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Banks & Finance Archive

Trading Brazil: Is the next teet to milk Brazil financials and NOT Commodities?

PBR and RIO have been Brazil’s stars in this latest Brazil run, dominating positions in the iShares Brazil ETF ticker EWZ. PBR and RIO’s stories are well known, and I actually think RIO looks done for now given the continual weakness in nickel prices. Could financials be the next leg up for Brazil’s markets?

BLOOMBERG: REINSURERS RUSH TO BRAZIL AS PREMIUMS CLIMB 40%

“By Telma Marotto

July 11 (Bloomberg) — Swiss Reinsurance Co. and Munich Re, the world’s two largest reinsurance companies, are leading a rush to Brazil to capitalize on the biggest deregulation of a market since China opened up more than six years ago.

At least 13 companies have been authorized to operate since the government ended its 69-year monopoly in April, said Armando Vergilio dos Santos Junior, head of Brazil’s insurance regulator, who estimates the number will reach 40 by December. He expects reinsurance premiums to rise 40 percent to $3.5 billion this year and then double to $7 billion by 2011.”

Full Article: http://www.bloomberg.com/apps/news?pid=20601109&sid=aGQItoNVF_As&refer=home

SuckingLess.com, My New Investor Research Site, Debuts!

SuckingLess Logo

Jim Cramer has always said, its not “buy and hold” but “buy and homework.” Too many “investors” do not know what they own when they buy a stock, which is just reckless, but I don’t think its completely their fault. Most people don’t now how to do proper research, or have the background to understand how to do it. Even my friends who work at mutual funds often ask me where I get my info for the analysis I put on this site. This is why I started SuckingLess.coman investor research and education magazine/community.

SuckingLess.com is a collection of the best industry and company websites to learn about the companies you own. When you own a stock, you’re, in a sense, an owner in the company. So, you should at least understand the basics of the business or industry, which means you should probably read what someone who works in that industry would read. Still, this ISN’T you’re actual job and making it so would be too time consuming, so I’ve also tried to filter SuckingLess.com to have only the most relevant and easiest to understand websites.

I want SuckingLess.com to be a COMMUNITY, a tool for ALL OF US. So, I invite everyone to come and participate on the site, SUBMIT your favorite research resource to help others learn the way I’m trying to get this started with my own favorite bookmarks. Please RATE the sites you’ve used before to help others know what’s most useful, and leave comments on how you’re using the sites or anything you’ve learned. Again, to help others. I’m sure you’ll learn something from the site, so give back a little and share your investing knowledge and experience with us!  Sometimes its not immediately obvious what you can learn from a website, so give people a little insight too if theres a special way you’ve found to tap into the markets with a certain website.

For example, I don’t have many resources on financials, healthcare, or retail/discretionary because, as readers of this site you know, I focus on industrials, tech, and energy sectors. So, help me learn a bit too!

Finally, PLEASE PLEASE send me feedback on how to make the site more useful to you. This is a tool for all of us, so lets make this what WE need to do the best research. And get your friends and trading buddies to help build SuckingLess.com too. Thanks and hope this is what we all need to become better investors, i.e. Suck Less!

P.S. 90% of mutual funds underperform the markets…so sucking is not something to be ashamed of. We just have to suck less as we learn more.

Must be a Goldman research joke: Buy Puts on Industrials? Really!?

Wednesday’s Barron’s article “Other’s May Catch GE’s Industrial Disease” cites Goldman options strategists John Marshall and Stuart Kaiser recommending clients to buy puts on the Select Sector Industrial SPDR (XLI), a ETF that’s supposed to track the industrial sector. The recommendation was to buy XLI June 36 puts, which was trading around $1.10 while the XLI was trading at $37.37 at the time of the article. Marshall and Kaiser’s report cited the following reason (which I think is totally ridiculous):

“The GE earnings miss and guidance revision last week highlights how the increasingly weak macro environment can quickly sneak up on even the most diversified and well-run of industrials businesses,”

I would actually be buying calls in specific industrial names and have Honeywell (HON) and Union Pacific (UNP) calls on my book for the past 2 weeks.

My biggest problem with this recommendation is the XLI is about 18% GE (making the XLI basically a lite GE play), its kind of late to buy the puts AFTER GE took that dive from $37ish to$32ish! And why did GE take that big plunge? It sure wasn’t because GE is an industrial. It was because we found out GE was more of a financial than an industrial where GE’s financial unit took GE’s earnings per share down by 7 cents and negated any positives the industrial units were producing.

