Monday, May 31, 2010

Chinese Going Crazy Over Gold

If this video is correct gold may be about to take a rocket ship higher. It is hard to know if this is simply a camera being pointed at one small subset of the Chinese or if this is really spreading throughout the China population. The video also says China has surpassed South Africa as the biggest miner for gold. The video also mentions that George Soros thinks gold may be the ultimate bubble. I agree but I think that comment was taken out of context. Soros has been buying gold like crazy. I don't think you can even think of gold as a bubble until it passes 5,000 per ounce.

Bank of Spain - Reduce Leverage

From the Spanish publication ABC.ES. This is translated into English from Spanish so wording may look funny.

The Bank of Spain considers that non-financial companies should take steps to reduce its debt, since debt levels are higher than those of European companies, and stresses that efforts should be greater in the housing sector, which reached reach a size "excessive" during the expansionary phase of the economy, reports Ep.


The watchdog's report recalled that the average 5% reduction in the salaries of public employees, the suspension of pension increases in 2011, the disappearance of the birth or adoption assistance and reduction of public investment will lead to state spending cut 5,000 million in 2010 to 10,000 millions in 2011.

This is what needs to happen worldwide BUT I think it is to late. Definitely could have been done during the recession in 2001. Possibly could have been done in 2008 letting the government balance sheet control the collapse rather than preventing the collapse but now the government is planning on cutting spending, the government is planning on reducing deficits and overall leverage, asking the private sector to cut deficits hence cutting spending, and asking the private sector to reduce leverage. Spain and the world is in a death trap. Governments have very little flexibility in padding the deleverging because they used all their ammunition a couple of years ago trying to prevent what needed to occur. It is a death trap.

From a markets perspective the question is whether Spain is where Greece was in February of this year and the markets can ignore it or is Spain where Greece was a month ago about to cause another major leg down in worldwide equity markets.

Spain has sovereign debt problems like Greece but not nearly as bad. The problem is Spain has huge private debt issues. The private sector is very overleveraged just like the United States was in 2007 into 2008 (and still so). In 2008 the U.S. government had room on its balance sheet to keep the private sector afloat. Spain doesn't have that room because they already have sovereign debt issues.

Spain is a major domino in the process of falling. Within months if not weeks.

Friday, May 28, 2010

Spain Losses AAA Rating

Spain etf losses 2% in minutes on Fitch downgrade causing Spain to lose AAA rating.

U.S. markets tank on the news.

All eyes on Spain. This sets up very bearishly the rest of the day and going into the weekend.

And I thought it was going to be a slow day.

Shocking Interview With Matt Simmons on BP Oil Spill

I am not an expert on the BP spill by any stretch of the imagination but I found this to be a shocking interview with Matt Simmons. Mr. Simmons is a fairly famous name in the oil industry. He has been a peak oil guy and not accurate with that call so far but his knowledge of the industry is both deep and wide. I found this video, on MSNBC no less, amazing. Whether he is right or not, I don't know. Let's hope he isn't.

Stock Market Drop

9:50 a.m. and the stock market just had a 40 point drop. It is very simple. EWP, STD, and BBVA. Spain is rolling over and specifically the banks.

Thursday, May 27, 2010

Holiday Weekend

Looks like the rally option was the direction the market took. Was putting it at 50/50 so not surprised. I was not shorting into the close today though I sort of wish I was. We hit the 1100 to 1110 area I was looking for but thought going into the holiday weekend that there was a very good chance the market will be up tomorrow and possibly open up on Tuesday. Tomorrow would normally be a very quite day with a bias to the upside. You have the bond market shutting down early and traders who will not want to be short going into a long weekend. That scenario still probably holds but comments from the French Europe's Minister reported in the Financial Times could put a damper earlier than I thought.

In reference to the Eurozone 440 billion euro debt guarantee he said:

“It is an enormous change,” Mr Lellouche said. “It explains some of the reticence. It is expressly forbidden in the treaties by the famous no bail-out clause. De facto, we have changed the treaty,” he added.

Because we are going into a holiday I don't know if this comment will be front and center but those words seem to me like a bombshell. It is incredible that this would find it's way to print. In the Financial Times no less! Not only has German politicians used tremendous political capital to get what they already have but there are a couple of lawsuits working there way through German courts saying this whole thing is unconstitutional. Here you have the French minister basically making their case.

In all these things the question is always to ask what is going on behind the scenes. Not the headlines. Why the interview, why the word choice, why now? Germany seems to already be laying the ground to evict Greece from the EU (Germany's short selling ban), is this a move by France to start doing the same thing?

Anyway, that throws open how we trade tomorrow.

In general I think we have topped or are close to doing so with a move up to the 1010area very possible. I think the extreme scenario is a rally to the 1040 but that is lower on the probability scale.

Normally I would say we would be up tomorrow and at least open up on Tuesday. I would normally have no problem not adding short exposure tomorrow. However, things are not normal and the problem is everything relies on what happens in Europe. It is possible you walk in on Tuesday and news over the weekend sent Europe crashing down on Monday and is crashing again on Tuesday and the U.S. opens down 3% plus. I don't see that as a huge probability but it is possible.

I said yesterday there were three things to watch. Euro at 1.2150. The S&P at 1055. And the three Spanish etfs. Well the Euro moved up and well away from the 1.2150, S&P gapt open and never looked back, and Spain rallied hard. Of those Spain was what drove the other two.

I think that story continues. Spain is most important. I think you can move the 1055 up to 1080. If we start breaking the 1080 area, the likelihood is that is very bearish.

