Bill Cara's Blog for Apr 27, 2011 [See Post-Close report]

Good morning.

No POMO Injection Scheduled Today.

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7:00 - MBA Mortgage Index (-5.6%)
8:30 - Durable Goods
10:30 - Crude Inventories
12:30 - FOMC Rate Decision

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AAPL - Apple coverage transferred with a Buy at ThinkEquity. Price target raised to $450 from $390.

AMZN - PT Lifted from $200 to $220 @ Oppenheimer. Outperform

AMZN - PT Lifted from $200 to $212 @ Benchmark. Buy

BRCM - PT Lowered from $48 to $46 @ Kaufman Bros. Buy

BRCM - Broadcom downgraded to Buy from Conviction Buy at Goldman citing weak Q2 guidance likely driven by wireless. The firm remains positive on shares long-term. Price target lowered to $48 from $52.

FSLR - Upgraded to Buy @ Kaufman Bros citing valuation, geographic diversity, and likely strong guidance on the Q1 report. PT = $165

NOK - Nokia initiated with a Hold at ThinkEquity. Target $8

QCOM - Qualcomm initiated with a Buy at ThinkEquity. Target $75

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"With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly."

- Ben Bernanke

Anyone else think this is going to turn out to be a non-event today?

QE2 is ending in June. We will monitor conditions and make next decisions based on what happens. Interests are still low as unemployment is high and needs to come down. Inflation is generally low other than commodity pressures which should be transitory.

I hope it doesn't turn into a political discourse with the questioners trying to play their positions!

looking at big picture money flow/ROC. The mining space certainly stands out for deteriorating indicators. SPDR sectors showing money flow top out, but that can take weeks to impact the market.

Watching EEM for a potential short position.

bbarberayr,

"Anyone else think this is going to turn out to be a non-event today?"

Yes. And I agree there will be a wait and see period — then some new twist.

As for inflation — All that matters to real people* are (Bernanke excepted) food and energy. If Joe Sixpack ever buys a chunk of copper or coal it may then matter to him too.

Right now it's all about getting your country's currency under the others. The Exports God must be appeased.

* Traders are a separate category where perception trumps all else ;-)

Grym

I agree UUP chart look dismal from the T/A.
However, notice a similar triangle on Stoch leading to the August 2010 breakdown on your UDN chart.

Jack,

Better yields should help the dollar. I notice the 2-year is oversold and due for a reversal.

The level of $1.47 for the euro will be watched before and after Bernanke speaks, says Mark McCormick of BBH. Breaking that level convincingly will show if faith in USD carry trade continues and investors show more signs of wanting to pore into riskier currencies.

I just got an email saying

Today's Fed announcement changed from 1:15pm CT to 11:30am CT

Les,

Missed the overly optimistic forecast of 0.8 per cent growth given by the Office for Budget Responsibility back in March. Seriously though, is this significant or just within a margin of error?

Above.

Setting a new 52-wk high.

The market is teaching top-callers the same lessons bottom-callers have learned.

I'm pretty sure Bernanke was born in Kenya and has no legitimate standing as a US government official. Well, at least the last part.

Based on past experience, I would say a sharp sell-off in metals/miners designed to shake out even diehard believers is in the cards.

2nd ave -

"Based on past experience, I would say a sharp sell-off in metals/miners designed to shake out even diehard believers is in the cards."

Same could be said of the U.S. dollar with better fundamentals supporting that outcome.

Short term, you may be right but Comex manipulations are shallow and brief while silver sits in backwardation near the all time Hunt brothers' high suggesting demand for physical outside the Comex paper lion is overriding it's longstanding manipulation.

Cheers.

AMZN - estimates raised at Credit Suisse. AMZN 2011, 2012, and 2013 EPS estimates increased to $3.63, $4.84, and $6.64, respectively. Strong revenues in 1Q11, Credit Suisse said. Maintain Neutral rating and $185 price target.

AMZN - estimates lowered at UBS through 2012, UBS said. Company is realizing higher infrastructure costs. Neutral rating and $180 price target.

BRCM - price target cut at Citi to $45 from $54 on disappointing guidance, Citigroup said. Maintain Buy rating.

