being forced to abandon price controls on fuel and energy, bringing hundreds of millions of consumers face to face with the true market cost of oil. The effect has already begun to chip away at world demand and may ultimately trigger a slide in crude prices.

Egypt - the most populous Arab state - has raised petrol prices by 40pc, despite protests in Cairo. Sri Lanka lifted diesel and petrol prices by 25pc over the weekend. India may have to follow soon to prevent its trade and budget deficits climbing to dangerous levels. "The situation is alarming. We need to stem the rot," said India's energy secretary, MS Srinivasan.

Indonesia has raised petrol prices by 33pc in order to restore fiscal discipline (subsidies are 3pc of GDP). Taiwan has mooted a 20pc rise, and Malaysia is to peel back controls. While China has so far resisted calls for price freedom, the policy is becoming unsustainable. Analysts predict a change in tack after the finish of the Beijing Olympics at the end of August.

The drip-drip effect of grim data from the United States, Britain and parts of Europe has sapped confidence, causing many investors to question the whole assumption of a rapid "V" recovery powered by low interest rates in the US. The number of miles driven by Americans fell in March at the steepest rate ever recorded. Oil use in the OECD club of rich states has been falling for more than two years.

Stephen Jen, currency chief at Morgan Stanley, says half the world's population now enjoys fuel subsidies of one sort or another. Petrol costs 5 cents a litre in Venezuela, 12c in Saudi Arabia, 64c in China, $1 in the US, and $2.16 (£1.10) in Britain. It is heavily subsidised in Mexico, Iran, central Asia and the Gulf states...

The result has been to encourage promiscuous use of fuel. It has masked the underlying rate of inflation in emerging markets, and flattered the economic growth rate.

Mr Jen says the game is largely over. "The subsidies will need to be rolled back, especially for governments with fragile fiscal positions. They face a stagflationary shock," he said.

Lehman Brothers estimates that supply will average 86.2m bpd in the second quarter, while demand slips to 85.6m. The surplus will widen to 1m bpd later in the year as new oil comes on stream from Brazil, Azerbaijan, Kazakhstan and the Sudan. The US Energy Information Agency expects US output to rise by 400,000 bpd by the winter..

For now, traders are keeping a careful eye on politicians in Europe and the US as they call for curbs on the derivatives market for oil futures. The Hunt brothers in Texas were ruined attempting to corner the silver market in 1980 when the COMEX exchange suddenly changed margin requirements, and then suspended trading altogether. The pair failed to heed the warning signs.

Speculators are missing the signs of the top in oil. It's everywhere. If the CFTC curbs the derivative market, it's lights out for the huge profits on the commodity swaps, that allows institutions to bypass the commodity position limits.

If these institutions can't bypass the position limits, they can't buy enough of the commodity to make a difference in their huge funds.

And then they can't pass off their commodity hoarding on to the rest of the world as higher commodity prices caused by India, China and the rest of the world.

Speculators bought homes with 1% down, attempting to game housing to profit from the "housing shortage." We all know how that ended.

Has anyone every planted a lettuce garden, or grown some fresh herbs for cooking? It takes all of three weeks, and the produce is just handled by you.

Sarkozy of France wants to end the 35 hour work week, while the local governments here in the States want to have four day work weeks to curb oil consumption.

People could spend their Fridays growing their garden. And then you would just handle the manure in your backyard, and not listen when it is spread by Wall Street!

Bank reserves

"However, she said one worrying trend was the declining “coverage ratio”, which compares bank reserves with the level of loans that are 90 days past due. This ratio fell for the eighth consecutive quarter, to 89 cents in reserves for every $1 of noncurrent loans, the lowest level since the first quarter of 1993.

“This is the kind of thing that gives regulators heartburn,” said Ms Bair. “We also want them to beef up their capital cushions beyond regulatory minimums given uncertainty about the housing markets and the economy . . . It’s only prudent to be building up capital at a time like this.”

In a sign that some US banks may have underestimated the cost of the housing slump, KeyCorp this week doubled its forecast for loan losses – its second revision in as many months – sending its share price tumbling by more than 10 per cent. During the property boom, KeyCorp expanded in fast-growing regions such as southern California and Florida, where problem loans are now growing."

Oil market shenanigans again

The CFTC has expanded an investigation, disclosed previously by The Wall Street Journal, into alleged short-term manipulation of crude-oil prices via a widely used price-reporting system run by Platts, a unit of McGraw-Hill Cos. One suspicion is that energy companies and traders have at times issued a flood of orders during a time window used by Platts to determine its reported prices for physical oil transactions, then used the potentially distorted prices to make profits in other markets. Platts has said its system has safeguards to protect against manipulation. Subpoenas on the matter have gone out in several stages, people familiar with the cases say.

Boy it wouldn't be the first time that someone put something over McGraw-Hill would it? Didn't S&P totally miss the boat on credit ratings?

But a "majority" of oil executives still see prices in the $100 level. Goldman wants prices higher so these "executives" get it, along with the consumer, and that they should deal with higher prices. But the consumer is changing his driving and energy habits because he "gets it."

The question is-If "they" get it-Isn't that the start of the curative, corrective process?

A majority of oil and gas executives surveyed by the KPMG consulting firm expect oil prices to fall below $100/barrel by the end of this year because fundamentals do not support prices at current levels, according to Bill Kimble, executive director of KPMG's Global Energy Initiative.

"We don't ask respondents for insights on their opinions but I can offer mine," said Kimble, elaborating on the results released May 9 from this year's KPMG survey of 372 financial executives from oil and gas companies.

Of that group, 55% predicted oil prices below $100 by the end of the year while 21% projected prices in the range of $101 to $110.

KPMG said 44% of the group expect an oil price peak by the end of this year while 39% predicted 2010.

Pension Funds Commodity Investments

A giant money-management firm, Allianz SE's Pacific Investment Management Co., or Pimco, which manages about $15 billion in commodity index funds, in recent days has circulated a position paper arguing that institutions and other index investors aren't a meaningful contributor to soaring commodity prices...

Of course they would argue that. The fund went from $200 million to $15 billion in assets. If you want the story on PIMCO and commodities, you can get it here:

Yet as global demand for commodities intensified, spurred by rapid growth in China and India, more pension funds began to view commodities not just as a way to diversify but as a source of returns. Since the end of 2005, index-linked commodity investment has doubled to $260 billion, according to Citigroup. During the first quarter, about $40 billion was added to the market. The California Public Employees' Retirement System, or Calpers, recently doubled its commodity positions to $1.1 billion...

A Goldman Sachs energy analyst argued this month that investors whom critics label "speculators" are indeed helping to push up commodity prices -- but that isn't necessarily a bad thing. "The so-called commodity speculator should be applauded for speeding up the message to both oil companies and consumers that energy markets are tight," the analyst's report says.

So everyone should now pay more for commodities so Goldman can sell PIMCO their commodity swaps? That's like dating a stripper when your marriage is rocky!

Thursday, May 29, 2008

Citigroup cuts refiners

This morning, we had Lehman saying bad things about the refiners, and this evening, Citigroup echoed their sentiments and cut the ratings on the stocks also.

The stocks should be bought on the downgrades sometime tomorrow morning.

Tesoro and Lehman brothers

Today Lehman Brothers (yes the Investment Bank that disguises the true value of assets on their balance sheet as Level 3 "assets") had this to say about the refiners:

Lehman believes the latest demand estimate revision by the DOE combined with FHA's monthly traffic report provide further evidence to support our medium term bearish view on the US refining market. Firm thinks the refiner shares will not bottom at the earliest by the end of this year or 1H09, and will exit the year below recent lows. (

Let's take a look at this for just a minute. Oil prices have topped out. Lehman must disagree. Maybe Lehman thinks they are going to $200, or maybe they think like Dick Berner of Morgan Stanley that they are going to $150. Between the two firms they've managed to throw over $30 billion dollars away, so their prognostications are at best a very weak and feeble guess.

