Chrysler has announced that it will stop offering leases through its leading facility (see WSJ article). The move comes as Chrysler and other car companies are seeing their borrowing cost rise (typically Libor plus a spread of 1% or more for Chrysler - with Libor around 2.8%). Higher borrowing cost make it more difficult for the car companies to make money on low interest rate loans, or absorb write-offs for 0% loans that are often used to increase sales of higher-margin or low selling vehicles. The old joke of "we lose money on every sale, but make it up in volume" may not even apply here. The first part still holds, but volume may not increase unless they can find ways to help customers purchase their vehicles. Customers have basically quit buying the higher margin vehicles, such as trucks and SUVs. To make matters worse, even if customers do purchase these vehicles, and the car companies finance or lease them, the car company may be stuck with a bad loan which has an asset that has depreciated below the current loan value.
Issues such as these have led to the recent decision by Chrysler to quit offering leases. But does this solve the problem, or simply make things worse? Sure, by eliminating poorly performing loans and leases, as well as reducing the company's dependency on higher borrowing cost, the company can scale back poor performing assets, which is good. Unfortunately, they may also be scaling back sales in the process, in what amounts to shooting themselves in the foot. Typically, buyers will utilize the dealer credit facilities if they are unable to get a better deal at a bank or local credit union (most likely due to weak credit). Even with good credit, they may still decide to take the loan or lease with the car credit facility when it is tied with incentives, such as rebates or low financing. By eliminate this line of credit for customers, you are essentially preventing the weaker credit customers that need the facility from purchasing your vehicles. For those with good credit who can obtain low interest loans elsewhere, you now lose another carrot that might help get them in the door to buy the higher-margin vehicles that make you the most money. In a sense, you have reduced credit risk by introducing sales risk, resulting in lower revenues and lower valuation.
Of course, this is not to say that Chrysler made the wrong move. They may have had no other choice given the credit markets, and car loans themselves may be the next shoe to drop, bringing down not only the car makers, but the banks underwriting the credit as well. Nonetheless, it does tell you how serious their problems are, and another reason their competitors, such as Ford (F) and General Motors (GM), and even Toyota Motors (TM) to some extent, are getting marked down in the stock market. They are in a bind, and there are not really any easy answers. I am just not sure that making it harder for your customers to buy your product is the answer.
As reported at IndexUniverse, another ETF focusing on the Middle East is available. The new fund, called the Gulf States Index ETF (NYSEArca: MES), tracks the Dow Jones index of public companies headquartered or doing most of their business in Gulf Cooperation Council (GCC) countries - an economic alliance between six Gulf State member nations. The focus on the GCC is what makes this ETF unique. The current weightings in the index include: Kuwait (52.3%), United Arab Emirates (25.8%), Qatar (14.9%), Oman (4.4%), and Bahrain (2.6%). As with the other Gulf State ETFs, Saudi Arabia is not included since it does not have any companies open to foreign investment.
The ETF is heavily weighted in the banking and financial services sector, with over 60% of the total weighting. The sector breakdown includes banks (38.5%), financial services (21.6%), real estate (10.5%), technology (7.6%), construction and materials (7.2%), industrial goods and services (7.1%), and telecommunications (3.6%). Large-caps currently make up 37.7% of the fund, mid-caps are at 47.1% weight, while small-caps make up the remaining 15.2% of the fund.
The annual net expense ratio of the fund is 0.98%, which is a little more than the Invesco PowerShares MENA Frontier Countries Portfolio (PMNA), which we discussed in an earlier post. Another recently offered fund for those interested is the WisdomTree Middle East Dividend Fund (GULF).
As highlighted in BusinessWeek, and illustrated by the recent acquisition of Anheuser-Busch by InBev, the United States is on sale. The weak stock market and even weaker U.S. dollar are allowing foreign buyers to purchase U.S. companies at discount prices. In the past five years, 2,331 U.S. firms with a total value of $772.3 billion were purchased by foreign buyers, according to data provider Capital IQ. In 2007, 614 U.S. firms, valued at $294.4 billion, were acquired by foreign entities, up from 541 deals valued at $155.1 billion for 2006, and 226 firms valued at $49.6 billion in 2003. While foreign buying slowed some with the slowing global economy in 2008, there has still been 266 foreign deals announced year-to-date valued at $121 billion.
