ALT-A's Pay Option Arms in the news...

The Economist had a piece about the impending Pay Option Arm (POA) debacle that will engulf this nation shortly.

Prices in America’s housing market may have slumped, but the pain for a significant subset of homeowners has barely begun... The bank’s [Barclays] Nicholas Strand says that roughly 1.4m households, most of them in California, hold a particularly nasty type of adjustable-rate mortgage called the “option ARM”. Although the overall value of option ARMs is lower than that of subprime loans—some $500 billion, according to Mr Strand, compared with about $1 trillion in subprime loans—their sting is more venomous.

But the real crunch will come when the mortgages “recast”, forcing borrowers to start making full payments. The loans recast after a set period (typically some five years after origination) or when the principal hits a predetermined ceiling. The biggest wave of recasts is due to happen in 2010 and 2011.

An option-ARM product called Pick-a-Pay (a name that gave fair warning it could lead to trouble) accounts for 45% of consumer lending at Wachovia, a large bank. Wachovia stopped originating loans that allow negative amortisation in June, and is setting aside heftier reserves to cope with expected losses.

Given this market's bi-polar behavior and very short time frame I do think there will be a 6 month tradeable bounce approaching in the financial stocks. However, I ultimately expect that in the second half of 2009, they'll get clobbered again by this POA implosion.

The Daily Show welcomes the GOP...

Too funny and too true

Fertilizer Fundies

The charts for Mosaic and Potash Corp. indicate they are still recovering from their respective breakdowns, but make no mistake, the long term fundies for these companies are still very-much intact.

When it comes to food production there are many fundamental problems facing the world (ie natural disasters, corrupt governments, lack of infrastructure to distribute food, etc.) but two problems often cited by the fertilizer companies are:

1) Exploding demand for food. "Shockingly" as people in the BRIC countries rise out of poverty they demand more food. Specifically people moving out of poverty begin to change their diets from starch to protein-based. This dramatic change in diets is driving the grain-intensive production of livestock (you gotta feed cattle a whole lotta crops to get them fat and tasty). Oh yeah, the world's population will also grow by 2.5 billion people in the next 40 years (from 6.7 to 9.2 billion people).


2) Less farm land exists (urbanization, pollution/environmental degradation) and yields from most existing farm crops are down considerably. The end result is that the supply of food is a lot harder to develop than it's been in the past as is reflected in this graph which shows current global food supplies:


As you can see, the stock-to-use ratio (which is just supply divided by demand) is at historical lows meaning that farmers have no choice but to spend considerable money on restocking their crop inventories. Likely these farmers will do whatever it takes to maximize yields from their existing farms, increasing their usage of fertilizers.

Given that macro perspective here are Potash Corp's internal expectations based on their production ramp up 16 million tons of potash by 2011 (I think 2012 is when we'll see the top).


Of course, these numbers are from management's perspective (I have heard these companies called the "dot-corns" given their parabolic charts) nevertheless I do believe that we are living in a "world of shortages" and that food is simply another item we in this country take for granted.

Shorting Technology...

This Dell News is not good:

Dell (NASDAQ:DELL) , the world's second-biggest personal computer maker, on Thursday sounded a sour note on the economy, warning that the slowdown in information technology spending that has gripped the US in recent months has begun to spread to Europe and parts of Asia.
The warning came as the company reported worse-than-expected profits for the second quarter, sending its shares down more than 10 per cent in after-hours trading. It came two weeks after Hewlett-Packard (NYSE:HPQ) , Dell's bigger rival, trimmed its sales guidance for the coming months.

This bad news might be a catalyst for a breakdown in other tech favorites, which are dangerously close to closing below support:





POSITION: LONG QID @ 42.50

TARGET 45
STOP 41

More writedowns for financials...

Granted these aren't obscene writedowns, only $10 billion, but when you are this capital constrained every penny counts (Citi just announced they are cutting back on colored copies).

The auction-rate fiasco is not over for banks. Having bought back about $55 billion of the paper, they are now faced with the reality that the bonds are only worth about $.80 on a dollar. The means the firms who were forced to take them off shareholder hands will probably have to account for $10 billion in losses.
According to Reuters, "The timing is not ideal given the balance sheets of a lot of these companies," said Walter Todd, portfolio manager at Greenwood Capital.

