Some Market Comments

Some market comments posted on Financialsense.com by market commentator, Frank Barbera: Rolling Defensive and What's NOT in Vogue

• .... A lot of these stocks are really poor quality, with no earnings, a dismal forward-looking sales outlook and yet, -- in a good market -- all was forgiven as prices were marked up dramatically from the lows. Our gut feel is that the days of ‘easy money’ are now well behind us, and that low priced stocks are going to start facing real head winds as a much harsher reality check is soon applied. Risk Appetite can be measured in other sectors as well. Going from the low end of the spectrum to the high end of the spectrum, we are always fascinated by the price action of high priced potential market leaders. These stocks can provide equally valuable insight as to the strength of an underlying trend. In the last few months, names like Google, Mastercard, Goldman Sachs, Baidu, CNOOC, Blackrock, Apple, Amazon.com, Priceline.com, Rio Tinto, Alcon, IBM have been important market leaders. Importantly, most of these high-flying, high priced leaders remain near their absolute highs and held up fairly well in the recent correction. Yet at the same time, most of these stocks seem to be losing upside momentum and struggling to perform well as the major averages recover.

Frank Barbera: Stage Is Set For Disappointment Of Most Epic Sort

Posted the other day: If The Economic Recover Is Real...

On today's financialsense market wrap, market commentator, Frank Barbera, talks about the same issue: Market Messages from the Outer Fringe

• As the bullish headlines continue to sway the masses that hope springs eternal, and that global economic recovery lies directly ahead, the outlook in our view for 2010 remains highly uncertain. In the weeks and months ahead, while it will be key to track a number of tried and true leading economic indicators, we also like to look below the surface as some of the lesser follow economically sensitive gauges. Call them - indicators of the outer fringe. In this case, one of our favorite fringe ‘battlefield’ type gauges is the shipping rate or shipping rate indices put out by the famous Baltic Exchange. These various indices measure the day rates for various types and sizes of merchant shipping. There is an aggregate index known as the Baltic Freight Index, which encompasses a number of sub-indices including day rates for dry goods, and a variety of energy related components which track tankers and of different shapes and sizes. The key point here is very simple, when the global economy is genuinely improving, these day rates tend to trend higher, and to that end, guess what is not happening in recent weeks? In the charts below, we take a look at the trend of the Baltic Dry Index, and some of the energy related, crude oil shipping rates. Get the idea, that things are not trending up? ..........
  
  In our view, this means there is still a lot more proof that needs to be seen coming from the market, --- from the frontlines of global business, where goods are bought and shipped, before we can take solace that a genuine recovery is taking hold. For now, the lackluster behavior in these fringe economic indices is strong evidence that a divergence of substance is present, and while this could end up improving as the year wears on, for now, the trends appear to be on the downside. According to a recent study by the National Bank of Greece, “it is highly unlikely that demand from China will be as strong as it was in the first half of the year.” The report goes on to say that, any pick up in demand should global economies begin to recover is expected to be moderate. National Bank of Greece estimated that it will take another two years before demand for dry bulk cargoes will stabilize, and the same applies for the tanker market as well, while the fact that a large number of newbuildings will hit the market, is expected to make matters in the freight market even worse.
  
  In our view, if it should turn out that next year is not the recovery of substance that so many now expect, the stage will be set for disappointment of the most epic sort. Psychologically speaking, if the herd is heading for another episode of fear and disappointment, the potential ramifications will be felt along a very wide fault line as bullish expectations have been riding very high over the last few weeks.
  
