S&P Over 25X Earnings

What gives? The market is surging pre market and Bloomberg front page article points out the obvious.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6BxAKLBZvII&refer=home
The Standard & Poor's 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter, the only gain among the world's 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.

and

The index's price-earnings ratio rose above 25 three times in the last five decades, data compiled by Bloomberg show. The last was in 2001, during the bear market that followed the bursting of the dot-com bubble. The increase in valuations preceded a plunge that helped erase about half the market value of U.S. companies.

Dumb Central Bankers

Interesting post out of naked capitalism about one of the proposals that came out of Jackson Hole. It dealt with setting up an equity insurance fund for the banks that when tough times come the banking industry can use this insurance for equity injections. That has to be one of the dumbest things I have ever heard of in my life. But the world bankers somehow think this is a good thing. The blog post goes on to expose the lunacy of it.

http://www.nakedcapitalism.com/2008/09/troubling-signs-from-feds-jackson-hole.html

One interesting tidbit in the long post was that banks are not taking losses. The bulls keep complaining about all the mark to market losses the banks are taking and how it will be a huge earnings surge. According to Bridgewater, not only is that not the case but in fact its the other way.

Bridgewater Associates estimates banks have taken only 1/5 of the losses they estimate they have already suffered.

Wall St Back to Work

Wall St goes back to work tomorrow after about a two week vacation. It will be interesting to see how the market reacts. Despite all the gyrations last week we actually finished down, definitely did not feel like it, and right in the middle of the trading range for the S&P at 1282. The bears have not been able to break 1260 and the bulls have not been able to break 1300. Last week we traveled from top to bottom, back to the top, and then finished right in the middle. Financials however put together a nice rally and the call buying in the XLF was incredible. When volume on the NYSE was about 60 to 70% of average the September and October 24 calls for the XLF on Thursday and Friday were trading over 10 times normal volume. Across the board the September and October calls were going crazy. I am not exactly sure why that would be. There is alot of chatter with Lehman and I have heard from non media sources that offers have been put on the table for their asset management division and other negotiations are in the works. Maybe the smart money is saying that once again the systemic pressures will be eased in the entire financial system and so the discount rate required would be decreased and financials across the board will rise. I don't know. What was not being bought was the calls way out in January of 2009 so this appears to be a short term bet. With all that said there is massive refinancing coming down the pipe for the banking industry in the month of September. It will be interesting to see the price of money for these banks.

The world markets continue to decline while the U.S. just sits. It is amazing to me the change in the story by the bulls. First it was a decoupling story where the rest of the world was going to save the U.S. Now all of a sudden it is the U.S. has avoided a recession and the rest of the world will slowdown but it won't affect us. Insane.

Interesting write up about Jeremy Grantham, Bob Rodriguez, John Hussman, and Steve Leuthold. I don't that much about Leuthold. The first three are definitely the bears out there. Thanks goes to Pete.

http://www.marketwatch.com/news/story/four-horsemen-market-why-you/story.aspx?guid=%7b7E15D43B-33E7-4179-87A5-06BCD94C6BF3%7d

Graphs

A couple of interesting graphs and charts. Thanks goes to Travis. The most shocking to me is the HELOC exposure at commercial banks. It is up over $50 billion compared to last year at this time. I don't know if that means actual lines of credit or only the drawn portion. The other graph looks at total home sales compared to previous cycles. The last really bad cycle was 82. We still have a ways to fall in comparison to that.

Nations Largest Municipal Bankruptcy Ever

Thanks goes to Pete for scouting out the regional papers. This was coming and I think stems back to the failure of the ARS market but it could still cause a double take by a few investors if it happens and ends up on the front section of the WSJ. I don't think this will be the last muni default before this is all over with.

http://www.al.com/news/birminghamnews/index.ssf?/base/news/1219738563247390.xml&coll=2

Jefferson County expects to default on its $3.2 billion sewer debt Friday and likely will not enter into another payment extension with its Wall Street creditors, Commission President Bettye Fine Collins said Monday.

At that point, the commissioners likely will authorize attorneys to begin bankruptcy proceedings, she said.

Collins said she had hoped a deal could be worked out without the county filing the largest municipal bankruptcy in the nation's history, but she now thinks that such a deal is unlikely.

Who is insuring this:

When the county defaults, bond insurers Financial Guaranty Insurance Corp. and Syncora Guarantee Inc. are required to cover the payments under an agreement with the county. Both insurers would expect the county to reimburse those payouts in full, as outlined in that agreement.