Even with this set of news, I still think that we will experience a major head fake coming from the financials and this overall market (ie we will rally from here). It is very obvious that this market is COMPLETELY ignoring the impending ALT-A POA debacle; Cramer just said the bottom in housing will come in Q3 of 2009, the exact time POA resets will be at their worst. My assumption is that "The Street" is looking at stabilizing subprime defaults and assuming that the worst is behind us.

Major shrinkage for the Europeans...

Apparently Europe's population will be shrinking in 7 years as death rates will begin to surpass birth rates. The situation is so bad in Europe that immigration won't even make up for it:

"From 2015 onwards," the document says, "deaths would outnumber births and hence population growth due to natural increase would cease. From this point onwards positive net migration would be the only population growth factor. However from 2035 this positive net migration would no longer counterbalance the negative natural change and the population is projected to begin to fall."

Now with a combined total of 495 million people, the 27 nations that make up the EU would increase their population to a total of 521 million in 2035 before falling back to 506 million in 2060.

Population growth obviously has serious socio-economic implications for Europe as well as the global economy (remember the world is flat)

The document did not spell out these likely shifts, but they could include reduced funding for schools, heavy burdens on welfare and social security systems, and perhaps even a political push for much larger immigration, which is currently deeply out of favor with most European voters.

In case you're wondering how the U.S. stacks up:

The document deals only with population trends in Europe. According to another report published last year, the United States population will increase from 301 million to 468 million in 2060, including 105 million new immigrants.

No shrinkage in the U.S., well except for this guy...

My thoughts on the market and oil...

don't matter. As Brian Shannon over at Alphatrends says: "The market doesn't care what you think." I know that's an obvious statement but it's important to stay humble and recognize that the market acts differently than you. The market is an irrational entity trading 99.99% of the time on fear and greed (markets are only efficient in the long run).

So with that said, I abdicate my thoughts on the market to who else but the market makers (aka the big funds and institutions that push stocks/commodities up and down). Are they right all the time? Of course not; but if you read enough research reports and stick with the most successfull groups you'll be right more often than you'll be wrong. Remember, even the best baseball players connect 30% of the time when they hit (I go with the baseball metaphor, because that's what Buffett chooses).

So here are some oil thoughts from Goldman Sachs. Why Goldman? Because they are one of the few market makers who have actually been right lately. It seems like all the other big players got too fat and happy and forgot that groupthink is bad for business. That's a $500 billion dollar psychology lesson.

Synopsis:

Goldman Sachs reiterates their call for $149 by years end.

"Although the recent correlation in dollar and oil prices is clear, it is important to emphasise that each of these assets are driven by multiple, varying factors ... Put differently, there is more to oil than the U.S. dollar and vice versa."

Let's not forget that China also took several million cars off the road for their Olympic preparations these past few weeks. Is it a coincidence that oil prices collapsed around the same time? I think not.

Technical Trade...

WSP Holdings - Chinese company that makes tubes and equipment for the oil industry.

WSP also has a:

Forward P/E < 7
PEG < .50
ROE = 29

But none of those fundamentals matter because this is a technical trade (just look at the pretty lines on the graph and pray they keep moving up ;-)

Target 9.50
Stop at 8.20

Long WH

Roubini on this market...

"It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich.”

Flawless synopsis.

Evidence that Fannie and Freddie are best of breed

To paraphrase Mark Twain:

There are three kinds of lies: lies, damned lies, and the stock market

Time of this very rare market sighting is 10:00 am on the west coast.

Time to buy financials?

I think not (thx Calculated Risk)

I need you back Moly...

Ok so Thompson Creek (the most respectable pure moly play out there) missed Q2earnings as their production costs soared 32% yoy (from $5.66 to $7.49 a pound). I am venturing that most of this cost spike had to do with surging oil prices (those big ass trucks that carry the moly from the mines basically run 24-7). However, now with oil apparently peaking (at least for the next 6 months), I am going back to Moly.

This decision isn't just because of oil prices, but because the industry fundamentals in moly are too good to ignore (shortages in 2008, 2009 and 2010 - that's what CPM Group says). Apparently, I am not the only one who has noticed moly's positive outlook as smart ass hedge fund manager Daniel Loeb holds a stake in TC with more than 4 million shares.

Positions: Long TC