Independence Day

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

That’s what we are celebrating today in America, about a year into the actual start of the revolutionary war, which was initiated when the first Continental Congress (the declaration was formed by the 2nd one) initiated a boycott of British goods (the Boston Tea Party) and a petition to King George III to repeal the Stamp Act, the Townshend Act and other nasty taxes and deprivations of the rights of the colonists in October,1774.

The response of King George was to march on Lexington and Concorde in April, 1775, causing the 2nd Continental Congress to be convened in which they signed the much lesser-known “Declaration Setting Forth the Causes and Necessity of Their Taking Up Arms,” in July of 1775. Like many Georges, this King George had foolishly started a war on the other side of the world looking to impose his will on an entrenched society and his army, well known to be the finest in the world, was humiliated by a rag-tag bunch of rebels, who received aid from George’s long-standing enemy (France) and the war ultimately ended up being the thread that led to the 100-year destruction of the British Empire.

Thank goodness we have history books or our leaders may repeat the mistakes of the past (those of them that read books at least!).

My favorite part of the Declaration of Independence is certainly the line that “whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government” - this is something we apparently just don’t do often enough these days! Our founding fathers do indeed caution us “that Governments long established should not be changed for light and transient causes” but they go on to say that “when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.“

So it is not unpatriotic to question your government and your elected officials - it is, in fact, unpatriotic NOT TO!

Whether or not it is true that President Bush actually said “Stop throwing the Constitution in my face, it’s just a goddamned piece of paper!” to one of his aids, the fact is that even this Supreme Court has rebelled against the Administration’s loose interpretation of the laws. Even if you are in favor of the Patriot Act and the treatment of human beings in Guantanomo Bay and Abu Gharib and even if you think we are fighting a just war in Iraq and even if you think that Bush purchasing over 250M barrels of oil for the SPR (using our money), which he has refused to release a drop of while the nation suffers (Clinton released oil 3 times to great effect) is just fine and even if you are comfortable with dozens of Bill of Rights violations under this Administration (oh wait, here’s 10 more) - you have to at least respect the right of others to want a change… It’s in the Constitution you know!

You may not mind the fact that this Administration has overspent the national budget by $4.5Tn in 7 years, doubling our national debt and placing a future tax (without representation) on every US household of $45,000 and incurring interest payments of $225Bn a year, especially if you are wealthy and $45,000 means little to you personally. You may not mind that the dollar has been devalued by over 40% since Bush took office, wiping out $18Tn of US household assets (while the top 10% of the country increased their assets by over 50%, keeping “even” as the rest of the country fell apart). You may not mind that the value of US homes is down almost 20% from their peak in the past 2 years or that homeowner’s percentage of home equity has dropped to 46.2%, the lowest measure since WWII while home debt rose to a record $10.6Tn even as the value of those homes slipped by $3Tn.

Health care costs have gone up 400% since Republicans defeated the Clinton Health Care Reform Plan in 2003, outpacing costs in the rest of the world by about 200% as America remains the only industrialized nation on the planet that does not provide universal health care. The “Misery Index” an official government measure of the happiness of the people measured with a combination of unemployment and inflation - even using the government’s BS low inflation numbers and BS low unemployment figures - has jumped from 7.35 in 2000 to 9.68 in May, before oil jumped $20 and before unemployment jumped 10%.

Life, Liberty and the Pursuit of Happiness. That’s what today is all about. It’s up to you to make tomorrow what you want it to be, what our forefathers wanted it to be and what it damn well can be if we all work together!

Happy 4th of July!

July 4, 2008 Posted by ilene9 | stocks | | No Comments

Jobs Decline

Comment on the Jobs data, courtesy of Mish. The numbers reported underestimate the actual job losses, and Mish explains why.

Jobs Decline 6th Consecutive Months

Before taking a look at the monthly jobs data, let’s take a look at weekly claims. The US Department of Labor is reporting Initial Unemployment Insurance Claims continue to rise.

Seasonally Adjusted

In the week ending June 28, the advance figure for seasonally adjusted initial claims was 404,000, an increase of 16,000 from the previous week’s revised figure of 388,000. The 4-week moving average was 390,500, an increase of 11,250 from the previous week’s revised average of 379,250.

Unadjusted

The advance number of actual initial claims under state programs, unadjusted, totaled 368,876 in the week ending June 28, an increase of 10,503 from the previous week. There were 300,348 initial claims in the comparable week in 2007.

Jobs Decline 6th Consecutive Months

This morning, the Bureau of Labor Statistics (BLS) released the June Employment Report. Jobs were negative for a 6th consecutive month. My target of 6% or higher stated unemployment by the end of the year remains on track. Here is a synopsis of that report.

Nonfarm payroll employment continued to trend down in June (-62,000), while the unemployment rate held at 5.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and employment services, while health care and mining added jobs. Average hourly earnings rose by 6 cents, or 0.3 percent, over the month.

Establishment Data

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The establishment data was the 6 consecutive decline.

Highlights

43,000 construction jobs were lost
33,000 manufacturing jobs were lost
8,000 retail trade jobs were lost
51,000 professional and business services jobs were lost
7,000 service providing jobs were added
24,000 leisure and hospitality jobs were added
29,000 government jobs were added

A total of 69,000 goods producing jobs were lost (higher paying jobs), and for the second consecutive month service providing jobs were weak. Government, the last pace one wants to see jobs, added 29,000 jobs or the service sector would have contracted.

Last month education and health services added 54,000 jobs, this month 29,000. One month does not make a trend but this will be interesting to watch.

These are clearly recession totals yet still we have pundits debating whether or not we are in recession.

Birth/Death Model From Alternate Universe

This was a very weak jobs report. And once again the Birth/Death Model assumptions are from outer space.

click on chart for sharper image

Every month I say the same nearly the same thing. The only difference is the numbers change slightly. Here it is again: The BLS should be embarrassed to report this data. Its model suggests that there was 29,000 jobs coming from new construction businesses, 22,000 jobs coming from professional services, and a whopping 177,000 jobs in total coming from net new business creation. The economy has slowed to a standstill and the BLS model still has the economy expanding quite rapidly.

Repeating what I have been saying for months now, virtually no one can possibly believe this data. The data is so bad, I doubt those at the BLS even believe it. But that is what their model says so that is what they report.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

With housing falling like a rock and commercial real estate now following suit, the BLS is assuming that 29,000 new jobs were added in construction. With lenders blowing up and countless self employed real estate professional exiting the business the BLS is assuming 22,000 jobs from professional and business services. The total number of jobs added in May by these absurd assumptions was 177,000 jobs.

No doubt you will see some who will subtract 177,000 jobs from -62,000 jobs and conclude that 239,000 jobs were lost in June. Such math is inaccurate.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

The important point in this mess is that both the job data and employment data are much worse than appears at first glance (and the first glance looked horrid).

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let’s take a look

click on chart for sharper image

If you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, etc., you get a closer picture of what the unemployment rate is. The official government number remained 5.5% after May’s huge jump, but U-6 (the most inclusive number) rose .2 to 9.9%. To the average Joe on the street unemployment feels more like 10% than 5.5. Both numbers are poised to rise.

This report was the 6th consecutive contraction. Service jobs were only positive because 29,000 government jobs were created. Yesterday in Downward Spiral In Jobs I commented on interesting stats from the ADP Small Business Report giving a breakdown of jobs by size of firm. Inquiring minds will want to take a look.

