Friday, October 30, 2009

Crash Alert

No I don't think we are really entering a true crash but watch out. Indexes are down close to 2.5% right now. VOLUME IS OFF THE CHARTS. The NYSE is having severe problems handling all the orders and already have used backup systems.

What is going on? Why now? Well I could explain yada yada and it probably doesn't have anythign to do it with it. The yada yada is that the GDP report was bearish because it was good like I said yesterday. Created alot of trader interest but fundamentally not a good number because it means the Fed may have to take action which means the dollar goes up and since the only thing that has mattered is the dollar going down it is bearish for stocks. That is a mouth full.

At 8:45 you had Chicago PMI. That was a really bad number last month. It was a really good number this week. Once again, good for the dollar, bad for the stock market.

So that is the yada yada. It may be as simple as it is just time. The majority of the mutual fund world fiscal year end on October 31st. Remember in 2007 the top was in late 2007. They have ridden this rally and it will be a good year for most of them. The end of the year could mean it is time to dump.

Thursday, October 29, 2009

The GDP Rally

The market rallied stronger than it should have today based on a truly meaningless number. I think it was last week that Great Britain had an awful miss on their GDP number and the market was up a little bit in London. GDP numbers once reported don't mean anything. Just the excuse for the market to go where it wants to go anyway. Today, this meant it was a bounce. The actual important number was jobless claims and that was not a good number.

Like I said, the bounce was stronger than my liking. I really wanted to see that 1062 number hold. We are at the top of the channel trend since the markets started declining. If we go above 1070ish I would guess the probabilities leave the bears and favor that this, yet again, was another head fake. Slew of economic data tomorrow that is much more important than the GDP released today.

Despite the big rally today, two things that I thought were worth nothing. 1) Yesterday was more bearish than today was bullish. Smaller advance decline ratio on the upside than the downside yesterday and less advancing volume to declining volume than the inverse ratio today. 2) The dollar sold off but considering the bounce, the sell off I didn't think was that dramatic. I thought all the risky assets moved way beyond what such a move in the dollar would normally constitute.

Anyway, we will know if this sell off is the real thing in the next 48 hours or if it was another big headfake. Probabilistically, I think it still favors the bears despite breaking 1062.

Letter is Out

My quarterly letter is out! Finally!!! Everyone who follows this blog at this point should be on my distribution list but if your not and would like the letter, put a note in the comments with your email address and I will email it your way.

3.5% GDP

"Good" GDP number. This should get us that bounce that I was talking about. In general I think this is a number you can short. Not only does it not mean anything (told you what already happened) but the bigger danger I think for the bears was a very weak GDP number. That would have meant a big fall in the dollar in anticipation of more stimulus. As it is, we have a trading pop, but the fact the number was so good I think is actually bad for stocks. 1052ish and 1062 ish are the areas you want to watch. Bears really don't want to see the market go above 1062.

Wednesday, October 28, 2009

Black Eye

Back from a quick whirlwind trip out of state. Market taking it on the chin getting a black eye the past few days. Is this the real McCoy? Time will tell but this is the highest odds since the late September top. Odds are probably higher as several indexes have broken their March trendlines. After being burned multiple times on multiple headfakes, most of the bears are wary of calling a top. That is a good thing if your bearish. Banks have led this market down (also a good thing if your bearish) but the XLF is coming up against heavy resistance 13.50 and 14. There is a series of higher lows that go back to early August. Financials bulls need to hold 14 to keep that trend going. Would not be surprised at this point to see some sort of market bounce. How the bounce feels and plays out will give me much more clarity on if we have set what will probably be a multi year top. All in all, we are only down about 5.5% from the top just a few weeks ago. Bears still have alot of work to do.

Other interesting thing is that junk debt finally broke today. Looks like it could be a double top.

Tomorrow is 3Q GDP report and jobless claims. That should be reason enough to give the markets a bounce though not sure if it will last the entire day. The big day will be Friday. Personal income, personal spending, Michigan consumer confidence revisions, and the Chicago PMI. Remember how bad last months Chicago PMI number was. This month may be just as bad.

Friday is also interesting because it ends the end of the fiscal year for some very big mutual funds.

Monday, October 26, 2009

Dollar Rebound!!

The sell the dollar trade finally reversed today and in a major way. This of course led to the big equity sell off. Today was no more about fundamentals than the previous 180 days. Simply, the short dollar buy everything else reversed. The dollars move was very violent and it has the potential to be just getting underway. Everyone and their dog has been hating and shorting the dollar. I have been shorting other currencies waiting for this thing to reverse because when the trade gets this crowded, it can't last forever. The reversal may have started. Time will tell.

The financial media didn't really cover it but I suspect the big dollar reversal may have had something to do with the ING annocement. Basically this European services giant is getting split up and the company is going to try and raise $11.3 billion dollars. ING shares went down 18% in Amsterdam.

So now what? The equity markets look very broken. The dollar has reversed and is now up three days in a row but there are some things that are bothering me. So far high yield debt really hasn't sold off. It is hanging in there very strong. Secondly, the big bull trendline from March has yet to be broken for the S&P 500 or the NASDAQ. This has been major resistance many times before and before everyone can jump on the bandwagon that the market has topped, at a minimum these indices need to break this trendline. Instead of a dramatic top this top looks like it is becoming more of a rolling top with pieces of the market slowly peeling away from the rally. Tech is so far hanging in there. Time will tell if that gives way.

What looks the weakest is big banks. If these guys really start to give ground, watch out. It will be just a matter of time before the rest of the market catches up.

By the way, that trendline for the S&P passes through 1052 tomorrow and 1055 on Wednesday increasing about three points a day. That is what needs to be watched.