Dead Man Walking

Thanks goes to Nathan for this. Interesting write up on the cycle of a bank becoming a dead man walking. It also talks about the GSE debacle and mentions some of the banks that are currently dead men walking.

http://www.safehaven.com/article-11073.htm

But this is where it is "different this time". Not only is it different, I think it may be unprecedented in nature. When I look at my Bloomberg monitor each day that contains my 100 most important indices, companies, commodities, bonds, bond spreads, preferred shares, etc, I shudder. The reason I shudder is that my screen doesn't have just one "problem child". It looks like a screen that contains many "dead men walking".

on the GSE's

While I have been expecting nationalization for quite a while, I am intrigued along with my peers and colleagues as to why the bailout is taking so long to accomplish. This is where it gets interesting and dangerous from a systemic point of view. My hunch is that the reason for the delay is that the Treasury Department is "peeling back the onion" on Fannie/Freddie and finding out just how much of a mess the two of them are in.

dead man walking cycle

It is a pattern that is not terribly dissimilar from the emotion charts I like to focus on so much. In the graphic below, I will offer my "recipe for disaster" for a bank or brokerage firm. I would like this cycle to be called, "The Dead Man Walking Cycle".

Wall St. Screeches to a Halt

About 393 million shares changed hands on the NYSE, 13 percent less than at the same time a week ago. Volume last week was 35 percent less than the year-to-date average.

I found that little data point interesting in a bloomberg article. Not sure what time that is of but Wall St. is entering a stand still. 35% decline is huge!!

Interesting that I didn't get text messages, emails, and phone calls from all my bearish friends complaining that the market is down while Fannie and Freddie are way up when last week I was barraged with such when Fannie and Freddie were way down and the market wasn't following. Like I said last week the base case of the equity get wiped out is a non event at this point I think. What matters is the preferred, debt, and the structure. The common is just a trading vehicle.

Interesting the market is down today. It makes me kind of think that the street was expecting or pricing in some kind of big news over the weekend on the GSEs or Lehman to take out some of the unknown. When that didn't happen the market sold of. Just theorizing.

Immigrants Returning to Mexico

Interesting possible domino affect from a slowing economy. Not something I would have thought would have been that noticeable.

http://www.foxnews.com/story/0,2933,409221,00.html

Illegal immigrants are returning home to Mexico in numbers not seen for decades

why?

Some say illegal immigrants are leaving because a soft economy has led to fewer jobs, causing many laborers to seek work elsewhere.

Others argue that a tough stance on immigration through law enforcement has spread fear throughout the illegal population.

we are not talking small numbers

The illegal immigrant population in the U.S. has dropped 11 percent since August of last year, according to the Center for Immigration Studies. Its research shows 1.3 million illegal immigrants have returned to their home countries.

Market Thoughts and Some Technical Analysis???

(For some reason the pictures are throwing off the alignment of the paragraphs in this post. I have played with it way to long and going to leave it the way it is.)
I feel like I need to qualify this post somewhat so some of my investing friends will still be friends with me. :) I take the view that almost any way of looking at the markets can be a tool at the right point in time. You don't want to be the carpenter that every problem looks like a nail and so you only reach for a hammer when you need a calculator.

Technical analysis in and of itself should be worthless. The reason it means something is because people believe it means something and there is big money at the margin that is managed following its principals on Wall St. Those more philosophical will argue that it is important because it falls into the patterns and math found in all areas of life from dimensions of tree trunks to how birds fly.

Whatever the reason, I really only find technical analysis useful in bear markets and a year ago never looked at it at. The last time I spent a decent amount of time looking at it is back in 2001 and 2002. I find it a useful tool in bear markets. The reason is because correlations of stock prices often go to 1 in bear markets regardless of what fundamentals are. In a bull market, in normal times, stocks usually react on their own merit. They move up and down on an individual stock basis. In bear markets if stocks are going down, usually all stocks are going down regardless of how the company is performing.

So you have two banks, one of which will eventually fail and the other which will emerge stronger because many competitors will disappear and they will survive. Who will win and who will lose between the two banks will be difficult to distinguish when things are bleak and investors who are panicky won't care. We will name them bank X (the one who fails) and bank Y (the one who survives). When things are deteriorating rapidly bank X and Y are both going to go down. When you have counter moves both will go up alot. Bank X may even go up more though it will ultimately fail. So say I am short Bank X because I correctly identified it is the inferior bank and have no position in Bank Y because it is to hard to tell if they will indeed make it (I have many such investments I could point to in this scenario currently). Well in the rallies especially, it is almost impossible to tell the difference. So if your trying to size positions and hedge and move out of hedges technical analysis can be a useful tool when dealing with probabilities of adding to shorts or taking profits and lowering exposure. Correlations become one. Bulls markets when things act more rationally and those who are succeeding are rewarded and those who are failing go down, the usefulness of the tool drops considerably (in my opinion anyway).