BRCM - estimates, target lowered at Goldman. Shares of BRCM now seen reaching $48, according to Goldman Sachs. Estimates also cut, as the company lacks near-term sales catalysts. Buy rating.

CSCO - estimates, target lowered at Goldman. Shares of BRCM now seen reaching $48, according to Goldman Sachs. Estimates also cut, as the company lacks near-term sales catalysts. Buy rating.

KO - price target increased at Credit Suisse to $80 from $70. Robust business model continues to dominate, Credit Suisse said. Maintain Outperform rating.

Time for some anecdotal evidence. Real demand (seeing is believing) as opposed to paper gains (games?)
http://on.ft.com/hZrnrW

bbarberayr - "Anyone else think this is going to turn out to be a non-event today"

I think its entirely likely we will hear exactly the same thing we hear every meeting lately, pretty much as you said.

However, the press conference is a new wrinkle. The very fact its being added today lends a bit of extra spice to the theater. Will something be said that requires a press conference to fully explain? My guess is no, but - only the insiders can say for sure.

Does FED change its FOMC time to 12:30 PM permantently? I remember the rate decision was to be announced at 2:30 PM and FOMC minutes to be released at 2:15 PM before.
Thanks

Well, I was wrong and now I'm thinking about liquidating positions before they stop out. They were fortunately small. I will wait a bit longer in case this is sell on news kind of thing.

Edit: At least shorting F is working so far.

Edit 2: I went ahead and liquidated shorts except for F and went long SLV seeing the strength, this is going to go up higher PROBABLY JUST LIKE 2006.

Besides, silver topped almost a week after FOMO in November 2010.

Bill if you or your associates have a moment would you mind illustrating an example of the death crosses you remark upon please? Am googling now for some examples but would appreciate looking at one. 8 day and 8 week MA death crosses not something I'm used to hearing of.

If anyone else has links to appropriate literature I would appreciate them. TIA

8 & 40 in a daily time frame. strange. thanks.

http://www.kitco.com/charts/livegold.html

http://tinyurl.com/3pdev9

Feel the Earth shake?

After announcement, Silver is +1.60 to 46.88, gold +16 to new all time high 1523. USD (front month future) is now off 0.30 to 73.70. The cycle low (and today's low) for DX is 73.68. e-minis are up +5 to 1347.

In spite of Bernanke's insisting that printing money doesn't debase the currency, Mr Market is saying otherwise.

beautiful observation. there is of course a reflection point where a USD tanking to lets say 30 (just using as ex) will also cause panic in all Americans and a grave situation in daily lives. Where AAPL at $500 USD wont mean much anymore.

(US) Fed's Bernanke: To reflect consensus of FOMC committee; Reiterates Fed prepared to adjust its holding of assets; Underlying inflation remains subdued
- New claims on unemployment show modest improvement
- Sees moderate recovery to persist through 2011; Acceleration of growth seen into 2012-13.
- Unemployment rate remains above the FOMC central tendency of 5.2-5.4%.
- Lower 2011 growth projections are the result of weak Q1.
- Short term rise in inflation has not prompted FOMC to raise rates at thsi time.
- Continues to monitor for 2nd round effects of inflation.

Q/A: - Expecting relatively weak GDP number for Q1, perhaps below 2%
- Q1 slowdown seen as "transitory".
- Would like to see more improvement in labor market.
- "Dont know exactly how long" until tightening process can begin; Suggests at least a couple of meetings.
- FOMC believe the recovery is sustainable but is watching indicactors.
- Pursuit of Fed's dual mandate (price stability and maximum employment) would support USD in the medium term.
- FOMC believe the recovery is sustainable but is watching indicactors
- Monitoring carefully the rise in gas prices, which add to inflation and sap purchasing power; Says our interpretation for higher gas prices is in supply and demand

After reading that exports make up 1.4% of our 3.0% total growth I wondered if such "exports" include products from US corporations' operations in cheap labor countries (few or no US workers).

The best I have been able to find so far is this:
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o Domestic Exports- Commodities grown, produced or manufactured in the U.S., including commodities imported from foreign countries that have been significantly changed or enhanced in value, in either the United States or a Foreign Trade Zone.

o Foreign Exports (Re-exports) - Commodities of foreign origin that have entered the U.S. but are "re-exported" in substantially the same condition as when imported.