Mike “Mish” Shedlock

July 3, 2008 Posted by ilene9 | Uncategorized | birth-death model, decline, jobs, losses, Mish | No Comments

It’s Still All About Oil

Update, courtesy of Bespoke Investment Group:

It’s Still All About Oil

Earlier in the week we highlighted a chart of the intraday performance of oil and the S&P 500 last week, which showed how each up (or down) move in oil was met with an opposite move in the S&P 500. Looking at the relationship between oil and the S&P 500 this week shows that it’s still all about oil.

July 3, 2008 Posted by ilene9 | Uncategorized | | No Comments

Reasons for Optimism

Scott Grannis is an investment advisor and writes for 13D Research. This is his response to an email discussion among friends on the state of the economy – an optimistic view and I think we could use a little of that.

Reasons for Optimism - note from Scott Grannis

No, and this isn’t even close to a depression. Or recession, for that matter. There is no reason to even try to compare today’s economy to the Depression economy. Our debt problems are most definitely not extreme, and the Fed today is easy whereas in the Depression money was tight and taxes rose signficantly; neither of those problems plague us today. Comparing debt to income, nothing stands out as excessive. The subprime problem will almost certainly result in losses that are significantly less, relative to the size of the economy, than what happened in the S&L crisis of the 1980s. Here’s something I wrote to a friend recently:

The economy is certainly struggling, but there is as yet no reason for a recession call. It’s still not insane to be more optimistic than the market. I expect GDP growth will be modest, 1-2% for the next several quarters, but that is pretty optimistic relative to where the consensus appears to be.

This has the feel of a final market blowout. Bank stocks are at a major new low. Spreads are climbing. Broad equity indices are now in bear market territory. Confidence is super low. Newspapers are full of bad news. Gasoline is at $5, everyone’s upset. The bears are predicting an economic collapse. Oil is reaching previously unimaginable levels. The dollar is near an all-time low. Worst of all: The Fed seems to be in a box: the inflation problem is getting worse every day but they can’t take action because the economy is weak. And Obama is considered a shoe-in, and the first thing he’s going to do is push through a massive tax increase which will crush the economy.

Obviously I think the pessimists are overreacting. Things aren’t that bad. Exports are incredibly strong. Residential construction looks to be very close to a bottom; the drag on GDP is going to go way down in the future. Commodity prices are still rising (the global economy is still booming). The Baltic freight index is still extremely high. The employment situation is far from dire; it’s not even nasty. $140 oil is seen by most to be a sign of impending collapse, but what it really means is incredibly strong demand, and surging investment in all sorts of energy sources. A recent Gallup poll showed that only 13% of the population thinks that income redistribution is a good way to solve our current problems. There is not anything even remotely resembling broad-based support for higher taxes. People are increasingly getting pissed at the Democrats for refusing to allow drilling. I just don’t think that a massive tax increase is very likely. If there’s anything good you can say about Obama, it’s that he has no problem abandoning his principles if it is politically expedient. Check out today’s WSJ Op-Ed which echoes this view.

For now, the Fed holds the key. All they need to do is start tightening.

Everyone thinks that the economy is very fragile, and so any tightening would be catastrophic and thus impossible. But why is the US or the Euro economy going to wilt if interest rates rise 25, 50, or even 100 bps? Offsetting any potential problem that higher rates might bring would be a huge increase in confidence and a reversal of bearish expectations, not to mention a stronger dollar.

This feels like late Feb or early March of this year in a way: back then the financial sector was collapsing and there was no way anybody could do anything to stop it. We were staring into the abyss. And then the Fed surprised everyone and things really improved.

So the solution is simple: the Fed just needs to worry more about inflation and less about the economy. How hard is that?

Meanwhile, encouraging signs:

The NAPM index is being described as only slightly above the boom/bust level. But it has moved higher in recent months, and strongly suggests continued positive growth.
Export activity is extremely strong. No sign here of anything like a recession.
The weakness in residential construction has been so massive, for so long, that it can’t get a whole lot worse. Rates of decline are slowing. We’ve probably passed through the inflection point, meaning the bottom in activity isn’t too far off in the future. The drag on GDP is going to go way down no matter what.
Rising prices are becoming a widespread phenomenon. This is not a sign of weakness, it’s a sign of very strong demand. And also a sign of loose monetary policy.
Debt burdens have risen a bit, but only marginally. Most of the increase in debt burdens happened in the 1990s, way before the housing crisis hit.
The employment situation would have to deteriorate significantly before we could call this a nasty recession.

I guess it’s my contrarian genes, but I just can’t help myself when I see overwhelming doom and gloom out there, at the same time as I see very attractive valuations on a lot of things (mainly stocks but also the dollar). There is definitely no shortage of bad news, I’ll be the first to admit. But when that happens, and when everyone knows it’s bad, then prices have probably reflected most of the damage to come. So that’s when you have to be an optimist. I’m not saying the economy is going to boom, I just think that it can continue to do a little better than everyone thinks. I think we can avoid a big disaster. When you look at the bond market, with interest rates of 2-4% alongside inflation of 2-5%, then you know that people are expecting such a big economic collapse that it will crush the inflation that is spreading like wildfire. I just don’t think that’s going to happen.

I would worry much more about inflation than I would about a recession or a depression.

July 3, 2008 Posted by ilene9 | Uncategorized | | No Comments

Trade Idea: DUG

Here’s a trading idea, courtesy of my friend, stock-trader Allan, who posts various ideas almost daily on his blog.

DUG

The table above represents the top ten (by weight) holdings of the Dow Jones US Oil & Gas Index. As a group, they collectively sport some very weak Daily and Weekly charts. Can’t short all ten of these big cap stocks?

Enter DUG, an ETF named Ultra Short Oil and Gas Pro Shares, described as follows:

Those top ten listed stocks in the table above represent 64.08% of DUG. They are leveraged 2-1, so that for every one percent the Dow Jones US Oil & Gas Index drops, DUG rises 2%. Those stocks above will constitute 64.08% of the movement of DUG.

If so, one would think that if these stocks are breaking-down, then DUG must be breaking-out.

Let’s see:

DUG DAILY

That big white candle, the most recent candle on this chart, represents DUG running up about 6% on Wednesday. Any follow through will be a break-out on the Daily chart.

WEEKLY CHART
A break-out on the weekly chart will require DUG to close above about 28.5 this week, a little lower next week. The MACD looks like it wants to cross and the MACD momentum is about to cross-over above the zero-line.

THE TRADE: DUG is very, very close to breaking out on the daily chart, it could happen Thursday, or next Monday. On the weekly chart, the breakout could occur this week, more likely next week. This is where forecasting is more of an art then a science. Is the evidence compelling enough now to go long DUG and thus shorting with double leverage those ten stocks above all in one simple Buy?

Remember, the signal has not yet been triggered, but I will be watching DUG closely on Thursday and will buy DUG if I am convinced the break-out is happening, or at least inevitable.

If DUG breaks out, it looks to me to be at least a double from current levels.