Wisdom from Jeremy Grantham

My favorite quarterly letter is out. That written by GMO's Jeremy Grantham. I post it on this website every quarter. It is a must read. He believes the markets are being downright silly (I couldn't agree more) and that high quality stocks are the cheapest they have been in years. This trade by the way has been murderous the past several months. The third quarter I was and continue to be short junk and have several longs in large high quality blue chips. The junk has soared and soared and soared and the high quality really hasn't gone anywhere. Hopefully at some point it will reverse.

As a side note, I am hoping to send my letter out on Thursday.

Sunday, October 25, 2009

Failed Banks but No Bargains?

Good write up in Forbes. Thanks goes to Pete.

Gerald Ford made a fortune scooping up busted financial companies. Right now he's sitting on his wallet.


Seven years after he vaulted into billionairedom (net worth today: $1.35 billion) with a killing from resuscitating feeble banks in California, he can't seem to find anything to buy, at least not at a price he's willing to pay. He's raised $2 billion from the likes of mit, Yale and the Ford Foundation, got regulators to give him unprecedented carte blanche to bid on failed banks, signed two dozen nondisclosure agreements, dispatched staffers to comb over books on-site (spending 2,480 man-hours on the commercial loans of one, he recalls with excruciating detail), even made seven formal offers. All to no avail.


One bank he did like: the failed Guaranty Bank, with $13 billion in assets and 164 branches. Ford and his staff of 18 in his offices in Dallas, Chicago and New York spent most of the summer studying the Austin, Tex. lender but, alas, were outbid by Spanish banking giant BBVA. Regulators let banks buying failed banks get away with a 4% capital cushion, while buyout funds must put up 10% of assets. Ford argues that this disparity allowed BBVA to make a nicer offer for Guaranty. His outlook is perhaps "not as rosy" as that of his Spanish rival, he says.

Thursday, October 22, 2009

Value Investing Congress

I always enjoy my trips to New York City. I really like the city and enjoy all the activity that seems to never stop. I also really enjoy being isolated in a small Texas town not hearing all the market yip yap that is shared in conversations over dinner, happy hours, and sporting events among all the investing professionals. The yip yap on this trip was very informative however.

The trip can be split up into two parts. I got their early to spend part of the weekend with friends who are investing professionals in the industry. This group of people was not tied to the Value Investing Congress. The second part of the trip was of course the Congress.

The first part helped me realize what is going on in the markets. Wall St. seems to be in a fervor about the dollar (at least the group I was talking to). Nothing matters fundamentally because the dollar is going to the toilet. We are drowning in oil? Oil supplies doesn't matter, should buy more oil because the dollar is going down. Amazon at 60x earnings? Well it better than owning dollars. It is a mad rush out of holding dollars because the dollar is going to zero. So the thinking goes. These guys didn't seem to be able to see another scenario, like the Euro crashing causing a mad rush to dollars. Who knows, to me the dollar seems to need a dramatic move down to find a bottom but it sure seems like the dollar trade is the like the equity trade in March. Everyone is so sure it is going down. It is weird. Looked at it, in this light, the stock market and commodity markets are going up because the end of the world is close. Isn't that backwards?

The Value Investing Congress was much different. Remember most of these guys are not macro guys but bottom up stock pickers. Still, this conference was notable for two things. It had more macro discussion than any previous Value Investing Congress I had ever attended. Also, it was the most bearish I had ever attended. First to the macro, alot of discussion on commodities (specifically gold), economic environment, and sovereign stability. Here though, there was a general liking of commodities but a general disliking of stocks. There were equity bears everywhere!! Now the Value Investing Congress is supposed to be the contrarians so this bearish view, which lines up very closely with mine, should be a comfort. However, I remember the November 2007 conference being very bullish. So it actually makes me nervous there were so many bears.

One thing that ties the groups together however was the views on the economy. Those buying equities and commodities think the economic rebound is a joke. Once again they are buying because the U.S. currency is coming to an end. The investors at the conference seemed to generally believe the economy is going to get much worse with a second dip in housing and increasing interest rates. Equity markets will fall and possibly fall hard.

I continue to fight this market even as Amazon after a "good" earnings report will be trading at 60x earnings instead of 50x earnings but maybe the first group is right. Dollar crashing and equities go to infinity. Either way the economy recovery is a joke, a very bad joke. Today jobless claims disappointed (really a bad number), average unemployment rate hits all time record high at six months, hotel occupancy rates are setting lows, apartment rents are plunging, and the percentage of employee separations labeled as permanent are a record high since data has been kept since 1970 (and this new record blew away the old record, it isn't even close). That is just economic data today.

So maybe those buying equities and commodities preparing for the end of the world, or the end of the dollar are right. One thing is sure, if something happens worldwide to drive investors back to the dollar, watch out, the equity markets have a hage air pocket underneath them. That is what happened in 1987.

More On Oil

I knew some of my oil friends would email me about my oil post. I got several. Below is one from a friend who works directly in the oil industry. He brings up a good point. How do you protect yourself against $150 oil from an investor standpoint. Simple. You don't short oil. Two things you should never short and that is oil and gold because without warning something could happen to cause to price to skyrocket in a blink of an eye. I don't have problems shorting oil or gold companies. One, you can be shorting operations. Even if the price skyrockets, operational failure can do a company under. Also, a big problem in the middle east can cause the spot price to skyrocket but way out on the futures curve to move up only slightly. As a result, if your short a front month oil contract you can lose a fortune but a company will move up much less because the cash flows 3 years out will normalize (plus alot of oil companies won't even benefit from a short term spike because they have hedged the price they are selling at in the short term).

From a friend:

Thought your opinion of oil was right on. for actual valuation purposes.

