Reader Mail

Stocks continue their upward climb. As TradeMaster’s Jason Cimpl  told us earlier in the week, the S&P 500 has kept its date with 1,150. And it looks poised to move higher.   

 

The retail sales data from February is positive. Despite two crippling blizzards on the East Coast, sales still rose 0.3%. And if you strip out autos, sales were up 0.8%.   

 

Normally, it makes no sense to ignore auto sales because they are obviously an important gauge of consumer spending, but in light of the recalls from Toyota (NYSE:TM), it’s reasonable to assume that some auto sales were simply postponed due to the uncertainty.    

 

Sales were especially strong for electronics and at restaurants and bars. Sounds like consumers are celebrating their new iPhone purchase over a beer. That’s probably led to a surge in drunk-texting.   

 

Retail sales from January have now been revised lower two times, from an initial reading of +0.5% to the current +0.1%. Funny thing about this rally – economic data is consistently revised lower, and no one cares. The only exception I can think of is 4Q 2009 GDP, which was actually revised slightly higher.  

 

Economic data has been improving. But it says more about the bullishness of investors that they are consistently overlooking negative data. That gives me more confidence that we will be seeing new highs for the major indices soon.   

 

Now, let’s wrap up our week with some Reader Mail… 

China to the Rescue

For the past year, the fate of commercial real estate in the U.S. has been a popular talking point for economic bears. Something like $1.4 trillion in commercial real estate loans comes due in the next 3 years.   

 

Given that a good portion of these properties are underwater, and the fact that banks are still reluctant to lend, the concern that many of these loans won’t get refinancing seems valid.   

 

Already, we have seen companies simply walk away from properties that are losing money, turning the keys over to the banks that hold the mortgages. Maguire Properties (NYSE:MPG) has done it. And we’ve seen BlackRock (NYSE:BLK) and Tishman Speyer Properties abandon Manhattan’s Stuyvesant Tower when the value fell from $5.4 billion to $2 billion.   

 

For shareholders, these moves make sense because it’s better than throwing good money after bad. For Maguire, it was a matter of life or death for the company.  

 

Still, it’s a concern because someone has to step up and buy the impaired real estate from the banks. Otherwise, bank balance sheets are saddled with even more toxic assets, capital bases fall, lending dries up and the whole financial crisis gets repeated again.  

 

Interestingly, it may be the Chinese who help the U.S. out of this commercial real estate problem. 

Maquire!

I got this letter in my inbox yesterday:   

 

Good morning Ian,   

 

I followed your instruction and bought MPG at 1.50 per share, today, it goes crazy. Thanks a lot.    

 

I really like to read your articles.   

 

Sue   

 

I first discovered Maguire back in September, 2009. As part of my daily routine, I check in on the stocks that are moving the most every day. You can find this information on Yahoo! Finance by clicking on this link:  http://finance.yahoo.com/gainers?e=us 

 

This list simply shows the stocks that are putting in the biggest moves of the day. It’s almost always dominated by small cap stocks. You’ll also usually see a few regional banks that are up 15% on 3,000 shares traded. I’m always curious why these big moves happen to small banks on ridiculously light volume, but I digress… 

Anniversary, Part II

I suppose it’s fitting that futures should be down on the morning of the one-year anniversary of the stock market bottom last year. Perhaps stocks will put in a similar reversal today, but even if they don’t, I think we can take a little selling in stride.   

 

Oil prices are down a bit today as the dollar strengthens. We should note that the dollar and oil have moved higher in tandem lately, proving that there is more to the strength in oil prices than its relationship to the U.S. dollar.   

 

Expectations for the global economic recovery and a subsequent rise in demand for oil are part of it. But I also think that investors are slowly realizing that there is very little upside for production levels in non-OPEC countries.   

 

A recent article about Mexico bears this out…

Chicken or Egg?

Payroll processing firm ADP reports that private employers cut jobs by 20,000 in February. That reading is in line with expectations. It also is more evidence that the rate of job losses is slowing, or stabilizing.    

That’s an important first step for getting actual job growth and putting the economy on a clear path to recovery. But there’s a long way to go before fewer job cuts turns into actual net hiring.  

More Upside for March

In early February, stocks looked as though they were breaking down. We had just gotten through the Dubai debt problem. China was raising reserve requirements for banks to slow the rate of lending. And then the news about Greece’s debt problems broke.  The S&P 500 had dropped from January highs at 1,150 to as low as 1,044. That’s a 9% move, and if you recall it was enough to get investors a little nervous. In fact, some were even saying that the global economic rebound was done before it was even a year old.

It was about that time that I started including TradeMaster Daily Stock Alerts’ Jason Cimpl in our daily conversation here at Daily Profit.

Consolidation

An influential German business confidence survey showed a surprise drop in the country, the first in 10 months. A cold winter has apparently hurt retail sales in Germany.

That’s pressuring the euro, and providing strength for the U.S. dollar. It’s been pretty well documented that the euro does not tend to rally alongside the dollar. And that’s what we saw yesterday.