It is very tricky but I think the risk lies to the downside not the upside at this point. I got my rally and the last few days removed the extreme oversold nature. In fact one measurement, the NYMO, is less oversold than when the market was at 1173. Anyway, at this point it is timing. I could very easily see another day or week of sideways action that grinds higher but those words in the Financial Times drop that probability in my mind and raises the probability that we are done rallying.

David Einhorn - "Are you worried about passing our debt on to future generations? Well, you need not worry."

Many of you have probably seen the op-ed piece in the New York Times by David Einhorn, another great investor. Well if you haven't, read below.

From the NYT

Are you worried that we are passing our debt on to future generations? Well, you need not worry.

Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.


A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs. How different is the government today from what General Motors was a decade ago? Government employees are expensive and difficult to fire. Bloomberg News reported that from the last peak businesses have let go 8.5 million people, or 7.4 percent of the work force, while local governments have cut only 141,000 workers, or less than 1 percent.

Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.

The entire op-ed is a great example of critical thinking. Highly recommend you take the time to read to the entire thing.

Professor Jeffrey Sachs Schooled by Hugh Hendry

This video only sort of scratches the surface of why I love Hugh Hendry. Unfortunately, his insight is limited by having to share time with two others. What the video does display is another example of full ignorance of our academia. I don't know what rock Jeffrey Sachs just crawled out from under but he has definitely not been living in the real world. I was discussing Greece (as were many others) last summer. This didn't come from no where and neither will the collapse from Europe no matter what rock you want to hide behind. To claim this is a 10 week story is preposterous!!!!! That is like claiming America started in 1994. Forget the American revolution, the Civil War, the Great Depression, Neil Armstrong walking on the moon. We are not connected to what happened before at all.

Greece just woke up one day and had a crises.

Enjoye the video and weep for our intellectual elite that continue to steer us towards disaster.

Wednesday, May 26, 2010

Confusion Abounds

Interesting day in the markets. Very bearish close. Going into the close I was thinking this looked awful but unsure at the current point. There are several things that should guide investors on whether there is more selling to come or we still have some rebounding to do.

There are three things I am watching very closely. The S&P 500 level of 1055 ish, the Euro level of 1.2150, and Spain. The tail I think is Spain. The dog is the other two. The tail will wag the dog.

If your in the stock market you need EWP, STD, and BBVA on your trading screens. The markets followed them tick for tick today. Spain seems to me to be about to unravel. Whether that is days or weeks I am not sure but Spanish banks appear to be having severe funding problems. The United States had this also of course and the United States backed the financial system. Whether you agree with this or not (entirely different discussion) it was an option the United States had because it had balance sheet flexibility. Spain does not have that same flexibility. Spain has sovereign debt issues but that is a much smaller problem compared to the other Euro nations. Its bigger problem is the private debt, similar to the U.S. in 2008. So Spain's problem is it has a sliver of Greece with sovereign balance sheet inflexibility and U.S. like overindulgent consumers. BBVA has been having trouble raising $1 billion in commercial paper. This has been heavily weighing on the Spanish markets and could spread.

Anyway, if that doesn't develop overnight, than i think we bounce tomorrow and have more rally to go. The current information seems priced in. The problem is future information will probably deteriorate. If it gets worse than I think you will see the U.S. markets fall apart.

In general we had a massive rally though it doesn't feel like it. We went from 1040 to 1090 or a 4.8% move from top to bottom. The duration seems quick for it to be all over and done with.

Anyway I am watching 1055. That was the low last Friday and acted as resistance several times yesterday before finally getting through it. If we have a legitimate break of 1055 I think we go to 1040 for the second time and don't think it will hold.

Resumption of heavy selling tomorrow I put at 50%. In otherwords I really have no idea. I still think there is a decent chance we get up to 1100 to 1120 but I think Spain controls that destiny.

China and Agriculture

Hugh Hendry of the Eclectica Fund is one of my favorite investors/thinkers and recently came out with his May letter which can be found here. The reason I like Hugh so much is because he thinks way outside of the box, very witty, and most importantly always talks about market history that I am unfamiliar with and haven't seen anywhere else.

His latest letter talks alot about Japan and China and why he thinks China is going to go bust. All very interesting and something I generally agree with. What was really interesting was the last two pages of the letter when he starts talking about soft agriculture commodities like corn and soybeans and openly wonders if there isn't something going on secretively in China. He talks about huge droughts in China and lower fertilizer usage at the same time the government is reporting very successful agriculture years. Of course the real canary may be prices (aren't they usually?). He points to the fact that in Dalian, a port city east of Beijing, corn is selling for more than $7.50 a bushel. More than twice of that in Chicago. He thinks talks about China's history (something I had never heard anywhere else) of how they manipulate agriculture data and how it caused starvation and death after the 1950s.

Anyway, I am basically bearish on asset prices everywhere but if I was forced to buy something, agriculture would be the one area I would be interested in. The case made by Hugh makes it that much more appealing.

As a result it was interesting looking through world papers that I found this from the China Daily.

China's National Development and Reform Commission (NDRC) said Monday it will curb speculation in farm produce, prices manipulation, and supplies monopolies, and investigate criminals when severe market disruption is spotted.

The NDRC said specific definitions and punishment are currently being discussed, China Securities News reported Tuesday.

Prices hike were seen this year in rice, grain, garlic, vegetables and green beans, possibly because of the drought in Southwest China and the cold weather in Central and East. The soaring prices are also believed to have been caused in part by hoarding, market manipulation, and rumors by unscrupulous traders

Interesting. Of course this sounds like the government blaming the market for prices they don't like even when they cause it. Sound familiar? Anyway, something to think about. If you had to buy something corn at 3.70 a bushel sure looks appealing.