Imports include commodities of foreign origin or domestically produced goods that are returned to the United States with no change in condition or after having been processed and/or assembled in other countries.

http://www.trade.gov/mas/ian/referenceinfo/tg_ian_...

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This seems to indicate that if it is desired to indicate improving US conditions, such "Foreign Exports" may be tallied as "US exports" if they pass through the US at any time.

I do know some of my former clients were manufacturing parts or sub-assemblies in South Africa for assembly in US autos and trucks here. (See "Domestic Imports" mentioned above.) These were not called out as foreign made in any annual reports I worked on. At one time they were all made here.

Since it is so difficult to obtain said info by asking simple questions — "What data constitutes US exports?" or "Are products produced in US foreign operations classes as US exports?" my suspicions are aroused that such padding is in use.

Vague areas like this make me suspect ALL US data.

Grym

US) Fed's Bernanke: QE 2 program to be done pretty much without tapering, end of program unlikely to have substantial impacts on the economy or inflation
- Q&A- markets have well anticipated this step
- Confirms will keep balance sheet stable at end of QE 2 program and reinvest assets - A likely early step would be to stop reinvesting all or part of maturing assets, which would reflect a policy decision and be considered 'tightening'
- Will continue to make judgments whether additional steps are warranted.
- Reiterates belief that QE2 program was effective, saw reduced volatility; were clear from the beginning that the program was not going to be a panacea
- Tradeoffs for QE 2 are starting to become less attractive
- Fed has no specific tools to address long term unemployment, as it is outside of monetary policy
- Hopeful that S&P's outlook change for the US debt may spur Congress to action
- Cuts made thus far in budgets are not likely to impact short term economic outlook; addressing the long term unsustainable deficit is a "top priority"

interesting chart setup GW, clean and functional.

I'm wondering if India and Brazil are still cyclical indicators for AM's. IFN's looking pretty ugly.

"- Reiterates belief that QE2 program was effective, saw reduced volatility; were clear from the beginning that the program was not going to be a panacea
- Tradeoffs for QE 2 are starting to become less attractive"

Translation: this was one big f***-up.

I follow INP and doesn't look good either (I bailed at 72 levels). I'm hearing that India has yield curve inversion, suggesting late part of cycle before recession. This, tightening in China and peaking commodities make me suspect global recession is not out of question.

I finally learned what 2nd Ave practices everyday. As soon as saw my SLV short today not performing, I cut it lose and went long SLV instead. So far it's working.

http://uleak.it/?1rm

oops, i meant the markets are flying.

My guess is USD 70 wont hold and we will see dow 13k

My prediction is dollar will slump for a week or a bit longer before staging some recovery. Simply too many dollar bears around (95% last time I checked).

I laugh at this rally. It is so hard to make money (adjusted for the USD loss) right now!

That is one of the reasons I am almost fully in cash (0%USD though). I honestly am starting to LIKE the USD at these levels and am thinking of buying some if it approaches 71. The way I see it the risk in the USD is decreasing as it falls. If not, one must like the Euro!

Bear E -

CRE peaked in Q4 2007 with all banks - Wall St goliaths, regionals, and community banks - quitting the collateralized real estate market. I see a little speculation in the better properties (location, location, location) at deep discounts to pre-crash values using convoluted financing that includes say $100k down, $125k drawn from a bank line of credit (peronal guarantee with strong financial statements), and $275k held by the seller in a personal debt structure. Most deals are for owner-occupancy by an established business owner while the more experienced players have bought taxes and bank debt hoping to get control of title by default for peanuts. The vultures are circling.

CRE is overbuilt and overleveraged big time. The opportunities are there and if bought right can steeply undercut the existing rental markets running on borrowed time as business owners wise up and take advantage of the weakness by purchasing or renting at significantly lower levels.

Bottom line for me is that the banks are unresolved and this dearth of liquidity and leverage will drive prices lower in CRE for years to come and as inventory is unwound. Most CRE bagholders are just doing a bang up job managing their underwater properties, paying down or restructuring debt, and marveling at the idea that the banks won't foreclose on them.

As time marches on, however, some will give in and let go when managing an insurmountable debt load proves to be an exercise in futility at what will be 'hot damn' prices and that's starting to happen in my Midwest college town market.