You are also correct in understanding that traders and investors try to build in a protection mechanism against disruptions in the middle east and elsewhere. Also noteworthy is the fact that our Secretary of Energy is against EP activity and for Nuclear energy. So, Cap and Trade- type bills could send the prices of energy higher.

And you are also correct in understanding that, with newer technology, we are drilling wells that deplete faster. Which means more current supply but less promise of future supply. And that means that we have to continue producing and exploring.

At any rate, as you mentioned, we are overvalued right now. I would place us at around 50 dollars a barrel. I moved out of oil stocks (something I understand) at 70 and planned to trade a trading range of 50-70. However, I did not see a digression and fortunately did not buy puts at 70/bbl.

If you watch start up EP firms carefully, you can catch discrepancies between the price per crude and the price per share of stock. And if you know shares outstanding and the firms' production levels/reserves/leases ... you can estimate value and buy or sell accordingly.

But I think we need to see the bubble seep some of the hot air that is inside of it. However, if a middle eastern country does something we do not like ... we could be at 150 in a heart beat. How do you protect against that from your viewpoint?

Back from NYC

Hey all - sorry for the long gap in postings. I was in New York City for the Value Investing Congress. I usually try to post when I am going to be gone but ran out of time.

The next few weeks are also nuts. I will probably have a flurry of posts in the next day or two and than will be gone this weekend, out of state midweek next week and out of state for the entire week following.

Combine that with I am sick right now, brain dead, and I am trying to work on my quarterly letter and my posting may be limited. Will try to have a post or two about the conference.

Friday, October 16, 2009

Oil Oil Oil

Oil is something very rarely I touch. Why? I don't really know. I have never really understood it. I can understand agriculture and even metals but oil has always been on the edge for me and something I have never been very comfortable with to invest in it short or long. Thank goodness because I would have been short from 60 on. Oil broke out Wednesday/Thursday and is up again today. We are drowning in oil. I know the arguments: peak oil is coming, boom in Asia is going to cause us to not have enough oil, production is outpacing new exploration. Yes, yes, I know. And it may all be valid. I really don't know but the price of oil today in what is being used verses the supply seems way out whack. I don't know how much premium you want to attach to the what ifs for oil in the future but it is higher than what I would care for.

Take this report from the Energy Information Administration (click on the Weekly Petroleum Status Report). On page 9 there is a graph (figure 2) (it is below) that show U.S. Stocks of crude oil and petroleum products.

This graph is through July. 1,841.5 million barrels of oil. This is up from 1698.1 million barrels a year ago. That is an 8.4% increase. Notice how high it is above the normal range. If you take just crude oil not counting what is in the strategic reserve excluding heating oil, propane, gasoline etc.etc. you have an increase of 17.6%!!!! From 295 million barrels to 347 million barrels.

The refiners are not running at very tight capacity and so when the report that gasoline stocks dropped last week by 5.2 million barrels is that any surprise? Oh but oil increased by 400k barrels. Enough for higher prices in oil.

Like I said. I am not an oil trader. I very rarely invest in oil stocks and when I do it is usually just the really big boys, not speculative exploration companies. I am sure I will get several emails from my oil friends on this detail or that detail on why oil is going to the moon but like everything else in this world, oil just does not make logical sense. Part of the bubble that the bubble blowers were able to blow.

Thought on Bank of America

I don't have a position in Bank of America. Frankly, it is a royal mess and you have a better chance of being an art major and understand the egineering intricacies of a NASA space ship than you do being a financial analyst and understand the intricacies of Bank of America or Citigroup. Don't believe me? From the Citigroup conference call.

"[T]he HAMP program right now ... really makes it difficult for anyone from the outside [of Citi] to actually have a good view as to the inherent credit profile in our [mortgage] delinquency buckets."
Citi CFO John Gerspach, Oct 15, 2009

Anyway, I am getting off topic. As bad of a mess Citigroup is, Bank of America may be worse. Two horrific mergers, Countrywide and Merrill Lynch mean not only can analysts not know what is going on inside the company, I would guess Bank of America management does not know what is going on in Bank of America.

Than you have this whole Ken Lewis, CEO of Bank of America. "Retiring" at the end of 2009, without pay, facing civil and possible criminal charges after Hank Paulson and other U.S. government officials have left him to the wolves. Fine, old story, Paulson should probably be facing charges also.

What about the new CEO? This is where it gets interesting. All the banks are playing games. Massive accounting and delay games. If your a new CEO coming in, do you want the old baggage? Wouldn't you want to give yourself some leeway room? Ahh, I would guess you would and considering how much of a mess Bank of America is, well there maybe need to do some serious house cleaning. This was the first earnings "miss" by a big bank. I am not sure Ken is helping out the new CEO. It just may have been that bad. But the new CEO for the 4th quarter and 1st quarter may want to sandbag earnings?? It will be easy to blame on Ken Lewis. Your the new captain but not your fault the ship is a wreck. You could be talking about a massive loss in the next couple of quarters. Bank of America has been Wall St. most messed up beloved darling. It has a long way down if the confidence is shaken.

Thursday, October 15, 2009

The Games of Wall St.

Below is a perfect visual representation of the games of Wall St. A game that is being played more fervently than at any point in my lifetime. Not only is it getting played by Wall St but it is getting bought which is the amazing thing. Those who lie start believing their own lies? All the headlines about how we have huge earnings beats and how everything is great. Well, one, you could look at the multiples Wall St is paying for those earnings and realize things are not that great or two, look at the earnings revision to realize what analyst are having to do to make sure you have an eye popping headline. This graph was as a couple of days ago. I believe as of the end of yesterday consensus Citigroup expected loss per share was $.39. It came in as a huge beat with a loss of $.27. What about expectations from two weeks ago??

