Tuesday, August 25, 2009

What Is The Baltic Preview Saying ?

The Baltic Dry Index (BDI) is one of the more trustworthy leading edges of the economy and stock market. It tracks dry cargo shipping rates and is levered only to actual planned shipping and economic activity and is not subject to speculation buying and selling. I used it a few months ago to predict a Baltic Dry Index preview of where the S&P would go. It suggested north, and it indeed has gone way north. Here's what it looks like now: (click to enlarge charts)

The top chart is BDI shifted ahead of the S&P by 3 months. As you can see, everything seems to happen first in the BDI. It can't predict everything, but it's now suggesting maybe a top for the S&P around September and then a significant decline, or at least a cool off - you can fill in the blank on the lower chart and have a matched pair.

The BDI isn't the only leading edge in the game of follow-the-leader in this market, but it is important. Art Cashin has been harping on it. The other leader groups I've been tracking are retail and technology. You can see how well retail has been leading the broad market in the article today at Seeking Alpha by Wayne Corbitt "Retail:Showing Signs of Distribution". I've noticed the very same thing:

It could be just a short term hiccup or the start of a major trend change. The tech stocks, to a lesser degree, have been underperforming the S&P lately in a shocking change. Is all this signalling the end of the rally and more ugliness by year end? After all, these leader groups have been about the only solid upward indicators. Analysts agree that the market is out of whack with fundamentals, and they're having to buy just because everyone else is. Buying just because everyone is usually happens near the end of a move.

But riddle me this. If the BDI is rolling over so badly, then why are the commodity charts so strong? Copper, oil, and most of them are parting ways with the sickly BDI. Shouldn't they be doing the same thing? Well, the new difference may be investor demand. Remember, there is no investor speculation in the BDI. But there is a broadening move in the world toward getting rid of dollars and replacing them with hard assets.

With the unprecedented debasement of not just the USD but all paper, there is a move to buy and store commodities now, after they've been marked way down, storing them, and treating them as bank accounts that can be eaten or poured into a tractor's fuel tank. That means that strong economic demand for commodities might not be there right now, which would explain the weakening BDI and RLX charts. And it would also explain the weak transports chart ($TRANQ) which has not made the nice new highs since late last year like the S&P, but instead shows lower and weaker highs - a non Dow Theory confirmation. It's important to note that this transport index is virtually devoid of the rails. The transport indexes with a lot of rails show much better results. But the rails are doing well only because of global commodity demand - again, the investor demand difference.

This "speculation" demand should not be underestimated in our current mess. It is becoming a way of doing business. Michael Pettis, a professor at a Peking University is a specialist in Chinese financial markets. He was recently interviewed by DNA for a July 13 article "China Cannot Really Dump The Dollar" where he discusses China's approach to the world's currency problems. He said
One other thing the Chinese seem to be doing is buying commodities. But that's just another speculative play. If commodities are at the bottom, they should be selling dollars and buying commodities ... if China grows, commodity prices go up; if it stagnates, prices go down ... By stockpiling commodities now, they're doubling up their bet.
In response to the question of whether China could drop the bomb and dump all their dollars, he said, "You can't really do that". They can trade dollars for commodities, impacting the dollar, but the effect is muted by the commodity countries recycling the dollars back into the U.S. But printing presses can dump the dollar, forcing investor demand for commodities as a new, unprintable currency.

Monday, August 24, 2009

A Market With Problems

There is a large body of thought that says the current stock rally is denial mixed with some greater-fool theory signifying nothing. We could just be in the eye of the storm with our big rally with a second and more deadly side to hit soon. My own market forecast back in early '08, when many were saying the January dive was the bottom, was for much more bear with new lows. For '09, I've been saying a big rally through the middle part of the year following the leader groups north, but then maybe some more ugliness toward year end. Well, we're starting to get into the twilight zone now.

