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.

Pawns in a Rich Man’s Game

Bespoke Investment Group is reporting that 10% of U.S. corporations are raising earnings expectations, compared to 4.1% that are lowering them. That’s the largest gap on record, and suggests that analysts still have earnings projections that are too low.

It’s hard to blame the analysts for being cautious. While the economy has improved, uncertainty about unemployment is an issue. It’s easy to imagine that consumer demand could drop. Still, let’s not ignore what corporations are saying. After all, they are the ones in direct communication with their customers. I can’t help but be a little optimistic that there is more upside for the stock market.

Don’t ignore the consolidation news from the commercial real estate sector this morning. Mall owner Simon Properties (NYSE: SPG) is offering $10 billion for its rival, General Growth Properties (NYSE: GGP).

Several investors and economists believe commercial real estate will be the next shoe to drop. And within that sector, shopping malls are probably the most beaten down group. That Simon Properties is considering a buyout means that it sees opportunity. And it is moves like these that often mark a bottom for an industry or sector.

I’ve recommended a commercial real estate stock that may have some terrific upside. Maguire Properties (NYSE: MPG) is back to its support level at $1.50. If you didn’t catch it there last time, you might want to give it a look.

Dumb Luck?

My Washington DC office has been vacant all week. It’s amazing to me that record snowfalls have turned my DC staff into shut-ins (and closed the government for the third day) while life goes on at its normal pace here in Vermont.

The snowstorm that’s crippled the mid-Atlantic region will certainly have an impact on 1st quarter GDP. I would expect that 1st quarter retail numbers will be pretty bad. But there could be some good numbers for restaurants coming. The rally in the dollar over the last few weeks has lowered food costs. And I also think that once we see a thaw on the Eastern seaboard, people will shake off their cabin fever with a night out. I know I would…

I’m really on the fence with this one: did the Obama administration purposefully wait to attack the unemployment situation? Or is it just dumb luck?

I ask because it’s clear to me that now is the time to strike. If stimulus money had been used at this time last year to help the unemployment situation it wouldn’t have worked. Corporations were still in the process of cutting costs to meet lower demand. And at the time, demand itself was a moving target.

Now that the economy has stabilized, demand is returning and corporate earnings are on the upswing. So corporations are starting to hire again. New jobless claims are down again, as are continuing claims. The unemployment rate has dropped, and on-line employment ads are increasing.

The Conference Board, a non-profit global business organization, reported that online job demand is rapidly rising. According to the Conference Board, the total job vacancies advertised online today is over four million, or the same level as November 2008.

Seems to me, the added perk of government incentives, like a payroll tax holiday or tax credits for new hires, could give companies the final push needed to add employees.

TradeMaster Jason Cimpl does it again

I expect the recent volatility is on readers’ minds, so let’s get right to TradeMaster‘s Jason Cimpl and his outlook:

The bulls did not capitalize on Friday’s bullish close yesterday. Stocks were up strongly in the morning with most indices up more than half a percent. Those gains held into the afternoon and it seemed as though we were going to see a nice pop into the close. Then around three, the market started to turn red and indices sold off hard in the last hour of the day. But it is not over for the bulls.

Despite the weak afternoon, the SPX managed to close above 1065 support. Resistance was formidable at 1071, which is the price we will be watching for a break out today in a short squeeze.

Short interest picked up substantially. We closed down most of our shorts already (including one with a sweet 15% profit . Basically, the market is oversold and any pop up will be fast. We held onto most of our longs anticipating a move higher, possibly back up to 1120, but we will be selling into any rally.

It’s important to remember that the vast majority of stock trading volume comes from institutional investors like mutual funds, hedge funds, and even sovereign investment funds.

As Jason notes, stocks rolled over yesterday afternoon. That’s consistent with institutional trading, which tends to take place during the first and last hour of the trading day.

It’s also important to remember that institutional selling isn’t necessarily an indication of economic or earnings data. Part of the reason stock prices hit such lows last March was that banks and other investors had to raise cash at all costs. And that can mean selling assets, regardless of one’s outlook.