Tuesday, May 25, 2010

Roller Coaster

27 hours without sleep. I think that is a new record for me. Finally got a 4 hour nap and don't plan on staying up tonight.

The last 24 hours of market action has been crazy. We essentially had a mini crash overnight and than a massive rally during the day which got the market back to flat. Talk about a massive trip just to end up back where you were.

The end of the day rally was impressive. It even had some volume to it. I was covering at the open again and covered a little more throughout the day. We went right to 1040ish which is what I have been pointing towards. The low of the day was 1040.78. Talk about going right to that level!! Wish I would have covered more but read a thing or two that clouded my judgment on the short term bearish potential. There were definitely bullish signs even at the open. The VIX really didn't gap up showing fear was contained. I was staring at Goldman front and center at the open as a tell and it basically was never negative. Finally, China outperformed overnight as did copper which never got close to setting a new low. All the tell tale signs were there and I took advantage of them but wish I would have been even more aggressive.

Before I start talking about noise I am a fundamental person first and foremost. Fundamentally, the economies worldwide are slowing and solvency issues are becoming more acute. That is the underlying fundamental reality and regardless of what happens in the short term I think we will below 1,000 in a few months if not sooner.

To the noise going on around us, several comments. I have been expecting a much bigger rally to work off the oversold nature of things and it may have kicked off today. It may not have. Tomorrow should let us know. We should almost certainly at least start up tomorrow with the big reversal today. How it trades will tell you alot. There are many rumors floating around including a ECB rate cut and more Fed swap lines with Europe. Either of those headlines I think the market rallies. It may be no headlines and just technical. There is a trendline coming down from the May 8th ish high that crosses somewhere around 1080. If you break that I think you head to the 200 dma (at 1103) and probably have a false breakout above that also. The trendline from the very top back in April sits around 1110 to 1120.

Anyway, than you have the noise of the end of the month and beginning of the month. Understanding how big funds raise and spend cash is important. I have postulated (not on the blog) that by the end of the month everyone who wanted to sell and raise cash would have sold and raised cash leaving a vacuum of sellers. In this scenario the market has another push down starting tomorrow afternoon into Thursday/Friday as portfolio managers follow directives to raise cash. I am less confident of that view now but it is possible. The otherside of the coin is the market tries to save this month from being horrendous to try to paint the numbers going into month end. I don't really know but the bottom line is this, next week I think you do whatever opposite this week ends up. If we rally much higher going into Friday's close you sell. If we sell off one more time, you lighten up.

So that is the noise. Like I said, the most important thing is you understand what is fundamentally going on.

The wildcard in all of this in the short term is Spain. The country's banking system seems to be cracking. Doesn't mean the tipping point has occurred but it seems close.

Mini Crash In Progress

No sleep for me tonight. Markets right now are down over 250 DJIA point or 33 S&P points. That is over 3%!!! That would be the biggest down open since this whole thing started. We are below 1040!!! If we really open below 1040 there is no telling where we go. 1010 maybe? Don't know. Euro broke below 1.22 and sure enough Spain went down more that 5% matching the etf move I mentioned earlier.

Squawk box just started and the talking heads seem totally lost. They don't understand why one bank failure in Spain would mean so much. I spent some time today (yesterday) looking through it and thought the markets were under estimating the impact.

It will be really fascinating if we open below 1040. WOW, interesting world.

Monday, May 24, 2010

Looking Bleak

Wow - today looked ugly. Ugly ugly ugly. There was no volume all day long until the very end. Despite that the markets stayed very close to the break even line as the idea of buying just wasn't appealing to people. Well those who wanted to sell finally gave up hope waiting for higher prices and dumped right into the close as volume spiked. Very bearish short term action. I was shorting towards the end of the day as well putting some of what I took off from late last week. Wish I would have done more.

Asia right now is getting pummelled. North Korea is reportedly preparing for war as tensions escalate over the sinking of the South navy ship. China, after rebounding yesterday, is giving it back tonight as are commodities.

The CajaSur bank nationalization in Spain I think is going to be a bigger story than most investors originally gave it credit for. I was watching the Spain etf (EWP) all day and it was down 5.24%!!! Massive move for an entire market. Today the fallout has already begun as 4 more big banks are in trouble working on merging together. This also seemed to greatly impact the Euro.

Despite all of this I am a very nervous bear right now. This may sound counter intuitive but I am extremely nervous because I am having trouble seeing what is going to send the market up in the foreseeable future. You would think that would bring comfort but it terrifies me because that is how you get your face ripped off. Two weeks ago it was the 1 trillion European package and I saw that coming and I figured there would be a rally into option expiration and the passage by German's parliament of the $1 trillion package. However, as I look forward I am not seeing much or envisioning much that can stop the market from going downward. We are very oversold and getting caught off guard with a surprise announcement that you didn't see as a possibility would not be fun.

With that said the U.S. futures are down over 1% and it feels like it would make sense to short right here. In general it sure seems like the markets are going to slice through the 1055 area onto the other heavy area of resistance that sits around 1040 to 1050 (centered around 1045). It still seems improbable that we would work through that resistance this oversold before bouncing again toward 1100 but it is becoming more possible especially if Europe continues the market selling Asia is experiencing. In general I think you have to start covering some, taking some profits between 1045 and 1050 and look to short again below 1040. Odds of a bounce seem to great not to take a few chips off the table.

