Category Archives: Trade idea

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Funds selling high dividend stocks

Money managers including T. Rowe Price, Bank of New York Mellon and AllianceBernstein are dumping some of the highest paying dividend stocks after a bullish run up in price fueled by investors hungry for yield.

“People are so focused on yield that they are willing to pay 14 to 16 times earnings,” for these high dividend stocks, says David Giroux, portfolio manager of T. Rowe Price.

Utilities and telecom stocks are trading 14 to 16 times 2012 earnings estimates versus 11 for S&P. Utilities had 5.5% yield and telecoms 4.2%. AT&T recently increased its dividend.

“Why is the P/E multiple so high? It’s because investors are not focusing on price valuations… they are only enamored by the yield,” says Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.
 
Grohowski has cut exposure to utilities and master limited partnerships.

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Money market fund reform ideas proposed

The government has proposed to reform money market funds today saying that capital buffers need to be established and that floating net asset value (NAV) could be relaxed. The proposal is made with an intent to remedy runs on money market funds like in 2008.

“We are focused in particular on a capital buffer option to serve as a cushion for money market funds in times of emergency and floating (net asset value), which would eliminate the expectation of stability that accompanies the $1.00 stable NAV,” SEC boss said.

Following the Lehman failure in 2008, money market Reserve Primary Fund had to liquidate because it broke the buck – its shares went below $0.97. The liquidation of the Reserve triggered $500 billion money funds outflow. The  run on money funds was stopped after Federal Reserve intervened. Such events are traumatic for the market as the chart below – with a $500 billion cliffdive -  indicates.

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Bank of Canada defends oil speculation

Major Canadian news media, last week, triumphantly noted the latest research by Bank of Canada’s analysts in which they deflect blame from speculators being responsible in rising energy prices.

Titled The Role of Financial Speculation in Driving the Price of Crude Oil, Bank of Canada’s in-house researchers, Ron Alquist and Olivier Gervais, present a three-prong argument whose real aim may be to provide, veiled into statistics, defensive powder to Canada’s policy makers that have consistently defended market speculation be it in oil or in food.

Alquist and Gervais warn Canada’s policy makers that what they did is of tremendous importance for Canada:

Understanding the relationship between financial speculation and oil prices is an important issue confronting Canadian policy makers. Since oil makes up about 35 per cent of Canadian commodity production, understanding the effect of speculative financial flows on oil prices has immediate implications for the Canadian economy… relationship between energy prices and the Canadian dollar implies that fluctuations in oil prices affect the overall competitiveness of Canadian exports.

Since fundamentals (presumably) and not the speculation are behind the oil price rise, Alquist and Gervais also warn Canada’s policy makers not to fall for speculation blame because it may ruin efficiency of sectoral capital and labor allocation.

“A sectoral reallocation of capital and labour unrelated to fundamental macroeconomic conditions would be inefficient and may call for offsetting macroeconomic policy actions,” write Alquist and Gervais.

Every paragraph thereafter goes on to defend speculation.

Argument 1: Futures contracts and oil consumption cannot be compared because futures are stock while consumption is a flow.

Alquist and Gervais say that “it is common to compare the amount of open interest in the futures market to U.S. daily consumption and use the fact that open interest is many times larger than U.S. daily consumption to infer the presence of speculative pressures (Cho 2008; Masters 2008).” and in the footnote conclude that “Once the maturities of different contracts are reconciled, the volume of futures contracts for delivery in a given month was a fraction, rather than a multiple, of global physical production during 2007/08, the period when futures contracts were the most heavily traded (Ripple 2008, Table 2).”

Argument 2: Statistical testing methods show that changes in futures contracts and price are predictable both ways.

Researchers use data from the data come from the CFTC’s weekly Commitments of Traders reports to conduct a “bivariate and conditional Granger causality tests” in which they reject the hypothesis that changes in futures contracts predict price changes as well as reject a claim that changes in prices predicts positions. “Thus, the test for the full sample is inconclusive – the evidence suggests that the direction of predictability goes both ways,” write Alquist and Gervais.