Another interesting thing today. Oil, which we are drowning in, is breaking out. Up almost $2 to about $77 a barrel. Gold is down $15 an ounce on a big drop. The highest correlation for President approval is gasoline prices. If oil goes beserk because of a weak dollar does that finally get Washingtons attention or does Washington start subsidizing gasoline prices? (I am joking obviously, sort of).


Tons of data today (mostly bad) and the market is down a measly 30 bips. Maybe if we close below 10,000 today and go back above it tomorrow we can have another party??? Yesterday of course officially shot my top call for August or September. The world has become much more loony than I ever thought it would become.

So first the good data. The NY Empire Manufacturing Index blew out numbers and recorded a reading of 34.6. Highest since 2004. This only indicates direction not overall level so we are not back to 2004 levels. But than the Philadelphia Fed manufacturing index came in at 11.5 which was below last months reading of 14 and below the forecasted at 13.5

Jobless claims came in at 514k which was an improvement of 10k but they revised last week number lower by 3k. This is hardly good, in fact it is still really bad, but it is less bad so maybe can pass as good.

That is about all the "good" news I can come up with.

On to the bad news.

Capital One's charge offs rocket higher. Charge off rate was 9.77%, much higher than the 9.32% from last month. 30+ day delinquent rate was up to 5.38% from 5.09% last month. That is meaningful credit deterioration.

Speaking of credit deterioration, foreclosure filings were up 5% in the third quarter from the second quarter. 1 in every 136 U.S. housing units received some sort of foreclosure filing. Mind boggling number. Banks are down 1.5% but that is nothing considering they were up 3.5% yesterday. Up, up, and away.

To JP Morgan's earnings yesterday which had the market rocking, well some things just never make sense. JP Morgan had great earnings individually but what the numbers said about the banking sector is just horrid. Credit got worse in the quarter (charge-offs, non-performers, delinquencies) and the outlook for credit (mortgage -- especially prime, credit cards and corporate) has worsened for the next few quarters. Yet it was hailed as a great report. Three months ago they indicated some improvement in early state delinquencies. That got all the bulls into a fervor. That obviously disappeared. Market ignores the reverse side.

To Goldman Sachs. Well you had big gains in fixed income. Surprise surprise but misses on everything else.

The one that was most confusing for me yesterday was railroad CSX. Revenue was a huge miss. Earnings big drop and the stock was up 7% after being up 150% in the last six months. Looking at rail volumes things appear to be improving very slowly if at all. It is incredible.

One more thing from Goldman. Trading profits were $10 billion. This used to be in the $3 billion range. This is all backed by the U.S. and taxpayers. Things go bust and we will have to bail them out. Yet management keeps around 50% of the profit for bonuses.

Risk appetite is back with a fury!! Someday we will all pay a serious price for this.

Wednesday, October 14, 2009

Dow 10,000

I don't understand what all the hoopla about Dow 10,000 is. We have crossed to the upside and downside many times over the past 10 years. If you would have bought the Dow the first time it passed through in 1999 you would really be worth 7,537 as the dollar has lost 25% of its purchasing power. Isn't that great.

Today, felt like a knock out blow to the bears. We will see tomorrow. A couple of interesting things. INTC retraced most of its gains. A close below 22.50 and it may be an interesting short technically. Fundamentally, like everything, the valuation is to the stratosphere for a highly cyclical tech company that is experience alot of double buying in prepartation for Microsofts new window program.

At this point, there seems to be only one last great hurdle for the bulls to overcome. The great bear trendline from November of 2007. It passes through 1019 tomorrow sloping downard losing a half point or so a day.

The dollar has got to be one of the harder calls right now. Does it crash, causing yields to spike, and the stock market to move down with the dollar? Or does the negative correlation hold, the dollar rallies at some point on short covering or some negative news in Europe causing the market to sell off? Or does it drip drip down and the market continues to go up?

It is hard to be bullish on the dollar but does anything crash when everyone is that bearish of it? Well maybe? What about a year ago October? The market was cracking, everyone knew it was cracking, and it crashed. I don't know. This dollar thing keeps my mind going. What I do know is that it can't be to much longer before it keeps going down is not considered bullish for stock.

Loony In Looneyville

Update: For anyone who read the article, I caught this the second time through. "So in January she decided to stop paying her mortgage.... the bank hasn't gotten to her yet" Since January!!! That is 9 months!!!

The world has officially entered loony town. Not just the stock market but everything. It seems like the only thing that is going to stop it is a crash in the dollar, a crash in the Euro, and/or interest rates spiking on government debt.

The same thing is apparently going on in San Diego. It seems like we are going to go into a mega bubble.

From CNBC:

Just when you think you've heard it all in today's housing market, along comes a story that takes all those statistics and all those monthly foreclosure reports and all that testimony to Congress and just drop kicks them all out the window.


But back to Katie. Her Realtor, who is also an old friend, emailed Katie the following warnings before her arrival on the Vegas strip:

- This market is crazy and many things are just not going to make any sense.

- I can guarantee you 99.99% of the listings emailed to you will no longer be available by the time you get here.

- Properties are selling in the blink of an eye.

- Properties are getting multiple offers within a few days of being on the market, the most offers I’ve heard a house had recently was 44 offers (I know, crazy).

- This market is crazy and many things are just not going to make any sense.

- 40% of all transactions are cash purchases, which makes it harder for the buyers who are financing to get their offers accepted.

- We have 1/2 the inventory we had a year ago and 4 times as many buyers as we did a year ago.

- Chances are we will have to submit several offers to have the chance of getting 1 accepted.

- This market is crazy and many things are just not going to make any sense.