There are three big problems greeting the market to the end of the year. First is the great twin peaks of real estate loan resets: (click to enlarge charts)

This problem has been much written about and it raises the horror of a son-of-subprime mess battering a much weakened consumer with forced, dramatic raises in their house payments from the starter and teaser rates. Late 2009 is the lull between these two punches. In December '08 60 Minutes ran this story on the second wave soon to hit. Add to this the even larger commercial real estate loan mess, which typically runs about a year behind residential in a downturn, and you have most of the real estate train wreck ahead. The commercial part is just now getting cranked up. This past quarter's 18% drop in property values is the biggest since they began tracking 25 years ago. Real Capital Analytics says that 2 trillion of the 3.5 trillion market bought or refinanced in the last 5 years is upside down already! That's most of it. Just refinance? Deutsche Bank says 65% or more of these loans won't qualify.

The second big problem for the market's year end is the geopolitical situation with Israel and Iran, which may be coming to a head as we go into 2010. See my previous post on that. This may be what Art Cashin has been talking about the last couple weeks with his "esoteric" things. Esoteric means "relating to knowledge that is restricted to a small group". He has built a network over his 40 years on the floor that does esoteric pretty well. He is going to be guest hosting Squawk Box tomorrow morning - maybe he'll explain some of this esoteric stuff. That's just what the market needs - a nuclear conflagration in the Middle East.

The third big problem as we go into next year is high oil - with or without the nuclear conflagration. In case the previous two big problems don't croak the economy and we get a return to normal, guess what? The oil won't be there. Not affordable oil as we have been spoiled by for decades. See my post on the missing barrels. I don't thing we'll get very far into the vibrant growth recovery desperately needed by the real estate mess before we will have about the same oil supply problem that started to show itself before the collapse.

This market reminds me of that old Hee Haw refrain:

Gloom, despair, and agony on me
Deep, dark depression, excessive misery
If it weren't for bad luck, I'd have no luck at all
Gloom, despair, and agony on me

Friday, August 21, 2009

Art Cashin's Strange Comments

If you've heard Art Cashin's market commentary on CNBC over the last week, you heard this no-nonsense, level headed, highly respected and followed analyst go on about some "esoteric" things coming together at Ramadan, the Muslim month long fasting observance that starts August 22, and how that will cause some "historic trading" in the stock market (to the down side). Is he off his medication?

As near as I can tell, his comments derive from some of his wide network of sources and are explained by what he writes in his column and, if you read the linked info, it would obviously be referring to an Israeli strike on Iran's nuclear facilities. The rumor mill has covered 4 of the last 4 strikes on Iran, none of which has happened. I've followed this a little, and I get the impression it nearly happened as the Bush/Cheney years came to a close last year. But the economic crisis may have stopped it. But newspapers recently have reported things like Israel ordering 100 LJDAM bunker busters earlier this summer and asking for approval from the Obama administration for a strike while the riots were going on after the recent elections in Iran. They reportedly were rebuffed and the strike was shelved.

Things have been fairly quiet in the Middle East after the 2006 Lebanon fighting, but observers are saying things are getting tense again. The regime in Iran is booting out anyone who wants to recognize Israel's right to exist. The G8 has set a September 20 deadline for Iran to come clean with its nuclear program or face serious consequences. Israeli intelligence does not believe other sources on Iran's nuclear bomb making schedule, believing that they may be capable of bomb making next year. Israel is not going to wait around for that.

The investment implications of this event, whenever it happens, are "historic" as Art says. It would imply treading somewhat lightly on the rest of the current rally if it is going to be a near term event, and maybe a healthy weighting in oil and gold/silver. Oil looks like it wants to break out and climb with the recovering global economy, so it may climb slow or fast depending on whether a strike happens. As for stocks, profit taking and cash building is probably better right now.

Thursday, August 20, 2009

Nam Tai Electronics Primed For Rebound

If you are looking for a tech stock related to the smartphone "tsunami" as Jim Cramer calls it, but don't like the much talked about names that have made big runs already to valuations that aren't dirt cheap anymore, then take a look at Nam Tai Electronics (NTE). This components company passes Cramer's hammer test. If you would smash open a smartphone, some of Nam Tai's stuff would fall out. In fact, Barron's says that, of all the stocks in their universe, NTE has the most exposure to handsets at about 70%. That was a very bad thing back in March, when nothing but dark things were being foreseen for the handset market.

