Late yesterday, I bought some Magna International and Smithfield Foods -- cars will still be made, and Magna will make the parts around the globe. Pork will still be needed, particularly in China, and pricing power for pork will rise to take care of the rise in feed costs.
Just part of a slow deployment of excess cash in the portfolio. That will accelerate if we get a decent decline.
Position: long MGA SFD
Another month in the books, and another NFP report.
Job creation has been flat to negative for the past 5 months or so. According to Bloomberg, consensus for today's non-farm payroll is a loss of -60,000, with estimates covering a broad range from -10,000 to -150,000. The most negative forecast was ING Financial Markets; Most positive was AIG Investments.
Although ADP reported a positive 40,000 on Wednesday, none of the economists surveyed are expecting a gain in NFP. For a while, ADP was on a roll, tracking pretty close to the BLS data. Suddenly last year, they diverged. Since then, ADP has been significantly overstating job creation versus BLS. At this point, their model is not a reliable tell as to what numbers BLS will generate.
Slack continues to build in the labor market. The employment-to-population ratio is now down to 62.7%. This is the denominator of the employment fraction, and is one reason why U3 unemployment has appeared so moderate. U3 Unemployment is expected to tick up to 5.1% -- which is still relatively moderate. It is not that so many more people have jobs, but simply that less people are in the labor pool. The WSJ's Ahead of the Tape column notes that "the ratio never fully recovered from the 2001 recession, partly because businesses have been more disciplined about hiring than in the late 1990s. Long-running secular trends -- like women entering the work force -- may also have peaked."
Regardless, we do know a few things before the 8:30am report: The overall employment trend is negative, especially in new 1) private sector job creation; 2) real wage gains; 3) hours worked. These all bode poorly for near term consumer sentiment and for non essential consumption.
Speaking of sentiment: Merrill Lynch's David Rosenberg has pondered the relationship between low consumer confidence and soft -- but not abysmal -- job creation data. He tries to reconcile why merely moderate job losses have created consumer sentiment levels typically observed at much much deeper recession lows. The two are inconsistent with what you would expect from the current slowdown. Why should current economic measures -- not showing an economy deep in recession by most traditional metrics -- have a sentiment reading that is usually concurrent with a much worse environment?
One possible explanation: Job growth may have started to slow much earlier than previously thought -- as much as a full year earlier. Evidence for this can be found at the Business Employment Dynamics (BED) section of BLS.
What are Business Employment Dynamics? "Business Employment Dynamics is a set of statistics generated from the Quarterly Census of Employment and Wages, or ES-202, program. These quarterly data series consist of gross job gains and gross job losses statistics from 1992 forward. These data help to provide a picture of the dynamic state of the labor market...
Business Employment Dynamics measure the net change in employment at the establishment level. These changes come about in one of four ways. A net increase in employment can come from either opening establishments or expanding establishments. A net decrease in employment can come from either closing establishments or contracting establishments. Gross job gains include the sum of all jobs added at either opening or expanding establishments. Gross job losses include the sum of all jobs lost in either closing or contracting establishments. The net change in employment is the difference between gross job gains and gross job losses." In theory, this should be a much less noisy data series, and provide a more accurate final read on total employment. They also form part of the basis for NFP revisions.
The data released up to the third quarter of 2007 suggest that private nonfarm payrolls could be revised down by 500,000 when the next benchmarking of payrolls takes place early next year.
Here's where the correlation between sentiment and employment get reconciled: BED data says private payrolls stagnated in mid-2007. According to BED, there was virtually no private payroll growth during Q2 and Q3 in 2007. The pre-revision data from BLS shows more than 500,000 jobs created over same period of time period. Hence, a potential downward revision of half a million workers in 2007 is a probability.
The BED data implies that BLS has overstated NFP by 41k per month. This might help to explain the ADP errors, the very negative consumer sentiment 9versus where you might surmise it should be), and the retail strength in discounters over the past few months.
BLS releases NFP data at 8:30 am.