So with that backdrop in mind below are two graphs. Let me make it clear I have never read a book on technical analysis or done any sort of training. What I do is amateurish and really has developed from looking at stock graphs since the age of 12. My positions are made for fundamental reasons, the technical analysis comes in when managing size of my shorts on a portfolio basis and when to hedge and not hedge. Click on the graph below.

This first graph is the S&P 500 over the last 6 months. It includes the huge April May rally. What you see in the April May rally were two high probability tops that the market may have been done universally moving up. One in mid April and one in mid May (the actual top). They are classic type tops. Huge moves up early in the day after a couple of violent up days the days before (the final squeeze of the shorts and buying panic of those fearing getting left behind) followed by a slam down late in the day. The final buying barrage has been extinguished and it creates a decent probability that in a bear market that is the end of the bear market rally. We saw that a week ago Monday and I blogged that I thought it was a decent chance of that was it. Both tops in the April and May rally broke their trend lines. First break in April ended up being false (you are dealing with probabilities) as buy the dips still permeated Wall St while the second break was legit. We had another break after this last top. Very encouraging. I laid out my thesis a couple of days ago that while this rally was not as long at the Sep / Oct rally or the Apr / May rally that I thought probabilistically it was done. I also said it would be natural for the market to move back up to 1290ish. I was hoping the market wouldn't be that strong but it should be expected, that it would be a natural move. Below is the 1 month graph of the S&P. Click on it.

By looking at this graph you can see where I came up with this number. Today sure enough we went to about 1293 and couldn't break it. We have sold off below 1290 since.

If you are a bear we are not out of the woods. For one if you compare the six month and 1 month graph we did not break that 1260 area truly distinguishing a new low like we did in May. Also the reason I was so frustrated yesterday, which came out in a blog, is because once again in bear markets fundamentals in real time are not followed very closely which tests the patience in severe ways of fundamental investors. It is all about the reaction to the news not the news. I really had thought things had shifted. You had bad news on Wednesday which was shrugged off which while disappointing was understandable since the two days before the market had gotten slaughtered. Then though to see it followed up on Thursday with even worse news and the market shrug it off was very concerning. Then today the market is flying? Why? There is no real good news. The reaction if we had truly rolled over should have bee an open up 100 points and then sell off. Lehman is not news in my opinion. People keep asking me which bank I think is going to fail and Lehman keeps getting brought up and I keep saying no, it is going to get taken under. It doesn't really change the fundamentals at all.

So the market opened up and held the gains and then quotes from Bernanke in Wyoming crossed the wire and the market rallied some more. They were bad quotes. There was nothing positive I could see in them besides the fact that the Fed is stuck. That fundamentally things are getting worse and we don't know what to do about. Yet the market bought it. Bad news is still being bought which is very concerning.

What I am saying is that we have to hold this 1290 to 1300 area or I will probably be buying protection against my short book. It was a failed breakdown like mid April, the market probabilistically is heading higher, and it doesn't really matter if your fundamentally right, your shorts are probably also headed higher.

After saying all this I just want to emphasize that this stuff should only be used as a tool. I don't usually look at individual stocks this way. I don't usually look at going long a stock this way. My view in April and May were that it was a bear market rally. I hedged some in the beginning of the rally but took the pain as the market put together a very massive rally looking for a turn in the markets. Last time I got it right. I bought puts and greatly expanded my short exposure around 1400 on the S&P. I have done the same here but this may be a failed April breakdown. You have to know fundamentally why you are short or long something and then you can use this tool to help when to make a big swing. I could easily be wrong that a week ago Monday was the top. If I am right fundamentally though on my positions it won't matter in the long term. Where it matters is that I avoided the end of July and beginning of August shorting things even as the stocks increased until I saw a high probability opportunity with shorts I fundamentally liked. 1325 to 1340 is still the area where I think a rally almost has to come to a halt though I really don't want to have to wait though that.

Insanity

This is insane. I don't gripe about the markets often. They are what they are and the goal is to take advantage of them and griping doesn't do anything. Today, I am going to make an exception. I can't see how the markets are not down at least 100 points. Instead as I type the S&P and Dow are up. You dig in the markets are they are down a little more. XLF down 1.2% and Russell 2000 down .3%. Still, the market's performance today so far has been awe inspiring. Asia down across the board, Europe down across the board, Oil up over $5!!! per barrel, Goldman and Lehman down over 1%, and somehow people are buying?? Sometimes all you can do is just shake your head. Volume again is next to nothing which may explain it. The Wall St. bosses are in tropical paradises this time of year while home is becoming a burning inferno but those at home are just maintaining the portfolios they have not making any large allocations bets bearish or bullish.

The most amazing thing of all (in my opinion anyway) is that the VIX is down over 4% today. Geopolitical tensions, oil, fannie and freddie, etc etc. are all rearing their flaired Cobra heads and the market reacts by selling down fear. Amazing.