Posts from — October 2006
Oil is Hot Again – Up on OPEC Cuts
Crude oil rose close to $60 a barrel on speculation OPEC members will agree at a meeting this week to cut production because of a 20 percent drop in prices over the past three months.
This wasn’t entirely unexpected. As pointed out by Gartman this morning:
We find it interesting that many of the oil companies shares broke out to the upside on Friday. Shares that had been under severe pressure for weeks and months have, over the past two weeks, found support and in many instances gapped higher on Friday. Valero (which we own in our own accounts here) did so; ConocoPhillips (a client of TGL) did so; Exxon Mobil did so; and our old favourite, Suncorp did so also. The gaps were small in most cases, but exist nonetheless, and all broke well defined downtrend lines extending back to the highs of two, three and four months ago.
October 16, 2006 No Comments
The foundation of a strong economy…
…is not payday loans and pawnshops:
Today EZCORP a pawnshop/payday loan operation surged 17% on 10x normal volume when the company raised 4th quarter earnings estimates. The stock is up over 150% so far this year. If you believe in the sector you may want to take a look at Cash America International another pawnshop/payday loan operation. This one moved up with EZCORP today 4% on 2x normal volume and is (only!) up 90% on the year so far. Finally there is First Cash Financial Services up 33% on the year.
The risks include a higher than expected defaults but the sector killer would be regulation.
October 13, 2006 No Comments
Investing in CUBA – Profiting from the Cuban Market
While the details remain sketchy, consensus is that Cuban Leader Fidel Castro has terminal cancer and will never return to office.
Traders at TradeSports.com, an online gambling site, confirm this view. A contract that lists the odds of Castro returning to power by the end of the year recently traded at 15 out of 100. The price of the contract is the same as the odds of the event occurring. In this case the market believes there is only a 15% chance that Castro will return to office by December 31.
So how can US investors profit from this? Cuba has a large supply of natural resources including oil and nickel. And while the figures are highly suspect, the Cuban economy seems to be growing rapidly.
Cuba’s economy grew 12.5 percent in the first half of 2006, boosted by a surge in the construction, transport and services industries, Economy and Planning Minister Jose Luis Rodriguez said.
A small closed-end fund NASDAQ: CUBA has positioned itself to benefit when the trade embargo is lifted, presumably following Castro’s death. Currently the $14m fund holds shares of firms that will benefit from the opening of the Cuban market. It is not a pure Cuba play; a substantial portion of the assets are allocated to the US, Mexico, the Cayman Islands, Panama, and Puerto Rico, but the security is trading like it is a call option on the leader not returning to office.
Here is a chart that tracks the odds of Castro returning to power and the closing price of CUBA (some data points have been eliminated to eliminate mismatched days on the contracts).
The contract will expire at zero if Castro does not take power by 12/31/2006. This can be due to any reason, including death. You can see the relationship clearly, the worse the odds of Fidel Castro returning to office get, the better CUBA does. Buyers of this fund could see a large jump when the inevitable happens.
October 12, 2006 2 Comments
Appetite for Foreign Equities Growing in US
Is this the sign of a market top? FT reports:
Of the $4,900bn in equities held by US mutual fund investors, $822bn, 17 per cent, sit in funds containing foreign companies, according to AMG Data Services, which monitors mutual fund flows.
Robert Adler, AMG’s president, said on Tuesday: “This is the highest percentage of international securities holdings by domestic mutual funds on record.” It also represents a doubling of this percentage since August 2000.
It should be noted that during the tech bubble a similar uptick in fund assets was visible near the top:
These aggressive funds were the recipients of the largest glut of cash inflow in the industry’s history—$238 billion. On the other hand, investors in value funds, which rose 11% during the same period, actually had a net cash outflow of $29 billion. Then came the burst in the bubble.
This chart illustrates it well, investors moved en masse to the worse performing sector as it peaked. There was nothing unusual about it, money followed returns, but by the time the average investor felt good about the tech sector it was ready to fall.
Options traders are already very bearish on the sector. Why is this important?
A high ratio meant a strong consensus among options traders that the price of the option’s underlying stock would fall, while a low ratio showed a widely shared expectation that the stock would rise. The professors found that the stocks whose options had the lowest ratios consistently outperformed the stocks whose options had the highest ratios.
Here is a table from OptionXpress (to see the full table click on the link and select High Put/Call Ratio) showing stocks with very high put/call ratios. EEM, an ETF with an emerging market focus, shows a very bearish feeling in the market. If you haven’t profited from the rise in foreign equities already, it may be too late.
October 11, 2006 No Comments
Is Fed Action Fueling the S&P?
