* In refining a barrel of crude oil, U.S. refiners like Valero (VLO), Tesero (TSO) or Conoco Phillips (COP) produce roughly two units of gasoline for every one unit of diesel/heating oil products...meaning that the crack margin from gasoline (vs. heating oil) is far more important to the earnings momentum of U.S. oil refiners
Data Courtesty: Daniel Dicker, Thestreet.com, snagged on 3/18/08.
Full Disclosure: I currently own shares of COP.
Tuesday, March 18, 2008
The Lessons from Bear Sterns' Fallout
Bear Sterns (BSC), last year's #2 largest U.S. mortgage originator, went under because they and their lenders were STUPID and reckless. Talk about not understanding the risk level of your own positions...
From what I've gathered, Bear had about $10 Billion in pure 'book value' assets...problem is that they borrowed 40 times this amount from their creditors....to eventually hold about $400 Billion worth of assets....1/3 of these $400 Billion in assets were mortgage-backed assets aka JUNK that they became stuck holding and unable to offload when credit markets started tightening up.
Congrats Bear, you're 85 years as a financial institution are OVER....congrats to JPMorgan (JPM) who actually made out on the deal by inheriting NO RISK and were basically awarded the good Bear assets ('prime brokerage' business) by the Federal Reserve at a CHEAP price ($230 mil or so).
Because of reckless irresponsibility demonstrated by Bear, the market is now stuck wondering what other institutions are at risk because they stupidly levered at 30-40X their own assets...most people are betting Lehman's in trouble as well (down 20% today) but I'm hoping its not near the same extent as STUPID Bear.
Also, for the time being, I am now avoiding ALL 'wounded' U.S. financials besides JP Morgan and Goldman Saachs (direct beneficiaries of the Bear deal...Goldman has benefited from gaining marketshare). The Bear Sterns debacle totally changes the stock valuation metrics investors use to determine the value of banks and brokers. Book Value used to be a measurement that had Wall Street credibility....but not anymore....Bear Stern's perceived book value was $80/share prior to the JP Morgan bid for $2/share. Countrywide Financial has a 'book value' of $22/share...but now that means absolutely NOTHING. In my opinion it doesn't make sense to buy the U.S. financials until there's a new consensus on how to TRULY value their assets....because until then you have no idea what they are really worth.
Full Disclosure: I currently own shares of GS.
From what I've gathered, Bear had about $10 Billion in pure 'book value' assets...problem is that they borrowed 40 times this amount from their creditors....to eventually hold about $400 Billion worth of assets....1/3 of these $400 Billion in assets were mortgage-backed assets aka JUNK that they became stuck holding and unable to offload when credit markets started tightening up.
Congrats Bear, you're 85 years as a financial institution are OVER....congrats to JPMorgan (JPM) who actually made out on the deal by inheriting NO RISK and were basically awarded the good Bear assets ('prime brokerage' business) by the Federal Reserve at a CHEAP price ($230 mil or so).
Because of reckless irresponsibility demonstrated by Bear, the market is now stuck wondering what other institutions are at risk because they stupidly levered at 30-40X their own assets...most people are betting Lehman's in trouble as well (down 20% today) but I'm hoping its not near the same extent as STUPID Bear.
Also, for the time being, I am now avoiding ALL 'wounded' U.S. financials besides JP Morgan and Goldman Saachs (direct beneficiaries of the Bear deal...Goldman has benefited from gaining marketshare). The Bear Sterns debacle totally changes the stock valuation metrics investors use to determine the value of banks and brokers. Book Value used to be a measurement that had Wall Street credibility....but not anymore....Bear Stern's perceived book value was $80/share prior to the JP Morgan bid for $2/share. Countrywide Financial has a 'book value' of $22/share...but now that means absolutely NOTHING. In my opinion it doesn't make sense to buy the U.S. financials until there's a new consensus on how to TRULY value their assets....because until then you have no idea what they are really worth.
Full Disclosure: I currently own shares of GS.
