Watch for Oil spike tomorrow as traders on the long side will likely hold positions regardless of build or drawdown in crude inventories. A drawdown will only add fuel to the fire leading to ferocious short covering and further momentum buying, and a build will do nothing more than provide a very shallow intraday dip for sidelined longs to add to/initiate positions. Watch for any dip to be met with strong bids, pushing spot prices well into green by close.
We are well beyond waiting for weekly inventory data to validate supply/demand imbalances at this point, and are now trading on pure technicals with a solid fundamental backdrop of rising inflation (just take a look at todays 1% PPI reading + USD making all time lows vs. euro + all time highs in wheat prices + Gold on the verge of clearing $1000/ounce). Our next near term target in Oil is now $105 which I expect to hit this week, and our $107-110 target (as outlined in our Feb. 10th blog) is right around the corner. Also note that gasoline prices are now rising in tandem with crude prices adding further pressure to an already cash strapped consumer. Here in southern california gas prices are approaching $4.00/gallon!
Watch for equity market to begin taking +$100 Oil very seriously now as uptrend in all commodities continues to gain steam adding further validation to ultimate US stagflation scenario.
Tuesday, February 26, 2008
Sunday, February 10, 2008
Oil Looks Set to Squeeze Past $100...
I've been watching oil intently now for the past couple months, waiting for the price of the black gold to break down and validate theories of a severe recession. Yet through builds in crude supplies, a meltdown in global markets, bears pounding the table on a US recession, and declines in GDP growth forecasts for China, crude has held up extremely well bouncing off the $86 level multiple times. At this point we have to believe that there are an enormous amount of frustrated shorts trapped in oil. I mean they've thrown everything but the kitchen sink at the commodity, and it refuses to break down technically. So what happens next? Well a short squeeze. Sidelined longs like myself have waited for signals of strength to get long the commodity and play the much more valid thesis of rising inflation. Gold has been on a tear on the heels of this thesis alone (busting through $900 and setting up for a test of $1000), and there's no reason why oil shouldn't join the party now after flexing its technical muscles. All the signs of rising inflation are firmly in place with the US dollar continuing to weaken, the yield curve continuing to steepen, and the Fed signaling that inflation fighting has taken a clear back seat to stimulating a lethargic economy. Couple a backdrop of rising inflation, strong technicals, and a hefty short position, with a dose of rising geopolitical tension in Nigeria and Venezuela and it appears we are setting up for a solid squeeze here. Watch for slight resistance at the $96 and $100 levels...but once $100 falls, watch for the squeeze to pick up in intensity sending oil to $107-110 quick.
Friday, February 8, 2008
Initiate Short Position In Urban Outfitters (URBN) @ $30.50...
After posting strong Q4 numbers Thursday, Urban Outfitters has made a nice little move above $30. Yet, the 11% rise in same store sales in Q4 is of course attributable to the Christmas shopping rush. My thesis continues to be that after Christmas, retail sales will experience a rather marked drop off as consumers significantly pare back spending specifically on discretionary items. Well everything Urban Outfitters sells is discretionary...shoes, jackets, shirts, pants...its a bunch of stuff we already have a closet full of, and really dont need.
In addition to the clothes being on the expensive side, so is the stock. When compared to others in its peer group, we can see that URBN has begun approaching rather lofty valuation levels. URBN now trades at almost 3.5 times its $1.4B in sales where Abercrombie and Fitch trades at 1.8, Guess at 2.1, and American Eagle a mere 1.5. Looking at its P/E, the stock looks even more overvalued, with Urban Outfitters now trading at a whopping 35 times earnings, while Abercrombie, Guess, and American Eagle trade at a more reasonable 16, 20, and 12, respectively. While a couple analysts have upgraded the stock recently on expected gross margin expansion, i'm just not buying it. We're in the midst of a recession, whether it be mild or severe has yet to be seen, but under either scenario I continue to believe it will have a significant effect on retailers, specifically mid-to high end retailers such as Urban Outfitters.
Moreover, looking at URBNs chart, we can see that the stock is approaching rather heavy resistance at the $32-33 level...its previous high set back in late 2005. In this kind of market environment I highly doubt URBN will have an easy time breaking through these long term resistance levels.
Therefore, from the $30.50 level we're looking at upside of $2.50 with downside of at least $5-7. With that kind of risk/reward, I'll take the short position no problem with a stop at $33.