This company is based in China, but serves Asia and Japan as well. As is noted in Global Advisors Look To China you don't often find a stock selling at the amount of cash on hand per share, but with $5 a share in cash, NTE is just that. Price/sales is 0.4 and price/cash flow is 6.7 and PE is 8 and they are dialed into the smartphone market growing at about 30% per year (globally - probably faster in China). The article also notes that the stock has "been been beaten up and left for dead" as the chart attests: (click to enlarge)

Look out, it's regaining consciousness. It's still down for the year, but probably not for long. That may change at 9:30 AM tomorrow.

Tuesday, August 18, 2009

Telular and the Smartphone Revolution

If you're looking for a smartphone stock that's not on everyone's radar with a big runup already, look at Telular (WRLS). If you haven't noticed, smartphones are becoming one of the best investing areas, climbing related stocks up through this difficult year, right past the February/March debacle like it didn't even happen. I wrote a post back on July 1 on this mobile internet wave; it includes the traditional laptop and the newer netbook computers. But as the post points out, everything gadgety is migrating onto the smartphone. You will one day be able to wax your truck from your mobile smartphone.

In-Stat did a growth projection back in 2007 where they predicted 30% annual smartphone growth over the next 5 years compared to single digit growth for cell phones in general. You'd think that the brutal recession that came after that prediction would have really messed with it, but Gartner reports that Q2 global smartphone results were up 27% from Q2 '08 ! Can you think of any significant consumer discretionary expense that's up 27% over that time? So it's about the best defensive play; and no telling what it does if we ever get to play offense.

Jim Cramer has put together what he calls a smartphone stock index of 21 prime names. In case you missed it, they are: ADCT, STAR, CIEN, TLAB, TKLC, CTV, QCOM, BRCM, NETL, XLNX, SWKS, RFMD, ONNN, CY, TSRA, SNDK, CSCO, GOOG, RIMM, PALM, APPLE. The trouble with many of these stocks is that they are general tech companies not very levered to just smartphones, and they are high profile. WRLS is low profile but in a position to benefit from the massive move of all our chores onto the 3G wireless platform. They have proprietary technology for what they call M2M (machine-to-machine) connectivity to the airwaves. They call some of their breadbox size products "office in a box" because they let you access fax machines and a wide varity of home or office data from any remote location as long as you have your smartphone handy. No added infrastructure is needed to put all this info into the wireless relm. Verizon and others are deploying Telular's added features in their plans.

The stock has been erratic in the past. The gripe has always been that they have great products but poor results. Well, that has been changing lately. They have turned earnings positive just before the recession and have stayed positive in the face of the downturn logging a current price/cash flow of 6.2, price/sales of 1.1, and PE of 33 and no debt. They have repurchased 23% of their stock since July '08 citing it as a good investment.

Technically, the stock looks like it could be ready to rumble: (click to enlarge charts)

It showed extreme stronghanded ownership over the February/March event and appears to be in launch mode from the two dollar area. The RSI is being pushed over the "normal" limit, which is typically viewed as a bad thing (sell point). But when an unusually strong climb is forming, it can be a good thing (buy point) as, for example, with FUQI:

A transition from normal oscillation to an energetic climb can push oscillator indicators like RSI and Bollinger Bands to sell signals just when you should be buying. How it will work out with WRLS we'll just have to wait and see, but if it is joining the smartphone tsunami, odds are a climb is forming.

Saturday, August 15, 2009

Monsanto - Power Broker of the Peak Oil Age ?

On Mad Money Thursday, Jim Cramer featured Monsanto's incredibly reckless power grabbing ways and pondered the wrath of the Obama administration on this company and its stock. MON has stalled in recent months after being a good climber for years. It is shying away from the current rally.

Fuel crops don't seem to get much respect. Peak Oilers belittle their value in replacing oil, and even the main stream media is now griping about the corn, the high food costs, and low net energy. Ethanol can get no respect except, apparently, from the movers and shakers of world affairs. There is somebody out there who has tripled global ethanol production in just two years and is busy legislating a very aggressive growth model out to 2022 in the U.S. Energy Bill. What's up with this?