Check out the chart and analysis from Lee Adler at The Wall Street Examiner pointed out by http://www.agorafinancial.com/ :
The level and direction of stock prices has correlated closely with the level of the Fed’s system open market account. The market sometimes gets ahead of the Fed, or it can lag behind from time to time, based on investors’ liquidity preferences, but it tends to move in the direction of the SOMA, with varying lead or lag times. The market follows the Fed not in terms of rate targets, but in terms of the amount of liquidity the Fed pumps into the financial markets through its daily open market operations. Over the last two years, the Fed has kept the SOMA growing at an annual rate of around 5.35%, with only seasonal exceptions for year-end pumping parties. Stock prices have risen at a similar rate. Since the 2004 high on Jan. 26, 2004, the stock market’s total percentage gain has been virtually the same as the percentage gain in the SOMA.
Coincidence? I’ll let you look at the chart below and decide for yourself:
(Click on chart for larger version)
October 10, 2006 No Comments
South Korean Equities – Time to Buy?
Asian markets were slammed by North Korea’s nuclear detonation over the weekend. One of the hardest hit was its neighbor, South Korea, whose market took a 4% hit on the news. From the London attacks and Madrid bombing we’ve seen international equities markets prove very resilient to geo-political events. They recover quickly after a shock and there is no reason to think this time will be different. Especially so, since this was a test announced in advance by a leader whose specialty is tantrums. Basically nothing has changed:
“This is because the prospects of a nuclear test leading to economic sanctions severe enough to hasten a collapse of the North Korean regime, or worse, spark a full-scale military conflict, are still remote,” S&P analyst Takahira Ogawa wrote.
The easiest was for an investor to get access to this market is by using the iShares MSCI South Korea Index Fund ETF. If the market recovers like in the past, investors could see a quick gain with little downside risk.
October 9, 2006 No Comments
The Borat Effect? – Kazakh Bonds Soar, Kazakhstan’s Economy Growing Faster Than China
Kazakhstans fast oil-fueled growth has forced banks to go abroad for funds according to this Bloomberg article.
Fidelity International, Deka Investment GmbH and Payden & Rygel are going to the former Soviet state of Kazakhstan for some of the highest yields on bank bonds with an investment-grade credit rating.The bonds pay an average yield of 3.05 percentage points more than U.S. Treasuries with similar maturities, compared with 1.8 percentage points for companies worldwide that have comparable rankings, according to data compiled by Merrill Lynch & Co.
Banks including Kazkommertsbank, the country’s biggest financial institution, and TuranAlem, the second largest, are selling bonds to international investors because they need funds to increase lending in an economy that’s growing faster than China’s.
Increased sales have pushed down yields (see chart) but based on the credit ratings of the issuing banks, they are still a bargain.
October 9, 2006 1 Comment
Emerging Markets Short of Bargains
Increased interest in emerging markets from new ETF’s and hedge funds has made bargains scarce says the frequently quoted Mark Mobious in this recent Financial Times article.
But despite their recent strength, emerging markets are not too highly rated. They are on single-digit price/earnings ratios, dividend yields of 5-7 per cent and price-to-book valuations of one to two.
“Historically, markets are not expensive, which poses a dilemma for us. Being bottom-up value investors, we have stuck to our knitting, holding on to stocks and searching for more.”
Investors generally demand a higher return to hold emerging market stocks due to poor oversight, lack of property rights, and political risk. A recent investment theme has been the difficulty of diversification due new correlations of instruments which previously had been considered unrelated.
October 5, 2006 No Comments
Is Singapore Housing the Next to Fall?
Bloomberg speculates that the “frenzy” in Singapore’s housing market could have painful consequences, “…if the excesses continue unabated, a collapse may occur, perhaps as early as next year.”
As you can see from this chart Singapore’s market doesn’t have anywhere near the froth of other markets world wide, so why the worry? There are reasons has to do with the nature of the market. The housing market is almost entirely supported by the state of the world economy:
Nine out of 10 local households live in their own homes, typically a Housing Development Board flat. Fewer than 22,000 Singaporean families rent private condominiums and mansions.
Rents and prices of 231,000 private dwelling units and apartments are thus almost entirely supported by expatriate families living in Singapore.
If there is a global slowdown firms will be quick to trim back and the situation will be exacerbated by the fact that demand was not driven by locals in the first place. If a slowdown occurs when the article predicts many new units will be coming to the market just as demand is declining.
October 4, 2006 6 Comments
Is a Big Move in the Euro Coming Soon? – Currency Volatility at Record Low
A report from Dailyfx.com points out:
It is interesting to note that this is the tightest the bands have ever been for EURUSD (since the advent of the euro in 1999). Going back 10 years with synthetic prices, there are only two instances when volatility was this low – December 1996 and August 1998. Both instances led to breakouts within 2 weeks and moves of over 1,000 pips in less than 2 months.
If a directional play is too bold another way to play increased volatility is by using options. A long strangle will allow a trader to profit from increases in volatility without a huge premium.
October 4, 2006 No Comments
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