Monday, August 31, 2009

Bear Failure

More bear failure today. China was down 7%, oil was down over 5% at one point, copper down several percent and we couldn't break through 1015. Like I said yesterday, 1015 was a key level. We hit it and bounced along it several times but could not break it. Has to be viewed as yet another total bear failure. We may break it tomorrow but it is frustrating.

Fundamentals are still irrelevant. When the market caps combined of AIG, Citigroup, Freddie Mac, Fannie Mae, and Bank of America equal over 200 billion you know you are living in another paradigm. What does that $200 billion represent. It represents "value" to shareholders. What is intrinsic value? It is the present value of all the cash flow a company produces, returned to its owners. The idea that the present value (or any value for that matter) of those five companies will be anything other than a very small fraction of $200 billion is ridiculous.

What will break this market? I can explain the fundamentals until I am blue in the face, that a 130x PE multiple and 22X multiple on operating earnings is absurd, that the credit problems are not behind us, but until the market breaks it won't matter. Incredible.

New month tomorrow and we may break but at least for today, bulls win again.

Sunday, August 30, 2009

Looking for a Top

I was ready to scream at the top of my lungs on Friday that we had hit a major top. It started out looking what a classic blow off top looks like. Good news from Dell and Intel and in line personal income and personal spending. Market gaps higher and looks set for a 3% gain when it gets just slammed down. Plummeting..and then, it caught and slowly started drifting higher all day. If we would have finished down 100 points I would be telling everyone I saw we had our top. Now I am not so sure. Friday may have been the top or we may have another push or two higher. Either way I think we are very very close. August to September has been my time frame looking for a top and we are in the middle of it. Tomorrow we get Chicago PMI which I think should be pretty good. Tuesday comes the ISM index which also should be pretty good. The market expects alot from those numbers so it may be another sell the news. There are 2 very important technical numbers we need to get through. One is the 1015 area. The other is the 975 to 980 area. We break the second and we should be headed quickly to 920. To sum up, I will be very surprised that if Friday was not our top, that we don't see it this week.

I have talked to several people who have been bearish who have been gunning the market all the way up. There response now is we may be at a top but the market needs to prove it to me before I try to short it again. The bears are giving up which is exactly what you need for a top.

China was down again last week. That makes four weeks in a row. Friday (our Thursday night) it was down almost 3%. Another thing to watch was the Japanese elections over the weekend where the ruling power for five decades lost. It will be interesting to see how the Asian markets react (i have no idea).

Anyway, very close to a top. Maybe a few percentage points higher but the market is tiring. You can feel it.

Friday, August 28, 2009

Sweden Goes Negative??

At first I had no idea what to think of this. I have sat and thought about and haven't read any commentary but composed an email to a financial friend walking through my thoughts. To my investor friends, if you have differing thoughts, please let me know. I am working through the concept and haven't worked through all the details yet.

First the article from the CNN (originally from the financial times) Below that is my email I sent which covers some thoughts.

For a world first, the announcement came with remarkably little fanfare.

But last month, the Swedish Riksbank entered uncharted territory when it became the world's first central bank to introduce negative interest rates on bank deposits.

Even at the deepest point of Japan's financial crisis, the country's central bank shied away from such a measure, which is designed to encourage commercial banks to boost lending.

But, as they contemplate their exit strategies after the extraordinary measures of the past two years, central bankers will be monitoring the Swedish experiment closely.

Mervyn King, the Bank of England governor, has hinted he may follow the Swedish example as the danger of a so-called liquidity trap, where cash remains stuck in the banking system and does not filter out to the wider economy, is an increasing concern for the UK.

Hoarding is exactly what happened in Japan earlier this decade when the Bank of Japan implemented quantitative easing between 2001 and 2006.

Japanese banks refused to lend, in spite of central bank stimulus, because of fears over the dire state of the economy.

There is much more to the article.

My email:

My initial take

I have literally been spinning in my chair for about 30 minutes thinking this through. At first I didn't know what to think but have worked through the various dynamics in my mind. To the extent you have a differing thoughts I would enjoy hearing them.

First what I don't know. I realized thinking through this there are several things I don't know about the process.

1) Is there a legal requirement that the commercial banks keep money at the central bank? I thought it was always voluntary. You have extra reserves and can earn a little bit keeping them at the central bank. To the extent you get charged to keep them there, why not just keep them as cash in a vault at your bank? Basically wouldn't it be very easy to get around it? The article actually addressed this at the end.

2) Isn't there are a certain amount of reserves required by law? Certainly the central banks wouldn't charge for this minimum?

What I do know or at least the way I am looking at the world.

1) Reserves do not directly impact solvency. They impact liquidity. Equity is a solvency issue. If you increase a reserve from an accounting perspective it changes the asset and liability side of the balance sheet. Equity and hence solvency does not change until reserves earn a profit. That profit adds to equity.

2) Liquidity can help starve off an insolvency event (even if you are still insolvent) because it dilutes the insolvent problem. This isn't completely accurate and being oversimplified here but as an example: I am insolvent by 1 billion dollars and have a 10 billion dollar balance sheet (10 billion in assets, 11 billion in liabilities and -1 billion in equity) (a banks balance sheet wouldn't show this even if this was actual reality because their marks are way off from reality). I have more risk of a liquidity run which would expose my insolvency than if I was 1 billion dollars insolvent but had a balance sheet because of a liquidity injection by a central bank that I used to build reserves that would now show as having 20 billion in assets and 21 billion in liabilities and -1 billion in equity. The huge build in reserves in no way helps the insolvency issue but does lower the possibility of a liquidity squeeze that would expose my insolvency (think Bear Stearns)

3) This thinking by the Bank of England and Bank of Sweden (also the Fed) continues to be completely and totally wrong. They still don't realize it is an insolvency issue.

4) Banks desire to make money. They are capitalistic creatures. To the extent they do not pursue higher yielding assets with their reserves is because they realize they are insolvent. BB&T markdowns of Colonials assets when BB&T took over Colonial shows just how insolvent the banking system is. In some cases the markdowns were twice what JP Morgan took on WAMU and Wells Fargo took on Wachovia which means these two companies are probably already underwater with these two FDIC helped acquisitions.

5) The few healthy banks that are out there (think Beal bank out of Dallas) who built huge reserves in 2004, 2005, 2006 (once again think Beal bank) are using their reserves as fast as they get them (once again think Beal bank). They couldn't be happier. They are very solvent and do what healthy solvent banks do when they get reserves. Lend and buy assets. Central bankers assume it is some fear issue. Maybe on a small scale but healthy solvent banks are buying assets and lending as fast as they can.

6) This is of course the downside of letting zombie banks live. We are doing what Japan did. There were banks failing 10 years after the initial implosion that should have failed in year 1 through 3. Japan solved the liquidity issue through flooding the banks with reserves but the banks were still insolvent and some weren't able to outrun this insolvency issues by earning there way out of it.

7) To the extent the central banks are actually able to charge for the reserves, (once again I think it is mostly voluntary how much of an actual banks reserves they can hold at the central bank) the long term results I think would be a disaster. Short term you could definitely create another liquidity jump (though I am not sure this is even likely) but instead of slowly building back solvency you are now depleting it because you are taking away from earnings which would flow to equity. To the extent the central banks actually do force these reserves out and the bank is actually insolvent (regardless of what the balance sheet says) instead of the dilution effect of the insolvency issue because of the liquidity injection you have instead leveraged up the insolvency issue. If you make good bets buying the right assets or lending to the right borrower you will get out of the insolvency problem quicker but to the extent you make wrong bets the insolvency issue becomes worse and is levered up in relation to the balance sheet. You are forcing the banking system to play Russian roulette. To the extent there is a positive feedback loop from the increase purchase of assets you may have increased the odds of more banks earning their way out of insolvency. To the extent there is some unforeseen event in the future you have just made the problem much much worse.

