Thursday, April 30, 2009
Bankruptcy better for Chrysler?
He should thank them instead. I think Chrysler under Chapter 11 will have much easier time eliminating and modifying the existing obligations and claims, and faster too. That should eventually cost the government (= taxpayers) less money in the long run.
Except... those CDS contracts. I am very, very curious how those claims will be handled by the bankruptcy judge.
Wednesday, April 29, 2009
Who has CDS on Chrysler's debt?
Who has Credit Default Swap contracts on Chrysler's debt?
Major holders of $6.9 billion secured (1st-lien) debt (JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), Citigroup (C)) already agreed to forgive the debt in exchange for $2 billion cash. That would be slightly under 30 cents on a dollar. They hold 70% of the debt. The remaining 30% is held by 40+ hedge funds, and they are still holding out.
If they don't agree, Chrysler would file for Chapter 11 bankruptcy. If these hedge funds hold CDS on Chrysler's debt, they would set to collect waaay more than 30 cents on a dollar. After all, those holders of CDS written by AIG got 100% on a dollar, didn't they?
Would they drive Chrysler to bankruptcy by not agreeing, so that they could collect on their CDS? Chrysler would be reorganized with or without bankruptcy. But in case of bankruptcy then, who wrote those CDS contracts? AIG again? Or big national banks like JPM and GS? What would happen if these entities were not in a shape to pay out? Taxpayers again? What about those CDS holders without the underlying debt, if they exist?
Maybe there is no CDS outstanding on Chrysler's debt and I'm worrying needlessly in the middle of the night...
Tuesday, April 28, 2009
Daneric's Elliott Waves: All Eyes on the DOW
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Daneric's Elliott Waves: All Eyes on the DOW
Daneric used to be one of the "resident chartists" on the SKF message board (I guess he still is, but he's more focused on his own blog these days). He uses Elliot Wave and other standard TA (trend lines, Fib numbers, etc.) to understand and predict the market movement. In this post, he is showing a potentially bullish scenario for Dow based on his analysis.
Just about everybody I read and listen to is saying the market is due for a huge correction downward (except for those happy perma-bulls in certain financial network), and I myself anticipated as much. Except it hasn't happened. After the sharp V correction from March low, the Dow Jones index has basically been flat for the most of April. It refuses to go down. It still shows good accumulation (On Balance Vol, CMF). Take a look at Dan's site and see for yourself.
As an aside, one of my friend said of this recent resilience of Dow: "The market is pricing in the government."
I think he may be right.
Gold update...
Yes, yes I know Indian buying for the festival is over, but it sure seems there are people behind the curtain pushing and pulling levers...
Monday, April 27, 2009
Gold
Potential move down for gold this week is Treasury auctions. So far, the "safe haven" play is a battle between Treasuries and gold. This is from Yahoo Bond Ticker on Monday:
"Today the market absorbed a $40 billion sale of 2-yr notes, a $29 billion sale of 3-month bills, and a $28 billion sale of 6-month bills. The Fed took a small step to offset the increased supply with a $7.025 billion purchase of securities with maturities ranging from September 2013 to February 2016.
"Tuesday's auction calendar will be highlighted by a $35 billion sale of 5-yr notes. That auction, the swine flu fixation, and the economic data are expected to be the drivers of Tuesday's trade, but the order of their importance is indeterminate at this time."
VIX - the Fear Factor losing steam?
Sunday, April 26, 2009
DBA and Hard Freeze in Oklahoma
Oklahoma, the 5th largest wheat producer in the US, was hit by hard freeze in early April. That has resulted in crop damage estimated between 40 to 96% of the crop, with the exception of Northern Oklahoma where damage is estimated to be only 15%.
Friday, April 24, 2009
Another one that got away from me: SMG
Fffffooooorrrrdddd...........!!!!!!!!!!!
I am mad at myself for not acting on this stock, so I've done some chart analysis to clearly see what I was feeling (that F was a buy). The 3rd chance was just this Tuesday, when it touched the trend line and bounced back up. The very next day, Goldman Sachs upgraded the stock, along with Japanese auto makers, to Buy.
Now I'll have to see if this pop is sustainable. You wouldn't think so but I've seen such a thing sustained. If it falls back and stays not far below the previous top, that may be another opportunity. On a longer-term chart (2 year), there seems to be a large overhead between $4.50 and $6 so the stock could well be bobbing in this area for some time.