So I disagree with their analysis. Tesoro (TSO 23. 26) was down .88 cents on almost 8 million shares today as a casualty of Lehman's shoddy analysis. But you must expect this at the bottom. Western refining (WNR 12.24) up .79 today, hit it's low on May 13 at just under 8, on 8 million shares.

The catalyst? Shoddy analysis by Caris & Company who downgraded the stock to a sell with a $2.75 target! So Lehman, attempts to take the high road, (excuse my sarcasm) and speaks in general negatives about the entire refining group.

So TSO is just a point off it's 52 week low, with declining cost of oil, and crack spreads that have widened $13 in just the past three weeks! Time to sell? Ridiculous. It is time to buy.

Now I'm picking on Lehman for a reason, because they have gotten a lot of press as they just put out their latest 10Q, and it is raising eyebrows in the shortselling community. It's a mess.

I just wanted to compare their 10Q with Tesoro's. TSO has a current market cap of about $3.2 billion dollars. But look at page 35 of TSO's 10Q:

We maintain inventories of crude oil, intermediate products and refined products, the values of which are subject to fluctuations in market prices. These inventories totaled 30 million barrels and 29 million barrels at March 31, 2008 and December 31, 2007, respectively. The average cost of these inventories at March 31, 2008 was approximately $42 per barrel on a LIFO basis, compared to market prices of approximately $103 per barrel. If market prices decline to a level below the average cost of these inventories, we would be required to write down the carrying value of our inventory.

So TSO has 30 million barrels of oil at $42 a share that is selling at $126 a share. I know this is just simple math, and not a complicated algorithm that Investment Banks prefer, but the last I checked 126-42=84. So TSO is sitting on an $84 dollar profit on 30 million barrels of oil. $84 X 30 million barrels is a $2.5 billion unrealized gain.

But then again, LEH uses their 10Q to hide the facts. Maybe their analysts just didn't read Tesoro's 10Q

Or maybe they just needed the stock down for an end of month mark for short hedge fund clients!

Obama losing "won" states

Time for the "Hillary" rally tomorrow, with a little help from DELL which is trading up a couple after reporting good numbers.

According to the NY Post, Obama gets beat by McCain:

"In the 28 states won by Obama, he has an average 45 percent of voters compared to McCain's 46 percent, according to the Gallup survey.

These states include Obama's home turf of Illinois, along with Virginia, South Carolina, Georgia and the battleground states of Colorado, Oregon, Minnesota, Iowa, Wisconsin and Missouri.

In a McCain-Clinton matchup in those same states, McCain has 47 percent to Clinton's 45 percent.

By comparison, Clinton clobbers McCain, 50 percent to 43 percent, in the 20 states where the New York senator carried primaries and caucuses against Obama.

Clinton strongholds included solidly Democratic New York and California, as well as battleground states Pennsylvania, Ohio, Nevada, New Hampshire, New Mexico and West Virginia.

McCain averages 46 percent to Obama's 43 percent in the Clinton states.

The Gallup analysis bolsters Clinton's contention she'd have a better chance than Obama in defeating McCain.

"Clinton appears to have the stronger chance of capitalizing on her primary strengths in the general election," said Gallup pollster Lydia Saad.

"At this stage in the race, there is some support for her argument that . . . she would be stronger than Obama in the general election."

Obama also has strength in some "purple" states that often determine presidential elections.

Obama leads McCain, 49 to 41, in a handful of swing states he carried against Clinton - Colorado, Oregon, Minnesota, Iowa, Wisconsin and Missouri. McCain leads Clinton by one point in these states.

But Clinton leads McCain, 49 to 43, in swing states she carried against Obama: Nevada, Pennsylvania, Ohio, New Hampshire, New Mexico, Arkansas and disputed Florida and Michigan.
Even when excluding Michigan and Florida, Clinton leads McCain, 51 to 41, in her favored battlegrounds.

"Clinton's main advantage is that her states - including Florida and Michigan - represent nearly twice as many Electoral College votes in November," the Gallup analysis said."

Obama will probably go and call Oprah!

Time to buy NYSE Euronext

NYX (64) is down 12 points from Cramer's Mad Money pump on May 6th, where it traded up to 74 on May 7th. The stock has promptly dropped 10 points to 64.

Now you can buy it.

Oil's missing 800,000 barrels

Monday I said there was a discrepancy of 800,000 barrels between the 31.8 million barrels of oil that OPEC says it produces, and the 31 million barrels that are actually shipped.

In today's WSJ it looks like we found the missing 800,000 barrels .

For all the attention paid to China's increasing energy thirst, rising energy demand in the Middle East may pose the greater challenge. Last year, the region's six largest petroleum exporters -- Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar -- curbed their output by 544,000 barrels a day. At the same time, their domestic demand increased by 318,000 barrels a day, leading to a loss in net exports of 862,000 barrels a day, according to the U.S. Energy Information Administration.

Doug Kass on the road to Damascus

Doug Kass of Seabreeze partners, thinks he has seen the light on the financials. After being bearish for the last few years, he is now bullish on Citigroup. He thinks this number, at 22, can go to 100 in the next few years. If it went to 100, it would be a Saul to Paul conversion!

Talk about talking your book!

Here's his reasons for his bullishness:

"After shunning bank stocks (and being short) for a number of years, I am making a large (and growing) commitment on the long side for some of the following reasons:

The curative process of substituting lost (or written off) capital for fresh capital continues apace and is now almost complete.

The industry's historic financial (balance sheet) opaqueness is being replaced by renewed disclosure.

The core banking franchises of deposit gathering and loan originating, which are producing solid growth in net interest income, remain intact.

The banking industry's competitive position has been enhanced as the non-regulated shadow banking industry labors under high funding costs, funding availability, capital constraints and poorly diversified books of business.

The banking industry's ne'er-do-well executives have been replaced by competent, pragmatic and more realistic management teams.

Despite all these emerging positive developments and with most negatives well known by now, sentiment toward financials remains at an historic nadir -- the sector represents only 15% of the S&P 500, down from its peak of 23% in 2007 -- as the stock prices have continued their almost never-ending descent.

And in a market in which so many investors/traders seem to worship at the altar of price momentum, that decline has no doubt been accelerated by those momentum-based market participants against a backdrop of almost total unanimity of opinion that the financials are untouchable from the long side.

While the negatives of the credit cycle, the dilutive effect of the industry's refinancings and other factors cannot be dismissed, quite frankly, I can make the case that we are now at an unprecedented point of time to get long financials."

The ESLR battlefied

Evergreen Solar (ESLR 11.26) was downgraded to sell by Merrill Lynch today, and was downgraded to sell last week by Citigroup.

The CEO was on Mad Money last Friday, and yesterday he touted profitability by Q1 of 2009, with 850 mw of production by 2012 versus the current 15.

A week ago, ESLR announced two purchase contracts for $1 billion of solar panels.

Why does Wall Street hate this stock?

Maybe because there's 20 million shares short and buyers actually want their stock and the back offices are having trouble delivering it?

I'd buy the stock if it pulls back on the sell downgrade. This sell downgrade is as good as Dick Berner's call at Morgan Stanley that oil is going to $150.

The call will be good for only a day.

A bottom in Sands?