Not surprisingly, bankers and M&A specialists expect the deals to continue and even accelerate if the dollar continues to be weak against the Euro. Foreign buyers also seem to have easier access to credit, compared to their American counterparts. Even those American companies who can obtain credit are less likely to do so given the uncertain economic environment. Who is next? It is difficult to tell, but the types of business purchased are being affected by the economy. Right now very stable businesses with good brands are being looked at. Companies similar to past and present takeovers, such as Anheuser-Busch, Genentech, Lucent Technologies, MedImmune, John Hancock, Commerce Bancorp, IPSCO, and the Thompson Corporation will be targets. If the economy were to improve, companies affected by the slowdown in the economy, and currently a little too risky given the environment, may also start to be considered, right at the point business starts to pick-up. Until the U.S. credit and housing problems are behind us, there may not be much some of these companies can do. Something to think about when you are having you next cold glass of InBev.
As discussed at MarketWatch earlier this week, VLMAP, which stands for Value Line's Median Appreciation Potential, rose to 100, a level that occurred during the last three major market bottoms (Oct 2002, March 2003, and right after 9/11). The VLMAP is a single number representing the median of the projections made by Value Line's analysts regarding trading direction over 3-5 years for the 1,700 stocks they follow. (Note: the last weekly data reported a 95 level, and given the recent market rally it may next report a lower level, but it is believed to have touched 100 intra-day on July 15 - yet an exact benchmark number on a non-widely followed indicator is probably not worth stressing over).
Of course, as just mentioned regarding pre-election market trends, the data and predictions of the indicator (just 3 recent market bottoms) is not enough to provide full confidence, but the indicator has been considered and used as a market timer since 1986. Econometric analysis by the Hulbert Financial Digest in 2004 confirmed its use for market-timing. It is also worth nothing that the VLMAP does not give you a precise time for the market bottom. The indicator simply looks at long-term reversals, and how the risk-reward trade-off is becoming more attractive to justify entering the market.
The Financial Times is reporting about a possible pre-election bump in U.S. stock prices if historical election trends remain in place. For those of you who are interested in such data (snooped or not), it appears that since 1926 U.S. stocks have beaten the world market in 75% of the presidential election years by an average spread of 13.4% from June to October. Analyzing that data more, it appears that when global stocks are rising, U.S. stocks lead 77% of those periods. When stock markets decline, U.S. stocks led in 71% of those periods. It also appears that it does not matter whether you begin the data analysis in July, August, or September, at least as far as having returns outperform.
In the past I did some research on how the stock market performed when there was a change in power in Congress (from one party to another). This research is similar to the analysis of returns for the stock market during different presidential cycles - data that always gets thrown around about this point in the election cycle. For our research we speculated that Congress, with its ability to create tax law, had more of an impact on stock returns, even with a Presidential veto threat. For those interested, our research found that divided government produced the highest returns (probably since Congress and the President were unable to get anything done, but that is just conjecture). Anyway, I point this out since it is worthwhile to remember that for any of these studies, the data sets that are used are often very small, with most results outside the acceptable levels of statistical error. So while they are fun, and sometimes worth paying attention to, always remember what type of data set you are dealing with so you can properly adjust your own confidence in the data and risk levels for your trading.
Recent EIA weekly data shows that total products fuel demand in the U.S. decreased, averaging 19.9 million barrels a day last week (a Bloomberg article also mentions that Japan imported 0.7% less crude oil in June than one year ago). U.S. demand has now declined for three straight weeks, with U.S. fuel consumption averaging 20.3 million barrels a day over the past four weeks, down 2.1% from a year earlier. U.S. crude oil refinery inputs averaged 15.1 million barrels per day last week, down 355,000 barrels per day. Refineries operated at 87.1% capacity last week, down 2.4%, marking the lowest utilization rate in over two months. Gasoline production increased, averaging 9.2 million barrels per day, while distillate fuel production decreased, averaging 4.6 million barrels per day.
