That Was The Week That Was – 2nd Week March

Not the time to Act Silly. Last week’s Barron’s on-line repeated an article that warned investors to keep their extra cash in cash and wait out  the expected correction. It was the Randall W. Forsyth article I reviewed last week that warned investors that it was the wrong time to put new money to work buying stocks, and to wait for the correction that was inevitable. Barron’s.com also put in a side-bar that read, ‘While many market watchers, including Barron’s, thinks that the recent rally still has legs, a confluence of signals suggests that we could see a sharp pullback in the next few weeks or months.’

Don’t expect gas prices to fall any time soon. As summer driving approaches gasoline prices increase an average of 3%.  The U.S. Energy Information Administration reported that even as the U.S. becomes a net exporter of oil the global demand is outpacing supply. China’s demands will continually push up the price of crude even as the we use less. We can expect an average of $4.00 a gallon rather soon. Making matters worse refiners are under pressure to process lower grade crude: Their facilities are not set up to process the cheaper grade and pipelines are insufficient to bring the raw product to them. Still, a fall in demand may bring the price down although analysts are at disagreement on when and by how much.

 The consensus is that any stock market pullback could be mild and nothing like the steep drop experienced in 2011 by the markets.

Most professionals expect that markets to move up substantially after the correction.

Good Times, Very Good Times for  Companies…Cheap money though bond offerings has yield- thirsty investors snapping up deals. Hedge Fund KKR refinanced or extended some $56 billion in debt in 2011 that cost them very little because of today’s (or yesterday’s in the case of 2011) low yields. They are not the only one.  Refinancing is the game so far in 2012- allowing weak companies more time to get their ‘game-on’. Recently we’ve seen Caesars Entertainment, Clear Channel (I did a radio show on their network), First Data and Realogy Corp drink from the well and get great rates extending their debt.Realogy just sold 8 year bonds to replace an issue that was coming due in one year. The CFO of Realogy said the deal was snapped up in six hours after it was launched.

From the Department of Surprising New Stuff- Dunkin Donuts plans to open 100 new Dunkin and Baskin Robbins stores in China. Currently the company has 150 up and running. No word on the time line for the new stores but insiders offer that the Dunkin stores will be selling pork donuts and will be endorsed by LeBron James. I cannot make this stuff up.

Speaking of China….has the largest Trade deficit since 1985. The data, as reported in Bloomberg, along with lower than forecast inflation, industrial output and retail sales; has raised the odds of easing policies to be implemented to support growth.

In His Book ‘Backstage Wall Street’, ex-stockbroker Josh Brown warns investors of ‘Murder Holes’, where money is invested by unwary customers and the deals blow up. He write that so much product is being churned out by Wall Street that he hears about many of them first from customers. Here he warns about  a few:

• Oil & gas limited partnerships –(if you’re being cut in on them the wells are dry).
• Insurance brokers selling asset management.
• Principal protection funds (They always come out after the markets been killed).
• Currency brokers and forex sites. (Fees are over the top and the returns are nothing like what’s being advertised).
• Financial advisors who self clear or self custody client funds (Get another pair of eyes on your money, preferably a large corporation).
• Private Placements- Just two private placements (that went bad) were responsible for the closing of 21 well known broker/dealers since 2010.

Jon D. Markham wrote Monday 12th, ‘Stocks rebounded last week with about as much sincerity as a six-year old eating broccoli.’ There’s too much worry on the Street. Brazil reported growth last year of 2.7%, or less than 1/2 the government predicted. ( Last week the Brazilian Index funds and small caps fell as the Brazilian real fell against the U.S. dollar. The fall was created by the government to stop the rise of their dollar in a global market where major currencies are fighting to reduce their value.) A possible trade war with China looms in the background. Europe is choking on a lack of consumer and corporate credit. Investors have been shrugging bad news off. Other pundits explain the markets may keep chugging higher for one or two more months.

On the Flip side -Zacks calls for a Melt-up, or a Break-Out and that little by little stocks move up until folks finally figure out a break-out has occurred. Zacks expects stocks to climb to 1400 –1420 and then make a decision based on earnings reports.  we’re theeere….on Thursday now what?

Monday last Dow was up, Naz down and S&P dead even for the session. Gold fell and oil closed up a smidge.

Psst…Looking for an investment that could pay off big on a trade? Myra P. Saefong in MarketWatch Commodities Corner explores the natural gas sector, warning that now is not the time to buy but probably some time this summer. Prices for NG are at the lowest since 2005 and futures have fallen this year more than 20%. Oil and gas producers have shifted focus to oil production. Some rig operators are burning off the gas a nuisance. This year there were high inventories along with a mild winter that caused the glut and price reaction. Wait until product gets depleted and play the sector with one possibility of buying the First Trust ISE Natural Gas ETF – FCG. 