A

July 3, 2008 Posted by ilene9 | Uncategorized | | No Comments

Why Oil Companies Don’t Drill

I’m excited to be posting this article because it’s probably both the first article courtesy of Mark Thoma, Economist’s View, (Thank you, Mark!), and he’s quoting my tax law professor, Prof. Theodore Seto from about 15 years ago at Loyola. How fun - first time for everything! And no, Prof. Seto won’t remember me, but I used to hang out after class to ask him my long list of questions, and he was very patient, and he looks the same now (in the picture) as he did then. - Ilene

“Why Oil Companies Don’t Drill”

Theodore Seto, a professor of tax law and policy at Loyola Law School Los Angeles, notes the distortion in the tax code toward investment in oil exploration with “the U.S. tax rate on profits from petroleum and natural gas structures … the lowest imposed on any type of corporate capital asset”:

Why Oil Companies Don’t Drill, Understanding Tax: U.S. oil companies are pushing hard to get Congress to allow the current Administration to issue more oil leases before its term expires. In response, skeptics have noted that three-quarters of the 90 million-plus acres of federal land already leased for oil drilling are not being worked. Oil companies deny this. Regardless of who is right, the number of operating oil rigs in North America declined across the course of 2007.

In the meantime, OPEC has raised its quotas by only 20% since 1998 – a measly 2% per year. World GDP grew by about 85% over the same period. The International Energy Agency reports that non-OPEC oil countries are also underproducing and predicts that they will continue to do so.

Everyone seems to be holding back. … So what to do?

On the tax side, Congress has done almost all it can do to stimulate U.S. production.

A 2005 Congressional Budget Office study concluded that the effective 2002 U.S. tax rate on profits from petroleum and natural gas structures was the lowest imposed on any type of corporate capital asset: 9.2%. Profits from computers, by contrast, were taxed at an effective rate of 36.9%.

A 2000 study by the Institute on Taxation and Economic Policy concluded that in 1998, of all U.S. industries, petroleum and pipeline companies were taxed at the lowest effective rates: 5.7%. Health care companies, by contrast, were taxed at an effective rate of 32%.

If tax incentives were going to induce U.S. oil companies to drill, they probably would have done so by now. Interestingly, Sen. McCain and Sen. Obama both propose to eliminate oil production tax incentives. After all, if oil companies are not responding by increasing production, those breaks are just gifts from you and me to Exxon. …

Remember that prices are a measure of value. If oil prices are going to be much higher 10 years from now, that means oil will be more valuable then than it is now. Valuable to us.

If so, should it really be our policy to drain U.S. reserves as quickly as possible? Or should our policy be to save at least some of those reserves for the day when gas is $10/gallon?

“just gifts from you and me to Exxon. …”

July 2, 2008 Posted by ilene9 | Uncategorized | | No Comments

Financials Near a Bottom?

This article is courtesy of Bill Luby, of Vix and More.

Getting Tougher to Push Financials Lower from Here?

Halfway through today’s session, my screen is once again filled with red, as the indices look as if they are poised to take a run at yesterday’s lows.

From a sector perspective, the picture is considerably muddier, as two recent laggards, financials (XLF) and consumer discretionary (XLY), are clinging to positive territory as I type this. As I see it, one or the other of these sectors will have to continue to deteriorate if the markets are going to continue lower from current levels.

Given that the financials are already down 53% from their May 2007 highs (see chart below), it is important to keep in mind that the easy money has already been made on the short side. A wide variety of financial sub-sectors (mortgage companies, bond insurers, money center banks, regional banks, investment banks/brokers, etc.) have already made multiple trips to the woodshed – and while some individual issues may still be quite vulnerable going forward, there is a limit to the amount of blood that can be squeezed from a broad-based ETF or index.

Going forward, I suspect the risk/return profile of the financial sector may actually favor the bulls. If the next couple of broad market moves down fail to pull the financials with them, the path of least resistance for the likes of XLF may indeed be up. Keep an eye on this development, because if (and admittedly this is a very large “if&rdquo the financials are done falling, then the markets are likely to be ready to put in a bottom too.

by Bill Luby

July 2, 2008 Posted by ilene9 | Uncategorized | | No Comments

Jobs

Downward Spiral In Jobs

Courtesy of Mish.

The New Your Times is reporting Deepening Cycle of Job Loss Seen Lasting Into ’09.

Plummeting home prices have in recent months eliminated jobs for hundreds of thousands of people, from bankers and real estate agents to construction workers and furniture manufacturers.

“The labor market is clearly deteriorating, and it’s highly likely to keep deteriorating,” said Andrew Tilton, an economist at Goldman Sachs. “It’s clear that the housing downturn and credit crunch are still very much under way. Clearly, there are more jobs to be lost in housing, finance and construction — hundreds of thousands of more jobs to be lost collectively.”

Recent indications lend credence to the view that the job market is in the grip of a sustained downturn. Three weeks in a row, new unemployment claims have exceeded 380,000, a level generally associated with recession. Construction spending fell in May. The University of Michigan Consumer Sentiment Survey, which tracks attitudes about business and personal finance, has dropped to a depth last seen in 1980.

With job losses growing and working hours shrinking, many paychecks are eroding, prompting millions of families to cut their spending. Soaring prices for food and gasoline are overwhelming modest wage gains for most workers, leaving households with even less money to spend. All of which deprives struggling businesses of sales, prompting them to shed more workers, sending the cycle down another turn.

Downward Spiral In Jobs

This is how downward spirals start, ant it was entirely predictable. Commercial real estate follows residential with a lag. Now that retail stores and restaurants are cutting back, it is finally dawning on mainstream media that the Shopping Center Economic Model Is History.

I have been asking for well over a year "Where is the driver for jobs once Walmart (WMT), Target (TGT), Pizza Hut (YUM), and Starbucks (SBUX) stop aggressively expanding?" The answer, which I knew, was "Nowhere".

ADP Small Business Report

The only bright spot in the economy has been small businesses. Now, even the ADP Small Business Report shows the last bastion of overall strength on the verge of contraction.

ADP Employment Forecast By Size Of Firm

click on chart for sharper image

The above chart tells the story of weakening small business employment. Service providing small businesses are still doing OK, but in aggregate, small business employment is barely expanding. Medium and large businesses are nothing short of a disaster.

Add it all up and things look bleak. ADP forecasts another 79,000 jobs will be lost in June.

Job Growth Timeline

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The above chart shows how small businesses have been leading the economic expansion since 2002. Small business employment will soon be contracting in my estimation.

By the way there have been a number of what one might call "huge misses" of ADP job totals vs. the BLS reports that come out the first Friday of every month (Thursday this month because of the holiday).

Note however, that ADP is based on actual job data, while the unemployment numbers from the BLS are distorted by the infamous Birth/Death Adjustment series. I recently talked about the BLS Black Box and Birth/Death Adjustments in May Jobs: Unemployment Skyrockets to 5.5%.

It is hard to say who is missing and who isn’t, and it is likely both are. No models are perfect. ADP does seem to be in catch-up mode at the moment, which is a bit hard to swallow given the nearly insane upward bias in in the Birth/Death Adjustment series. The important point now is that both the ADP and BLS models are showing a contraction in jobs. One thing is sure: The small business series is going to be interesting to watch going forward.

Mike "Mish" Shedlock

July 2, 2008 Posted by ilene9 | Uncategorized | | No Comments

Non-Farm Payrolls Preview

Kathy Lien, Chief Currency Strategist of DailyFX.com, discusses the Non-Farm Payrolls for June being released tomorrow. She’s predicting the negative number expected will worse than currently anticipated.

