Baltic Dry Index

Shot up 2.58% today. The Baltic Capesize Index shot even higher, up 1,108 points for a 15% gain. Forbes reports this in their article "BHP/Baosteel Deal Drives Shippers Higher" The meat and potatoes of the news is that Baosteel just upped their supply from BHP from 6 to 10 million tons per year for 10 years. That's almost 70%! The price is still not agreed for the coming annual period starting April 1st, but it doesn't look like China will be getting what they want, if they are increasing imports 70%. Here's the picture going forward:

Rupinski said investors are looking ahead to the end of February, early March when there’s expected to be a lot more movement of dry bulk cargoes as the Chinese seek to replenish their steel and coal inventories,
which are at very low levels.
"A lot of cargo is being withheld right now," Rupinski said. "There are millions of tons of coal and iron ore that really haven’t been moved and that are expected to be moved in the next couple of months to get as much moved before the iron ore prices increase."

This is looking good for DRYS. Time to start thinking about taking some profits. If the Baltic Dry Index continues to rebound, they could easily go to $80. For the moment, I will sit back and wait for a deal on iron ore pricing to be announced. Then the Baltic Dry Index will really go through the roof.

Fed Cuts...

by a half point. Didn't get it up here, but that was obvious beforehand considering TOMO operations from yesterday and today. The weakest collateral was bid and accepted at 3.15 and 3.17%. The banks are still not showing any great desire to borrow except at very low rates. The rate for Treasuries was 2.15% That's far below both Fed Funds Rate and ten-yr. Treasury yield.

I went into this news 50/50 long short because I'm still not sure how the market will react. The initial jump was to the upside, with financials benefitting.

Sometimes, You Just Gotta Laugh

Seems Bernanke got egg on his face this week. Societe General reported the largest loss ever due to a "rogue trader", $7.2 Billion. It seems that the process of unwinding tens of billions of positions in stock index futures caused the global plunge on Monday and Tuesday. (see whole story at Bloomberg) Among other hilarious details is that Societe General took the opportunity to sneak in a $2 Billion loss on subprime mortgage derivatives as well. Here's a great quote, "The company said it's suing the trader, who had a salary and bonus of less than 100,000 euros a year and worked at the bank since 2000." Wow! How will they get anything back? Make him come back to work for free? It gets better. "His approach was to balance each real trade with a fictitious one, and his ``intimate and perverse'' knowledge of the bank's controls allowed him to avoid detection, co-Chief Executive Officer Philippe Citerne told reporters. " It also seems that the trades were "massively in the money" until the last couple of weeks. Never fails. When you are trading, you usually lose if you don't take profits that are "massively in the money." Why don't banks ever discover their rogue traders when they're making money? This story is the greatest hooey I've ever heard. And one final gem. "He ``breached five levels of controls,'' Christian Noyer, the governor of the Bank of France, said at a press conference today. He described the trader as ``a computer genius'' and said he was told he was ``on the run.''

"On the run," eh? Next we'll be hearing that they're making this into a movie. I can't wait.

Up is Down and Down is Up

More churning in the market -300, +4, -75, etc. Bad stocks (financials, retail, homebuilders) up. Good stocks (tech, commodities) down. The market seems to churn whenever it's near a top or a bottom. I'm thinking of shorting more homebuilders with what promises to be a dismal spring selling season. The homebuilders (ITB) index is up 8% at the moment, and 15% off its 52-wk low. I guess some jokers think that the rate cuts will help people buy more houses. But they didn't read the foreclosure report from Dataquick. California foreclosures are up 430% yoy for the fourth quarter. On top of that, mortgage rates have barely budged from Bernanke's 5.25 to 4.25 cuts. I doubt that the last one will help much.

The thing that makes me jumpy about being long in anything right now, even though I think we're overdue for a bounce is that the whole market has now been throttled. There's nowhere left to hide. Not even in China, or anywhere else. Only treasuries are safe. The 30-yr. dropped to a record low yield today of 4.12%.

Now, here's the scary thing: the futures market is pricing in the chance of another 0.75% cut next week.

