Few investments performed better than oil during 2009’s second quarter. Black gold is up 44% for the second quarter and has traded near $70 for the past four weeks.

But a consensus appears to have emerged that oil is overpriced and ready for a fall. The International Energy Agency released a report on June 29 showing weak demand. Furthermore, while fundamentals may be determining the direction of the price, speculation is responsible for oil’s enormous price swings. In its Perspectives Quarterly, Credit Agricole says that $70 is unsustainable. “Looking at fundamentals, however, the recent rebound in prices appears overdone,” the French bank says. It expects prices to return to $60 per barrel in the third quarter before increasing to $68 per barrel in the fourth quarter.

And the Wall Street Journal attacked the notion of $70 oil in two separate blogs, “$70 Oil, but Where’s the Demand?” and “Is the Oil Bubble Back?”

British bank Barclays has a different take. In a new report, Commodity Refiner: Children of the Revolution, Barclays claims the fall in oil to below $40 a barrel was the aberration, and the recent rise in oil prices is a “return to normalcy.” Look no further than the price of December 2015 futures contracts, which have traded above $66.77 since September 2008, despite market turmoil and the complete collapse of spot oil to under $40 a barrel.

“Even at the lowest point for macroeconomic expectations, and for oil demand forecasts and sentiment, the idea that a sub-$70 per barrel price could be sustainable did not seemingly gain any significant traction,” the report says.

Barclays attributes oil’s renewed vigor to the fact that the world economy didn’t implode, an event that may have been priced into the market. (Sorry, no link.) It also says that the declines in oil production caused by the collapse in oil prices has yet to hit the economy. When it does, it will make up for the lack of demand cited by the IEA.

If Barclays is right, it’s time to stop assigning blame for $70 oil and learn to live with it.

Shares of Dell Inc (NASDAQ: DELL) have been moving higher in a pretty spectacular fashion. Dell is up 74% from its February bear market lows.

Investors appear to have put the banking crisis behind them, but they might want to reconsider. The Bank of International Settlement, an international organization of central banks, today announced today in its annual report that toxic assets still threaten the banks and a financial recovery. (Hat Tip: EuroIntelligence via Calculated Risk via the Guardian)

From the BIS report:

At this writing, the ability of those plans to generate a sustained recovery is an open question. The major reasons for doubt, discussed in the final section, are limited progress in addressing the underlying problems of the financial sector and the risks associated with the expansionary fiscal and monetary policies put into place during the period under review.

This probably shouldn’t come as a surprise. As astute investors have noticed, the government’s plans to get toxic assets off the bank’s books have been undermined by the banks themselves, who refuse to sell the securities at distressed prices, and by changes in mark-to-market accounting rules, which have given them the ability to ignore the problem.

And more bank assets may be on the verge of going toxic. Everyone knows that commercial real estate is the next domino to fall, but the worst may not have been reflected in bank earnings, says Douglas Burtnick, investment manager on the Aberdeen Global Financial Services Fund. “We’re still early in the game in knowing how that’s going to play out,” he says.

Shares of ISHARES Lehman 20Yr (NYSE: TLT) have been rising over the past two weeks, after a decline that lasted almost seven months and loped some 28% off share prices.

July starts the earnings season, with 70% of the issues expected to report by month end. The period is usually marked by early volatility from investors trying to use the initial reports to guess the rest of the market; which very often drives individual stocks in one direction for a few days and then the other direction when the accruals, along with the details, are reported. While summer trading is typically lower, I expect this earnings season to be a bit more volatile then usual.

The background is that Q2,’09 is expected to come in 17% lower than Q2,’08, but off 17% is better than the Q1 which was off 39% and much better than the negative earnings posted in Q4,’08, which of course was the first quarter in history where the index lost money. So, if less bad is good, Q2 will be a winner. And with Q3 estimated to be down only 6% from its prior year’s comparison, everything is going by plan – at least up to then.

Q4 is where ‘getting less bad’ needs to change to ‘getting better’. Earnings recoveries are not a U turn or V curve, they decline, flatten out and then start to improve. This recovery is being fueled by a few trillion dollars extra from the stimulus programs, reduced tax withholding schedules and lower Fed rates. We are seeing positive signs of the impact, but signs will need to change to actual sales by year end.