One positive note from yesterday – Maguire Properties rallied off of support at $1.50. Volume was strong and the stock broke above its 50-day moving average. You may recall yesterday, I said the stock needed to rally, and soon. Now, it needs to keep rising.

Also yesterday, TradeMaster Daily Stock Alerts‘ Jason Cimpl told us he expects consolidation for the stock market this week. (Consolidation occurs when prices don’t move much as investors adjust to a new price level.)

Yesterday, the S&P 500 traded in a tight 7-point range. And it won’t be surprising if it holds to a similar tight range today. We might anticipate the negative news from Germany to be offset by an improved reading of the Case-Shiller home price index.

Soros Bullish on the Euro?

It was just last Thursday that we discussed "talking one’s book" and made special mention of George Soros. If you missed that issue of The Daily Profit, talking one’s book means advocating a belief in public that supports one’s trading position, regardless of whether you actually believe it’s true.

So it’s interesting that Soros has a piece in today’s Financial Times where he states that "The survival of Greece would still leave the future of the euro in question." He goes on to say that the aid package for Greece won’t work for Spain, Italy, Portugal or Ireland.

Now, if we check the chart we can see that the U.S. dollar has been rallying. Part of the reason for this has been weakness of the euro due to debt problems in European countries.

$USD chart

The recent spike higher by the dollar was a response to the Fed’s discount rate hike. And quite frankly, it looks unsustainable. I think we can assume that Soros is short the euro, and he may even be trying to cover that short right now, in anticipation of a rally for the euro.

Of course, a rally for the euro would send the U.S. dollar lower. That, in turn, will be good for U.S. stocks, gold, and oil.

Soros Talks His Book

You’ve heard me call out big-name investors who are "talking their book" in the past. An investors is "talking his or her book" when he/she states an opinion as fact for the sole purpose of helping a particular trade.

We’ve seen Warren Buffett do this. Last year, it was widely known that he was massively short the U.S. dollar. And he continued to say he thought the dollar was collapsing, even as it hit important support. Then we learned later that Buffett was covering his dollar short, all the while extolling its weakness.

Obviously, Buffett, in true P.T. Barnum fashion, was attempting to use his influence to talk the dollar down while he covered. He only needed to fool people for a short time as he exited the trade.

Last month at the Davos conference in Switzerland, George Soros did his version of talking his book. He made headlines when he said "The ultimate asset bubble is gold."

I always view statements like these with skepticism. And sure, recent SEC filings reveal that at the same time Soros was saying gold was a bubble, his Soros Fund Management was buying 6.2 million shares of the SPDR Gold Trust ETF (NYSE: GLD) for $663 million.

chart

Looking at this 6 month chart of GLD, it’s a reasonable guess that Soros was buying between $105 and $110 in December (you may need to zoom in on the chart in order to see all the information). Gold is on the verge of breaking above that range now.

It would be easy to think that Soros was simply pulling a fast one on unsuspecting investors. But this is a case where it pays to know a little more about the man and his methods. Here is a Soros quote from the early ’90s:

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited."

I love that quote, even though it’s a bit cynical and perhaps depressing. But what he is saying should be a revelation to any investor, because it requires the investor to maintain a sense of skepticism.

I also want to emphasize that companies do make money, they grow, and their stock prices will reflect this. In other words, there are fundamental reasons for stocks to move. But Soros is talking about making the big money.

As late as 2007, Soros was calling the housing boom a bubble. I also think we can assume he made a lot of money during the housing bubble in the sectors that were supporting the housing bubble, like commodities. And there’s no doubt he was well-positioned when the bubble burst.

Lennar’s Windfall

So far this year 15 banks have been closed by the FDIC. Last year, it was 134, if I’m counting the closing figures right as posted on the FDIC website. Some of you may remember the last time there were mass amounts of bank closings during the S&L crisis of the late ’80s and early ’90s. At the time, a special agency, the Resolution Trust Corporation (RTC) was set up to dispose of the assets of these banks.

The RTC was controversial because many times it sold assets at prices far below market value. Ultimately though, the RTC succeeded in getting assets seized from insolvent banks into stronger hands. And because some of these "stronger hands" had low cost structures due to low up front costs, a new phase of growth was born.

A similar thing is happening now. Lennar Corporation (NYSE: LEN), a homebuilder, recently picked up $3 billion worth of unfinished homes from the FDIC for about 40 cents on the dollar. Lennar only had to put up $243 million. The FDIC kicked in $365 million and provided 0% interest financing.

Because Lennar’s upfront costs are so low, it will be able to hire the workers needed to finish the homes and offer those homes for sale at a price that makes sense for buyers. This is how growth returns after a bubble.

But this time there’s a twist. The $365 million put up by the FDIC? It’s an equity stake. Yes, rather than simply disposing of the assets to the highest bidder the FDIC, and by extension the government, now has a stake in those unfinished homes.

The FDIC could turn a profit here. But by offering financing and providing an interest-free loan, the FDIC is also supporting home valuations by not letting these unfinished homes sell at absolute rock bottom prices.