Buzz on the Street: Bulls Are Hungry -- and Bears Are What's for Dinner
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, July 29, 2013
A Rocky Road Ahead
When I was a kid, the local news used to ask, "It's 11:00. Do you know where your children are?" Now for Treasury bond holders, it might be worth asking, "It's Sunday night. Do you know where your yields are?"
I've been talking about the importance of SHIBOR for the past month and trying to understand the relationship between it and US Treasuries, which I have been saying has a good chance of getting caught up as collateral damage in a Chinese deleveraging cycle. But this post by ZeroHedge, complete with charts from a recent report by Morgan Stanley (NYSE:MS) really takes the cake for connecting the dots.
First, they point out there's a forthcoming government audit of Chinese debt, and nobody really knows how much debt will be reported. An audit conducted two years ago found local government authorities had RMB10.7 Tn ($1.8 Tn) of debt, so you know this number is going to be higher than that. The IMF has already expressed concern about the levels of debt in the Chinese economy and its potential to hamper growth. Clearly, this is becoming an issue. In fact, former Finance Minister Xiang Huaicheng said in April there could be as much as RMB20 Tn.
But the real issue isn't debt levels, but the ability to service it. Here, ZeroHedge says some things that should make folks take notice, if they are confirmed (emphasis mine):
In other words, China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleeding-inducing $1 trillion, or roughly 15% of China's goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is).If those numbers are accurate, I think the Chinese banks and other financing vehicles are going to dump every liquid asset they can get a bid for, part of which is bound to be US Treasuries. And with that, we'll see more bloodletting in emerging markets as well since prices for bonds and emerging markets have been positively correlated in this wacky QE world we find ourselves in.
In the weeks and months to come, Sunday night is going to be really important for bond investors and it won't be because Sunday Night Football is on.
Something to keep your eye on -- SeaWorld Entertainment (NYSE:SEAS) could come under pressure due to buzz around the documentary Blackfish, which is apparently a damning attack on SeaWorld's Orca whale treatment practices in the wake of whale attacks at the park. It was released on 7/19, but the negative publicity is really picking up.
Activists are starting to protest at SeaWorld locations. This could turn into a real PR mess. Google Trends is showing a huge spike in activity for Blackfish-related searches. Meanwhile, the financial media is not really covering this. When searching the ticker SEAS in Yahoo! Finance, the coverage is pretty light.
SeaWorld has been arguing that Blackfish is spreading misinformation, but at the end of the day, I think people really have a soft heart for animals and SeaWorld is not looking so hot right now.
I don't know about you, but discussion of Blackfish lit up my Facebook page over the weekend, and it seems the critics are liking it as it has a 97% positive rating on RottenTomatoes.com.
And while Blackfish has only made $123K in box office receipts playing in just five theaters, according to BoxOfficeMojo.com (and data for this past weekend doesn't even exist), the trailer has nearly 1 million views on YouTube. So don't be surprised if it gets wider distribution in a jiffy.
Note that the company reports earnings on August 13.
Bullish Behavior In AAPL
Following last weeks gap above its 50 DMA, Apple (NASDAQ:AAPL) turned its Daily Swing Chart down on Friday and tailed up to close near session highs.
This morning, Apple is following through.
It looks like the double-bottom square-outs noted in this space in April and June underlie higher prices.
See this daily chart of AAPL from April.
Click to enlarge
Tuesday, July 30, 2013
Fertilizer Shares Being Dumped
The breakdown of a joint venture has occurred between Russian based OAO Uralkali, the world's largest potash producer at nearly 20% of global production, with Belaruskal, citing a violation of their export agreement. Together they accounted for 43% of global exports. This seems to be a gambit for Urakali to grab market share, particularly to China. This is expected to lead to significant drop in prices - possibly as much as 25% to $300 a ton down from the current $400 per ton level. The breakup has been perceived as a cartel potentially shattering.
Shares of fertilizer makers such as Potash (NYSE:POT) and Mosaic (NYSE:MOS) are getting crushed, down 25% in pre-market. Shares of CF Industries (NYSE:CF), which is also in the fertilizer business but produces mainly nitrogen based products rater, is moving down in tandem, off some $10 or 5%. This comes a day after shares of CF surged more than $20 on news that Loeb's Third Point had taken a stake and would be agitating for change. I'm sure Loeb is in at lower prices, but this certainly serves as a reminder not to blindly follow what a well known hedge fund is doing especially on news that brings you late to the game.
