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Thursday, August 18, 2022


Yentervention Wednesday – Kan Baffles Bulls


As we discussed yesterday, it was meet the new boss, same as the old boss in Japan as Naoto Kan’s re-election sent the Yen to new highs as he was considered the least likely candidate to back intervention.  Well surprise, surprise this morning as Japan officially intervened in the FOREX markets and sent the Yen down a full 2.5% as they used their Yen to purchase an undisclosed basket of currencies.   

Since the Dollar is up today against both the Pound ($1.55) and the Euro ($1.29), we can assume the dollar is one of those currencies and demand for Dollars means upward pressure on rates so that should be the end of the TLT bounce for the moment.  Stock boys want bonds to die so the money can come this way and bond boys want you to fear the stock market so you will let them hold your money (and charge you fees) at ridiculously low rates of interest.  That’s they Yin and Yang of the markets. 

Investors were starting to doubt the government’s commitment to its pledge that it would take bold action,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. Kan and Noda in recent weeks repeatedly said that Japan was ready to take “bold” measures to stem the currency.  The Japanese government official said European and U.S. officials were informed of the move in an effort to avoid a negative reaction. It took a while to convince Europe because authorities there didn’t like the idea, the person said.

We’ll see if the stronger Dollar today puts pressure on commodities but we’re in pretty good shape as this rally, for a change, has not been led by commodities as the market is now flat to the August despite an 8% drop in oil prices (see USO on chart):

I often complain about rallies that are led by Financials and Commodities as those are things that suck money OUT of the economy and are not long-term drivers of growth.  The entire 2006-7 rally was this kind of rally and I bitched about it all the way up.  We also had housing back then, another type of commodity, but that’s so dead now it’s hardly worth mentioning, is it?  Actually housing is where we used a lot of commodities like lumber and copper etc.  33 months after the onset of the Great Recession, new home sales are still down 70% and non-residential construction is down 36% – that market is dead, dead, dead

We get housing starts next week but who really cares?  Is it going to be 525,000 or 575,000?  I can tell you one thing, it’s not going to be 2.1M, which is where we peaked out in 2006 and it’s not going to be 1.4M, which was around "normal" in the 90s.  While many bears will latch onto this number and tell you how it spells DOOM for the economy – I’ll give you a couple of reasons why it’s a GOOD thing.

A) Commodities – they get expensive when housing sucks them all up and that makes the cost of goods more expensive for consumers as well as for manufacturers.

B) Savings – With an average price of $250,000 and an average deposit of 10%, each new home sucked $25,000 out of savings accounts – 1.5M less homes sold means $37.5Bn more money in savings accounts.  Ad in mortgage fees, moving costs etc. and you can double that amount.  Also, it pays to consider the vast number of people who have simply stopped saving for a new home as it is no longer considered a goal for many people – that money can be used for other purchases or to pay down debts.  If the average family saved 3 years to buy a new home than that’s a very large amount of money that has been re-directed. 

C) Loans – If they are putting down a $25,000 deposit, they are borrowing $225,000 from the bank.  That’s a demand for $337.5Bn per year of bank capital.  Less demand for money for homes means more money available (in theory) for businesses to expand (and hopefully hire).  

D) Cash flow – Hard to quantify but generally, people who stay in homes can afford their mortgages, the stress comes when they upgrade to bigger homes and have to make bigger payments.  

To some extent, the same thing applies to the 6M cars per year that are not being bought as well.  Of course, cars only last so long before they begin falling apart but so, to some extent, do homes.  At 500,000 homes a year we are only replacing the average US home every 205 years.  Is your home likely to last 205 years?  If not, then at some point, people will HAVE to start buying new homes again.  If we assume 1.5M homes a year is a proper replacement rate (once every 73 years for 110M homes), then we can use the above chart and estimate that about 1.5M homes too many were built between 2003 and 2006 while about the same 1.5M too few homes have been built in the past two years.  This is called "working off excess inventory" and it’s very, very normal and explains whey the Case-Shiller Index has found a bottom of sorts recently:

Interest rates are the real wild-card here as people don’t buy homes, they buy mortgages, so low home loan rates (remember that low demand for money) makes homes seem more affordable and it remains to be seen if buyers really have the stomach to pay 70% of peak home pricing if rates head back to 6%.  At 4.5%, a $200,000 mortgage is $1,266.71 per month, at 6%, that $200,000 jumps to $1,498.88 per month – a 15% increase.  So, we can look at the above chart and knock 15% off if rates had not dropped so significantly during the housing bust and that puts the chart at 136.  7.5% mortgages can drive us down to about 115 so it is not out of the realm of possibility that an event (like the Yen being devalued to the dollar, for one thing) can still drive rates up and drive housing prices another 15-30% lower. 