Sunday, March 16, 2008
The Inflation Trade
As the U.S. continues to cut interest rates (and subsequently pressure the dollar lower), expect fears of inflation to aid trades in the following U.S. dollar-denominated sectors...The Inflation Trade:
1.) Gold + Gold Services
2.) Energy + Energy Services:
- Crude OIL
- Natural GAS
- Ethanol
- Coal
3.) Non-Gold Commodities (including Food/Ag) + Services:
- Copper
- Steel
- Wheat
- Platinum
1.) Gold + Gold Services
2.) Energy + Energy Services:
- Crude OIL
- Natural GAS
- Ethanol
- Coal
3.) Non-Gold Commodities (including Food/Ag) + Services:
- Copper
- Steel
- Wheat
- Platinum
Components Of Money Supply
Components of Money Supply:
M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
M1: M0 - those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.
*The Federal Reserve ceased publishing M3 statistics in March 2006, explaining that M3 did not appear to convey additional information about economic activity compared to M2, had not been used in determining economic policy, and that the costs to collect M3 data outweighed the benefits. Some of the data used to calculate M3 are still collected and published on a regular basis.
Data Courtesy: Wikipedia
M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
M1: M0 - those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.
*The Federal Reserve ceased publishing M3 statistics in March 2006, explaining that M3 did not appear to convey additional information about economic activity compared to M2, had not been used in determining economic policy, and that the costs to collect M3 data outweighed the benefits. Some of the data used to calculate M3 are still collected and published on a regular basis.
Data Courtesy: Wikipedia
REF - U.S. Fed Primary Dealers (Discount Rate)
The Federal Reserve Bank of New York's list of primary dealers (those eligible to borrow from the Federal Reserve at the Fed's discount rate):
U.S. Fed Reserve Primary Dealers:
* BNP Paribas
* Bank of America
* Barclays Capital
* Bear Stearns (no longer solvent)
* Cantor Fitzgerald
* Citigroup
* Countrywide Financial (merged with BAC)
* Credit Suisse
* Daiwa Securities
* Deutsche Bank
* Dresdner Kleinwort
* Goldman Sachs
* Greenwich Capital Markets
* HSBC
* J. P. Morgan
* Lehman Brothers
* Merrill Lynch
* Mizuho Securities Company
* Morgan Stanley
* UBS Securities
Data Courtesy: Wikipedia.com, snagged on 3/16/08.
Full Disclosure: I currently own shares of GS.
U.S. Fed Reserve Primary Dealers:
* BNP Paribas
* Bank of America
* Barclays Capital
* Bear Stearns (no longer solvent)
* Cantor Fitzgerald
* Citigroup
* Countrywide Financial (merged with BAC)
* Credit Suisse
* Daiwa Securities
* Deutsche Bank
* Dresdner Kleinwort
* Goldman Sachs
* Greenwich Capital Markets
* HSBC
* J. P. Morgan
* Lehman Brothers
* Merrill Lynch
* Mizuho Securities Company
* Morgan Stanley
* UBS Securities
Data Courtesy: Wikipedia.com, snagged on 3/16/08.
Full Disclosure: I currently own shares of GS.
Tuesday, March 11, 2008
A Crude Ending ?
In the face of a U.S. recession, the price of crude oil continues to ascend. Oil is currently trading near all-time (non-inflation adjusted) highs of $108.41/barrel. This begs the obvious question - when will the commodity reverse course and finally reflect a global slowdown? When will the current crude oil 'winning steak' end?
Does the Fed's latest $200 Billion move...one that doesn't involve reducing U.S. interest rates...signal a potential bottom in the U.S. dollar and therefore a potential trading top in the dollar denominated price of crude oil ?
Per data gathered from TheStreet.com on 3/05/08:
*The U.S. is the world's largest consumer of crude oil and consumes 21.0 million barrels a day
*China is the second largest consumer of crude oil and consumes 7.2 million barrels a day
* The U.S. currently makes up 25% of total world crude oil consumption per day (China makes up 9%)
Data Courtesy: TheStreet.com.
Does the Fed's latest $200 Billion move...one that doesn't involve reducing U.S. interest rates...signal a potential bottom in the U.S. dollar and therefore a potential trading top in the dollar denominated price of crude oil ?
