Friday's rally fizzles... Bad numbers from China and Europe... European banks buying bad loans... Jeff nails the oil trade... Dell changes again... Great feedback on Nicaragua...
Negative economic news out of China and Europe today was enough to sink markets following Friday's huge rally. On Friday, leaders of the European Union announced they would directly lend to Spain and Italy's ailing banks. This set the stage for a huge cash injection... But few specifics were given.
The implied bailout sent markets soaring Friday... The S&P 500 was up nearly 2.5%. Oil jumped more than 9%. Gold increased more than 3%.
But the rally was short-lived (though we're sure another big bailout will boost markets in the near future). Today, oil is down 2% to $83.50 a barrel. The Dow and S&P 500 are down around 0.5%.
Unemployment in the eurozone rose to 11.1% in May, according to Eurostat, the statistical agency of the European Union. That marks the highest unemployment rate since the creation of the euro in 1999.
A separate report showed eurozone manufacturing fell for the 11th-straight month in June. According to a survey of purchasing managers in the manufacturing sector by research firm Markit Economics, conditions continued "to deteriorate at the fastest pace for almost three years."
In China, the official manufacturing Purchasing Managers' Index (PMI) fell to 50.2 in June from 50.4 in May. A PMI reading above 50 indicates an expansion in manufacturing activity. So China is still growing, but at its slowest pace since November.
On June 22, the European Central Bank reduced the minimum ratings for mortgage-backed securities it would accept as collateral from its member banks. The ECB also started accepting car loans and riskier business loans.
Pair the relaxation of credit standards with the demand from the European Banking Authority for banks to raise 114.7 billion euros by last week, and what do you think happened? European banks loaded their balance sheets with even more garbage...
With Spain and Portugal leading the pack, European Banks are buying back mortgage-backed securities at distressed levels to bolster capital levels and ECB collateral. So far this year, Spanish and Portuguese banks have repurchased $8.4 billion in asset-backed bonds (more than double the level for 2011). They buy this debt at distressed levels, then book capital gains on par with the discount.
For example, Spanish bank BBVA bought back 638.2 million euros of mortgage-backed bonds, consumer, and business loans, and recorded a 250-million-euro capital gain, according to a June 28 regulatory filing.
In other words, these banks are buying back bad debt they issued leading up to the crisis at huge discounts. And with the ECB as a backstop, they can mark the debt back to face value and book capital gains. So on the surface, European banks are getting stronger... But they're really just loading their balance sheets with more garbage debt. And they're buying these assets because they can't raise money in the private markets.
With relaxed collateral requirements, banks will continue this financial trickery to "improve" their balance sheets because the ECB will buy more and more. And while the market may recover, European banks will be left with loads of awful assets. The European economy won't recover by adding more and more debt into the system.
But the ECB and European banks are taking on more debt. Eventually, the ECB will start directly purchasing bonds (as opposed to making loans as it is now).
Kudos to Jeff Clark on a bold call on oil stocks... In the June 19 issue of the S&A Short Report, Jeff noted "a new buy signal for oil stocks."
Yes, we're aware Porter is long-term bearish on oil (and most of what we write in the Digest is bearish). But no trend goes on uninterrupted. Jeff is a master of trading short-term extremes in sentiment... And as of last week, the oil sector was oversold. Here's what Jeff told his subscribers...
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Oil stocks look like death. The AMEX oil index is down 10% in the past two months. It's down almost 20% since March. Oil services giants like Halliburton (HAL) and Baker Hughes (BHI) are trading at less than 10 times earnings. It's hard to find any analyst, anywhere, who'll say something good about the sector. |
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And as we saw with gold stocks last month, the bullish percent index for the oil sector (BPENER) has just whipsawed into, out of, and back into a buy signal. |
Jeff recommended buying calls in a certain land-drilling contractor. As we noted above, oil soared last Friday. And this company's shares jumped with it... Today, Jeff told readers to close half their position for a 65% gain in less than two weeks.