- You will probably leave not knowing if you have a house or not because banks take 2 to 3 weeks to respond, because this market is crazy… you know the rest.


But here's the crazy part:

"We went to a home that had been on the market for one day, and the key was stolen out of the lock box. Our Realtor said immediately, 'You want this home.' She told us another Realtor had stolen the key because they wanted their client to get it. So what did my Realtor do? She broke in. And sure enough this was the home we fell in love with. It was on for $132,000 so we decided to be really aggressive and offered $160,000, plus we had government backing on our loan. Well our Realtor called that night and said, 'You're not going to get the home. They got 30 offers and half are cash offers, so the bank is not even going to look at you.' The banks just want the cash to unload these places."

No...this is what is crazy / ridiculous

Oh, and by the way, a fun factoid on Katie's Realtor: She bought her brand new home in 2005 for $240,000. According to the comps she runs daily, she says it's now worth between $90-110,000. So in January she decided to stop paying her mortgage. No financial hardship, she just figured she was throwing money away. The bank hasn't gotten to her yet, so she's just been living there for free. At some point, she knows, her bank will foreclose, but she's fine with that. She says she'll do far better financially renting for a while.

This is what the housing market has come to.

Tuesday, October 13, 2009

Another Move Higher?

Not looking good for the bears as the break appears like it will be higher. Not set in stone yet but the bulls are ahead with the Intel earnings release. Not really surprised with the Intel numbers. I actually sold covered puts on a different chip maker I am short in anticipation of good Intel numbers. You have retail sales number tomorrow which will probably be good and JP Morgan earnings numbers tomorrow morning which will also probably be good. The JP Morgan numbers will be interesting because expectations are really high. You could have a beat and the stock still sells off. The only hope in the short term for the bears is you open up around 1077 to 1080 and like Alcoa, Intel sells off all day and JP Morgan sells off all day. I don't really know what the probability is. It seems like it is higher than what it feels like right now looking at futures.

I have been saying we are at a breaking point and tomorrow the market may finally show its hand. In a strange way, I feel like earnings sort of comes down to three or four companies. JP Morgan, General Electric, Citigroup, and maybe Goldman. You could maybe throw Apple in there as well. How those four (five) stocks react around the earnings release I think will determine whether we will be marching higher to the 1100+ area.

Looking good for the bulls. Time will tell.

Monday, October 12, 2009

More of the Same

The market continues to trace the underbelly of the broken trendline from July. I said last week the market was heading to a breaking point and the market continues to maneuver in that direction. It can't go much further without showing its hand. S&P is close to its September high, wasn't able to get there today and you have a cluster of technical signals going each direction. Earnings of course happen to start in earnest after the bell tomorrow. Not an accident, the market has placed itself to break higher or lower in a major way. Friday and today really don't mean much with holidays both internationally and at home. Banks all closed today and volume didn't exist today or Friday. Probably changes soon.

Europe continues to hemorage and the trade contiues to be to sell dollars and buy eruos. The entire investing world does not make sense. Besides Latvia and Sweden, EU country Romania seems like the government is about to collapse. At the same time the Netherlands had to take over DSB Bank after an old school bank run caused it to fail.

Black & Decker raised guidance today and the stock spiked. I decided to take a look and more of the same from last quarter, cutting your way to prosperity.

Earlier this year, the company said it would cut 1,200 jobs and lower base salaries of top executives, as well as end contributions to retirement programs because of economic weakness. Black & Decker also cut base salaries for other U.S. workers by between 2.5 percent and 5 percent.

Partly because of that cost-cutting, the power-tool maker now expects earnings of about 91 cents per share, up significantly from its prior profit forecast of 35 cents to 45 cents per share.


Despite what Black & Decker called "better-than-expected sales," the company said it still expects sales to fall 23 percent compared with the same quarter last year.


Revenue is coming in better than expected partly because of earlier shipments leading up to the holidays that hadn't been anticipated until the fourth quarter.

They figured out the government CARS program. Pull forward demand to make things look rosy.

But, it works like a charm. Black & Decker was up 7.5% today.

Mark Sellers Nails It

Mark Sellers of Sellers Capital quarterly letter is floating around. He hit a grand slam in explaining what is going on.

At present, no one expects the U.S. dollar to rise anytime soon because the Fed and U.S. politicians are printing money. Oddly, this has the disturbing effect of sending stocks up when U.S. economic news is bad, because the dollar falls and the carry trade becomes more profitable.

The conclusion is now apparent: The worse the U.S. economy gets, the more dollar-priced assets such as U.S. stocks will rise. A weak U.S. economy is required to continue the boom in the U.S. stock market. It’s nuts.

Beware, however, of the day when the Fed starts to remove money from the system. This could cause the dollar to rise, and therefore cause the carry trade to backfire quickly. Until then, though, the market will likely continue to move up on carry-trade speculation as long as the U.S. economy remains weak.

Think about that for a minute. The Fed and our politicians are fostering an environment where speculation is rampant and the money they’re printing doesn’t get used to actually help society. The Goldmans of the world will make billions on the carry trade. Meanwhile, the mom and pop hardware store down the street will go bankrupt. In fact, our stock market depends on the hardware store going bankrupt. If things start going well on Main Street, the dollar will rise, interest rates will rise, and the market will crater.


This is the first time I can remember seeing government bonds, gold, and world stocks rally significantly all at the same time. Government bonds and gold are supposed to move in the opposite direction of stocks because bonds and gold are safe havens. U.S. government bonds and gold are supposed to go up when people are afraid; stocks are supposed to do the opposite. And yet all three have been moving up together.

The rise in gold prices in conjunction with stock prices is particularly perplexing because gold is considered either a safe haven or an inflation hedge. If people are worried about the world falling apart, they buy gold. Alternatively, if people are worried about inflation, they buy gold. In either of those two scenarios, why would stock prices be going up?

