Tuesday, December 15, 2009

Bond Market Makes It's Presence Felt

As the administration pushes its spending proposals, the bond market has been speaking quite loudly the past few days and just broke through its trading ranges of the past six months.

Technically speaking, we have a clear inverse H&S pattern possibility on a 60 min and a much larger daily scale.

These technical setups equate with fundamentals and it is difficult to say when the vigilantes make life difficult for the various government entities. But this much is clear.  While equity markets can be controlled and manipulated even for a time, the bond market is far bigger than any government entity.

While some are calling for the markets to go higher, and it is highly likely, the preponderance of news today has to be considered negative between the Empire State survey, the PPI, the rise in yields.

Eventually insitutional money will realize that this time really is not different, ie, not different than past credit crises which are usually followed by fiscal crises. 

That being said, the markets will likely break through resistance and head higher anyways I guess.  

The Same Old Story with Real Estate

Realtors are again putting out the same old story, are these guys ever bearish?

Prices are on sale and if you do not get in now, you'll miss out.... the same old story of greed and fear.

Having been a landlord for many years myself, let me tell you that a vacant apartment can be death to your finances.  If you're an investor buying on financing, it is a risky business. We're still clearly in a deflationary path on rents.

One very simple way to determine demand and supply is looking at the craigslist listings for rentals.  Search craigslist las vegas or craigslist palm beach or any other location and if you've been tracking this data over the past years you'll see that where listings used to average about 100 a day during the peak we are now up to over 500 listings each day! Care to compete with that kind of competition?


Here is what is happening in the Palm Beach market based on my personal conversations with agents and investors


Lenders like Option One that own defaulted inventory are not foreclosing on that inventory.  I know of property that owners have walked away from over 18 months ago and is still not foreclosed.  Why? Because lenders know if they foreclose they'll be responsible for taxes and maintenance and liens.  So lenders are opting to let the foreclosed owner keep the property until they find a willing buyer.

Option One recently offered a tenant at a local community $3000 to move out so that they could start showing the property without actually owning it.  This kind of illegal activity is underway in Florida and I am guessing other parts of the country.

All it does is confirm the huge amount of shadown inventory that continues to sit on lenders books.

Rising Rates Coming
Now if you're an investor that has the cohones to buy in this market, granted there are a few good deals if you know how to land a renter.  Hats off to you.

But if you're an investor, you need to consider what will happen to prices when rates go up.  It does not take a rocket scientist to figure out that prices will continue to stay under pressure for a long time to come as rates are most definitely headed higher over the longer term.  And if you don't get that, then you really have no business being an investor.

Regardless of how you spin it, investing in real estate is an unattractive opportunity unless you have a 20 or 30 year horizon and are willing to deal with the headaches of being a landlord during that time.

Thursday, December 10, 2009

Time Symetry

EW normally requires Wave 5 to be 100% of the time spent in Wave 1.  That requirement was satisfied to the T in the chart below.  No idea if the count is right but it does offer hope to us bears. If this is indeed the count, this may be the confirmation that Wave C is finally complete.  And if that is true, time for the fireworks to begin on Wave 3 down.

As an aside, added small position at 1105 earlier today.


The Real Story on Bonuses & Value Provided

Me Likey.  However this news will only contrast how powerful the finance lobby is in U.S. as it will never happen here.

Bankers furious at UK bonus supertax

Bankers in the City of London reacted with fury to UK government plans to levy an immediate 50 per cent supertax on’ bonus pay-outs, saying the move played into the hands of rival financial centres.

France to impose tax on bank bonuses

President Nicolas Sarkozy is to follow Britain’s lead and impose a one-off tax on bonus pay-outs by banks operating in France.
The French government is still working out the details, but intends to bring Paris in line with London by forcing banks to pay 50 per cent in tax on bonus pay-outs for 2009 above €27,000.


As a former worker on Wall Street let me provide some details on how the bonus structure on Wall Street works.

I was a Senior Analyst at a top 5 investment bank.   Total compensation was a combination of a base salary, and a bonus.  Bonuses were usually a combination of cash and restricted stock.

Base salaries today range from $120k to $150k for senior analysts, possibly higher as i have been out of the industry a few years.  In addition, bonuses ranged from 100% to 200% of the base.  Managing Directors and VPs have base salaries in the $200s and bonuses multiples of that.

The question though is this - does the Wall Street employee provide a corresponding value to the salaries? No.  In my opinion, my job and those of most analysts and senior analysts could be performed by an average finance graduate and unfortunately, even better by a finance graduate coming out of India.

And that is the reason for the outrage amongst Americans.  Wall Street salaries have no connection with performance.

Monday, December 7, 2009

Adding to Shorts - S&P 1107

I could talk about fundamentals, but why bother.  This is a technically driven market rally and this trade is based on technicals weakening.