Amber Lee Mason and Brian Hunt, co-editors of DailyWealth Trader, have helped readers make a small fortune by following the short trades of hedge fund manager Jim Chanos. They've shorted Brazilian oil giant Petrobras, coal producer CONSOL Energy, and DVD-rental firm Coinstar, just to name a few. They've also shorted one of the biggest busts in the tech sector: Dell.
Here's what they wrote in the May 3 DailyWealth Trader...
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As Chanos told the audience at the prestigious Grant's Interest Rate Observer conference last month, tablets and smartphones are stealing growth from the PC market: In 2011, shipments of mobile devices were up 79% over the previous year. PC shipments were up less than 3%. Dell gets about three-quarters of its revenue from PCs and "peripherals" like printers and monitors. This makes the company extremely vulnerable to the shift toward tablets. |
In the May 23 Digest, I noted Chanos called Dell a "serial restructurer," which kept the company from focusing on its core problem (the decline of the PC). The night before, Dell said it was reorganizing to train its staff to sell a complement of Dell products instead of specializing in individual ones.
And today, Dell announced it would buy enterprise management software maker Quest Software for $2.4 billion in cash. John Swainson, president of Dell's software group, said the following in a statement...
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The addition of Quest will enable Dell to deliver more competitive server, storage, networking and end user computing solutions and services to customers. Quest's suite of industry-leading software products, highly talented team members and unique intellectual property will position us well in the largest and fastest-growing areas of the software industry. |
Shares are down more than 1% on the news, approaching 52-week lows. Dell is down 24% since DailyWealth Trader wrote about it.
New 52-week highs (as of 6/29/12): Berkshire Hathaway (BRK-A, BRK-B), iShares Dow Jones U.S. Home Construction Fund (ITB), ProShares Ultra Health Care Fund (RXL), Anheuser-Busch InBev (BUD), Constellation Brands (STZ), Coca-Cola (KO), Pepsico (PEP), Abbott Laboratories (ABT), Eli Lilly (LLY), Alico (ALCO), Hershey (HSY), Union Pacific (UNP), and Wal-Mart (WMT).
In the mailbag... our work has "enlightened" one reader... And another subscriber writes in to tell us how great Rancho Santana is. Send your e-mail to feedback@stansberryresearch.com.
"There is an old phrase about "snatching oneself bald". After reading many of the subscriber comments and questions in the past and now most notably the one from Bruce, I would enjoy seeing the tops of the heads of you both and also those of your staff members! Some of the mail you pint is really priceless. I never know if you are laughing until you cry or just crying.
Thank you all at Stansberry& Associates. Your work has enriched, enlightened and educated me." – Paid-up subscriber Marci
"Funny you mentioned Nicaragua in recent newsletter. I just returned from my first trip to Rancho Santana. The place is everything you described and more. Amazing people, beaches and surfing. Along with the new Clubhouse is a new menu with outstanding food, service and atmosphere. If you are traveling there to get away, you certainly can, but the addition of a fast Wi-Fi connection is huge if you need to stay in touch. Surprised to see many American's visiting with their children. The fact that it is only just a little over a 2 hour flight from Miami makes Rancho Santana is hard to beat and I will definitely be planning a return trip.
Regarding your real estate play, out of all the places I've traveled it is hard to image a better price to value. You can rent / buy homes or property on a cliff overlooking the Pacific for fractions of the price of other locales. I'm still too much of small time player to afford to purchase, so just have to keep renting for now." – Paid-up subscriber Justin T. Thompson
Goldsmith comment: I'm glad you had such a good time at Rancho, Justin. Maybe I'll see you down there one day.
If you missed the note in last week's Digest, we're hosting a small group in Nicaragua from August 1-5. To learn more, read the June 27 Digest.
Regards,
Sean Goldsmith
New York, New York
July 2, 2012