None of the other components in the XLI has any financial units like GE (hence they’re true industrials, unlike GE). After listening to GE’s call, one should actually be bullish on export industrials. Read the rest of this entry »

Restructured Portfolio: Dynamics Engineering & Industrialization Focus Fund

Finding my comfort zone. Restructuring the portfolio to suit my strong point. Not trying to run a diversified portfolio. I’m not running this for retirement. Its a specialized fund in science, engineering, and technology. Most picks here are for the long term, looking at supercycles of 7-14 years that will dwarf the credit crisis we have now, which is already making Paul Bunyan look like a baby (much much bigger, and hairier).

  1. Union Pacific (UNP) – Weak dollar. Lets keep exporting stuff! Maybe some lead back to China? Just kidding. How about just some POT(ash).
  2. Potash Corp. of Saskatchewan, Inc. (POT) – If you saw how excited the CEO was on Fast Money talking about the potential growth, you’d think he was smoking some. Perfect explanation of the growth: once people taste meat, they don’t go back. Meat requires several times more grains to produce. Show me the POT baby.
  3. Companhia Vale do Rio Doce (RIO) – Steel producers being able to raise prices?  I think the real beneficiary here is Companhia Vale do Rio Doce (aka CVRD).  CVRD is the hand that’s squeezing the toothpaste of steel producers’ margins.  I don’t think steel producers want to raise prices.  Commodity prices are forcing them to.  They’re just passing on CVRD’s price hikes, not really expanding margins and making more mula.
  4. Southern Copper Corp. (PCU) – Even though we don’t notice it, civilization is built on copper.  And man oh man are we building.
  5. Precision Castparts Corp. (PCP) – Riding the commercial airplane replacement and buildout cycle. Also, essential for the furnaces going into the power plants popping up in China every 2 weeks.
  6. ABB Ltd. (ABB) – Perfect play on the power grid (along with PCU and PCP), both the decaying ones in the U.S. and the new grids to be build in China, India, Russia, Europe, Mid East, and Latin America. A growth-value. Hard to say that about many stocks. A lot of advanced energy-generation and energy-conservation technologies no one talks about.
  7. Foster Wheeler, Ltd. (FWLT) – No MDR, but should approach MDR’s perfection with the opportunities in the Middle East and especially in Asia. The new products they’re pushing including the CFB and Pluto platforms should help margins & efficiency explode.
  8. McDermott International Inc. (MDR) – 4000% over 5 years, and still trading at the lower end of it’s P/E range. This should not be classified as a Engineering & Construction company. It’s a highly efficient mass (low cost) producer of oil & gas infrastructure.
  9. TransOcean, Inc. (RIG) – love National Geographics’ “Oil, Sweat, and RIGs” series.
  10. Chesapeake Energy Corp. (CHK) – Natty (natural gas) is so much cheaper on a BTU energy basis than oil. L.A.’s Long Beach harbor is already switching to NatGas for clean energy, other municipalities will do the same.
  11. First Solar, Inc. (FSLR) – CdTe is the RIGHT semiconductor material for capturing solar energy, silicon is not. Simple as that.
  12. L-3 Communications Holdings Inc. (LLL) – Best defense contractor. Period. Little to no operational risk and in a highly efficient niche of government contracts. No design and manufacturing problems that everyone from Lockheed Martin (LMT) to Northrop Grumman (NOC) and Boeing (BA) deal with daily. Raytheon (RTN) could have been like LLL, except RTN’s management prefers to run RTN like feudalism Japan.
  13. Corning Inc. (GLW) – How awesome is that signal on the oscilloscope for the ClearCurve optical fibers?!?!!! THAT…is what gives engineers wet dreams.
  14. Apple Inc. (AAPL) – iPhone should NOT a smartphone and shouldn’t be compared to a Blackberry (RIMM) or a Nokia (NOK) product. The iPhone is a full-fledged tablet PC with a complete operating system.
  15. FTI Consulting, Inc. (FCN) – Anticipating lots of legal activity required in the aftermath of the credit/mortgage apocalypse. Municipals suing financial corporations, corporations restructing, etc.
  16. Annaly Capital Management, Inc. (NLY) – Attempt to be the vulture, not the meat in this credit crisis. I can take the pain. No pain no gain.
  17. Hologic Inc. (HOLX) – @ forefront of women’s diagnostics technology. Because like most people, I have a mother.
  18. Altria Group Inc. (MO) – Yield, weak dollar, defensive diversification.  Don’t smoke. It’ll make you ugly…like a camel.
  19. McDonald’s Corp. (MCD) – MickyD’s Baby! Yield, weak dollar, defensive diversification.