A similar situation may be happening right now. Greece (especially) and other European countries have debt problems. No doubt some of the selling activity we’ve seen lately is related to this. Investors are hopeful that a solution for Greece’s debt problems is on the horizon. That’s helping today’s upside bias. That hope is also boosting the euro against the U.S. dollar which is good for stocks and commodities.

Also, don’t dismiss the government’s new-found focus on employment. We’ve already started to see what may be a trend change for employment. Jobs are the missing link to the economic recovery. Good news on this front will certainly help stocks move higher.

The Forecast for 2010: Looks Like Volatility

Wow. Two strong rallies to kick off
February. It’s great to see some buying interest after January’s
sell-off. But I would caution that 2010 will be more volatile than the
final 9 months of 2009, when stocks were on a one-way trip higher.

You
could argue that stocks are overvalued based on index P/E levels. The
trailing P/E for the S&P 500 is 21. At the same time, companies are
once again beating earnings estimates. Business is better than analysts
expected.

The forward P/E for the S&P 500 is 14. That’s based
on analysts’ expectations of 2010 earnings. If analysts are once again
low-balling the numbers, then the S&P 500 may actually be cheap.
But if unemployment continues to weaken, or if banks don’t loosen up
lending, or if the housing market doesn’t improve, then perhaps stocks
are expensive.

And so, stock prices will very likely be more
volatile this year. That means it’s going to be even more important to
do good research and buy quality stocks at reasonable valuations. It’s
also going to be critical for investors to focus on the sectors that
will outperform this year. Of course, all of this will be part of our
ongoing conversation here in Daily Profit.

When You Hear Hoof Beats…

It sure was nice to see stocks make a nice
move higher yesterday. Especially after I came out yesterday and said
Dow 10,000 and S&P 500 1,071 were support points.

It’s also
interesting that this advance came on the first day of February. Recall
that the positive GDP surprise came on Friday, the last trading day of
January. Investors were not interested in buying stocks in January. But
now that it’s February, the buyers are back.

It might seem
strange, but mutual funds and other institutional investors don’t base
their buy and sell decisions solely on making money. They have to play
the percentages. And that sometimes means taking profits when the
economic data supports better earnings and higher stock prices.

Is
that what took stocks lower in January? Maybe, although it’s a little
too soon to say the upside trend has been re-established. But
sometimes, when you hear hoof-beats, it’s best to think horses not
zebras.

The financial media has a
tendency to think zebras. The writers always want to find the reason
behind the selling. It’s China, maybe it is earnings, or is it economic
data? The list goes on. Of course, I’m not saying that these items
aren’t factors. But at the end of the day, it is institutional
investors that drive market direction. And like I said, they will take
profits sometimes, just because they can.

Low Rates to Continue

I managed to catch part of Treasury Secretary Geithner’s
testimony yesterday. I actually thought he represented himself pretty
well. I can appreciate his stance that AIG really was to big to fail.
But that notion that the New York Fed had to make sure all of AIG’s
credit default swaps were paid still doesn’t make sense.

Geithner’s explanation was that if AIG did pay off debts like
the $25 billion that went to Goldman, AIG would get downgraded and it
would become more expensive to unwind the company. Maybe I’m wrong, and
I haven’t checked to be sure, but I’m pretty sure AIG’s debt was
downgraded. And do you even need a rating for a company that’s 80%
owned by the government?

Bottom line: I still think former Treasury Secretary Paulson
made sure Goldman Sachs got paid and it really stinks that tax payers
get taken advantage of like that. Unfortunately, it’s unlikely anything
will come of it.

*****The Fed reiterated its pledge to keep
interest rates low for an extended period. No surprise there, but
investors liked the news. Stocks finished the day with a nice rally.

Still, it’s not like the Fed is keeping the liquidity spigots
wide open. The Fed plans to end its mortgage-backed securities
purchases. With so many stimulative monetary policies in place, low
interest rates will probably be the last thing to get changed.

*****China
is also d oing its part to soothe investors. According to Bloomberg,
China’s banking regulator has told lenders to "….step up scrutiny of
property loans while pledging to satisfy "reasonable" financing
needs…"