Argument 3: If speculators drove the oil price, then that would be reflected in increased hoarding of oil stocks but evidence does not show any oil inventory accumulation.

“If non-commercial firms had created expectations of persistently high prices, it would have been more natural to observe the accumulation of stocks and an upward sloping futures curve. Furthermore, in the United States, where the data on privately held stocks of oil are the most reliable, inventories of oil during the first half of 2008 were below those prevailing in 2005/07,” write the researchers. 

Authors note that the oil inventories, blue line, fell dramatically during the 2008 price spike while production remained steady.

Authors note that the oil inventories, blue line, fell dramatically during the 2008 price spike while production remained steady.

As a result of Arguments 1, 2 and 3, an explanation for the surge in oil price has to be found elsewhere – like low real interest rates and increase in demand – and regrettably, Alquist and Gervais do not convincingly find that any of these “alternative” causes did anything to the price of oil.

Of course, all of this fancy statistical analysis, and ultimately all the conclusions, hinge on the choice of the time interval used and the authors admit that.

“It is important to stress, however, that this rejection of the null hypothesis is highly sensitive to the lag-length specification and sensitive to the start date of the sample. For instance, using the Schwarz criterion and/or starting the sample in 1996 would result in non-rejection of this null hypothesis.” [my emphasis]

If choice of the time interval matters, then why mesh the oil bubble that occurred in 2008 with data going back to 1993?.. unless, perhaps, that a stylized dataset is the only way to obtain facts necessary to support the pre-existing conclusion.

In fact, the value of the t- statistic authors use to validate or reject a claim is obviously higher for the shorter interval they present – from 2003 to 2008.

But even this interval is stylized  so that 2008 ends in June omitting the period when the oil price really spiked – after June – thus fueling additional suspicion that facts are harvested here to support a pre-existing conclusion.

The text of Alquist and Gervais oil price study is available here.

Additional readings on oil speculation:

- The Accidental Hunt Brothers
- Black Gold & Fool’s Gold: Speculation in the Oil Futures Market
- Stock Price Manipulation by Hedge Funds
- Causes and Consequences of the Oil Shock of 2007–08
- How Wall Street Speculation is Driving Up Gasoline Prices Today
- Peak Energy and the Limits to Global Economic Growth

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Tata Steel sees coking coal higher

Tata Steel group director of procurement, Kees Gerretse, says that coking coal will go up in the long term.

“If you are looking to steel consumption and production and coking coal assets, coking coal in the long term will go up; to what level it would be hard to predict,” Gerretse said.

Latest coking coal contract was set at $315 per ton which is up from the $200s last year.

Along with iron ore, coking coal is the main input ingredient in steel making. Excessive rise in coking coal price, some fear, could lead users to switch to the lower grade semi-soft coal.

Gerretse says that use of lower grade is possible.

“(Lower coal grades) are good enough but they affect the production process. In today’s market, where you don’t have the full utilization of assets you can use lower coking coals, “says Gerretse.

Head of natural resources equity research at Itau BBA, says that Brazil’s steel industry is at crisis point due to high coal prices.

“Coal prices have risen even more than iron-ore prices which is damaging to Brazilians,” the analyst says.

The appreciation of Brazil’s currency, the real, has also contributed to the fall in profitability. Real rose “much more than currencies in other steel-producing countries,” the analyst said.

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Big banks foreclosure slumlords, harbor snake pits



OK, so banks used robots to fake millions of signatures on mortgages they issued, and it’s not like they are not willing to pay $5 billion to government for counterfeiting!

But, the part of the $5 billion may come from insurance claims banks make on foreclosed homes that may be deliberately held out of the market until vandals create a cause for an insurance claim… or so say activists in Detroit.

“There are 90,000 vacant homes and vacant lots in Detroit, and most of them are like this: eyesores in the community,” said Rev. D. Alexander Bullock, president of the Detroit chapter of the Rev. Jesse Jackson’s Rainbow PUSH Coalition. “We’re calling on the banks to do right by the community, not to be slumlords.”

