Well, I'm in a better mood.
We did hold our levels yesterday and I did my review of housing and the GDP last night and it left me still fairly bullish on the long-term economy. Oil is up to $117 pre-market (7:30) but if that's all they can get with a legitimate hurricane aiming right for the Gulf Coast then woe unto oil investors once the wind changes direction! Oil was at $120 last Wednesday and there was no hurricane so don't color me impressed until they can hold that level for more than a day. Today we have another inventory report and crude stocks are expected to rise 1.5M, distilates are projected up 900,000 barrels and gasoline is projected to have a 2.8Mb draw. Last week's inventory report was disappointing to say the least with a massive 9.6Mb build – that hurricane better be a doozy if we have another build like that one!
So we have this storm to get past (and we're only up to Gustav, the killer storms were Katrina and Rita, much further up the alphabet) and tomorrow's GDP report and then the holiday weekend. If we survive all that I would imagine next week things will get very interesting – last September was a 1,000-point month but the fun didn't start until the second week of the month. Looking at the chart: there was a spike down in mid August, there was choppy trading through the 10th, and the market exploded to new highs through October 9th. Coming into this Labor Day weekend, we had a spike down on July 15th and have had choppy trading since. I'm not sure there's going to be a rally into September expirations but I sure would hate to miss it…
Someone is bottom fishing the housing market in Las Vegas as 56% more homes were sold this July than July of last year. Housing supply is down to less than 8 months after ending 2007 with a 22-month supply. "The data suggest that the Las Vegas market continues to improve more rapidly than other areas of the country," Bottfeld said. This was one of the things we talked about in last night's post – a lot of the data that is being used to scare investors this month is old news, lagging data is not the way to base forward investments. Median home prices sold are way down due to foreclosures but they are only down to $210,000, about what they were in 2004. As with oil, it's the speculators who get burned in the end, the people who pile in at the end of a ridiculous bubble thinking they are going to double the double and end up losing half as things normalize.
Speaking of backward looking data. Remember Freddie Mac and Fannie Mae (we talked about them last night too!)? FNM said net interest income rose to $2.1Bn in the second quarter, up from $1.7Bn in Q1 as the company's profit on investments expanded to 100 basis points from 82. FRE's net interest income jumped 92% to 1.5Bn for the quarter and annualized profit per dollar of investments rose to 80 basis points from 48 basis points. No wonder Paulson's boys at GS are dying to get their hands on the GSE's and "privatize" them – these things are better than gold mines!
“They, at the increment, are very, very profitable,'' said Dan Fuss, vice chairman of Loomis Sayles & Co. in Boston and co- manager of the $17 billion Loomis Sayles Bond Fund. “If they can continue to do anything close to business as usual, they are immensely profitable.'' “Our funding costs remain attractive, particularly based on the opportunities to purchase mortgage assets at attractive spreads,'' Freddie spokesman Michael Cosgrove said. I gave my take on them last Wednesday, including my "foolproof" spread on FRE, which is right on target so far. Citigroup agrees with me too, saying: "There is no pressing need'' for a bailout, they wrote in the report, titled “All That Sound and Fury, Signifying Nothing New.''
The same can be said of the FDIC report that lists 117 "problem" banks, up from 90 in March. Assets of troubled banks jumped from $26Bn to $78Bn during Q2 but that included $32Bn from IMB, who failed on July 11th. Banks, on the other hand, have upped their loan loss reserves from $11.4M to $50.2Bn in June – THAT'S a statistic you will never hear on CNBC as it shows banks to be rationally concerned about the economy and taking measures to address the issue. Meanwhile, Q2 bank industry income, although low, was still $5Bn overall – that's AFTER all the write-downs, now totaling over $500Bn.
That will not stop you from seeing the headline in the WSJ and repeated ad nauseum on CNBC that "The FDIC's Chairman said the agency might have to borrow from the Treasury to see it through an expected wave of bank failures." – WSJ 5:37 am. What she ACTUALLY said, after being pressed by reporters looking for a headline was: "I would not rule out the possibility that at some point we MAY need to tap into [short-term] lines of credit with the Treasury for working capital, NOT to cover our losses, but JUST for short-term liquidity purposes," Ms. Bair said such a scenario was UNLIKELY in the "near term." She said she did NOT expect the FDIC to take the more dramatic step of tapping a separate $30 billion credit line with Treasury, which has NEVER been used.
Asia was a mixed bag this morning with the Nikkei being dragged down to a 25-point loss by property shares while the Hang Seng added 400 points (2%) led by CHL's 45% jump in profit on strong subscriber growth. The Shanghai was flat for the day, dragged down by airlines as a butterfly flapping it's wings in the Gulf of Mexico causes planes to drop out of the sky in China – amazing! Even more amazing to conservatives must be CEO's report that first half profit rose 89% on an 8.3% increase in output that they achieved as they were MOTIVATED to overcome HIGHER WINDFALL PROFIT TAXES.
Europe is much improved after a poor open. Oil prices were hurting auto makers, airlines and travel companies at the open while banks stayed down but our own Durable Goods report was gangbusters, up 1.3% vs 0.2% expected by "economists" (who seem to keep their jobs regardless) and up 0.7% even ex-transports (yay Boeing for adding 0.6%!), that's turning our futures around nicely but no surprise to the faithful at PSW. Even June was revised from 0.8% to 1.3% so that sell-off was overdone too!
Even better, non-defense capital goods ex-aircraft (business spending) was up 2.6% after rising 1.3% in June. This is a great early indicator of corporate spending patterns and shows that optimism we noted in the surveys last quarter (see how long these things take to come around!). Orders for commercial planes were up 28% while military aircraft orders rose 7.8% yet still BA is trading at $63. I'm tired of hitting the BUYBUYBUY button on BA, we are long and deep on that stock.
Unfortunately, this all gives oil and excuse to bump up to $118 and the Dow has not been able to shake that inverse relationship to POO and I suggested to members yesterday we just start day trading the DIAs against every move we see in oil, the problem is they both jerk up and down so fast it's hard to follow. We'll see what the inventory does to the price today but last week, even a huge build was an excuse to pump oil up to $120. It was all reversed the next day (as it was total BS) but now we have a hurricane to sustain prices so we'll be lucky to make much progress ahead of the GDP tomorrow.