Non-Farm Payrolls Preview: Job Losses Could Top 100k

Non-farm payrolls for the month of June are due for release this Thursday, but with the Federal Reserve no longer looking to cut interest rates, will the degree of payroll growth actually have meaningful impact on the US dollar?

Here is the NFP Preview that I wrote for DailyFX.com

The NFP number is being released at the exact same time that ECB President Trichet begins his press conference (3 Potential Outcomes to the ECB Meeting), which means that we could see unusual volatility tomorrow morning. The ECB press conference and the NFP report will either neutralize each other or be a toxic combination for the US dollar.

How to trade the Non-Farm Payrolls Release

Non-farm payrolls are being released early this month because of the Independence Day holiday in the US and for that same reason, trading could grind to a halt after 12 noon as US traders take off for the long weekend.

Trading the NFPs is usually very difficult given the inherent volatility of the currency pair but given the 2 big event risks tomorrow – the ECB rate decision and the NFP release, the US dollar could behave very differently against the Japanese Yen and the Euro. USD/JPY will be the best currency to trade the NFP because it will not be diluted by the comments from the ECB. The currency pair has actually been consolidating for the past 3 trading days and is itching for a breakout. The EUR/USD on the other hand could have a knee jerk reaction to the NFP report and then a sharp reversal as traders tune into Trichet’s comments. Don’t be surprised by 100 pip candles in both directions. The press conference begins at 8:30am ET, but by the time Trichet starts talking, it is usually 8:40 to 8:45am.

The market currently expects a bad number, so a negative non-farm payrolls report will not be enough of a surprise. The current forecast calls for 60k jobs to be shaved off US payrolls. If payrolls come any where near -90k, the dollar would collapse against the Euro as the market questions the viability of a 2008 rate hike by the Federal Reserve. If payrolls on the other hand are better than -40k, it suggests that the labor market is bad but not as bad as everyone may have feared, which would be dollar positive.

Also keep an eye on the ECB interest rate decision and the press conference. If Trichet proves to more hawkish by hinting that they have to raise interest rates by more than 25bp this year, then the dollar could fall against the Euro even if NFPs drop by less than expected. If Trichet is noncommittal about future rate hikes beyond, the Euro could suffer.

Non-Farm Payrolls Could Fall by 100k?

Without question, non-farm payrolls are expected to drop for the sixth month in a row, but we believe payrolls could actually fall by as much as 100k. Of the 9 leading indicators for non-farm payrolls that we follow (Service Sector ISM will be released post NFP), 8 point to a sharp increase in job losses. The labor market has deteriorated significantly over the past month as layoffs hit the financial and non-financial sectors. Citigroup previously announced that they were cutting 9000 jobs in April and earlier this month they announced another 6000 layoffs in their investment banking division for a total of more than 13,000 job cuts this year. Goldman Sachs has also announced more layoffs while Starbucks is planning to shed many as 12,000 jobs as they close 600 underperforming stores. The bad news just keeps on coming, making a 100k single month drop not only likely, but inevitable.

Even though it is still being debated whether or not the US economy is currently in a recession, it cannot be argued that we are relatively close to one. Therefore it is important to remember how bad the labor market has deteriorated in past recessions. Over the past 3 decades, the US economy has gone through 3 recessions and in each of those 3 recessions, there was a string of job losses that lasted for a minimum of 10 months. Many people argue that the current downturn in growth could be more severe than the recession in the early 2000s due to the triple blow of a housing crisis, credit crunch and skyrocketing commodity prices. If this is true, it will be a long time before we see a positive non-farm print. In each of the past 3 recessions, the largest single month job loss was more than 300k.

recessions

nfp0708

Of the 79 economists polled by Bloomberg, the most optimistic forecast is by Bank of America who calls for drop of 20k jobs. The most pessimistic is Dresdner Kleinwort who is calling for job loss of -130k. All of the economists surveyed expect a negative print, but the range of estimates is extremely wide which means that there should be a good deal of volatility across the financial markets post NFPs.

Nearly all of the leading indicators for non-farm payrolls point to a weak release. The only argument for stronger job growth is the increase in strike activity which is nominal compared to the sharp rise in layoffs and the large drop in the ADP employment report. With the total number of people filing for unemployment benefits at the highest level since 2004, consumer confidence has hit a 16 year low, telling us that the labor market is in a worst shape than it has been since beginning of the year.

Arguments for Weaker Non-Farm Payrolls

1. ADP Employment Report Falls 79k
2. Monster.com Index Dips Modestly
3. Challenger Reports 46.8% Increase in Layoffs
4. Consumer Confidence Hits 16 Year Lows
5. Jobless Claims 4 Week Moving Average Increases from 376k to 378.2k
6. Continuing Claims Hit Highest Level since Feb 2004
7. Help Wanted Ads Continue to Fall
8. Employment Component of Manufacturing ISM Plunges

Arguments for Stronger Non-Farm Payrolls

1. Strikes Activity Down by 8.3k

All Boils Down to the Fed and the ECB

The problems in the labor market and the continual rise in food and energy prices will eventually start affecting consumer spending. The impact on the non-farm payrolls number of the US dollar all boils down to what it means for the Federal Reserve. If payrolls drop by more than 100k, like we expect, it could be enough to convince the Fed to remain on hold for the remainder of the year. If payrolls are better than expected, then the labor market is not doing as bad as the layoff announcements suggest, leaving the Fed flexibility to raise interest rates in the third or fourth quarter. Also keep an eye on the ECB interest rate decision. If Trichet proves to more hawkish by hinting that they have to raise interest rates by more than 25bp this year, then the dollar could fall against the Euro even if NFPs drop by less than expected. If Trichet is noncommittal about future rate hikes beyond the one expected tomorrow, the Euro could suffer.

July 2, 2008 Posted by ilene9 | Uncategorized | | No Comments

Solar Stocks - Cash Crunch?

Note: This article was provided to subscribers of Envoy Global Research on June 12, 2008, and posted on Seeking Alpha today. If anyone here has any special knowledge in this industry, and can add any comments/discussion, please email me (ilene@philstockworld.com) and I’ll post your thoughts here. I don’t think we can post comments through the Phil’s Favorites section yet. - Ilene

Will Some Solar Companies Face a Cash Crunch?

Please visit Seeking Alpha for the full report. Here are a few excerpts:

Introduction

This post is devoted to some thoughts on companies in the solar industry, particularly the Chinese polysilicon-based solar module manufacturers. The basic issue I address here is the risk for a serious cash crunch at some of these module manufacturers given their working capital deficits and their capital expenditure requirements.

Moreover, despite seemingly positive accounting earnings reports from many of these companies, a more careful perusal of these companies balance sheets raises serious questions as to the viability of their businesses, given the continued cash outflows. Importantly, this post does not address thin-film solar manufacturers, and my basic points do not apply to these businesses given the different economics of the thin-film segment of the solar panel industry.

Accounting Operating Metrics Are Misleading

Wall Street’s propensity to value Chinese solar companies off of accounting earnings, MW produced, and other non-cash metrics, completely obfuscates the significant cash-flow problems that many of these companies currently face. The cash-flow issues are caused by significant working capital needs, and it’s hard to imagine how the working capital situation can be improved any time soon, even in the event that polysilicon prices ease. There is simply too much competition in the industry and therefore suppliers, as well as customers, will continue to squeeze these companies on payment terms and cycles.