Las Vegas Sands (LVS 66.80) opened lower yesterday and closed higher, giving a nice candle on the chart for technicians. The stock was pressured because of a court case win by Richard Suen, who helped LVS get a casino license in Macau. The verdict was $43 million; it will be appealed, and he'll probably get $15 million out of court to go away. Meanwhile the stock took a $3 billion hit during the trial.

Last Friday, Goldman Sachs put LVS on it's conviction buy list, and buyers who bought on Goldman's advice got the opening print of 69.99.

Today, LVS offered a peak at its new Cirque du Soleil show opening at the Venetian Macau.

LVS is trying to turn the Macau day trippers into overnighters, and the two day players into four days. This won't quite do that, but at these prices, look for some of the timid analysts to join Goldman's bullish call. They can tout the new ferry service of LVS into Macau, and the new shows; and by doing that they'll accidentally recommend buying a stock at its low instead of its high.

Wednesday, May 28, 2008

Dry Ships bounces 8 points

I wrote about this stock last week.

Today, in Investor's Business Daily there was a nice article titled:

Demand For Deep-Water Drilling Rigs In Faraway Places Stays Hot

Offshore drilling has become the last frontier in the exploration for new oil and natural gas reserves.

The easy-to-get oil on every continent except Antarctica has been found, and geologists believe that there are few "elephant" oil fields left to be discovered.

One of the hottest markets today is Brazil, which recently discovered two hydrocarbon-rich basins off its shores. The country announced it has leased 80% of the world's deep-sea offshore oil rigs.

Another new market is emerging halfway across the world off the coast of India. The discovery of a promising natural gas block, the Krishna Godvari basin, could make the country more oil self-reliant.

Brazil and India represent the hidden potential that lies beneath the ocean's surface, but no oil company can obtain it without a drilling rig.

The article didn't mention DRYS, but they have deep sea rigs. When the street figures this out the stock will be pushing new highs.

A competitor of DRYS, Genco Shipping and Trading (GNK 70.49) which closed on a sale of 3.7 million shares at 75.47 after the close today, panned DRYS deap sea acquisition in December.

"Peter C. Georgiopoulos, chairman of dry bulk shipper Genco Shipping & Trading wasn't impressed by the deal, saying that investors entrust their money with the management of a company to do what the management originally set out to do. "For us to go buy oil rigs is a completely different business and that's not what investors signed on for," he said. "What I find shocking is that you see a lot of our competitors doing things that are not part of their basic business with no good corporate governance and sometimes without management."

Looks like Peter was wrong, as the acquisition by DRYS is looking exceedingly shrewd now. But would you actually expect a competitor to really tell the truth about it's competition?

The stock should get another bump tomorrow, as an analyst had good things to say about DRYS after the close, coupled with the IBD news on deep-water-drilling.

Flip Flops

Are supposed to happen in politics. Look what President Bush had to say about Scott McClellan when he resigned as press secretary in 2006:

"One of these days, he [McClellan] and I are going to be rocking on chairs in Texas, talking about the good old days and his time as the press secretary. And I can assure you, I will feel the same way then that I feel now, that I can say to Scott, 'Job well done.'"

Now that Scott has published his memoirs that are critical to Bush, this administration says:

“Scott, we now know, is disgruntled about his experience at the White House”

Oil, which was at $135 a barrel last week, fell back to $126 a barrell this morning, only to rebound to $131 after Morgan Stanley's Dick Berner said Brent oil could see $150.

"It seems that these big banks are driving oil prices, where instead it used to be the other way around," said Alaron Trading senior market analyst Phil Flynn.

That's what happens at tops. Fundamentals get disconnected. Demand wanes but prices get propped by an outside catalyst, shaking out the bears and giving the bulls hope. Oil will fall back tomorrow. Just look at the action in the refiners as Western refining (WNR 11.45) closed up over a stick, and Tesoro (TSO 24.24) closed up 3%, with extremely heavy call options in the June 25 strike, indicating that it's time to start the rumour mill with the refiners, and that the cost of goods, oil prices, are heading down, and not up.

But back to Morgan Stanley and oil predictions. Dick Berner, today's oil bull, was famous for being the first investment bank predicting a recession which he did in December. His oil forecast today is $150??? I'll just go back to February 25th when he said that Brent crude would average $90! Here's what he said:

Higher US Inflation, Not Stagflation
February 25, 2008

By Richard Berner New York)

Our energy team and we now think that supply constraints are putting a higher floor under crude and refined product prices. If Brent averages $90/bbl this year, US retail gasoline prices (all grades) seem likely to average about $3.25 for the year, and in the spring driving season could hit $3.50.

So three months later, after oil has made it's biggest dollar gain, in the shortest amount of time in it's trading history, after it has moved up 50% in three months, he now tells us it's going to $150?

So he Flip Flops.

But he has company.

John Mack, the CEO of Morgan Stanley, who personally gave $70,000 to Republican candidates, also raised over $200,000 for Bush's 2004 election garnering the elite "Ranger" status. This year he endorsed Hillary.

So he Flip Flops, just like his economist.

All these flip flops and no one is backing a winner! Their flipping and flopping will just back you into a corner!

But when Morgan Stanley writes off $16.1 billion dollars the last few quarters, maybe you can be flip about flopping your calls!

Oil headlines

Qantas, which spends $2 billion a year on fuel, is going to mothball 5% of it's flights. Two weeks ago, American Air cut routes; today Jet Blue announces that they are delaying the delivery of new planes. Truck drivers are stopping traffic in Europe, and Prime Minister Brown is meeting with oil executives trying to find ways to stop the "crisis."

Today we have the Exxon shareholder meeting, and the trust fund Rockefellers will be protesting and clamoring for green initiatives for the world's largest oil company.

Indonesia says it is going to pull out of OPEC because OPEC's interests are different from theirs. When it's government subsidizes gas prices to the tune of $20 billion a year, and you are just a marginal producer, pulling out of OPEC is a nice symbolic gesture for it's citizens who are protesting higher fuel prices.

The stock market can't get scared by financial losses from banks, and it isn't spooked by housing anymore. The only bugaboo that spooks the market now is higher oil prices. So the oil bulls have to get hit, so the stock bulls can buy.

When Oil makes this many headlines, you know it's time for a pullback.

That's Wall Street's new script. And they will follow it.

Commodity Index Speculation

Tuesday, May 27, 2008

A crapshoot on oil cratering

Macroshares Oil Down (DCR 1.15) is an ETF that was designed to allow stock investors to play the downside in oil. However, the fund is closing on June 25, as oil has stayed above $111 for three days in a row. So the "ETF" terminates on June 25 with it's NAV being distributed along with a dividend of about 8 cents.

The NAV is determined by dividing the price of oil by 3, and subtracting it from 40. Thus the NAV will be zero if oil stays above $120. (40-120/3=0). If oil would drop to $110, it's NAV would be 3.33. (40-110/3=3.33). In effect, this a put option on oil for a month.

It's probably a play as a trade since oil looks to have made a short term top and is rolling over. Somehow, I don't think all the oil bulls in the pit will buy with all the government threats and calls of increased margin requirements amongst the talk of oil price gouging and hoarding.

They'll play where it isn't such a battleground.

Hussman sells Oil

"Meanwhile, despite the prospects for fresh economic weakness, oil prices surged to fresh record highs last week on speculative momentum and increasing fears of permanent global scarcity. When investors frantically compress extreme views about the indefinite future into current prices, the bubble ends in tears more often than not.