Then there's the ECB saying that it won't follow the Fed and lower rates. I think it's time to short the Euro and the Pound and go long the Yen. Europe's consumer spending is in a downturn, and British property prices are dropping.

trades

Bernanke bailed out the market today with a 0.75% point rate cut, the biggest since 1984.

I bought what was down, namely RIO, and sold what was up, namely RYL and MER.

Trades

I made some trades today, with the market selling off again. First, I covered AIG at 51.81 for a 17% profit. They were down 5% today alone on news that Hank Greenberg, their ex-CEO and largest shareholder was looking to sell part of his stake. Longer term (6m to 1yr) I expect that Ambac's downgrade will hurt them. their so-called AAA subprime exposure will soon have nowhere to hide. I expect that MBIA will be downgraded in short order as well. Short term, I think AIG's oversold. We're a couple of quarters away from any news of this coming out. Maybe Hank can see the writing on the wall. Either way, I want them to bounce about 10% off their near-term bottom.

Second trade: covered Wells Fargo. Went short at 32.56 on 12/06/07. Covered today at 25.51 for a 22% profit. Again, long term, they're in a world of hurt. They have a huge home equity loan portfolio. It's mostly linked to prime lenders, so foreclosures have been few and far between. However, since SoCal property values have fallen 16% from the peak, as the next wave of prime loans defaults, the home equity loans on top of them are already completely worthless. There will be no recovery on them, and the losses will go straight to the bottom line. Again, like AIG, this is a short-term oversold story. I want the market to bounce back a little. Also, I foresee that they will have big problems with their credit card portfolio.

Third trade: Bought RIO. There are rumors of a 70% price increase for iron ore being a possibility. I don't think that this is even remotely being priced in. Another report says that China has already agreed to 30% increases. This, together with record production means that 2008 will be a record year for profits. One more thing about iron ore prices: there are no derivatives for speculators to manipulate price with. The only people who can manipulate the price are the producers, because control is wielded by BHP, Rio, and Vale (70% of world market). Right now, they are exercising that control by shutting down production. A measure of their success is the fall in the Baltic Dry Index. With agricultural commodities, copper, and iron ore at seemingly incredible valuations, why is the shipping index down 40% in three months? There is a fundamental disconnect between product at record prices and collapsing shipping rates (which are not due to a huge new supply of boats, as far as I can tell). If Japan is willing to buy huge new orders of wheat at all-time highs, can they be worried about a few cents a bushel more for transportation? No. My guess is that the iron ore companies are hoarding production. When they get their contract, either they or the shippers or both will skyrocket.

The risk to the iron ore miners is that China has a market crash before they finish negotiations. Even if they do, however, the central government will probably respond with more public projects. Public projects means infrastructure which means more iron ore. Even with a crash, iron ore should be the last thing to slow down.

Merrill Lynch

The news on Merrill Lynch is worse in every way than for Citigroup. Revenue was negative. How is that even possible? Book value dropped 25%, so the stock is now trading at 1.75X book. GS is at 2.1X, but they're making money.

On top of that, the bond insurers MBI and Ambac have fallen 30%+ today. (I knew MBI was a great short at $16.71, but the shares were already overshorted.)

Thoughts for Today

The Baltic Freight Index is down because of iron ore miners shutting down supply to pressure China during their price negotiations. 30% iron ore increase is in the bag, but the miners want 50%. They may very well get it… China’s supplies are rumored to be low, they’re building infrastructure for the Olympics, they’re being pressured by Indian tariffs, their attempts to buy out smaller miners in Australia is taking forever, spot prices for ore in China are up over 100% of last year’s contract price, etc.

I expect a crash in China, possibly this year, probably next year, so this trade makes me wary.However, I do see this as a possible short term trade for, say, RIO (or if you have lots of balls, DRYS) until the new contract price is negotiated. I think the miners will get their price.

Question is ..... Do I have the balls to buy DRYS?

Another thought:

Inflation #'s out today: 2007 4.1%. That's the highest since 1990, when inflation reached 6.1%. The next year there was a recession. Coincidence?

Citigroup

Citi announced $18 B in writedowns, $10 B in losses, and $12.5 B in dilution of shareholders, euphemistically called "capital infusion."