In addition to the clothes being on the expensive side, so is the stock. When compared to others in its peer group, we can see that URBN has begun approaching rather lofty valuation levels. URBN now trades at almost 3.5 times its $1.4B in sales where Abercrombie and Fitch trades at 1.8, Guess at 2.1, and American Eagle a mere 1.5. Looking at its P/E, the stock looks even more overvalued, with Urban Outfitters now trading at a whopping 35 times earnings, while Abercrombie, Guess, and American Eagle trade at a more reasonable 16, 20, and 12, respectively. While a couple analysts have upgraded the stock recently on expected gross margin expansion, i'm just not buying it. We're in the midst of a recession, whether it be mild or severe has yet to be seen, but under either scenario I continue to believe it will have a significant effect on retailers, specifically mid-to high end retailers such as Urban Outfitters.
Moreover, looking at URBNs chart, we can see that the stock is approaching rather heavy resistance at the $32-33 level...its previous high set back in late 2005. In this kind of market environment I highly doubt URBN will have an easy time breaking through these long term resistance levels.
Therefore, from the $30.50 level we're looking at upside of $2.50 with downside of at least $5-7. With that kind of risk/reward, I'll take the short position no problem with a stop at $33.
Thursday, February 7, 2008
Mastercard Thesis Validated Today...
Continue to hold all MA short positions, and revisit Tuesday's "Short Mastercard @ 210" blog for a recap of our thesis....
Growth In Consumer Credit Fell In December To Slowest Pace In 8 Months
By Associated Press
2/7/2008 2:47 PM
WASHINGTON -- Consumers increased their borrowing in December at the slowest pace in eight months, additional evidence that economic activity was slowing significantly at the end of last year. For all of 2007, consumer credit rose at the fastest clip in three years.
The Federal Reserve reported Thursday that consumer borrowing rose at an annual rate of 2.1 percent in December, a sharp slowdown from an 8.2 percent jump in November. It was the weakest showing since credit had increased just 1.6 percent in April.
The gain was about half of what economists had been expecting. They had forecast that total credit would rise by $8 billion and instead it increased by $4.5 billion to $2.52 trillion.
The report on consumer borrowing was the latest evidence that economic activity was slowing at the end of last year as households were struggling with a prolonged slump in housing and a severe credit squeeze which has prompted banks to tighten their lending standards.
For all of 2007, consumer credit increased 5.5 percent, up from an increase of 4.5 percent in 2006. The 2007 performance was the best showing since a similar 5.5 percent rise in 2004.
Analysts attributed much of the growth in credit in 2007 to households moving to put more of their purchases on their credit cards as banks tightened up on their lending standards for home equity loans in response to the widening crisis in mortgage borrowing.
Consumer credit, as measured by the Federal Reserve, does not include any debt secured by real estate such as mortgages or home equity loans.
The December report showed that revolving credit, the category that includes credit cards, rose at an annual rate of 2.7 percent in December, a significant slowdown from a 13.7 percent jump in November.
Borrowing in the category that includes auto loans posted a 1.8 percent rise in December, down from 4.9 percent increase in November.
Growth In Consumer Credit Fell In December To Slowest Pace In 8 Months
By Associated Press
2/7/2008 2:47 PM
WASHINGTON -- Consumers increased their borrowing in December at the slowest pace in eight months, additional evidence that economic activity was slowing significantly at the end of last year. For all of 2007, consumer credit rose at the fastest clip in three years.
The Federal Reserve reported Thursday that consumer borrowing rose at an annual rate of 2.1 percent in December, a sharp slowdown from an 8.2 percent jump in November. It was the weakest showing since credit had increased just 1.6 percent in April.
The gain was about half of what economists had been expecting. They had forecast that total credit would rise by $8 billion and instead it increased by $4.5 billion to $2.52 trillion.
The report on consumer borrowing was the latest evidence that economic activity was slowing at the end of last year as households were struggling with a prolonged slump in housing and a severe credit squeeze which has prompted banks to tighten their lending standards.
For all of 2007, consumer credit increased 5.5 percent, up from an increase of 4.5 percent in 2006. The 2007 performance was the best showing since a similar 5.5 percent rise in 2004.
Analysts attributed much of the growth in credit in 2007 to households moving to put more of their purchases on their credit cards as banks tightened up on their lending standards for home equity loans in response to the widening crisis in mortgage borrowing.