  Take a look at the action in some of the high beta ‘discretionary’ spending stocks. During last year’s contraction, where the ‘high-end’ sphere of ultra-wealthy was only dinged by the major contraction. ---Yes, high end home prices began to decline, but only sold off to a much smaller degree then the middle and low end range for homes where sub-prime mortgages dominated and laid waste to the economic landscape. While it is true that capital market portfolios (equity market declines) hurt those on the high-end, to a very large degree their financial staying power was much greater then that of Joe Six Pack, who saw the plunge in 401K values hit much closer to the financial core. This year, 2009- has been a different story, as high end home values are now falling at a much faster pace, with the lower and middle range of home prices heavily bombed out, and beginning a sort of begrudging plateau. The outlook for 2010 is not rosy, as the number of prime mortgage foreclosures and REO’s is rising steadily. This is the ‘high end’ taking its turn as feeling the recession bite.
  
  In our view, real change is always seen at the periphery, often in the underlying message of obscure markets like the Shipping rates, or perhaps to cite another example, in the value of Gaming shares. In the Gaming shares, we have an entire fringe sector that is absolutely manically leveraged to debt and debt dependent to the extreme. They now reside in the giant hangover of the Great Las Vegas/Macau building/development booms of the last decade. “Take two aspirin and call me in the morning”, is not likely to be any kind of quick fix as this industry is in desperate need of a genuine recovery. Yet, at the heart of a recovery that leads people into the gambling dens of Vegas and Macau, there needs to be a sustained asset re-inflation. To this end, the Gaming stocks are on the far end of the high dive board acting like happy days are here again.. In our view, one small misstep and its off the plank and into the drink, snake eyes for the gaming group. Consequently, we like to watch the price action of the GST Gaming Index, which includes a wide variety of usual suspects such as Bally Tech, IGT, Penn National, Las Vegas Sands, MGM, Wynn and others. So far, what we see is a five wave bull market that ended at the peak in October 2007 (at 87.09), followed by a five wave collapse into the March 2009 lows at 9.44, a heart stopping decline of 89.16%. Since those lows, the index has been fueled by the herd mentality of eternal hope, (ed. right along with other heavily marginal sectors such as Housing and REITS) soaring by a stunning 224.8% in just the last 6 months. Now annualized that!
  
  Here’s the real point. Typical bear market rallies, however powerful, very often retrace about 50% to 61% of the prior decline. In the case of the GST Unweighted Gaming Index, the striking rally of the last few months has led the index back up to a virtual bulls-eye on the 50% bear market retracement mark. This is going to be very telling as to which direction the next 10% to 15% move happens to be. If a real recovery lies dead ahead in 2010, then the heavily leveraged gaming issues should soon be latching onto the pungent aroma of fresh dollar bills heading for the crap tables and the slots. If on the other hand, the outcome for 2010 turns out to be the stench of a double dip contraction, well, then in that case, the Gaming Stocks are likely to start under performing the S&P. That means a declining relative strength ratio in the weeks ahead, and lots of divergence with the S&P...

The Current Libor Issue

Read this posting by Financial Sense market commentator, Frank Barbera, The View From 30,000 Feet

• “It’s a matter of trust” says Robert Kessler, head of Kesslet Investment Advisors, a Denver based manager of Treasury Securities. While Libor rates are based on the rates between some of the world's largest banks, shaky confidence has led the market to demand higher yields on inter-bank lending versus the Fed Funds Rate and Treasuries, which are seen as risk free. The widening yield spreads in recent days have been quite dramatic, and have served to strengthened overseas currencies. Yet the big downside risk ahead still resides in the US Credit Market where the long march of “resetting” adjustable rate mortgages has just begun. Looking out over the next 12 months, the US is facing a monumental series of ‘resets’ to its pile of Adjustable Rate Mortgages on the order of $50 to $60 Billion dollars per month, with some months north of $70 billion. In this light, the surge in recent weeks in overseas Libor Rates is potentially devastating news for the US Homeowner because within the US, increases on Adjustable Rate Mortgages are tied to the LIBOR Rate, and NOT the Fed Funds Rate. In fact, a recent article by Randall Forsyth in Barron’s pointed out that most resets will take place at several points ABOVE LIBOR. “This means that some of those borrowers may face mortgage rates of close to 10%, with the recent rise in Libor rates exacerbating this squeeze.” Consequently, even if the Fed lowers the Fed Funds rate by 25 basis points, the offsetting rise in Libor Rate imply that for most borrowers, there will be no benefit whatsoever.