BP Rumors

Something is going on with British Petroleum and the Horizon rig site. Rumors abound of some major problems over the weekend including underwater ruptures. I have no idea but the stock market seems to validate some of this. BP is down over 2.5% which is a new 52 week low. In a month the stock has gone from 61 to 42. RIG is also hitting a 52 week low and has dropped from 92 to 57 in a month.

Based on rumors I am hearing it seems the gulf disaster may have taken a turn for the worst though so far there is very little actual fact that is being reported and the major media sources seem to be quite on the issue.

A New Week

Well, I guess you have to give me a little credit. It may have just been dumb luck but I nailed Friday and what to do depending on how the market opened. We got the 1055 and the climb toward 1100.

The markets are still oversold though Friday helped. I don't have much of an opinion in the short term. I would think you short/sell between where we are now (1087) and 1100 using 1105 as sort of a stop.

The bounce right at the close on Friday I don't think really means much because it was driven in large part by options expiration. As a result that bounce could (emphasis could) reverse quickly. I would say that the bounce probably saved alot of Wall St. firms alot of money as it took alot of profits away from the put holders. Take JP Morgan. Closed at 40.05 after being around 39.00 most of the day. As a result, of the last 15 minutes all the the 40 puts expired worthless.

A large portion of Europe is closed tomorrow. I think Germany is as well. This will give them another day to work on things and potentially have some sort of surprise announcement going into Tuesday training. I would think any announcement would be bearish for the markets.

I would think the news of the weekend would be the seizer of CajaSur

The Bank of Spain removed the managers of CajaSur, a savings bank crippled by property loan defaults, and put the bank under a provisional administrator.

This thing is not small.

The board of CajaSur, a savings bank with assets of about 19 billion euros and 486 branches that posted a 596 million-euro loss last year last night rejected a plan to merge with Unicaja, a bigger lender based in Malaga, sparking the action by the regulator.

That is a pretty big institution though not probably manageable. This may be ignored or it may gain traction and cause more problems in the Spanish and hence European banking system. I don't really know but this things sometimes become a bigger issue a day or two later.

Anyway, another interesting week. It seems to me like the odds are lower in the short term but it also seems to me that at some point we will need to bounce or consolidate to alleviate some of the oversold nature of the market.

Friday, May 21, 2010

Market Action

So I will admit it. I was covering some at the close. Had to sort of force myself to because I didn't really feel like it but it is discipline that wins in the end. Even if the market is down tomorrow, it was the right thing to do.

I actually shorted a tiny bit right at the open. We gaped down below 1100 and the 200 dma. It was a full risk off trade. I think tomorrow you do the opposite if we gap down (will explain below)

Tomorrow will be an interesting day for multiple reasons. The Senate bill passed tonight, Germany's parliament votes on the 1 trillion Europe package at some point during the day, and you have options expiration day which will add to volatility.

We are getting close to major resistance which ranges between 1040 to 1065. The heart and core of that resistance is between 1045 to 1055. It is always possible we bust through it but the highest probability scenario is we will bounce off that climbing back up towards 1100 to 1110. We are very oversold and any more selling sets up for a big bounce. I do think we get to that resistance sooner rather than later and would be surprised to see us bounce seriously before hitting it.

Tomorrow we could see a bounce as a result of the Senate bill (sell the rumor buy the news, banks are oversold) and we could see a bounce on the passage of the 1 trillion dollar package by the German government.

The open is important. If we gap up than I think you add shorts between 1090 and 1100. If we gap down and open anywhere between 1045 and 1065 I think you take profits. The best case scenario is you open around 1065 to 1070, sell off hard in the first 30 minutes somewhere south of 1065. If this happens I also think you take profits on shorts though it will be really really hard to do. If that happens I think it will be a false move before we rally hard.

The one scenario where all bets are off is if in some form or fashion Germany does not pass the package. I am not expecting that to happen, but if it does watch out!!

For those really aggressive a call spread on Goldman Sachs would be interesting. I limit trading in general but Goldman looks very interesting. Goldman is sitting at 136.10. If I was playing it I would buy the June 145 calls and sell the June 150 calls. You do this for two reasons. With the sky high volatility you don't want to buy an option without selling one. Second the risk reward looks interesting. Your risking 1.30 to make 5.00. Obviously, in actuality you don't hold the option to expiration. You would essentially be betting on a bounce to 145 or 1 6.7% move to unwind the trade. Goldman has started outperforming the market after being the first one to turn down. More importantly if the banks bounce on the passage of the bill because it is a sell the rumor buy the news type of thing the banks could have a little more giddy up than normal. Just a thought.

The Euro has been screaming higher. Whether that is because of central bank intervention or short squeeze or both it is hard to know. The Euro is very oversold also and has huge short exposure causing a potential massive short squeeze. It could create an interesting short opportunity before long if you missed the first move down.

Markets were once again headed down despite the Euro strengthening and the dollar weakening. I happen to think at this point the last 300 points on the Dow had more to do with the U.S. markets starting to price in a double dip over problems in Europe.

Well the world could look totally different in a few hours but that is my thoughts right now.

More Misguided Policies

From Bloomberg

The Bank of Japan said it will provide one-year loans to banks to encourage lending and defeat deflation, and raised its assessment of the export-led recovery.

That is the first paragraph and that is all you really need to read before you should start laughing (or crying).

The Bank of Japan are going to make loans to banks and that is supposed to help Japan? HAHAHA. First of all, if a bank is taking a loan from the BOJ (central bank of Japan) that is simply debt. Hypothetically it could give some room to have a few more loans but the multiplier impact will be very very close to zero.