But the biggest number is revenue. The reason the loss was double expectations was not the size of the writedown. It was a corresponding loss of revenue from Ponzi scheme operations. Even when the writedowns cease, revenue will remain impaired for years.

Let's try to estimate how much Citi's value is impaired by loss of revenue alone. EPS for 4Q06 was $1.03. 30% of that is $0.31. That comes out to yearly EPS of $1.24. At a market multiple PE of 15, we get a fair value price of $18.60/share.

Citi has a long way to fall. Add in 8.5% equity dilution. Subtract $875 M in yearly interest for the capital infusion. On top of that, Citi's Tier 1 capital ratio has fallen to 7.1%. That leads me to believe that their new CEO, Vikram Pandit, wanted to take more writedowns but couldn't. We've got more on the way. Take my word on it.

Crap!

Tried to short CFC at close... Schwab told me that I need $100K + finder's fee for them to find me shares to short...Shorted MBI instead at $13.96. It's bounced 26% off its low, and apparently there's still room to short it.

Another trade:

Closed UAUA @ 32.52 up 30% since 1/08 @ 25.00.

Boooo-yah!

Seriously, though, I am watching several things for market sentiment. If BAC does indeed buy CFC (it's the only way they don't lose their whole $2 Bil from last summer) then I'll just have to short BAC sometime. This would give the financial sector a humongous bounce. I need some ammo for this possibility. Also, at the end of the month, we have Bush's State of the Union address Jan. 28, and the Fed meeting Jan. 29-30. Bush will almost certainly announce a one-time tax rebate of $500-1000 for the working man. This will boost the market. However, I don't see Bernanke lowering rates a half point, unless economic news gets worse over the next 2 and a half weeks.

Falling into Place

As I predicted with help from some insightful minds, the ECB refused to lower rates. However, the future seems less certain, as Germany's economy is also slowing. This move by the ECB has bolstered the Euro, and clearly shows that they mean to slow their economy even more. Short term, this is good for China, long term, it is bad.

So, my question is, when do I short China? Timing is everything. FXI is about 22% off its peak of last year. It's only bounced 9% off the recent low of $160. Then there's this sentiment that the Chinese government won't allow a crash before the Olympics, as if they could prevent one if they tried. It is true that after the Olympics, they might tighten lending more than they already have, but that just tells me that if I wait til then, It'll be too late. The correction that everyone expects will occur after the Olympics will probably occur before the Olympics, with a nice bounce afterward.

Overall, however, it's still tough to time. One of these days, I'll just have to go for it. I mean, 50% of their GDP is foreign investment, and they cannot afford to purchase the value that they add to products. There goes almost all the rest of their GDP. It's all a sham, because 80% of it is not self-sufficient or self-sustaining.

Across the Pond

German retail sales down 1.5-1.8% for 2007. Sales accelerated downward in the fourth quarter by a 3.2% loss. This can't be good for the Euro vs. the dollar. This is even worse for China. Europe had passed the U. S. as the chief destination for Chinese goods earlier this year. I don't see that continuing for very long.

Bought 41 UAUA at $25 today at the open.

Closed CFC at $5.63 yesterday.

Not bad at all. I may have missed the boat on shorting CMG. They've dropped from 155 to 117. Too bad. But since that's their first drop, I'll have to wait a month for a rebound.

yippeee!

Wow! What a wild couple of weeks. I finished out 2007 up 4%, + another 4% on the massive dividend from IPSU that gets paid this month. After the wild swings and excellent forecasting (even if I have to say so myself) I was disappointed with an 8% return. It didn't even recover 2006 losses.

However, the market's turned completely in my favor. I closed CFC today for a 51% profit in just over a month. Last Friday, I covered KBH and TOL for substantial gains.
I've cashed in almost double last year's gains already. With all this talk of recession, I think now's a good time to take a few chips off the table and wait for a bit of a rebound. Also, this will let me reshuffle my positions. Short financials and homebuilders is getting a little crowded.

The thing that bugged me today was the question "what should I buy?" as the DOW dropped over 200. After the close, I noticed that airlines dropped significantly, especially UAUA. I will buy it tomorrow at the open. It's down to a 52 week low, and has 3 straight quarters of solid operating profits behind it. I think it's a steal.