Late last week, Boeing (NYSE:BA) said that its long saga of delays and frustrations with the much-hyped jet are coming to an end. The first Dreamliner is now on track to leave terra firma by the end of the year, and the jet will actually be delivered to various international airways by the end of 2010.

Just how late is the Dreamliner? Japanese airliner All Nippon will get the first in 2010… since they were originally promised delivery by the start of the Beijing Olympics.

“My next buy recommendation is based on some of the historic changes happening in air transportation,” notes Chris Mayer, who chronicled the Dreamliner saga in the latest Capital & Crisis alert. “One of the key drivers of this change is what I call the Silk Roads of the sky. The aerospace industry has a $6 trillion backlog for new aircraft — which will double the global fleet over the next 20 years.

“In large measure, new and booming trade routes will link all kinds of cities and markets flung all over God’s green footstool. There are hundreds of new airports planned and thousands of new planes that will connect China to Africa to the Middle East and more.

“The thing about the new aircraft is that they are titanium intensive. Titanium is a silvery, lustrous metal that is corrosion resistant and has the highest strength-to-weight ratio of any metal. Aircraft manufacturers love titanium, especially now that the market has crushed the price of titanium, along with everything else.

“That creates some space for us to buy a quality operator now. Titanium prices are way down. Sentiment is terrible, with most analysts only lukewarm to the idea. Most of the near-term news is bad. That gives us a great price to get in on a promising long-term story. Of course, this is already in the process of changing, thanks to the Dreamliner announcement.”

Source: A Dream-like Time to Invest in Titanium

Wall Street cheered the announcement as Boeing’s stock soared more than 6% in New York trading after the company said it still expects the 787 to be profitable.

The rally came despite news that costs for the first three test planes would be charged-off as having no commercial value, resulting in an estimated pretax charge of $2.5 billion, or $2.21 a share, in the third quarter. Boeing said the charge wouldn’t affect its cash flows.

“This new schedule provides us the time needed to complete the remaining work necessary to put the 787’s game-changing capability in the hands of our customers,” said Boeing Chief Executive Officer Jim McNerney.

The 787, already two years behind its original schedule, was scheduled for its first test flight in the second quarter of 2009, but the flight was delayed so Boeing could address newly discovered structural problems. The latest development marks the seventh delay in the production cycle for the highly anticipated plane.

“The real challenge for Boeing is to actually stick to this revised 787 timetable — something it has been unable to do in the past.” Rob Stallard, a New York-based analyst with Macquarie Capital Inc., wrote in a note to clients obtained by Bloomberg News.

All Nippon Airways Co. Ltd. (OTC: ALNPY), which is scheduled to take delivery of the first 787, was quick to register displeasure with the latest delay.
“We understand the need to make the best and safest aircraft possible and appreciate that delays due to engineering issues of the current nature must be solved in order to move forward and achieve this,” ANA said in an emailed statement obtained by Reuters. “However, as launch customer and future operator of the 787, the length of this further delay is a source of great dismay, not to say frustration.”

The repeated delays have cost Boeing millions of dollars in penalties and concessions to customers.

Major airlines have used the delays as bargaining chips to squeeze concessions from the plane maker on delivery dates, incremental payment schedules and even the final purchase price.

Some airlines have gone so far as to threaten to cancel orders for the 787, as well as larger 777s, because of delays caused by disruptions at Boeing.
“Boeing doesn’t realize how much they’re hurting their customers’ plans,” Akbar Al Baker, chief executive officer of Qatar Airways WLL told The Wall Street Journal at the Paris Air Show in June. It’s now uncertain when that airline might receive the first of 30 787s it had ordered to be delivered starting in 2011.

The fastest selling plane in history, the Dreamliner has racked up over 900 orders since it was announced in 2005, largely based on fuel efficiency.  With recent cancellations that number is now closer to 850.

In addition to technical problems, getting the plane to production has also been hampered by major labor disruptions.  A prolonged strike by machinists in 2008 was largely responsible for an 8% drop in aircraft sales.  Commercial aircraft generated $28.3 billion of Boeing’s $60.9 billion in sales last year, behind only defense contracts.

“Work stoppages over the past several years have cost Boeing $9 billion in revenue and $2 billion in lost profits,” Sen. Mike Hewitt, R-Wash. told the Spokesman Review.

