Commentary


On the lighter side… Just found, and thought it was interesting enough to share…? Stock Twits.? Just in case you want an even more spastic view of the markets…? but it might be useful to watch the rumor flow or day-trading junkies.

Also useful is BreakingNewsOn which attempts to identify breaking news.? There are a few news stories, including the passing of Tim Russert, that have supposedly popped up on Twitter well before any mainstream media.

Apparently T. Boone Pickens wants to solve our energy dependence issues…? and he thinks Wind is a good way to do it.? At right is an image of the wind potential of the world, including the “wind corridor” of the midwest.

Go to PickensPlan.org for more details of his plan.? Of course Pickens is a private investor and has put his own money into building wind farms, but the whole effort seems remniscient of Al Gore’s global warming campaign…? perhaps Pickens is thinking about his legacy as well as profits?

If you believe wind is a growth industry (which it will be if Pickens is right), you should know about a new ETF with the ticker FAN.? It’s only been trading for two weeks, but plans to track the growth in wind power by investing in ~50 companies active in wind.

Sorry to keep bringing pessimism to the forum, but that’s just what stands out for me as I absorb news and such.? There’s a future post in what I perceive to be a large asymmetry in naive perspectives amongst the bullish lot.? Anyway, on to a quote from Paul Volker via Marc Fleury‘s blog:

Simply stated, the bright new financial system ? for all its talented participants, for all its rich rewards ? has failed the test of the market place.? Paul Volcker, April 8 2008

What’s the fallout?? Why is it not just about write downs and losses?? The current financial situation have not only caused losses, but they’ve also taken away the most profitable business for most banks and brokers.? From Nouriel Roubini (emphasis mine):

So how will mortgage brokers, banks, broker dealers, monoline insurers, rating agencies generate revenues and profits now that this slice & dice scheme has unraveled? The current market delusion that the worst is behind us for financial institutions is based on the view that most of the writedowns of the toxic assets have already been done. But this is not just a balance sheet problem. Now financial institutions have a more severe P&L problem, i.e. how to generate income and earnings from now on when they cannot originate junk any more. The entire income generating model of financial institutions ? make income out of securitization fees rather than by holding the credit risk – is broken now that the generalized credit bubble (not just subprime mortgages) has burst; thus, how will these financial institutions generate earnings over time? Capital losses are one-time problems; but destruction of the income generation process is a more severe and persistent problem that will require banks and other financial institutions to rethink their overall business model of credit risk transfer.

I know Quicksilver will respond with some comment about how Roubini is always bearish, but Nouriel also happens to have hit on an important point here.? Where will the income generation come from for banks?? If the Fed and Treasury really are trying to give the banks time to grow their way out of the current mess, where will that growth come from?

This is a little old (June 2, 2008), but worth sharing…? John Hussman reviewed the FDIC Quarterly Banking profile…? here’s what he found.

?Industry earnings for the fourth quarter of 2007 were previously reported as $5.8 billion, but sizable restatements by a few institutions caused fourth quarter net income to decline to $646 million.?

Note what the FDIC is saying here. The banking industry reported $5.8 billion in earnings to its investors, but restatements took that total down by 89%. Stop and think about that – only 11% of the earnings that were reported to investors survived after the restatements. And yet, investors seem naively willing to take recent earnings reports, guidance and charge-off levels at face value, as if these reports can be trusted. Unfortunately, all that seems to matter to investors over the short-run is whether earnings-per-share can beat estimates by a penny, regardless of whether they are massively restated later.

Quite an indictment…? and the whole article is worth reading if you want to understand the state of banks today, and why they’re still not as cheap as one might think.

Marketwatch is leading with a headline this eveing saying “WaMu bucks bank trend“.? And indeed, the stock is up over 8% in after-hours trading…? but that’s hardly the whole story, despite a sensational headline…? Which one of the following details do you think is the most important for WaMu today?? The one where it “leaped” by 9% after hours, or the one where it went down over 34% earlier in the day?

From John Hussman, when talking about recent prices in the Crude Oil market:

Geek’s Rule o’ Thumb: When you have to fit a sixth-order polynomial to capture price history because exponential growth is too conservative, you’re probably close to a peak.

You’re usually in unusual territory when exponential growth is too conservative.