Secondly, and this is what I really thought was absurd, these are 1 year loans!!!!! Even if this was a magical elixir, which it is not, how in the world does the BOJ expect Japanese banks to lend for GDP creating projects with a year time from? Banks basically don't lend money to anyone for less than a year and yet this money which you are supposed to lend out to create growth and escape deflation has to be paid back in a year.

Add the whole thing to the absurd pile.

Thursday, May 20, 2010

"Markets Are Out of Control"

"In some ways it’s a battle of the politicians against the markets. That’s how I do see it. But I’m determined to win this battle." - Angela Merkel (last week)

“I’m convinced the markets are really out of control." - Wolfgang Schaeuble, Germany’s finance minister

How is that working out for you Angela? Yeah, not so good huh? That line of thinking worldwide has led us to our problems. The idea that the politicians and their governments are bigger than the markets. Even in a country founded on capitalism, the U.S. political leaders have embraced that idea. And so they manipulate and move behind the scenes for years until they run out of room and they lose control of that which they thought they did control. Unfortunately, they won't learn and try to double down. The panic in Germany one can feel.

Everything I just said is made perfectly clear on this CNBC article.

The man at the eye of the financial storm that has engulfed the euro has learnt to be patient after 20 years confined to a wheelchair. But Wolfgang Schaeuble, Germany’s finance minister, is also a man in a hurry......He wants urgently to rewrite the rulebook of the euro zone to prevent any such crisis happening again


“I’m convinced the markets are really out of control. That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism.”

Like I said, they don't learn. They just try to double down over and over and over again. I mean how stupid can one be?

“A market does not function properly if the risks and rewards are completely unbalanced,” he says. “We need transparency. Given the complexity of modern technology, the individual needs a chance to judge what he is doing. That’s why we need standardization of products. And we need transparency for all market participants.

Than why is worldwide the idea of changing accounting rules to hide transparency so popular?

The entire article is just nausiating.

Wednesday, May 19, 2010

At A Major Crossroads - Which Way Are We Going?

Today was a little wacky. There were some things that looked exceptionally bearish and some things that looked bullish. The market felt all afternoon like it was going to go into positive territory and it made several runs and couldn't get there. At the end of the day it sold off. Heavy heavy volume. I heard one commentator say alot of buying power was wasted and thought that was bullish. I was thinking throughout the day the opposite. Huge selling going on and it wasn't pushing the market down. Buying appetite came back in. Does this bounce have further to go?

Goldman was up 2%. Citigroup up 2%. JP Morgan up 1%. Small cap stocks as measured by the Russell 2000 were down 1.2%. Dollar down but precious metals slaughtered. Alot of divergences.

Big reversal off of the 200 day moving average at 1100. Bounce was expected but it was a big bounce.

Tons of headline risk over the next week. This Fin Reg bill is becoming important. South Korea and North Korea threatening war after South Korea declared the North did sink its navy ship. The riots in Thailand and the stock exchange actually being lit on fire. Germany and what is coming out to handle the European problem. Vote in the German parliament in the next couple of days. Euro manipulation and rumors of manipulation by world central banks.

The market the last couple of weeks have bounced between the 50 day and 200 day moving average. 200 day sits around 1102 and the 50 day sits around 1170 ish. Unfortunately that is a big swings as that spread is north of 6%. Whatever happens between this range I think you have to fade the bounces. Unless we break 1170 the bears are in control.

Tomorrow and going into option expiration on Friday are major unknowns. If we bounce I think you short into it. If we break a 1100 hold the shorts and maybe quickly short more.

If I had to guess today slightly favored the bulls in the very short term. 1125 to 1130 is possible in the S&P 500 but I am in no way confident we get that bounce. As much as we have sold off we are not that oversold. So we may bounce, I think the probabilities slightly favor it, but I wouldn't bet on it and if it happens I think you sell into it.

Equity Death

Update: One additional thought. It looks so bleak that it seems like the market could catch people off guard with some sort of rally. The financials are actually holding in there and the big money center banks (GS, C, JPM) are actually up. Why? Maybe getting ready for the financial regulation passage? Once it passes, though fundamentally bearish, it could be a sell the rumor buy the news type of thing to cause a decent stock market bounce.

It looks like death out there for equities right now. I was literally up all night. I am not a trader but the futures market gave some great trading opportunities bouncing up and down 5 to 10 points about 5 times.

The even more bearish thing is the dollar is getting killed and the Euro is way up. That has typically been bullish for the markets. Even more interesting is the dollar is down and copper just looks UGLY, gold is getting KILLED, palladium is getting SLAUGHTERED, platinum is getting ANNIHILATED. I heard (and haven't confirmed) that on the German DAX every single stock was in negative territory. That is extreme negative breadth.

We went right down to 1100 which is where the 200 day moving average sits. We hit and what was almost 100% predictable bounced off it. The bounce is a chance to sell into it.

To add insult to injury the next few days the headline risk is huge. Congress and the financial regulation bill. Germany and rumored proposals to reign in countries who are not balancing the budget. Greece and Spain bond offerings coming with a bunch of question marks. Especially Spain. At least currently the bears are ruling. The 200 day moving average is the final stand for the bulls before you get another 5% lopped off.

Impact of German Financial Moves

We still have many more questions than answers. Those questions are more on the short term and the answers for the real problems are non existent. In the long term this is noise and tries to address (very badly might I add) a symptom and does nothing to go after the cause.