Monday, November 30, 2009

Back In The Channel ... What Happened to the Dollar trade?

I cannot help but be satisfied that the S&P is comfortably back in the bear channel

Tech is showing leadership to the downside and on a day when the dollar is down
, the markets are down as well?  What happened to the relationship that drives all asset markets?  One day does not a trend make but this is now the second day this has happened.

Impulse Character - One of the other items that I would point out is that the moves down have a definite impulsive characteristic to them.  Impulse waves generally point to the direction of the trend.  Particularly on a smaller time frame you can see this clearly, a struggling upwards move and a strong down move in bunches.

Sadly when the market breaks most that believe they will be able to exit will not be able to exit.  Tops are a process and it certainly seems like reality is starting to set in.

Time will tell, I remain short for now.

PS  - will be travelling next couple days so I may or  may not be able to post.

Friday, November 27, 2009

A Great List of Resources

Although I follow a number of bloggers, I rarely find any useful resources or indicators.

Mact is one of the guys that I respect and he posted these indicators and I think an excellent analysis that I wanted to share with you.  Mact is the disqus name, look him up.  The guy is a good trader.  Generally I find that I agree almost 100% of the time with his commentaries and views match my own almost without exception.  That being said, I'm more a swing trader and he is a day trader. 

His post is below:

1. highest SOS on SPY since the march lows....big boys jumping ship.





2. Sentiment  - 8th lowest bear reading in past 20 yrs



3. ISEE showing blowoff sentiment




5. price keeps goin up but internals and volume cont's to weaken.

Goddamn Tryptophan!

Due to a bout of overeating - why do fat people always cook so well? - turkey, I woke up too late today to take early profits.

I was able to close out shorts and reopen at slightly higher levels.

I am astounded at the goldilocks market, good news, bad news it does not seem to matter.

Market participants seem to be in the "Dont Fight the Fed" phase.  But this is getting absurd.  As usual futures were gunned and bulls have got to be feeling giddy with today's performance.

At some point, maybe not in my lifetime, reason will return to the market.

However, from this market observer's perspective, being long this market is riskier than bunjee jumping off a bridge.

Risk levels have just gone up.  Who will be next? My guess is something is brewing in Greece and Eastern European countries intermediate term and longer term, I am certain China will deliver a shocker.

The U.S. carry trade just got a lot riskier as well from a currency perspective.  It is clear that emerging markets represent higher risks than U.S. equities.

I will be focusing on shorting emerging market stocks and small caps.

Thursday, November 26, 2009

Dubai: A Repeat of Miami

Those of you think that this news is a $60 billion check and not a big deal are not thinking this through.

If you have followed Dubai over the years, the only true comparison to what is happening in Dubai is Miami.  Now this may be hard to believe, but the Dubai bubble is going to be actually far worse than Miami.

Investors were convinced that millions in oil money would have to be invested somewhere.  The plans were audacious - the second tallest building in the world, a man made complex in the ocean visible via satellite and numerous skyscrapers, stars being paid huge contracts to be a part of  the story.

What was missing? Demand.  The story that unfolded in Miami, Las Vegas, Arizona and Florida will unfold in Dubai. 

Why? Fundamentally, when massive overbuilding and speculation occurs, as it has in Dubai, the mania is difficult to identify to the participants.  It is only now starting to sink in with the unfortunate real estate speculators that Dubai is a massive bubble.

Expect to see this news lead to a wave of investors walking away from contracts, speculators walking away from projects and follow on impacts.

Equities - You are Back of the Bus

Time and again, it has been proven over the years that the bond markets are usually smarter than the stock market.

To Wit:

Fear pushes US rates into negative

By Michael Mackenzie in New York
Published: November 24 2009 19:19 | Last updated: November 24 2009 19:19
Negative interest rates are back. Yields on short-term US government debt have fallen into negative territory as banks and investors park their cash in havens before the end of the year.
 Equity investors have been ignoring the robust demand for treasuries, negative short rates.

One need only be reminded of Sep 2008 and Dec 2008.



Ignore the bond market signals at your peril.  Robust demand for bonds at historically low yields, negative short rates are not a healthy sign. 

Secondly, we have Dubai and we also have an imploding Greece.  These could be one off events.  But they could also be the first dominoes.  In the larger scheme $60 billion or thereabouts in Dubai is not that big a number given where we have come from.

But what is far worse is the structural damage that is being inflicted in the region.  China is a bubble.  India is a market share gain story and FDI flows, not much more.  Brazil is a commodity play.

And we have seen the bogus recovery stats with the bulk of GDP growth this past quarter driven by cash for clunkers and housing programs. 

Take it all away and what do you have left?
A strapped, over debted, suffering consumer and governments entering the scenario consumers were in 5 years ago, teaser rate debt.  Leverage is a bitch.  It usually comes back and bites you.

