Iceland goes bust

Iceland banks have become insolvent. The Icelandic Krona was amidst collapse, and trading was frozen on their equity and currency markets. When it was predicted the polar ice caps would melt soon, perhaps few knew that it would happen economically first.

TED Spread Indicates Fear

The TED spread between T-bills and 3 month LIBOR is one indicator showing the immense fear in the markets. LIBOR did drop significantly last night from 6% to around 2%. Regardless, Japan had its second 10% down day in a row, and US markets were down 20% for the week.

World Markets fall off a cliff

Tranches in the trenches

The government bailout focuses so much on how complicated these mortgage-backed securities are. That they are, but that doesn't mean we should enter the going-out-of-business sale, throw up our hands, open our wallets, and say "sell us the items that aren't moving and name your price". These instruments *can* be understood, and it all starts with a new word that was used only by hard-core financial engineers and "quants" until last week: tranches.

Oil spikes up $11 in one day to $139/barrel

A combination of dollar hedgers rushing to buy oil and sellers pulling back supply resulted in a record single-day rise in oil prices today (in dollar terms). The general market tumbled on this and the reports of higher jobless numbers with overall unemployment now at 5.5%.

More Earnings in the Pipe - 08'Q1

Some upcoming earnings to watch:

   Semi-darlings: NVDA, MRVL.

   And Energy power houses: XOM, CVX.

Companies tied directly to the consumer remain the most exciting.

Signs of Recovery -- 2008 Q1 Earnings Recap

Earnings season is in full swing, and one of the surprises is how much some companies have been able to massively grow their profits while most financial news coverage focuses on the doom and gloom. It seems that for well-run companies, this localized down turn has been a bonanza. Here is a sample of some of the companies that have reported incredible gains in profits in year-over-year this quarter:

Tech

• Baidu (BIDU) +100%
• Google (GOOG) +30% +46% (sales)
• Apple (AAPL) +36% +43% (sales)
• IBM +25%
  
• VMWare (VMW) +5% +69% (sales)

Semi

• TSMC (TSM) +49%
• Texas Instruments (TXN) +29%
• Broadcom (BRCM) +22%
• Xilinx (XLNX) +10%

Networking

• Juniper (JNPR) +66%

Energy

• BP +63%
  
• Shell (RDS.A)  +25%
  
• ConocoPhillips (COP) +17%

Chemical

• ADM +42%
  
• Du Pont (DD) +26%

Finance

• Mastercard (MA) +100%
• Visa (V) +28%

Consumer

• Johnson & Johnson (JNJ) +40%
• CocaCola (KO) +32%
• Yum Brands (YUM) +31%
• MacDonalds (MCD) +24%
• AT&T (T) +22% 

Industrial

• CSX +63%
  
• Honeywell (HON) +22%

Costco and WalMart ration rice sales to small businesses

Have a small Chinese food restaurant and need to stock up on rice at Costco (COST) or Sam's Club (WMT) for your growing business? Well as of yesterday, both stores imposed rice rationing restrictions, and your purchases will be limited to 80 pounds per visit.

Stimulus Package Signed

The Economic Stimulus package was signed into law today. Perhaps the most significant aspect of this is that the size of conforming loans has been increased from ~$400,000 to over $700,000. The increase appears to be retroactive for loans funded in 7/2007 and will expire 12/2008. This should create a refinance rush like we haven't seen before with Jumbo loans in California across the country getting converted to cheap conforming money. Rates have already risen 0.25% which is to be expected considering the increased demand anticipated.

Yahoo up 70% on hostile bid by Microsoft

Having just bid up Facebook to $10 billion and Aquantive to $6 billion last year, Microsoft decides to go for the gusto and take a stab at purchasing Yahoo, the long obvious internet bargain sale. The hostile bid weighed in at $45 billion dollars. The mere 4.5x premium over Facebook shows that internet titans come and go.

The Apple Drops -- Fed Slashes 0.75% in emergency relief

The markets remain in madness. Days ago, Apple announced its earnings -- amazing growth numbers of 44% year over year. Unfortunately their guidance of 29% future growth was just not good enough. The stock plummeted 20% over the next two days.

Meanwhile, the Fed came out with a historic 0.75% emergency rate cut. Mortgage rates went crazy for about 36 hours, and rates on conforming 30-year fixed dropped to an amazing 5.1% level. Mortgage rates have since corrected and stand at a still-low 5.5%.

Cisco Effect, Intel Effect, and Recession with a big "R"!

One of those "never posted" entries back in October was to be "the Cisco effect". Cisco had a Q4 2007 earnings announcement that blew away the estimates. They had grown their earnings by something like 25% -- an incredible number for a company of their size. But hidden in the earnings announcement was a foreboding warning of a slowdown in purchase orders from large banking customers. The next day, the market slammed Cisco stock to the tune of 10%, and the market as a whole got dragged down with it. Just last week, Intel dropped 12% in a day on weak earnings and pulled down the entire market. Professional paid-for indicators went negative 2 weeks ago -- suggesting that everyone pulled out of stocks entirely. Not bad advice in retrospect! We are clearly in the midst of a Recession -- perhaps the first of 2-3 quarters. The only thing that hasn't hit yet are the type of layoffs that grow unemployment to the 6% level. Investment opportunity for 2008? Cheap foreclosure real estate! Sell your stocks and look for a house on the cheap if you can afford it...

Oil hits $100 a barrel

Oil prices reached $100 a barrel today, further driving concerns over inflation and a weak dollar.

Return of the Dragon

China China China. It's simply been on fire for the past two years.


All markets, in fact, are at all time highs, so the eternal search for "new money" plays is especially difficult currently. Rather than provide an outright endorsement, this article is more of a reflection on mightiness. Contemplating whether these China plays are overheated is perhaps much like philosophizing on how to attack Bruce Lee only to get a nunchuck in ones face.

• FXI - this index of 25 domestic plays is the "Dow Jones Industrial" of China. Includes the following prominent components:
  
• PTR - PetroChina - consider this the ExxonMobile of China
  
• CHL - ChinaMobile - the AT&T, Sprint, T-mobile, Vodophone, and Verizon of China
• ACH - Aluminum Corp - China's demand for raw materials is simply insatiable.
  
• BIDU - the Google of China. In my 6 trips to Beijing over the past 2 years, I got ample confirmation that all the natives use this engine (official number is over 70%). They say that is simply understands the Chinese language better. They also say it has a killer feature that finds free mp3 music.
• SINA - the Yahoo of China. A popular portal and e-mail service.
  

A few basic factors to consider with China investments are:

+10% growth. Each % of GDP growth has a profound effect on the standard of living residents and business environment of a country. China has sustained GDP growth of over 10% for over 4 years straight. The last time it was at all comprable to US growth of 3-4% was 1989. The US is still vastly larger, but the gap is shrinking fast, and the market has always rewarded growth.

Undervalued currency. Because it maintains a peg to the dollar, the RMB would be much stronger if it were ever to be let loose. The current exchange rate is ~7.5 to 1 dollar. Only last year the predicted true-value was 6 to 1. Now after the dollar slide, the predicted value is 5 to 1. Yes, the peg allows cheap exports, but most FXI components are dominated by domestic sales. So a complete float of the RMB has a 50% upside for US investors of the FXI, and provides a hedge against total dollar erosion in other investments if such an event were to ever happen.

Massive Reserves. The Chinese government has over a trillion dollars of hard currency reserves. This provides an implicit insurance policy for FXI components, as the Chinese government would likely not let any of the component companies fail.

Risks: plenty. Mostly to do with highly overvalued multiples, arbitrage situations where shares have completely different rules and prices for foreigners vs. domestic investors, and banking issues within China that still need to be sorted out.

New $5 USD Bill released today

To stifle counterfeiters who would bleach $5s and make them into $100s, the Federal Mint today released its new grey/purple "honest Abe" fiver.

Since M2 (the # of $ in circulation and in all checking and savings accounts) has effectively tripled in the past 20 years, it is nice to know that when these dollars are pulled out in the form of M1 (the # of $ in physical paper money form) that they will look nice and have the latest security features.

Fed cuts rates by 0.5%

Executing the first ever cut by the Bernanke led Fed, the Fed Funds Rate is now down to 4.75% from 5.25%. Conforming 30 year fixed rates almost immediately dropped 1/4 point to 6.0%. The US continues to ease market fear with cheap, diluted dollars. Stocks cheered, many up 3-5%, but will the euphoria continue to push the S&P500 and other indexes to new all-time highs?

Apple moving into video rentals?

Rumor has it that a meddling user stumbled across some interesting help pages in the iTunes support site. They found links for "wrong video rental received" and other things that implied that Apple (AAPL) may be planning to enter the video rental market. Similar to book retailers, which got gutted by online vendors such as Amazon (AMZN), video rentals which used to be delivered by throngs of mom-and-pop corner shops that are now being threatened by a few online giants:

• NetFlix (NFLX) - The inventor of the concept of mail-in DVD rentals now has everyone after them. Their only hope to achieve dominance is to build their national brand-name outside of their comfort zones (local city market such as the Bay Area) and add subscribers.
• Blockbuster (BBI) - Trying to leverage their bricks-and-mortar strength to add value to and steal away the NetFlix business model.
  

The Wandering Economist

This is an interesting audio Podcast on economics. Be sure to listen to the ones on inflation and ending the gold standard (Bretton Woods Agreement).

Apple offers more for less

Apple (AAPL) continues on its path of being a consumer super-product assembly line. Today it announces several new iPods including one with WiFi capability, and slashes the price on its sizzling iPhone device by $200. These moves should drive its volumes up and improve its market share in the smart phone market. The stock has been volatile in between $120 and $145 over the past few weeks, with investors buying aggressively on weakness despite an over 50% YTD gain thus far. There are many reasons for Apple to remain strong within the technology segment. Besides now being perhaps the largest % component of the Nasdaq 100 Index (QQQQ), it has a small and growing ~4.5% share of the OS and PC market, and a relatively low market cap compared to MSFT and INTC.

Liquidity Scare

This sub-prime lender crisis is well underway. Countrywide (CFC) is undergoing serious issues and may go bankrupt. Capital One closed a large lending arm (Greenpoint). Many financial companies have tanked drastically. There are reasons to believe that things aren't as bad as the markets are making them out to be however. If the wider impact of these sub-prime issues turn out to be overblown, some potential companies to look into are:

• Thornburg Mortgage, Inc. (TMA) - Lender to wealthy, high quality Jumbo clients. Highly leveraged, but their loans are unlikely to default.
• Deerfield Capital Corp. (DFR)
• RAIT Financial Trust (RAS)
• Crystal River Capital, Inc. (CRZ)

All of these issues have high dividend rates, low P/E, and are valued well below their book value currently. Each hit a massive low in mid August -- down over 50% from June. If fears subside, some nice speculative gains may be possible.

A note on sub-prime: when mortgage rates (10-year bond + ~1.75%) hit a historic low in 2003, many borrowers over-leveraged themselves with very cheap 5-year ARMs or interest only loans. The low 2002 rates are beginning to expire, and while some borrowers were already paying 50-75% of income for their housing, they now cannot sustain the increased cost of their ARMs going to a variable rate. As these 5-year ARMs move from fixed to a variable rate tied to the Fed Funds Rate or LIBOR, which has risen by 2-3%, borrows are faced with paying hundreds of dollars a month more for their mortgage. With housing prices softening, more borrowers in such situations are going into foreclosure. This phenomenon is likely to continue into 2008 as the 2003 ARMs expire. Also, with the dollar weakening and inflation growing, there will be pressure for rates to go up over time. However it turns, this should be an interesting trend to follow.