Which Way Wednesday – World of Worries Weighs on Wall Street

7 W’s in the title – that has to be some kind of alliterative record! 

What could we possibly be worried about with the market making new highs?  Well, I’m a little concerned that Shanghai housing prices fell 10% in a week.  That’s the kind of behavior that may make you think they may have a bit of a bubble that’s popping.  Of course they held up well compared to Shenzhen, where prices dropped 14% in the first week of March.  That was matched by a 14% decline in iron ore shipments from Australia as China’s demand fell from 11M tons in January to 8.7M tons in February.  So, if you were wondering how much China’s $600Bn stimulus spending was affecting their economy – 14% is the effect of them simply slowing it down a little. 

Japanese Machinery Orders fell 3.7% in January and Producer Prices fell a deflationary 1.5% in the World’s second-largest economy (for now).  “The gap between supply and demand in the domestic economy has yet to shrink,” said Morita at Barclays Capital. “It’ll be very difficult for companies to pass on those costs. That’s not good for their profits.”  The Baltic Dry Index is topping out just over our 3,200 target, signaling a possible end to the great commodity run of 2010.  Devan Kaloo, head of Aberdeen’s Global Emerging Markets is predicting that emerging markets (we are long EDZ, now $47) may fall as much as 15% this year.  “The markets will see a correction this year,” Kaloo, whose Aberdeen Emerging Markets Institutional Fund has beaten 93 percent of competitors in 2010, said in an interview in New York. “People get over-optimistic and expect too much out of earnings and global growth.”      

Sure, I know I’ve been saying this for a while but it sounds so much more official when a guy in charge of $22Bn says it!  China’s 4 trillion yuan ($586 billion) stimulus package, coupled with record bank lending in 2009, helped the benchmark Shanghai Composite Index rally 80 percent last year. The gauge has dropped 6.4 percent in 2010.  “From a stock-picking perspective, we can find better opportunities” than China, Kaloo said. “The government pumped money into the financial system, but soon they’ll run out of money,” which will hurt the earnings of Chinese companies.

Amazingly, much of the tech growth we’re seeing in Asia is resulting from a mad rush to produce 3-D TVs in time for the holidays – something I believe may be one of the biggest marketing catastrophes of our time.  At the moment, I’m hoping SNE gets to $40 so we can short them, not just over 3-D TV but on the general lack of health of the consumer as well as the fact that they are fighting losing battles with AAPL on music players, smart phones, laptops and book readers (the IPad will make the BookMan pointless).  As it stands now, a SNE Jan $50/40 bear put spread is $7.60 and the Jan $40 calls can be sold for $2.75 for a net $4.85 entry on the $10 spread, which is already completely in the money with SNE at $37.15.  The upside on this play is 106% if SNE fails to hold $40 by January expiration day (21st). 

We made a similarly hedged play exacly a month ago on ITMN when my trade idea for Members was to buy the stock for $15.40 and sell the Jan $10 puts and calls for $12 (ITMN was priced for very high volatility with an FDA decision pending) dropping the net entry to $3.40 or $6.70 if the stock fell below $10 and we had another round put to us at that price.  The good news is the stock is now almost at $40 as they got their approval and the bad news is we "only" made 194% on the trade since our gain is capped at $10 but, of course, with a $6.70 worst-case net entry when the stock was at $15.40, we were able to buy twice as much with half the worry!  All in all, it’s a very nice return for a month and our favorite way to play volatile biotechs. That’s what hedging with options is all about – reducing risks, not increasing them! 

Thanks, of course, to the great and powerful Pharmboy, our resident Biotech specialist, who pointed out this opportunity earlier that week (we had been in various ITMN plays for some time, thanks to him) and gave our team so many good entries that our higher-risk trades popped up on Andrew Wilkinson’s hot sheet that Monday!  Congrats to all who played along on that one.  We’re working on a Wiki but, if you ever want to know how we feel about a play, you can always Google it – like "Philstockworld: ITMN."  We don’t do a lot of these speculative plays but we latched onto this one in the fall and have been playing it since – very much like the way we doggedly kept after DNDN last year, until it finally popped.  Speaking of DNDN, word is there will now be an investigation into the manipulation of that stock by certain hedge funds and their media lackeys who told their sheeple to SELLSELLSELL based on false information with very suspicious timing!  This is something I was talking about back on Aug 9th of last year.

