Jon Markman's Rank Speculation

Food for Thought...

2008-09-02T13:38:08Z

The Financial Times just posted an article about the low number of retail investors in U.S. equities. I think it warrants some attention:

Individual ownership of US stocks has fallen to a record low, underscoring the increasing importance of institutional investors in domestic equity markets, according to a report to be released today.

Retail investors owned 34 per cent of all shares and 24 per cent of stock in the top 1,000 companies at the end of 2006, the last year for which figures are available, said the Conference Board, an industry group. Both numbers are record lows.

By contrast, individual investors owned 94 per cent of all stocks in 1950 and 63 per cent of all shares in 1980, the group's 2008 Institutional Investment Report said.

Institutions - defined as pension funds, investment companies, insurance companies, banks and foundations - held 76 per cent of the shares in the biggest 1,000 companies, up from 61 per cent in 2000, the report said. The 66 per cent share of all stocks held by institutions was up from 63 per cent two years before.

Keep Your Eyes on HAL

2008-08-20T15:02:18Z

Halliburton (HAL), the world's second-largest oilfield services provider, told Bloomberg last week that the recent 17% slide in crude oil is unlikely to reduce orders for drilling and exploration contracts.

"Customers are basing decisions on significantly lower oil prices, and they plan very long-term projects that don't switch on or switch off based on the oil price,'' CEO David Lesar told Bloomberg. "I don't really see it having a major impact on our business.''

Halliburton opened a second headquarters in Dubai last year and has its biggest operations in Saudi Arabia, where it is the leading drilling services provider for the new Khurais oilfield. HAL just won a contract to provide services at the new Manifa offshore field. The long-term prospects for this energy giant look bright. But if the bear market really takes hold this fall, all stocks are likely to go down together. HAL shares have been hanging in there as well as any of its peers, but watch it carefully. A decline below $41.50, particularly if it's at that level at the end of August, would be a serious sell signal.

Steel Giant Weighed Down By Negatives

2008-08-18T19:51:45Z

Arcelor Mittal (MT), the international steel giant, was reported by Bloomberg last week to be on a drive to augment its development of iron-ore reserves by plowing $6 billion into the development of mines in strife-torn African countries like Senegal, Mauritania and Liberia.

The company believes that it must produce its own iron ore--the key raw material in steel--to control its own destiny. At present, iron ore miners like BHP Billiton (BHP) and Rio do Vale Doce (RIO) control 80% of seaborne trade in the material, and Mittal has been forced to accept price surges of up to 85% in the past year. Mittal has a goal of producing 80% of its own ore in the next 10 years.

That's a great idea from a long-range, fundamental point of view. But in the meantime, I'm very concerned about Mittal's recent decline below its 12-month average for the first time since 2005. I've supported MT for three years, but now is the time to sell if you still own it, as a lot of real negatives are weighing on the stock, including the dollar, the threat of a global recession, and then protectionism.

Once the global economy starts to heat up again, MT will be the first company on my team. But for now, it's more than likely headed lower toward the $60 area from its current perch around $73.

An Innovative Solution...

2008-08-14T12:55:03Z

In an interview with The Wall St Journal, former Fed chairman Alan Greenspan offers the most innovative solution to the national residential real estate crisis that I have seen. It's wacky but clever: Change immigration rules to let in a lot more skilled immigrants, who will form new US households and buy excess housing inventory.

He tells the Journal the only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale - and hence help stabilize prices."

This idea is so far out there that it makes a certain amount of sense. He's saying that if you don't have enough native US demand for houses, import more demand. It will never happen, especially in an election year, but it just might work.

More Bad News Out of Europe...

2008-08-12T16:46:40Z

The economic news just keeps getting worse on the other side of the Atlantic.

Moody's Investors Services issued a report that indicated the number of struggling commercial property borrowers in Europe continues to rise--a conclusion drawn from the acute increase in the number of mortgages on the "watchlist."

According to an article in the Financial Times,

Watchlists are an early indicator of potential events of default or transfer to special servicing, which sees commercial property experts move in to explore the best ways to cure a mortgage's troubles or look at options for a work-out or sale, the agency said in a report published yesterday.

The Moody's report follows analysis from Fitch, a rival ratings agency, which showed a high chance of widespread defaults in the US and UK commercial property mortgage markets if the gloomy economic predictions for those markets were true. ...

"The number of loans experiencing adverse issues is growing, as can be seen from the number of loans which have been added and have remained on servicers' watchlists over the past four quarters," says Viola Karoly, a Moody's analyst and coauthor of the report. ...

"Given that more than 50 per cent of all loans currently on watch are in breach of coverage or loan-to-value covenants, the number of loans defaulting and/or moving into special servicing is expected to increase over the next couple of months and quarters," the report said.

Buckle Up!

2008-08-11T15:33:03Z

Newsweek featured an article recently where leading economic experts tackle the global inflation problem.