Speculative bubbles occur in financial and commodities markets because rising prices become the justification for rising prices, but there is almost always an accompanying “story” that encourages traders to transform long expectations about the future into an immediate and present urgency to buy. During the dot-com and technology bubbles of the late 1990's, for example, beliefs about rapid and long-term future growth rates for the internet were compressed into current prices, yet even though the late-stage price advances were nearly vertical (the Nasdaq gained about 50% in the last 16 weeks of the bubble), somehow investors expected continued rapid price gains from there over the long term. One would have thought that the steep losses paid by speculators would have bought at least a small lesson. But given successive bubbles in housing, private equity, Chinese stocks, and now commodities since then (all but the last which have also exacted heavy losses), it's clear that speculators have learned squat.

It's understandable that speculators are easily caught up in a tendency to compress all future demand from China, India and elsewhere into current prices, but it may be helpful to remember that these countries did not simply rise out of the sea in the past year. We need only look back a year to remember that oil prices plunged from about $80 in mid-2006 to about $50 early last year. Of course, wide swings in commodities are nothing new. If you stare at a few historical commodities charts, you'll notice that commodities are particularly subject to vertical spikes and spectacular failures. Price trends in commodities often have a greater tendency to persist once they reverse, compared with equities. You might recall a striking case of that a decade ago, when crude experienced a steep plunge to just $12 a barrel. What offered a warning of the periodic plunges in oil prices during the 1990's, and even just last year?


Normally, the oil futures curve is in “backwardation,” which means that futures prices for distant delivery dates trade below the current spot price for oil. Occasionally though, longer-term futures trade well above spot prices, even adjusted for interest rates and cost of carry. Often a contango emerges during a period when the spot price of crude is declining – usually with a resulting acceleration in the decline (as we observed several times during the 1990's). In recent days, we've observed a contango develop between spot crude and futures expiring in 2010 and beyond, while the spreads between near-term futures have narrowed sharply and may also move into contango soon. This is worth monitoring. It is a sign that traders have accepted the bullish case so thoroughly that they have become frantic to bid up oil for delivery well into the future.

Contango creates immediate incentives to buy oil for near delivery and store it in inventory. Producers don't particularly like markets in contango, because that tendency to build inventories reduces their ability to control prices through their own actions.

Just as stocks tend to be poor buys in overbought markets with extreme advisory bullishness, commodities tend to be poor buys when prices have already enjoyed a parabolic speculative rise and futures move into contango (with the caveat that the last few weeks of a speculative rise can be nearly vertical, so the ultimate highs are unpredictable). A few years ago, the tendency of oil prices to increase despite a mild contango made it appear that the relationship between contango and subsequent price weakness had vanished. But as the contango steepened in 2006 and early 2007, crude plunged from about $80 to nearly $50 a barrel. I emphasize – this was just a year ago. We probably shouldn't assume that the world has suddenly changed so dramatically that the demise of fossil fuels and the extinction of mankind as a species has to be priced in by Labor Day, and then continually revised so that prices form an ever steeper parabola.

While the notion of an exhaustible resource encourages traders to think in terms of exponentially rising prices, the economics of exhaustible resources are well-studied. The standard result is that if the level or growth rate of demand is generally known, the price of the commodity should tend to rise at approximately the rate of discount (i.e. about the risk-free interest rate plus a small “convenience yield”) over time. When there is uncertainty, compounded by adjustment costs, there will be a range of demand shocks that will not provoke a supply response, so prices may spike temporarily in response to those shocks, but those spikes will tend to revert back to the mean. Permanent shifts in demand will of course cause permanent shifts in price levels, but temporary shocks continue to induce mean-reverting spikes and declines.

Presently, we have low single-digit growth in world demand for oil which is expected to be sustained over the long-term. The main factors inducing short-term price fluctuations for oil are short-term fluctuations in demand and supply, amplified by speculation. It's clear that the oil markets are characterized by very low short-run demand elasticity (that is, price changes don't have much effect in suppressing demand), as well as low short-run supply elasticity (price changes don't immediately prompt increased supply, especially where there is not much production slack). That combination of inelasticities can certainly produce unusual price spikes over the short-term, particularly when speculators get a theme in their teeth.

But it should also be clear that oil demand responds cyclically to even moderate economic weakness, and that even moderate supply responses over the intermediate term can have a significant effect on prices. It is likely that we will observe some retrenchment in demand as the global economy softens. Notably, the Shanghai stock market has plunged by about 50% from last year's highs, the Hang Seng dropped about 30% before a recent bounce, and stock markets around the world are also clearly off their highs with the exception of Brazil and Russia (due to the high weightings of resource stocks in those markets). So the signal from the equity markets is that economic weakness is not likely to be isolated to the United States. Meanwhile, the EIA estimates that non-OPEC supply will increase by roughly 600 million barrels in the coming months.

I've noted before that once a speculative price run-up becomes nearly vertical, it becomes very difficult to form expectations about the final price peak, since very small changes in the date of that peak imply significant differences in the final price. Still, the combination of a developing contango in the oil futures curve, a weakening global economy, and the likelihood of a moderate but positive supply response in the months ahead makes it unlikely that oil prices will escape their cyclical tendencies beyond the summer months.

In the Strategic Growth Fund, we finally closed out our oil stock positions on the price strength of recent weeks. In the Strategic Total Return Fund, we reduced our exposure to precious metals shares to just about 2% of Fund assets a few weeks ago as well. Investors wishing to maintain commodity exposure can easily establish it elsewhere. My intent here is not to open an argument with speculators about the prospects for oil and other commodities, but to communicate that we no longer hold them, and that I believe the downside risks have increased significantly in those markets."

More CDO sewage

Battered investment banks trying to dump billions in soured mortgage securities are being challenged by struggling insurance companies that claim such efforts could cause them further pain.

It's a battle that pits large financial firms like UBS, Merrill Lynch and Citigroup against insurers MBIA, Ambac and others. These insurers, which the industry refers to as "monolines," provide specialty insurance used to protect investors from losses on various types of debt securities.

At issue is a type of protection that banks have obtained against defaults that is now preventing them from purging portions of their holdings of arcane mortgage securities known as collateralized debt obligations.

Under the terms of this protection, the banks need approval from the monolines in order to unwind these securities - and obtaining that OK is proving difficult in some cases.

For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades. As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately - a tall order for companies whose financial future is already murky.

Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.

The banks appear to recognize that the insurers are unlikely to be able to cough up the cash needed to pay off these losses.

That has led to discussions about whether to waive claims payments in exchange for cash or warrants in certain publicly traded monoline companies.

Monday, May 26, 2008

OPEC on Oil

OPEC statements:

"Since the beginning of the year, crude oil prices have surged, with WTI rising from around $99/b to set an all time high ofmore than $126/b in early May. The depreciation of the US dollar has played an important role in the rise in prices, which along with the increased flow of new speculative investments in crude oil futures, has helped push prices further out of line with the levels justified by fundamentals.

The upward price trend has come despite a number of bearish developments. Forecasts for world oil demand growth this year by major institutions have been revised down sharply in recent months, OECD commercials stocks remain above the five-year average in both absolute terms and in days of forward cover, and US commercial crude stocks have risen to ninemonth highs. At the same time, OPEC continues to produce at around 32 mb/d and spare capacity has grown to now stand at more than 3 mb/d. The start-up of new projects, such as the 500,000-b/d Khursaniyah field in Saudi Arabia, should help to further ease market fundamentals...

The demand for OPEC crude in 2007 is estimated to average 32.0 mb/d, an increase of 280 tb/d over the previous year. In 2008, the demand for OPEC crude is expected to average 31.8 mb/d, or 120 tb/d lower than in the previous year."