Some niche categories like prime student rentals (most University of Michigan kids come from wealthy families) and small service industrial are in demand and have not collapsed like general office, warehousing, manufacturing, and retail.

Key is to identify a stable and sustainable income stream with a rate of return that outpaces a hefty inflation. Remember, CRE is illiquid, the opposite equities and hard to escape from when it turns brown.

Any ideas on stable and sustainable income streams? Crops, mineral rights ...

Cheers.

Dr Strangelove,
Ann Arbor is a very specific market not unlike my college town of Bellingham, WA. I am interested in the 'convoluted financing' scenario you describe. I've seen much better deals privately and via SBA (Small Business Administration) partnering with regional banks to fund 90% for perfectly conventional lending terms. OK so the best terms may be 2-5 years privately, but SBA loans can go to 20 years. I guess it's all a matter of perspective and mine is a bit brighter. Maybe it's timing and we haven't seen the penny drop yet.

What I do see are vacant inner city commercial shops while outer villages and certain industries are expanding to meet a localized demand. Our diabolical parking fines and city red tape could be at fault here! Certainly multifamily is on bouncing back with a vengeance. Our subsidized housing initiatives ((ultra high tech green)are sprouting up all over) funded by the local municipalities and non profits-- I wonder if we have reached a tipping point: when private owners (tax payers) of college housing will find it hard to rent their little old 1-4 plex compared to the shinier new versions closer to nightlife with groovy built in murphy beds owned by these conglomerates.

Today the rubber stamp on banks getting cheaper money longer. While tax payers who gifted them are paying more for our everyday use. When was the last time you paid 0.25% for a loan?

This article came out just before Bernanke spoke. OUCH to 30% interest!
http://www.dailyfinance.com/2011/04/27/bank-of-ame...

Dr. and loanetter,
Do either of you have an explanation for the strength of IYR?

loannetter -

I'm seeing the SBA deals too. I hear they're hard to qualify. Ann Arbor has seen an influx of Chicago hedge fund money building mid-rise student apartments close to central campus with some success even after the ball dropped. But I attribute that to a new overlay zoning district finally allowing higher density pent up demand near the central campus after 40 years of ghetto housing mandated by city beaurocrats and NIMBYs.

Now our DDA is building a massive public project: underground parking but the fines and rates just keep going up! The regional mall just outside of town is weak so that helps the downtown.

That deal I mentioned using a line of credit keeps popping up with the community banks since it doesn't show up as a part of fractional reserve balance. The seller took back a 15-year note at 6% with no balloon for more than half the price. S.P. dropped one third from original list two years ago. Hard to unwind an illiquid asset, no?

"I guess it's all a matter of perspective and mine is a bit brighter."

I live just west of Detroit in a little oasis that some around here say has its own reality so, yes, I'm tarnished.

Cheers.

Dr. S- Why not trade around your positions? Why not (for instance) have taken at least partial profits on SLW at 47? All I'm saying is I know of no One Way streets in this game. Silver could easily drop to the thirties in the blink of an eye. The last time I traded metals/miners in a significant way was late 2005 to early 2007. It's one hell of a sector to be 'all-in.'

Energy companies have moved up with the price of oil based on their reserves in the ground and projected production. Without further oil (or, crazy throught, nat gas) price increases, think they will range trade for a while.

If you want to play energy, the services companies are probably a better place to go as the energy companies have money to spend. Service companies tend to be late cycle as the producers don't invest until they feel comfortable. Own a few small ones in Canada and HAL for my largecap.

Also, same with the metals - think there are better opportunities to play the drillers than the metal companies at this point.

I live just west of Detroit in a little oasis that some around here say has its own reality

My folks lived a few blocks away from the Arboretum (they eventually moved to the Bay Area after retirement). I stayed with them off and on in the seventies. Whenever possible, I would take a walk after dark to the Geddes entrance > down to the (Huron) river > and back. There would be a utility building on the other side of the river with a solitary bulb burning. One experiences exaggerated ups/downs in their late teens/twenties, and I certainly had my share. When down, I would sit in solitude on the opposite bank and commiserate with that lonely swath of light.

Great place to raise kids.