So where does that leave Q2. Reporting a penny more or less may not be as important this quarter as it has been historically. Instead the attention will be on how you earned your money. Year over year quarterly sales have declined at a double digit pace, and this quarter is expected to be slightly down but not double digit – again ‘less bad’. The programs in place were expected to kick in near the end of the second quarter, and have a greater impact on Q3, so there should be some signs in the reporting to support that hope. If not, the market will be quick to revaluate the situation, Washington test balloons for a second stimulus package may be floated, and companies, already nervous about commitment will take another look at spending, all of which can not bode well for consumer confidence or the market.
For my full FILE please click here

http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS

Perfectionism may help some people succeed in many other careers. It is often the difference between success and failure.

Should money market funds be allowed to “break the buck”?

The Securities and Exchange Commission unveiled its money market fund recommendations yesterday. If there is any controversy to be found, it is the whether the net asset value of a money market fund, currently pegged to $1, would be allowed to float. The reason why this is an issue is that money market funds came under intense scrutiny when the Reserve Fund “broke the buck” last fall-the value of a share fell below $1. Breaking the buck is the financial equivalent of wearing white before Memorial Day. You just don’t do it.

Overall, however, the fund industry was relieved. “The big news is that there are no earth-shattering new recommendations here,” says Peter Crane, president of Crane Data and publisher of the Money Fund Intelligence newsletter.

As expected, the SEC’s proposals include:

* A requirement that money market funds have certain minimum percentages of their assets in cash or securities that can be converted to cash for redememptions.

* Shortening the weighted average maturity limits for money market fund portfolios from 90 days to 60 days.

* Limiting money market funds to invest in the highest quality securities.

* Banning illiquid securities in money market fund portfolios, which can currently make up 10% of a fund.

(The SEC is accepting comment on these recommendations for the next 60 days.)

Back to the floating NAV: For the record, I haven’t spoken to anyone who thinks a floating NAV is a good idea. Charley Ellis, who is a consultant to large institutional investors, is in favor of keeping a stable NAV. “Most of the money invested in market funds are at outfits like Vanguard, T. Rowe Price, and Fidelity,” he says. “They are doing a really good job.” Ellis is a director at Vanguard.

Vanguard also says the $1 stable net asset value is an integral feature of the money market fund product. “A floating net asset value would not be well-received by investors accustomed to the safety and stability of money market funds,” says Vanguard spokesman John Woerth.

The proposals, if adapted, could ultimately lead to slightly lower yields for money market funds, but, overall, Crane is pleased with the SEC’s recommendations. “I’m definitely happy,” Crane said. (Then again, he was talking to BusinessWeek from a cruise ship in the Caribbean.)

Reuters writer Agnes Crane says the proposed reforms don’t “go far enough considering that most people park their money (in money market funds) so they can get it out quickly if needed.”

What do you think of the proposals? Should money market funds be allowed to break the buck?

Shares of JC Penny Inc (NYSE: JCP) gained over 138% from their bear market lows to their May 6 highs. But since those highs JC Penny has been correcting.

Last year’s race was between commodities to see which would hit $4 a gallon first – milk or gas. Milk won, and is still over $4 a gallon, but while gas is down it’s making a comeback and is up 66% year to date - it’s not over till it’s over.

This year’s race was between buybacks and dividends; for a few days it looked like executive pay might join the race, but it didn’t. Dividends payments were down 18% in the first quarter and I expect the second quarter to be down 20%, with no improvement until ‘sometime’ in 2010. Buybacks, which had easily outspent dividends for the past four and half years, and peaked in Q3 2007 at almost three times more than dividends, have fallen off 82% from that mark, with the Q1 2009 expenditure of $31 billion down 72% from the Q1 2008 expenditure of $114 billion. And the numbers are actually worse than they first appear. First, Exxon Mobil, the poster child for buybacks with 35 consecutive quarters of share count reduction, accounted for over 25% of the total Q1 buybacks – it’s always good to have money. Second, many companies only made token purchases, which were most likely used to cover options or prior agreements. And third, 83 of the issues that repurchased shares during the fourth quarter of 2008 didn’t buy any shares in the first quarter of 2009.

What’s happening here is that the need to conserve capital in the current recession, combined with the uncertainty of future cash flow, has made buybacks too high risk for most corporations. While companies may want to buy back shares to support their stock and increase EPS, their priority is insure that they have enough resources to run the business, just in case the recovery is delayed a bit.

I expect buybacks to remain weak for the foreseeable future, even as earnings improve. Buybacks are now well behind dividends in corporate priorities, and dividends are declining. The reality of buybacks is that are gone as we knew them, at least until the bad memories fade from our minds and portfolios.

For more details see my buyback release chick here

P.S. - Without buybacks supporting stocks it’s going to be hard to gain that 60.2% advance needed to break even for the decade

Shares of JC Penny Inc (NYSE: JCP) have had a good run since successfully retesting their bear market lows back on March 6.