>
Sources:
Business Employment Dynamics
BLS
http://www.bls.gov/bdm/
U.S. Economy Probably Lost Jobs in May for Fifth Straight Month
Shobhana Chandra
Bloomberg, June 6 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNredapIlf2E&
Job Market Appears Likely To Bump Along
MARK GONGLOFF
WSJ, June 6, 2008; Page C1
http://online.wsj.com/article/SB121271315942750649.html
Position: ∞
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Christopher Atayan |
| Tobbaco Stocks: California Teachers Deliberations Could Be Bullish |
6/6/2008 7:30 AM EDT
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It is important to note that in the make believe world of "corporate governance" there are certain institutions that are though leaders. California State Teachers Retirement System is one of them. So there announcement yesterday that they were considering getting back into Tobbaco stocks was very bullish for the group. If they do go back in the rest of the big institutions on the sidelines will go back in like lemmings>
This will benefit RAI,UST,MO, and PM significantly. It is hard to quantify exactly how much but there is no question several billon dollars could be coming into these names. This is a well need boost,as the tobbaco stocks have all been in the doldrums.
Position: none
A few brief items in the media world for this morning:
Kung Fu Panda opens today. The film has received good reviews and there has not been a major child focused film in theatres since Horton Hears A Who. A strong marketing campaign, good tracking data, and the usual optimism about funny talking animals has box observers optimistic about the opening. Most estimates are in the low $50 million range but I sense that a higher number might be what the experts are really thinking. DWA shares pulled back more than 2% in yesterday's strong market from a new recovery high. I think the stock will rally on anything over $50 million but that a significant up move will require $60 million plus. Analysts are projecting a healthy $200 million for the total North American box office run. I think this is the minimum required to support DWA shares at current levels. $250 million or more is necessary for significant and sustained upside.
AdAge.com is reporting that NBC completed its upfront sales with $1.9 billion, up $100 million from a year ago. This is a better than expected performance and boosts confidence that the total upfront could eke out a gain. A small gain is not as much as it seems however, as NBC's "up" year is at least partially fueled by its decision to sell a greater percentage of its inventory in the upfront. Analysts are speculating that advertisers are willing to lock in current pricing to avoid a repeat of last year when scatter pricing on unsold inventory soared to a 15-20% premium to the upfront. ABC and FOX are generally thought to be in the lead in this year's upfront seeking prices increases of high single digits and low double digits, respectively. These levels would be enough to offset last TV season's ratings declines and produce a flat to slightly higher industry wide upfront on similar inventory sellout ratios. I'd consider this outcome a success as far as national ad-supported media stocks are concerned.
Position: No positions in stocks mentioned
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Steven Smith |
| Unemployment Rate Jumps Higher |
6/6/2008 8:32 AM EDT
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May non farm payrolls declined 49,000; that's better than the 60,000 decrease forecast.
The unemployment rate jumped to 5.55, up from the 5.0% level recorded in April.
Stock index futures have given up their early, though modest, gains and are now pointing to a lower opening.
Position: none
Little noticed yesterday were the comments from FedHead Kohn about fresh loan losses on real estate for the banks. As I have written, this debt problem goes well beyond the subprime write-offs. And, it represents a major risk to the economy and stock market. I pay no attention to those who claim the stock market is giving us an all clear sign. What does the stock market know? Has any single provider of recap equity for a bank or broker not gotten slammed in the trade? What happens when the recap buyers say no more? Stay tuned for scariest financial ratio ever....
Position: none
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Bob Faulkner |
| Whatever Happened to Basic Supply and Demand?
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6/6/2008 9:27 AM EDT
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Here's part of a news story from earlier in the week from Nikkei Electronics Asia:
Hemlock Semiconductor Corp, a joint venture of Dow Corning Corp, Shin-Etsu Handotai Co Ltd and Mitsubishi Materials Corp, has begun production at its new polysilicon facility that will nearly double its output of polycrystalline silicon (polysilicon) to serve the needs of the semiconductor and fast-growing solar energy industries.
This new facility will produce approximately 9,000 metric tons of new polysilicon capacity, bringing the company's annual capacity to approximately 19,000 metric tons by the end of 2008.
