A Mess of Mario Draghi's Own Making

European Central Bank (ECB) Chairman Mario Draghi pulled out of his planned appearance at the Kansas City Fed’s Jackson Hole Symposium this weekend. The ECB chief has been under the spotlight since declaring that the euro would not fail and the ECB would not fail it. His appearances since have been highly heralded, as markets wait for follow through. I warned about his scheduled appearance just yesterday, saying, “The euro is likely to face a test after its recent rally, especially if Mario Draghi can only offer more talk without follow through, as I expect this weekend.” So it would appear that Draghi has taken some age old wisdom to heart, and that would be, “If you don’t have something nice to say, don’t say anything at all.”

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Mario Draghi's Mess

“The ECB chief has been under the spotlight since declaring that the euro would not fail and the ECB would not fail it.”

Federal Reserve Chairman Bernanke will address the Jackson Hole crowd, and the world, this Friday morning at 10:00 AM EDT. Seeing as the Fed boss typically plays by the book, he really should not usher in any new Fed policy this week. Rather, he and the rest of the Federal Open Market Committee (FOMC), to which he is bound, will issue policy as prescribed in September following much deliberation and process.

Considering Draghi was scheduled to partake in a panel discussion on Saturday, it would appear that he would likewise not offer much new news. Draghi, like Bernanke, also has a prescribed process to follow and all sorts of other red tape to work through before issuing policy, and especially before launching any new initiative. This makes it highly unlikely that he could do anything more than disappoint the high expectations of the market this weekend. But, he only has himself to blame for the predicament he finds himself in today.

Shaky markets were reassured by his July 26th statement to a London investment conference marking the start of the Olympics. Draghi’s now infamous declaration read, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." Markets mostly focused on the “it will be enough” part, and unfortunately tossed the “within our mandate” portion aside for later chewing. Continuing on an upward trajectory begun in early June, the SPDR S&P 500 (NYSE: SPY) climbed another 3.8% from July 26 through August 28. The SPDR Dow Jones Industrials Average (NYSE: DIA) gained 2.0% and the PowerShares QQQ (Nasdaq: QQQ) has risen 7.9%. Obviously, Draghi has had more influence on the direction of the euro and European shares. You can see the stabilizing impact of Draghi’s statement clearly in the chart of the euro/dollar comparison.


Chart by Yahoo Finance

Draghi’s impact is also prominently behind the more significant gains of European stocks, in comparison to U.S. shares since July 26. The iShares S&P Europe 350 (NYSE: IEV) has gained 7.0% through August 28. ETFs of the hardest hit nations of Europe have done even better; those are the nations that would benefit from ECB purchases of their debt.

ETF SECURITY	CHANGE JULY 26 – AUG. 28
iShares MSCI Spain Index (NYSE: EWP)	+19.6%
iShares MSCI Italy Index (NYSE: EWI)	+15.4%
Global X FTSE Greece 20 (NYSE: GREK)	+11.5%
iShares MSCI France Index (NYSE: EWQ)	+8.9%
iShares MSCI Germany Index (NYSE: EWG)	+8.6%

But since Draghi’s statement, he’s found himself backtracking and qualifying comments. His announcement about missing Jackson Hole to focus on an otherwise busy work schedule was clearly carefully constructed to manage expectations. Spanish yields have expanded since the news broke that he would not appear at the central bank event. However, his reason for not making it, because of workload, implies he’s possibly working on something that might support the euro and the region generally. It’s quite a mess he’s found himself in, and one our own Fed chief does his best to avoid. It is not central bank concern to manage equity market expectations, but stock investors follow closely the words of those who impact the cost of corporate funding. So, wise bankers carefully word every statement so as to keep speculators from reading into anything.

Draghi’s infamous words did exactly the opposite. I suppose the leaders of Europe are happy about that today, since the euro has stabilized, yields have eased, and European equity portfolios have fattened. However, the devils in the game at play will eventually take the candy away and replace it with nails. It’s a game best not entered, and one I’m sure Mario Draghi wishes he did not step into. If this is not yet so, I’m certain that someday he will regret it.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Are Higher Rates Scaring Homebuyers Into Action?

