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That was quite a show Maguire Properties (NYSE:MPG) put on yesterday after it reported 4th quarter earnings. It opened down, around $2.50 a share, and then marched steadily higher for the rest of the day to close at $3.54.   

 

Maguire’s cash reserves are rising after it walked away from a few underwater properties and sold a couple others. Investors seem to be saying the stock is on more solid ground now – volume was monstrous.  

 

While I’d love for Daily Profit readers to have participated in yesterday’s gains, I stand by my recommendation to take your profits on the stock before earnings. Earnings are a big uncertainty. Maguire could just as easily have dropped yesterday. There’s always risk when investing, and perhaps more so with a stock like Maguire. It would have been irresponsible of me not to have you take profits before earnings. 

Health Bill Profit Opportunity

Yesterday morning was the bears’ big chance. Futures were down, resistance at S&P 500 1,165 had held and there was a steady stream of seemingly negative news. Greece was still a question mark, trade relations between the U.S. and China was getting tense, and the controversial health care bill had just passed. There was enough uncertainty in the air to drive the S&P 500 to an early test of support at 1,150.   

 

That was the moment. 1,150. And the sellers couldn’t take it lower. In fact, the bulls took control and pushed the S&P 500 back above 1,165. As I wrote last week, there is very little resistance between 1,165 and 1,200. I think the odds are good that we see S&P 500 1,200 in the near future.   

 

Now, I want to switch gears and discuss the Nasdaq a little, because it’s been outperforming the other major indices by a wide margin. The S&P 500 is up 2.8% for the year. The Nasdaq, on the other hand, is up 4.3%. 

Google and China

The financial media is jumping to the conclusion that recent weakness for stock prices is related to the ongoing Greek bailout saga. But considering that Greece would prefer to have the IMF involved in its bailout plans because emergency loans would be cheaper, I’d suggest we need to look elsewhere for the real cause of the recent mini-sell-off.  

 

The Indian rate hike is certainly a more likely candidate. Not because India’s economy is driving the global economy, but because this move is another sign that central banks around the world are ending their stimulus policies.   

 

India’s move comes a full month ahead of the next scheduled central bank meeting. The timing suggests that perhaps inflation is becoming problematic. And it also raises the possibility that India will hike rates again when it meets next month.   

 

Don’t underestimate the significance of Google’s (Nasdaq:GOOG) possible exit from the Chinese market. 

New Highs Coming?

Today is March options expiration, so don’t expect a lot of action. Options expiration days (the third Friday of the month) tend to be pretty dull.  

 

Still, it’s been a pretty good week for stocks. The S&P 500 moved up through two important resistance points – 1,150 and 1,165. 1,165 is a post-crisis high. And if you check a chart, you have to go back to late-2005 to find the next resistance point at 1,200. (The S&P 500 attempted to find support at 1,200 during the crash in 2008, but I don’t see that as particularly significant – investors were literally grasping at straws then.)  

 

Ironically, individual investors aren’t on board. Total inflows into diversified equity funds for U.S. stocks were negative in February. Bond funds and foreign funds showed gains.  

 

Also, ETFs had a positive inflow of $5 billion. That suggests that investors may be taking matters into their own hands and opting for a lower cost investment vehicle. 

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. 

Happy St. Patrick’s Day

Happy St. Patrick’s Day! In honor of the holiday, the stock market is in the green. The Fed reiterated its pledge to keep interest rates low for an extended time. The promise of cheap money is clearly helping to support stock valuations.

Also helping move prices higher, and supporting the Fed’s stance, is the 0.6% drop in the Producer Price Index. The drop was led by food and fuel prices. Excluding those, the so-called "core" rate climbed 0.1%.

You wouldn’t know fuel prices were lower looking at the price for a barrel of oil. Despite the relative strength of the U.S. dollar, oil has staged a month long rally that’s got it within spitting distance of its 52-week highs. And I expect we’ll be seeing those highs in the very near future.

What About Ethics?

Senate Banking Chairman Christopher Dodd is all set to put his latest banking regulation bill up for a vote. The bill would put an end to proprietary trading, lend transparency to hedge fund trading and derivatives, and give the Federal Reserve the power break up companies if they pose a “grave threat” to the economy.  

 

Dodd’s proposal would also create a nine-member “Financial Stability Oversight Council” of regulators, led by the Treasury Secretary. According to Bloomberg, “…the council can make recommendations to the Fed to impose “strict” rules for capital, leverage, liquidity and risk management to make it difficult for firms to grow so big and complex that they endanger the financial system. It could require the Fed to regulate non-bank financial firms that threaten financial stability, ensuring that “the next AIG would be regulated” by the Fed…”   

 

It’s clear what Dodd is trying to accomplish here. He’s trying to make it so that financial firms can’t engage in trading activities that could ultimately destabilize the entire economy. I’m not sure these proposals, as I understand them, accomplish the objective. 

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.