Now here is the essence (I'm paraphrasing) of a comment from a tier-one brokerage house this morning relative to MEMC Electronics (WFR:NYSE):
Worries about polysilicon spot prices collapsing at the end of '08 are overblown because most of the new supply is tied up in long-term contracts.
What's wrong with this picture?
If most (not all) of the new supply is for long-term contracts it means: a) that the new polysilicon will generate revenue at a far lower rate (contract prices are about 25% of spot prices); and b) to the degree that the customer's demands are satisfied, that customer will not be in the spot market keeping prices high. The production not spoken for by a long-term contract will wind up in the spot market, potentially reducing pricing pressure.
It would seem that unless there is some heretofore-unseen explosion in demand over the next 12 months, spot prices are going down. unless we've repealed the laws of supply and demand.
Position: Position: The Telecom Connection Model Portfolio is long WFR puts
I completely agree, Robert. That report was as little noticed as the fact that crude oil futures are up $10 in the past 24 hours.
I'm not going to run out and see it Steve, but I have a feeling that the Kung Fu Panda is going to be a monster. It's getting great reviews, not to mention the fact that it's only 95 minutes long, which could mean more daily screenings.
Finally, it's supposed to be hot and sticky out east this weekend, so why not go to the theater and let Regal Entertainment (RGC: NYSE) foot the air conditioning bill for a couple of hours.
Position: none
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Frank Curzio |
| 'Kung Fu Panda' Could Help Imax |
6/6/2008 10:23 AM EDT
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Steve,
Another beneficiary of Kung Fu Panda, if it does well in the box office -- is Imax (IMAX). The movie will open in 89 Imax theaters domestically and 37 internationally, and it's the first of five DreamWorks Animation (DWA) films that are expected to be released through Imax over the next two years.
Imax is scheduled to roll out 130 new theaters over the next 30 months, and in the short term, the company will release Madagascar: Escape 2 Africa -- another DWA film -- as well as Harry Potter and the Half-Blood Prince, and The Dark Knight, two movies that are expected to be blockbusters.
Imax is in my Stocks Under $10 portfolio and has been a solid performer since initiation, but I think it still has upside potential. Its new digital 3-D technology is seeing huge demand and its long-term portfolio of potential blockbusters continues to grow
-- including Iron Man 2 and Transformers 2, which are rumored to be coming to IMAX 3-D.
Position: None
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Brian Gilmartin |
| Crude Oil Requires a Good Ol' Fashioned Currency Devaluation |
6/6/2008 10:26 AM EDT
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I've been in the business long enough to vividly remember the devaluation of the Thai bhat and Malaysian ringgit in late July 1997, which was the proverbial butterfly flapping its wings that eventually led to the meltdown of Long-Term Capital one year later.
Crude oil collapsed at that time from the mid $20s to $8 per barrel, as the devaluation shuttered the economies of the Asian tigers and the currency tsunami swept around the world in late 1997 and early 1998.
If you've followed Cramer's and others missives on the energy discussion, this supply/demand imbalance can't be fixed overnight, which is probably stating the obvious.
Other than a global economic shock, which drastically causes crude demand to be curtailed, what causes crude to drop?
Position: (Long CVX, XOM and hoping today is the double-top for crude prices)
In our relentless attempt to get at The Truth, we often spill pixels showing how government data makes things appear rosier than they are in the real world.
This morning's data may have made things appear worse.
Providing a glimmer of hope that the U-3 unemployment rate isn't as bad as it appears, an unexpected surge in teenagers and 20-25 year olds is responsible for a chunk of the unemployment jump.
There's more here.
Position: none
Endlessly tired of ranting about this -- I mean, Ole Slorrer of Morgan Stanley posits a $150 spike in the next 5 weeks and .....and.....and, I don't know, what else can we look at.........??
Off of that little nothing, crude is up 11 (ELEVEN !) dollars in two days.
Fundamentally -- the speculation is fundamentally rife -- that's the only fundamentals you'll find driving this market yesterday and today. BTW, historically, Crude oil and commodities in general almost never give back much in spike environments -- article to follow next week on this interesting wrinkle in commodities -- so even after this run is done, don't expect much relief.