In the short term do we get a forced short covering bounce and if so how long? In general the markets seem to be getting wiser to the fact that banning short selling smacks more of desperation and a reason to sell than something to get excited about. You saw that when the news hit today in the U.S. markets. They started selling off and the Euro started getting pummelled. Europe opens in less than an hour and it is very possible you see equity shorts being covered dragging up US futures and maybe the Euro. Why Germany would do this now is still a front and center question. It smacks of desperation but desperation of what? Is something else going on? I read a couple of pieces speculating it had to do with trying to get the bailout package passed in the German parliament which is receiving more resistance than anticipated. (Surprise Surprise)

CDS on Germany actually went down after the news in New York but it could have easily been forced unwinds of those contracts. The "short covering" rally before the market crashes.

One thing is certain. The market looks very very broken. Every bounce looks like a shorting opportunity. Today you had Spain try to come to market to sell a large amounts of bonds. They were less than successful only selling about 75% of what they wanted. They are supposed to sell 10 years on Thursday. Not a good sign leading into that auction. Greece has a debt auction this week as well.

Then you have this Financial Regulation Bill that will probably be passed in the U.S. in the next couple of days and primary jitters showing that the free spending individuals in Congress are getting voted out. Commodities are getting pummelled on China slowing and companies are starting to warn about earnings related to Europe.

The unwind seems to have started.

Tuesday, May 18, 2010

Big Potential News!!! - Germany to Ban Short Selling

From Reuters:

BERLIN, May 18 (Reuters) - German Finance Minister Wolfgang Schaeuble plans to ban short-selling from midnight, coalition sources told Reuters on Tuesday

The big question IF TRUE is why now???? Is there something going on behind the scenes and this is to preempt something? Is Germany about to make a big announcement?? There has been rumors of Germany leaving the Euro which I have strongly discounted. Trying to figure out the derivative as figuring out what is motivating this seems very important. IF TRUE this short selling ban doesn't seem to be as a result of panic like all previous short selling bans. The DAX is up close to 3% in the past two days and down only about 6% from its highs in March. There has to be something else going on???

The way these things often work is a large rally and than crash afterwards. I am not sure you get the large rally in the U.S. if there is actually a reason Germany is doing this before some big annoucement.

I have no idea. Ideas WELCOME!!!

The market looks broken. Seems like it may be better to short and ask questions later. In the end this can't be good.

Avoid Banks 'At All Costs' - Meredith Whitney

Famed banking analyst Meredith Whitney was on CNBC today talking about the new banking regulation. Some very interesting thoughts.

She would not invest in European banks in a million years. She said the marks were worse than U.S. banks.

When referring to the new banking regulation she actually quantifies some of the impact. She thinks that $1.3 trillion of credit will be siphoned out of the system. In her mind "politicians have proven far worse than our worst expectations."

Regarding the drop in credit card deliquesces this month, well in her mind it was just a change in banking rules where poor credit has been "jammed out of the market."

Many more thoughts. Very good interview.

Monday, May 17, 2010

A Day For Bear Frustration

Wacky day today. Market futures were down close to 150 points overnight. Recovered all of that before the market opened today. Than the market sells off hard where at its lows it was down 180 points. Than it reverses completely finishing positive on the day. Crazy market. There was no reason for the market to rally. Manufacturing data was very dispointing. First glimpse of May data and it didn't look pretty. China was down over 5% last night as most of Asia was punished. Tehcnically we broke 1122 to 1125 which seemed to set us up to go down to 1100 to 1110 at least. Homebuilder sentiment came out and surprised to the upside but that doesn't seem like it would move the market as the market has ignored that data point for months (at least when it surprised to the upside)

Euro stabilized and rallied from its lows as well but still sitting under 1.24 currently.

All in all in the short term today was pretty bullish. Goig up to test 1150 to 1180 again isn't out the of the question. Such a big reversal will add momentum. In general this is still just chopping around working around the oversold conditions from two weeks ago. I think the bears completely control things unless we break 1180. Like I said though a rally for a day or two seems likely at this point.

Sunday, May 16, 2010

The Week Ahead

1180 held. First time since 2008 where a natural oversold bounce stopped naturally where it should have and turned back down. I was shorting like crazy on Friday. The market bounced into the close which seemed ridiculous. Unlike the previous week when everyone was bearish the only news that could have come was going to be viewed as positive. This weekend what can come out that would be positive? They already committed a trillion dollars to try to help the problem? What more news can come out.

This end of the week market action was very negative. This week could, emphasis on could, be extremely negative. Time will tell.

There are knew world issues with violence occurring in Thailand causing currency issues and growth concerns over in Asia. UK flights are again canceled because of volcanic ash. Euro is breaking its 2008 lows moving towards 1.22.

The market appears like it may be about to give away. Should be interesting.

Thursday, May 13, 2010

Pretty Simple

Its pretty simply I think. If we close above 1180 we are probably going back up to test old highs.

So far the bounce has been normal but the bears are running out of room. The bulls need to clear 1180 but if they do they will be back in control.

If we do break 1180 and head higher it will be the most absurd move of the entire rally. Just becoming unbelievable on every front.

Monday, May 10, 2010

EU Plan and Markets

Looking through this European plan it would seem to me that if it is actually implemented it is pretty rock solid in the short term. Two keys in that sentence. If actually implemented and in the short term. What that means for asset markets also means two things. Whether the markets will test the implementation and force it to happen (or fail) and how long the market will ignore the short term.

First you have legal issues. Legal challenges are already being shaped in Germany. Courts refused to create an injunction but are reviewing the case. Second, my understanding is the ECB is planning on offsetting the QE measures. What that exactly means and how they plan on doing it I still haven't quite figured out. What does seem apparent is the ECB is legally prohibited from monetizing EU debt at auction so they can only do it in the secondary market. Now how private participants will participate is up in the air. Entirely possible you will see busted auctions because investors will know these are short term fixes. For Greece you are looking at 18 months of time bought. What happens if your issuing a 5 year bond?