8) It is basically like doubling down in black jack. Something the banks shouldn't want to do, be compelled to do, or be required by law to do. It gets away from everything that banking is supposed to be.

9) To sum it up, I still think it speaks volumes to how clueless the central bankers still are.

Thursday, August 27, 2009

A Second Credit Crises - European Style

I have been amazed at European strength. You can make an argument that their banking system is (and has been) worse off then ours if that is possible. I have been hearing little snippets from contacts about growing European concern. Nothing concrete, all hearsay. Of course, that is the only thing that would make sense with the dollar going up (until the last half of the day today) the last few days even as the dollar slayer (Ben Bernanke) got full support from Obama. Anyway, I have been expecting much bigger European banking problems for months if not a year and they haven't materialized. I don't know if they are about to now or not so take all this with a grain of salt. The UK Telegraph had an interesting op-ed by Ambrose Evans-Pritchard. You always have to know the source. So you should know that Pritchard hates the EU and has been on the Europe blow up train for several years.

One thing interesting to note is the German elections coming up in September. I have been following this for a couple of months. Germany has worked overtime to push off problems and make things look good for the election. Of course the U.S. did this also and came up just short. Germany may succeed to make it to election day (September 27th). Even if they do, what happens afterward?

From the Telegraph

The finance minister, Peer Steinbrück, said broad sectors of the German economy are in trouble even if the country has avoided a full-blown lending crisis so far.

"Conditions have become much tougher for some industries – electrical engineering, machine tools, suppliers, chemicals and shipbuilding. We have clear evidence from both small and large companies that lending is jammed.

"The banks are not stepping up to their responsibility to provide credit," he told the German paper Handelsblatt.


Mr Steinbrück has now backed away from talk of forcing banks to lend, recognising they have to rebuild their capital, and shifted the focus to direct lending by the state.


While some measures have been discussed before, there appears to be a new urgency. Decisions may be made by "early September".

The comments are hard to reconcile with the a record surge in the IFO business confidence index, which jumped for a fifth month to 90.5 in August. Sentiment is racing ahead of economic hard data.

Axel Weber, the Bundesbank chief and until recently the arch-hawk, last week spoke of a second wave of the credit crisis as home-grown problems come to light, triggered by ratings downgrades that force banks to put aside more capital. "The first round of disruption in the bank balance sheets from structured credit products is behind us. Now we are threatened by stress from our domestic credit industry," he said.

"They are in panic," said Hans Redeker, currency chief at BNP Paribas. "They know the money supply and credit figures coming out are going to be awful." He added that Germany's stimulus measures have put off deep problems until after the election in September. The car scrappage scheme has brought forward demand, implying a cliff-edge drop when the scheme expires. Kurzarbeit (short work) schemes that subsidise companies to keep idle workers on their books are slowly bleeding corporate balance sheets. "This has delayed the restructuring that needs to occur," he said.

Mr Steinbrück said markets are awash with liquidity again, but little is going into the real economy. "The banks evidently prefer to put their money into securities rather then granting new loans because they can get a higher return. After two years of financial crisis the gambler mentality is gaining the upper hand again."

Doug Kass Calls Top

If you remember, Doug Kass was within a few days of calling the bottom in March. He is now out calling the top. I tend to agree with him but would be careful with the end of the month portfolio buying, ISM numbers that should be really good next week, and retail sales which are going to be all convoluted because of cash for clunkers. I still think we find our top, if we haven't found it, by the end of September. The top may very well be in. Personally I would prefer Doug Kass to be as accurate in timing as he was with the bottom.


It was at this point in time, on RealMoney Silver, in an appearance on CNBC's "Fast Money," on "Mad Money" and in multiple appearances on "The Kudlow Report," I confidently forecast the likelihood that a generational low had been reached.

I went on to audaciously predict that the S&P would rise to 1,050, a gain of nearly 400 points from the S&P low of 666 during the first week of March, by late summer/early fall. I even sketched a precision-like SPDRs (SPY Quote) expectation chart that would reach approximately the 105 level (a 1,050 S&P equivalent) within about six months.

Yesterday the SPDRs peaked at 104.20, within spitting range of my intrepid March forecast of 105, and the S&P nearly touched 1040 in Tuesday's early morning trading.


As if the movie is now being shown in reverse, the bull is persistent, stock corrections are remarkably shallow, cash reserves at mutual funds have been depleted, and hedge funds hold their highest net long positions in many moons.


A double-dip outcome in 2010 represents my baseline expectation. When the stimulus provided by the public sector is finally abandoned, it seems unlikely to be replaced by meaningful strength or participation by any specific component of the private sector, and the burgeoning deficit (described above) will ultimately require a reversal of policy, leading to higher interest rates, rising marginal tax rates and a lower U.S. dollar. My forecast assumes that the market's focus will shortly shift from the productivity gains that have been yielding better-than-expected bottom-line results toward these chronic and secular worries.


Stocks bottom during times of fear. With the benefit of hindsight, the March 2009 lows represented a dramatic overshoot to the downside. Markets top during times of enthusiasm. I believe that the markets are now overshooting to the upside and that the U.S. stock market has likely peaked for the year.

Tuesday, August 25, 2009

Japan's Export Decline Accelerates

This was only briefly on the front page of Bloomberg but I think it is potentially important. The export decline accelerated from June to July. One data point does not make a trend but things have stabilized or have been getting better. This is a big number that may indicate that trend may be ending. If nothing else it puts a big dent into the V shaped recovery argument. Once again a data point does not make a trend and this actually beat expecations. Still, this bolsters my thoughts that the best U.S. data will be July into August. We lag Asia a little bit.

From Bloomberg:

Japan’s exports fell for a tenth straight month in July, an indication that overseas demand won’t be strong enough to sustain the nation’s recovery from its worst postwar recession.

That doesn't really tell you that much because I am assuming that is yoy declines. This is the money sentence.

Shipments abroad tumbled 36.5 percent from a year earlier, steeper than June’s 35.7 percent drop, the Finance Ministry said today in Tokyo.


Declines in shipments accelerated in all major regions: Exports to China fell 26.5 percent, shipments to the U.S. slid 39.5 percent and those to Europe fell 45.8 percent, according to today’s report.

Yikes. China growth story? Hmmm.

Keeping One Eye on The Market

It has been better to just have gone on vacation for a couple of months as the froth works through the markets but I just can't help myself keeping an eye on the markets.

Interesting last couple of days. Sunday Asia was flying and Europe was flying and the U.S. market opened higher and drifted down all day . Today, no surprise (at least for me), great headline Case Schiller index number and then less bad consumer confidence number and the market surges and then slowly sells off all day.

Even more interesting is despite the big up Asia day on Monday China didn't really participate and was down alot last night. Net them together and they are down 1.5% or so for the week. Commodities have also been selling off. Copper did not set a new high last week and sold off hard today. Lumber prices are back to their March lows (what does that say about housing)and oil sold off hard today.

I think this week and maybe next week through next Thursday you will see the peak for the economic data. Not going to fall of the cliff but I don't think it gets any better economically than what you have seen in July and August. The market is priced in much much much better economic data.

Friday, August 21, 2009

All About Housing

The headline number on existing housing prices should be no surprise. The fact that the market surges on it is mind boggling but also no surprise. If you can rally like the market is going to infinity on bad economic data you can expect a surge on when the market gets a good headline number.

But a headline number is all it is. This was really a weak number looking out into the future. Incredible how an "efficient" market can be head faked so easily.