Crude oil inventories were down 1.6 million barrels to 295.3 million barrels. Stockpiles were forecast to only decline by 675,000 barrels. While Hurricane Dolly turned out to not be as bad as initially worried for on- and off-shore Gulf refineries, some energy companies nonetheless evacuated select oil rigs as a precaution, cutting Gulf production by 4.7%. Total motor gasoline inventories increased by 2.9 million barrels last week. Distillate fuel inventory, including diesel and heating oil, increased by 2.4 million barrels. Commercial petroleum inventories increased by 1.9 million barrels last week.
Crude oil imports to the U.S. averaged 9.8 million barrels per day last week, down 985,000 barrels per day. Total motor gasoline imports averaged 1.1 million barrels per day last week, while distillate fuel imports averaged 102,000 barrels per day. Over the last month, motor gasoline demand has averaged 9.3 million barrels per day, down by 2.4% from last year. For the same period, distillate fuel demand has averaged about 4.2 million barrels per day, up by 3.6%, while jet fuel demand fell 2.5%.
For those who read the crude oil / financials post and are interested in reading more about the current relationship between the USO (crude oil) and the XLF (financials), check out these two posts (first, second) at the VIX And More blog, or at greenfaucet. Bill Luby has created what he calls a "headwind index" that looks at the ratio between the XLF and USO. Interesting stuff.
As reported at IndexUniverse, State Street Global Advisors is now offering 10 new sector ETFs:
- SPDR S&P International Consumer Discretionary Sector ETF
- SPDR S&P International Consumer Staples Sector ETF
- SPDR S&P International Energy Sector ETF
- SPDR S&P International Financial Sector ETF
- SPDR S&P International Health Care Sector ETF
- SPDR S&P International Industrial Sector ETF
- SPDR S&P International Materials Sector ETF
- SPDR S&P International Technology Sector ETF
- SPDR S&P International Telecommunications Sector ETF
- SPDR S&P International Utilities Sector ETF
The NY Times has an article regarding the preliminary results of a task force study headed by the Commodity Futures Trading Commission, along with staff from the departments of Agriculture and Energy, Treasury, the Federal Reserve, the FTC, and the SEC. While some will argue with the composition and motivations of the task force group, the study found that speculators were not responsible for driving crude oil prices higher. As an example of their findings, swap dealers who provide investors a future return tied to commodity market performance were nearly balanced between purchases and sales of energy futures contracts. In fact, from January to May of 2008, more of these swap positions were selling than buying, even while oil prices rose 28% during the same period. Furthermore, the task force found that speculators were more likely to change their positions after prices had moved, and not before, suggesting they were responding to new information as is typical in an efficient market. The compete report is due in September, but the initial findings are interesting nonetheless.
The Washington Post reports today how the Congressional Budget Office Director, Peter Orszag, feels that Fannie and Freddie will likely cost taxpayers less than $25 billion, but further deterioration in the housing market could force an infusion beyond $100 billion. The quote of the day comes directly from Orszag: "There is significant uncertainty involved here," Orszag said. The cost "could be zero. It could be $100 billion." At least he is honest. Like the market, no one really knows. Of possible contention in the recently drafted legislation is how the protections for taxpayers were not specifically spelled out but were left to the Treasury to define.