Sure, Jackson’s organization is known to make accusations against big corporations until they make a donation or make Jesse and his compadres members of some board that the target corporation will fund, but with 90,000 vacant properties and a population that is fleeing the city, banks have a hard time recouping any money for their real estate that resided in the ghetto even before they loaned out $70,000 on something that now can fetch maybe a $1 and few pennies.

A company from Columbus is trying to unload some of their Detroit possessions by offering $500 down and $300 per month and is finding no-takers. For that money, one can lease a car and drive out of that collapsing city.

Whether banks are deliberately prolonging property liquidation after foreclosure eviction in order to file an insurance claim is something to be determined, but mold and mildew, for sure, is beginning to destroy the real estate banks hold.

From Barron’s:

Quite literally, from the mold and mildew of foreclosed houses on the low end in Milwaukee, he [Ed Yardeni] relates from a fellow portfolio manager house hunting there. Even in higher-priced sections, houses are in better condition but are surrounded by neglected structures in disrepair… If they get bad enough, the properties are worth more if the house is torn down.

But how much can a home be worth if it becomes a snake pit?

From Denver Post:

Last year, the J.P. Morgan Chase banking unit foreclosed on a home near Rexburg, Idaho, that is infested with garter snakes.

They slide through the yard, the crawlspace, the walls, the ceilings and even across the floors. Sure, they’re harmless, but there are perhaps thousands of them. They give off malodorous secretions when alarmed, and can even leave the well water tasting a bit like they smell.

In Florida these foreclosure snake pits do not look harmless. Check out the video below.

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Two stocks with great price charts

A sell-off is a good time to evaluate strength of particular stocks and although not many have any good trading patterns, here are some stocks with exemplary chart set-ups, some with good fundamentals also, that could reward risk takers in coming days.

Motorola Solutions (MSI)
Huge ascending triangle looking to break into $50s.

Good Year Tire (GT)
With the earnings gap largely filled, this name at a good entry point. The May highs at $18. 72 is not an island reversal which typically means the top could be broken through much more easily.

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The problematic dollar-yield X-formation replay

Despite dangling at the 20 DMA support, the action in the market has broken most of the good trading patterns. As a result, there are no compelling reasons to enter any trades.

As an example, PLCM has looked as the standard bullish-flag consolidation pattern until yesterday when the NASDAQ sell-off broke trader belief that the 20 DMA is support.

To see where support in the stocks is, if any, more waiting is required but during the wait a conspicuous dollar-yield divergence is once again sneaking up on the market.

During last year’s April-July market tremors, yields were dropping as dollar was rising. The dollar-yield X-formation highlighted in the chart is the result of falling yields and rising dollar that coincided with a rout in the stock market during that April-July timeframe. Fast forward to right now and dollar up, yield down is in a replay mode.

The dollar-yield divergence is not in standard economics which argues that currency value rises as interest rates go up, unless fear was descending on the market. Back then, the fear was Greece, but market almost never reacts on the same thing twice so what is it this time?

From MarketWatch:

There was the muni-bond panic, the euro panic, the Greece panic, the dollar panic, the quantitative-easing panic, the inflation panic, oil and gold and commodities panic, the Japanese earthquake/nuclear-disaster panic, the Middle East panic, the S&P U.S. ratings panic.

To keep it current, we’re in the middle of the debt-ceiling panic and the International Monetary Fund sex-crime panic.

It is a well known that market rarely moves for reasons that media reports so that spells some respite for Strauss-Khan: him raping a hotel cleaning lady cannot be the cause of market fear.

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Metals: Organized crime’s next theft target

Forget drugs. Stealing metals is the latest up-and-comming most profitable criminal activity in these United States and the world.

Consider some US headlines from last several days:

- New Orleans city employees arrested in copper theft case
- Damage and copper theft [S. Carolina] value exceeds $100,000
- Calhoun Police [Georgia] arrest suspect in copper theft
- Police [N. Carolina] looking for pair suspected in copper wiring theft
- Sheriff [S. Carolina] announces arrests in crackdown on copper thefts
- Attempted [California] Copper Theft Leads to Arrests

More headlines on this kind of theft is available here.