We have tons of bullish postions – I don’t want people to think we are perma-bears but when you are loaded up with bullish plays (and our last major buying spree was a well-timed Feb 6th Buy List) that are well-hedged and so far in the money that there’s nothing to do but wait – then it pays to be a little more bearish with your short-term trading.  I don’t like being bearish, I’m an optimistic person by nature but, as I said yesterday – what really worries me is how NOT worried other traders and the MSM are, so I am thrust into the role of a stock market Cassandra but, like the famous Oracle – I just calls ’em as I sees ’em…

Speaking of Greek tragedies: The Bloomberg Professional Global Confidence Index fell to 53.8 from 54.9 in February.  The confidence gauge for Western Europe fell to 41 from 49.8 as Greek Prime Minister George Papandreou struggled to convince investors his government was serious about taming Europe’s biggest budget deficit, which has stoked financial market turmoil since January.  Euro-area growth almost ground to a halt in the fourth quarter, while unemployment held at the highest level in more than 11 years in January. The European Commission last month said the economy may fail to gather strength for most of 2010.    

As usual, it was Asia carrying the ball in this global survey of 1,612 Global Bloomberg Terminal Users (clearly people in the top 1%), with that index rising to 75.9 in March from 70.8 in February.  Latin America was also spicy with a 74.5 reading.  The US rose to 48.5 from 41.3, perhaps boosted by the $1Bn in fees skimmed in just 6 months by Wall Street terminal users who overcharged municipalities for the government’s "Build America" bond program.  On average, the underwriting fees for Build America Bonds are $8.20 per $1,000, according to Thomson Reuters. By comparison, the standard fee for tax-exempt issues is $5 to $6 per $1,000, according to Wall Street banks.  Goldman Sachs Group Inc. is the top seller of Build America Bonds, with $9.79 billion in sales, according to research firm Thomson Reuters, followed closely by J.P. Morgan Chase & Co., Citigroup Inc., Barclays PLC, Bank of America’s Bank of America Merrill Lynch and Morgan Stanley – otherwise known, in part, as the infamous "Gang of 12" that seems to be at the center of every single scam. 

Europe finally wised up and has stopped doing business with Wall Street Banks in Government bond sales and I challenge you to find this story reported in the US MSM.  "Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."  

Next on the EU’s agenda is a move to set new limits on credit-default swaps and European leaders are pushing for a ban on speculative bets against government debt.  Greece only has until the end of April before they must formally seek EU assistance if their borrowing costs don’t come down sharply.  The high premium now charged by investors for Greek bonds is "simply unsustainable" and must be brought down in the coming six to eight weeks, one official said Wednesday.  The officials said Greece needs the spread to tighten to around two percentage points before crunch time: Athens must redeem some €22 billion ($29.92 billion) of bonds in April and May.  "In all his meetings the prime minister reiterated that Greece needs EU support," the official said. "The next move must come from Brussels and there is not much time left."        

Asia was amazingly flat for the second day in a row with the Hang Seng rising 0.74 points (21,208), the Nikkei dropping 3.73 points (to 10,563) with the BSE making a relatively big 45-point move to 17,098 and the Shanghai Composite dropping 20 points to 3,048.  Europe is up slightly ahead of our open and Jesse’s Cafe American says we may be showing signs of an "Exhaustion Top Amidst Rumors, Hype and Shenanigans" which saves me the trouble of saying it so we will just continue to watch and wait.  They almost had us yesterday but we ended up shorting into the top for some nice, quick wins – perhaps more of the same today but we do have some breakout plays ready as well – just in case!