The easy trade may be finally over for F, but who knows... Certainly I don't. I thought the easy trade was over every time F doubled in price.
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Looks like my other obsession, NRO, may be joining the "Shoulda, Coulda Stocks" soon... Who could have known, the closed-end fund that invests in REITS and CRE can perform so well?
Thursday, April 23, 2009
Credit cards
I've heard horror stories of people whose credit limit was lowered significantly without notice, APR jacked up, again without notice, or card outright cancelled. My personal experience somewhat differs from these stories.
I have a WFC credit card as an overdraft backup for my checking account. In December, WFC sent me a notice that my credit limit had been INCREASED, and they were offering promotional rate of 2.9% on purchase and balance transfers. I have a JPM credit card that earns UA mileage. In the middle of the market crash last October, they sent me a notice saying my APR will be CUT to prime rate + 2.75%. About the same time, C's offer was a card with APR at prime or prime plus 1% (or some outrageous number like that).
I suppose I could interpret it as desperation to get any business, and say no wonder they are in trouble. Or I could say it's moral hazard. The government has publicly announced that these large banks will not be allowed to go under. So the large banks may think they can count on the government backstop even if these unsecured debts go bust.
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The trade I thought about today and didn't do (as usual) was to play AXP for the AH earnings report. I would have gone long, because that would have been the less crowded trade. Just about everyone was predicting a disasterous quarter for AXP therefore it was more likely that bad news was priced in. COF, which reported on Tuesday, didn't go down much despite bad results (and it went up 17% today). Unlike last week when good earnings results got sold, this week's sentiment seems a bit more positive. Bad news is bought. It will be interesting tomorrow, if any information of the stress test briefings gets leaked.
Tuesday, April 21, 2009
SRS and CRE Bond Spreads
A lot of analysts and traders have been saying that commercial real estate (CRE) is the next shoe to drop (I just wonder how many more shoes are left to drop). News is bad and getting worse.
So you would think SRS, an ETF that seeks investment results which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Real Estate index, would be flying high. The graph, above left, is SRS performance since last October. The huge 2 spikes in October and November correspond to the market swoons that took place. But notice, ever since then, it's been mostly a sell-off on an increasing volume.
The graph, above right, is CMBX index since last October. The index tracks the spread of BBB tranches of CRE bonds (CDO, MBS). Despite all the bad news you hear, the spread has been narrowing.
SRS seemed like such a bargain when it dropped from $240 to $60 and I almost bought it. Glad I didn't. However misplaced this seeming optimism shown in narrowing CRE spreads may be, fighting the trend with SRS looks like a losing proposition for now.
Baltic Dry Index
Not many people (except in a certain TV network well known for its market optimism) predict a quick turnaround in global trade which has absolutely collapsed. Still, the index, a daily average of prices to ship raw materials, is considered to be an indicator of economic activity, and an uptick does represents an increased shipping activity which may be a precursor to production.
I've been monitoring bulk shippers, but they are a wild bunch. Stock prices can easily go up 10% in a day, only to crash back 15% the next day. Most of them corrected more than 90% from their highs.
DRYS: up 9.4% for the day
DSX: up 7.6%
EGLE: up 11%
EXM: up 6.7%
Many of the bulk shippers seem to be priced in for bankruptcy, which could still happen if the credit contracts again and global trade collapses even further. Another uncertainty is excess capacity. New vessels are coming in, which were ordered at the height of the commodity boom (or bubble as some call it) last year.
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12:16pm update
Looks like DRYS may join my "Shoulda" stock list... Up almost 12% for the day. Darn!!
Monday, April 20, 2009
OT: Georgian Waltz
Saturday, April 18, 2009
Easy trade - how can I find them?
Case in point: C (Citigroup). I did have some sort of gut feel that it was a buy when the big investors and hedge funds shorted it to below $1. I even called up the order screen and put in the order to buy C at market for 10,000 shares. Would have cost me $10,000. Worst it could do was to go to zero, which I thought was highly unlikely. It could go to 50 cents or so, like FNM, FRE, and AIG (companies effectively taken over by the government). Upside, I thought, at least up to the conversion price ($3 plus) so as not to piss off the Saudi prince and the Singapore government. That would have been the easy trade, in hindsight.
Instead, I waited until C's share price went up to $2.70 to get in. Upward movement is stalled for now, and it may indeed come DOWN to the conversion price.