The setbacks in bringing the plane to production have had a “significant impact” on company finances, Boeing Chief Financial Officer James Bell said in an Aug. 20 memo to employees obtained by Bloomberg.

Despite Thursday’s market rally, Boeing’s stock has lost more than half its market value since the 787’s first delay in October 2007.  At least seven Wall Street analysts have downgraded the stock since last December, including Credit Suisse (NYSE: CS) and Barclays Capital PLC (ADR NYSE: BCS).

Source: Boeing Will Test Dreamliner in 2009 but Delays Delivery, Again

For a bunch of financial writers, we sure do a lot of talking. There is no debating we have a lot of interesting discussions around the TFN office. Yesterday we got into an in-depth conversation about penny stock investing.

The question: what does the perfect small cap look like?

Of course, each of us had differing opinions based on our own theories and experiences, but we came to one obvious conclusion. Give us a small cap that has the books of a Blue Chip and we will show you a winning pick.

As if it was some sort of divine intervention, our conclusion was proven to be deadly accurate this morning.

When I initially recommended SpongeTech (OTC BB:SPNG) to Hot Stock Confidential subscribers on August 13, I said, “The company’s balance sheet reads more like a blue chip than a speculative penny pick.”

It’s true. SpongeTech was highly undervalued. It was buying back its shares and is growing like the national debt.

The recommendation was only made two weeks ago, but already it has paid off. I advised readers to sell half of their positions for gains of 30% today. By locking in at today’s price, we can afford to ride out any future volatility.

Room for more

Almost instantly after sending out the sell alert, another “small-cap Blue Chip” popped up on my screen.

The headline from the Associated Press reads, “Kewaunee Scientific raises dividend to 10 cents.”

My first thought… who in the world can raise their dividend in this economy?

For any investor who has ever studied signaling theory, this is the ultimate buy signal from the company’s management. It shows that Kewaunee’s (NASDAQ:KEQU) top brass is confident growth is going to exceed shareholder expectations organically.

Investors rewarded the company by increasing its share price by as much as 8% during the session.

Of course, digging through the company’s books, it is obvious this company is a Blue Chip in a small-cap shell.

With a market value of just $33 million, many of this company’s brethren barely have revenues worth noting. Kewaunee flexed its muscle by sporting a top line of $104 million last year. Best of all, the company turned the sales into a net profit of $4.2 million.

A 4% margin is not worth shouting about, but it sure beats what Ford (NYSE:F), Boeing (NYSE:BA) or Hone Depot (NYSE:HD) did during the same period.

Now, with a market cap of $33 million and $4 million in earnings, we get a price/earnings (P/E) ratio of 8.25.

Home Depot’s ratio stands at 20. Boeing comes in at 15. And Ford, well, it may be a few years until it finds a positive figure for the ratio’s denominator.

Of course, with any small cap, liquidity is a major risk factor. With $25 million in debt, investors should certainly watch Kewaunee’s leverage. But it is nothing worth crossing this one of your buying list for.

After all, aren’t liquidity concerns an issue at almost every Blue Chip these days? The Dow was built (and crashed) on debt.

As a manufacturer of laboratory equipment (cabinets, vent hoods and work surfaces) Kewaunee is in a strong position to take advantage of Washington’s trillion-dollar spending spree. As the biotech industry continues to grow and as more and more high-tech school labs are built, Kewaunee’s phone is going to be ringing a lot.

I am not saying to buy shares of the company right this instant – prices have risen a lot of the last six months – but it is worthy of your watch list.

I know it is at the top of mine. Our subscribers may be reading more about this winner in the months ahead.

Source: A Small-Cap Blue Chip

When Airbus recently announced the delivery of its first China-built passenger jet, it was more than just the usual bit of corporate PR. It was an admission that any company that wants to remain a global leader in its industry will have to embrace China as a customer – and probably as a partner.

Airbus – a subsidiary of defense giant European Aeronautic Defense and Space Co. NV, also known as EADS NV – said it assembled the A320 passenger jet in a plant in Tianjin, China’s sixth-largest city. The factory is 49%-owned by a Chinese consortium, and is expected to produce another 10 passenger jets this year alone.