Lloyd's MIU data shows that OPEC is actually shipping a bit over 31 million barrels a day.

Someone's got their data wrong!

The start of the fall in Oil?

"German leaders are to propose a worldwide ban on oil trading by speculators, blaming the latest spike in crude prices on manipulation by hedge funds.

It is the most drastic proposal to date amid escalating calls from Europe, the US and Asia for controls on market forces, underscoring the profound shift in the political climate since the credit crunch began. India has already suspended futures trading of five commodities.

Uwe Beckmeyer, transport chief for Germany's Social Democrats, said his party would call for joint measures by the G8 powers to prohibit leveraged trading on energy contracts. "It's an extreme step but it has to be done," he told the Berlin media....

There is now broad support in Germany for a clampdown on “locust” funds. President Horst K√∂hler said modern capitalism had turned into a “monster”, bringing the entire financial system to the brink of collapse this spring.

The Social Democrats form part of Chancellor Angela Merkel’s ruling coalition. Her own Christian Democrat Party shares concerns that funds are causing a fresh bubble in commodities, risking further havoc for the real economy and society."

George Soros says Oil is in a bubble also:

"Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble, George Soros has warned.

The billionaire investor's comments came only days after the oil price soared to a record high of $135 a barrel amid speculation that crude could soon be catapulted towards the $200 mark.

In an interview with The Daily Telegraph, Mr Soros said that although the weak dollar, ebbing Middle Eastern supply and record Chinese demand could explain some of the increase in energy prices, the crude oil market had been significantly affected by speculation."

Sunday, May 25, 2008

Bear Stearns again

Why didn't Bear Stearns sell itself earlier? Apparently because Bear Stearns knew the extent and the depth of the problems in it's mortgage book. Two weeks and two executives from Bear now "leave" JPMorgan. From FT:

The departure of Jeff Mayer and Craig Overlander comes amid questions about the value of the Bear Stearns mortgage book. The two men had been in charge of the fixed income department at Bear Stearns and were named vice-chairmen of JPMorgan’s investment bank soon after it agreed to buy Bear Stearns in mid-March. The promotion of the pair was seen as a sign of JPMorgan’s commitment to integrating Bear Stearns staff.

But they are leaving, partly because of problems with Bear’s mortgage portfolio. Their departure “is not exclusively because of marks on the mortgage book,” according to a person familiar with the matter, who added “there were plenty of other people involved with that.”
A JPMorgan internal announcement from Steve Black and Bill Winters, who run the investment bank, said: “Jeff Mayer and Craig Overlander have let us know that they plan to leave the company.”

Jamie Dimon, JPMorgan’s chairman and chief executive, said last week that it would take a one-off charge of $9bn to cover the losses at Bear, as well as potential litigation costs, and severance and retention payments. That number is about 50 per cent more than its original estimate of the cost of the take-over. Mr Dimon said the higher costs were driven by losses and a bigger than expected amount of bad assets on Bear’s balance sheet.

Bear and JPMorgan both declined to comment. Mr Mayer and Mr Overlander did not respond to calls and e-mails.

Looks like the only way that we would know the extant and the depth of the problems at Lehman Brothers would be if they got a takeover bid!

Saturday, May 24, 2008

Barron's on Oil

He is not, in case you wondered, the disinterested party mentioned above. That designation, by his own vouching, belongs to a fellow named Michael Masters, proprietor of a hedge fund unsurprisingly called Masters Capital Management, who testified last week before a Senate subcommittee. The burden of his presentation was that such deep-pocket investors as corporate and government pension funds, sovereign wealth funds, university endowments and kindred institutions are in no small measure responsible for the spectacular run-ups in commodities, particularly food and, of course, oil.

He dubs this motley group "index speculators," and he feels quite strongly that Congress should act pronto to curb their pernicious practices. He offers a kind of tutorial on commodities speculation, replete with graphs and charts and other quasi-scholarly trappings.

Mr. Masters seems well versed in the fine points of commodities trading, and he's passionate in his belief that the major stimulus for the fiery gains in oil and food are those big-bucks players. His testimony created a bit of a buzz in the Street, and it's certainly worth a read. That speculators -- especially in the past five or six months, when their normal haunts, the equity markets, were frequently in the dumps -- have been active in the futures arena is no secret. Ironically, we recall a similar plaint -- but in reverse -- made to us by a prominent Texas oil guy who beefed bitterly that speculators were behind the then sharply depressed price of oil.

We suspect that Mr. Masters gives rather short shrift to the impact of both exponential growth of demand not only from China but from India and other emerging countries on the price of oil, and reasonable and growing concern about prospective supply. For all his worthy effort, we found his case not entirely persuasive and, at best, as the old Scotch verdict has it, not proved.

Barron's missed a point. Masters was talking about index buyers and institutional indexers who don't sell. In the last paragraph above, Barron's says: We suspect that Mr. Masters gives rather short shrift to the impact of both exponential growth of demand not only from China..

They missed his point entirely, or Barron's was being disengenious. Mike Masters had a rather extensive testimony before Congress. Here it is:

What he actually said was this:
In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

I suspect that Barron's really didn't read Master's testimony!

Friday, May 23, 2008

No Silver for you!

From the WSJ:

The government rationed food during World War II and gasoline in the 1970s. Now, it's imposing quotas on another precious commodity: 2008 dollar coins known as silver eagles

The coins, each containing about an ounce of silver, have become so popular among investors seeking alternatives to stocks and real estate that the U.S. Mint can't make them fast enough. In March, the mint stopped taking orders for the bullion coins. Late last month, it began limiting how many coins its 13 authorized buyers world-wide are allowed to purchase.

This came out of nowhere," says Mark Oliari, owner of Coins 'N Things Inc. in Bridgewater, Mass., one of the biggest buyers of silver eagles. With customers demanding twice as many as they did last year, Mr. Oliari would like to buy 500,000 a week. But the mint will sell him only around 100,000

The coins have a face value of $1. But the mint sells them for the going price of silver, plus a small premium, to a handful of wholesalers, brokerage companies, precious-metals firms, coin dealers and banks. The dealers mark the coins up a bit more and sell them to the public. Currently, the coins are fetching about $19 apiece, with some sellers seeking more than $20.

Apple and Intuitive Rumors

On Wednesday, there was a vague rumor that Steve Jobs was going to resign. And then yesterday there was a rumor that the new iPhone wasn't coming out. Yeh right!

The only thing that isn't new is the rumor mill.

But the bulls are fighting back.

AAPL hit a low of 172 and change before rebounding, and today Merrill Lynch upped it's target price on AAPL to 215 from 186.

Intuitive Surgical (ISRG 274.75) was rumored to have lowered guidance at a conference call yesterday and was down 13 points.

But after the close, ISRG was chosen to be added to the S&P 500.

Even Lehman's "fashion" CFO, Erin Callan is getting dusted up by shortseller David Einhorn.

She's a good target. Especially if you are selling a book. But Lehman still has the dirtiest laundry on it's Fed blessed balance sheet.

Which just means the price of gas at the pump has emboldened the bears to start talking their books and to start taking a look at the banker's books again.

The bears get Memorial day, the bulls get the Fourth of July.

Thursday, May 22, 2008

Dry Ships dips

Dry Ships (92.13) after trading as high as 116 Friday, has fallen 20% in three days, providing a good entry point.

Stock investors can't ever decide if they want to be enamored or afraid of this stock. They'll probably make over $18 this year, but it's not just the dry bulk business that has investors confused. Look at this gem on Fast Money tonight!

Najarian said DryShips (DRYS) and Eagle Bulk Shippers (EGLE) are buys here. He said the Baltic dry shipping rates are increasing.