This is what we consider to be one of the biggest overhangs in the economy because we are not creating enough jobs to create demand for homes and every day we risk an event that raises rates and the banks are still on the hook for 3 years worth of home loans they made at higher prices than those homes are likely to fetch today and that deficit in their loan to value ratios can get MUCH worse very quickly if we do have a rate event and that line drops from 160 to 130 to 115, which would put a whole decades worth of home loans deeply in the red on the banks’ books (if they ever actually mark them that way, of course). 

Don’t be fooled by the recent bounce in financial stocks, Louis Navellier warned yesterday. "High foreclosure rates and low lending rates are acting against the big banks," he says, urging investors to sell these 11 famous financials: STD, BAC, BCS, LFC, C, HBC, GS, JPM, LYG, RBS, WFC.  This morning we got the MBA Mortgage Application Report and that was down 8.9% for the week, despite the fact that the 30-year fixed rates fell from 4.5% to 4.47%.  When I met with the Treasury last month, we discussed rates and (we are not allowed to be specific) I got the impression that they were not all together against the idea of seeing rates drop to 1% if they thought it would actually boost housing but, in fact, they don’t.  That foreclosure rate and lack of new buyers is going to keep housing down for quite a while but, as long as it doesn’t get worse, as I said, not such a bad thing

This overall uncertainty is why we held onto our hedges yesterday as we were only testing the top of our range, so we expected some pullback anyway.  We took advantage of the morning pop to add SQQQ and TZA hedges and we’ll be out following our 3 of 5 rule if we can get over our lines but seeing the Russell struggle to hold the 2.5% line at 650 made us a little dubious as to whether they would be joining us at the 5% mark.  Oil failed to hold $77.50 and copper failed to break $3.50 and gold went higher – all things to make us nervous but not so nervous that we didn’t like ARNA on the dip as a fun, risky trade idea that will make or break on Thursday, when the FDA makes their decision. 

We set up a hedged play on ARNA that pays 1,566% at $5, which is a fun way to gamble on silly biotech stocks.  The idea of a play like that, of course, is not to put 1% of your virtual portfolio in and hope to make 15 times your virtual portfolio on one trade but to put 0.01% of your porfolio and make 15% if it works out.  That way, you can afford to have 10 misses trying to make 15% before you are out even one tenth of one percent of your virtual portfolio – we see trades like these at least once a week so it’s not like they are a rarity. 

Asia was mixed this morning with the Shanghai getting hit for 1.3% but the Hang Seng held flat at 21,752 and that 22,000 line would be bullish for them.  The BSE hit 19,502 with a 0.8% gain and the Nikkei was thrilled with the intervention and jumped 2.3%.  Europe is down about half a point ahead of the US open as protests against austerity budgets broke out in Romania and the EU proposed a ban on short selling that made the markets nervous.  

Also making everyone nervous is our miss on Industrial Production (0.2% vs 0.3% expected) as well as Capacity Utilization (74.7% vs 75% expected) and the Empire Manufacturing Index for September also fell short of the mark at 4.1 vs 6.4 expected and 7.1 prior.  If that kind of data keeps up, then the August "recovery" is going to start looking like a bump on the way down.  However, new orders were the bright spot of the report, up 4.33 vs down 2.71 last month while employment ticked up slightly and prices turned higher.    August Import Prices were up a surprising 0.6%, doubling expectations.

We expected to test our 4% lines today and we’ll see if they hold up at: S&P 1,112, Nas 2,288 and NYSE 7,072.  The Dow has yet to give us 10,608 nor has the Russell seen fit to test 660 but these are the expected pullbacks off our 5% lines and the other 3 have tested the tops and how they behave on a pullback is going to be critical as we decide on our stance into the weekend.  It’s very had to make any conclusions on a day where there has been such a massive currency intervention and I would take all early moves with a huge grain of salt. 



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dc – I have my spreads and picked up a few Oct 4 Cs.    Gambling money.  I feel pretty good about this one.

Well, Lloyd got $3G out of me today; I am rusty !!  I still think South into Friday, and then maybe vertical !!

I am glad to hear that. Took a little off the table (didn’t want to-as usual), but still have shares and Oct. and Jan ’11 calls. After reading FDA papers I just don’t see where they don’t give a positive vote. …….but for all that other crap!!!!!!!!!

Pharm – Thx for all the info about ARNA in general. The last two days were devestating but I made so much following your trades with ARNA that Im still in the green and will be even if they are rejected tomorrow.

Looks like Meridia is gonna get yanked.

Got me today also, lost too much on TBT, sold half at even 63.40, holding half for AM or Friday?

Deano and Jro – UR welcome.  I live and breathe this industry.  I am not always right, but believe in the science.  Let’s keep our fingers crossed for a good outcome tomorrow.

 Phil – quick question… why is the max pain calculator you posted giving different results than this one:
For Sept IWM options… the pegger you posted shows 65… but the one I just posted shows 63?