**Disclosure: Author is long UNP, POT, RIO, PCU, PCP, ABB, FWLT, MDR, RIG, CHK, FSLR, LLL, GLW, AAPL, FCN, NLY, HOLX, MO, MCD as of this post. **

Checking in from a Self-Imposed Trading Vacation

After going to some 60% cash in early January, I’ve taken a seat high up in the bleachers to just watch the action and try not to get too involved.  As I keep hearing, and have been trying to do, patience is your best trading skill in a market like this.  If you’re not a great swing trader (I guess I’m ok, but its not gonna be how I make my name), then its probably best to take it slow and not throw everything at the momentum names like Apple (AAPL) last year.  I’m not particularly a big fan of Warren Buffet, but yes, maybe it is time to go to Buffet style this year as we meander around and frustrate short term players.  Even the fact that Warren himself has come out to play, getting involved with the bond insurers and becoming the biggest share holder in Kraft.

I do not believe the worst is over.  Even as the banks’ writedowns keep coming in, I’m still waiting for the Armageddons that’s the $2 Trillion aggregate damages related to mortgages and CDOs Annaly (NLY) CEO Mike Farrell has estimated.  With under about $200 Billion in writedowns and borrowings from the Fed’s TAFy auctions, we still have a ways to go as you can see.  Having said that, these go-nowhere days are great for doing homework.  I’m going to pick at some of my long-term investments on today’s rather bullish action so far (bullish because I would’ve expected us to be down much more on the inflation data in the CPI and the breakdown of another private equity deal between 3COM and Bain Capital).

1. MO – building up this position to be the largest holding in the portfolio head of the breakup of the domestic and Philip Morris International businesses and the opportunities that comes with, including increased buybacks, dividends, and realization of extraneous assets such as Altria’s 28.6% stake in SAB Miller.  No question in my mind that the Fed’s excessive rate hikes have put the U.S. into a recession, which makes defensive names like Altria great right now.

The Fed raised rates to knock down inflation, which has been caused by international growth not U.S. growth.  I guess the Fed is finally finding out that it’s “broad hammer” tool of interest rates hammers the U.S. much harder than the rest of the world.  So, global growth continues, commodities continues to rise, and the U.S. has to deal with stagflation where inflation continues because the rest of the world keeps growing and Americans have less money to buy the inflated goods because the economy’s weak, their houses are worth less, and their retirement funds have shrunk.

2. PCU – So, I’ve taken a starter position in PCU with the intention of building up a larger position.  U.S. home construction has been nonexistent and thus a non-factor in copper prices.  Manufacturing activity has fallen off quite a bit in the U.S., yet copper prices are again trying to take out that $375 mark (as pointed out by Helene Meisler on RealMoney.com today).  Also, China’s determination to keep Rio Tinto out of BHP’s hands tells me commodities are still in short supply, or so says those in charge of the country…who I’d say are much much smarter than me.

3.  POT – Same here.  Higher commodities are here to stay.  If you saw how the CEO was salivating bullishness on Fast Money last week, you’d want into this stock too.  I’m taking a starter position and hoping this thing pulls back, although it’s just tapped another all-time high and got legs to go higher.  The interesting point that the CEO made was, once the rising middle class tries meat as a source of protein, they never go back.  But as I learned in h.s. biology, it more energy efficient to have a vegetarian diet than to feed those crops to livestock.  In other words, higher demand for meat requires a lot more crops, and thereby requiring a lot more fertilizers as well as farmland (bodes well for Deere still).

4.  PCP – Boosted this position to a meaningful size as orders for the 787 Dreamliner as well as smaller planes keep coming in.  I thought we could see another big drop in 787-related names, but I’m not so sure now so I want to at least have a good stack of PCP.  Boeing’s nearly finished with another 787 for testing purposes, and have 2 more on the way, so demand for PCP’s products aren’t going to fall off as sharply as if the whole production was on hold.  Also, China building a power plant every 2 weeks certainly helps the demand for high-performance metals.

5.  UNP – Coal on fire? (no pun intended)  Got to move the coal to the coast somehow so they can be shipped to China.  Same with the ag story and moving fertilizers to the coasts.  See how nice the world starting from the U.S. coast and beyond looks?  Already had a position. Building it up.

*Disclosure: Author owns AAPL, MO, PCU, POT, PCP, and UNP as of this post * 

Fed cuts 0.75 bps, FOR OCTOBER. Now let’s cut for November and December

Why couldn’t the Fed cut by 0.5 or 0.75 back on October 31st?  Wasn’t hard to see the train coming at ya, even a nobody like me saw it coming, you’re telling me the Chair at Princeton’s Economic Department couldn’t?  Great, we’ve finally caught up to October now. If we get a 0.5 or 0.75 at the meeting at the end of January, maybe we can get to where December 2007 should’ve been, and the market calms down for a while.  But just look at where the 2-yr notes are!  2.04%!  That’s a full 1.5 cuts that the market says it needs now. Ok, build in some panic and call it a 2.25 or 2.5% yield on the 2-yr just to catch up to the current environment.  Let the Fed funds bullets fly Ben.  Shoot them now while we’re still alive.