Tuesday Early Boost From Consumers started the market off on the right foot. A market analysis by Fidelity confirmed that ‘technically’ the market trend remains strong. The S&P 500 well above its 200 day average. However….there is evidence of technical divergence for stocks. …it suggests that a correction may be in order.’ The Fidelity analysis reminded investors of China, Iran and the high price of gasoline. Not to forget, the summary went on to say, ‘Don’t forget Greece.’ The consensus was that while Fidelity wouldn’t recommend a full hunker down mode it wouldn’t rule out taking some risk off the table.

A sunny day Tuesday as J.P Morgan Chase scored by announcing it would increase the bank’s dividend and buy-back shares. The news caused the Fed to release information early (They planned on releasing the news on Thursday) on their latest stress test  (t0 see if buy-backs and dividends would damage bank’s capital buffers). Also the test was to see if banks would have enough capital on hand to keep lending if another economic or financial crisis erupted.  Buying back shares is what investors like to hear and want to see more and more of. They know there will be less shares on the street and a ready continuous buyer of stock. This usually results in share price to increase. This bit of news caused markets to rally to close waaaay over 13,000 on the Dow and 3000 on the Nasdaq. the Naz is still 40% off its highs from 2000.

Not All Banks Passed Stress Test. MetLife, Ally, Citi and SunTrust failed. They test showed that if in an economic crisis the above financials could possibly find themselves strained.

Sell Bonds! Investors have been looking for any excuse to exit bonds said Doug Kass at CNBC. This may be the time when bond traders signal the Fed to start raising rates ahead of their proposed- possible 2014 date. Kass suggested shorting Treasury bonds and investors can do so by buying the ETFs. Kass gave five reasons for his view:

• The flight to safety will likely have a diminishing half-life.
• Flows out of stock funds into bond funds seem to be at a tipping point.
• Confidence is recovering as economic growth reemerges and risk markets improve.
• Inflation remains an issue.
• The failure to address fiscal imbalances could come back and bite the bond market.
  • You can do this but call me for the best etf for you.

Thursday Bond Yields Broke Up! The steep rally in stocks this week saw investors sell bonds and yields moved inversely to price as shares fell. With a view that stocks may be heading higher bonds are finally in trouble as the following chart from technical analyst Michael Kahn illustrates:

And-Michael Gayed wrote that ‘scared money’ was not so much in stocks, although it’s there, it’s in the bond market.

War or No War- The Iranian Nuke Question

Bloomberg-Businessweek examined the consequences of a war to eliminate Iran’s nuclear capabilities. Here is the precise:

• Israel could eliminate the Iranian threat for about 3 years. If the U.S. attacked it could knock the Iranians back about a decade.
• Oil could jump up an immediate $23 a barrel.
• If the Straits of Hormuz were closed the price could jump $60+. Over 40% of all oil exports move through the Straits.
• Any price over $150 a barrel would lop off 2% of growth of the U.S. economy and put the country into a recession.
• The alternative is worse. A nuclear armed Iran would cost us more in defense spending for all time; and the world, and especially the Middle-East, would be less stable.
• The really worst outcome would be a nuclear armed hostile Iran.

Thursday rumors that the U.S. & U.K. had agreed to coordinate on releasing strategic oil reserves was deemed just that – a rumor. In the meantime oil prices fell before moving back up. According to the WSJ the strategic oil reserves can supply 1/2 of the U.S. need for up to five months. Most talking heads agree that the leak was intentional and a message to Tehran.

The S&P 500 Index closed over 1400 for the first time in nearly four years on Thursday. Gold was up to close at $1658 and oil finished the day at $105.45

Does The Street Love Apple Too Much? Customer lines waiting for the new iPad were 75% shorter than they were with the new iPad, but you’d expect that. Still at CNBC the talk was if the run-up in Apple stock was too much too soon. The stock is up 45% in the last 12 months. Traders are concerned and some are vocally cautious of the stock. Apple is key for the Nasdaq, much like IBM is for the S&P 500 Index. Right now Apple is 1.5% of the global market value, according to index analyst Howard Silverblatt.

Consumer Sentiment drops for the first time since August… Households are balking at the price of gasoline. The U of M study showed consumers are positive on jobs and stocks but the price of gas has increased from $2.72 at the beginning of the year to $3.88 in March.

There are few things you can feel good about and (1) bond yields going up is one and (2) home prices soon bottoming is another. Investors should be able to take (see below chart) advantage of both conditions- mark your investment calendars- Buying the inverse Treasury ETFs is one way to take advantage of rising yields on bonds and home building stocks and ETF up substantially the last five months. Barrons.com reports that Beazer Homes (BZH), Toll Brothers (TOL) and the SPDR S&P Homebuilders ETF (XHB) have all seen substantial moves to the upside. Home values probably have another 5% downside which is estimated to hit by spring 2013.

Finally: No Bank Closings for this week. The scoreboard: 2011 - 61 banks closed 2012 -13 banks closed.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.