2nd ave -

Wow. Small world. I remember that solitary bulb. Now there's an emergency phone on a very bright lamp post at the base of the path that floods the location with light. The old Forest Hill Cemetery next to the Arb contributes to the vibe and even more so now with more familiar dead friends and family buried there! The peony garden is still there every spring with its centuries old varieties (I got married there) but is now overshadowed by the $1 Billion (yes, Billion) Women's and Children's replacement hospital nearing completion.

Cheers.

Dr S,
Thanks. I did take note when Sam Zell sold out a few years back, smart money leaving. I've been salivating at the SRS chart, having made a few bucks on it before the RS, but fortunately kept sitting on my hands. Only other thought was that the Fed cares little about housing, as the banks can bully the homeowner, so it was CRE that needed to be goosed to save the banks. Perhaps the end of QE2 will tell.

Off topic, this long time goldbug confesses to selling 20% of SLV position today. Just reducing risk a little before May, which may or may not be the time to go away.

I suggest that that institution is playing defense. There are a lot of scalp hunters that given an opening would matriculate to Head Hunters who would whack those sorry pseudo politico/economic hacks at the FED... Today will be remembered as the day the FED cried 'UNCLE.' What a sorry performance from a whiskered mole whose only hope is to be paid expost facto from bankers with short memories and ever shorter bankbooks...A very modest advance on his book "HOW I SAVED THE BANKSTER SYSTEM" or "A COPPER PENNY IS NOW WORTH A NICKLE, AND THE NICKLE IN A NICKLE IS NOW WORTH A QUARTER...would probably get him enough to pay the rent on his townhouse til his landlord raises his rent to $20,000 a month...

Seriously, Bernanke reminded me of Jimmy Carter's speech where he was wearing a cowled sweater in front of the turned up gas logs in the White House while extolling everyone to slide back their thermostats to save energy!!! THAT was a hoot of a lifetime!!!

So Mr. "Subprime is Contained" now extolls the peasants with "inflation is transitory." He is correct. Inflation is transitorially 3 steps foreward and 1 step back! A simple stutter dance step down the stairway to Hell!

What is left of the middle class saver ain't worth more than a rotten roasted turnip. Every 4+ percent that the saver DOESN'T get is transfered to the banking cabal with blown kisses from the FED.

Is it any wonder that asset allocation is being forced to risk? The biggest risk is a 'risk free' return of less than 1 percent per year when ones donuts increase in price by 1 percent per month!

I cry fraud! We must RICO the FED! Fat chance...

I would rather put my trust in the voodoo of a mushroom smoked Siberian Shamman than in a serial printer of colored chits...

Bennie will be remembered as the anti Willie Sutton who robbed banks because 'that's where the money was.' Bennie robbed from the savers to give to the banks because 'That's where the money should be.'

The question that wasn't asked; "If you marked the FED'S balance sheet to market, would you still be solvent?"

actually the one stock I was tempted to go long on yesterday was AMZN. Someone with deep pockets decided to move it yesterday. But with this rally having gained over 100% I'm not so stressed about going long here.

$ dropping softly softly is good and dandy for helping asset prices but for how long? How long before investors start to ask themselves if the $ is going to stop dropping and how do they react en masse to such an event, once someone gets it into their head?

Credit Vad for day trading in this high risk environment, otherwise keeping it light...

4ever,

"Well...probably not, but really should. I see this press conference as a waste of time. All it did was add to the national debt(it had to cost something). I have to wonder why. A diversion of some type?"

BB press conference is his move to the Bully Pulpit. Hey, "free" face time and a chance to reinforce his "I'm doing a good job" image with the gullible masses.

I view EVERYTHING regarding the economy or markets coming from any level of government as deceiving, destructive, and diversionary. These are the people who have the power and want, more than anything else, to keep it.

Two items in my local paper today: 1. In spite of the real estate tax cap passed several years ago there will be a major raise (surprise! They found a way around it!) coming next week. 2. State pension debt will rise 5% this year.

I wonder how many of those "Welcome to Illinois" signs have been trashed at our borders.

At least Bernanke's face doesn't read like a neon sign — did you catch the look on Geithner's this week while claiming to favor a strong dollar? Send them to bed without supper.

Grym

Thanks for the link. Articles like this may put us on the road to fixing some of the troubles we're in.