First of all, despite the huge effort to sell houses and supposed large increase in housing sales (I will get into this in second), inventory did not budge. You still stood at 9.4 months. You have to get down to at least 7 months of supply for housing prices to have a chance of a sustainable price move higher and really you need 6 months or less of supply.

Secondly (thanks goes Mark Hanson of M Hanson Advisors) you had a 16k increase in Northeast condo sales. You exclude that and month over month total existing home sales would have been down!!! In fact national house sales (taking out condos) was down month over month!!!! The western region was down 10% month over month!!!

Thirdly, this graph speaks volume. Once again thanks goes to M Hanson Advisors

This shows the percentage of foreclosure activity as it relates to sales. This maroon line does not represent actual sales. It represents foreclosure activity. Delinquency is a foreclosure activity. This represents a probable huge increase in overall housing inventory that is coming.

How people who manage billions of dollars can look at the headline number, not dig into obvious very poor data, and buy stocks is beyond me. You have a surge of first time buyer interest to lock in the housing purchase before the 8k government credit expires, much lower prices than a year ago, and this is all we can muster?? The speaks very poorly for housing prices over the next twelve months as we are way oversupplied and demand will begin to wane. It is incredible.

Like I said yesterday, the Case Schiller index comes out on Tuesday. This should also be a very strong headline number. This could mean another surge as Wall Street is in full buying panic/greed mode to the upside.

The absurdity of it all.

Thursday, August 20, 2009

Logic Need Not Apply

Another just unbelievable day. Large increase in jobless claims and the market ignores it. What may be even more surprising is the huge increase in deliquencies reported by the MBA setting yet another record and today's rally is being fueled by financials. Just doesn't makes sense from any fundamental standpoint but it has been this way for the last 200 to 300 S&P points.

I said in a post earlier after Monday I was putting 50 50 odds that the top was in. I have been calling for a top by the end of September and I am still calling for that top but the probability that the top was in has to have dropped. It is the way of probabilities. There has been absolutely no follow through from Monday's sell off despite dismal economic data. The really "bullish" data should be coming tomorrow and next week. As a result I think probabilities that the summer top is in probably have dropped to 20%. Tomorrow is existing home sales. That should surge and beat expectations. Next week is the Case Schiller Home Price Index which also should be very strong along with a whole slew of manufacturing data from July which should be the peak of the data. I was hoping we would have some additional follow through from Monday's sell off to give a cushion to when this data comes out. Yet the market has powered higher and so now setting up for yet a probable additional high.

How the market can be up today on dismal data for arguably the two most important economic metrics for the market, jobs data and mortgage delinquencies, is beyond me.

The absurdity of it all.

J.P. Morgan and Its Social Mission

The absurdity of it all. I think I could title that for every post these days.

J.P. Morgan is playing in the unsecured bridge loan arena to fulfill its "social mission." If that doesn't sound absolutely ridiculous I don't know what does but that according to the WSJ.

This is a great start to the article:

J.P. Morgan Chase to the rescue.

Wait a minute. Weren't they bailed out through the Bear Stearns deal and greatly helped through Washington Mutual deal not to even mention the TARP money they recevied? Yep, yep, and yep.

The New York bank has agreed to loan the struggling state of California $1.5 billion to generate some badly needed operating cash. The loan agreement is meant to tide the state over until it can get a deal for a much larger $10.5 billion loan which should help the state’s cash needs through 2010.

This funding is supposed to be completed in September. So we have what is called a bridge loan, a loan that is supposed to be for a short term that will be taken out by new funding.

This is just a riot:

J.P. Morgan says it loaned the money to California as part of its “social mission” to help a struggling state

The article goes on to explain, though not explicitly, that basically they are doing this to buy more business.

Of course, the bank also has a keen interest in building its business with the nation’s largest state. Late Tuesday, California picked (Surprise. Surprise) J.P. Morgan as senior book runner to sell the $10.5 billion in “revenue anticipation notes,” known as a RAN.

But this is classic high risk transaction that probably ends up okay but may not. The type of deals that worked until they didn't that got us into this mess.

There are some interesting elements about the J.P. Morgan’s loan deal. The bank agreed to the loan without any collateral from California, which has seen its credit badly bruised by a months-long fiscal crisis.

No collateral???

And in an interview tih Jeff Bosland, the head of tax exempt capital markets for Jp Morgan, when he was asked about this he admitted they were just trying to buy business.

Bosland: There is no collateral. It’s unsecured….Any time you lend money it is risky, but we are not concerned about the state of California. We are here to show them and other states that our commitment is firm. We are confident they can achieve the RAN (the $10.5 billion loan) around the end of September, which will take out our $1.5 billion loan.

They are confident? No, they don't care because if it goes sour Bernanke and crowd will be there to bail out JP Morgan or California or both.

The absurdity of it all

Wednesday, August 19, 2009

The Absurdity of It All

It is about 2:00. The market may end down, I don't know but looking at the markets it is just absurd. It just shows how much liquidity can make fools out of fundamentals in the market in the short term. China is typically the liquidity canary in the mine and its massive drop in a month should be a warning for the more mature markets who experience a lag.

Anyway back to the absurdity of today. China gets pummeled overnight. Down another 5%. Europe is down and the U.S. markets open down 100 points. A few minutes after the open the oil inventory number comes up. Shocks traders as U.S. inventories decline the most in more than a year. Oil reverses and screams higher. With it the dollar starts falling (why would oil impact the dollar? It is usually the other way around) and the stock market starts screaming.

What in the inventory drop data reverses a huge equity decline in China, which should be a warning sign. I don't trade oil, very rarely even invest in oil stocks but I wanted to understand. From Bloomberg:

Crude oil rose after a government report showed that U.S. inventories declined the most in more than a year as imports tumbled and refineries increased operating rates.

This first sentence almost tells it all. Imports tumbled. Not demand surged, imports tumbled. Maybe this is good for oil prices but how is that any indication on making the dollar move lower and the equity markets move higher?

Let's keep reading:

“Refiners were probably nervous about rising stockpiles and the outlook for lower gasoline demand in the months ahead, so they reduced purchases,” said Rick Mueller, a director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “You can’t help but pay attention to the massive drop in imports.”

Once again, demand going forward is lower. That should indicate weak economic activity.

The drop left inventories at 343.6 million barrels a day in the week ended Aug. 14, or 15 percent higher than the department’s revised figures for the year-ago period.

Wow, now I wonder about the oil move (once again, not an oil trader so the move $3 higher may be justified). Either way, no wonder imports are dropping. The U.S. has tons of supply. This is echoed by Mueller:

We are still looking at more than 340 million barrels of oil, which is still a pretty good number,” Mueller said. “This is by no stretch of the imagination a low inventory number.”

Anyway, the whole chain reaction just seems absurd on a day we should be down 100 points. We have gotten to the point where China going down 5% can be brushed off by oil moving up $3 because imports were lower because demand was lower causing companies to curtail their oil imports.

The absurdity of it all.

The Warren Buffett Op-Ed

Splashed all over the headlines this morning is mention of Warren Buffett's Op-ed piece in the New York Times. What he says in my opinion is obvious. It describes something worse than a 1970s scenario with massive inflation down the road. I still think this is like seeing the housing bubble in 2003. Several more years before it becomes obvious to the overall public. By then of course it is to late. Of course this isn't a housing bubble. It is much much worse.

From the New York Times a couple of highlights:

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.


Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Tuesday, August 18, 2009

What Makes Us Google?

Dreadfully slow day in the markets today. A more normal August day with volume not to be found.

So with no big news (that may change, I believe the Guaranty Bank bid is due today) it is always good to catch up on psychology.