Anyway, I don't have a strong conviction on the markets as of the end of close today. In many ways I am clueless. We bounced right up to the area I thought you should look to short but we did it so quickly it made me nervous. I finally talked myself into putting back on at the close today about 10% of the short exposure I took profits on at the close on Friday. There are enough problems with Asia (i.e. China) that I don't really feel like I am betting on just a Europe story but a story of the entire world economy slowing down again. Time will tell. In general I would not be surprised to see the markets climb some more or sell off. Two similar TARP type announcements in the U.S. caused the markets to bounce one and the other time two days. It may be the same or different I don't know. If we are up another 10 to 20 points I will be probably short a little more tomorrow.

Like I said yesterday this whole things seems EURO negative and asset markets positive but if the EURO starts sliding hard again the asset markets could start selling off hard.

The big danger is that the unity in Europe for the bailout starts breaking up with different quips in different newspaper reports or there was already to much damage done to capital markets that this really doesn't repair things.

2nd Card Played?

Seems like the 2nd card was played over the weekend also.

Thanks goes to Pete.

From CNBC:

The European Central Bank said it will buy euro zone government bonds to help support fractured markets, abandoning its resistance to full-scale asset purchases.

Sounds like QE to me. No wonder the futures are flying (interestingly China has so far tonight been flat to down...again). So government officials have gone all in. We will see how much time they have bought. Few hours/days or a several months with markets going to new highs?

Seems like that would be weak for the Euro but strong for asset markets. Time will tell.

Sunday, May 9, 2010

Flying Futures

No real surprise, the EU came out with some massive "bailout" package. I really don't know much about it yet so will not talk about it to much just yet. In general, you can't solve debt problems with more debt and that looks like what this is. We are so oversold (especially Europe) that any bounce should not be surprising. In my previous post I mentioned that on Friday you sell if you approach 1140 and buy (cover shorts) if you get down towards 1100. Both happened on Friday and I was taking profits on shorts into the close. Wow that felt good. Been a long time since I have been able to say that.

Anyway, tomorrow we should scream higher. I would guess you would want to leg into shorts between 1140 and 1170 over the next few days. I would not be surprised to see a generally positive week though it is possible any rally will be a one or two day affair. I will have a better idea as I get to understand this bailout package.

I mentioned two cards the world government leaders could play to buy time. Possibly a few months. They played one of them over the weekend. All they have left that I can see is the ECB buying government bonds. Tick tock tick tock. Continue to move towards the end game.

Thursday, May 6, 2010

Where We Go From Here?

First of all, I HAVE NO IDEA. This is just conjecture. Going to discuss some various scenarios.

First, lets put the bad trade excuse to its death bed.

The real cause of the crash is the below intraday chart. The crash in the Euro Japanese cross led the U.S. equity market crash by about 5 to 10 minutes. That implies someone is collapsing or taking a large loss. This type of move is UNHEARD of. This creates massive liquidity issues outside the already insolvency issues. You can hear screams of agony from a major institution looking at this chart.

Second, what I consider some absolutes.

If we bounce early tomorrow morning towards 1140 to 1145 you sell into it.

If we open down around 1100 you take profits on shorts. Don't have to cover all shorts. Just take some profits so you don't miss out.

Third - some various scenarios.

I think there is one maybe two cards left to play by world wide government officials that could buy a few more months before the collapse really becomes official. The first is the ECB buying European government bonds. The second is the IMF coming in to backstop Europe. The markets will probably fall until this occurs which will cause some sort of rally until economic data and the UK/Japan collapses causing essentially the end of the game.

So the key is to figure out timing. The ECB came out with their decision today. There is no way they are reversing anything tomorrow. So you have the weekend in which investors will be looking towards. I don't know, but if the markets are down huge around noon to one I would start guessing there will be some sort of end of the day/week rally into the close. If nothing develops over the weekend you really could have a black Monday or Tuesday.

You have huge targets at this point by the market at S&P 1100 (50% retracement of the end of the day rally) and Dow 10,000. It seems highly likely we retest to one of those levels soon. After that you are looking at around 1050 which is around today's lows and the February lows.

There is a wild card in all of this related to the chart above. A major European bank(s) may be in trouble. That creates an entire new problem on an entire new front. While investors are waiting for a weekend surprise from European governments, it could be a weekend disaster revelation.

Bottom line, tomorrow or next week any bounce towards 1140 1150 I think you sell into.

If today did anything it completely destroyed any remaining confidence in the retail investor. After the retail investors was only still gun shy at the markets, to have this happen means they won't be coming back anytime soon.

Volatility is going to remain high. No where you want to sell. I am sure the governmetn is working on secretely supporting this market in some form or fashion.

What Selling Turning Into Panic Looks Like

Watch these two videos. These are real time showing the market going from down -300 to -800. Over about a 20 minute time span. Where is there all of a sudden a glitch? That is just pure selling turning into panic. This is all being blamed on Citigroup. Right now Citigroup is denying any bad trades. Hilarious.

Video 1


Video 2

Trading Error - Give Me A BREAK!!!!

Good grief. There is nothing wrong in the world. Everything is fine. We had a trading error which caused the crash. Go about your business.

This is absurd. Were there human errors today? Absolutely. This is a symptom not a cause. The market started accelerating to the downside after we broke 1150. I said in an earlier post (before the crash) the bounce off of 1150 was a gift to short. So we break 1150, selling starts to intensify, people start panicking, and the market goes whoosh. Was there a billion instead of a million done? Possibly. I am not going to say absolutely not but it was after resistance was broken. Market was liquidating and it was stress in the situation as much as anything else. The liquidity that has been a farce for months that many people have pointed to just isn't there.