In Detroit, score of High Schools have seen their aluminum fence hinges taken out while abandoned homes and factories have already been raided and valuable metals have been taken out and sold. Detroit’s scrap metal refiners, located at the edge of Detroit’s ghetto, actively advertise metals they need in flash scrolling billboards.

Situation in Mexico looks even worse. There, drug bandits are diversifying their criminal operations and organizing metals raids on plants.

From Reuters:

Criminal gangs, some with links to drug cartels, have increasingly nabbed raw commodity shipments like metal and even foodstuffs as those goods have increased in value and the gangs become more brazen.

Mexico’s President of the National Chamber of the Iron and Steel Industry says that “Things [metals banditry] are not improving. they are getting worse”.

In the UK, the infrastructure – rails, bridges, etc. – are under threat of being stripped.

From BBCs October 2010 report:

Traditionally, the thieves have stolen the copper cable used in railway signaling, as well as the metal cable used in electricity sub-stations.But as prices have risen, memorial plaques, statues and even catalytic converters have become targets.

Just today, UKs NorthWest Evening Mail says that “Copper cabling thieves are dicing with death and endangering the lives of others” as wires are stolen from “a sub-station on the road”.

It is also of no surprise that the US pennies, made from copper before 1982, are slowly coming out of circulation because profit on them is 100%: pre 1982 penny is worth 2 cents!

Although sifting though rolls of pennies seems to be a rather profitable endeavor, such one off endeavor is small potatoes for the scale of the organized crime action that looks to surely persist.



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HGSI: Trades vs Investments

Lots of discussion is waged over what constitutes a trade and what is a stock investment. Each has its disadvantages that one should be cognizant of.

A trade exposes a person to risk of a loss while an investment ties up person’s capital that otherwise could be making a gain.

To compensate the short-term risk traders often default to price patterns known as technical analysis, while investors compensate short term set-backs with fundamentals and contrarian moves on the prevailing market sentiment.

Human Genome Sciences, HGSI, is an example where these views merge and make the the two approaches blurry.

Long term technicals are awesome, while short term ones suck… Long term fundamentals look bleak because of no new drugs in the pipeline but short term HGSI can be a nice appendix in the overall drug portfolio of a conglomerate.

Fundamentally, HGSI recently got an approval for a Lupus drug, first one in over 5 decades, and traders got overly zealous after they read the fine print, including side effects on mortality, depression… started selling but investors failed to sell and the stock is back into the long consolidation pattern.

This super long consolidation pattern in HGSI, to a technical person, looks like a coiling of a spring so that the longer it goes the higher the object will fly… but how long is the wait?

Therefore, HGSI is not an immediate trade because short term price pattern is bad but the long-term technicals suggest capital should be parked there and the fundamental expectations support that.

HGSI has a huge potential upside and if a person is willing to park his capital into a stock that will do not much (or go down) daily but make huge money later… this is the stock!

Conversely, this stock could collapse to near zero because its current price of $26 handle comes off of $2.50 level… a huge price change that can revert back if things do not go as the long term investors believe it will.

If 10% of the portfolio is dedicated to speculative investments (not trades) then HGSI should have a place in it.

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Two stock setups

First, a follow-up on my last week’s 6 power chart set-up.

MGA totally broke down with TIF, TSCO and PL still holding up. The FP and LFUS are still good.

For the week ahead, I am looking at DEER and LVS.

Both of these stocks are set up so that they have to make a move one way or another.

DEER is in a 4 and 1/2 week consolidation period with a distinct floor at $11. These setups typically resolve themselves on the upside if the market corresponds. REE was a similar setup to DEER as it consolidated in Nov-December period.

LVS does not have a distinct floor but a good trading box between $42 and $52 and as the STO has just turned up off the bottom as the stock bounced entering this trade through $50 looks like a good way to play the stock. Selling half at $50 and waiting to see if it breaks through $53 is a good way to bet on any possible break through (which would be a monster one).