Consumer credit, as measured by the Federal Reserve, does not include any debt secured by real estate such as mortgages or home equity loans.
The December report showed that revolving credit, the category that includes credit cards, rose at an annual rate of 2.7 percent in December, a significant slowdown from a 13.7 percent jump in November.
Borrowing in the category that includes auto loans posted a 1.8 percent rise in December, down from 4.9 percent increase in November.
Wednesday, February 6, 2008
Philly Fed Pres Plosser Says "Damn The Torpedoes" Isn't Good Policy...
Finally a man with some sanity! While speaking to a business group in Alabama this morning, noted inflation hawk and president of the Philly Fed, Charles Plosser, sounded the alarm that "there are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible." He warned that this "damn the torpedoes, full speed ahead" type of policy "risks undermining our ability to achieve economic growth over the long run," and "cannot solve the bad debt problems in the mortgage market. It cannot reprice the risks of securities backed by subprime loans. It cannot solve the problems faced by those financial firms at risk of being given lower ratings by rating agencies."
The most noted take away from his remarks, however, were in regard to inflation and the Fed's ability to maintain credibility. Plosser noted that "so far inflation expectations have not changed very much. But they bear watching because there are some signs that they too are edging higher. These may be early-warning signs of a weakening of our credibility, and we must be very careful to avoid that." Well those remarks sent the market heading south quickly as any insinuation of taking away our beloved rate cuts completely freaks the market out...especially when you couple those hawkish remarks with words like "weakening of our credibility."
While the market may believe it simply wants rates cut as fast as possible, I continue to believe (as Im sure you'll recall from yesterdays blog) that the Fed's number 1 priority right now should be regaining credibility. The Fed can cut rates all it wants, but if it loses credibility, Americans will eventually find themselves jobless, yet paying $5/ gallon for milk and a gallon of gas. Its called stagflation, and it very much may be a reality in the next few years if the Fed doesn't do its job correctly. We must recall that the purpose of the Federal Reserve is not simply to appease financial markets, but rather to maintain price stability throughout the economy over the long run. Hence, this is why the Fed is almost always intensely focused on inflation expectations, as once they get out of hand it must drastically adjust monetary policy for fear of allowing its most dreaded enemy to arise....hyperinflation. Once this takes hold it is extremely difficult to work an economy back to stable ground without severe consequences.
While Plosser's hawkish remarks may have been in response to yesterdays call by Merrill that the Fed may be gearing up for yet another inter-meeting rate cut, they did little to dampen expectations of future rate cuts, with Fed Funds futures continuing to price in a high probability of a 50bp rate cut at the next Fed meeting in March, and still pricing in a 1/3 probability of an inter-meeting rate cut.
Either way it is good to see that there is some semblance of sanity within the Fed...we may have some hope of getting out of this alive after all.
The most noted take away from his remarks, however, were in regard to inflation and the Fed's ability to maintain credibility. Plosser noted that "so far inflation expectations have not changed very much. But they bear watching because there are some signs that they too are edging higher. These may be early-warning signs of a weakening of our credibility, and we must be very careful to avoid that." Well those remarks sent the market heading south quickly as any insinuation of taking away our beloved rate cuts completely freaks the market out...especially when you couple those hawkish remarks with words like "weakening of our credibility."
While the market may believe it simply wants rates cut as fast as possible, I continue to believe (as Im sure you'll recall from yesterdays blog) that the Fed's number 1 priority right now should be regaining credibility. The Fed can cut rates all it wants, but if it loses credibility, Americans will eventually find themselves jobless, yet paying $5/ gallon for milk and a gallon of gas. Its called stagflation, and it very much may be a reality in the next few years if the Fed doesn't do its job correctly. We must recall that the purpose of the Federal Reserve is not simply to appease financial markets, but rather to maintain price stability throughout the economy over the long run. Hence, this is why the Fed is almost always intensely focused on inflation expectations, as once they get out of hand it must drastically adjust monetary policy for fear of allowing its most dreaded enemy to arise....hyperinflation. Once this takes hold it is extremely difficult to work an economy back to stable ground without severe consequences.
While Plosser's hawkish remarks may have been in response to yesterdays call by Merrill that the Fed may be gearing up for yet another inter-meeting rate cut, they did little to dampen expectations of future rate cuts, with Fed Funds futures continuing to price in a high probability of a 50bp rate cut at the next Fed meeting in March, and still pricing in a 1/3 probability of an inter-meeting rate cut.
