S&P Resistance

The S&P 500 is trying to push past a key resistance point at 1165. The Consumer Price Index was unchanged for February. The lack of pricing pressure supports the Fed’s monetary stance. As the Nomura Securities chief economist David Resler told Bloomberg, “Inflation is certainly no imminent threat to the U.S. economy…We see the Fed on hold through this year.”   


Resler’s expectation for interest rates is a bit of a departure. Most economists think rates will rise later in the year. But any interest rate hikes will be dependent on jobs growth. Unemployment claims fell by 5,000 last week. That’s an improvement, but we still need to see payrolls increases. We won’t get that number for a couple of weeks.   


The dollar is stronger against the euro today as the bailout plan for Greece takes another turn. An agreement seemed to have been made a couple days ago. Greece was even taken of credit watch by ratings agencies. 

Sovereign Wealth Fund and Commercial Real Estate

The AP is reporting that China has trimmed its holdings of U.S. Treasury’s by $5.8 billion in January. I’m sure members of the doom and gloom economic faction will point to this as solid evidence that the U.S. is losing its ability to fund spending and is inching ever closer to default.   


In my opinion, this line of thinking is completely unrealistic.   


China still holds $889 billion in T-bills. It’s clearly not “dumping” American debt. And as I discussed last week, there is evidence that China is moving to more direct investments in the U.S.  


China’s state-run investment company, the China Investment Corporation (CIC), is already involved in a buyout offer for shopping mall owner General Growth Properties (NYSE:GGP) through Brookfield Asset Management (NYSE:BAM)

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. 


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.   




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… 

Well Played

This morning’s payroll data came in better than expected. After economists warned that February snowstorms may have depressed payrolls by as much as 100,000, the 36,000 job losses reported for last month sounds like good news. Well played, sirs, well played.  

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.

Munger’s “Basicland”

There is an article at Slate.com making the rounds in the financial press. Warren Buffett’s partner at Berkshire Hathaway, Charlie Munger, penned a parable about America’s rise and fall, called "Basically, It’s Over."

The article details how a young, fiscally responsible country called Basicland got caught up in the "casino" of speculation, ignored its export economy, and essentially went bankrupt.

While perhaps a bit simplistic, Munger’s piece is intended as a warning about rising government debt and an over-reliance on risky financial speculation. This speculation is intended to make up for the lack of manufacturing as a major component of GDP.

Some of the statistics he throws out are a bit scary. He says "The winnings of the casinos (investment banks) eventually amounted to 25 percent of Basicland’s GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos."

I haven’t verified those numbers, but they certainly suggest an economy that’s out of balance.

As I read Munger’s article, I thought immediately of yesterday’s story about how Goldman Sachs and other investment banks may knowingly used mortgage-backed securities and CDOs to set-up AIG.

I’m sure we all believe it is any company’s right to take advantage of another company’s weakness. At the same time, however, it seems to me that at some point, a company must ask itself "at what cost?"

In the case of the housing bubble, investment banks knew the mortgage-backed securities they were selling were junk. Not only did they set AIG up for a fall, these casinos, as Munger calls them, essentially cannibalized America to make a buck.

Munger’s answer? Listen to Paul Volcker. Keep banking separate from investing. And "…produce and sell items that foreigner’s [are] willing to buy."

Let’s hope that our elected officials are not so ensnared in the casinos’ tentacles that they can make the changes that America needs.

Recession for Europe?

It’s no surprise to me Europe is experiencing weaker than expected growth. In fact, in Wyatt Investment Research 2010 Economic Predictions and Investment Outlook, I wrote that it was likely that Europe enters recession again. And when we read that Euro-zone GDP growth for the 4th quarter actually declined 2.1%, and sequential growth was just 0.1%, it appears that recession is more than just a possibility for Europe.

The contrast between the 4th quarter in the U.S. and Europe is about as stark as it gets. And it’s clear to me that the main difference is government stimulus. For instance, French car-maker Renault expects car sales in Europe to fall 10%. Car sales in the U.S. have been pretty good, and the cash for clunkers program helped. There should also be no doubt that government support for the housing market has helped.

There is also an interesting parallel between countries like Greece or Ireland and states like California and Nevada. No doubt, if California was a country and not a state, it would be on the list of countries with sovereign debt problems.

Fortunately, California’s problems are somewhat masked by the overall relative strength of the U.S. economy, but that won’t last. Debt issues in certain states have the potential to become a real drag on growth.

Is China Caving?

The Dow Industrials cruised past 10,000 yesterday. Clearly, the news that Germany may be coming to Greece’s aid was a big relief for investors. The euro rallied against the U.S. dollar as well, an important catalyst for stock and commodity prices on U.S. exchanges.

Some stability in Europe and progress on a jobs bill in Congress will be good for stocks. Earnings are already solid and I suspect there is more upside coming.

I got on the phone with TradeMaster‘s Jason Cimpl to see if yesterday was the type of bullish activity he wanted to see from the market. He noted that although the market got a nice bounce (TradeMaster Daily Stock Alerts members closed short positions worth 15% and 5%), the close was very weak.

Typically, indices in a bull trend would have made a push higher into the close. Despite the weak close and his growing pessimism, he did note that market internals were "spectacular." The advancing volume data showed us that the upward action was more than just shorts covering their downside positions – it was also bottom feeders nibbling at the low stock prices. He’s watching the 1085 level on the S&P 500 as an important resistance point this week.

There’s also some significant news from China today. Credit Suisse is suggesting that instead of letting the yuan appreciate, it may raise wages for Chinese workers. That’s important on a number of levels.

First, higher wages for Chinese workers removes some of the competitive edge that China enjoys because it makes their goods more expensive. This move would also put more money in the average Chinese citizen’s pocket, which serves China’s bigger goal of supporting domestic demand for Chinese goods.

Being an export economy is an unsustainable model, and China knows this. It must transition to a more balanced economy. I’ve noted in the past that China needs some form of social security to unlock the massive amount of saving in that country. Higher wages is a step in that direction.

Obviously, if wages in China are higher, it will help the U.S. manufacturing sector as well. This is one of the pleasant outcomes of globalization. Ultimately, we will see a more level playing field as the standard of living in emerging economies rises.

The final takeaway of this move is political. It’s no secret that President Obama has been putting some pressure on China to remove unfair trade advantages. I won’t call it "caving in", but the fact that China would take steps to remove some of the advantage that its exports enjoy clearly shows the country is sensitive to the demands of its trading partners. Who knows, maybe China will also find a solution that lets Google stay in the country?