Macke said he thinks the shippers' pricing model doesn't make sense, because companies like Wal-Mart (WMT) won't be able to buy goods shipped across the globe at exorbitant shipping prices.

Last I checked, Wal-Mart imports toys and items from China-manufactured goods not dry bulk goods! Maybe Macke should just read Wikipedia!

A dry bulk cargo barge is a barge designed to carry freight such as coal, finished steel or its ingredients, grain, sand, or gravel, and similar materials. Barges are constructed of steel.

It isn't Wal-Mart that is affecting DRYS, it's the perception that the market doesn't quite know what to make of DRYS investment in Ocean Rig, a Norwegian deepwater oil drilling company, that will be spun off to shareholders next year.

The hedge funds throw hissy fits, because George Economu runs the company as if it is private, and he couldn't care less (or so it is alleged) about shareholders. Mr. Economu had this to say about shareholders in a Forbes article:

"Who are my investors? Computer models, hedge funds and some institutions that go in and make $10 and get out."

But if you like the odds of more deep sea drilling, and continual high rates on dry bulk shipping, the volatility makes it a great stock to trade!

It should bounce from here.

They've already shaken the crybaby hedge funds out!

Dick Bove's "Once in a generation call"

Back on March 7, when the financials stocks were melting down, Dick Bove came on CNBC and told the world to buy the banks. He also had this to say about Citigroup:

I think the stock will be trading at $55 in the next 3 years, concludes Bove, which is double from where it is at the present time. “You only get a once in a generation chance to buy a stock like this at this price. This is it,” he says.

Today, Bove put sell recommendations on the Investment Banks.

At least now we know what it means on Wall Street for "a once in a generation chance to buy." It's good for two months!

And on Wall Street, when an analyst talks, you'd better parse the difference between a bank and a broker, with as much carefulness as President Clinton defining the meaning of the word "is."

Suntech Power beats numbers

Suntech, (STP 46.26) the world's largest solar producer beat numbers and gave good guidance and the stock will have a 5 handle today. It has flatlined for the past couple of months, so it was poised to move on the charts, and today we get the breakout.

Trina Solar (TSL 51.13) reports next week, but they were supposed to report this week. This delayed reporting happened with China Precision Steel (CPSL 6.57), which was supposed to report last Thursday, but then reported Friday. The stock did a double after earnings before pulling back.

So look at traders who are goosing these stocks. If the granddaddy, STP can beat numbers, how about TSL? And since another Chinese stock reported earnings that were exceptional that were delayed, maybe TSL has it's earnings in the bag also. They just need to let the stock run before they report like SOLF did!

At least that what the traders will think. You get a free pass on the stock for a few days!

Who's going to short these numbers before earnings? So the bulls have their ways with these stocks before they report!

Wednesday, May 21, 2008

IEA warns of Oil-Production Crunch

According to the WSJ:

The world's premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.

The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world's top 400 oil fields. Its findings won't be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought.

A pessimistic supply outlook from the IEA could further rattle an oil market that already has seen crude prices rocket over $130 a barrel, double what they were a year ago. U.S. benchmark crude broke a record for the fourth day in a row, rising 3.3% Wednesday to close at $133.17 a barrel on the New York Mercantile Exchange.

For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

The decision to rigorously survey supply -- instead of just demand, as in the past -- reflects an increasing fear within the agency and elsewhere that oil-producing regions aren't on track to meet future needs.

"The oil investments required may be much, much higher than what people assume," said Fatih Birol, the IEA's chief economist and the leader of the study, in an interview with The Wall Street Journal. "This is a dangerous situation."

The agency's forecasts are widely followed by the industry, Wall Street and the big oil-consuming countries that fund its work.

PIMCO pimps commodities?

One of the best returning funds is PIMCO's CommodityRealReturn Strategy Fund A (PCRAX). It's up 25% YTD, and has 1, 3, and 5 year annualized returns of 44.32%, 20.41% and 18.52%.

This $15 billion fund, invests in highly rated bonds and TIPS and gets its exposure to commodities, according to it's prospectus: "This Fund will typically seek to gain exposure to the commodity markets by investing in commodity-linked derivative instruments, swap transactions, or index- and commodity-linked "structured" notes."

So you have the inflation hedge of TIPS, a six percent yield from the bond exposure and you participate in the upside of commodities.

And the fund's return is paid by the back of the average consumer who pays higher prices for food and gasoline.

Here's how and here's why we have such high commodity prices.

Demand for futures come from commodity consumers and speculators. Speculators buy and sell, but these commodity index hybrid funds just accumulate positions. They in effect hoard the commodities, causing the real users of them to pay higher prices.

And the fund investors make more money.

I highlighted a portion from their prospectus. There's a reason for that. The Commodities Futures Trading Commission (CFTC) regulates position limits in commodities, unless you are an Investment Bank hedging an over-the -counter swap transaction.

Thus the fund can get the commodity exposure while bypassing the position limits, and getting interest for the shareholders from the bonds backing the swaps. They win both ways.

And you pay the higher cost for groceries and gas.

The CFTC says that commodity and equity assets are non-correlated, thus commodity exposure provides diversification:

Diversification is the operative word here. It has driven the growth of hedge funds as a vehicle to provide investors exposure to commodity markets as well as adopt strategies that are uncorrelated with a publicly traded securities portfolio. Exchange traded futures and other derivatives that have been particularly popular with funds as a way to both speculate on and hedge market risks brought on by changes and uncertainty in the underlying marketplace.

We all know that when stocks get added to the S&P 500 they increase in price. What do you think happens when these funds hoard commodities?

So the next time Goldman Sachs shouts out $200 oil, they aren't only talking their book.

They're also talking the swaps they are selling!

House of Reps votes to sue OPEC!

WASHINGTON (Reuters) - The House of Representatives overwhelmingly approved legislation on Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure.

The bill would subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela, to the same antitrust laws that U.S. companies must follow.

The measure passed in a 324-84 vote, a big enough margin to override a presidential veto.

The legislation also creates a Justice Department task force to aggressively investigate gasoline price gouging and energy market manipulation.

You would almost think this was an April Fool's session!

$310 billion of losses...and counting

The losses keep mounting for the banks, who than the sovereign wealth funds for the money.

But then again, the Royal Family from Qatar paid $73 million for Rockefeller's Rothko aptly titled, White Center (Yellow, Pink and Lavender on Rose.)

$73 million? For that???

Maybe these buyers deserve to own Citibank at 31!

Solar stocks are the "1998-99 Internet" stocks

Except that they are cheap on earnings.

Except that supply won't come on board until late 2010.

Except that a kid can't start up a solar company.

Except that Europe and the world gets it, while the US doesn't.

Which will change.

SolarFun (SOLF 25.24) was panned by all the "smart" shorts at 15. After earnings today it could have a 3 handle on that number.

LDK Solar (LDK 41) was also panned when a disgruntled ex employee told every news service that LDK had junk silicon.

LDK raised cash to build their poly plant and to buy back stock and has a ton of long term agreements.

And the stock will punish the shorts, just like SOLF did. The stock can trade in the 60's in a hurry.

Wall Street "hedges" aren't hedged!

In today's WSJ:

Just as they were emerging from their bunkers after a dismal first quarter, some of the big Wall Street investment banks got ambushed. That could lead to another round of losses when the second quarter closes next week.

The bad news comes from the hedges the banks have used to offset losses in real estate and other securities. These hedges, where the brokers bet against indexes that track markets such as real-estate securities and leveraged loans, have helped limit losses over the past year.