And as for a hope for a double top??? What's the dirtiest 4-letter word in trading??? HOPE.
DANO
Position: didn't sell enough TSO in the $28 -$29 range and suffering again on this monster fast runup in crude - cracks off $8 bucks!
Bespoke Investment Research just put out a note examining historical price spikes of 10% in the price of crude, and over the last 10 years, crude has spiked more than 10% in a two-day time period 19 times. The "average" change over the next week in the price of crude being -2.63%, with positive returns just 26% of the time, while over the following 30 days, the price of crude has had an average decline of 2.74%, with gains 31.6% of the time.
Position: Long CVX, XOM
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Geoff Johnson |
| Good Banks, Bad Banks, Ugly Banks and Tangible Book |
6/6/2008 12:35 PM EDT
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I continue to argue that banks are on their way to bottoming somewhere in the vicinity of tangible book, a process that is continuing today as banks sell off again. This makes me think that we're not that far away from a bottom in banks that is akin to what I argue we have in retail. I see retail as having made a hard bottom on the current fundamentals (which could change, but this is what they are for now). If you're sharp (sharper than me I'm afraid), one can find retailers that have upside either due to the fact that they're taking share or they're cutting costs or both. One can also find retailers with downside, too. But the point is it is not longer a group call.
I think we need to get down close to tangible book value (say 1.0 to 1.3 depending on the bank) because so many of the worst offenders in terms of tossing loan standards out the window are also the same banks that paid too much for other banks that also tossed loan standards out the window. The market is going to write off the goodwill from these ill-fated purchases even if management won't. (The older the acquisition(s) the more likely it was rational and the less likely this applies.)
If banks as a group can get down to a low multiple of tangible book I think we can have what I noted yesterday as a good bank, bad bank dichotomy. However, I'll amend that to a trichotomy of good banks, bad banks and ugly banks. Once everything is cheap enough to discount the uncertainty value investors will come in anew and this time they will find enough good apples to buy that it is worth their while and banks as a group will no longer be a group sell. As we sort through for the winners, we can ignore the bad ones and especially ignore the ugly ones; that is, banks destined to trade well below TBV and in need of major recapitalization or being wiped out.
This continued sell off in the banks is an important part of the process of moving us on.
Position: None.
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Robert Marcin |
| Insanely Controversial Long Idea |
6/6/2008 12:51 PM EDT
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Check out Happy Hour this evening on Fox Business at 5pm. I will be introducing an new long idea which I deem insanely controversial!
Position: none
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Geoff Johnson |
| I'm Dreaming Of A Christmas Only As Bad As The Last |
6/6/2008 1:02 PM EDT
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I'm thinking that if the banks can bottom such as I described in my earlier post, then I start thinking about what it would take to put the rest of our economic problems behind us and then I immediately focus on the consumer. When I focus on the consumer I immediately think about Q4. When it comes to Q4 and holiday shopping I find myself dreaming for consumers that are only as feeble this year as they were last year. In fact, I'd give a lot for that.
If retailers can do only as bad as they did last year then we might have a pathetic sort of victory on our hands as retailers may not be stuck guiding down. And if they need to guide down Q4 it would likely be by a lot as each percent of lost revenue in Q4 is an outsized chunk of annual earnings.
Such a pathetically wonderful event, though my hope, is hardly certain. Since last Q4 the consumer has been hit with higher gas prices, negative job creation, and higher unemployment. Yesterday's "beat" on same store sales was meaningless as most retailers were producing seriously negative comps. As a practical matter, retailers only continue to take down numbers, albeit in small amounts, but nonetheless the weakness hasn't stopped getting weaker.
As an aside, when retailers report Q2 in August, their last good earnings quarter (Q2 of 2007) falls out of their calculation for headline trailing p/e. I say this because as much as I realize the market values stocks on forward earnings I just have this sense that some retailers continue to stay levitated on the old numbers.
Position: None.
