Buzz of the Street: Leaders Lead to the Downside
Some of this week's most insightful and timely vibes.
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Monday, January 11, 2010
Biotech in Style
JP Morgan conference is crowded, which many believe is good for the sector. Attendance is at a maximum 7,000 this year versus 6,300 last year. Every room I've seen so far is standing room only, which wasn't the case in the last few years.
Currently I'm watching Roche CFO building a case that pharma is not dead yet and how they won't screw up Genentech (DNA).
Notes from Jamie Dimon's Speech
Editors Note: David Miller is at the JPMorgan Healthcare Conference. Jame Dimon is giving a key note address about the events that have happened over the past two years. Here are some of the highlights.
Causation of financial problems:
- Bad Mortgages
- Poor underwriting
- Housing bubble, fueled by gov policy
- Excessive leverage everywhere
- Structural flaws, incl. breaking the buck
- Regulatory lapses, BASEL II didn't measure risk or liquidity correctly
- Allowed huge trade and capital balances so large
- Compensation and derivatives did not cause problem, but accelerated it
Fundamentally, they were known beforehand and they were not a secret. Nobody anticipated what could happen when it all went wrong at once.
Nobody to blame, but large institutions took on too much risk. Regulators didn't regulate and enforce current rules. Unregulated businesses not following rules drove regulated businesses to follow. Obviously we need to overhaul the system, but we need good regulation not just MORE regulation.
We believe in enhanced consumer protection by simplifying and strengthening OCC/Fed and not create another agency.
Need derivative rule changes and put most of them in clearinghouses, but do need some OTC capability.
Long-term policy is not to protect against failure. Regulators need ability to take over the companies as this will save taxpayer dollars. Decisions should not be based on politics or size of the company.
Need to be changes to compensation, especially the way some took huge payoffs just before their companies went down.
US must focus on solving additional problems to make sure we are successful, not just manage by crisis. Biggest future issues are:
- Energy policy
- Education policy
- Infrastructure policy roads, electrical grids, power plants
- Fiscal discipline over the long term
- Immigration policy stopping illegal, fairly treating existing
Tuesday, January 12, 2010
China's coal shortage
A headline overnight slipping under the radar was that China will be forced to shut down 11% of power generators connected to the country's main electricity grid because of coal shortages.
My first thought? Remember the myth that China was only building up for the Olympics? Well they are now importing more coal and iron ore after than before.
Click here to enlarge
The second is that skeptics will say the US doesn't export much coal to China, and that is true. Australia is still the best vendor for that. But out of the US companies, Peabody Energy (BTU) has the most exposure to China.
This trend may be changing, however. Natural Resource Partners (NRP) recently hinted at an increasing trend of exporting coal to China. Something to keep on the radar.
There is reason to believe that we'll see one final spurt led by utility stocks before the market rolls over into a mild, short-term correction.
A number of technical market indicators are flashing overbought signals. Breadth is narrowing as the percentage of stocks above their 10-day moving average falls to just 67% from a high of 80% on Christmas Eve -- a sign that fewer and fewer stocks are participating in the move to new highs. Periods of similar breadth contraction coincided with the market tops witnessed since the March low, including most recently the tops in September and October.
History also suggests a pullback is overdue. I recently discussed how the S&P 500's divergence from its 10-month moving average has been at extreme levels for a sustained period. This suggests a period of sideways chop with -10% downside potential is likely to come next as the moving average catches up.
I also performed a similar analysis of the Dow Jones Industrials Average going back to 1928, looking at the number of consecutive up months. The DJIA has been up for seven months straight after suffering a 9% decline into the early July low. Such a long string of monthly wins has only happened 3.2% of the time over the last nine decades.
The chance of an eight-month rally is just 1 in 50, while the odds of a nine-month rally are just 1.5 in 100 -- so the probability of continued gains without a monthly loss drops precipitously as time inches forward. Moreover, most of the really long rallies happened before 1960. Most recently, in 1961 and again in 1995, the Dow topped out after an eight month rally.
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