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.