At the end of Q1, both Fannie and Freddie had liabilities of $1.6 trillion, plus mortgage guarantees and investments totaling $5.2 trillion. Unfortunately, the excess of their assets over liabilities may have fallen to $7 billion. Still, the $25 billion estimate may also end up overstating the cost since it does not reflect the value to the government of any purchased stock received for their $25 billion investment (assuming the company needs to be taken over). As quoted in the article:
"If we do this right, taxpayers will not spend any money because the markets will be confident in the vitality of Freddie Mac and Fannie Mae, and the markets will correct themselves," said Sen. Judd Gregg (R-N.H.). "But if the markets don't correct and Fannie Mae and Freddie Mac become unstable, then we've got very serious problems well beyond anything in this estimate."Of course, if the government does step in, then the confidence has been lost, and the value of the stock at that point is most likely less than their bailout investment. As argued, it still appears the issue comes down to a matter of confidence (to some extent), which partially explains the need for Treasury to have an open checkbook, or at least give that impression. Open checkbooks are nonetheless scary, and often end up being used to buy more than you originally went to the store for, but in this instance, they may have no choice. Too little, and confidence is lost. Too much, and either the market gets scared, and/or moral hazard starts to creep in. I wonder if Treasury Secretary Paulson is missing his Manhattan corner office right now?
Coming soon with more frequency at Bull Bear Trader will be stocks, charts, and/or sectors of interest. Of interest will be stocks on the move with potential and/or new opportunities for growth, upcoming earnings announcements, or changes in analyst coverage, charts with interesting price action and patterns, or indicators setting up for a potential move, and sectors or specific industries that are leading the market or seeing increased activity. As for the normal disclaimer: once again, none of the stocks listed are recommendations to buy or sell, but ones that may be worth watching or performing further due diligence on. These are simply stocks, sectors, and data I am currently watching, and now include on the blog for those readers who may be interested. In many cases I will not have a position, or even planning a position, but am simply offering an opinion or observation. Readers should take any comments as such.
As seen in the chart below, financials (represented here by the XLF) and crude oil (represented here by the USO) continue to diverge.
There have been numerous explanations for the recent move in financials (new SEC requirements generating a short squeeze, oversold stocks, reported numbers not as bad as expected for select financials, etc.), but I suspect that the recent sell-off in crude oil also has a lot to do with the short-term price action in the financials. The chart below shows the recent 10 day, 15 minute price performance of both the USO and XLF. Again, the divergence between the two, in particular the price action around sharp sell-offs in the USO, is of interest.
Source: BigCharts.com (10 day, 15 minute)While a simply chart comparison, I suspect that until the market has confidence that recent credit problems and sell-offs in housing are corrected, the price action in crude oil will continue to affect the performance of the financials, and the market in general. The financials have had a nice move over the last week, housing is still weak, the Fed is in a box regarding rates, the crude oil supply-demand balance still remains tight, and hurricane season has begun in earnest. Each points to continued interesting times for both crude oil and the financials. The impact of crude oil on the dollar, inflation, and interest rates also can not be ignored. While crude seems to be looking for reasons to sell-off the last week, I don't expect this trend to hold for long, nor do I expect the market to quit following crude oil movements as long as we stay around these current historically high levels.
The threat of Hurricane Dolly disrupting oil and natural gas production in the gulf coast helped to stem the slide in crude oil and natural gas prices late last week, but now as reports indicate that production will be relatively unaffected, both have continued their sell-off. As of mid-day, crude oil was down over $4.50, falling below $127 a barrel while natural gas was off over $0.50, falling below $10 per MMBtu. As I write this post the UNG is down -5.72%, while the natural gas company Chesapeake Energy (which I have been following) is getting taken to the wood shed, down -7.47%. This stock certainly looks sick and is already testing the support I worried about earlier in a post written just yesterday morning. Longer-term fundamentals still appear bullish based on long-term projections in supply and demand, but short-term price activity is certainly weak. The crude market has been known to turn-on-a-dime lately, but trading or picking an investment bottom is foolish at best. Giving up a few points to wait for confirmation of the trend is probably the smarter move. As for now, things are certainly looking ugly in oil, and natural gas seems to be going along for the ride. Both seem to be looking for reasons to go down, unlike just a few weeks ago. It is unclear how much of the current moves in crude are based on the recent passage of the Senate bill aimed at curbing speculation.