In the meantime, these companies are only able to keep their doors open due to a continued influx of cash in the form of loans, dilutive equity offerings, and other financial vehicles that Wall Street investment banks arrange. At issue, though, is how these companies would fare, should financing become more difficult. The businesses continue to burn thru so much cash, that it seems very likely that without financing many of these companies would go bankrupt very quickly.

Additionally, since few investors are paying attention to cash-flow, and most reports on these companies focus on accounting earnings and sales, there is a very strong incentive on the part of these companies to engage in questionable sales practices and revenue recognition policies…

Conclusion

In conclusion, as is spelled out in the risk portions of polysilicon-based PV suppliers, and as is evident from annual and quarterly financials, working capital cash-flow deficiencies are a serious financial drain on many of these companies. As such, valuing these companies off of earnings is misleading and vastly overstates the underlying economic value of the companies.

Moreover, considering the tremendous amount of capital expenditures still needed by these companies to ramp up production to meet demand, it should be obvious that polysilicon-based suppliers are starving for cash. However, since the industry is currently oversupplied and suppliers have little differentiation, it seems clear that there is a significant risk that these companies could face a cash crunch should investors grow tired of financing these companies…

July 2, 2008 Posted by ilene9 | Uncategorized | | No Comments

Notable Calls on SNDK

Here are a couple quick notes on SNDK from Notable Calls.

Sandisk (NASDAQ:SNDK): More colour from Amtech

Amtech on Sandisk (NASDAQ:SNDK) (Focus List BUY): SSD Adoption is Being Constrained by Cost/Benefit Equation. Based on our checks during the recent AmTech Asia Bus Tour, we believe that SSD demand and adoption rates are being temporarily delayed by price, performance and endurance issues, which could result in push-outs of volume ramps until 2010. The obvious headwind is SSD pricing preventing demand elasticity, including SLC and initial MLC-based solutions. Asia-based ODMs believe that pricing is preventing SSD adoption in their notebook platforms. We also think SSD performance is a significant factor holding back adoption as the throughput performance of SSD-based storage is not improving as expected, especially in high-end server systems. Volume adoption of notebook SSDs based on MLC NAND could be pushed out into 2010 as customer perceptions of high price and low performance needs to be addressed by suppliers. We believe the low endurance of inexpensive MLC SSDs is a new constraint that storage architects must accept and design solutions around and is not a permanent headwind to SSD demand elasticity.

Maintain BUY on SNDK rating and $40 price target.

Notablecalls: See below for more colour on SNDK.

posted by notablecalls # 8:52 AM

Sandisk (NASDAQ:SNDK): Major positive call from ThinkPanmure

ThinkPanmure is out with a major call on Sandisk (NASDAQ:SNDK) noting the stock has been hurt by collapsing NAND pricing and build up of inventory at retail, OEMs, and the Taiwan module houses. However, NAND pricing could stabilize. Firm’s checks indicate that Samsung is allocating 50M chips of 8Gb MLC to AAPL in July and August, which could substantially reduce Samsung’s inventory and reduce some of the price pressure on NAND and inventory overhang in the market. In firm’s view, while not a panacea for the inventory in the channel or at retail, it should stabilize NAND pricing. NAND spot pricing in the last two days has been trending up modestly.

While Bears have been calling for a renewed drop in NAND pricing, they believe the 50M chip order could remove a lot of NAND inventory and reduce a lot of inventory overhang from Samsung. Think believes it will also stabilize the NAND spot and contract pricing trends. If the pickup from the AAPL iphone, given what they view as an attractive $199 in the U.S. and free offers in some countries, is ahead of forecasts, it could drive more allocations from Samsung and help stabilize NAND pricing through the quarter

Reits Buy and $40 tgt

Notablecalls: SNDK will trade over $18 level today following this wonderful call by ThinkPanmure’s Vijay Rakesh. Also note that Morgan Stanley is closing out their short SNDK idea this morning which is likely to contribute to buy interest.

Well done Vijay

PS: Digitimes talking about NAND this morning saying AAPL is back and spot pricing is going to start reflecting it.

posted by notablecalls # 8:30 AM

July 2, 2008 Posted by ilene9 | Uncategorized | | No Comments

Solar Stocks Feeling Heat

This was written by Eric Savitz, Tech Trader Daily at Barron’s Online, on Solar Stocks and how badly they are doing lately.

Solar Stks Feel The Heat: Report Spain Plans Subdidy Cut

Excerpt: Solar stocks are again feeling the heat from a report that Spain plans sharp reductions in subsidies for solar power. On Friday, a number of solar stocks dropped sharply after Lehman’s Vishal Shah asserted in a research note that the country was considering sharp cuts in its solar subsidy program. Today, there were further reports on the same theme.

According to Bloomberg, the Spanish newspaper Cinco Dias reported that the Spanish industry ministry is considering cutting the electricity rate paid to photovoltaic installations by as much as 35%.

The story reports that the ministry would set a limit of 300 megawatts of new capacity for the industry for next year, 200 for roof-top installations and the rest for ground equipment. The new tariff would be 33 Euro cents per kilowatt-hour for roof installations and 29 cents for ground panels, down from about 45 cents. (Shah last week had said the proposal could be 33 cents for roof-top installations, and 25 euro cents for ground-mounted.)…"

July 1, 2008 Posted by ilene9 | Uncategorized | | No Comments

Dancing with the Bear

Courtesy of Ockham Reseach.

Since hitting an all time high of 14279.96 on October 11^th of last year, the Dow Jones Industrial Average (DJIA) will close the second quarter of 2008 officially having entered bear market territory–enduring a 20% decline. The broader market index–the Standard & Poors 500–is off 18.4% from its high on that date, while the Nasdaq Composite–which peaked later in October–has declined 19.4% from its most recent high and the Russell 2000 (small cap) index is off 19% from its high of last summer. I don’t think that anyone would argue at this point that we are not in a bear market. Furthermore, if you look at the peak-to-trough numbers of some of the formerly high-flying equity markets around the world, the recent performance of U.S. equities looks downright docile in comparison. For virtually every major global equity market, the first half of 2008 has been a painful ride.

Most investors would prefer not to experience the pain of a bear market. If investors had the benefit of hindsight, we would all sell our shares at the market peak and get back in once the selling was over. However, investing does not work that way and most research over the years suggests that timing the market is a futile task.

So, with that in mind, what are investors to do when the bear appears? The most important thing to remember is to not panic. While every bear market is painful, it is important to put major market declines into perspective. No market’s chart is a straight line up and to the right. There are peaks and valleys which make the ride more dramatic and stress-inducing than many would prefer. It is part of the game. Historically, the major indices have moved up and to the right in a consistent fashion. However, the ride has not been smooth and there have been significant periods of dramatic under-performance.

The U.S. stock market has been in a funk for over eight years now. Before this difficult period began, domestic equities had enjoyed over 17 years of well-above average performance. Today, we are in effect paying for the sins of this prior “Super Bull” market. By 2000, most major stock averages had valuation metrics (such as price-to-earnings) virtually unheard of based on historic norms. Something had to give—and indeed it has!

While certainly not cheap by historic standards, domestic stocks are much more reasonably valued today than they have been for well over a decade. While the U.S. economy faces unique challenges today that we have not had to confront in the past (a sizeable glut of residential and commercial real estate, historically high energy and commodities prices and a very weak dollar), in many ways, our economy is better positioned to weather this economic storm than it was in the recession of the early 1970s. Back then, manufacturing was a much bigger component of our economy. Today’s economy by comparison is more nimble and able to adapt to the needs of the changing global marketplace.