While this may seem another nail in the commodity the bull market or a sign the "supercycle" is over, it may actually present long-term opportunity. I'm of the mind that consumables such as agriculture and energy sector will still benefit from growing emerging market demand over the next decade. By comparison the infrastucture build out that uses recyclable materials, such as steel and copper, are likely to continue to see suffer from over capacity and a deceleration in demand.
This morning Generac (NYSE:GNRC) reported very strong results and raised its second half outlook. From my perspective, few companies have benefited from the socionomics of weak social mood like this back-up generator manufacturer. When mood is weak, we crave certainty and products that offer "just in case" local solutions - like home generators.
Over the past three years Generac is up four-fold.
But just for fun, consider what has happened to the stock of what is arguably the most "just-in-time" global solutions provider out there - FedEx (NYSE:FDX). Over the same three-year period, that stock is up just 25% and still below its peak-of-confidence, 2007-high price of $121.
Social mood matters, and knowing where mood is headed can be a powerful advantage to investors.
So where do I think Generac is headed from here?
While I am not involved in any way with Generac, I always get nervous when companies up their outlooks. Positive extrapolation of performance is something you see at peaks in confidence - by company managers, equity analysts and investors. Given the universal praise I see by all this morning, I'd offer that caution may be best.
And in that regard, I'd note that over the past twelve months, we have seen the peaking of a lot of weak social mood "me, here, now" stocks - like Sturm, Ruger & Co. (NYSE:RGR), Cash America (NYSE:CSH) and even Apple (with all its "i" as in "me" products). And I think the same argument could be made for the peaking in high dividend paying mega-corporations too - another weak social mood "bounce" trade.
To everything there is a season, and I would be cautious to assume that the "safety" trade can go on forever. Even more, I would encourage you to consider what happens to investor psyches should heretofore "safe" assets, like bonds, fall in price along side supposed "unsafe" assets. The teeter-totter of "risk on" to "risk off" could quickly become a very one-side "risk out" trade.
Is Europe Getting Better?
Yes, Spanish jobless claims fell but to 26.20% from 27.16% in the previous quarter. Any improvement is good, but let's cobble together more than one month before we start calling for a change in trend. Anyone that pays attention to employment data points knows that there is a myriad of ways to manipulate the data.
The media is so desperate to put a good face on what's happening that they often intentionally misrepresent data to make it sound better than it is.
France is not only a problem, but it very well may be the "pale horse" of the continent. I've stated for months now that people are wildly underestimating the problems that will come from France. Now we see that French jobless claims are hitting record levels. Almost 3.3 million French are out of work, and this is indicative of the vast majority of Europe.
To be sure, there are some pockets in and around Europe that aren't doing poorly, but like any puzzle, we must step back to see the full picture. What strikes me as interesting is how any piece of data that is "less bad" is immediately heralded as the sign of a bottom or a nascent recovery. Just because something is declining at a slower rate doesn't mean there is improvement. It likely means that it's difficult for things to get much worse without some exogenous event. Based on the data I'm about to present, I believe that things in Europe are actually worse than they've ever been.
Beginning with the PIIGS, Greek GDP is expected to contract by 7% by year's end. Industrial output is down 4.6% year-over-year, and the little manufacturing they have was also down 1.8%. Lending to businesses continues to fall, deposits are still leaving banks, and unemployment is a stifling 26.9% (under 25, it's over 55%).
The IMF has handed down a -1.8% forecast for Italian GDP, which is now down ~10% since 2007. PMI's are still in contraction - manufacturing in June ticked higher, but services fell and both are below 50. Unemployment is over 12% (great compared to the rest of the periphery), and its debt has ballooned to 130% of GDP in the last year (up 650bps from 2012). The YTD deficit is now 7.3% from just 2.9% in 2012, and S&P downgraded their sovereigns to one notch above junk, saying that Italy needs to run a surplus equal to 5% of GDP just to stabilize the debt ratio.
Are you seeing a recovery yet?
I'm not either.
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