The China connection doesn’t end there, either: The just-completed A320 will be sold to a leasing company and eventually put into service by Sichuan Airlines Co. Ltd., a regional carrier.

Both Airbus and its U.S. rival, The Boeing Co. (NYSE: BA), understand that the Chinese market is crucial to their futures. Boeing has said that China will become the largest aviation market outside the United States by 2028, with the mainland set to require 3,700 additional aircraft - worth more than $350 billion – in that time. Airbus, which projected a slightly lower figure of about 2,800 aircraft, hopes to see its market share rise from about 30% now to about 50% in the next couple of years.

In the near term, the global downturn has left China’s carriers feeling the pinch, too, but it’s the long term that has companies such as Airbus and Boeing feeling both excited – and worried.

In many industries, partnerships represent the price of entry. And in the long haul, China has ambitious plans of its own. In the commercial airliner business, for instance, it is already developing a regional airliner and more recently has launched plans to design and build a globally competitive jumbo jet of its own.

The Rise of China as a Powerhouse Market

One of the hallmarks of any great economy is its ability to produce technically complicated machinery. I’m not talking flat screen TVs here but stuff like spaceships and, closer to earth, commercial and military aircraft. While Airbus is a partner right now, the point is that China is moving up on the technology scale both hard and fast. Faster, in fact, than most Westerners realize.

But the rollout of a completely Chinese-built Airbus A320 highlights something else, the significance of which is lost on most investors: It’s not really about Chinese airplanes or even the fact that China is making something new. The real key here is that Airbus – like many companies – understands that the Chinese market is growing so fast, and has the potential to be so huge, that that it has to invest there, and do so as a partner, or risk getting left behind.

Chances are good that Airbus understands something else that I’ve been telling investors since I first visited China nearly 20 years ago: There will come a time when China makes the transition from just being the world’s biggest manufacturer and becomes the world’s biggest market. In the long run, it’s not about China the export machine – it’s about the Red Dragon’s transition into a full-fledged consumer market.

With more than 300 million people – the majority of whom save an average of 35% of their income, China’s quickly emerging middle class is by itself potentially larger than the entire U.S. population. And the top 2% of China’s academic community – I’m talking the best and brightest only – is larger than our entire university population.

The bottom line: China not only has the capability to produce entirely new and different products, but its consumers increasingly have the ability to buy them. Consider Snow Beer. Most people have never heard of the ubiquitous green bottled stuff because it’s sold only in China. Yet according to beer-market-researcher (yes, they do exist) Plato Logic Ltd., Snow Beer sold about 6.1 billion kiloliters of beer in 2008, up 19.1% from the year before – outselling such former brand leaders as Bud Light and Budweiser.

Not surprisingly, Snow Beer is a partnered product - the result of a collaboration between China Resource Enterprise Ltd., and London-based SABMiller PLC (OTC ADR: SBMRY) news portalalibaba.com reported.

Maybe this won’t surprise you, but it never fails to surprise the majority of people I talk with when they learn that China is now the world’s largest beer market, having surpassed the United States as early as 2001.

It’s much the same story with cars. For the past four months running, China has been the world’s largest automobile market. There are still a dozen or more automakers slugging it out for Chinese consumers’ hearts and minds, but all the biggies are there – including the only profitable business unit of General Motors Co., the Japanese, European makers and more. China this year also became the world’s largest producer, consumer and exporter of light-duty electric automobiles.

China Profits Poised to Zoom

And that brings us back to Airbus.

After delivering the 10 planned A320s from its Tianjin factory this year, Airbus plans to deliver aircraft at a rate of four a month by the end of 2011. Overall, Airbus expects to deliver 70 A320s to China in 2009 – a total that includes jetliners built in Europe.

But it’s just not enough, notes Airbus China President Laurence Barrons. In fact, the executive told the China Daily that the “ramp-up [production] capacity of 48 planes a year is insufficient to meet [domestic] demand.”

It’s not surprising, then, that Airbus is planning on boosting production to 286 aircraft a year in Tianjin, which puts the China production facility on par with Toulouse and Hamburg, where the company has its European plants. Ultimately, and again here’s the really important stuff, there’s no reason in the world why Airbus won’t begin selling Chinese-made aircraft overseas to non-Chinese carriers within the next few years. Not only will this further pressure Boeing, but also it demonstrates yet again that there isn’t an asset class on the planet that won’t be affected by China’s growth – a point that I’ve made so often that it’s basically become a Money Morning mantra.