Per data gathered from TheStreet.com on 3/05/08:
*The U.S. is the world's largest consumer of crude oil and consumes 21.0 million barrels a day
*China is the second largest consumer of crude oil and consumes 7.2 million barrels a day
* The U.S. currently makes up 25% of total world crude oil consumption per day (China makes up 9%)
Data Courtesy: TheStreet.com.
The $200 Billion MASTER Plan ?
The Federal Reserve's recently announced $200 Billion plan allows the prime brokers (C, GS, MER, BAC, BSC, LEH, MS, etc.) to use some of their troubled assets (including triple A rated mortgage-backed assets) as collateral for borrowing against $200 Billion worth of new loans being issued by the Fed in order to stimulate the economy.
This is a rather large deal because the Fed is in effect creating a temporary market/demand for the toxic 'assets' that are severely handicapping the ability of the brokers to lend/take on additional balance sheet risk in the 'free market'. One important point to note is that this market for triple A rated mortgage-backed debt may only be temporary- the current terms expire in 28 days...but the Fed has stated that, if needed, it would consider renewing the terms in the future. Could the Fed be willing to continue to renew its terms and thereby indirectly promote liquidity into the system until the credit markets FINALLY stabilize??? Maybe all of wall street's problems wouldn't be solved by this initiative (these shoddy assets will still exist and may continue to lose value until HOUSING stabilizes) but it sure does seem like it could prevent systematic failure in the U.S. financial + credit complex.
The Fed's action indicates it is aware and concerned about the current global 'credit crunch' seizing up debt markets worldwide. It is also introducing a new tool to fight against the 'illiquidity' created by the credit crisis...one that doesn't involve reducing interest rates...one that may also temper the market's concerns of inflation because it does not directly pressure the U.S. dollar downward. If the Fed is able to succeed with this tool then could it mean we are we finally nearing the bottom of the U.S. dollar's decline against the euro/yen???
This is good news and FINALLY shows some creativity by the Fed !
Full Disclosure: I currently own shares of GS.
This is a rather large deal because the Fed is in effect creating a temporary market/demand for the toxic 'assets' that are severely handicapping the ability of the brokers to lend/take on additional balance sheet risk in the 'free market'. One important point to note is that this market for triple A rated mortgage-backed debt may only be temporary- the current terms expire in 28 days...but the Fed has stated that, if needed, it would consider renewing the terms in the future. Could the Fed be willing to continue to renew its terms and thereby indirectly promote liquidity into the system until the credit markets FINALLY stabilize??? Maybe all of wall street's problems wouldn't be solved by this initiative (these shoddy assets will still exist and may continue to lose value until HOUSING stabilizes) but it sure does seem like it could prevent systematic failure in the U.S. financial + credit complex.
The Fed's action indicates it is aware and concerned about the current global 'credit crunch' seizing up debt markets worldwide. It is also introducing a new tool to fight against the 'illiquidity' created by the credit crisis...one that doesn't involve reducing interest rates...one that may also temper the market's concerns of inflation because it does not directly pressure the U.S. dollar downward. If the Fed is able to succeed with this tool then could it mean we are we finally nearing the bottom of the U.S. dollar's decline against the euro/yen???
This is good news and FINALLY shows some creativity by the Fed !
Full Disclosure: I currently own shares of GS.
A Bullish Bet on NATURAL GAS?
Chesapeake Energy (CHK) CEO, Aubrey McClendon, bought 100,000 shares of CHK at an avg price of $45.70/share on 3/06/2008 ($4.5 million worth of stock).
On 3/05/2008, Aubrey bought $400,000 shares of CHK or $18.5 million worth of stock!!
Looks like NATURAL GAS will continue its somewhat stealth run (natural gas is currently trading at $10.02 per BTU). Jim Cramer recently stated he had a $16 per BTU target on natural gas.
Full disclosure: I currently own shares of HAL and COP.
On 3/05/2008, Aubrey bought $400,000 shares of CHK or $18.5 million worth of stock!!