This is not a time to be overly aggressive in chasing stocks nor is it a time to be using debt to either augment one’s lifestyle or purchase financial assets. However, as the bear market begins to uncover real value in stocks, it is a good time to patiently wait and look for once-in-a-generation opportunities. At Ockham, our methodology uncovers significantly oversold stocks and recommends purchase during significantly oversold general market conditions. While this approach does not guarantee that you will not lose money in a bear market, it does give you the tools to weather the downturn with an eye toward the market’s rebound—which, like the bearish phase, is inevitable.

July 1, 2008 Posted by ilene9 | Uncategorized | | No Comments

Bringing Down Bear Stearns

Here’s an excerpt of a compelling, detailed account of "The Collapse" of Bear Stearns, published in August’s Vanity Fair, written by Bryan Burrough. It starts off reading like a murder mystery. (Click here for the full article.)

Bringing Down Bear Stearns

"On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street. With the blow-by-blow from insiders, Bryan Burrough follows the players—Bear’s stunned executives, trigger-happy reporters at CNBC, a nervous Fed, a shadowy group of short-sellers—in what some believe was the greatest financial scandal in history.

On Monday, March 10, Wall Street was tense, as it had been for months. The mortgage market had crashed; major companies like Citigroup and Merrill Lynch had written off billions of dollars in bad loans. In what the economists called a “credit crisis,” the big banks were so spooked they had all but stopped lending money, a trend which, if it continued, would spell disaster on 21st-century Wall Street, where trading firms routinely borrow as much as 50 times the cash in their accounts to trade complex financial instruments such as derivatives.

Still, as he drove in from his Connecticut home to the glass-sheathed Midtown Manhattan headquarters of Bear Stearns, Sam Molinaro wasn’t expecting trouble. Molinaro, 50, Bear’s popular chief financial officer, thought he could spot the first rays of daylight at the end of nine solid months of nonstop crisis. The nation’s fifth-largest investment bank, known for its notoriously freewheeling—some would say maverick—culture, Bear had pledged to fork over more than $3 billion the previous summer to bail out one of its two hedge funds that had bet heavily on subprime loans. At the time, rumors flew it would go bankrupt. Bear’s swashbuckling C.E.O., 74-year-old Jimmy Cayne, pilloried as a detached figure who played bridge and rounds of golf while his firm was in crisis, had been ousted in January. His replacement, an easygoing 58-year-old investment banker named Alan Schwartz, was down at the Breakers resort in Palm Beach that morning, rubbing elbows with News Corp.’s Rupert Murdoch and Viacom’s Sumner Redstone at Bear’s annual media conference.

It was an uneventful morning—at first. Molinaro sat in his sixth-floor corner office, overlooking Madison Avenue, catching up on paperwork after a week-long trip visiting European investors. Then, around 11, something happened. Exactly what, no one knows to this day. But Bear’s stock began to fall. It was then, questioning his trading desks downstairs, that Molinaro first heard the rumor: Bear was having liquidity troubles, Wall Street’s way of saying the firm was running out of money. Molinaro made a face. This was crazy. There was no liquidity problem. Bear had about $18 billion in cash reserves.

Yet the whiff of gossip Molinaro heard that morning was the first tiny ripple in what within hours would grow into a tidal wave of rumor and speculation that would crash down upon Bear Stearns and, in the span of one fateful week, destroy a firm that had thrived on Wall Street since its founding, in 1923.

The fall of Bear Stearns wasn’t just another financial collapse. There has never been anything on Wall Street to compare to it: a “run” on a major investment bank, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo that, as best one can tell, had little basis in fact. Bear had endured more than its share of self-inflicted wounds in the previous year, but there was no reason it had to die that week in March.

What happened? Was it death by natural causes, or was it, as some suspect, murder? More than a few veteran Wall Streeters believe an investigation by the Securities and Exchange Commission will uncover evidence that Bear was the victim of a gigantic “bear raid”—that is, a malicious attack brought by so-called short-sellers, the vultures of Wall Street, who make bets that a firm’s stock will go down. It’s a surprisingly difficult theory to prove, and nothing short of government subpoenas is likely to do it. Faced with a thicket of lawsuits and federal investigations, not a soul in Bear’s boardroom will speak for the record, but on background, a few are finally ready to name names.

“I don’t know of any firm, no matter the capital, that could have withstood that kind of bombardment by the shorts,” says a vice-chairman of another major investment bank. “This was not about capital. It was about people losing confidence, spurred on by rumors fueled by people who had an interest in the fall of Bear Stearns.”

He pauses to let the idea sink in. “If I had to pick the biggest financial crime ever perpetuated,” he concludes, “I would say, ‘Bear Stearns.”’

At Phi Kappa Wall Street, most of the frat boys are instantly recognizable. There’s the big, backslapping Irishman, Merrill Lynch, the humorless grind, Goldman Sachs, and the straitlaced rich kid, Morgan Stanley. And then, off in the corner, wearing its beat-up leather jacket and nursing a cigarette, was the tough-guy loner, scrawny Bear Stearns, who disdained secret handshakes and towel snapping in favor of an extended middle finger toward pretty much everyone. Bear was bridge-and-tunnel and proud of it. Since the days when the Goldmans and Morgans cared mostly about hiring young men from the best families and schools, “the Bear,” as old-timers still call it, cared about one thing and one thing only: making money. Brooklyn, Queens, or Poughkeepsie; City College, Hofstra, or Ohio State; Jew or Gentile—it didn’t matter where you came from; if you could make money on the trading floor, Bear Stearns was the place for you. Its longtime chairman Alan “Ace” Greenberg even coined a name for his motley hires: P.S.D.’s, for poor, smart, and a deep desire to get rich."

Note: Articles in the Favorites Section are free and not part of any subscription service. There is always a link to the full article, just click on the title. Also, for the blogroll or comment section - if you have a comment and cannot make it on this page - go to the backup site. Thanks! Ilene

July 1, 2008 Posted by ilene9 | Uncategorized | | No Comments

Your Brain Lies to You

Excerpts from a NY Times article,

Your Brain Lies to You

By SAM WANG and SANDRA AAMODT

“FALSE beliefs are everywhere. Eighteen percent of Americans think the sun revolves around the earth, one poll has found. Thus it seems slightly less egregious that, according to another poll, 10 percent of us think that Senator Barack Obama, a Christian, is instead a Muslim. The Obama campaign has created a Web site to dispel misinformation. But this effort may be more difficult than it seems, thanks to the quirky way in which our brains store memories — and mislead us along the way.

The brain does not simply gather and stockpile information as a computer’s hard drive does. Facts are stored first in the hippocampus, a structure deep in the brain about the size and shape of a fat man’s curled pinkie finger. But the information does not rest there. Every time we recall it, our brain writes it down again, and during this re-storage, it is also reprocessed. In time, the fact is gradually transferred to the cerebral cortex and is separated from the context in which it was originally learned. For example, you know that the capital of California is Sacramento, but you probably don’t remember how you learned it.

This phenomenon, known as source amnesia, can also lead people to forget whether a statement is true. Even when a lie is presented with a disclaimer, people often later remember it as true.