The latest reporting of Weekly Mortgage Applications by the Mortgage Bankers Association (MBA) produced an interesting result. While overall activity dropped significantly on a spike in mortgage rates, applications tied to home purchases actually increased. This begs to question whether a counter-intuitive allowance of rate increase might actually help the housing market. Before I lead you on too far, you should know that I’m relatively certain the answer here is no, and I’ll tell you why.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The MBA’s Market Composite Index, measuring overall mortgage application activity, dropped sharply 7.4% in the period ending August 17. The decline was clearly driven by a dead stall in refinancing activity, with the MBA’s Refinance Index falling 9.0%. This was all driven by a marked increase in mortgage rates through the period.

Average Contracted Mortgage Rates & Changes Across Loan Types

Loan Type	Rate	Rate Change
30-Year Fixed Rate w/ Conforming Loan Balance	3.86%	+10 Basis Points
30-Year Fixed Rate w/ Jumbo Loan Balance	4.11%	+8 BPs
30-Year Fixed Rate w/ FHA Backing	3.62%	+9 BPs
15-Year Fixed Rate Mortgages	3.15%	+3 BPs
5/1 ARMS	2.74%	+1 BPs

Yet, purchase activity increased through the same period, with the MBA’s Purchase Index rising 0.9%. Now, you could argue that the purchase of a home is not a nimble action like the refinancing of a mortgage is, and that the increase therefore is more likely reflective of rates and other factors over the last several weeks. This is an important point and the best argument against the thesis that rising rates might drive homebuyers on the sidelines into action.

Still, many in the industry believe that falling home prices (over the longer term) and falling mortgage rates have had many prospective homebuyers waiting things out. The same theory would thus imply that a sudden jolt higher for mortgage rates in conjunction with the latest increase in home prices could help the housing market. The latest action might incorporate such a psychological draw, with some number of special cases waiting for the best time to buy real estate. However, the latest increase really is more likely just due to the length of time it takes to decide on, contract for and buy a home, and to be rid of any old property held in an illiquid market.

It would be a risky game to play if the Fed were to actually attempt to target higher rates now, assuming they could. I say that because of the great demand for U.S. debt instruments as a relative hedge against external risks. This works to drive rates lower. Most economists would likely warn that a rate increase now would only serve to send the U.S. economy into recession. Our economic recovery out of the financial crisis has been burdened by the tighter lending regulation and higher expectations of mortgage lenders. Institutions like Bank of America (NYSE: BAC) are still working through bad loans and fending off demands of mortgage-backed security holders and insurers, who are demanding to be made whole for alleged faulty loans written by BofA, J.P. Morgan Chase (NYSE: JPM), Citigroup (NYSE: C) and others.

Thus, on net, higher rates would certainly hinder economic recovery and cyclical housing activity. Recession happens to be my current expectation for our economy as is - for this year if not in 2013. It’s the reason why I’ve been recommending stock investors avoid the high-flying housing stocks like Toll Brothers (NYSE: TOL), PulteGroup (NYSE: PHM) and D.R. Horton (NYSE: DHI), which have been benefiting from demand for new homes in a special situation - tight supply environment; and from multi-family residential property construction for rental; and from market share gains from smaller builders. The SPDR S&P Homebuilders ETF (NYSE: XHB) has gained dramatically over the course of the last year. Still, I feel the more important macroeconomic driver will force a tide too strong against them soon enough, and at least see it as a risk not worth taking with other options available for capital. But the new home market and its builders are part of a special situation, and relatively small with respect to the overall market.

Today, Existing Home Sales were reported 2.3% higher, but that followed June’s sharp drop in activity. Sales at a 4.47 million annual pace actually fell short of economists’ expectations for 4.5 million for July. So, despite the headlines, the real estate environment is still far from robust and thus vulnerable to economic shock catalysts like rate increase.

In conclusion, I think it’s safe to say that while there likely is a curious draw provided by higher home prices and mortgage rates for a few shy real estate watchers, on net there would be an overwhelmingly destructive effect to the overall economy and the real estate market by a rate increase today.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The Market is Due for a Gut Check