Looks like NATURAL GAS will continue its somewhat stealth run (natural gas is currently trading at $10.02 per BTU). Jim Cramer recently stated he had a $16 per BTU target on natural gas.
Full disclosure: I currently own shares of HAL and COP.
Sunday, March 2, 2008
A March/April Comeback for Google ?
When will Google (GOOG) bottom???
The stock is down 220 points (32%) year to date and much of that decline has been attributed to a perceived slowing in the economy and worries about declining advertising growth in the future. Recent internet survey data released from comSCORE last week seemed to SCARE shareholders as the stock dropped precipitously when it was announced that Google's amount of received 'paid clicks' dropped 7% sequentially (from December '07 to January '08) and was flat year over year (i.e: no growth). There is no doubt that Google is a popular momentum stock and that it needs to be punished when there is documented evidence of its growth slowing. But..as is always the million $ question...at $450/share (a $140 Billion marketcap...trading at 30x forward earnings), is the selling overdone?
I believe so. And I also believe GOOG may be ripe for a bounce as we approach a potential catalyst in early April - the European Union's decision regarding the Google-DoubleClick merger. If the EU approves the $3.1 Billion merger on April 2nd, 2008 (and I see little reason for them not to given increasing competition a la Microsoft's recent $45 Billion bid for Yahoo....unless its based purely on anti-American sentiment which could unfortunately be the case), then Google should see a significant pick-up in a potentially key earnings growth stream - DISPLAY advertising.
Unfortunately, Google does not currently break out its % of sales by advertising segment (search, display, print, television, etc.) on its annual 10-K report. However, according to the Wall Street Journal, display advertising currently represents about 20% of all online advertising revenue....if Google is finally ALLOWED by the EU to make inroads against the display advertisting segment then the stock could rebound (and maybe rebound with some velocity).
My fundamental reasons for owning Google in 2008:
1.) The EU's decision on April 2nd could be a catalyst if the Google-DoubleClick merger deal goes through. If approved, Google should be able to grow earnings by making SIGNIFICANT inroads in the online display advertising market.
2.) Google will be releasing its Android mobile operating system platform in the 2nd half of 2008.
Full disclosure: I currently own shares of GOOG.
The stock is down 220 points (32%) year to date and much of that decline has been attributed to a perceived slowing in the economy and worries about declining advertising growth in the future. Recent internet survey data released from comSCORE last week seemed to SCARE shareholders as the stock dropped precipitously when it was announced that Google's amount of received 'paid clicks' dropped 7% sequentially (from December '07 to January '08) and was flat year over year (i.e: no growth). There is no doubt that Google is a popular momentum stock and that it needs to be punished when there is documented evidence of its growth slowing. But..as is always the million $ question...at $450/share (a $140 Billion marketcap...trading at 30x forward earnings), is the selling overdone?
I believe so. And I also believe GOOG may be ripe for a bounce as we approach a potential catalyst in early April - the European Union's decision regarding the Google-DoubleClick merger. If the EU approves the $3.1 Billion merger on April 2nd, 2008 (and I see little reason for them not to given increasing competition a la Microsoft's recent $45 Billion bid for Yahoo....unless its based purely on anti-American sentiment which could unfortunately be the case), then Google should see a significant pick-up in a potentially key earnings growth stream - DISPLAY advertising.
Unfortunately, Google does not currently break out its % of sales by advertising segment (search, display, print, television, etc.) on its annual 10-K report. However, according to the Wall Street Journal, display advertising currently represents about 20% of all online advertising revenue....if Google is finally ALLOWED by the EU to make inroads against the display advertisting segment then the stock could rebound (and maybe rebound with some velocity).
My fundamental reasons for owning Google in 2008:
1.) The EU's decision on April 2nd could be a catalyst if the Google-DoubleClick merger deal goes through. If approved, Google should be able to grow earnings by making SIGNIFICANT inroads in the online display advertising market.
2.) Google will be releasing its Android mobile operating system platform in the 2nd half of 2008.
Full disclosure: I currently own shares of GOOG.
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