Speaking of which, Chinese domestic air passenger growth would make a western air exec drool. According to China’s Aviation Administration, domestic traffic is up 17% to 56.9 million in the first four months of 2009, at a time while international traffic fell 17% to 5.6 million. Some consider that a wash, but get this: Over the past 30 years, air passenger traffic rose at an average annual rate of 16% – reaching 190 million at the end of 2008.

In a statement issued on April 8, Li Jiaxiang, the director of the Civil Aviation Administration of China, stated that China intends to boost travel to some 700 million trips a year by 2020. And that underscores yet again the projected growth in China’s middle class strength. Somebody’s going to be paying for all that travel. My own travel experiences in China suggest that it will be the Chinese Yuppies, or “Chuppies.”

With the increase in demand has come an escalation in quality – of products and services. Gone are the days when flying Air China meant taking your life into your own hands and ghostly silent terminals at a few scattered airports. Also gone are the formerly ubiquitous souvenir shirts depicting overcrowded aircraft with parts falling off as they zoom skyward.

Flying in China today is a wonderful experience that I look forward to each time I visit China. The airports are modern and well staffed, the security is generally excellent and the flight crews are as sharp as they get. Increasingly, the aircraft are mostly all new – a welcome change from some of the timeworn airframes I routinely hop aboard when traveling back here in the United States. Of course, having real food with real silverware is a nice perk, too, in an era when a boxed lunch sets you back seven bucks.

Now, before you guys jump all over me with comments about state subsidized travel and the like, I know – you’re right. But that doesn’t change the fact that air travel in China is a throwback to an earlier – and eminently more pleasurable – time when travel was an experience to be enjoyed, and not just time spent getting from Point A to Point B, as is now the rule in the Western world.

In a recent interview, the president of Sichuan Airlines Co. Ltd., showed me that China understands the path to take to win in the global game of business when he said that “when air travel becomes a consumer pastime, that’s when you will see the real peak of aviation demand and industry growth.”

That’s true of virtually every market in China these days – which is why investors better not miss their flight: The Red Dragon’s domestic market is just getting ready for takeoff … 

Source: Airbus Deal Shows Investors That China Profits Are Cleared For Takeoff

Editor’s Note: Fifteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 15 for 15, meaning he’s closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.

• Regulators will hold hearings this month and next to possibly limit the holdings of energy futures traders, including index and exchange-traded funds. The U.S. Commodity Futures Trading Commission (CFTC) will hold hearings in the next two months to consider the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets, Chairman Gary Gensler said in a statement. “Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities such as crude oil, heating oil, natural gas, gasoline and other energy products,” Gensler said in the statement. “This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants.” The CFTC did not give dates on when the hearings would be held or who would speak at them.

Source: Investment News Briefs Wednesday, July 8, 2009

Anyone who has ever flown on most any commercial airline is familiar with this scenario: Your plane is supposed to depart in the next few minutes. The big board says the flight is on time. The lady behind the counter is all smiles.

But you haven’t actually boarded or anything. In fact, as you squint out the window, you can see that there is no plane available to board, a fact that the oblivious clerk seems unable or unwilling to acknowledge.

Thirty minutes after your takeoff slot has come and gone, the ubiquitous screens that decorate the departure lounge’s walls suddenly blur, flicker and light up with the announcement that some flights may be delayed… by 10 minutes.

Airlines Crash and Burn

I’ve always wondered: Is this just wishful thinking? “Maybe pixies will make a plane appear!” Or more probably, “Maybe if we say nothing, no one will complain.”

When does arrogance and stupidity become plain and simple fraud?

This unwillingness to admit to the obvious appears to be endemic to the entire air biz. Note the recent behavior of aircraft manufacturer Boeing (BA: NYSE).

Let’s be frank – things really stink these days for the airlines. Bookings are way off, and fuel costs are rising again. As a group, shares are off some 59% over the past 12 months. I have a report on my desk noting that various U.S. and international airlines are looking to mothball some 2,302 planes this year.