Either way it is good to see that there is some semblance of sanity within the Fed...we may have some hope of getting out of this alive after all.
Bloodiest Of Days Scenario Now Within 7 Trading Days....
I believe my "Bloodiest Of Days" scenario outlined in my January 30th blog is now within 7 trading days of coming to fruition. Technicals have continued to deteriorate, rallies are extremely pathetic and sold into almost immediately, there is no leadership anywhere, and we continue to make lower highs on all the indices. As such I believe we are very much setting up to take out the January lows on this next downleg. Again, I reiterate there are no buyers in the market, and the hedge funds are putting extreme pressure on high beta techs and anything assuming high growth in their models...this is in addition to very heavy fund liquidation from funds around the globe. I am initially looking for 11,100 -11.300 as a new near term low on the DOW, and am looking for the Nasdaq to test 2000. However, once we take out the January lows which I believe will happen on extremely high volume, I believe we may possibly reach an ultimate bottom in the market, and it may be safe to begin taking long term positions in high quality growth stocks (I am working on a post outlining a few picks and will post it shortly). Anyway, we will revisit this thesis once the lows are taken out. Again, as outlined in my January 30th blog, I am looking for a DOW plunge of 600-800 points and Nasdaq plunge of 125-150 in the next 7 trading days. In the meantime, continue to stay short the market or sidelined.
Good luck all.
Nostradamus
Tuesday, February 5, 2008
Bernanke To Recession, "When I Shoot, You Go Down!!"
"The ISM composite non-manufacturing index data came in well below even the most pessimistic expectations, Merrill Lynch economist Sheryl King said, increasing the likelihood that the Federal Reserve will cut key interest rates before the Mar. 18 Federal Open Market Committee meeting."
Here we go again....didn't we just get a 125 bp cut in Fed Funds over the past 2 weeks?? Isn't anyone aware of the fact that this has been one of the fastest declines in Fed Funds in the history of the Fed! Let me tell you what will happen if we do indeed get yet another inter-meeting rate cut....the market will crater and crater bad (unless we crater bad before that which is highly probable). Wait wait wait, hold on a second, I thought the market loved rate cuts!? Yes, they do, but only when the market believes that 1) The rate cuts are actually doing something to stabilize the economy, and 2) That the Fed has the situation under control. Yet, if the Fed decides to cut between meetings yet again, it signals several things to the market:
1) It signals that the Fed is in panic mode.
2) It signals that the economy is in much worse shape than we think.
3) It signals that the Fed does not have time to wait 9-12 months for a rate cut to work its way through the the economy.
4) It signals that the Fed has finally acknowledged that it is way behind the curve in cutting rates.
5) It signals that it could care less about the value of the US dollar.
6) It signals that it could care less about inflation.
It further points to the fact that the Fed is actually slowly running out of bullets to cure this ailing economy. You see, the Fed only has so much cutting power...it cant cut rates below zero! So the more the Fed cuts, the less ammo it actually has left. And once the market realizes that these finite number of cuts are doing nothing to cure the credit crisis, or to get people spending again, the financial markets will begin to panic.
Yet what I will say, in all fairness to Bernanke, is that he is in fact dealing with a confluence of very negative economic headwinds. The current economic environment is extremely severe with regard to strains on the US economy. We have a major credit crisis ongoing, plummeting US dollar, unstable housing market, consumer debt loads climbing, limited access to credit markets, increasing layoffs, unstable global financial markets, high probability of a US recession, declining GDP projections for emerging markets, declining consumer confidence, and rising inflation. Yet, to say that the answer to all these problems is a series of Fed rate cuts is just ridiculous...what the Fed needs to do more than anything right now is to regain credibility, appear calm, and at least make it look like it has the whole situation under control. Once we lose that we're screwed.
I can't help but wonder if Bernanke isn't starting to feel like the Asian guy trying to kill Bullet Tooth Tony in Snatch lol.....Recession = Bullet Tooth Tony, and Bernanke = the Asian Guy lol :)
Here we go again....didn't we just get a 125 bp cut in Fed Funds over the past 2 weeks?? Isn't anyone aware of the fact that this has been one of the fastest declines in Fed Funds in the history of the Fed! Let me tell you what will happen if we do indeed get yet another inter-meeting rate cut....the market will crater and crater bad (unless we crater bad before that which is highly probable). Wait wait wait, hold on a second, I thought the market loved rate cuts!? Yes, they do, but only when the market believes that 1) The rate cuts are actually doing something to stabilize the economy, and 2) That the Fed has the situation under control. Yet, if the Fed decides to cut between meetings yet again, it signals several things to the market:
1) It signals that the Fed is in panic mode.