This focuses on the desire to always be seeking information. I believe it is applicable in the markets as well as often times you have all the information you need to make a decision. When the market is moving against you the desire is often times to find more information. It is often times better just to go on vacation but internally we have a desire to constantly be seeking additional information even if not particularly useful.

Anyway, interesting read on a slow day lacking new information highs. :)

Thanks goes to Ron.

From Slate

Seeking. You can't stop doing it. Sometimes it feels as if the basic drives for food, sex, and sleep have been overridden by a new need for endless nuggets of electronic information.


For humans, this desire to search is not just about fulfilling our physical needs. Panksepp says that humans can get just as excited about abstract rewards as tangible ones. He says that when we get thrilled about the world of ideas, about making intellectual connections, about divining meaning, it is the seeking circuits that are firing.

The juice that fuels the seeking system is the neurotransmitter dopamine. The dopamine circuits "promote states of eagerness and directed purpose," Panksepp writes. It's a state humans love to be in. So good does it feel that we seek out activities, or substances, that keep this system aroused—cocaine and amphetamines, drugs of stimulation, are particularly effective at stirring it.

Monday, August 17, 2009

Camping and the Markets

I went camping this past weekend in the great Texas August heat. I do not recommend it. I knew it was going to be horrible from numerous experiences in my younger days in boy scouts but decided to go anyway to hang out with friends. The thing is since I have done numerous times before, I don't have to prove to myself that I can do it. I would rather pay for a hotel room thank-you but city friends feel like they got to get out with nature. So it happened. The fellowship was awesome, trying to sleep was a nightmare. I even bought a $25.00 battery operated box fan to help out. It didn't help much I can assure you though I am helping China's export numbers. We did float the Guadeloupe river which is always fun. So I didn't really sleep (a six hour nap on Sunday) but minus the late night hours it was way fun.

Anyway, you don't care about any of that. What about the markets? Markets are brutal aren't they. If you wanted to play the short side but wanted to wait to see how things developed you would have missed almost the entire move today. The markets opened down and stayed in a very tight trading range. In the short term, this is all fairly bearish. What I don't know and not willing to say is that the final top is in before heading all the way back down to 800 and eventually lower. I put it at 50/50. What I have been looking at as leading indicators are all pointing south which is why I shorted some last week. China has been getting pummelled as has high yield credit. That doesn't mean however that U.S. equities will follow without a fight. China set its high before the U.S. did in 2007. It set its low in November of 2008. U.S. set a newer low in March of 2009 in which China did not follow.

The breadth was very negative today with very heavy volume for an August day. I would bet strongly we are going at least somewhat lower but there is still going to be some very good housing data that will be coming out in the next couple of months.

As as side note I feel like the economic picture couldn't be playing out closer than what I described in my first quarter letter and then in my second quarter letter. Consumption/demand is what matters. It is following the textbook deleverging cycle.

England's Home Prices

I have talked a couple of times about home prices in England. On a valuation basis, real estate became more overvalued than the U.S. I don't remember the exact number but I think Grantham estimated the U.S. real estate market was a 3 standard deviation event and England was a 5 standard deviation event (may have been 4). Anyway, England home prices have supposedly not declined nearly as much and recently shown some form of stickiness. Unlike the U.S. however there is really no one standard for home prices measurement (this is my understanding, if I am wrong please let me know). In the U.S. you have several measurements of housing prices also but the Case Schiller Price Home Price Index is sort of the standard that everyone goes by. In England, there are three or four and all are reported. Well today Rightmove reported big home price drops in England. There are alot of interesting things in the Independent article:

A 2.2% drop in a month?

The average asking price fell by 2.2 per cent, equivalent to £5,102, between 12 July and 8 August despite a scarcity of stock coming on to the market, the property website Rightmove said.

This is what I am talking about with different data releases:

The latest survey carried out for the Halifax found that house prices were now rising and that the cost of the average home had gone up by 1.1 per cent in July, to £159,623.

Rightmove has not been one of the aggressive data centers on home price drops. They have just been playing catch up:

Asking prices fell by 1.9 per cent and 0.4 per cent in January and June, respectively, which were the only other monthly falls this year, according to Rightmove.

In the whole article this is what I found most amazing:

In another positive sign for the market, Rightmove said 75 per cent of home owners did not expect prices to fall in the next year.

That seems very bullish to me on housing in England. This mindset may have helped prices in England but overvalued is overvalued and reality may be slower than the United States but I would not surprised if this isn't overly optimistic. Of course that has huge impact on the banking soundness of England's banks which is why I continue to watch it very closely.

Thursday, August 13, 2009

Demand Deterioration Continues

I have been on the road all last night and today. Closed the San Antonio deal I have referenced previously.

If you have read my quarterly letters, you know what I consider most important is demand. In the long term, inventory and production levels do not matter if you do not have a rebound/stabilization in demand. As long as demand is deteriorating, true underlying intrinsic value is deteriorating. As the value declines, the market may pass it numerous times like a drunk individual trying to walk the yellow line. The markets may go below intrinsic value and then surge above the value before realizing that value is not following.

In a deleverging cycle, the end is reached when the system has delevered and demand has found a bottom. This is why I am and will continue to be bearish regardless is the market heads higher.

Today, you saw horrific retail sales numbers. Currently, I consider this one of the most important economic data points that comes out each month. It did not fall nearly as hard after Lehman. Whereas production in some cases fell 50% after Lehman, overall consumer demand fell a few percentage points. Production had to bounce after that sort of cut. It is bouncing. This bounce will not continue unless demand stabilizes. The numbers today, showed they are not stabilizing.

Economically my thesis has been following exactly the way I thought it would. At some point the markets will react to this economic reality. All in all, I was very pleased with the market action today, especially considering the Dow futures were up over 120 points at 7 am. this morning.

As a side note, debt markets were wider across the board today. First you had China leaving the rally party, now you have the U.S. debt markets leaving the rally party.

Wednesday, August 12, 2009

Afternoon Action

Well the FED makes nothing easy. They are "ending" the QE program but extending it through October. This is seems like a punt in that the they could reverse course if they so desired. It buys time. In general, I see this as bearish however and was shorting after the announcement as I said I was going to to do if they did not increase the amount of the QE program. However, I did not short as hard as I would have because of the market reaction and the fuzziness of it. The market may have another spurt, I don't know but I am more comfortable shorting with no amount increase of the QE than if they would have added to the overall notional value of the program. The market ended lower than when the announcement was made and below 1008. I think you have to take that as bearish.

In general the market is in the mode, no matter what the news it is bullish. If they increased the amount of the QE program than means more money hitting the economy, so buy. If they don't extend the QE program than that means the economy is great and they don't need to, so buy. Just the market we live in right now.

The most interesting thing was the dollar. It spiked hard and then sold off hard. I would have thought it would have kept its gains. I find that concerning from a bearish perspective.

As I am typing this I see headlines that investor John Paulson bought 168 million news. This isn't really news. He participated in the secondary offering months ago, this was well known. It wasn't totally clear whether he used that to cover short or actually go long but that headline is not really news.

Tuesday, August 11, 2009

Atticus Liquidation

I don't usually post things from other blogs but decided to make an exception here.

Atticus fund is $3 billion. Any liquidation in the short term will have short term impact on investments. 29% of their assets are in financials. Could have helped added to the weakness in financials today.

From Bespoke

Atticus Capital announced earlier that it would shut its $3 billion flagship fund and liquidate its holdings citing personal reasons on the part of the company's founder. Below we summarize the firms's most recent holdings by sector (as of 6/30) along with its top three holdings in each sector based on its 13-F filing.