Does Boeing care? Does it even deign to notice?

Naaah!

Delays? What Delays? Of Course We’ll Board on Time!

For months now, management has stood firm on previous forecasts for 2009 profits, despite Boeing’s commercial division receiving as many current “contract deferments” as there are fresh future sales. FedEx alone is talking about canceling between 15 and 30 planes. On the military side of the house, the Pentagon is canceling the LMT/BA F-22 Raptor program (at roughly $137.5 million per plane) and cutting off a good chunk of BA’s missile biz.

Faced with (as CEO Jim McNerney put it back in April) “economic times that are more difficult than many of us have ever seen,” BA dramatically hauled back on production, halving Q1 profits along the away. They have completely abandoned even the pretense of a prediction regarding 2010.

And yet they still insist the original projections for 2009 are intact. “Your flight is still on time – honest!” And you know what the most amazing part of it all is? Investors believed every word of it… for a while anyway.

Dreamliner Nightmare

In fact, it wasn’t until BA’s much ballyhooed 787 “Dreamliner” failed to fly in time for the annual Paris Air Show that folks began to wonder about the company’s veracity.

BA’s plane-of-the-future was already about two years behind schedule when top exec Scott Carson stood at the Paris podium on June 16 and promised – Scout’s honor – that the beast would see its maiden flight June 30. Over the course of that two-year delay, BA’s share price lost some 70%.

Now to be fair, that loss parallels the general demise of the American – and global – stock market. But word of the Dreamliner’s launch had managed to prop things up a bit, with BA shares recovering 82% between March and early June.

Failure to Launch

Problem is, Scott Carson’s performance in Paris was BA’s fifth such promise. And just one short week later, BA engineers have revealed that the plane’s ultra-light hybrid plastic/metal wing attachment points would require substantial modifications. They are calling this a minor problem to be expected in the development of a new plane.

I somehow think that keeping the wings on is a tad more than minor.

And now investors are (finally!) noticing that there are no planes loading – indeed, not even any planes at the gate. BA shares are off 20% since word of the 787 debacle began to break, including a 6% single day loss last Tuesday. And there is every technical indication that this downside trend is just getting started. I anticipate BA hitting the low $30s, if not high $20s shortly.

Source: Boeing’s Flight Delayed – or Canceled?

Source: Investment News Briefs Wednesday, June 24, 2009

• Inflation fears were quelled at least temporarily as U.S. consumer prices were raised only slightly last month, and actually experienced their biggest drop in almost 60 years. Higher gas prices contributed to the 0.1% increase in the Labor Department’s Consumer Price Index (CPI) versus the April’s CPI, which was flat. Financial markets had expected a 0.3% increase. The CPI fell 1.3% versus the same period last year, the largest drop since April 1950. “There is no sign that there has been widespread inflation because of the Fed’s quantitative easing regime. In fact, long-term inflation expectations haven’t budged and the Fed is still ahead of curve on inflation,” economic and investment strategist John Canally of LPL Financial told Reuters.

• Four of the nation’s largest banks repaid $54.7 billion to the U.S. Treasury’s Troubled Asset Relief Program (TARP), freeing themselves of government restrictions on lending and pay.JPMorgan & Chase Co. (NYSE: JPM) repaid $25 billion, andMorgan Stanley (NYSE: MS) and Goldman Sachs Group Inc.(NYSE: GS) repaid $10 billion each, Bloomberg News reported. As Money Morning’s Martin Hutchinson reported yesterday (Wednesday), the other two banks, U.S. Bancorp (NYSE: USB) and BB&T Corporation (NYSE: BBT) repaid their debts of $6.6 billion and $3.1 billion respectively. The banks are among 10 other that agreed last week to repay $68 billion in TARP funds,Bloomberg News reported. “Our strong capital position allowed us to pay back TARP in a very short amount of time,” BB&T Chief Executive Officer Kelly King said in the bank’s statement.