Wednesday, November 25, 2009

Out of Gold Miners

Taking profits on recent entry in gold miners
After a huge move, the risks are now to the downside

Adding to TZA, SDD Shorts at S&P 1108

While the S&P index and Dow appear at highs, the small caps are telling a different story.  Limited bailout monies, limited exposure to weak dollar.

SDD and TZA both look to be forming rounded bottoms. According to McHugh :
Stocks continue to trace out the path we annotated over the past few night's newsletters, a small Rising Bearish Wedge, which is usually a termination top pattern. Historically, stock prices generally rise the day before and after Thanksgiving, and historically have a bad Monday afterwards.
Despite the S&P rising the past few days, my TZA position is still profitable.  SDD is another small cap play.

As I have mentioned previously, I use these highly leveraged securities as short term plays.  Timed correctly, they offer significant benefits versus options.  The leveraged returns allow me to play with smaller positions than I would normally need to invest to generate returns.

My position is relatively light as the pattern is not entirely clear, but the divergences building on the 60 min RSI make me comfortable that my entry will pay off.  Having enough ammo on hand is critical to playing this strategy.  And I do.

Happy Thanksgiving.

Tuesday, November 24, 2009

Secular Trends Trump Cyclical

Here's a secular trend:

Adults Moving Home in Recession; Delaying Marriage, Kids

 The recession has caused many adults to move home, shack up with roommates and delay having kids according to a study to be released today by the Pew Research Center. The report, which draws on Census data as well as a nationwide survey, follows media reports on some of the same phenomena.

One-in-ten adults ages 18 to 35 (10%) say the poor economy has forced them to move back in with mom and dad.

12% said they moved in with a roommate.

Recession Hits Immigrants Hard - Survey Shows First Decline in Foreign-Born U.S. Residents in Nearly 40 Years

The number of foreign-born residents of the U.S. declined for the first time since at least 1970, as a recession and tight labor market dented America's image as the land of opportunity.
A decline in construction jobs lured fewer immigrants from their home countries, especially those from Mexico, according to the Census Bureau's annual American Community Survey.
Due to the ill advised policies, more homes and inventory will continue to come into the market.  Despite what NAR wants you to believe, secular trumps cyclical.

Monday, November 23, 2009

The Fallacy of Investors

Sadly, it is only a matter of time before we reach similar situations in the U.S.

JAL seeks 40 percent pension payout cut for survival

TOKYO (Reuters) - Japan Airlines Corp (9205.T) asked retirees and employees on Monday to accept an average 40 percent cut to their pension payouts and warned the struggling airline could face bankruptcy if an agreement could not be reached. 

The cuts will impact 17,000 current employees and some 9,000 retirees.

Meanwhile, more speculation in China:

Chinese are just like New Yorkers. They can't stop talking about real estate.  There's one distinctly American habit the Shanghaiese seem to have picked up easily: talking about money, profits, and real estate prices without self-consciousness. 

The fallacy of investors over the ages has been an expectation that the recent past will extrapolate into the future.  However, real estate like all other investments can be a painful asset to hold as it is one of the most leveraged of investments that individual investors can have exposure to.

The parents, in their 50s, are both longtime employees of Shanghai's public bus company—the husband a middle manager, the wife a retired laborer. Their daughter, Yang Gao, a recent graduate of Fudan University, is going to start work at Ernst & Young next month. They were happy to share details of their personal finances. The Gaos were given the opportunity to buy workers' housing elsewhere in Shanghai very cheaply a few decades ago. That apartment, which they still own and rent out, has soared in value.

When taxi cab drivers, bus drivers and the common man start to benefit and get caught in asset bubbles, it is usually in the last stages.  Nasdaq stocks, Florida real estate anyone?

Just to jog memories, New Yorkers - along with their NJ cousins - were amongst the most aggressive investors in Florida and Las Vegas and in my opinion, responsible for the speculative frenzy that drove Florida into stratospheric valuations.   

 

Short Stocks Long Gold may be the easiest trade

My recent re entry into Gold Miners is paying off handsomely today.

As mentioned I exited stocks late last week and took profits, that was timely.

I entered a very small position at the end of the day Friday.  That position is at a loss now but more than offset by my longs in the Gold Miners.

This week will likely be portrayed in a positive light because we need the lemmings to spend on Black Friday.

I have not had a chance to review the economic data.  Will be taking care of some business matters most of the week.  Letting the miners run for now with a hedged position in short equities.

Long Gold Short Equities is the easiest way to stay profitable in a hedged fashion.

That being said, it feels like classic distribution.  Financials are lagging, XHB lagging, transports are lagging, Russell 2000 is lagging, QQQQs have not made a new high.

