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Thursday, March 28, 2024

Tuesday Morning

[Strong Start]

The Wall Street Journal says the "markets are moving into a sweet spot" and that "the mood is downright bullish."

I hate to hear that kind of talk, it’s often the sign of a top when everyone starts telling you how great the markets are but it’s also hard to argue with our year to date performance.  As I said last week, while I’d love to go gung-ho bullish here, we are at an inflection point and we need to break out right here, right now to make a real rally of it.

Much as I hate to take the role of Prophet of Doom, I do think it’s important to remind you that this sub-prime mortgage problem is NOT going to go away.  New home inventories are still at an all-time high, and by all-time high I mean 170,000 unsold homes (x $240K = $41B) vs. perhaps 90,000 in a normal year.  Over 100,000 default notices were filed in California, almost double the 2005 pace and housing starts are dropping rapidly, down by almost 1/3 in the past 6 months.

Michael Shedlock wrote a great piece about this entitled "Every Picture Tells a Story" where you can see all these charts together but biggest eye opener for me is this one:

Holy housing crisis Batman!  Can you say Exponential Risk Increase? 

3 straight years in which 25% of the 10% of the $75 Trillion in total home loans that have turned over have been written as "sub-prime" loans.  That’s over $2,000,000,000,000 in risky loans.  Let’s say just 10% of them turn out badly (despite the fact that HBC just told us it was 20%) – that’s $200Bn!  Starting to sound like real money isn’t it?

I already found $1Bn of it – our buddies at GM have to pony up $900M to GMAC as their $14B half of the stake in the company is coming up a little short "because of questions about the end-November balance sheet of GMAC’s ResCap unit, which provides mortgage financing."

If you are worried about the banking sector, you should be but I’m going to trust my man Warren and add USB and WFC to our watch list probably for plays early this week as both should do well as capital flies to quality and both of these have the Berkshire Hathaway seal of approval.  I’ll be hoping for a knee-jerk pullback on the sector but we’ll do a spread if not.

Japan already had their housing meltdown in the 90s as their market fell from 40,000 to 15,000 in 3 years, came back to 20,000 where it drifted until 9/11 where it plunged all the way down to 8,000.  I wonder how you say "No, don’t sell – it’s just a dip" in Japanese?

Asia is on hold today waiting to see if the BOJ will raise it’s rates, which may double at this meeting (hard not to make a big move when your rate is just .25%).  Bets are that they will hold rates steady, which will be bad for our MTU leaps but that’s why we took the leaps, at some point they will go higher and I still have my hopes for this meeting as the Yen is getting really low.  Steel stocks Nippon Steel and Posco both jumped 2.5% as merger mania runs through that sector.

C is getting big in Japan, looking to get listed on the Tokyo Stock Exchange, which will make it easier for them to acquire Japanese banks!  "Citigroup is committed to Japan for the long term and has been reviewing its business strategies, which could include listing Citigroup on the TSE. We have not yet, however, made any decisions at this stage of the study," said a spokeswoman for the U.S. banking giant.

Europe dropped off a touch despite the fact that DCX may have found some suckers to buy Chrysler backPerhaps it was EADS announcing that they won’t be announcing a restructuring plan as they haven’t a clue how to fix the mess that they are in but they do know they already need 10,000 less people to do it, whatever it may end up being.

The German economy is on track but Spain is having some trouble with runaway corporate debt.   VOLV went up on merger news which may provide yet another boost for our CAT leaps, EMI.LN shot up 6% on another offer from WMG and there were numerous other mergers indicating either a top or a bottom – hard to tell!

Back home we need to get the markets moving.  We have Retail Sales and Consumer Confidence today followed by Refis, Redbook Sales and the CPI tomorrow which will really set the rest of the week.  For today we will be happy not to go down!

Of course the big excitement today is the SIRI/XMSR merger talks – we talked about it on the weekend so I won’t rehash but we’ll watch for the opportunity to develop.

Our guess the NYMEX contest comes to a close today all guesses are final at the open so good luck to all – my official pick is a high 42M barrels as I can’t see how they can dump more than 34M barrels today but we’ll see how it pans out.  We’ll keep watching $58.50 as the major point of resistance but tomorrow we roll into the +.50 April contract.  The action should be very exciting now as May and June already each have 100,000,000 barrels already scheduled for delivery – very high for subsequent month contracts and June is stacked with 329M barrels already.

The dollar is just sitting down around 84, very sad, and gold is the metal to watch at $670.

We’ll be looking to pick up our weekend plays but this is no time to be rushing into anything until we get some better signals.

Be very careful out there!

– Phil

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Oops, there is one play we’ll be making if these numbers hold up.  John pointed out over the weekend that AGIX has some wild option pricing ahead of earnings and here’s a couple we will take advantage of if the prices hold from Friday’s close:

Earnings are 2/22 so you’re paying a big earnings premium, actually a huge, irrational earnings premium!

There’s a great play here that many of your brokers won’t let you make – buy the March $25s for $1 and sell the Apr $35s for $2.50 – I have a hard time coming up with a way you can lose on this one!

There’s also a bull call spread of buying the $5s for $7.40 and selling the $7.50s for $5.40 for a net of $2 so as long as the stock holds $7 or more you make .50.

It also has very stupid put pricing as you can buy the $20 puts for $8.70 and sell the $22.50 puts for $12.90, that’s just giving you $4.20 for a $2.50 spread – nice if you can actually get it!

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