If you’re wondering where the next rally will begin (whether you beleive it will be a bear market rally or the next bull market), it is a good idea to watch the VIX index.? As you can see from the chart below, medium-term lows for the SPX (S&P 500 Index) coincide with upward spikes in the VIX.? At current levels, we don’t have a spike, though this isn’t a precise indicator of timing.

SPX and VIX

You can track the VIX at the usual places.

With oil on everyone’s mind these days (and since Jason breached the topic), I’ve had one question nagging at me. Everyone seems to think that oil and gas have nowhere to go but up. If that assumption holds, then why wouldn’t everyone just buy all the oil futures they can, hold them and become rich? Or to put it another way, why doesn’t the supposedly efficient market just spike price all the way to $200-300/barrel if that is really where we are all but destined to go. Why the steady daily grind up? It’s the basic contrarian question: if everybody thinks it’s going up, doesn’t that put it into question that it’s going to happen?

Like all speculative bulls, they have to go through the motions. Rarely does a market have an instantaneous bubble rise. It takes time. But I can’t help but wonder if the minute everyone thinks it can’t ever come down that it will. If oil were destined to go up until it is replaced, then there really isn’t any point in even wasting one second investing anywhere else, is there?

Here’s an interesting excerpt that I saw over at the blog Infectious Greed

The remedy to high food prices is to increase food supply, something that is entirely feasible. The most realistic way to raise global supply is to replicate the Brazilian model of large, technologically sophisticated agro-companies supplying for the world market. To give one remarkable example, the time between harvesting one crop and planting the next, in effect the downtime for land, has been reduced an astounding thirty minutes. There are still many areas of the world that have good land which could be used far more productively if it was properly managed by large companies. For example, almost 90% of Mozambique?s land, an enormous area, is idle.

Unfortunately, large-scale commercial agriculture is unromantic. We laud the production style of the peasant: environmentally sustainable and human in scale. In respect of manufacturing and services we grew out of this fantasy years ago, but in agriculture it continues to contaminate our policies. In Europe and Japan huge public resources have been devoted to propping up small farms. The best that can be said for these policies is that we can afford them. In Africa, which cannot afford them, development agencies have oriented their entire efforts on agricultural development to peasant style production. As a result, Africa has less large-scale commercial agriculture than it had fifty years ago. Unfortunately, peasant farming is generally not well-suited to innovation and investment: the result has been that African agriculture has fallen further and further behind the advancing productivity frontier of the globalized commercial model.

As I read about this and annecdotes about ranchers reducing their cattle herds and chicken producers cutting back (due to the high cost of feed), I believe we’re going to have a food crisis sooner or later.

Here in the US, we will probably still be fed (if not over-fed), but it will cost more as a percentage of our total spending…? if some Americans are having trouble paying for gas to get back and forth to work (see Mish’s Pawnshow Society for more shocking annecdotes), what happens if your food costs shoot up alongside?? Maybe people will shift to simpler (vegetarian) diets, or be forced to cook at home more.

Regardless, with every danger is opportunity.? If beef becomes scarce, we can consider investing in Cattle Futures, or the relatively new ETN COW that tracks cattle futures (oh the ticker symbols!).? Likewise, DBA (agriculture ETF) has been good for trades in the past (DBA is only corn, wheat, sugar, and soybean, so it did not participate in the recent price run-up in rice).? General commodities funds/ETFs are normally overweight oil and energy, so it’s nice to have these focused funds/notes available if you’re interested in trading these trends.

A word on risk — the ETNs (exchange traded notes) have counter-party risk, which is something that doesn’t apply to ETFs or stocks…? if a major brokerage house or hedge fund is on the other end of those notes when it blows up, your holdings of an ETN like COW might be adversely affected.? It’s low probability, but a real one that you should be aware of.

Very impressive info nugget at the NY Times (via The Big Picture) on how much fertilizer is being used around the world…? (or more specifically, the growth of said fertilizer use…)

The amount of fertilizer is amazing, especially considering the recent run-ups in supply/demand issues with various foods.? The dead zones are also something to consider in long-term thinking…

As mentioned, Mosaic (MOS) and Potash (POT) would be big beneficiaries of the fertilizer growth, as would companies like Agrium (AGU) and the like.

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