The broad market indexes are trading at multi-year highs today, but the macro- economic environment is deteriorating at the same time. Stocks have likely benefited from the gradual pace of deterioration globally, versus how far and fast they would fall in a panic stricken economic slide. That is evident in the performance of the “fear index”, the Volatility S&P 500 (VIX), which is trading at about a five-year low. Equities are likewise benefiting from hope, however false it may be, in the Federal Reserve, European Central Bank (ECB) and other central banks globally. Thus, I expect an inevitable gut check is in store, and most likely within the next two months.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The Dow Jones Industrial Index and the Standard & Poor’s 500 Index are trading at 4-year highs today. The SPDR Dow Jones Industrial Average (NYSE: DIA) is up 10.4% year-to-date into Tuesday’s trading day, and the SPDR S&P 500 (NYSE: SPY) is higher by 15% this year, each after accounting for dividends and splits. The PowerShares QQQ (Nasdaq: QQQ) has gained an astounding 23.5% on the year supported by the gains of Apple (Nasdaq: AAPL) and others (Apple marked a record high Monday). This is in a period in which Europe fell into recession and remains in financial peril; as China’s economic engine slows and as the U.S. economy bears the weight of all. It is, thus, counterintuitive.

Stocks have certainly been fueled by the survival of the European monetary union, which would seem to have escaped some of its toughest challenges. The Vanguard MSCI Europe ETF (NYSE: VGK) has recovered since its June trough, and even the Global X FTSE Greece 20 ETF (NYSE: GREK) reflects cautious optimism. But the EU’s issues are likely to reignite chaotic concerns with yield costs to bear, as sloppy austerity cuts into the budget balances it is meant to restore. So as local economies defy recovery, Greece, Spain, Portugal, Ireland and Italy are likely to continue to demand attention from increasingly unwilling partners. And as those partners experience their own taste of the disease that will contaminate the union through to its core, greater and greater commitment will be demanded. The likely outreaches of the ECB and concessions of the so far unwilling will be reassuring to investors, and provide lift from time to time. But eventually, the true picture will be better understood, and it will either provide an illustration of ruination or of triumph.

In a controlled environment, I would say triumph is entirely possible. However, we have a complex environment with all sorts of challenging dynamics to deal with. When China and Russia stand counter to action against a Syrian regime that is rejected by its own people, there is a problem in the global equation. When a war with Iran is undertaken in the tight quarters of the Persian Gulf, with a counterpart who is capable of anything, control cannot be maintained. Disruptions to order cannot be adequately accounted for by the chess players at the Federal Reserve, ECB, nor in Washington D.C. When the market realizes this, one way or another, a gut check is in store.

When those days dawn, investors will be served better by stakes in counter-plays and hedges including the ProShares Short Dow 30 (NYSE: DOG), the ProShares S&P 500 (NYSE: SH), the ProShares Short QQQ (NYSE: PSQ), the iPath S&P 500 VIX ST Futures ETN (NYSE: VXX), the ProShares Ultra VIX Short-Term Futures ETN (NYSE: UVXY) and the VelocityShares Daily 2X VIX ST ETN (NYSE: TVIX).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Sell High-Beta Small Cap Stocks

During my time on Wall Street, I learned all about high-beta stocks and their sensitivity to the economy and stock market. I inherited a group of them when promoted into a stock-picker’s role as an Emerging Growth Analyst in early 2000. The companies I inherited represented my predecessor’s favorite forays into every hot new technology, and I was the lucky boy stuck holding them just as the dotcom bubble was about to pop. I survived though, and realizing a complete overhaul was going to be necessary, I still managed to beat the S&P 500 that year, despite following the high risk group.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

High Beta Stocks

I see too many risks being realized in the coming months, and have determined to warn you to exit most high beta stocks before the fall, especially undercapitalized small-caps. By fall, I mean decline, not the season, though the two may be interrelated. While I present a list below, I suggest investors review their portfolios for high-beta shares, and inspect the fundamentals of each to determine whether corporate specific operating results will be strong enough to fight a tide that will come against the segment in the coming year. It’s already begun.

So I ran a screen looking for high beta-stocks of 1.5 or higher, trading at a price of $5 or more, with up to $1 billion in market cap and up to $100 million in revenue, but without earnings. Those smaller names without earnings but with high hopes tend to take the biggest hit when capital dries up. It’s because they are dependent upon it before gaining operating traction.

My screen turned up 22 stocks that are listed by beta coefficient below (highest to lowest). A couple came through with positive earnings expectations near-term, so I marked those with an asterisk. I then weeded through the stocks one-by-one to understand where greater risk might lie. For instance, companies with higher debt are at greater risk in downturn and should exaggerate decline even further. I was dissatisfied though with the number of candidates for downgrade, as too few were clear cut calls. So I expanded the hunt to include stocks trading from $4 to $5; that turned up a second table of names below. The reason too few candidates showed up in our first screen is probably because many have already been penalized as the global economy has deteriorated. The price action of these stocks precedes and exaggerates tangible economic changes.