Structured Products is reporting on the new Dow Jones Brookfield Infrastructure Indexes, covering companies in the airport, pipeline, ports, toll road, communication, electricity transmission and distribution, oil and gas storage and transportation, and water sectors. The index comprises the Global Infrastructure and Composite index, regional sub-indexes for the Americas, Europe, and Asia-Pacific, eight global sector sub-indexes, and the Infrastructure MLP index. Companies included must have a market cap of $500 million, minimum 3-month average daily trading volume of $1 million, and derive more than 70% of cash flows from the development, ownership, lease, or management of infrastructure assets.
In 2006, the Office of Science and Technology estimated that global infrastructure investment is projected to exceed $20 trillion. To take advantage of global growth, the index is spread over more than 20 countries, with the U.S. and Great Britain have the largest allocations at 37.55% and 19.44%, respectively. All other country allocations are below 10%. Of interest is that China is only at 2.69% and India is not even on the list. As for components, National Grid PLC (NYSE: NGG) comes in at a weighting of 10.16%, Spectra Energy Corp. (NYSE: SE) at 5.98%, and American Tower Corp. (NYSE: AMT ) at 5.56%. All other companies are at a weight less than 5%. Total returns in US dollars were 16.26% in 2007, but -9.75% YTD. While down, the return is still greater than the -14.17% in the S&P 500 YTD. As (or if) ETFs are developed based on the index, companies in the index should see increased buying pressure.
Global Infrastructure 100 For those looking to invest directly in infrastructure, there is the SPDRFTSE/MacquarieETF (GII). The GII is currently down -7.68% YTD. Again, not bad compared to the S&P 500. Utilities are its largest holding at nearly 80%. Another potential investment in infrastructure with a little more group diversification is the iShares S&P Global Infrastructure Index (IGF). Of interest is that the IGF fund may invest in futures contracts, options, options on futures contracts, and swaps that are related to its underlying index. Utilities are its largest holdings at over 40% weighting, energy at just below a 23% weighting, and business services slightly below a 34% weighting. The diversification is not helping this year given that the return for IGF is down 14.59% YTD.
As regulators and others look to solve the problems that led to the current credit crisis, or at least look to find something to blame, derivatives are often an easy target. After all, most people don't understand them, let alone know what their benefits are. They simply know that derivatives are complex, risky, and make a fortunate few a lot of money.
A recent Reuters article highlights how regulators are looking to standardization of the over-the-counter derivative market as a potential solution to current problems. But will this help? While it may make future products easier to understand, it is also likely to prevent the type of innovation that is often needed to develop the products necessary for facilitating the transfer to risk to those who are best able to handle such risk. As such products are removed from the system, it is likely that the Government will increasingly be forced to come to the rescue, nationalizing more risk at the taxpayer's expense. As an example, there is no doubt that the credit default swap market needs to be more transparent, but can this be done without standardization, or simply putting everything through the same cookie-cutter framework? While such a system could help eliminate large losses, it may be at the expense of slower growth and innovation. Hopefully regulators will continue to take this into consideration.
As mentioned in a Bloomberg article, research by BeSpoke Investment Group has found that more than $1.4 trillion of global equities are now on loan. This is a third higher than at the start of 2007. Short selling on the NYSE rose to 4.6% of total shares in June, the highest level since 1931. As the market has sold-off, both short positions and subsequent short profits have increased. In fact, short positions in Frannie Mae and Freddie Mac generated profits of $1.4 billion in July alone.
In addition to recent credit and housing issues, and the higher energy and commodity prices that are fueling inflation and reducing profits, short positions are also increasing in response to extra interest in 130/30 funds. These funds, which often have up to a 30% short position to provide for a higher long exposure, have been on the rise as retail investors look for ways to generate hedge fund-like returns. In fact, investments in such funds are expected to clime to $2 trillion by 2010, from a mere $140 billion last year. This is in addition to other hedge fund replication strategies that also utilize shorting of various securities and products to mimic hedge fund returns.