The only explanation that makes sense is that there’s so much newly-created liquidity sloshing around today that people are using the carry trade to throw money at anything that moves. People expect the U.S. dollar to fall, and they don’t want to hold onto depreciating dollars. The problem is, everyone already knows that the U.S. dollar is going to fall. I know it, you know it, we all know it. It’s not a secret! How can everyone be on the right side of this trade?

For me to feel comfortable holding stocks unhedged at the current time, I’d have to be essentially making a bet that the U.S. dollar will continue to fall and so the carry trade will continue. I’m not comfortable making that kind of bet because I’m not a currency speculator. The fundamentals of the U.S. economy are not in line with the current valuations on U.S. stocks. I have always invested based on earnings fundamentals and not my thoughts on the macro environment.

Thursday, October 8, 2009

Something Is Gonna Give

Very interesting day on Wall St. for multiple reasons. Today has to be a disappointment for the bulls. Alcoa was rocking the futures all last night, the dollar was screaming lower, jobless claims came in arguably bullish and the market finished up only 75 bps, Alcoa almost reversed its entire gain and finished up a measly percent, high yield credit did not participate, and financials were lucky to finish positive.

Back to high yield, I said a few days ago the best thing for bears was that equity markets would push up possibly making a new high and high yield not participate. That is exactly what has happened. Since Monday's close, the S&P is up 25 points in three days and high yield credit is wider by 1 basis point. Maybe it is a blip but that should be a warning sign for equity buyers.

The market to me feels like it is torquing. Getting wound up with pressure building. Remember when we broke the trendline from July? Well the last two days the market has been coming up underneath hitting that same trendline. Such a occurrence should not be expected but is not rare either. So far, the market has been unable to bust up above it. Another bigger trendline is starting to come into play. That is the trendline down from the entire bear market, from the October 2007 high. That trendline is still up at about 1100. Than you have the 88 week moving average that will hit 1067 tomorrow. Most media outlets do not talk about this moving average but some Wall St. guys swear by it. So right now we are sandwiched beneath the trendline from July that we broke below and the market has been bouncing off of from underneath, the trendline below us which goes all the way to the March bottom, hitting up against the 88 day moving average, and the 1080 high from late September. Add that to the dollar which briefly broke below the September low today that has been getting pummelled and is now getting the attention of everyone and the Euro which did not set a new high today and you have a toxic mix.

So something is going to give. I really don't know which way the give is going to be. I lean bearish (maybe because I am biased) simply because of the market reaction to Alcoa, high yields non participation, and the market is somewhat overextended. I would be surprised if it is tomorrow. The market can still wiggle tomorrow with giving its next move away. I would expect early next week. Time will tell.

One theory, I am just going to throw it out as maybe a 20% probability. The most crowded trade right now is to hate the dollar. Sentiment is as extreme as when the markets were at their March lows. Latvia is making serious news again over in Europe. Yesterday the Swedish Krona got crushed along with the Latvia currency (i could explain it all and why Sweden is involved but don't have time). Could it be over the weekend things don't go well in Latvia, the risk to the Euro goes up and hence starts to fall which reverses the whole dollar trade?? The risk of Latvia spilling over into Europe and the rest of the world is not high but it is not zero either. So far, investors are ignoring it. Just a hypothesis I am throwing out there. Not something I would bet on but the markets feel like something is about to give.

Wednesday, October 7, 2009

Alcoa the new Intel?

Markets look like they are getting ready to break higher. Will the Alcoa earnings kick off a 3rd quarter earnings craze like Intel did last quarter? At first blush it would seem so. Of course the market sees what it wants to see right now.

Take the Aloca earnings. Revenue up from last quarter 9.5% from $4.6 billion to $4.2. Solid sequential growth. But wait, prices were up 18.3%. So what does that mean? Probably sequential volume decline. So the buyers of this stuff (everyone else who will be reporting earnings) are buying less which should mean they are selling less. Of course this also means their input prices are going up which should mean tighter margins. Now whether this is true or not, don't expect Wall St. to care and if it gets reported don't expect it to get seen. Alcoa for its part is up 7% after the bell. Aluminum prices have been dropping since mid August. Hope that reverses for those guys. But Alcoa is cheap right? Well umm. Even if you double analysts earnings estimates for next year (which I believe is $.50) they are trading at a 15X forward earnings multiple for a highly cyclical company. So analysts have to be 100% wrong and the stock is still expensive. I don't have a position but if I did I would be short and be getting killed. Just like every other company that makes sense to short and I continue to get killed. Either way, I just beat my head against the screens day after day watching what doesn't make sense keep making even less sense.

As far as the markets tomorrow, barring a massive bad jobless claims numbers, we could be seeing new highs.

Tuesday, October 6, 2009


I am as confused as anyone right now so back to just watching and waiting. The rumor for the market being up was the Australia rate cut (ridiculous, that is not bullish for stocks) and of course the weak dollar. I really don't understand how at this point weakness in the dollar can mean such bullish things for stocks. I understand there is indeed a correlation, I just don't understand why there is such a correlation. Any weakness in the dollar means strength for European currencies. So why isn't Europe going down on dollar weakness? Also if we are the new carry trade and taking Japan's role, I hate to break it to investors but it didn't turn out so well in Japan.

Anyway, no thoughts on where the market goes over the next few days. Coin flips in my book all the way around.

Finally, today high yield did not lead the rally. One of the best things that could happen to bears is equity markets set a new high at the same time high yield is declining. I wouldn't count it.

Independent Article Accurate?