• Beleaguered outdoor clothing retailer Eddie Bauer Holdings Inc.(Nasdaq: EBHI) yesterday (Wednesday) filed for Chapter 11 bankruptcy protection and said it planned to sell itself to private equity firm CCMP Capital LLC for $202 million. The sale to CCMP, known as a 363 sale, means the sale needs the approval of a judge, and other bidders could emerge. CCMP is entitled to a $5 million breakup fee if it loses to a higher bidder. Court filings show that Bank of America Corp. (NYSE: BAC), General Electric Company (NYSE: GE) and CIT Group Inc. (NYSE: CIT) will provide up to $100 million in financing during the bankruptcy case,The New York Times reported. Eddie Bauer said its 371 stores in the United States and Canada are operating as usual.

• Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) options will begin trading on the Chicago Board Options Exchange (CBOE), enabling investors to bet on the company using a technique Chairman and Chief Executive Officer Warren Buffet has rejected, Bloomberg News reported. “Usually, if you want to buy or sell a stock, you should buy or sell the stock,” Buffett said last year on the weekend of the company’s annual meeting. “Using options, four times out of five you will be right, the last one you’ll miss. I’ve virtually never used options as a way to enter or exit a position.” CBOE will offer contracts on Buffet’s conglomerate starting today (Thursday).

• FedEx Corp.’s (NYSE: FDX) losses more than tripled in its last quarter, and the company said things won’t be much better in the near future, The Associated Press reported. The nation’s second-largest package shipper reported a loss of $876 million, or $2.82 per share in the quarter ended May 30. That compares to a loss of $241 million, or 78 cents per share in the same period last year. “The operating environment for our first two quarters in fiscal 2010 is expected to be extremely difficult,” Executive Vice President and Chief Financial Officer Alan B. Graf Jr. said. The company has not yet decided whether it will have to lay off more workers or make further cutbacks due to poor economic conditions, Graf said in a conference call with investors.

• Newly sold automaker Saab secured a key court ruling yesterday (Wednesday) to cut 75% of the more than $1.28 billion (10 billion in Swedish crowns) of debt after a vast majority of creditors approved the proposal, Reuters reported.  Sweden-based Saab was sold on Tuesday to fellow countrymen Koenigsegg Group ABby soon-to-be former parent General Motors Corp. (OTC:GMGMQ).

• The annual rise in gas prices entered its 50th straight dayyesterday (Wednesday) after crude prices bounced back after an initial slump in the beginning of this week, The Associated Pressreported. Pump prices are now at a national average of $2.67 per gallon. The rising crude prices and less production has added to the typical increase in demand in the late spring and summer months as more Americans take to the roads for vacation-related travel.

• After being dogged by reports of orderless days at the Paris Air Show, The Boeing Co. (NYSE: BA) finally got a $153 million order for two single-aisle planes, The Associated Press reported. But this order pales when compared to the $6.2 billion in orders already attained by rival Airbus S.A.S. Both aircraft makers are feeling the economic crunch by the worldwide recession.

• China will use part of its $200 billion sovereign wealth fund to invest in hedge funds, according to Felix Chee, who will initially run the fund. “We will have a preference for managed accounts,” he said in an interview with Bloomberg News Wednesday at the GAIM International hedge fund conference at Monaco’s Grimaldi Forum. “The platform would like a core of single-manager funds and fund-of-funds.” Chee, is a special adviser to the chief investment officer of China Investment Corp.’s hedge fund and proprietary trading effort, “It’ll be across the spectrum of strategies,” he said. “We’re looking for the best managers and a handful of fund of funds, and when I say handful I mean five or less.”

• A prominent Wall Street analyst sees the benchmark S&P 500 Index (NYSE: .INX) breaking its all-time record by the end 2012. JPMorgan Chase & Co. (NYSE: JPM) Chief U.S. Equity Strategist Thomas Lee said on Wednesday the index should surge back above 1,500, its October 2007 high in less than three years, provided the U.S. economy sees a V-shaped recovery.  “The global economy is in the midst of a synchronized recovery,” Lee said at the Reuters Investment Outlook Summit.  Lee also reiterated his year-end 2009 target of 1,100 for the S&P 500, saying the United States will likely come out of its recession some time this summer, followed by the rest of the developed world.

