What the heck was Friday about?
Our working theory, watching the action in Member chat was that a fund was liquidating but there’s been no confirmation of that over the weekend so we’ll have to get cautiously technical until we get more facts. Also, who says they are done? This is why we add our disaster hedges at the top of any 5% move (which we did Tuesday and Wednesday last week) although a 3% pullback after an 8% run back to our 5% lines can hardly be considered and actual disaster – so far.
Six banks failed on Friday, keeping us at a record breaking pace for 2010 but it’s the same old story with the same old broke FDIC so hard to say that’s a market mover. BP’s well cap may NOT be working as there seems to be a leak somewhere else now. This is like fixing a leaking pipe in the bathroom but then, a few days later, you are still getting water dripping down the walls and you know it’s going to be MUCH harder to fix the leak you can’t see than the leak you can and it’s very hard to find a good plumber at 6,000 feet below sea level…
Europe remains uncertain as the IMF and EU withdraw about $21Bn worth of financing from Hungary, telling them that they must CUTCUTCUT their budget if they expect to get any help. There is a great article in the NY Times about Germany’s views on debt - a great read. Another pullback indicator in China is a sudden drop in the price of Car Plates, licenses to own private cars, which have fallen by 1,018 Yuan ($150) in June from 40,380 in May (2.5%). The licenses are auctioned and are considered pretty good leading indicators of demand AND the government offered fewer licenses and there are indications that 1.3M vehicles are stockpiled as expectations have exceeded actual demand. China is also questioning whether or not GDP is a good way to measure growth as they discover "stuff does not necessarily make you happy."
Bloomberg reports that China’s eastern province of Shandong faces an oversupply of oil products, news portal dzwww.com reported, citing the local petroleum and chemical association. The province received 12.2 million metric tons of oil- product supply in the first half and fuel consumption reached 7.3 million tons during the period, according to the report. Shandong’s fuel demand will rise to 14.5 million tons this year, up by 500,000 tons from a year earlier, it said. Oversupply of oil products in the province will persist in the long term, it said.
Possibly the most significant bit of new bad news is a report that the top 10% are now tightening their belts. If this is true, that is bad, as they were the only ones spending! Of course the market was falling and the MSM was a non-stop gloom-fest since early May so what do people expect these surveys to turn up. If all the news channels tell you it’s not safe to shop in downtown Manhattan over the weekend because of a terror threat and then, a few weeks later they do a survery that finds less people are shopping in downtown Manhattan – are we supposed to be shocked? I have already discussed CNBC’s brand of financial terrorism in the past and our friend Mohammed El-Erian will be featured tomorrow to comment on corporate earnings tomorrow at 8am. Earnings last week looked like this, but what do you want to bet our favorite bond pimp gives them the smackdown?
Despite these problems along with the European debt crisis, the possibility that the Chinese juggernaut will stumble, and persistent high unemployment in the United States, Wharton’s Jeremy Siegel agrees with me and calls the market panic highly overrated saying "the possibility of a double-dip recession minimal." If post-World War II patterns hold for the future, he calculated last week, prospects for stock investments are excellent: there would be a 96.6 percent probability of a positive return for the next 5 years, going up to 100 percent for 10- and 20-year periods. Average real returns would be stellar — about 11 percent annually in holding periods from 1 to 20 years.
This weekend I discussed "The End of the World As We Know It" and I pointed out to Members that the death of America does not correlate to the death of American corporations, who stand to make hundreds of Billions of additional dollars from decreasing labor costs in the US.
Barron’s this weekend said the markets are punishing BP "unduly and irrationally," noting "the stock is dramatically cheap relative to the company’s energy assets and cash flow, even applying a severe haircut for many billions of cleanup and liability expenses related to the Gulf spill." It may be a bit premature to BUYBUYBUY BP (we went in at earlier, safer levels) but it’s a great time to pick up some BA, now back at $61.90 as Emirates places a $5Bn order for 20 new planes. BA is sitting on about $1Tn in orders, enough to keep them at full capacity past 2020 yet they are still 1/3 off their highs so I like them a lot. Barron’s also loves GOOG at this price ($460) and so do we!
Moody’s downgraded Ireland’s debt this morning but that didn’t stop the EU markets from ignoring our nonsense on Friday and they are up half a point at 9am. Asian markets were off this morning but Japan is closed so very low volume and the Shanghai actually gained 2.1%, led by property developers on news the government will build more low-income housing. Imagine that – helping people get affordable homes creates jobs AND boosts the stock market – who’d have thunk it?
We have our own National Homebuilders Index numbers next week and tomorrow we get June Building Permits and Housing Starts with Existing Home Sales on Thursday along with a very important report on Leading Economic Indicators at 10am but, other than that – not much data and lots of earnings so strap in for a wild ride and we’ll see how we perform in between our lines: