practice update...

Practice account up 73% this year, after an 8% loss last year (starting Oct. 20). Not bad practice.

Treasuries...

... got crushed again today. Yields were up four basis points to 4.69%. I picked up my put option on the 10-yr. note when it was at 4.48%. I was thinking of taking a profit on Monday, because the option was up 30%, but I really have a strong gut feeling that Bernanke will not lower rates until after March, so I will stick with it, even at the risk of some or all of my profit.

Treasuries...

... got crushed again today. Yields were up four basis points to 4.69%. I picked up my put option on the 10-yr. note when it was at 4.48%. I was thinking of taking a profit on Monday, because the option was up 30%, but I really have a strong gut feeling that Bernanke will not lower rates until after March, so I will stick with it, even at the risk of some or all of my profit.

First half 2007 Prediction

Well, I was going to wait a couple more days to post my view of the market's future path. However, when a title like "Dow Falls 9 After Upbeat Economic Data" made it to the top of the Yahoo! Finance news pile, I couldn't resist. Isn't this the same thing that happened with the pessimism at the beginning of last summer? Every time there was good economic news, the market would stumble. That is, until Bernanke stopped raising rates and everyone realized that the economy would be okay. Well, the economy will be okay whether or not Bernanke lowers rates next year. As soon as the market figures that out, the market will take off again. My prediction Dow +10% in the first half of 2007.

Is Russia getting a bad rap?

It seems funny to me that Russia is accused of bullying Georgia and Belarus over its gas dealings according to the BBC. All they are trying to do is bring prices up to market level, but no one says this. In the U.S., gas sells for about $210 per 1000 cubic meters ($6.00 per 1000 cubic feet). Russia is trying to charge Belarus $80.

confused musings and ramblings...

Fintrend Moore Inflation Predictor works better than I give it credit for. I gave up on it at the beginning of December, and minor inflation pressures have continued throught the end of the month.

Now, the new chart predicts even lower inflation than the last two. It's now predicting inflation at 1.25% in August 2007. (Zero to eight months out is its most accurate time period.) The MIP predicts that right now will be the high point for inflation in a long time. The market, however, has been feeling decidedly more pessimistic about the economy in the past month. Is market sentiment a month early, or is the MIP a month late? Is the pessimism a mistake, with lower inflation coming, or is lower inflation coming as a result of a slowing economy, or both?

Aside: I think that United Airlines (UAUA) will do well either way. Either oil falls on higher supply, or oil falls on a slowing economy. It's not foolproof, but it does make me feel safer.

What will deflation do for currency? In theory, it should strengthen the dollar. Also, lower inflation will raise GDP, making it less likely that the economy will fall into a recession.

Hmmm... lots to think about for the new year.

Frontline...

Frontline FRO is converting its single-hull VLCC's into heavy-lift vessels. Frontline owns 9 single-hull VLCC's and 10 single-hull suezmax's. The September issue of Seabreeze reports that dayrates for rig moves ran from $120,ooo to $165,000.

Seadrill...

Seadrill (SDRL.OL) is looking to consolidate the industry. This is no surprise. But now, with an almost $9 billion market cap and no debt as yet, they can buy anyone they want except Transocean (RIG), which is too big.

Let's analyze the industry players according to:

enterprise value
operating income

A lower value means a cheaper valuation, i.e., a more profitable takeover candidate.

The second thing to consider is the number and type of rig these companies own and have under construction. Seadrill is concentrating on deepwater, state of the art rigs that can drill in harsh conditions. For simplification purposes, I will value any rig that can drill in depths of 5000 feet or more at $1 billion.

Global Santa Fe (GSF):
EV/OI=16.5 6 deepwater rigs (5000'+) market cap: 14.92 bil.
Diamond Offshore (DO):
EV/OI=15.0 9 deepwater rigs (5000'+) market cap: 10.61 bil.
Noble Corp. (NE):
EV/OI=12.9 12 deepwater rigs (5000'+) market cap: 11.05 bil.
Ensco International (ESV):
EV/OI=11.6 4 deepwater rigs (5000'+) market cap: 8.19 bil.
Transocean (RIG):
EV/OI=27.2 33 deepwater rigs (5000'+) market cap: 23.96 bil.