Click on the link to see the largest holdings. Bank of America is the biggest with 11% of the fund. That would be a little over $300 million the market will have to swallow. With a 137 billion market cap it would seem the market could swallow it without to much trouble.

Thanks goes to Travis.

Thoughts to Ponder

Interesting last couple of days. It was psychologically brutal but I sold some hedges for a short on Friday. Other than that, I have not shorted anything additional in the market, yet. Tomorrow is a big day. The FED meeting and any statement concerning the quantitative easing that will expire next September will dictate alot of what I do. This is weird for me because usually macro stuff like that doesn't matter that much as for as timing my trades. I can't remember the last time I have traded on FED day but as I mentioned I have been looking for signs of a possible top. Signs are starting to appear. China is down 4 of the last 5 days, the dollar has reversed, the Baltic Dry Index was down five days (i think that is right) in a row or 25% coming into today (not sure what it did today). These are the things I have been following. Also, today for the first time in I don't know how long, we sold off into the close. Anyway, if the FED doesn't extend the QE I will be much more comfortable getting short. The street seems to assume they won't but there is smart money that thinks they will extend. This includes Bridgewater. Remember last week it was assumed that England wouldn't extend their QE program and they did last week. Normally I would say that is a for sure sign that the U.S. would follow suit but there are few key differences. For one, the Pound has been on a massive run so it was very convenient for the them to extend QE and kill their currency rally. We don't have nearly the same leeway.

Anyway, I will be shorting if they don't extend. It may not be the top but it will be close. I actually put it at 50/50 odds that the absolute top is in. Basically 800 before 1100 (I actually think lower than 800) but there should be some very good economic data still to come out in the next few weeks and if that was combined with more QE you could see another nice little run.

Want to make one comment about volume. The market is dead. Yes it is August and a large portion of Wall St. is on vacation but it is dead for even normal Augusts. This is what bear market bottoms look like. Not what we saw in March. There is no one left to sell and no one is interested in buying and the market just starts drifting up slowly picking up steam and slowly picking up volume. This is also what bear market rally tops looks like. As the bear market rally dies so does volume.

Anyway, I still stand by my next 60 days call from a couple of weeks ago that the top in the market will be by the end of September. It is possible we have another move higher but I would move those odds lower if there is no extension to the Fed QE.

It is also possible they push it to the next meeting. That would be very unlikely leaving the Treasury market in limbo that long.

One other side note. Dick Bove (who I personally can't stand) was out today saying that bank's earnings in the second half won't be getting any better. Besides the fact he is more of a trader and not a true analyst, my guess is he understands the sham job that is going on with reported earnings the last two quarters. The closer you get to the annual audit, the more difficult it is for banks to play games.

Monday, August 10, 2009

Intraday Observation

I have no idea why but the futures market is deader than a doornail. We only have 598,000 contracts that have traded which is well well below the normal run rate BUT the cash market has already traded 1.125 billion shares. This is already above what we have been trading on average the last couple of months for the entire day.

If anyone reads why this may be occurring today please let me know.

Saturday, August 8, 2009

Lending in China

Been no secret surrounding the China lending boom. The only question is has been going into anything productive or just asset prices to create asset bubbles. Considering the Shanghi Composite Index is up 79% this year it was seem the latter. Despite the surge in the U.S. markets last week China was actually down. Part of it has to do with the possibilty of Chinese officials clamping down on the stock market. Bloomberg ran a story on the disuccsion. Most of the article is your normal mumble jumbo and how things really won't change except maybe for the stock market. Then you get to the end of the article. Why does it seem that anything of any value has always been pushed to the end of the article.

China Construction Bank Corp. President Zhang Jianguo said Aug. 6 that the nation’s second-largest bank will cut new lending by about 70 percent in the second half to avert a surge in bad debt. Construction Bank plans to extend about 200 billion yuan ($29 billion) of loans, down from 708.5 billion yuan in the preceding six months. The company’s new lending through June 30 was 42 percent more than for all of 2008.

That is a massive cut!!!! It could be why the Chinese markets are showing signs of weakness for the first time in months. China Construction Bank Corp basically takes their marching orders from the government. If these are the marching orders for more than just this bank, the China growth story going forward could be much different. Short copper anyone?

Thursday, August 6, 2009

Fannie and Freddie

I usually don't do this but I am going to speculate on a little conspiracy theory I have come up with. Two days ago Moody's came out with a report that the government was going to probably wind down Fannie and Freddie. Yesterday James Lockhart III who oversees these two entities announced his resignation. The thought being mulled by Washington according to MSNBC is to "strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said. The bad debts the firms own would be placed in new government-backed financial institutions -- so-called bad banks -- that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate."

I find it interesting that it is almost a year when Fannie and Freddie made their way on the scene and Hank Paulson made his famous Bazooka comment.

Anyway, why now? Why are they moving this direction currently? Think think think. Well who knows but my theory is that it may have to do with disclosure. I have several friends connected to that whole situation and I am hearing the eventual losses could be out of this world. Of course there has been nothing but back slapping and false hopes spouted with how good everything is going to end up.

Let's run with this disclosure thought a little more. If these two guys do have major undisclosed losses, well of course other financials do also. If Fannie and Freddie are a public company that has to report all this, auditors will use this stuff to help them determine if the marks for say JP Morgan or Government Sachs is indeed accurate. EWWW, that wouldn't be good now would it? Also, there will be big press releases and 10-Q's that will be very easy to go through for inquiring minds to see what kind of farce this all is. If a new shadowy government entity is created, presto, disclosure becomes that much more clouded. No more lengthy q's, maybe just a few pages or slides of selected inflation.

These are all my own thoughts but it can't be an accident that all of a sudden now they want to make the bad debts disappear into a government eating vortex.

Wednesday, August 5, 2009

Day in Review

Below is part of an email I sent to a friend in finance. Sums up the important news I read today. The truth is read this stuff everyday. Until it matters in the market it hardly is worth posting on.

Anyway, below is just a brief look at my today's reading. Only today. Somehow through all of this the markets basically yawned with financials up 3.5% and REITs up over 4%.

1) Deutsche Bank Report

The percentage of properties “underwater” is forecast to rise to 48 percent, or 25 million homes, as property prices drop through the first quarter of 2011, according to [Deutsche Bank] analysts Karen Weaver and Ying Shen.

I guess they didn't get the memo that house prices have bottomed (as a reference point they estimate that 26% are underwater currently.

2) 12th largest U.S. mortgage lender told to cease operations by the U.S. Department of Housing and Urban Development. It was the the 3rd larges FHA loan originator in May

3) BRE confernce call yesterday - apartment REIT operator in west

our current views have not changed from the start of the year, specifically the rent curve should continue to decline well into 2010. Cumulative rent loss may be double digits and pricing power will not return until jobs turn positive which may be late 2010....This environment calls to mind the Churchhill comment,”if you are going through hell, keep going.”

The CEO of the gigantic REIT Boston Properties has been selling his stock by the bucket load.

All this and the REIT Index is up 13% in the last five days!!! Up 90% in the last 5 months. (I have no position in REITs)

4) Procter and Gamble expects sales down 0 to 3% in Q3. More revenue disappearance....BTW this was forecasted yesterday by Multi-Color who makes labels for consumer product companies (19% of Q1 sales to P&G)....from their conference call Yes, order flow actually was pretty decent during the month of June, better than May, and then as July came in, July began looking more like May,

5) ADP report very negative with non fram payrolls decreasing 371,000

6) From the Challenger job-cut report

Planned layoffs at U.S. firms increased in July for the first time in six months, signaling more uneasy times for workers and a continued drag on consumer spending and the broader economy.