• Prices on Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE:FRE) mortgage securities rose for the fifth day Wednesday, pushing yields down as they tracked a drop in rates on benchmark U.S. Treasuries, foreshadowing possible further declines in borrowing costs for new home-loans. Yields on Washington-based Fannie Mae’s 30- year fixed-rate mortgage bonds fell by 0.02% to 4.56% in New York trading, the lowest since June 3, according to data compiled by Bloomberg. Treasuries and so-called agency mortgage bonds rallied after a government report showed the cost of living rose less than forecast in May. The mortgage-bond yields are down from 5.07% on June 10, the highest level since the Federal Reserve announced plans to buy home-loan bonds in November.

• Applications for mortgages fell for a fourth consecutive week, with overall demand plunging to its lowest level in nearly seven months, according to a report Wednesday from the Mortgage Bankers Association.  Rising interest rates have tempered demand for refinancings and new purchase applications, as the industry group’s seasonally-adjusted index fell 15.8% to 514.4 for the week ended June 12, the lowest since the week ended November 21, 2008.  Rates on 30-year fixed-rate mortgages averaged 5.50%, down 0.07% from the previous week, but significantly higher than the all-time low of 4.61% set in the week ended March 27,Reuters reported.

Source: Investment News Briefs Thursday June 18, 2009

We see red on our Google Finance screen. And nasty little minus signs. The Dow closed down -1.25% yesterday. The S&P 500 fared worse. It ended the day down -1.27%. The yield on 10-year T-bonds dropped too, signaling increased demand for safer havens than the notoriously capricious stock market.

What’s there to doubt? We were under the impression here at our Notes bunker that the global economy was awash with “green shoots.” Investors have been piling into junk stocks since March. US equity markets are up 37% in just under four months. Why stop now?

The bulls’ answer is that the recent flagging in stocks is a necessary “consolidation” – a “breather” on the way to the moon. But concern is growing that the rally may not have the staying power the green shoots brigade has been touting.

Here at Notes we’ll be watching closely as the end of the month – and this quarter – draws to a close. This is when companies often put out profit warnings. We’ll also be keeping a beady eye on those 200-day moving averages. If the Dow and the S&P 500 break below these magic lines there could be trouble.

Underground investor Karim Rahemtulla, investment director of the Smart Profits Report has been warning investors about overheating stocks for the past couple of months.

He’s also been warning investors not to get suckered by the short sell. According to Karim, if you’re not careful this can lead to a nightmare scenario: the short squeeze.

You short an asset that you’re convinced is about to decline, but it turns the tables on you and rises instead. You’re now on the hook to buy the shares at a higher price than you borrowed them – and you’re on the wrong end of a short squeeze.A short squeeze puts short sellers in a losing position, faced with the prospect of unlimited losses as the asset rises. The more people who went short, the more severe the reaction will be.

In a panic, they all pile into the stock at the same time, trying to buy back the shares to cover their trades and get out of them. This is known as short covering – and the buying demand, coupled with the lack of sellers drives the price up even more, thus adding to your unlimited losses.

For example, let’s say you shorted 1,000 shares of Boeing (NYSE: BA) at $35 where it was three months ago. That would have given you $35,000. But you’d still have to replace those shares eventually because you only borrowed them.

But Boeing has performed very well over the past three months and is trading around $50 today, so if you hadn’t covered your shares till now, you’re forced to buy them back for $50,000 – a loss of $15,000. And the more the stock rises, the more you lose on your original investment.

Bill Bonner reckons the rally is a head fake – just like the ‘recovery’ of 1931. Readers with even a passing knowledge of history will know that the Great Crash of 1929 was just the beginning of the Great Depression.

The rise in stocks in 1931 was nothing more than a cruel joke, a bull trap that lured hungry investors back into stocks only to drag them down to a new bottom on July 8 1932. This was the day the Dow finally bottomed out at a puny 41 points – a mere tenth of its September 1929 high.

Of course, Team Obama is now in charge. And student of the Great Depression Ben Bernanke is heading up the Fed. What can go wrong? More than you think, says underground investor Rick Ackerman, a veteran market maker on the floor of the Pacific Market Exchange (hat tip the Daily Reckoning)…

Bailing out the economy and the banking system has been such a brazenly corrupt, mendacious and, ultimately, doomed enterprise that one could almost forget for a moment how very clever the perpetrators are. If we needed proof that these guys are the slickest behind-the-scenes spin-doctors around, consider the following two headlines that ran on successive days atop the Wall Street Journal’s front page. “Rate Rise Clouds Recovery” was the grim news that greeted us last Thursday, on day one. The article described how, despite the Federal Reserve’s explicit strategy of buying as much Treasury paper as it takes to hold market rates down, particularly in the mortgage sector, rates are rising anyway, and steeply. In fact, 30-year fixeds climbed to 5.79% from 5.00% just two weeks earlier, suggesting that market demand for mortgage paper is drying up despite the Fed’s strategy of direct monetization of Treasury debt (a.k.a. “quantitative easing”).

