Since 3:30 on Friday the Dow futures are up 100 points!
Isn't that fantastic? As we are forced to do in the face of positive market movement, we will try to find a story to justify, to "fit" the move, because human beings like for things to make sense - even when they don't. Casting our market bones and reading the news entrails (as we did extensively in this Weekend's Ramblings) I'd have to credit rumors of additional job stimulus as well as Surging Chinese Imports (quick, he said CHINA – BUYBUYBUY!), which were up 57% in December for giving us this Monday's boost.
I mean, we're back to paying $3 for gas this weekend and oil is up to $84 a barrel as Rent-A-Rebel attacked another Nigerian pipeline where they couldn't afford $5 a day for a Nigerian Security guard to protect 100,000 barrels a day of $80 oil ($8M). Of course, if they stop the rebels from attacking the pipeline then oil would be $82 or less today (where it closed on Friday) and not $84 and CVX and RDS.A would make $200,000 less selling that oil today, not to mention what they make on the other 8.5M barrels those two companies alone sell around the globe (OK, I'll mention it, it's $17M a day) as a bonus for NOT securing their pipelines.
As we discussed in Member Chat this weekend, the system is designed to make it not just economically foolish but downright dangerous for the Officers and Directors of an oil company to insure a safe, reliable and inexpensive supply of oil to the public THERE'S NO PROFIT IN THAT and, as a shareholder, you should be outraged at the very suggestion that they put an end to these Nigerian Rebel Attacks, which are a reliable 2.5% boost to the price of global oil (even though Nigeria is only 3% of global supply) about 20 times a year. Business Week had a great article about the global oil glut – pointing out that just 32% of the World's proven reserves are tapped for production – an artificial shortage that keeps prices so ridiculously high.
But I digress. Let's just focus on the fact that Americans were only spending $1.25 for a pound of copper last December (now $333) and $38 for a barrel of oil (now $84) and $2 for natural gas to heat our homes (now $5.50) so we must be rich, Rich, RICH to afford those things now which means, drum roll please, that our economy is recovering! Oh, I'm sorry, I meant OUR economy (at this point, if you are not in the top 10%, please leave the room). Ah, that's better – so OUR economy is recovering very nicely and our energy companies and commodity companies should once again be able to print money faster than the Treasury, which make XOM (a 2.4% dividend payer) pretty darned attractive at $69.50.
The low VIX makes for cheap leaps and the XOM 2012 $60 calls are just $13.30 (a $3.80 premium) which is a nice way to play them long-term. Since you can sell the Feb $70s for $1.55, covering just 1/2 of the leaps each month for 24 months would pay off the entire leap and give you free upside above $60. Those are the kinds of plays we've been discussing in our updated Buy List, as we look to take advantage of quality stocks that are still trading to the low side while setting up sensible hedges to ride out what we still expect to be a choppy market. Also in our weekend post is an update of our disaster hedges – VERY important reading!
With 7M jobs "officially" lost since mid 2007 we are all set to celebrate to addition of a projected 2.3M jobs in 2010 as corporations are expected to hire 1.1M new workers and the government has a budget to hire another 1.2M census workers (3 times more than the last census). With all that government hiring slated for the first half of this year, we can expect some very robust job numbers coming up – maybe enough to keep our momentum going through the summer.
Robert Barbera and Charles Weise argue for a job-rich recovery, saying "jobless recovery" adherents misunderstand why employment collapsed: "The drastic reduction in inventories and payrolls was not a result of restructuring: it was symptomatic of panic, the same panic that caused the massive sell-off in equities, corporate bonds and mortgage-backed securities."
With even more green shoot news on a Monday, our friends at AIG effectively call a bottom to the housing market by removing 45 geographic areas from its riskiest underwriting category. This gives the green light to investors to put more money into Real Estate in those markets. Ordinarily I would mention that AIG cost the taxpayers $185Bn (so far) the last time they though housing was a solid investment but now I'm bullish so I'm going to pretend that all this news should be taken at face value. Speaking of face value: The cost to protect against defaults on North American Corporate Bonds fell half a point to 77.25 last week – a 2-year low! Why? Because 85,000 people lost their jobs and that is GREAT for corporate America (that's US as long as those bottom 90%'ers have stayed away) as it keeps new hires cheap and the existing labor force scared and productive!
