Tuesday, May 27, 2008

Looking at the March Trade Data

We often hear that one shining light in this economic downturn is an increase in exports.
That is not happening.

http://www.census.gov/indicator/www/ustrade.html
* Exports fell $2.6B (to $148.5B in March from $151.1B in February). Goods accounted for most of the drop
- A $3B decrease in capital goods ($1.2B), car parts ($1B) and consumer goods ($0.7B)
- A very slight increase in food and beverages ($0.3B)
* Imports fell $6.2B (to $206.7B from $212.8B). Goods accounted for most of this
- Auto parts & cars ($2.1B), industrial supplies and materials ($2B), consumer goods ($1.1B), and capital goods ($0.8B)
- Oil rose only $0.8B: a 6% price hike was offset by a 2.5% drop in barrels imported.

Simply put: folks are buying less. Imports fell 3.5% when you take out the impact of oil. China trade dropped almost $2B in furniture, clothing, & toys - the stuff of conspicuous consumption.

Quick stock comment: we are short consumer services and products. If the trade trend continues, that's $13B less business for this sector, and that's a big hit. We are also short AutoNation and Harley Davidson - a drop in auto related business of $3.1B in 1 month (exports and imports) is bound to hit these companies.

I am surprised that food exports haven't increased: $0.3B is small. Maybe food sales will surge as the Spring and Summer harvests get underway.

Quick stock comment: a smaller trade deficit is good for the dollar. The dollar grows stronger as we owe the world less. More interestingly, the rest of the world will stagger from a US importing $75B less in goods. They will look for dollar safety as their economies weaken.

Some interesting highlights:
* Coal exports rose almost 50% from previous month
* TV imports surged 10%
* Corn and wheat exports are surging

* Exports to oil countries like Saudi Arabia are not growing much - meaning that petrodollars are NOT being recycled into buying US products

Stocks I'm watching

The ETFC contracts were exercised at $4, which is no big deal - the stock is below $4. Meanwhile we are still sitting on 1000 shares of ETFC which I want to sell covered calls on. I may be forced to do it for less than I want.

We have the short positions sitting there, watched every day by me. I'll be reviewing them later this week, but suffice it to say that the good news is not very strong. The MGM puts are a bright spot. The Ultrashorts seem to be reversing the downward move.

Meanwhile, I have a list of stocks that I would buy and go long, but they are a bit over bought right now imho. So I'll be watching for opportunities. Also, this list is long and overlapping. For example, CF, POT, & MOS are all popping up. So the list needs thinning as well. But this is my first pass.
Bsaically, I think the energy and agriculture sectors have legs but are over bought. CF is finally retreating back to its 50 dma and I'd jump in if it hit $110.

ARD
BDE
CRK
DNR
PXP
RIG
CF
DSX
SOHU
MUR
GNK
APA
BRY
EAC
ME
GTI
LNN
ROSE
WLL
WTI
XEC
NXY
PXD
MOS
VIP
ACI
WDC
MVL
CSIQ
SOLF
pot
stp
tbsi
osg
BMRN
SWN
WG
SD
CRZO
FST
CLR
CXO

Monday, May 26, 2008

The Week Ahead - Expect More Market Weakness

My reasoning for a market slowdown is a combination of psychology and reality. I think, globally, everyone now expects recession. Meanwhile, money is flowing away from investments and into cash
Recessions and moving into cash tend to move hand in hand. And every dollar going into money markets is a dollar that is moving away from the stock market.

The world in recession
According to a recent report by JP Morgan, ~85% of global GDP is in the hands of the US (31%), Japan (14%) and Europe (40%). http://www.ism.ws/files/ISMReport/JPMorgan/JPMorganMfg-Svcs050608.pdf
These countries are also expected to face recession in the next 12 months, if not sooner.

The impact of a slowdown will affect China as well, but maybe not in the way you imagine. Exports are not the major driver of China's GDP: investment is. Exports are 10% of GDP while investments are 40%. http://www.economist.com/finance/displaystory.cfm?story_id=10429271 But if the world suffers a slowdown in consumption, that investment will slow as well. And let’s not forget that post-Olympics, government spending will slow.

I focus on a slowdown because it strikes me that the current picture of stagflation (runaway inflation and recession) may morph into plain old recession. That is: inflation will go away.

My thinking is that inflation in food, energy, and steel is more about speculation than demand. Yes, demand is there and it is strong and growing. There is no denying that Chinese consumption of meat is rising, a long term trend. But the recent and sudden price surge is speculative driven. Food and oil are the new bubble mania.

The assumption is that, in a downturn, people have to eat and use energy. Moreover, demand for these is inelastic in the short-run. Charge anything and people will still pay. But that thinking is wrong.

Look at US consumers and oil. According to recent reports, US drivers drove 11 billion fewer miles in April 2008 than April 2007.
http://www.marketwatch.com/news/story/americans-drive-11-billion-fewer/story.aspx?guid=%7B93E83ED2-0EE6-48BF-B104-D82FE8A93D70%7D
At 4.3%, that's the largest drop on record. If this trend continues, global oil tips into oversupply. Add in slackening demand in other countries, and we have ongoing oversupply. Suppliers are more addicted to selling oil than we are to buying it.

The rules of supply & demand won't drop prices for a while, assuming even that consumption drops. Speculators have contracts locking in higher prices. Which means it’s too soon to short oil (DUG).

The same with food and other commodities like steel. A slowdown in consumption will ease demand. Meanwhile, production is surging for all commodities. Expect major oversupply in one year.

But today, not a year from now, the boom continues in agriculture and energy. The problem I am facing is that the stocks I want are over bought. I’d prefer to wait for a pullback, and I think this week will provide one.

Sunday, May 25, 2008

New Stock Watch List out next week

I'm taking advantage of the 3 day weekend to sift through Q1 earnings releases and identify a new stock list.
One thing is clear: very few stocks are making even the first round. Typically I wade through a few hundred candidates. This time, fewer than 100. That tells me that companie sare struggling. And no surprise, all companies are fitting in a few sectors:
* Global infrastructure
* China growth
* Energy
* Agriculture

The map for the US economy is written in last week's Gap earnings release.
http://news.yahoo.com/s/ap/20080523/ap_on_bi_ge/earns_gap;_ylt=Am1DL8Y9BY7m331CIMvEGXKyBhIF
"sales are slumping and shoppers appear unlikely to spend more anytime soon, but the clothing retailer still boosted its first-quarter profit by 40 percent by managing inventory and cutting costs"
Managing inventory = buying fewer products
Cutting costs = layoffs, less advertising spending, and so on

In some ways, the Gap's struggles stem from an inability to hit the fashion conscious scene. But the cold reality is that companies that need to meet margins buy less and fire people. Based on my stock sifting, that is the reality for the majority of US companies, so I expect them to follow the same formula.

Now is the time to double down on a few ultrashorts in the consumer space and commercial real estate space