First, corn is just a starter feedstock. It is just the first thing the U.S. found laying around in the backyard just as sugarcane was in Brazil. It is coming to be regarded as a perfectly worthless solution to declining oil and is described by researchers as a "first generation feedstock" in the ethanol buildout. Lab work is sprouting all over the globe bringing the computerized gene mapping wizardry of today into focus on the designer fuel crop problem. Ethanol from cellulose (found in trees, grasses, etc.) has net energy of 5 or 6 and emits 85% less greenhouse gases than gasoline. Theoretically, biofuels are carbon neutral because plants absorb CO2 while they grow and put it back when combusted. One of the primary goals of designer biofuels is raising their EROEI to what we have enjoyed from fossil fuels, now down to around 8 as we go past peak.

What if ethanol's net energy were to be improved to that of oil soon and then improved to be twice as good as gasoline in say 35 years? And what if the U.S. Energy Bill were actually a feasible global model? You could project current transportation usage into the future and glimpse how ethanol is going to develope vs the other fuels: (click to enlarge)

These projections were done by Stoneleigh at The Oil Drum; I've added a projected fuel crop curve. This would start to put fuel crops on a par with coal and nat gas in global energy supply in a little over 20 years from now. This curve is an if-and-but scenario with everything going just right for fuel crops including solving the available land constraint problem and the net energy problem. But bioscience may do just that. Just how did they come up with the ethanol growth mandates in the Senate anyway? Maybe they just looked at a map like the one above and said, "This is what we need fuel crops to do."

Add to all this a dash of big time international political intrique into the fuel crop porridge, and you have an evolving drama worth watching. The big time international political intrique starts with a sleepy little company on the Arkansas/Mississippi border at One Cotton Row between Goat Island and Choctaw Bar Island. Here is where you have Delta and Pine Land, a seed company. But not just any seed. They have been quietly working with the USDA on Terminator seeds since 1983.

The U.S. government's interest in seeds centers on a view expressed by Henry Kissinger when he said, "Control the oil and you can control entire continents. Control food and you control people." He was known to have used food exports in what he dubbed "food as a weapon". In 1998, Delta and Pine patented the Terminator seed, a genetic modification that causes seeds to "commit suicide" after just the first harvest so farmers can't save and replant the seeds as they've done for thousands of years. They instead must buy a new supply of seed each season. Well, the global agribusiness cried foul and effectively blocked Monsanto, the world's largest seed developer, in their first attempt to buy out Delta and their patent in 1999. According to an article in Global Research (8/27/06) this global outcry "threatened the very future of the Rockefeller Foundation's Gene Revolution". They convinced Monsanto to shelve Terminator for a few years while they and other seed giants (Syngenta, Dow Chemical, etc.) proliferated their yield improving, gene modified fare, developing a very dependent global user base. So the sleepy little company from Goat Island now had the whole international geopolitical agri world by the seeds.

Delta and Pine Land had the financial backing of a Little Rock, Arkansas investment banking firm called the Stephens Group, which was their biggest shareholder. The Stephens Group prides itself on being the nation's biggest investment bank outside of Wall Street operating in the middle of hillbilly land and a prime mover and shaker in the rise of Tyson's, Wal-Mart, and Bill Clinton. Not that they dote on just one president mind you. The Stephans Group seems magically connected to all things shadowy and political. Jackson Stephens was a Navy Academy classmate of Jimmy Carter. During the Georgia bank scandals of Carter's years, Stephans stepped in to bail out Carter cabinet member Bert Lance's bank. And Stephans Group is nonpartisan in their help having done favors for George Bush and others. Their web of influence extends around the globe. Hillary Clinton was a partner in the Rose Law Firm, the house law firm of the Stephans Group. A couple years ago, Monsanto quietly bought Delta, which is now busy opening up subsidiaries all over the globe. Now the Terminator seed patent is ammo for food and/or fuel crop as a weapon and Hillary Clinton is our Secretary of State and Bill is being assigned geopolitical chores around the world.