National Semiconductor (NSM) is ignoring the carnage today, with the help of last night's strong earnings report. The stock is up over 7% after beginning the day with a huge gap higher open. Volume on the breakout is running very heavy, helping the stock to maintain its early gains, even as the broader market has continued to drift lower.
The action today continues a very strong week for the stock. NatSemi is working on its fourth straight positive day on well above-average trade. By the close of trade today, this week will rank as one the stock's heaviest volume weeks of all time. The gains off the May lows, which held support at its 50-day moving average, now total over 20%.
Aggressive buying didn't kick in until Tuesday of this week after Amtech recommended buying the stock now ahead of earnings. The heavy accumulation continued for the next two days as investors gained confidence that a strong report on Thursday afternoon would beat expectations.
Thursday's action was very telling. NatSemi was able to push back above resistance at its 200-day with authority, making new 2008 highs in the process. After today's huge gap higher open on heavy trade, NatSemi is in great position to make a run at its 2007 highs of $29.70.
A pullback to fill the opening gap just below $23.00 would be a buying opportunity. NatSemi will need a breather at some point allowing patient buyers an chance while a new short term base is formed.
Position: No positions
Brian, you put out some interesting numbers regarding the historical pattern following past spikes in oil prices over the past 10 years.
But it raises several questions. Ten years ago, crude was trading around $20 a barrel, so a $10 move would have translated into a 50% increase in price change. Big to be sure, and certainly worthy of predicting a blowoff top.
But the data of subsequent declines over the next two-week and six-month periods don't seem to bear this out as good times to sell. Let's face it -- drops of 2.55% and 3.29% over those respective periods were hardly the beginning of sustained decline in oil prices.
Last week's decline, which also amounted to 10% decline in a two-week period, amounted a very short-lived pullback. Two days later, prices are right back to record highs.
Granted, the dynamics of the market has changed -- it is no longer the sole domain the actual users and producers that use good old price discovery for the true economic reason of locking in a price that would allow a company to predict relatively stable and reliable earnings.
Now we have the speculators, and the amount of money they control is tremendous, so even a 4% reallocation out of equities or bonds and into bonds can have an outsized impact in price.
Will new rules call for greater transparency, such as commitment of traders' reports, help to relieve some of the increasing volatility? Maybe. It would also be helpful if the memebers of the Nymex would just agree to merge with the CME Group (CME:NYSE). It would move most transactions onto the electronic platform and create a paper trail.
Sounds ironic, but the last thing someone engaging in suspect trades such as exceeding position limits would want is to have to produce the who, why and how of such transactions.
Maybe that will be the first step toward removing conspiracy of contango that speculators are in control of the market. Just ask the Bass brothers, or even the late great Simplot, which tried to corner the silver and potato markets, respectively.
Position: n/a
This two day crude oil rally is just unbelievable. Yesterday I thought it was a contained range swing, with resistance at last week's high.
No such luck. Now it looks like yet another wave in a parabola that "ain't" over yet.
Position: n.m. but my dollar-bullish (UUP) position getting beaten up mildly today.
So much for the top in oil and the bottom in the banks. Sometimes good business consitions remain good and bad stays bad. Don't get too far ahead predicting a FUNDAMENTAL change.
Position: none
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Adam Oliensis |
| Employment-Population Ratio and Recessions |
6/6/2008 2:19 PM EDT
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There's a lot of talk about whether today's Employment data makes things look better or worse than they are. Well, have a look at this chart from the St. Louis Fed's Website:
Employment-Population Ratio
Since the late '40s, any time this EM Ratio has dipped by 1 percentage point or more there has been a recession. The EM Ratio is now at 62.6%, down from 63.4% at its late'06 high, now at a 3-year low, and continuing to trend down.
This is the least-jiggered series of the monthly employment series.
Of course, "this time could be different." But, it's axiomatic that things usually aren't different.
Position: No positions mentioned.
I should follow my own advice about anticipating reversals. It woul have saved me some real dough with my coal short. Granted I am hedging some large oil/nat gas/driller longs, but it has been painful waiting for the correction in the commodity and stocks.