Speaking of AIG: Did Goldman Sachs engineer the ouster of Hank Greenberg as early as 2005 in order to remove an oppenent who was unlikely to put up with the CDS games they were playing with the insurance company? It was former GS Alumni Jim Cramers "friendbuddypal" Elliot Spitzer who drove Greenberg out of office and the subsequent destruction of the company cost Greenberg the majority of his fortune. According the the WSJ – AFTER Greenberg was foced out, AIG ramped up it's housing market bets by writing insurance policies on sub-prime derivatives, something Greenberg had been against and the chief beneficiary of those polices was GS. AIG had committed not only to insure them again eventual loss, but to make cash payments in the meantime to compensate for any drop in price or downgrade of their Triple-A ratings by credit agencies—both of which promptly happened as housing collapsed and panic spread about the possible failure of large financial institutions.
How did it all come apart so quickly? Here are the pieces Mr. Greenberg says he sees falling into place. In 2005, a trade group called the International Swaps and Derivatives Association got together and drafted new standards for the kinds of credit default swaps AIG had been writing. Previously, Mr. Greenberg explains, losses to the underlying securities were paid off at maturity. Now, cash payments would have to be forthcoming to cover any drop in value or credit downgrades even before any losses were realized. "I don't know whether Goldman Sachs was the force behind the ISDA change or Deutsche Bank," Mr. Greenberg concedes. "That's something investigative reporters are going to have to spend time digging out." This is a great article I strongly suggest reading.
Speaking of repeating the same old financial idiocy: Banks are boosting their lending to hedge funds and private-equity firms to levels unseen since before the financial crisis, raising their risk levels and adding fuel to the buying power of key players across the stock, debt and buyout markets. Banks and investment banks, including Citigroup Inc., Bank of America Corp., J.P. Morgan Chase & Co. and Morgan Stanley are offering levels of borrowing—known as leverage—that they haven't provided in more than two years, according to people familiar with the banks and funds.
Speaking of brand new financial idiocy: Fitch warns us that Chinese banks are creating "a growing pool of hidden credit risk" through financial moves that shift loans off balance sheets. The ratings agency said in a report the practice could lead to conditions similar to those that triggered the US subprime crisis, in which banks suffered big losses on mortgage-backed securities when housing prices fell. "These transactions, which free up space to extend new loans and lessen the pressure on capital and liquidity, can lead to a noticeable reduction in a bank's outstanding loans," analysts Charlene Chu and Wen Chunling said. Fitch said banks were selling loans to financial institutions or repackaging them into wealth-management products in largely unreported transactions.
Gosh I hate to point out this kind of stuff when I'm trying to be bullish but China also JUST approved short selling AND margin trading but don't worry WE are not going to let THEM use it for protection as average investors (not us!) will need to spend 105,000 Yuan ($15,379) to by a single futures contract, which will effectively shut out retail investors from protecting their virtual portfolios against a correction but will be FANTASTIC for OUR Chinese investments. Chinese banks lent out over $88Bn in the first week of January, a pace of $4.5Tn for the year or the entire GDP of China. Last year banks lent out roughly $1.4Tn, spurring record demand for autos and appliances as the public lined up for the low-interest loans. What could possibly go wrong?
BCS won the first ever foreclosure case in Dubai this weekend, clearing the way for lenders holding about $16 billion of Dubai home loans to take action when borrowers don’t pay. Dubai’s housing rout sent prices down 52 percent in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. Not one received a foreclosure notice. Moody’s estimated in September that 12 percent of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.
China's two major markets were up about half a point today, trailing the Nikkei, who jumped 1% back to just under 10,800 where they are waiting for the Dow to catch up. Japan was loving the fact that China has officially passed the US as the World's largest car market with 13.6M sales vs. 10.4M in the US, ending our 110-year winning streak as the world's biggest buyers of automobiles. You would think someone would question how China's consumption of autos could jump 46% in a single year and perhaps question the economics of what might happen when the artificial stimulus is removed and China can no longer artificially keep gas prices down below an average worker's daily wage ($2) per gallon but not me – I'M BULLISH so I don't think about that stuff anymore….
We're actually not THAT bullish yet but we are starting to buy. This weekend is a holiday weekend and THEN we get major earnings next week and that will be a good time to start picking things up but it's fun to be a bull in a market that goes up 100 points in 20 minutes of actual trading so let's enjoy it while it lasts.