Banks are not worth nothing, but next to nothing

Happy MLK Day everyone! Probably not the most respectful to Dr. King to put out an article like this today, but given how the global markets are trying to play catch-up (or catch-down) to the U.S. market’s selloff, I think the cat’s out of the bag. The global markets are just now, yes JUST NOW, realizing they are the next line of infantrymen to get cut down in this credit debacle. While I’ve been saying the global story is strong, I was looking out 5 years into the future. In the short term (6 months to a year) there is no way the rest of the world will avoid a recession alongside the U.S. despite all the talk about decoupling and the ECB still talking inflation. I’m sidestepping this market, running into the hills, and watching from above until the carnage stops.

I want to discuss how this complex CDO mess finally makes sense to me, and how much further we have to fall. But first, my short rundown of why the world can’t decouple in the short term, even with China, India, Europe, Mid-East, and South America running strong. Just as China has been growing like a weed by being the manufacturer of the world’s goods, selling to everyone, America is the flip side of that being the ultimate consumer. A lot of people argue that exports to the U.S. as a percentage of China’s sales is much smaller now so China’s damage by the U.S. will be contained.

$U.S. -> China

Ok sure, that’s the first link in the sales chain. But why couldn’t analysts go just one or two steps further? China also has a lot of exports going to the growing European Union, but a main driver of the EU’s ability to buy stuff from China is because the EU has benefited to some degree from business in the U.S.

$US -> EU -> China

The point is, the U.S. is the stilts upon which the world is built. Wherever you are in the world, some town in Hungary or a city in Korea, you may not have a direct line of sight to see the U.S. below you…but it’s below you. The termites called CDOs just have to eat through one of these stilts, and you’ll probably have further to fall than the U.S.

And, aside from the EU’s business in the U.S., the EU’s banking system has been smacked by the mortgage crisis just as U.S. banks have. EU Central Banker Trichet can talk inflation all he wants, but the central bank’s action speaks louder than words as they keep pumping in more liquidity than Uncle Ben Bernanke is willing to.

This brings us to why I’ve finally given in to the bearish scenario and flipped on the negativity switch. It took Ambac’s potential downgrade by Moody’s, Merrill Lynch’s earnings, and Uncle Ben’s testimony on Thursday together to make me understand what this crisis is all about and how much further down we have to go. I may be wrong, but most market players are wrong more than they are right, so read into this as much as you want. This is just my understanding.

First, the monoline insurers such as Ambac are down more than 90% year-over-year on what? Maybe SOME calls on the mortgages they insured for loans made in 2005, 2006, and some 2007? What about the rest of the neighborhood in California or Arizona whose value’s getting floored by the defaults down the street? What about the defaults to come as the mortgages resets in February? Ok, so count these monoline insurers gone. That’s not the end of the story, however. Ambac was providing insurance on SOMETHING, and just like your home or car, if your insurance doesn’t pay for the damages well, YOU’RE gonna have to eat the bill. In this case, it’ll be the banks and brokerages, U.S. and international banks alike, who got caught with their hands in the cookie jar.

So what does this mean? The banks and brokerages become their own insurers and have to probably write down even more than they already have, because they have been valuing the write-downs based on insured values. Ooops! Safety net’s gone! The value is likely to be closer to ground ZERO than not. I believe this explains why Merrill Lynch’s new CEO John Thain continues to look for investors and capital infusions from sovereign funds all over the world. Merrill, like other banks, must keep hoarding cash as they have become their own insurers and have to pay for what the insurers would have. Ambac may say they don’t need any more capital, but I’m with John Thain. Thain is one smart cookie. As he continues to hoard cash to build up his bomb shelter, I’m staying pessimistic about this market.

If I had to summarize Uncle Bernanke’s testimony on Thursday, it would be, he’s not doing anything, not cutting rates, not pumping in more lending more like the EU is doing, BECAUSE HE DOESN’T KNOW WHAT TO DO.

As Chief Klough said to Lt. Tyler in the movie U571, “You’re the skipper now. And the skipper always knows what to do, whether he does or not.” I believe most market participants heard the same thing, which is why the market got clotheslined on Thursday after the testimony.