Planned job cuts announced by U.S. employers totaled 97,373 last month, up 31 percent from June when it had hit a 15-month low

7) ISM non-manufacturing index came in at 46.4 below the 47 in July and below analysts expectations of 48

8) James Lockhart III announcing his resignation from the Federal Housing Finance Agency. He was supposed to be overseeing Fannie and Freddie. Wonder if it has anything to do with the Moody's report yesterday that the government is going to start winding these two entities down? What? No more Fannie and Freddie?

9) On some good news (if you can call it that) Government Sachs only lost money on 2 trading days in Q2. A record 46 of 65 trading days they made $100 million or more during that day. This of course supplied by Uncle Sam. Frontrunning, leaks? How do the best traders in the world lose money only for two days??

10) ABC Weekly Consumer Confidence Index fell to 47 from 49 which is back to where it was 2 months ago when it sparked a huge rally. Well that was the excuse given anyway.

11) Trim Tabs research on very questionable government data

“The personal income report the Bureau of Economic Analysis released Tuesday contained huge downward revisions to wage and salary growth,” said Biderman. “Now that the BEA is using unemployment insurance reports from the first quarter to estimate current wage and salary growth, its data confirms what we have been reporting for months.”

The BEA’s estimates of wages and salary growth changed from year-over-year declines of 0.8% in April and 1.1% in May to year-over-year declines of 4.0% in April and 4.2% in May. Also, the BEA reported that wages and salaries dropped even more sharply in June, falling 4.7% year-over-year.
“Two months ago, we asked BEA economists how they reconciled the huge declines in real-time tax deposits with their report of a modest decline in wages and salaries,” said Biderman. “They could not answer our question. We know now that by ignoring real-time data, the BEA was providing an inaccurate view of the economy’s health.”

12) Lower Lending by the banks

For the second week in a row, bank-wide mortgage lending fell $22.0 billion for the week ending July 22. Consumer lending fell $1.1 billion and has now declined for eight weeks running (cumulative loss of $16.0 billion or a 13% annualized slide). Commercial & Industrial loans contracted $8.0 billion during the latest reporting week and has collapsed at a 15% annual rate over the past two months — interesting way to embark on a restocking phase: with no inventory financing! All told, bank lending to households and businesses shrunk $31.0 billion during the July 22nd week and is down a record $114.0 billion or an 11% annual rate over the past eight weeks.

But the banks did add $12.0 billion to their cash hoard that week, bringing the total accumulation to $118 billion over the past three weeks.

13) Three very big banks are set for failure. Colonial, Guaranty, and Corus. These should be taken over by the FDIC in the next couple of months if not weeks. My understanding is that any one of three will bankrupt the FDIC which means they will have to borrow from the Treasury. Speculation? What do 10 year treasury yields do when this is made known to the world? What kind of shock does this enter the system. As far as Corus, at this point tier 1 capital is negative 2.1%. My understanding is the only reason it hasn't been taken over is the FDIC has no idea what to do with it. Their book is almost 100% condos in Florida though based out of Chicago. No real branches and very little in true deposits (all cd's).

14) This was actually yesterday -

BIRMINGHAM, Ala. – The sheriff in Alabama's most populous county may call for the National Guard to help maintain order, a spokesman said Tuesday, after a judge cleared the way for cuts in the sheriff's budget and hopes dimmed for a quick end to a budget crisis.

Business Success in a Recession

I have a good college buddy up in Dallas who runs Entertainmart which is owned by his uncle. He sent me an article talking about the business. Thought the whole article was interesting enough to put on the blog. Several takeaways that are applicable. Few comments below.

From the Dallas Morning News

Mark Kane figures: If at first you do succeed, try, try again.

First, Kane turned a booth at a Garland flea market into CD Warehouse, netting him $7 million when he sold out in 1997.

Then he founded Movie Trading Co. He sold that seven-store chain to Blockbuster Inc. for $12 million in 2002.

Now the 55-year-old is rolling out Entertainmart – his latest, and perhaps greatest, adventure into the retail world of buying and selling used music, video and games.

He isn't trying to reinvent the wheel. He calls it a retread.

"Better, more expansive, nicer environment, obviously much larger sales volume," Kane says, surveying 32,000 square feet of merchandise at his newest store at Central Expressway and Parker Road. "I know this business. I've been doing it for 20-plus years. I'm just putting a little more lipstick on the pig."

From an investing standpoint, here is a man who sticks with his core competence. He knows what he knows and so far has stayed within it. So many people make a fortune in one area and then go lose it in a completely unrelated field. It also shows he loves what he does. This is the type of manager investors should be looking to invest in.

These days, Kane is taking advantage of desperate landlords.

His rent in Plano is half of what the landlord wanted 18 months ago.

The store sold $60,000 in merchandise its first week – about 20 percent of its first year's rent.

The lease has a key feature: a 90-day rolling kick-out. That means he can give notice anytime he wants and walk the lease three months later. It's a one-way opt-out, he says. His landlord can't give him the same 90-day heave-ho.

This is going on everywhere. In the world we live in of course the worst the news the more investors want it. REITs are up like 10% in the last three days. BRE Properties, an apartment REIT out west, expects rents to decline well into 2010. NYC office space rent is dropping like a stone. The desire for REIT stocks seem to have never been greater.

The big boogeyman is digital downloads of movies, Kane admits. "CDs used to be all of our business, and now they're 10 percent. If that happens to movies, it will obviously hurt."

But he has an escape route planned. Kane says he can mark down and liquidate his inventory in 60 days and still make money...."I'm all about mitigating the downside," Kane says. "I'm getting 1 percent on my CDs at the bank. I'm getting 60 percent on my CDs here. Low rent, a kick-out. How do I lose?"

Another key feature of his success. Worried primarily about his downside. Let the upside take care of itself.

Good luck to Russell and his Uncle.

Truth Squad on Whole Foods

First of all, I have no position in Whole Foods. Two years ago I owned it and sold in a very short time period making a little money. Anyway, I glance at it every now and then and knew some people shorting it and so after seeing the stock report earnings and the stock rally 20% I decided to take a look. Good grief!!! How in the world this stock is up 20% I have no idea but the spin job in news reports is in full force. Hadn't looked at anything: below is the first story I looked at.

From yahoo finance (actual article is from Reuters)

From the first paragraph:

Whole Foods Market Inc on Tuesday posted third-quarter earnings that beat Wall Street's expectations, as sales rose, and the seller of organic and gourmet food items raised its full-year earnings forecast.

Wow - sounds pretty good right. Beat on earnings, raised forecast, and sales rose!!

Third paragraph. Are you kidding me???

Though it raised its profit outlook, the company chose to remain guarded about its sales expectations for the fourth quarter -- possibly to avoid disappointing investors, according to one analyst.

Wait, so it raised forecast but apparently it wasn't impressive enough unless you assume that the company is being conservative??? So the company forecasts and we are automatically to interrupt that they are low balling because otherwise it would be a negative. Unreal.

From the 6th and 8th paragraph:

Austin, Texas-based Whole Foods said net income rose to $42.8 million, or 25 cents per share, for the fiscal third-quarter ended July 5, from $33.9 million, or 24 cents per share, a year earlier.

Analysts, on average, expected 20 cents a share, according to Reuters Estimates.

Okay so they beat by a nickel or by 25% but earnings yoy increased by 4%. That would be something to get excited about right? I mean the company is trading at a 10 PE. That should be worth at least a 12 PE if you assume 2 to 3% inflation. Oh wait?? They aren't trading at a 10 PE?? NO WAY!!! A 46X trailing PE and 32X forward PE???? (that is consensus analysts forward PE, using company guidance it is a 38X forward PE) More than 15X FCF? Gulp!!