But get this: On day two, as if to reassure us that [the] Treasury’s borrowing is well under control despite the fact that the opposite is true, the spinmeisters co-opted the Journal’s front page with this well-timed policy leak: “Fed to Keep Lid on Bond Buys.” Are we actually being asked to believe that, absent the acceleration of direct purchases of Treasury paper by the central bank, demand from other sources will suffice to keep rates from rising further?

• Consumer credit in the United States fell by a record $11.1 billion in March after the jobless rate reached its highest level in a quarter century and banks made it harder to get loans in an effort to firm up their balance sheets.  Consumer credit fell by $2.55 trillion, almost three times more than forecast and the most since records began in 1943, according to a Federal Reserve report released yesterday (Thursday) in Washington. “When you have record job losses, you have to expect record declines in spending and economic activity in general,” Richard Yamarone, chief economist at Argus Research Corp. in New York told Bloomberg.

• General Motors Corp. (NYSE: GM) said it burned through $10.2 billion in the first quarter as it tapped into federal bailout funds to survive a sharp decline in global sales that overwhelmed its cost-cutting efforts.  Revenue dropped by almost half to $22.4 billion as the company cut production by about 900,000 vehicles and worked to run down costly inventories in the United States and Europe.  Chief Financial Officer Ray Young said there was evidence consumers were scared away from GM cars and trucks because of concern the automaker was headed for bankruptcy, Reuters reported.

• Delinquencies on commercial mortgages in the U.S. jumped to the highest levels in over 11 years in April as scarce credit made it difficult for landlords to refinance loans, Bloomberg reported, citing a report from property research firm Trepp LLC.  About 2.45% of loans are now 30 days or more behind in payments, more than five times the year-ago number said the report. “It’s about as bad as it’s ever been,” said Thomas Fink, a Trepp senior vice president. “I don’t think we’re done yet. Where it’s going to top out, I don’t know, but we’re not done.”

• Nearly two-thirds of U.S. retailers posted better- than-expected monthly sales results for a second straight month in April, giving fresh evidence that consumer spending is warming up. Most retailers reported April sales at stores open at least a year that topped Wall Street estimates and a handful said their first-quarter results, which start landing next week, will be better than expected. “Overall, you are seeing some signs of a return to discretionary purchases throughout different areas of retail,” Barclays Capital PLC (NYSE: BCS) analyst Robert Drbul told Reuters.

• The U.S. Justice Department’s proposed budget calls for adding more FBI agents to investigate mortgage fraud and white-collar crime, Attorney General Eric Holder said on Thursday. In prepared testimony to a Senate appropriations subcommittee, Holder said the proposed $26.7 billion budget includes a 3.8% increase from the previous year for combating financial fraud for fiscal 2010, Reuters reported.  Increased funding would be used for “additional federal prosecutors, civil litigators and bankruptcy attorneys to protect investors, the market, the federal government’s investment of resources in the financial crisis and the American public,” he said.

• Boeing Co. (NYSE: BA) lost a deal for 25 of its 787 Dreamliners, the biggest order cancellation yet for the plane, meaning the giant jetmaker now has lost one more contract this year than it has won.   The scrapped deal, valued at about $4.44 billion, takes Boeing’s cancellations in the first four months to 59, versus 58 purchases, according to data published today on the Chicago-based company’s Web site, Bloomberg reported. Airbus SAS (NYSE: SPR) said earlier it has 11 net orders after signing 30 agreements and losing 19. The 787 remains Boeing’s best-selling new plane ever, with 861 contracts remaining. The jet, built mostly of composites, has suffered four delays because of defects, parts shortages and redesigns and is due to fly by the end of next month before entering service in the first quarter of 2010.

Investment News Briefs Friday, May 8, 2009