Do give the rest of the article a good read: The View From 30,000 Feet

On Shanghai Again

My Dearest Moo Moo Cow,

Everyone is talking about Shanghai again and FSO Market Commentator, Mr.Frank Barbera, has made some brief comments on his write-up today, A Little Bit of This, A Little Bit of That...

• Yet, as we noted last week, the Shanghai Stock Exchange looks dangerously unstable, and in my view, that is a key market to be watching as the volatility there continues to increase, with prices tumbling last night by nearly 4%. Again, it is very possible that the Shanghai Market may continue to move higher still, expanding its parabolic arc to the 4,500 level, but if that is to happen, it will happen soon as the parabolic bust is now knocking on the proverbial door -- with mid-to-late June a prime candidate.
  
  

  

  
  

  Above: The long term weekly chart of the Shanghai Composite…perhaps a few more weeks, then POW! Right in the kisser. Expecting a 30% sell off in Shanghai early this summer; it will not be pretty and it will likely not go unnoticed by other markets.

Fellow blogger Sal, has made some interesting posting too.

• http://malaysiafinance.blogspot.com/2007/05/t-he-emperor-is-very-naked-naked-is.html
• http://malaysiafinance.blogspot.com/2007/05/nasdaq-vs-shanghai-there-is-not-much.html
  
  

How Now Brown Cow?

Here's an update worth reading posted by Mr.Frank Barbera at FSO, Torpedoed by Sub-Prime -- Again

Here's a snippet of what's written:

"2007 is going to suck, all 12 months of it,” said CEO of D.R. Horton, the nation's largest homebuilder, Don Tomnitz at the companies March 7th conference call. Criticized for bluntly speaking his mind, the rather extreme verbiage coming from a top drawer CEO underscores the outlook ahead with Tomnitz really telling it like it is. While his wording may offend more sensitive ears, the content of his message is at least honest, and probably on the mark -- a far better outcome than the seemingly endless industry lying, deceit, and cover-ups that has led so many in the falling housing market, proclaiming a bottom, and the “worst is probably” over at virtually every turn. Few industries have a lock on more disingenuous behavior than the homebuilders and realty crowd who “somehow’ manage to consistently find the world's most blindly optimistic economists, (i.e. shills). So much so, even the guys on Wall Street blush. After all, we are now treated to the admission by New Century Financial – the nation's #2 Sub-Prime Lender -- that they made an “inadvertent error” on the magnitude of $500 Million Dollars? -- only 500 Million!!!! -- Hello? Nope, nothing but honesty, and good intentions there…

From CBS MarketWatch Today

“NEW YORK (MarketWatch) -- New Century Financial Corp. shares were delisted Tuesday as the company provided updates on criminal probes and disclosed a $500 million error over debt obligations as it approaches an expected bankruptcy filing. The New York Stock Exchange said New Century's common stock and preferred securities "are no longer suitable for continued listing on the NYSE" just one day after the Big Board halted trading of the stock and Wall Street signaled a looming bankruptcy filing for the lender. The company, whose credit problems have erased nearly $3 billion in market cap in a matter of weeks, said it received a grand-jury subpoena for documents in a previously disclosed investigation by the U.S. Attorney's Office for the Central District of California, as well as formal notice of a preliminary Securities and Exchange Commission probe. New Century also said in a filing to regulators that its obligations to Credit Suisse First Boston Mortgage Capital were $1.4 billion, not $900 million as it previously reported. New Century called it an inadvertent error.”

And of course, we also saw the major headlines coming from Accredited Home (LEND) where a liquidity crisis is taking shape.