The Independent article is already getting pushback. There are some dubious parts to it which is why I put the qualifier, "assuming the article from the Independent is legitimate" in my last post. Sometimes it doesn't matter as the dollar is down, gold has set all time highs, and stocks are flying (because the dollar is down).

Either way a couple of counter articles. Reuters has an article saying the Arab states are denying the reports (if it was true they would still deny the reports.

Mish writes a post on his blog why the hype over the article is ridiculous.

If the article is indeed legitimate, I disagree with Mish. It seems to me that currency value is set by supply and demand over the long term and if all of a sudden a big economic market no longer uses a currency the demand for that currency drops considerably.

Now the article may be overhyped, won't argue there. If it is true, it isn't irrelevant.

Monday, October 5, 2009

Two Things of Potential Serious Interest


I heard rumors about this news story coming out in the London Independent earlier today. It finally hit the wires. There have been many articles lacking any sort of substance on this topic but this story has much more meat than previous stories. Bernanke goal of destroying America may be closer than he thought. I really think a must read article. Only cut and paste a couple of paragraphs. Follow the link to read the whole thing.

From the Independent

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.


China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East.


Japan may be revealing how the second iteration of trying to game the system will work. Just have a debt moratorium, alter the accounting rules so banks will be able to hide more losses, and keep companies that shouldn't survive in business which continues to hurt the strong companies and keep way to much capacity in the system. Guess what, this will probably cause banks to hold and hoard even more reserves. The crazy thing is that Japanesse banks are up big on this news right now (though it could just be follow through from Government Sachs gaming upgrades of technically insolvent institutions). From a true business model perspective (not talking about gamed earnings and gamed capital ratios) this would be very bad.

From Bloomberg:

Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.

Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said.

The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as

Market Implications

There is alot of noise in the news world. Things that really aren't that important but make headlines and investors get all excited about them. I don't think either of these two fall into that category assuming the article from the Independent is legitimate. They may not be important in the next twenty fours hours, but they could be very important over the next year. The Independent article is of course really bearish for the dollar which in the short term could mean bullish for stocks regardless of valuation. Now, if the dollar slide turns into somewhat of crash, stocks will crumble with the dollar. It is also of course very bullish for gold. It could also be very bearish for U.S. government bonds which if that would get out control would be bearish for stocks. Remember this is centering around oil. Wars, billions of dollars, and countless Americans have died over who controls the world oil reserves and who has the greatest influence. This is a huge power play by China using what was once our greatest strength, market systems. It will be interesting to see how that develops.

The Japan news stories is concerning on all levels. Primarily because it is exactly the sort of thing America did during the Great Depression. How do banks, businesses, individuals, plan and invest if the rules change? Will you owe debt payments or won't you? When does the moratorium end? Will I owe money in three months, six months, or never? If your the bank, will you get paid or won't you? How you plan cash flows and whether you will have the cash to reserve? If your an investor, how is valuation affected for a non performing loan that is not marked as non performing?

What ends up happening (this is proven over and over during the Depression) is that people do nothing. You don't have the information to know what the business environment is going to look like so businesses don't buy to invest for growth, banks don't lend, investors hoard cash, and the net result is the economy continues to sink. It is better to have losses set by defined rules than not have losses with rules that are constantly in flux.

Market Still Gameable?

Frustrating day today for the bears. I am not surprised at the rally, should have been expected, but the way it rallied calls much into question. Back to no volume, mindless upgrades, dollar getting slaughtered, and (most importantly) high yield credit surging (yields going down). Seemed for sure the momentum was finally broken last week. Instead, a weekend erases all memories.

Goldman upgraded several banks today. This really kicked off the rally as the financials never looked back up 3.15%. First of all, it is amazing there is anyone left to upgrade (hasn't every company been upgraded like 5 times already?). Second, of all, the banks upgraded are up between 100 and 300%. How can you upgrade them now? Either way, it is concerning from a bears perspective, because Goldman probably knows what the banks earned in Q3 and it is an implicit upgrade for the entire banking sector. This is why the banking sector and the markets flew. I keep thinking this should be obvious (remember the gaming of the end of Q3, banks were part of the big beneficiaries) and already priced in. I guess when you are pricing things into infinity, there is no top limit where it is priced in.

Dollar continues to trade very poorly. It may still be getting ready for a big rally but so far the way it is trading is saying no. If the dollar starts falling again, equities of course will start rallying.

The most concerning thing of all of course is junk debt continuing to tighten. Shows how the speculative juices are flowing when this happens. Money just keeps get poured into this space. This means junk companies will continue to be able to not have to pay back debt and just refinance.

So the bears are back to on edge wondering if the system is still gameable or if the game is finally ending. Market needs to hold this 1040 to 1044 area. A rally was expected. Very frustrating the way it occurred today. All the economic data the last week in a half that showed the economy is not rebounding as thought was simply forgotten. Makes life alot easier when you can just forget the bad.

Friday, October 2, 2009

It's A Wrap

As predicted the market went down right to 1015 and has bounced strongly. Unfortunately it was all in the futures market around 8:00 a.m. central. I took off 75% of my short futures exposure which I trade in my personal account but unfortunately that started the big bounce and the cash market never gave me the chance to hedge in the fund or elsewhere. Probably wouldn't do much outside my trading account anyway. Fundamentally, my thesis over the last six months is playing out perfectly. I just can't believe the market made it all the way up to 1080.

We may get down to 1015 by the end of the day in the cash market but right now the market is in no man's land.

To dollar had a brief surge but ever since the nfp report, the dollar has been collapsing. The reason of course is the poor non farm payroll means chatter in Washington will be on more stimulus and higher deficits. Very poor for the dollar. Gold is up. This could throw some wrinkles in the continued market decline.