Of note were comments made by Mohamed El-Erian--a leading authority on the global financial system--on how economic leaders should navigate policy in a challenging environment:

The global economy, still reeling from the U.S. financial crisis, has entered an even riskier phase on account of inflationary pressures. Inflation is particularly painful when it is driven, as it is now, by price increases on essential products like food and fuel. Governments and companies have to react even if they end up using blunt instruments that initially make the situation worse. ...

In normal times, the emphasis on monetary policy would be necessary and warranted. But conditions are far from normal in today's global economy. ...

First, tighter financial conditions, especially higher mortgage rates, will further undermine a U.S. housing market that is already collapsing under the weight of overvaluation, excessive inventories and growing foreclosures. The recent decision by the U.S. Congress to extend emergency assistance to mortgage holders and behemoth lenders (such as Freddie Mac and Fannie Mae) will only act as a short-term Band-Aid. ... Second, growth in emerging economies will also decline as policymakers there realign their domestic priorities. For the global economy, this means slowing the "other" engines that, particularly in the past year, have accounted for a growing share of the increase in world GDP, thereby effectively compensating for the more sluggish U.S. economy.

So where does that leave us? El-Erian's bottom line is that policymakers must respond to inflated food and energy prices. But, he continues:

..in relaying overwhelmingly on tighter monetary policy, and in failing to aggressively pursue enhanced production and distribution channels for food and energy, they risk weakening global demand too much, thereby being potentially forced into a sudden reversal. The rest of us should keep our seat belts fastened as the global economy continues to navigate an even bumpier phase, as weakening growth impulses aggravate the impact of the credit crunch.

From a trader's point of view, El-Erian's comments further reinforce my Trader's Advantage research, which indicates that the current bear market likely has a long way to go...

Junk Bonds News

2008-08-04T18:58:34Z

Standard & Poor's reports that defaults on American corporate junk bonds could more than quadruple in the next year as the declining economy in the United States severely restricts companies' ability to repay their debts.

The Times reported that, "A default on the debt usually leads to bankruptcy and means that bondholders lose some or all of the money they are owed. Diane Vazza, head of global fixed-income research for S&P, said: "Things are going to get much worse yet. The situation in Europe will follow the US."

This is another in a series of indications that the economy is worsening and will have cascading, negative effects for financial assets. It helps make my case for the market to continue to transition lower over the rest of the summer and, probably, the fall.

Genco: Navigating Among Lower Oil Prices

2008-07-30T19:18:34Z

As oil prices come down, it becomes more economical to transport goods from China to the United States. Globalization had been threatened by $145 per barrel crude oil, but now it appears on track again.

That's one reason that I have been recommending premier shipping company Genco Shipping & Trading (GNK) in my Traders' Advantage letter. Lazard analysts last week raised their estimates due to a "persistently firm" market for ocean shipping. They expect GNK to be exposed to profit-sharing arrangements for its Capesize fleet that rise from $93,000 a day in the second quarter to more than $100,000 a day for the rest of the year. Read more about the fleet here.

Lazard lifted its second-quarter estimate to $1.72 per share from $1.56, boosted its 2008 estimate to $7.11 from $6.76, and boosted its 2009 estimate to $8.85 from $8.62. Do the math, and you'll see the stock is trading at a forward price/earnings multiple of 10 despite expectations of 25% growth. That's cheap. Now throw in the sustainability of its 4.85% annual dividend yield, it's a good buy.

Demand growth is coming from increased demand from China for steam coal and iron ore this winter, and we are also entering the northern hemisphere's high-demand grain season. The downside is that more boats are being floated amid a robust stretch of new shipbuilding, but I think GNK will be able to navigate amid lower prices next year effectively by managing its own fleet and improving efficiencies.

Knowledge is Power

2008-07-25T17:14:53Z

I've found that regardless of whether the news is good or bad for the markets, it's best to stay informed. That's exactly what I've been doing.

Here's some news from Australia that I couldn't help but share with you.

The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a "meltdown".

This massive writedown at NAB, reported in the Business Spectator, is likely a harbinger of more pain to come for U.S. and European banks. It makes me even more concerned than before that the current bear market will continue at least through the rest of this year. If NAB's estimates are correct, banks face the prospect of having to admit up to 3 times more losses than they have already, and obtain more capital at high prices from skeptical investors.

With news like this, I'm encouraged to continue trading mostly from the short side this summer. Just because the bear market's carrying on doesn't mean the profits stop for my Trader's Advantage subscribers and I. Quite the opposite. In this type of environment we find ourselves thriving.

Insights From the Fannie and Freddie Battle

2008-07-23T18:54:25Z

Wall Street Journal editor Paul Gigot today published a terrific explanation of the battle over Fannie Mae and Freddie Mac waged by the political left and right. In this editorial, Gigot explains how liberal Congressmen and journalists pushed the quasi-public mortgage banks' agenda, and the extent that the two organizations went to bully their opponents.

Fannie and Freddie's ... unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of "affordable housing." To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo.