The most likely takeover candidates are Noble and Diamond Offshore.

trade deficit...

November brought a record trade deficit with China.

What does this mean?
-means demand for US bonds and Treasuries will put pressure on rates to lower. How much pressure is uncertain.
-increases liquidity. Again, how much liquidity is uncertain.

Thoughts on 12/09 issue of Barron's...

Short RIMM? What do analysts think?

Bank of Japan is much more crucial to global liquidity than Fed. Watch them closely. 0.25% to 0.50% is a much bigger jump than 5% to 5.25% was.

NT - what's cash flow?

Roll over Treasury put to June
-or just buy another one if it's cheaper
-try to take some profit off the table
No. June's more expensive. 2-yr. doesn't have enough strike prices.

Think about taking profit in QQQQ. If I really believe rates are going up, I should sell.
-how cheap are Mar/Apr/June puts?
Soft landing is already priced into market

If the economy tanks, the market will slide. With a soft landing, the market will climb uphill. Remember, there are more contrarians than... what do you call 'em? If the economy recovers well that's probably the sorst news for the DOW, because the market's priced in a rate cut. Two downsides, one upside. The only way the market can do well past Janruary is to go back and forth so no one can make up their minds.

"Ownit Mortgage Solutions, one of the largest lenders to borrowers with marginal credit abruptly closed its doors last week," Randall Forsyth observes in his weekly Barron's column, Current Yield. Why did they close? Because credit derivatives to insure these loans is too expensive or impossible to get. This scenario is a precursor to how credit derivatives will eventually fail. As insurance against defaults gets more expensive, the loans become worthless and plunge faster than if they never had insurance in the first place.

What's PCAR's dividend?

"Look both ways before you cross the street." -If I'm wrong and the Fed eases next year, what can we expect?

trades in practice account

Sell FD @ open.
Short 2 VG @open.

Risky business

Citadel Capital has assets of $12.8 billion. So far this year their costs have totalled over $5.5 billion. Investors pay all costs. That's about 43% for operating costs. Tack on another 20% of profits. Many hedge funds leverage their portfolios by borrowing $3 to $8 for every $1 in assets that they have.

Is this risk worth a 20% return?

Treasuries...

The March '07 10-yr treasury bond 107'00 put gained 45% today. The great thing is that there still is a 25% chance of the Fed lowering rates built into the market. I think I'll hold onto these options until there's a 10% chance or so.

Remember, EVERYTHING is an opportunity.

the Dollar

Just another thought on the Dollar. I think the recent plunge of the dollar from $1.88/Pound to $1.98/Pound was completely overblown. Since the dollar started its decline, we have had good retail sales numbers, weakness in the European economy, a signal from the ECB that they might stop raising rates, and today, healthier than expected employment numbers. I'm sticking with my bet on the dollar in the practice currency account and I just added a bet on the 10-yr treasury bond yield increasing.

Perhaps the Europeans are overly concerned about Iraq... Either way, I see it as an opportunity.

Interest rates.....

The 10-yr. treasury bond is at 4.48%. I think that's too low, and will come higher. I just bought a March '07 put at 107'00 for the practice account. I funded the purchase with excess cash and profit-taking in PDC, PCU, and UAUA. It closed at 109'04 yesterday. I believe it will easily retrace its steps to 4.7% in the next six months.

credit swap derivatives....

Interesting article from Reuters...

Thomas Huertas, head of wholesale banking at Britain's FSA, calls them a "boon to mankind." However, earlier this year, the FSA looked into how banks calculated their risks associated with CDS's.
________________________________________________________

The FSA earlier this year asked banks to use their own internal models to value a particular complex, illiquid portfolio, and was surprised by the results.
"We had a wide variety of approaches and a wide range of valuations," Huertas told Reuters. "We had an interesting dialogue as to how they came up with that range, and it confirmed the difficulties involved."
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Hmmm... something's fishy. On the one hand we have a "boon to mankind." On the other, no one, even at banks knows how to value these things. Let's not forget that they can blow up in our faces.

are rates going up next year?

Barclays thinks so. Now so does Jim Jubak. Thanks, Jim. It seems that the dollar falling is inflationary, and if it causes too much inflation, then Big Ben will raise rates.