We’ve green 11 out of the last 12 days.  I don’t think its out of the question to expect a little pullback.  It  is September after all.

kustomz / balls — Can’t find the clip but I immediately thought of John Turturro playing Jesus in The Big Lebowski. Polishing his ball and telling the dude "Nobody F*cks with Jesus"!.

Why do you think GSI will go double in 6 months?  Can’t find anything in Yahoo finance.

srfrog, I think the optionistics one isn’t updated as frequently. I’ve looked at it every day for the last couple of weeks and have seen little to no movement in the values.

 Phil – nevermind – your’s seems to automatically default to Sept 30th when you put in Sept options… the one I posted you can select the date (which I was selecting Sept 18th).  Do you know how to change the day?  I can only find the month.  Anyway – they are still slightly different in results – as for Sept 30 IWM your’s says 65, the one I posted shows 66.

 Phil – nevermind – your’s seems to automatically default to Sept 30th when you put in Sept options… the one I posted you can select the date (which I was selecting Sept 18th).  Do you know how to change the day?  I can only find the month.  Anyway – they are still slightly different in results – as for Sept 30 IWM your’s says 65, the one I posted shows 66.

All Windows Users
There are a ton of updates, maintainence time!

rain…LMAO..one of my all time fav flicks…found it ..

Damn, didnt know the ARNA announcement was that late, I would have held onto it until tomorrow. It’s gotta pop at least a bit tomorrow, the stock is already down near 50%!

bobhu / GSI
Ok, here is my take on the projection, other than the chart is screaming for a correction. A few days ago, the Government ( China ) announced industrial growth of 13.9%, year over year, and retail expansion of 18.2 %, and consumer prices of 3.5% for the same period. These kind of numbers will attract investment capital into Chinese stocks. The Chinese bear market is starting to turn around – and typicially the small cap stocks are early in the sentiment shift.
GSI has just announced a joint venture with Tianjin Materials Group, as well as an iron ore purchase agreement with Minera Santa Fe ( Chile ), which will provide up to 50% of GSI iron ore needs. Both of these deals will keep margins up and prices down.
I bought the stock and sold a large quantity of puts at 2.5 for December.

jr – trading will be halted tonight FWIW.

Oh, ok. Well then Im glad I sold 🙂

JRW…. nice photo you took of Lloyd  –  was he on that cruise you were recently on?

Another class warfare political speach by Obama, bitching about the Republicans. This will never help him or the folks that need a solution to our unemployment.  He needs some new advisors to get him on a different track.

gel / cruise

No, he has his own cruise ship !!  I wasn’t on a cruise; I rented a place outside of Monte Carlo and a small sailboat, not in the same league !!

JRW… I should have guessed – Lloyd had his arm around the masthead.  Your vacation does sound very nice. I had an office at one time in MC – all for legal purposes only.  My wife is continually hounding me for a vacation in Monaco… I keep telling her the beaches are topless and she must do the same – so far it is working!

Re MC you are a fat lyer did not see anything like it they all stricked Catholics

JRW; I somehow went 4-4 today on small trades / small gains in TZA, stayed out after 2:30.

yodi   re MC – I did not understand your post… please re-post

Gel you better read it again or I will draw you a picture, The are all Catholics in Monte Carlo no topless!!!!!!!!!!!!!!!!!!!!

Phil – whatever happened to Rush Limbaugh ?
Were you consulted about this grand strategy ?

gel1…. thanks a lot for the info on GSI.

Yodi…. Monte Carlo ( MC ) was the location of our office. I do not remember the catholic beaches, but I do remember many topless beaches, and many more nearby that were topless and bottomless. ( Cap d’Agee )

yodi…..  that is Cap d’Agde.

AAPL GM are going to be fabulous
iPad, iPhone fail to halt NAND flash price drops in 1H September

Taiwan and Japan flat panel makers lower utilization rates
Taiwan- and Japan-based flat panel makers began to reduce their production recently, lowering their capacity utilization rates to 60-70% on average, and even to below 50% for some production lines. However, Korea-based rivals seem to have taken the opportunity to expand their market share optimizing on their cost advantage.

Pan observed that the solar industry will face a tough period between December 2010 and early 2011, as demand starts to weaken. Gintech is aware that ongoing expansions at solar cell players worldwide may have a negative impact on the market during the period.


yodi / MAIL
I sold my shares today because I had a nice profit. The profit exceeded the $.45 dividend that will soon be recorded. The company is very solid, and is trading at a 6.5 PE ratio ( very low for the tech sector ). The annual dividend yield is actually 15.4%, as the dividend is paid twice a year. The dividend payments are fully covered by earnings. I expect a drop after it goes X-Div, and will buy back in the same day and will hold for the next semi-annual dividend.

Phil / India — I know your thoughts on Chinese ADR’s but what how about India? Just as bad?

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