Regardless it has been another good week for the bears. I can't imagine how the market closes under 1015 today and it really doesn't matter where it goes from here for the rest of the day. Who knows but I would expect a consolidating possibly up market next week and than the next big catalyst will be bank earnings starting the following week. My guess is that those will have to be not spectacular to break the big trendline going back to March.

I am heading to Dallas for the Texas A&M vs. Arkansas football game being played in the new Dallas Cowboy stadium. Should be fun.

Thursday, October 1, 2009

More on Pending Home Sales

I am really not understanding how the pending home sales number is so high. It slaps in the face all the other data I am seeing on housing.

Surprisingly Diana Olick may have an explination from ummm CNBC. Yeah I know, but she is one of the few talking heads on CNBC who continually warns not all is well in housing land.


I realize I'm not making friends with the Realtors by trouncing their index today, but I have to say honestly: I've read an awful lot of National Association of Realtor reports in my time on the housing beat (five years+), and never before have I seen them express so much skepticism in such a positive report. Remember, so many of you in the blogosphere refer to the NAR as the "shills" for the industry, which I supposed is what they're paid to be. But I digress.


So given a two-month lag time from contract to closing, you would expect that the Pending index would mirror the Existing sales numbers, that is, August Pendings would equal, give or take a few, October's Existings. The trouble is we are not in a normal market.

“The rise in pending home sales shows buyers are returning to the market and signing contracts, but deals are not necessarily closing because of long delays related to short sales, and issues regarding complex new appraisal rules,” said NAR Chief Economist Lawrence Yun.

I followed up with the Realtors, asking just how many contracts they believe are failing to get to closing.

"We really don't know for sure, but it appears to have increased, particularly regarding HVCC [Home Valuation Code of Conduct-new appraisal rules]. Lawrence thinks it may be as high as a double-digit number that are being cancelled or postponed," NAR's Walter Molony wrote to me in response.

There is one possible explanation. I am not fully satisfied but it will have to do for now.


We broke. Is that not incredible? All those who get long expecting to be able to get out at the right time, look at the percentage drops on some of these stocks. My screen is littered with every day names down between 3% and 8%. Lets take a typical stock, you fill in the name, and say it was $10 six months ago. It started climbing, grinding its way higher. At 12.00 (20%) rise, you start looking at it kicking yourself for not buying it at 10. At 12.50 you promise yourself if it pulls back to 12 you are going to buy it. At 13 you give in and buy it. Now up 30%. Sure enough it grinds and climbs its way higher making it to $15 (50% move). It pulls its way back to 14.40. Nothing to get worried about, at least that is what Cramer is telling you. Than today it happens to be an unlucky stock that drops 7% (or higher). Bam, the stock drops 1.01 and the price is down to $13.39. You are now up a measly 3% (in my example most people would have probably bought higher than 13 and would be down). What do you do? Tomorrow you could lose all of it and be down on a stock that had a 50% rise in six months!!!

My point is, it is so hard to chase stocks you don't have a fundamental view on because when going down, you can lose money very very quickly and left in no man's land.

The 10:00 a.m. economic data which I was bearish on really wasn't that bad. I guess it was just time for the market to sell off. The 200 point down day that we should have gotten yesterday came today (but all the very long funds didn't want to go through that math I just explained to you and made sure they were able to collect their big fees from the moms and pops at the end of the quarter). The one most surprising to me was pending home sales. At some point I will dig into it and try to figure out why that number was so high. ISM as expected was really bad but not as bad as it could have been. New orders was meaningfully down from 64.9 to 60.8 but backlogs was up from 52.5 to 53.5. But when you have expectations sky high watch out.

So that leaves the non farm payroll report tomorrow. Goldman's analyst came out at the end of the day and downgraded the report expecting a loss of 250,000. Market is expecting a loss between 150,000 to 200,000. Market probably still has some downside left.

So we broke the trendline from the July rally. Before the bears get all giddy we are quickly approaching the trendline of this entire rally from March. Because when the market falls it moves down so quickly, you don't have a moment to just sit back and relax. The big resistance is around 1010 to 1015. I have talked about that level before. Guess where the trendline from March is tomorrow?? 1014. You can't make this stuff up. I would be shocked if we broke this big trendline the first time we hit it. If we get a bad non farm payroll number and get a gap down and if your trading the market, I would bet strongly we will have a big bounce that starts if we get close to this 1014 / trendline number. That 1038 to 1040 level was very important that we broke today. I wouldn't be surprised for the market to go back up and test it if we bounce off of 1015. Obviously I don't know, just hypothesizing.

In the bigger picture, the fundamentals continue to deteriorate. I was calling for an August or September top. I would put it at close to 75% that we have seen our top for 2009. If we break the trendline from this whole move up from March over the next week or two (be surprised if we break it the first time) it becomes near a 99% probability in my book.

Personally, I think todays down move is the first of many more to come over the next 18 months with a very high probability of going back to 840 and 50/50 of breaking the March lows.

First Round of Economic Data

Correction in brackets below:

Jobless claims came in at 551,000. An increase of 17,000. Consensus was 531,000. That is bearish.

U.S. personal income. Up .2% Consensus was .0% to up .1% So that comes out as bullish. As a side note, this data serious has been particularly suspect to me.

Personal spending up .9%. [Nominal personal spending was up 1.3%. This beats the market expectation and would be considered a positive] That is huge but the market was expecting 1.1 to 1.2%. Not sure how important that number really is to the market but it should be taken as bearish.

The potential positive round of data I interpret as neutral. [With the adjustement of personal spending, slightly positive] With Europe down and the dollar strengthening, this sets up a negative tone going into the data set at 9:00 that I think will be bearish.

Today could be a breakdown.