With time, this misremembering only gets worse. A false statement from a noncredible source that is at first not believed can gain credibility during the months it takes to reprocess memories from short-term hippocampal storage to longer-term cortical storage. As the source is forgotten, the message and its implications gain strength. This could explain why, during the 2004 presidential campaign, it took some weeks for the Swift Boat Veterans for Truth campaign against Senator John Kerry to have an effect on his standing in the polls.

Even if they do not understand the neuroscience behind source amnesia, campaign strategists can exploit it to spread misinformation. They know that if their message is initially memorable, its impression will persist long after it is debunked. In repeating a falsehood, someone may back it up with an opening line like “I think I read somewhere” or even with a reference to a specific source.

Adding to this innate tendency to mold information we recall is the way our brains fit facts into established mental frameworks. We tend to remember news that accords with our worldview, and discount statements that contradict it.

Journalists and campaign workers may think they are acting to counter misinformation by pointing out that it is not true. But by repeating a false rumor, they may inadvertently make it stronger…

Consumers of news, for their part, are prone to selectively accept and remember statements that reinforce beliefs they already hold…

In 1919, Justice Oliver Wendell Holmes of the Supreme Court wrote that “the best test of truth is the power of the thought to get itself accepted in the competition of the market.” Holmes erroneously assumed that ideas are more likely to spread if they are honest. Our brains do not naturally obey this admirable dictum, but by better understanding the mechanisms of memory perhaps we can move closer to Holmes’s ideal.”

Sam Wang, an associate professor of molecular biology and neuroscience at Princeton, and Sandra Aamodt, a former editor in chief of Nature Neuroscience, are the authors of “Welcome to Your Brain: Why You Lose Your Car Keys but Never Forget How to Drive and Other Puzzles of Everyday Life.”

June 30, 2008 Posted by ilene9 | stocks | | No Comments

Do not despair

Anyone despairing? Okay, don’t. Here’s some marginally good news for those with long positions not sufficiently hedged recently. Courtesy of Minyanville, question by Prof. Sedacca, and answered by Prof. Jason Goepfert. - Ilene

Minyan Mailbag: The Ruins of June

Prof. Goepfert,

What has happened historically after months this lousy, particularly during secular bears?

Thank you,

Prof. Sedacca

Prof. Sedacca,

One of the pieces of data that’s been drifting around the past couple of days notes that this is shaping up to be the worst June in the DJIA since the Great Depression.

That’s sobering stuff, so let’s take a look at the S&P 500 and see how this month is shaping up (subject to change, of course, as the month is obviously not over just yet).

This would be the worst June swoon in the history of the index, beating June 1962 by about 1%. There was a particularly nasty 25% spill in the four months leading up to June ‘62, a touch worse than what we’ve seen so far this time around.

Overall, this month would rank 10th on the all-time dunce list, and the worst month since September 2002. Going forward there wasn’t a lot consistent about the other months. There was a generally positive bias, but that’s the case for any random month, and especially so after a down month.

Five of these "worst months" occurred during the last bear market from 2000 - 2002, and surprisingly enough the next month was positive four of the five times, and we were positive three months later three of the five. During the mostly-pathetic 1970’s, six of the months qualified for this list, and again the performance going forward was mixed to even slightly positive when looking out longer than one month. There were some huge sell-offs following these already-disastrous months, but also some major rebounds. I’m not sure that this has a ton of use other than the headline shock factor ("10th Worst Month of All Time!"), but generally there has been a positive bias following horrendous performances like this.

-Jason

June 30, 2008 Posted by ilene9 | Uncategorized | | No Comments

Trading Idea: VLO

Here’s a trading idea, courtesy of Daniel Jones of Option Notions, along with a summary of his recent trades. Today’s pick is a call spread on VLO.

UPDATE: GM LONG, SPREAD

Last week we mentioned that the market was almost past the technical “Panic point” that we saw at the 11,800 Dow Industrials point. The “left field” loop appeared on Thursday with Goldman’s friendly downgrade of GM, and the mention that Goldman’s analyst figured they would have to raise capital sometime soon. Thus, the market’s vulnerability was exposed and the rest, as they say, is history. Here we sit this morning about 400 points lower. Can the bottom be far away? It’s always darkest before the dawn, and with last week’s downside action, I have to say I think we’re approaching a very tradable bottom in the markets.

We mentioned GM in a bullish pick on 16 June 2008 (ouch!) with long-term 2010 LEAPs and January 2009 calls being recommended. We don’t think the company will have to raise capital, nor will they go bankrupt. They have $40+ billion in the bank and a solid cash flow. Something will happen here from a strategic point - GM is presently valued at only $6.4 billion in equity. That’s shark bait and some private equity player will pounce. We’d like to go on record today as recommending investors add to those GM call spreads at this time. The stock is at a 53-year low this morning (30 June 2008 ) due to the remaining investors throwing in the towel on them for end-of-quarter window dressing, and of course, the impact perceived from higher oil prices, which are skyrocketing today. We would recommend buying another position of the January 2009 $15 calls that we are long in that spread for $1.45 this morning, and sell the Jan 2009 $25 calls for $0.30, for a net cost to the spread of $1.15. The same goes for the 2010 LEAPS if you got those long. If you didn’t, now is a great time to buy Jan 2010 $20 LEAPS at $1.55 and sell the Jan 2010 $30 LEAPS for $0.55, for a net cost of $1.00.

We sent an update on the FDX and UPS puts last week. We hope you are enjoying those and waiting for the recommended sales prices we highlighted. Those picks are holding up well and nearly to the sales targets. Also, last week’s HBC puts are doing nicely. We think we’re participating in the downside in the market fairly well, so this week’s pick is an upside play.


TODAY’S RECOMMENDATION:  CALL SPREAD ON VLO

You would think that with oil prices skyrocketing, the people who turn barrels of crude oil into usable products like gasoline for our cars and heating oil for our homes would be absolutely minting money. Well, unfortunately, when the refineries’ input commodity (crude oil) price skyrockets, the margins for the finished products (outputs) actually get compressed. This margin is often referred to as the “Crack Spread” and it’s something that is highly cyclical and thus, the refinery stocks that live and die by the spread are also highly volatile. One such name that we’ve followed for quite some time is Valero Energy (VLO). Today’s pick is a call spread on VLO.

Valero Energy (VLO) Corporation operates as a crude oil refining and marketing company in the United States and internationally. Its refining activities include refining operations, wholesale marketing, product supply and distribution, and transportation operations primarily in the Gulf Coast, Mid-Continent, West Coast, and northeast regions.

The company produces conventional gasoline, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products, as well as reformulated gasoline mixture, gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates. As of 31 December 2007, Valero Energy owned and operated 17 refineries in the United States, Canada, and Aruba with a combined throughput capacity of approximately 3.1 million barrels per day.

The company’s retailing activities include the sale of transportation fuels at retail stores and unattended self-service cardlock sites; sale of convenience store merchandise in retail stores; and sale of home heating oil to residential customers in the United States and Canada. As of the above date, it operated approximately 5,800 retail and wholesale branded outlets under various brand names, including Valero, Diamond Shamrock, Shamrock, Ultramar, and Beacon.

The company was founded in 1955. It was formerly known as Valero Refining and Marketing Company and changed its name to Valero Energy Corporation in 1997. Valero Energy Corporation is based in San Antonio, Texas.