This article is a must-read no matter what side of the political spectrum you are on, as it explains a lot about how the two organizations rose and fell. Meanwhile, you should also check out a column written by former FNM chief executive Franklin Raines in the Washington Post.

He argues that the government should not bail out the two mortgage securitization titans because ...they don't need the money. Interesting piece indeed.

Understanding the battle over Fannie and Freddie is critical to understanding the current world credit crisis, as these two organizations were responsible for securitizing trillions of dollars worth of U.S. mortgages. If we can understand the level of corruption, mistakes and incompetence that lies at the heart of credit derivatives, we can better determine how to lay out bets as traders and investors. When you read between the lines of these two op-ed pieces, you can see that the battle has just barely begun to engage in a meaningful way, and as a result it's clear we are going to be able to trade the banks and brokerages from both the long and short side over the next year. My Trader's Advantage subscribers have already made money on trades with longs and shorts in the financial sector, and I'm looking for more right now.

Troubles Across the Pond

2008-07-21T18:52:30Z

The downturn in residential and commercial property markets is intensifying, underlining the growing risk of Britain entering its first recession in almost two decades.

In this piece from the Telegraph of London, we can see the commercial real estate downturn is by no means limited to the United States. From falling tenant demand to a sky-rocketing unemployment rate, it appears that our friends over in England are also seeing their fair share of economic turmoil.

Whether you're experiencing financial hardship in the U.S. or across the pond, there are key investment opportunities out there that can provide profits regardless of the economy. My Trader's Advantage subscribers are taking full advantage of these opportunities as we speak. Are you?

A Not So Well-Oiled Machine

2008-07-16T13:04:36Z

The financial system is like the oil in your car. Without the oil, it no longer matters whether you have a solid engine, good brakes or fancy safety features. The car will not function.

I couldn't have said it better myself. Mr. El-Erian, a former investment manager of the Harvard Endowment, gives an excellent view of the current market situation and how the government and industry is likely to respond in his Financial Times article, "Crisis and Coherence: Finance Remains Vulnerable."

Demand Destruction Explained

2008-07-14T17:55:28Z

"Crews get their wage packets on the basis of the fish they catch, less expenses. If they are out there steaming around in bad weather, there is no money for them."

That is a view echoed by Paul Trebilcock, chief executive of the Cornish Fish Producers Organisation. "The price of fuel has risen to the point where it is affecting skippers' decisions about whether they go to sea," he said.

An article found in Telegraph.co.uk today, explaining the reluctance to hit the seas in bad weather is a great example of higher diesel prices generating "demand destruction" in the fishing industry in England. I wouldn't be surprised if the same thing is happening in Alaska too. Of course the rise of fishermen looking for work that doesn't rely upon oil prices will feed inflation as fish prices will rise in line with the decline in supply. If you thought the price of milk, and other food staples, was high... just wait until you go to pick up fresh salmon.

Considering Financials? Better Find Your Hazmat Suit

2008-07-11T17:18:24Z

In case you were wondering why there are no financial stocks in my Trader's Advantage portfolio, you should check out the following article I wrote for MSN back in January, "How the Smart Money got it Wrong."

Smart money? Not so much. A review of the one-year results of value-focused funds with some of the best long-term records shows that a virus of total stupidity savaged their ranks as one after another bought into banks, credit card providers, home builders and retailers at bargain-basement prices that seemed too good to be true -- and were.

In the grand scheme of things, little has changed for financials since I first wrote this in January. The "smart money" has been killed on the financials this year ... and with Fannie Mae (FNM) and Freddie Mac (FRE) down another 40% today, and Lehman (LEH) down 20%, this is as true today as ever.

Along the same vein, back in December I quoted Jim Rogers as saying that FNM and FRE were technically bankrupt back then and would probably be "nationalized." At the time that I wrote the MSN article, "Stock Market Winter is Moving In," this statement seemed pretty outrageous to most.

With FRE currently trading at under $4, it's far from outrageous now.

What it all comes down to is that if you're thinking about investing in financials, do so with flame-retardant gloves and full hazmat suit.

Does History Repeat Itself?

2008-07-11T14:17:16Z

John Steele Gordon, author of "An Empire of Wealth: An Epic History of American Economic Power" wrote a very interesting piece today featured in The Wall Street Journal which is a comparison of 1932 and today, both economically and politically.

You see, in 1932 the market slid straight down into July 11th. Sound familiar? While, admittedly, there are some dissimilarities between today's market and that of 1932 (in 1932 the market was already down 60% in July, today we're only down 20%), there are also enough similarities to get both economists and historians talking. If history repeats itself, like Gordon believes, then we could be looking for a 70% out-of-the-blue turnaround as early as this week.

To learn more about how history could repeat itself historically as well, I suggest you read Gordon's article "2008: A Watershed Election." Here's an excerpt to get you started:

Exciting as presidential elections can be, they don't often change things fundamentally. Now and then, however, they can remake the American political landscape for years to come, and the country enters into a new era. Will 2008 be one of those watershed elections? Perhaps, but not in the way that many people think.