When I bought C, I actually had more attractive candidates, under the radar and far less manipulated by the big boys: FITB and RF. They are regional banks which have had their share prices decimated in the past 6 months. I could have gotten the equal amount of shares of FITB as I got C, or 2/3 the amount for RF. Either purchase would have resulted in much greater gain with less stress (although FITB would probably have triggered stop loss on a massive decline on Tuesday).
But since I had spent time studying C, I got totally fixated and ended up buying it instead of other choices. Hindsight is 20/20, they say. It is, so I'd better learn something from it quick.
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Right now, I'm looking for a less crowded trade, place where just about everyone is negative and predict worse things to come. One such recent trade has been successful: MTL. It's a commodity play (iron ore, coal and steel) and emerging market play (Russia). Analysts and economists are still saying commodities markets will not recover anytime soon, and that emerging markets will be hit even harder. The stock is up 70% since my purchase 3 weeks ago. My thinking was that it would be an inflation play long term (I think it is impossible not to have inflation with all the money that Fed is pumping into the economy), and Russia was one of the net creditor nations and its national debt was only 6% of GDP.
One of the less crowded, or much despised, market is commercial real estate. Unlike the Russian stock, I haven't come up with the justification for getting into it yet... I have several stocks (mostly closed-end funds) I've been looking at, but again, I'd better not get fixated...
Thursday, April 16, 2009
BYD
Warren Buffet takes charge...in an entrepreneurial Chinese auto company
What's interesting to me is the CEO's approach to manufacturing. Definitely a uniquely-Chinese advantage: sheer manpower.
"BYD's breakthrough came when Wang decided to substitute migrant workers for machines. In place of the robotic arms used on Japanese assembly lines, which cost $100,000 or more apiece, BYD actually cut costs by hiring hundreds, then thousands, of people.
"When I first visited the BYD factory, I was shocked," says Daniel Kim, a Merrill Lynch technology analyst based in Hong Kong, who has been to the fully automated production lines in Japan and Korea. "It's a completely different business model." To control quality, BYD broke every job down into basic tasks and applied strict testing protocols."
I tend to dismiss any Chinese manufacturing as "poor quality". But I'm open to the idea that their "quality" may be improving, at least in certain sectors and companies. After all, Japanese-made products were known as junk for quite a while before they became synonymous with "high quality".
Combine that with the news that Chinese Reserve Board has been hoarding metals for the strategic industries, and it is getting very interesting.
Monday, April 13, 2009
Everyone loves to hate Goldman...
But before you join the chorus condemning the financials, check this out:
Taxpayers Subsidizing Paper? (Econompic Data)
"In January 2009, the company [International Paper] was notified that its registration as an alternative fuel mixer was approved. On March 20, 2009, the company received its first check from the Internal Revenue Service in the amount of $71.6 million related to an alternative fuel mixture produced and used at 15 of its mills for the period of November 14 to December 14, 2008. The company will continue to submit refund claims based on actual mill production and use of an alternative fuel mixture and will provide investors with information relating to future credits during its regular quarterly earnings calls."
Cool $71 million for one month worth of alternative fuel mixture produced and used at their mills.
And here's the catch:
"Since the 1930s the overwhelming majority of paper mills have employed what's called the kraft process to produce paper. Here's how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it's so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It's a neat, efficient process that's cost-effective without any government subsidy."
Without any government subsidy. So, in order to get the government subsidity, the company mixed diesel fuel to this perfectly efficient, organic fuel so that the resulting fuel mixture qualifies for mixed-fuel tax credit.
$70 million per month of free money for the company, and probably environmentally worse off for everyone else.
Saturday, April 11, 2009
Market Liquidity
The analysis mostly went over my head (they are discussing the impact of quant funds and program traders on the market liquidity, I think), but then I remembered a comment on the Yahoo SKF board some time ago by a former trader at a major financial institution.
He was referring to a day in late March when the market did the intraday about-face with less than 1 hour remaining. The market had been declining, and then came a steep sell-off. When it seemed like it was going to bust through the support, it made a V-shape recovery that came out of nowhere. The SKF poster said that was when JPM (J.P.Morgan Chase) allegedly bought 1500 lots of S&P futures. According to him, that one trade probably triggered 10,000's of other trades in stocks, options, derivatives, T-bills, Nikkei, DAX, etc. Which in turn, I would assume, triggered 10,000's of trades. Possibly millions of trades emanated from JPM's purchase of S&P futures.