The profits the firms made by betting against the indexes offset some of the declines in value for other investments.

But since the market bottomed in mid-March following the collapse of Bear Stearns
Cos. (in the process of being acquired by J.P. Morgan Chase & Co.), some of these hedges came unglued.

In some cases, indexes such as the CMBX, which tracks the market for commercial-mortgage-backed securities or loans, rallied as much as 50%, while the securities the banks were hedging rose much less, or in some cases fell in value.

The biggest loser by far appears to be Lehman Brothers Holdings Inc., where losses from both write-downs on assets and ineffective hedges will likely range from $1.5 billion to $2 billion, according to some analysts.

Lehman Brothers had about $36.1 billion in commercial-real-estate loans and securities on its books at the end of the first quarter, and $17.8 billion in leveraged loans.

Last week at a conference hosted by UBS analyst Glenn Schorr, Lehman Brothers Chief Financial Officer Erin Callan said some of the firm's hedges have become "counter productive" or are actually losing money.

This is a far cry from a few months ago, when, she says, the firm's hedges were about 70% efficient, meaning that for $100 it lost on one side, it would recover $70 with the hedge.

Analysts say Morgan Stanley will be more affected than Goldman Sachs Group Inc. and Merrill Lynch &Co., but its losses related to ineffective hedges and write-downs will be less than half of what Lehman is looking at.

Morgan Stanley was sitting on some $23.5 billion in commercial-real-estate securities at the end of the quarter and another $15.9 billion in leverage loans.

At last week's conference, Morgan Stanley CFO Colm Kelleher declined to provide details on the firm's losses this quarter but played down the issue, noting the firm has been selling its holdings in many of the affected asset classes.

Goldman has substantially less commercial real estate on its books. However, it had $27 billion in leverage loans, more than any other rival, and analysts expect it will post some losses on its hedges on this portfolio.

To be sure, the hedges could start working again and some of the losses that are being booked now could turn into gains.

Even if that proves true, a new round of losses, albeit smaller than in quarters past, does little to help rebuild Wall Street's reputation for managing risks.

It looks like this story is finally coming home!

Sunday, May 18, 2008

Mister Softee still wants Yahoo

In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business. Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.

"There of course can be no assurance that any transaction will result from these discussions."

You can buy Google on this news which was pinned at 580 on option expiration.

Meredith Whitney calls the bottom in bank stocks

Surprised? She's the "axe" on the stocks, and is still bearish. So why do I say she called the bottom in the bank stocks?

In 1982, Joseph Granville was the bear on the market, and he called the "bottom" while predicting great calamity that never happened. His calamity call marked the bottom in stocks.

The same with Meredith.

On the exact bottom of the bank stocks, Meredith Whitney predicted that they had another 50% to drop. Her calamity call marked the bottom. Still she remains bearsih. Those waiting for her to turn bullish, already got her call! The bottom was her call for another 50% drop!

Last week she said Citigroup was beyond repair:

May 13, 2008 -- Banking analyst Meredith Whitney blasted Citigroup's turnaround plan yesterday, saying the financial giant is so deep in a black hole that even renown physicist Stephen Hawking could not help the ailing company.

"We wish [Citi's] management team all the best in their ambitious endeavors, but we fear [it] is past the point of fixing," quipped the Oppenheimer analyst known for her forecast that the company would slash its dividend.

The biting remarks, in the form of a research note to clients, came on the heels of Citi's long-awaited turnaround plan, unveiled by the bank's executive team on Friday.

She stayed too long at the bearish table. So here's her call of the bottom:

Meredith Whitney warns of 50% fall in US bank shares

Meredith Whitney, the Wall Street analyst who received death threats after writing a negative report about Citigroup, has predicted that financial stocks could plummet by as much as half in the wake of the Bear Stearns fire sale.

In a note released today, the Oppenheimer analyst says Merrill Lynch, UBS and Citigroup will be the worst hit. Lehman brothers shares are already down 30 per cent in pre-opening trading.

This is likely to be the start of a string of bad news banking stories this week as three leading investment banks are set to announce billions of dollars worth of write-offs owing to the credit crisis.

Analysts were scrambling to re-adjust their forecasts downwards for big investment banks.

Friday, May 16, 2008

Solar stocks burn the bears! GRMN on deck next!

SolarFun (SOLF 22.84) was up $4.36 on option expiration today, burying the bears who laid out 15 million shares short in the teenage range.

ReneSola (SOL 26.04) was under 19 Monday, and reported good earnings Wednesday, and ramped, following in the footsteps of Canadian Solar's (CSIQ 44.90) good numbers Tuesday.

So why would you stay short SolarFun? Because back in January, SOLF raised $150 million in a convertible offering at $19.13. So the hedge funds shorted common against the convert. The downside pressure in SOLF from the shorting, brought all the solar stocks down.

Too simplistic for you? Not for Wall Street. The same con was used with Apple Computer. After Apple reported earning in January, the stock was knocked down to 137, from 155, down from 200, on the way to 116 and change. Tech investors thought if Apple, the best stock in the market, could drop 40%, then anything could. So the lemmings furiously sold. They sold the stocks right off the cliff. How smart was that?

Take a look at Garmin, (GRMN 50) which has been hammered from 120 down to 50, and up from 42 just this week. Option expiration capped the stock at the 50 strike. Look for it to ramp again next week.

The catalyst? How about 11 times earnings and $1.1 billion in cash, and lifetime navigation with your Blackberry for only $99? This news was inexplicably missed by some of the wire services:

OLATHE, Kan./May 15, 2008/PR Newswire—Garmin International Inc., a unit of Garmin Ltd. (NASDAQ: GRMN), the global leader in satellite navigation, announced today a one-time-purchase plan for Garmin Mobile for BlackBerry. This one-time, $99.99 purchase is only available in North America and will give customers who own BlackBerry devices unlimited use of Garmin Mobile’s turn-by-turn, voice prompted directions for the life of their specific BlackBerry. Users will also have unlimited access to Garmin Mobile’s dynamic content such as traffic, weather conditions and forecasts, fuel prices and more. The one-time purchase Garmin Mobile for BlackBerry is designed to meet the navigation needs of customers who prefer a one-time purchase rather than continuous monthly payments.

Friday, after the market closed, Garmin was on Oprah's semi annual "top pick event.

Garmin gets an Oprah endorsement
The Kansas City Star
Oprah knows what she likes, and Oprah likes Garmin.

Members of the Oprah Winfrey Show audience went home following a recent show with a pink Garmin Nuvi 250 and a slew of other gifts dubbed summer must haves by the queen of talk TV.
The show airs today at 4 p.m. on ABC.

“If you watched Gayle and me on our road trip last year, you know there’s nothing worse than getting lost,” Winfrey said. “And we got lost a lot — but you don’t have to. We found the perfect road-trip gadget. This is the Garmin Nuvi 250 navigator in pink. It’s portable and small enough to fit in your pocket.”

The show was Oprah’s semi-annual “top picks” event. The pink Nuvi was included with items like swimwear, makeup and a Weber gas grill.

Oprah and BlackBerry. That's all you need to know. Wall Street ain't that complicated.

Look for 62 on this number next week.

Paulson buys 50 million+ Yahoo shares

Did anyone besides me find this interesting? Carl Ichan, stoking a proxy fight with the kids at Yahoo, has the support Paulson & Co. who bought 50 million shares of Yahoo:

"We intend to support the Icahn slate but sincerely hope that Yahoo will negotiate an agreement with Microsoft thereby making a proxy fight unnecessary," Paulson said in a statement. Paulson also said that a Microsoft/Yahoo hook-up would offer stronger competition to Google Inc....