Position: none
Two stocks I'm watching today as crude prices go crazy are Hess (HES) and Fluor (FLR). I'm a bit surprised, as HES is trading less than 2% higher, while FLR is actually down about 3%. For what it's worth, I'm a subscriber to the "sustained high energy prices" thesis, but not necessarily the "insane $200 crude" theory.
The action over the last two days makes me think the latter is "almost, sort of, maybe" possible, and so I'd thought HES would be a particularly good play. Instead, it's still sitting 11 points below the 52-week high of $137 from mid-May. Obviously there are company-specific issues regarding production expectations from Hess' Brazilian assets, but I'd still think shares should be even higher on the long-term potential.
Meanwhile Fluor should continue to benefit, as every producer continues to improve capacity and efficiency in order to get every possible drop out of the ground as quickly as possible.
I'm thinking we should take this as a sign that the current spike is a front-month issue with limited long-term impact.
Position: none
It's now the highest volume day on the SPDR Trust (SPY) since March 17th, the Bear Stearns reversal day.
Position: n.m.
Today I sold my Ultra Russell 2000 ETFs (UWM) in the last hour of trading. This was a trade that I put on just after Memorial Day. Despite today's drubbing we still took out some profit of a few percentage points. I am holding the cash for now.
Position: None
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Tim Melvin |
| That Was Interesting |
6/6/2008 5:30 PM EDT
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After today's sell off I am amazed that the talking heads are still looking for reasons to rally. The unemployment report was said to be unreliable because so much of it was teenagers and early 20's folks who could not find work. That begs the obvious question. Why not? Simple. All the good people who lost other jobs have the service jobs the kids want, or they are working them as second jobs to make ends meet. If you know any one who owns a restaurant or other service business, ask them where the applications are coming form these days. Coupled with many of the small businesses that would traditionally hire teenagers and young adults to cut back or close, the lack of jobs for the young cannot simply be dismissed.
The Fed bank report on banks was widely ignored until Robert Marcin pointed it out this morning to readers. He is correct when he says that tangible book is the downside target for banks. Of course for some of the more troubled banks this is an almost unknowable number until we know how much more money they have lost this quarter. Many of the banks I looked at this week have enormous amounts of goodwill and other intangible assets that need to be discounted. The downside for large banks is still substantial.
I have been saying for some time that retail has serious problems. The only retailers showing gains are those that offer discounted goods, or high end consumer items outside the United States. The consumers are scared. Foreclosures are still climbing and real estate prices are still dropping. Until real estate stops dropping and consumers and financial companies can retrench, being aggressively long stocks will remain a dangerous, if not foolish game.
Position: none
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RSS FEEDS
Slack continues to build in the labor market. The employment-to-population ratio is now down to 62.7%. This is the denominator of the employment fraction, and is one reason why U3 unemployment has appeared so moderate. U3 Unemployment is expected to tick up to 5.1% -- which is still relatively moderate. It is not that so many more people have jobs, but simply that less people are in the labor pool. The WSJ's Ahead of the Tape column notes that "the ratio never fully recovered from the 2001 recession, partly because businesses have been more disciplined about hiring than in the late 1990s. Long-running secular trends -- like women entering the work force -- may also have peaked."
Regardless, we do know a few things before the 8:30am report: The overall employment trend is negative, especially in new 1) private sector job creation; 2) real wage gains; 3) hours worked. These all bode poorly for near term consumer sentiment and for non essential consumption.
Speaking of sentiment: Merrill Lynch's David Rosenberg has pondered the relationship between low consumer confidence and soft -- but not abysmal -- job creation data. He tries to reconcile why merely moderate job losses have created consumer sentiment levels typically observed at much much deeper recession lows. The two are inconsistent with what you would expect from the current slowdown. Why should current economic measures -- not showing an economy deep in recession by most traditional metrics -- have a sentiment reading that is usually concurrent with a much worse environment?
One possible explanation: Job growth may have started to slow much earlier than previously thought -- as much as a full year earlier. Evidence for this can be found at the Business Employment Dynamics (BED) section of BLS.
What are Business Employment Dynamics? 
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