You can see that here in the six-month chart comparing the SPDR S&P 500 (NYSE: SPY) and the Russell 1000 High Beta ETF (NYSE: HBTA). The high-beta group led the decline, exaggerated it and has not recovered with the SPY.

This trend likely submerged many of our candidates under the initial $5 per share qualifier starting in the second half of May. Here’s that first list ranked by their beta values.

Company & Ticker	Price	Beta	Debt/Equity	P/S
First Financial (Nasdaq: FFCH) *	12.49	3.2	N/A	3.3
Triangle Petroleum (Nasdaq: TPLM)	6.14	2.7	N/A	21.2
FX Energy (Nasdaq: FXEN)	7.21	2.5	62%	10.3
Blue Dolphin Energy (Nasdaq: BDCO)	6.35	2.4	51%	1.5
OncoGenex Pharma (Nasdaq: OGXI)	14.43	2.3	8%	34.1
Endeavor Int’l (NYSE: END)	8.81	2.2	446%	5.3
Sangamo BioSciences (Nasdaq: SGMO)	5.04	2.1	N/A	18.4
Affymax (Nasdaq: AFFY)	16.71	2.0	9%	6.4
JMP Group (NYSE: JMP) *	5.84	1.9	239%	1.4
Alpine Global (NYSE: AGD)	5.63	1.8	N/A	5.1
Immersion (Nasdaq: IMMR)	5.53	1.7	N/A	5.1
CUI Global (Nasdaq: CUI) *	6.90	1.7	30%	1.9
Nektar Thera… (Nasdaq: NKTR)	8.49	1.7	141%	12.5
IntriCon (Nasdaq: IIN) *	5.28	1.6	66%	0.5
Gladstone Capital (Nasdaq: GLAD)*	8.51	1.6	70%	4.5
OraSure (Nasdaq: OSUR)	10.59	1.6	7%	6.0
Scorpio Tankers (Nasdaq: STNG)	6.38	1.6	38%	2.7
Derma Sciences (Nasdaq: DSCI)	9.63	1.6	N/A	1.9
BroadVision (Nasdaq: BVSN)	8.18	1.6	N/A	2.4
Depomed (Nasdaq: DEPO)	5.10	1.5	N/A	4.8
Rentrak (Nasdaq: RENT)	19.19	1.5	1%	2.3
Alnylam Pharma (Nasdaq: ALNY)	18.44	1.5	N/A	11.6

Since the second list of stocks trading from $1 to $5 per share is too long, I only include stocks trading higher than $4 here.

Company & Ticker	Price	Beta	Debt/Equity	P/S
Agenus (Nasdaq: AGEN)	4.83	1.9	N/A (Neg.)	7.1
Halozyme (Nasdaq: HALO)	4.82	1.6	N/A	9.3
Glu Mobile (Nasdaq: GLUU)	4.71	2.1	N/A	3.9
Array BioPharma (Nasdaq: ARRY)	4.66	1.6	N/A (Neg.)	5.0
The9 Limited (Nasdaq: NCTY)	4.63	2.1	N/A	8.0
Arrowhead Research (Nasdaq: ARWR)	4.62	2.7	20%	36
Mitek Systems (Nasdaq: MITK)	4.52	2.7	N/A	10.7
MCG Capital (Nasdaq: MCGC)	4.49	1.5	87%	4.4
Targacept (Nasdaq: TRGT)	4.33	2.1	2%	1.8
Essex Rental (Nasdaq: ESSX)	4.14	1.7	284%	1.1
GenVec (Nasdaq: GNVC)	4.08	1.7	N/A	3.2
SmartHeat (Nasdaq: HEAT)	4.04	2.5	16%	0.2
Miller Energy (Nasdaq: MILL)	4.02	3.5	8%	4.8
Plures Tech (Nasdaq: MANY)	4.00	5.9	38%	2.4

In the second part of this report, we’ll offer the results of our due diligence into the company specifics of both lists of high-beta stocks. From there we will determine which stocks are the true sell candidates, giving credit to their company specifics. To be notified of the second report via email, follow my column at Seeking Alpha and at our Wall Street news blog.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.