Paulson manages more than $30 billion across several strategies. The firm was founded in 1994 by John Paulson, a former managing director for mergers and acquisitions at Bear Stearns. Mr. Paulson personally made $3.7 billion last year, thanks mostly to his shorting of the subprime mortgage market.

Yes, it's the same John Paulson who warned us of the coming depression and made $3.7 billion! You need to re-read the entire story here:

Now he that warned us of the financial collapse, is taking a $1.5 billion dollar arbitrage stake in Yahoo. Well maybe he didn't really believe that there was a pending economic collapse, but he wanted others to think that so he could get the easy marks on his bearish bets! Apparently his bearish bets are now blowing up before he can cover them, but not before he had already cashed out! So now he's betting big on the upside.

In any event, it seems that he and Carl have met over dinner, and now Yahoo will be Microsoft's lunch.

Wednesday, May 14, 2008

California's stimulus: Foreclosures!

44,000 pre-foreclosure "notices of default" were initiated in California last month. Assuming that the average monthly payment of these 44,000 mortgages are $2,000 and assuming that it takes at least six months for a foreclosure to hit, the "economic stimulus" of these foreclosures are 44,000 x $2,000 x6 months=$528 million that was earmarked for mortgages can now be spent elsewhere. In Palm Beach FL, the courts are so jammed, the lenders will be lucky if the process can be done in nine months.

To call this misfortune a "stimulus" would seem to be hedonic adjusting; something more akin to what the BLS (Bureau of Labor Statistics) would do. They are the only person on the planet who said that gasoline prices at the pump went "down" 2% last month even though they went up 5.6%. When the BLS "adjusts" gasoline prices for the normal prices increase that happen in April, the gasoline price increase is less than zero! And that is what they report!

So I'm going to hedonically adjust every foreclosure as a new stimulus as homeowners live rent free for six to nine months.

Somehow we'll forget about the equity they lost. We'll just write it off to the bank, and let some sovereign wealth fund offset the bank's loss in capital by lending more to bank from the money that they made off of the homeowners who are paying the costs of the higher price of oil!

Tuesday, May 6, 2008

Bears get kicked in the teeth-Again

Remember the talks of "depression" and of the worst financial crisis we would ever see in our lifetime? Whatever happened to that?

Today, Merrill Lynch opined that it might be advantageous to get bullish, since the preponderance of hedge funds were in cash, short or under-invested. Now the hedge funds call foul, as the analysts don't support their bearish thesis or their positions. What crybabies these bears have morphed into!

After sticking the investment banks with billions of losses on their credit default swaps, and of the inventory they bought back from these hedge funds, does anyone find it unusual that these houses are not playing ball with the bears, but just with the bulls?

Look at what had to say in their commentary today:

Weak data
Fed eases, stocks rally.
Strong data
Strong economy, stocks rally.
Consensus data
Lower volatility, stocks rally.
Bank loses US$ 8 billion
Bad news all out of the way, stocks rally.
Oil price up
Good for energy producers, stocks rally.
Oil price down
Good for consumers, stocks rally.
US$ down
Good for exporters, stocks rally.
US$ up
Lower inflation, stocks rally.
Inflation up
Good for commodities and asset prices, stocks rally.
Inflation down
Fed eases, stocks rally.
Climate change
Soft commodities up, stocks rally.
World ends
Good for disaster recovery companies, stocks rally.

Welcome to the new bull market bears. Phase one is the PE expansion. That alone will take us to new highs. The next phase will be when the market will be led by easy comparisions for 2009 and the economy's ensuing recovery.

Sunday, May 4, 2008

The $3.7 billion dollar man

John Paulson made $3.7 billion last year, taking realized profits for himself on unrealized gains for his funds. Does anyone but me find that a bit unauthentic?

I wrote about this entire credit default swap and pricing here. You need to re-read the piece to understand the junk that is going on in hedge fund land, and the chicanery going on in credit default swaps.

In today's NY Post, we see that Paulson was down for the month in his funds.
John Paulson, the hedge-fund titan who earned superstar status after earning billions by correctly predicting the collapse of the mortgage market, slipped slightly in April betting Wall Street firms such as Bear Stearns would collapse and default on its debt.

One Paulson fund that invests in things like mergers and bankruptcies fell 3.4 percent last month; a second dropped closer to 2 percent. The funds are up for the year, but the declines come when most hedge funds are expected to post positive monthly returns.

Paulson was using arcane instruments known as credit default swaps to bet companies like Bear would default on their debt. Instead, JPMorganChase in mid-March agreed to buy Bear and support its obligations. Spreads on these bets widened - in some cases by several hundred basis points - as confidence in financial stocks returned.

Jim Cramer, of picked up on this over the weekend with an article about these swaps on his site:

Better. It's better. The credit markets are better. Those who have all of those reams of credit defaults, the ones meant to profit from the imminent demise of the financial system, are right now feeling the sting. They, alone, unwound, praying for negatives, are the source right now of the upside....

Not only that, but we could also be in a moment where there could be gigantic bond issuance to clear up short-term problems.

And best of all, we are not seeing the hidden shorts. Hedge funds bet against the system using credit default swaps, bets that the bonds of institutions would spread in value from Treasuries or go belly-up. The hedge funds levered up in this trade. The price of these swaps is plummeting. Those who are stuck in these positions are going to go belly-up. And the banks that are technically on the other side will zoom.

Recall that the biggest worry two months ago was the $4 trillion credit default market and whether there was counterparty risk. There is, but this time it's on the hedge funds' side.

This is something to watch as the big macro funds that made these bets, one by one, try to get out of these stupid pieces of paper that they are rapidly proving so wrong on.

The hedge funds have been profiting by marks on swaps and securities that materially overstate the losses that the other parties (the banks) will have to take. That materially overstates the profits that the hedge funds have in their unrealized positions. But the hedge funds take 20% of the profit in these unrealized positions, as if they could actually realize those gains. They can't, and that's why they don't cover them. Which is why we had the huge start of the April Fool's stock rally because Q1 for the hedge funds ended on March 31. Press your shorts so you get the benefit of the lower marks, and then try and make up the losses in the next quarter.

But these funds need a depression to book their phantom profits.

Has anybody taken a look at FairFax Financial (FFH 279) a stock the shorts have been squealing about since they pressed it down to the high 80's a couple years back? They had $700 million of gains on these credit default swaps in the first quarter, and gave back $300 million of it in April.

In this volatility exists in stock land where are the bodies in over-leveraged hedge fund land as the financials rally and these swaps tighten?

The banks say they are taking writedowns of which they'll eventually be able to reverse. Maybe that's true, or maybe it isn't. We know S&P now stopped rating second mortgages:

May 1 (Bloomberg) -- Standard & Poor's will stop rating new bonds composed of U.S. second mortgages, saying it's too hard to assess the debt while the housing slump continues.

The recent deterioration of the loans has been ``unprecedented'' and the ``market segment does not allow for a meaningful analysis,'' New York-based S&P said in a statement...

``The problem with seconds is it's either good, or it's zero,'' said Brad Golding, a managing director at Christofferson Rob & Co., a New York-based money manager.

When people are a couple of hundred thousand upside down on a home loan, they walk away. They spend $995 here to get the help to do it right:

They then spend $1,000 at the corner credit repair agency to repair their credit.

This behavior is not in FICO scores or in S&P models. That's why these second mortgages are either good, or they are zero.

But the banks which the hedge funds have bought swaps on, have all the Central Banks in their corner. It's not good or zero, but good today, and better next year.

And that's not in their playbook when you bet on a depression!