JPM's trade created an arbitrage opportunity that started the cascade of activities around the globe, resulting in massive amount of money moved around in a very short period of time, while the slow retail investors/traders watched with their jaws dropped.
The above Zero Hedge article says as much as one-third of the trades are quant trades but it is probably higher. Why? Because increasing number of institutional investors and hedge funds are using the dark pool, where they can trade anonymously without regulators' oversight. Institutions claim that the dark pools have no impact on market liquidity, but just take a look at the recent market volume. It is not low, but not high either given the monstrously huge run-up it has had.
Here's a link to Investors Business Daily's articles on dark pools. NYSE has one, Nasdaq has one, GS, MS (Morgan Stanley), Merrill Lynch each has one, Europeans have theirs.
Thursday, April 9, 2009
Communication Blackout in Bay Area!
11:33AM: This is a disaster. The Internet, cellphone, landline including emergency line have been out since 2am today. The landline within at least part of Santa Cruz county came back at about 10:30am, but still no cellphone connection, no Internet connection, we cannot call outside the area, and no 911 connection for most of the area.
The AREA ... that's San Francisco, San Benito, San Mateo, Santa Clara, Santa Cruz counties (I think, not for sure at this time). The story I’ve heard so far that someone at Verizon accidentally severed a major optical fiber cable at around 2:00am, causing the outage of just about all data communication in the Bay Area. But there are also talks that this is the "terrorist" attack. Just yesterday, there was a piece of news that Russians and Chinese have infiltrated in the nation's power distribution systems, and only a few days ago there was also a news piece that the administration is seeking a legislation to shut down the Internet and other data communication in case of "cyber emergency". Hmmmm. Did someone act to help the government fast-track this legislation?
So, we are all back to the age before the telephone, landline that is. 19th century? My only access to outside news is an AM Radio news station with very scratchy reception. DSL still doesn't work, dialup backup number produces dial-tone, but doesn't connect. News says ATM machines are not working, and credit cards cannot be processed. The police are resorting to patrolling the neighborhood on foot to make sure things are in order.
The market is up significantly I hear, but to my sheer frustration... you guessed it, I CAN'T DO ANYTHING ABOUT IT! There is no way to connect to my online brokerage account - no connection via the Internet, and even if the local landline has come back to life I can’t dial any 800-numbers.
My ISP's latest update is that they are hoping that the situation will be resolved by 6:00PM. PM!
Oh well. My long positions are mostly financials - FAS, UYG, C, WFC, ABK. I would love to take profit on some of them, and even add positions (I would buy more WFC, for one), but there's no way, no how. I'm sure my hedges - FAZ, gold and silver stocks - are down big, and I would love to add to some positions if the price has dropped significantly.
How do companies prepare for the major outage like this? Even if I go to Palo Alto to the Etrade Office there, I still wouldn't be able to trade because their entire system is probably down, and I can't even call them to find out.
WFC announced the largest ever quarter profit of $3 billion, and said they initiated $100 billion mortgages in the 1st quarter which just ended. And I just heard the radio advertisement for mortgages, urging people with low credit scores to contact them, for they can get you a mortgage even if your credit score is 540 or below. Seems like good (bad, depending on your perspective) old times, which I thought ended.
12:12PM: OK, the latest of this communication blackout. 4 optical cables were INTENTIONALLY severed. Someone climbed down 10 feet down a manhole and cut the cables. Also there is some vague talk about disgruntled union members which I didn’t catch well.
12:26PM: Wells Fargo is up 27%. Yippeeeee! Too bad I control only 500 shares. Dow is up 229pts, so it’s well above 8000 again.
1:13PM: Wells Fargo ended up 31%. Holy @#$%. Let’s see, yeseterday’s close was about $15. So it ended near $20!!! My options (strike at $25, July) should be worth at least double!!!
2:30PM” The Market Watch snippet on the radio just said that even the top government officials are turning positive (so why should we doubt their wisdom?). The news host said “President Obama tells us to go out and SPEND, buy a house, buy a car”, and everything will be A-OK soon! Unbelievable behavior.
So Communication Workers Union’s contract expired (last week?). The police and the FBI are investigating. Terrorist act by a disgruntled Union worker? Great. Just what we need.
2:46PM: IT’S BAAAACK!!!!! The Internet sprung to life!