Listen to this video. The story seems way to canned to me. Automatically blaming a synthetic security? How do we know that? One guest says we have these every few years. Nothing to worry about. ARE YOU KIDDING ME?????? This was the biggest drop in the history of the markets. This included 2008. Biggest percentage drop since 1987. We don't have this every few years where we have a human error. In fact, there has never been a human error quite like this. But lets believe right away its a human error.

Also my experience on Wall St. is this computers would flag this anyway. How in the world does a trade go for a billion over million? How does that get executed? That just doesn't happen.

This whole thing is some quickly manufactured story to calm things down. Reduce headline risk. Calm Asia down before the markets open. Also Wall St could be very wrong on which side of the trade they on. Leak these stories, get the market to rally and sell as fast as they can to get positioned correctly.

There were many bad trades today. Not denying that at all. But it is all a symptom, not a cause. Just absurd to think otherwise. Worse than absurd. Complete denial that we are f****d because of dumb after dumb after dumb decision we have made over the last five years.

I will have more later on my thoughts (complete clueless-ness) on where we are going.

Market Midday Thoughts

ECB meeting came out with absolute nothing. I was up at 3:30 a.m. The absolute nothing is contrary to how the markets have been coddled where they scream and politicians jump. I said last night watch Europe. Had a bounce early and than after the ECB meeting sold off hard. I said last night, if that occurred, that meant throw everything overboard. The bounce for the S&P off of 1150 was a huge opportunity to short. At this point the markets are in full route. Leaves tomorrow wide open. It is vegas baby. We could be down 5% tomorrow or bounce 1 or 2%. I think if your short you have to take a little profit off the table. Need to be prudent.

Pimco's El Erian on Sovereign Risk

Good interview with Pimco's El Erian. Everything he says is right on. What ticks me off so much though is back in 2007 and 2008 Pimco and the Bill Gross cohorts were the ones preaching more debt and more stimulus. Had to do stimulus. Now they see the light (maybe they did then also and was just talking their book). Anyway, whether the next 1 day or 3 months feel fine the next three to five years are going to be very painful for the average American.

Wednesday, May 5, 2010

Roach vs. Chanos: The Topic - China

Economist Stephen Roach is a big China bull. Jim Chanos thinks China is a bubble and will implode in the next 12 to 18 months.

Bloomberg got them together in a little 20 minute debate/discussion. I thought Jim sort of ran away with it and was toying with Roach almost like a cat toys with a mouse.

Market Thoughts

Talk about a cross road at the market. Where do we go from here? Is this like February where we are corking up to start what will seem like another endless rally?

Some thoughts. If you go back and read what I wrote in early February I kept saying my biggest fear from the bear side was this was going to be like August of 2007. If you remember, the market sold off hard on bank concerns, the Fed lowered the discount rate, the market started climbing to new highs in October and early November of 2007. That was two in a half months before the market realized, Houston, we have a problem. This time we sold off hard because of Greece, a large problem that the market than threw off as nothing. Well we have again gone two an half months and Houston is getting another call that we have a problem. The situation wasn't really resolved. I find that very similar and with the economy topping out world wide, it seems a market top is possibly in the cards. With that said, regardless it won't go straight down. So where are we currently?

Tomorrow is going to be a very interesting day for two main reasons. Tomorrow morning you have the ECB meeting. They aren't going to raise rates obviously but will they announce some sort of QE program? Very unlikely. Tomorrow is also interesting because investors will start thinking about the Friday payroll report.

The European markets are down two days in row very sharply. My guess is the European markets will rally on the ECB release. If they don't, if the sell off intensifies, start throwing over board the cargo. If as I expect the European markets do rally, I think you will see a U.S. market bounce also going into Friday's release.

Unless the ECB starts QE, the meeting tomorrow is a non event even if you do get a bounce or they lower interest rates. The bounce could be hard but if there is no QE you sell into it. Period. If there is QE, that could be enough of a jolt to send the market up for awhile just because so many investors believe that will solve the problem (please).

From a trading perspective, the best outcome is a bounce tomorrow into the Friday payroll number. If you get that, I don't think the number matters on Friday (though CNBC will act like it does) as the market will sell off going into a weekend with huge unknowns surrounding Europe. Even if the payroll number comes in really good, the market will sell off because the payroll number just doesn't matter and it will be explained away as the positive outcome was because of census hirings or because of Europe or both. Basically, who cares if the news is good, we have other problems. Won't that be a switch?

For the bears (purely conjecture), you would love to see the market sell off to 950 to 1050 over the next one to three months while Europe buckles and eventually it is resolved (short term) with a huge IMF package that comes in or QE by the ECB. You than get a large rally before the bottom really falls out because of the U.K., Japan, and weaker economic data.

Tuesday, May 4, 2010

The Complete Warren Buffett Annual Meeting Notes

Thanks goes to Pete for pointing me to this website. Basically it is a transcript from the Berkshire Hathaway meeting. Well worth the read.

Click here.

Quote of the Day

"We're going to be gifted with a health care plan written by a committee whose chairman says he doesn't understand it, passed by a Congress that hasn't read it but exempts themselves from it, to be signed by a president who also hasn't read it and who smokes, with funding administered by a treasury chief who didn't pay his taxes, to be overseen by a surgeon general who is obese, and financed by a country that's broke. What the hell could possibly go wrong?" = source unknown