2) It signals that the economy is in much worse shape than we think.
3) It signals that the Fed does not have time to wait 9-12 months for a rate cut to work its way through the the economy.
4) It signals that the Fed has finally acknowledged that it is way behind the curve in cutting rates.
5) It signals that it could care less about the value of the US dollar.
6) It signals that it could care less about inflation.
It further points to the fact that the Fed is actually slowly running out of bullets to cure this ailing economy. You see, the Fed only has so much cutting power...it cant cut rates below zero! So the more the Fed cuts, the less ammo it actually has left. And once the market realizes that these finite number of cuts are doing nothing to cure the credit crisis, or to get people spending again, the financial markets will begin to panic.
Yet what I will say, in all fairness to Bernanke, is that he is in fact dealing with a confluence of very negative economic headwinds. The current economic environment is extremely severe with regard to strains on the US economy. We have a major credit crisis ongoing, plummeting US dollar, unstable housing market, consumer debt loads climbing, limited access to credit markets, increasing layoffs, unstable global financial markets, high probability of a US recession, declining GDP projections for emerging markets, declining consumer confidence, and rising inflation. Yet, to say that the answer to all these problems is a series of Fed rate cuts is just ridiculous...what the Fed needs to do more than anything right now is to regain credibility, appear calm, and at least make it look like it has the whole situation under control. Once we lose that we're screwed.
I can't help but wonder if Bernanke isn't starting to feel like the Asian guy trying to kill Bullet Tooth Tony in Snatch lol.....Recession = Bullet Tooth Tony, and Bernanke = the Asian Guy lol :)
Short Mastercard (MA) @ $210...
Mastercard has been on a great run over the past several months, and much of it has indeed been warranted based on the idea that during tough economic times, cash strapped consumers do in fact turn to plastic to finance much of their discretionary as well as non-discretionary items. And this is exactly what we have seen.... Mastercard's earnings have been stellar over the past several quarters on the heels of increased consumer transactions using plastic. Yet this rapid pace of increased credit transactions can not go on forever. Why? Because consumers have limited credit lines to finance items. Everyone has a credit limit, and with the increased rate of transactions we can safely say that over time consumers are getting closer and closer to their credit limits. We are also noting that we are in a slowing economy, and in a slowing economy, consumers are less likely to have the ability to pay down debt rapidly. Therefore, increased transactions will likely result in increased debt loads as consumers are less likely to service their debt obligations immediately. Moreover, we can say that the velocity of the move to approach their credit lines is very much a function of the pace of overall transactions. In other words, the more I use my Mastercard, the faster I get to my credit limit. Hence with an increase in the rate of overall transactions we can postulate a theory that consumers are getting closer and closer to approaching their credit limits, and therefore we may in fact begin to see the pace of consumer transactions decline. For you mathematicians out there, note that we are simply looking at the second derivative of consumer transactions. We are not saying that consumer transactions using plastic will decline, we are simply saying that the RATE of the increase in transactions using credit will begin to decline. This is the trend that I believe will begin to surface over the next few months. We will begin to see signs that consumers are getting tapped out in terms of using their credit lines to finance the purchase of goods. This will indeed take a toll on Mastercards earnings, and once the market is fully aware of this, I believe we will see a rapid selloff in the stock. It will be similar to the reaction we saw in Google....as institutions begin to realize that Mastercard's rate of growth is declining we will see a contraction in P/E, as well as a decrease in analyst earnings expectations which will result in a much lower stock price.
Also, taking a look at Mastercards institutional ownership we can see that the float is 85% owned by institutions which means that most of the moves in MAs stock will be dictated by institutional adjustments. Since insitutions are much smarter than the average joe, I believe that they are beginning to expect this trend and are in the process of slowly scaling out of MA here using the volume surge produced by last Thursdays earnings beat. We can see this on the 5 day chart as the stock has failed to close over the 220 level on multiple occasions now. The inability of the stock to breach $220 has also produced a possible double top at $220 on the 6 month chart. Given these observations, as well as my overall bearishness on the market, I believe MAs risk/reward profile warrants a bet to the short side here at $210....and we will make the 200 day MA at $163 our first target.
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