Of course, just as the SEC is placing restrictions on short selling, other countries are either initiating or increasing access to short selling in a effort to curb rampant long speculation and help contain markets before they reach bubble territory. After the current credit crisis is over, and money begins to flow once again into the financial companies and other securities, don't be surprise if we begin to hear calls from regulators and others looking for ways to pop the bubble and reduce speculation. Ironically, such calls were happening just a few weeks ago in the crude oil markets (and will no doubt begin again in earnest if prices return to over $140 a barrel). When all is said and done, we may end up with trading that restricts short selling in beaten down industries, while encouraging it in those industries with higher valuations. I am not quite sure that helps the markets reach efficient levels, but it is certainly good news to the next Enron.
As crude oil has sold off over $16 (approximately 11%) in the last four days, natural gas, and the natural gas companies have also taken a hit. As of last week, natural gas prices are down over 20% since July 4, and fell over 8% last Thursday alone. Not surprisingly, Chesapeake Energy sold off with the corrections in both crude oil and natural gas, falling almost $10, or over 15% in the last week.
Well, what a difference a week can make. While Aubrey McClendon continues to buy shares, purchasing another 750,000 shares at $57.25, many of the other parameters and assumptions have changed (guess who bought into the offering at $57.25? - one could speculate that the CEO purchases have been holding the stock up short-term). While crude oil has not fallen below $100 a barrel, it has had a historic one week sell-off. Furthermore, the sell-off in natural gas has been just as bad, if not worse than expected. Natural gas in underground storage increased to 2,312 Bcf, registering an increase of 104 Bcf.
Given the recent price action in crude oil and natural gas, the sell-off in Chesapeake's stock, the dilution from the recent stock offering, and the historical pressure on natural gas prices in late July and early August, it would be easy to sell the stock at current levels and wait for more clarity. In fact, this may be the smart move, even at the risk of selling at a near-term bottom. Nonetheless, for now I will continue to hold what is left of my position, but look to either add or sell in the low 50s as the stock tries to find support in this area. While the recent uptrend appears broken, there is some support in the low $50s, and it will be important for the stock to hold at these levels. Otherwise, there may be a fall to the $40 or even $35 per share level, with some weaker support at $45 per share along the way.
Given his recent purchases, I would expect the CEO to continue to accumulate stock at these levels, but even his buying may be not be enough to support the stock if crude oil continues to break support and suffer the kinds of sell-offs it has recently experienced. A number of funds ratcheted up their exposure to crude oil over the last year and are now beginning to unload their positions and lock into any remaining gains. The right (or wrong) news could once again begin the selling in earnest. Nonetheless, I am still bullish on natural gas long-term. I also still believe in the story and management at Chesapeake, and I still feel that crude oil is not going back to 1990 levels anytime soon, even if the current sell-off continues. Any weather related disruptions to crude oil and natural gas would also be bullish for prices. Yet, I am not as confident in this view as I was just a little over a week ago, and will certainly be watching the price action closely.
There has been a lot of anticipation recently as to when the VIX would finally spike back into the 30's. Recent moves above 30 in November, January, and March have produced temporary bottoms, although the November and January relief rallies were short lived, and the March rally rolled over 2 months later. The VIX briefly touched into the 30's last week, but quickly corrected back into the mid-20's. Some are arguing that not only was the recent move into the 30's too short, but a confirmation spike probably needs to now be in the mid-30's (if the old rules-of-thumb don't work, try another).
Given the recent market action, it appears that more than changes in market sentiment are necessary to reverse the current bear market. Others have recently mentioned that even with the bullish market sentiment indicators, the cycle of news flow probably needs to change before we see a strong, longer-term rally. The recent pullback in the VIX, after briefly touching above 30, also has some wondering if fear has been vanquished from the markets. As mentioned before, I believe that the recent SEC actions explain some of the current moves, and that crude oil is still the main story and will continue to determined whether the market will hold any rally or reverse. The market is still at such a tenuous position that reports of continued breakdowns in diplomatic discussion or slight disruptions in the supply/demand balance will be enough to spike crude prices and send the market to new short-term highs and lows. Given the upcoming weekly economic data on crude oil inventory levels, the leading indicators number, existing and new home sales, durable goods orders, and revisions on consumer sentiment, it should once again be an interesting week.