The Global Research article states, "Under the Clinton presidency, agribusiness, especially agribusiness tied to the Stephans interests, made huge advances." With such high powered backing, I can envision a suprising development of fuel crops. The rapidly developing nations have small agrarian populations, a lot of land, and a strong motivation to make something very valuable for export. Enter the Gene Revolution for fuel crops.

Perhaps Cramer need not be so alarmed over Monsanto's reckless power grab. Maybe they can afford to be reckless.

Saturday, August 8, 2009

Sugar Price Explosion?

The price of sugar is starting to garner some attention as it escalates to 20-plus year highs. There seems to be three major forces converging on sugar right now, any one of which is quite capable of inducing a large runup in prices. One of these three tsunami waves is the subject of a current article here at SA, where the monsoon situation in India, one of the world's major sugar centers, looks to produce a severe shortage. There is also a nice article at the Financial Times on this (ft.com Javier Blas 7/28/09 Sugar Prices Head Toward the Sky) where Nicholas Snowdon, a soft commodity analyst with Barclays Capital, says that weather problems have laid the way for "a global deficit of historic proportions".

The second of this 3 wave attack is the sugar/oil link that I wrote a post about back in June. About 60% of the world's ethanol is made from sugar, and when you have the oil price rising, you have added pressure on biofuel demand, which competes with food demand. If the global economy normalizes soon, the now crippled supply mechanism, that wasn't able to keep up with demand 2 years ago when it was going full blast, may induce a surprising price run in oil. By the time the monsoon effect wears off, we may have the return of high crude keeping sugar at elevated levels.

But now let's focus on the third wave, as if the first two weren't enough. This is simply the investor demand for sugar, to go along with the food demand and fuel demand. As with commodities in general, there is investor demand for hard assets when paper assets are threatened, as in any major recession, with monetary policy and currency debasement. In general, however, this runs in major cycles and we are now in a major up cycle: (click to enlarge charts)

Those who say the commodities bull is over are probably wrong. The above map puts us somewhere in the middle of the present up cycle with the most powerful climbs yet to come. So we are in a major up trend toward investor demand for sugar as we were in the last two major recessions. Sugar loves major recessions by the way:

I think you could rank our current recession on a par with '74-'75 and '79-'82, so where is the sugar spike? We may be starting it. The normal trading channel seems to be breaking. Sugar has a lot of catching up to do just to catch up to inflation. As the above chart shows, you could buy sugar last year for what you paid for it in 1963.

The macroeconomic picture is a lot different for sugar now than it was in the two previous spikes. We did not have peak oil and rampant ethanol production back then. We did not have the exploding emerging market demand for sugar as both food and fuel. If there is a major spike from this triangulated tsunami, it may not recede as rapidly as in the previous cases.

All the good sugar stocks trade on the non U.S. exchanges. Here in the States, there is IPSU Imperial Sugar, which is breaking out of a brutal downtrend of about 3 years, but without really good fundamentals. Then there is CZZ Cosan, the Brazilian sugar company. Less volatile and dangerous is ALEX Alexander and Baldwin, the Hawaiian sugar company that has some diversification into real estate. SGG is an ETF that tracks the sugar price.

Tuesday, August 4, 2009

KSW Starting a Climb?

It's hard to find stocks with decent fundamentals that haven't already careened way off the market's bottom and are a worry to buy now. KSW is in a despicable area of the market. They do HVAC and commercial building piping, not globally, but just in the U.S. and mainly just New York. You won't hear its virtues being discussed on CNBC and I doubt if the funds are too loaded up with it just now. The current quarter has dipped into the red, but overall they haven't been too devastated by the recession: (click to enlarge charts)

The stock has been devastated far more than their financial results and now trades at a ttm PE of 5. Inside ownership is a strong 31% of the shares, no big recent buying though. They pay a 3.5% dividend if you have to wait some more for a recovery in the stock. But you may not have to wait that long:

It had a more active February than is ideal, but it has that "left for dead" appeal. And it has good divergence between the accumulation/distribution trend and the 200 dma, which has just now been breached as well as a fairly well entrenched resistance level just below $ 3 dollars.