From CBS MarketWatch Today

“Accredited Home after said it's seeking more capital and exploring strategic options after paying about $190 million in margin calls since Jan. 1. The mortgage company, which operates in the troubled subprime loan category, said it plans to seek additional capital. Accredited Home is also seeking waivers and extensions of certain financial and operating covenants under its credit facilities. Keefe Bruyette & Woods on Tuesday downgraded Accredited home to underperform from market perform and slashed its price target to $7 a share from $26 previously. "Based on our new significantly lower volume and margin assumptions, we estimate that LEND will lose money for the foreseeable future which will likely trigger a liquidity crisis," KBW said in a note to clients”

Of course, it is this writer's continued view that we are a long, long way from any type of important cyclical economic low, either for the broad economy which is weakening, or for the real estate/housing market which is in a serious recession. Just look at the latest information regarding the number of Homes For Sale that are Vacant. Going back to 1955, the US Vacancy Rate has never seen this type of dramatic surge. One year ago, the number of vacant homes waiting to be sold stood at a total of 1.57 million homes.

Today, the number of vacant homes waiting to be sold has surged by 34% to a total of 2.10 million homes, by far the most rapid increase ever recorded. As a result, the US Vacancy Rate for owned units has jumped to a record 2.70%, up from 2.00% a year earlier, which is now virtually double the long term average of 1.40% for the vacancy rate. From 1955 to 2005, the vacancy rate had never been above 2.00%, highlighting another element of just what kind of boom/bust dynamics are now potentially at work in the present cycle.

In addition, with more than one million housing units of excess supply, there is strong evidence for the case that Housing Starts, already down 18% in the last 12 months, to a seasonally adjusted rate of 1.64 million, will need to fall considerably further before any type of important bottom is seen. In the past, soaring vacancy rates have been a fairly good leading indicator for additional downside pressure on Housing Starts. In the next chart, we plot the 12 month Rate of Change for the US Vacancy Rate using an inverted scale and overlaid against the graph of US Housing Starts. Notice that surging vacancies tend to be a leading directional gauge for more weakness ahead in the Housing sector. In addition, as time passes and inventories continue to build, odds are high that homeowners will soon begin offering these properties for rent, which will put downside pressure on rents as the supply of new rentals hitting the market increases.

In a separate report out today, the Mortgage Bankers Association noted that late mortgage payments shot up to a 3 ½ year high in the final quarter of last year, with new foreclosures surging to a record high as borrowers with tarnished credit histories have had trouble keeping up their monthly payments. According to the MBA, “Home loan delinquency rates showed an increase for a fourth straight quarter as sub-prime defaults rippled through the real estate market. Past-due payments on 43 million loans tracked by the survey have climbed with about 4.6 percent of mortgage holders now at least 30 days late. “This includes about 2.4 percent of prime borrowers and 12.6 percent of subprime customers with poor or limited credit histories” noted Nicolas Retsinas, director of Housing Studies at Harvard University at Cambridge, Massachussetts. "The delinquencies and defaults have started to soar -- a lot of these lenders started to make loans and lost track of some of the fundamentals.'' Separately, Grant Bailey, analyst at Fitch Ratings noted that "with delinquencies going up, the rate of the increase doesn't appear to have slowed down,'' and that delinquencies on subprime loans have doubled in the past 12 months. According to Bailey, “If you graph that, it's a pretty steep line”.

Is Investing In Defensive Stocks A Good Strategy?

This is something I always find so amusing.

When we invest in a stock, it's only commonsense because we find that the stock represent a truly wonderful business and we are given an opportunity to invest in it a great price.

Defensive stocks? LOL!

What about Offensive stocks?

Do you reckon investing in defensive stocks just because they are 'defensive' stocks a good, 100% safe strategy during a bear market?

Anyway I am writing this post because of the comments written by Frank Barbera posted on FSO market-wrap. What is truly great is that he came up with hard facts to back what he is saying.

Enjoy!

link to article