The chart here shows VLO for the last six months. The stock has been compressed as the profit margin of each barrel of oil they refine has been similarly impacted negatively by the irsing price of crude oil. The Relative Strength Index (RSI) and Moving Average Convergence / Divergence (MACD) stochastic lines are both rounding out at low levels, indicating a bounce, at least on a technical basis could be coming.

VLO’s Fundamental Data:

Current Price: $40.86
Shares Outstanding: 528.5 million
Market Cap: $21.6 billion
Forward Price / Earnings (avg. Est): 6.8x
PE/G Ratio (5 Year Expected): 5.7x
Price / Book: 1.2x

Valero’s revenues have been surging lately. As you can imagine, just selling the same amount of energy product while the price soars nearly 100% will give you a revenue boost of 100%. But VLO has been unfortunately not making as much of a profit per barrel of oil as they did in 2007. The 2008 annual earnings estimates for VLO are averaging about $5.23 per share right now for the full year ending in December 2008, versus a 2007 full year figure of $8.17 per share. Try to get your head around the fact that VLO’s revenues have surged over 42% in that time, and you’ll fully understand the seriousness of the compression of the crack spread. VLO’s operating environment in higher oil price conditions is just plain brutal. 2009’s earnings estimates are currently posted at $6.03 per share, though revenues are expected to grow another 10%.

Given VLO’s current valuation and earnings expectations, we think the market has basically denied them any potential benefit of either a respite from rising oil prices (which could happen) or a cessation in the compression of the crack spread. The second potential factor would immediately follow the first. We think the present value of VLO, given its earnings and revenues outlook under what is today arguably a “worst case” scenario has much downside risk to it. Quite the opposite - we see the price today representing a great value and a free call option to the upside.

Valero’s balance sheet has a nice-sized cash cushion of over $1.4 billion. The debt they carry though, amounts to over $6 billion. Still, with the annual revenue run rate of over $130 billion, they have an EBITDA number on a trailing twelve month basis of over $6.64 billion. If they wanted to, they could probably pay off the company’s debt within one year - that’s powerful. Certainly within two years, but then that’s probably not the best use of funds for the Company. Share buybacks have happened here in significant size in years past, and we would expect that to continue. VLO pays a $0.60 dividend, and that could easily see an increase, as the payout ratio is currently at only 6.0%.

Our recommendation this week is to buy VLO stock at its present price of $40.86. We would also buy a September call spread in the $42.50 / $52.50 strike prices. We would look to acquire the VLO Sept $42.50 call for $3.00, and write the Sept $52.50 puts for $0.70, for a net cost of $2.30 to this spread. We would look to sell this put spread at a level of $8.00 or higher between now and the future expiration, giving us a return of just over triple the money.

We’ve heard from a few of our readers who just want straight option buy recommendations, rather than spreads. For investors who do not wish to write the higher strike call, a direct purchase of the September $42.50 call for $3.00 would be an alternative. We would look to sell that call at a level of $9.00 or higher.

Please note: Options trades all involve a high degree of risk and the potential to lose some or all of your investment. These recommendations are general in nature, and you should consult your own financial professional who is familiar with your situation as to the appropriateness of these trade ideas.
Disclosure: Analyst has no position in VLO stock or VLO options.

Current VLO Stock Price: $40.90 12:23 PM, 6/30/2008
Author: Daniel Jones of OptionsNotions.com

June 30, 2008 Posted by ilene9 | Uncategorized | call spread, trade, VLO | 3 Comments

Early Morning Tidbits

Courtesy of Notable Calls,

Early Morning Tidbits:

- Citigroup adds Google (NASDAQ:GOOG) to Top Picks Live list based on what presents itself as a highly favorable Risk-Reward outlook. Based on extensive channel checks, they believe that GOOG’s Q2 results are well on track to meet their estimates ($3.82B revenue/$4.73 EPS), despite recessionary headwinds.

- JP Morgan reits Overweight on Research in Motion (NASDAQ:RIMM), with conviction.

Notablecalls: Both look like good bounce plays here.

June 30, 2008 Posted by ilene9 | Uncategorized | | No Comments

Blue Chip Losses

Here’s some more interesting information from Bespoke Investment Group:

Investors Losing All Their Blue Chips

Excerpt: "So called blue-chip stocks have struggled mightily over the last year. The total loss in market cap from their 52-week highs for stocks in the S&P 100 (largest 100 S&P stocks by market cap) is now $2.5 trillion. Below we highlight stocks in the index that are the furthest from their 52-week highs, as well as the loss in market cap from their 52-week highs. As shown, GM is 75% from its 52-week high, Lehman is 72.4%, and Wachovia is 71.7%."

It’s All About Oil

Check out the chart that’s part of this brief note, courtesy of Bespoke Investment Group’s

It’s All About Oil

If any one tries to tell you differently, all you need to do is show them the chart below. As last week’s trading illustrates, every time oil went up, stocks went down, and every time oil pulled back, the market gained steam.

June 30, 2008 Posted by ilene9 | Uncategorized | | No Comments

Confirmatory Analysis

My friend and stock trader Allan is sharing an update on his methodology and a new stock he’s buying, GSI.

“Confirmatory Analysis” is a stock selection methodology that combines strong technicals with stellar fundamentals. In my case, technicals always come first and will often suffice in and of itself for a reason to buy or sell a stock. When fundamentals kick in, the trade becomes compelling. Since there are usually more technical-based trades then capital to trade them all, requiring the kicker of fundamental confirmation serves as a filter to reduce the array of attractive set-ups to a manageable level.

I bought GSI on Friday near the close, even though the general market looks sick and we are headed into a holiday week. But the trade became compelling around mid-session when I pulled up the GSI chart and realized that it was about to break out of a six month pattern:

The annotations on this chart give a clue as to why I like GSI here;

It is breaking out of a nine month long horizontal trend channel (lower channel line not shown).

The break out is accompanied by a huge volume bar;

The MACD oscillator is showing building upward momentum.

Now the truth is that I bought GSI just on the break out. I didn’t have time to check out the fundamentals on the stock at the time, but, GSI has been a stock I have been day trading for months, because when it runs it really runs and it has been easy to scalp 5% under the right trading conditions.

The fundamentals that I usually look for in a stock will vary with each individual security and sector. I’ve highlighted a few in prior blogs that have shown to be good indications of future price movement. I especially like Revenue Growth and Earnings Growth and those are easily available on Yahoo Finance.

But by now you should know that I absolutely love a good story stock. A good story will get under the skin of a trader/investor and completely take over those areas of our brains that control rationality and allowing total domination by and for the area of our brains that control greed and yes, dreams. It may sound risky, but, remember the late 1990’s when this chemical or biological process became epidemic, causing fortunes to be made (and then lost, but that story is for another blog).

GSI is a Chinese stock and that is itself a story. It is also a Louis Navellier stock and in order to be a Navellier stock it by definition must have stellar fundamentals as well as a compelling story (as only Louis can tell it) behind it. Now we’ve made good money on the last two Navellier stocks, GTE + 12% in two weeks and FSYS +4% in one week.

Here is Louis’ “Portfolio Grader” for these three stocks:

As you can see, according to the way Louis Navellier looks at fundamentals, GSI (as well as GTE and FSYS) is very highly rated. But wait, there is more.

Nobody writes a story better then the copywriters who work at Navellier’s publisher. So I will end this rather lengthy blog with their hook, the story behind GSI and why if you don’t own it yet, not to worry, you haven’t missed out because as you will read, the best is yet to come.

Click here for more.

A

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