But sales are doing great. The first paragraph talking about the increase. They can grow into this valuation especially if they are focusing on costs.

From paragraph number 10 and 14

Same-store sales, which tracks sales at stores open at least one year, fell 2.5 percent. Identical store sales, excluding nine relocations and two expansions, fell 3.8 percent.

For the first four weeks of the fourth quarter ended August 2, same-store sales fell 1.1 percent and identical store sales declined 2.7 percent, Whole Foods said.

This is just unreal. Because of new store openings sales technically did rise, don't fall over, I know it is shocking, from 1.84 to 1.88 billion or 2.2%. Since when has Wall Street ever cared about that? Same store sales mean (or used to mean) 100 times more. So we are paying 38X forward earnings for a company whose earnings went up 5% and their sales went up 2.2% because of newly opened store? Same store sales are falling between 1.1% and 2.5%.

I guess I shouldn't be shocked yet the pressure is to buy buy buy so you don't get left behind and underperform the stock market.

If your a trader, the trade is simple. Big resistance at 30 if you pull up a 2 year chart. You short it below 30 and have a stop at say 30.25 (day high was $30.13). Very very easy trade. I don't usually trade and haven't decided whether I will do that or not. If your an investor looking at this as a great short it becomes much harder unless you willing to ride the roller coaster. When an earnings release like this can send the stock up 20% in the face of all logic, tread carefully. That is the entire market right now.

Discover U.S. Spending Monitor

Reason to rally I am sure but the credit card company Discover has a little followed spending index (that is what I am calling it anyway) called the Discover U.S. Spending Monitor. Well this little baby fell for the second month in a row. It is also the first time since March that a majority of consumers plan to spend less on Discretionary, Home Improvement, and Major Personal Purchases. That has to be worth at least a 100 point rally in the Dow. Thanks goes to Pete.

I tried to cut an paste the points of interest. Shoot - The whole thing is jaw dropping. Though not in italics the entire section below is from discover.

From Discover:

Discover® U.S. Spending MonitorSM Falls for Second Consecutive Month as More Consumers Grow Concerned about the Economy and Their Finances

First Time Since March That a Majority of Consumers Plan to Spend Less on Discretionary, Home Improvement and Major Personal Purchases

RIVERWOODS, Ill.--(BUSINESS WIRE)--Aug. 5, 2009-- The Discover U.S. Spending Monitor fell for the second consecutive month from 85.6 to 83.5 (based out of 100), as consumer attitudes towards the economy and the current state of their personal finances continued to deteriorate. Overall, 61 percent rated current economic conditions as poor, a 2-point increase from the previous month.

The drop in economic confidence also appears to be weighing on consumer attitudes about their personal finances. Only 32 percent currently rate their finances as good or excellent, a Monitor low and a 1-point drop from last month. Twenty-five percent currently rate their finances as poor, tying a Monitor high.

Their growing pessimism toward the economy and their finances has more consumers planning to cut back on spending overall.

Anticipated Spending Falls for First Time Since February; Majority of Consumers Planning Cutbacks on All Discretionary Purchases

The number of consumers expecting to spend more in the month ahead fell to 21 percent in July, a 2-point decrease from June and the first drop since February. The fall coincided with a 6-point decrease in the number of consumers expecting to spend more on household expenses like gas and groceries. For July, only 29 percent of consumers expected to spend more on household expenses. That’s a significant change year-over-year. Last year at this time, when gas prices were reaching record highs, 57 percent of consumers were planning to spend more on household expenses.

Despite gas prices being well below the records set a year ago, the number of people planning to spend less on discretionary spending in the month ahead is similar to what was reported in July 2008. Fifty-three percent are planning to spend less on discretionary purchases like going out to dinner or the movies, 50 percent plan on spending less on home improvement purchases, and half plan on spending less on major personal purchases like a vacation. This is also the first time since March that a majority of consumers are planning cutbacks in all of the discretionary spending categories surveyed.

“Despite some positive signs in the economy, consumers are showing no intentions of increasing their spending,” said Julie Loeger, senior vice president of brand and product management for Discover. “With a Monitor-low 32 percent feeling their personal finances are good or excellent, it is no surprise that consumers are continuing to cut back.”

The cutbacks consumers are making toward discretionary spending aren’t having a positive effect on consumer savings either. Forty-two percent expect to save or invest less in the month ahead, tying a Monitor high, while only 9 percent expect to save or invest more, a Monitor low.

Monitor-Low 47 Percent Expect to Have Money Left Over After Paying Monthly Bills

For the second straight month, a Monitor-low 47 percent have money left over after paying monthly bills. This is the fourth straight month this number has fallen below 50 percent. Of those who do have money left over, only 10 percent plan on having more money left over, tying a Monitor low and 2 points lower than June.

On a positive note, for the seventh straight month, less than 40 percent of consumers say they are expecting an added expense or an income shortfall in the next 30 days.

Majority of Consumers Feel Economy, Personal Finances are Getting Worse

For the first time since February, there was an increase in the number of consumers feeling economic conditions are worsening. Fifty-two percent feel economic conditions are deteriorating. This is the highest this number has been since March.

An increasing number of consumers also are concerned over the direction of their personal finances. Fifty-one percent feel their finances are getting worse, a 2-point increase from June and also the highest this number has been since March.

“The optimism consumers showed about the economy during the spring has faded during the summer,” said Loeger. “Unemployment is still rising and while some are saying the worst is over, the majority of consumers surveyed by the Monitor in July currently don’t feel that way. Until they do, consumers are unlikely to start spending again.”

Tuesday, August 4, 2009

China - "The Central Government will keep the market in good shape"

Nothing to point out in the market besides full steam ahead. Only thing to point out is the fact that high yield debt has widened the last two days. Other than that, the market shakes off anything and everything and powers higher.

U.S. markets aren't the only ones. From MSNBC

The middle-aged crowd in the packed Guosen Securities office jostle around buzzing printers that spit out receipts for their share buys, hoping to cash in on China's stimulus-fueled stock market boom.

"The central government has to fulfill their promise of 8 percent economic growth," said Wu Jun, 62, a retired civil servant who invested part of his life savings of 50,000 yuan ($7,300) and lives on a 2,000 yuan-a-month ($290 a month) pension. "They'll come up with measures to keep the market in good shape."

Sheez, the markets world wide have become grand casinoes. Do investors forget that quickly? I read somewhere that the volume on the Chinese stock exchanges is now exceeding the volume on the NYSE. China's stock market is still a fraction of the size of the U.S. market!!

The Finance Ministry says it found some companies played the market with money borrowed for stimulus projects. It gave no details but Chinese companies frequently are accused of violating China's already lax financial controls by diverting money from borrowing or their core business into stocks in hopes of making a quick profit when the market is rising.


Thousands of investors have jumped into the market. The number of new trading accounts soared to a weekly record of 108,932 last week, according to the Securities Depository and Clearing Corp., an arm of China's two stock exchanges.

no one learns...."more cautious", greed all over the statement below. And the market will be ruled by fear and greed. Should be a verse in the Bible somewhere.

Wang Zhijun, a 58-year-old retiree, calls himself a market veteran and says he lost more than 10,000 yuan ($1,400) in the last stock plunge. He said he is more cautious this time but exuded optimism about the market benchmark's continued rise.

"Maybe next year it can go as high as 8,000 points," or more than double the current level, Wang said as he joined the throng in Guosen Securities. A friend standing nearby said that was unlikely, and Wang shot back, "5,000 at least."