(yes, this is my favorite Big Ben photo. I call it “Gansta Ben”)

I had a whole schpeal to complain about Bernanke, but I threw it away because it seems pointless now. He may be right in trying to look for alternatives to a interest rate cut. The rate cuts so far have not worked, and it may not be because he didn’t cut enough or raised rates one time too many in ’06. Banks continue NOT to lend, freezing the banking system, regardless of how much liquidity is pumped in from rate cuts, TAFy auctions, etc. Why? Because all the banks are doing what John Thain is doing, hoarding cash, building their reserves, for when ALL the monoline insurers become dust in the wind AND the bulk of the bad mortgages from the last several years are dealt with. The first condition, the executions of the monoline insurers might be closer than ever. The faster these insurers give up, the sooner the banks can value their CDOs for what their REALLY worth, and we can all put this behind us. But these insurers refuse to just close up shop and go work at the docks like in the 1930’s. Still, the rating agencies can quickly end everyone’s suffering when they downgrade the insurers holdings push them under.

The second condition, writing down the bulk of the bad mortgages from 2005-2007 might be a little harder to do, as it’ll take time for people to make decisions, take the defaults and run, etc. In any case, the sooner we write down these CDO’s completely, the safer the economy will be. The economy is in a recession now. Even though the last few years have been great for the economy, leaving the corporate balance sheets as pretty as they’ve ever been, we are starting to burn through that cash, and fast. Each day we drag this on and the banks can’t write down their CDOs completely, the longer and deeper the recession will be. Until both these conditions are met so the banks are able to know their full CDO exposure, interest rate cuts will mean little as banks will just stuff that cash away under the bed. This isn’t the Nasdaq in 2000 when companies were worth nothing, but a lot of the banks as well as businesses that need loans to stay alive, are worth a lot less than the numbers on Yahoo! finance.

With that, I’ll begin a recession quote of the day, starting with:
“Sorry Johnny, Daddy gets the bread because daddy has to go looking for work tomorrow. Go melt some snow and drink that.”
“At least in the 1930’s, this dollar I have left would sure go a lot further.”

**Disclosure: no positions in the stocks mentioned. **

Carving my Ben-o-lantern, addendum

p.s. A friend of mine counters, how about the inflation from higher import costs as the dollar falls? Alright, I’ll give you the continue falling of the dollar (initially, until investors, both domestic and foreign, start putting money back into the U.S.). Still, who are we importing the most from? China. Why are we so worried about the quality of Chinese imports? Because we get so much from them. The U.S. is the world’s biggest consumer, and thus China’s biggest customer. China has to export to the U.S. If need be, they’ll adjust their Yuan currency and maybe some trade restrictions as well. Yes, they can do that fast and effectively. Just another benefit of being communist, its unlike the U.S. free markets where there are as many moving pieces as there are large and small business and difficult to turn around on a dime.

Carving my Jack-o-,no wait, Ben-o-lantern

For the record, I believe the Fed should/must cut 50 basis points, reinvigorate the rest of the economy to compensate for the coming mortgage resets in February that will cause even more trouble. This, I believe will give foreigners more confidence to come back to the U.S. to invest, buying dollars to do so, and thus stabilizing the dollar. The dollar isn’t getting manhandled by lower rates but simply, who the heck in their right minds would need dollars? If they don’t need dollars to invest in the U.S…they’ll dump the dollar to buy other currencies where they are actively investing. Am I just pulling this stuff out of my, well, you know. Not really, check out these stats:

“Including ETF activity, Equity funds report net cash outflows totaling -$2.223 billion in the week ended 10/24/07 with Domestic funds reporting net outflows of -$2.504 billion and Non-domestic funds reporting net inflows of $281 million” ~AMG Data Services for week of 10/24/07

I’m not biased because I’m long equities (at least I don’t think so!). I can go to 100% cash in a few clicks of my mouse. What I’m keying off of is how many companies were crying on their Q3 conference calls (as much as CEO’s, CFO’s, and directors can cry on telecons). Hiding, under the kitchen sink (those who haven’t thrown it out like Citi), rolled up in the fetal position, crying, begging for mercy. That’s how it looks going forward for these companies, and its not just the banking and housing sector anymore. Retail, manufacturing, steel, logistics. All crying. They’ve tossed out the baby (with the bath water). They’ve thrown out the kitchen sink (now that there’s no baby or bath water in there…yes they had to wash the baby in the sink because they couldn’t afford a bathtub). They are going to lose their shirt and pants soon if things don’t change. I judge Ben Bernanke’s intelligence by the quality of his baldness- it’d good quality baldness. Says his brain is so powerful the radiation burned off his hair. Let’s see what you got Uncle Ben.

(yes, this is my favorite Big Ben photo. I call it “Gansta Ben”)

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