Monday, August 3, 2009

Hunches - A Valuable Tool in the Brain

I love stuff like this. It is very applicable to investing. I spend alot of time studying psychology and understanding how the brain works under stress in various scenarios. The article below is very similar to the book Blink which I really enjoyed. I bolded several things below that I believe are pertinent not only to surviving explosive devices in Iraq but also the investment world.

From the New York Times

The soldier patrolling closest to the car stopped. It had to be hot in there; it was 120 degrees outside. “Permission to approach, sir, to give them some water,” the soldier said to Sgt. First Class Edward Tierney, who led the nine-man patrol that morning.

“I said no — no,” Sergeant Tierney said in a telephone interview from Afghanistan. He said he had an urge to move back before he knew why: “My body suddenly got cooler; you know, that danger feeling.”

The United States military has spent billions on hardware, like signal jamming technology, to detect and destroy what the military calls improvised explosive devices, or I.E.D.’s, the roadside bombs that have proved to be the greatest threat in Iraq and now in Afghanistan, where Sergeant Tierney is training soldiers to foil bomb attacks.

Still, high-tech gear, while helping to reduce casualties, remains a mere supplement to the most sensitive detection system of all — the human brain.


Studies of members of the Army Green Berets and Navy Seals, for example, have found that in threatening situations they experience about the same rush of the stress hormone cortisol as any other soldier does. But their levels typically drop off faster than less well-trained troops, much faster in some cases.


The men and women who performed best in the Army’s I.E.D. detection study had the sort of knowledge gained through experience, according to a preliminary analysis of the results; but many also had superb depth perception and a keen ability to sustain intense focus for long periods.


A soldier or Marine could have X-ray vision and never see most I.E.D.’s, however. Veterans say that those who are most sensitive to the presence of the bombs not only pick up small details but also have the ability to step back and observe the bigger picture: extra tension in the air, unusual rhythms in Iraqi daily life, oddities in behavior.


In war, anxiety can run as high as the Iraqi heat, and neuroscientists say that the most perceptive, observant brain on earth will not pick up subtle clues if it is overwhelmed by stress.


In the Army study of I.E.D. detection, researchers found that troops who were good at spotting bombs in simulations tended to think of themselves as predators, not prey. That frame of mind by itself may work to reduce anxiety, experts say.

Sunday, August 2, 2009

Weekend Musings

I got back from a much needed weekend of sleeping, reading, and thinking. I have been going for over a month straight and needed the catch up time. Of course, I spent alot of time thinking about the markets (I don't really know how to do anything else). I have said on this blog a couple of times that I believe the market will top in the next 60 days (by the end of September). If that is even right, that sounds like a much bigger statement than it actually is. Sixty days is a long time when the markets have been moving like they have been of late. 1200 on the S&P is basically only 20% away. We have covered that more than twice in the last few months. Incredible, right? So if I am right (that is a big if), there is a whole lot left open that impacts portfolio decisions. Shorting at 987 if the market was to have blow off top that propelled it to 1200 would be deadly.

This 60 day top is different than other "corrections" I have talked about and tried to navigate for the last several months. I have for months thought the inevitable top would be in August or September because of what I discussed below. I was looking for a correction in May into June which I never got (the market decline 9% at its greatest point) and because I never got it, it was painful. But that doesn't change my thoughts for the final top, similar to October of 2007.

So why do I think the market tops in the next sixty days? First, I am not a big believer in the market's discount ability. CNBC and others love to talk about how the market is way ahead of the actual economy. This is only partially true and I think way overblown. The market topped at basically the start of the recession in October of 2007. Great job leading there and the market bottomed after the true economic bottom which was December of 2008 (the greatest percentage decline in growth worldwide was occurring in December). I could give many more examples. I think economically we have just passed the top or will shortly (the difference is very important and makes a difference I think on if the market goes to 1200).

Below is a graph from Bridgewater (yes I am probably not supposed to have it)

This shows the net impact of the government stimulus spending on the economy. I saw this graph back in February. We are now on the otherside of where the government spending has the greatest impact on the economy. You need to be careful in reading this graph. It is the margin change. At first blush it looks like the government spending is declining because we are on the right side of the hump. No, it is the rate of change. So if the economy is $10 back in April the government was adding $.60 even as they private sector was pulling back say $.80 (you saw this in the last week's GDP report). Now the government is adding say only 2% above what it was adding but it is on top of the $.60 already added so spending is $.612. Well soon, that changes. The hope when all this was put back together 6 to 9 months ago is that this government surge (think Iraq surge) would shock the economy enough for the private sector to take off on its own and run. This shock and awe was only supposed to be in place for a short time. Later this year into next year the actual money being added starts taking away from GDP growth. Once again that doesn't mean the government stops spending, simply that it was just less to prior months, a net drag to GDP. This is of course assuming no additional stimulus packages which if the market does top and starts to head down in any meaningful way, the government is sure to start spending again.

We have been getting less bad for months. The proverbial "green shoots." I would not be surprised if July was actually positive. If that is the case, all these numbers get reported in August. There will be alot of "good" economic numbers that will be reported. The real question in my mind is how August will be. This means alot in the timing of how all this plays out. Is August a little worse than July or is there still enough of an umph that August continues to improve? I really don't think the market will move ahead "predicting" anything. When the economy tops the market will be topping or have just recently topped.

We are at critical levels in the markets. The best scenario for the bears is the market does not break 1000 in the S&P 500, rolls over moving back down to 940 to 960 eating up a week or two and rallies again up to 1,000. Fails again. If that were to occur I believe that would be it. If you break 1,000, and I mean a meanginful break say 1,020, you could have a market surge, blow off top that would send the market screaming (I mean absolutely screaming) higher in a very short amount of time. The reason is there are quite a few bears that would give up the ghost if 1,000 was broken. That isn't guaranteed of course but the probabilities are alot higher than anyone who is short the market would like.

The key is signals, divergences, to be able to adjust the probabilities on which way to market is likely to go. For example, China was down a little over a 1% last week while the U.S. markets were up. To the extent that China starts drifting down, pretty important. China has led in all of this. The dollar got slammed on Friday, down over 1% in a day. That has typically meant big surge in equity markets. Market finished basically flat with the NASDAQ down 29 bps. If the dollar would to start drifting higher and the markets were ignoring it moving up also, I would see this as pretty big. There was failed divergence last week also. Oil got completely pummelled on Wednesday before regaining all of it back and setting new highs for the week.

Other big signals is if the market actually sold off hard on good news. I would take that to mean that was the top of the good news, the market is predicting the next data set to be poor. This is what occurred in March. Like I said, I am expecting July (except for retails sales) numbers to be pretty good. To the extent the market starts selling off on these numbers, that could signal a peak.

Finally, you need to see the sentiment readings to become a little more extreme to the bullish side. This has started to happen but it needs to climb a little more.

Anyway, the net government impact of their huge stimulus game essentially becomes zero and starts going negative soon. That will be the first big test for the economy. Also, as I have mentioned before, I think we have seen the best of the earnings for banks. The closer we get to the year end audit, the fewer games they will be able to play. Housing issues under the surface will also start to cause a big problem.

It is possible of course (though I put a low probability) that the momentum guys are firmly in control and we will rally into the end of the year.

Time always reveals its secrets. The next 60 days promise to be interesting.

Until the market tops, basic corporate analysis seems pretty fruitless. Amazon should probably be trading sub 50. It is released horrible earning numbers, subpar guidance, and stock is firmly in the mid 80s. PALM is 16, probably should be below 8 but continues to chug away on its trend line (thank goodness I avoided that trap). JP Morgan should probably be closer to 30. I could go on and on. Until the market appears to have topped, the normal corporate analysis doesn't have the value it normally has.