The Dow which is easy to manipulate is at new highs and large caps are probably what is pulling the market.  Why? Foreign profits repatriated into cheap dollars equals good profits.

Bottom line? This is a rally on the legs of a cheap dollar.  If fundamentals were healthy, governments would not be lining up to purchase Gold.

Friday, November 20, 2009

ReBuilding Shorts S&P 1092

This Is Not What a Recovery in Month 9 Looks Like

Japan says economy back in deflation

By Robin Harding in Tokyo
Published: November 20 2009 06:31 | Last updated: November 20 2009 10:18
The Bank of Japan moved towards a neutral stance on the risk of inflation on Friday even as the government formally declared that the world’s second-largest economy has entered deflation for the first time since 2006.
The government’s declaration sets the scene for heightened tension with the bank, which has been resisting public calls by politicians for greater aggression in the fight against deflation.

State, local budget cuts a "time bomb" for jobs

NEW YORK (Reuters) - Budget shortfalls pose a direct threat to millions of U.S. jobs, many in the private sector, as state and local governments lay off workers and cut spending on contracts and other business services, a think tank said on Thursday.
State and local governments will have to raise taxes and cut spending in the current and next two fiscal years to cover shortfalls totaling $469 billion, according to an Economic Policy Institute report.

Obama mortgage rescue: Only a few get lasting help
Only a tiny percentage of troubled homeowners have received permanent modifications under President Obama's foreclosure prevention plan, raising concerns about the effectiveness of the $75 billion effort.


U.S. Mortgage Delinquencies Reach a Record High - 1 in 7 is delinquent, 1 in 10 at least 1 payment behind
Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.


Upcoming Week

There’s a lot jammed into a holiday shortened week ahead. Readings on October homes sales (existing and new), September home prices from Case-Shiller, another look at 3Q GDP, November consumer confidence, October durable goods and personal income & spending are among the highlights packed into the first three days of next week.

Next week could be a nasty surprise for the complacent self preserving idiots we call mutual fund managers.

Exiting Last Close Positions Now for 2% Profit at S&P 1088

Will exit substantially most of the short positions soon

Sentiment Overview

Click here to find out more!

1. Interesting Timing on this headline and post - could be downright prescient as a contrary indicator

LA Times Blog - 'Buy the dips': The Wall Street cliche that has worked like a charm

November 18, 2009 |  6:00 am

2. Barron’s Big Money Poll which found that the most bullish positions also highly correlate to the highest net speculative futures positions:

Below chart highlights the latest Barron’s consensus on the various asset classes — percent bullish and bearish. As expected 60% are bullish and only 13% bearish on equities.






 Amazing!



Thursday, November 19, 2009

Dell Lays An Turd -- What? Businesses are not spending?

Revenues down from last year, losing market share to Acer, profits down 54% from last year.

Expectations were priced in that Dell would beat, so the earnings ugliness is a surprise to the green shooters.

Dell reported a net profit of $337 million, or 17 cents a share, for its fiscal third quarter, down from $727 million, or 37 cents a share, in the year-ago period.
Revenue fell 15 percent to $12.9 billion, missing the average analyst estimate of $13.2 billion, according to Thomson Reuters I/B/E/S.
While the revenue shortfall was troubling, some analysts also expressed concern about Dell's margins, particularly because the company had stressed profitability over growth amid a $4 billion cost-cutting effort.
Dell, which relies primarily on sales of PCs to businesses, has suffered as companies dialed back spending during the economic downturn. Acer and HP have also been waging a price war, analysts say, particularly in consumer laptops.
 But weren't consumers the ones that were holding back the recovery? Now  businesses are unwilling to spend?  Huh, What A Surprise (sarcasm)

This will likely have a impact early in the morning, and I will look to take immediate profits on the shorts added this afternoon, and exit additional positions as the selling slows down.

It looks to be a good idea to have added shorts at the close.

Looking to Add Short at the close 1099

Edit : 3:58 pm - Increased short exposure moderately in TZA QID & EDZ
Not risking too much here

Taking Some More Profit at 1090

How Far Will Productivity Take Us? Main Street & Wall Street's Differing Perceptions

Businesses have been benefiting from cost cutting and productivity the past couple of quarters.  Large businesses are also benefiting from a weak dollar allowing them to post large currency gains on overseas earnings.

Employers have in large part achieved this rise in productivity through moving jobs overseas - bad for the U.S. consumer, laying off workers - bad for the U.S consumer and thirdly through efficient use of networking technology, reducing travel costs - bad for the U.S. economy.

Secondly, government has made abundantly clear that their approach is clearcut handouts for financial firms and no clear cut programs to help consumers.

It is my view that amidst this abundance of optimism on Wall Street, Main Street has not participated in this rally, which has enriched  the fat cats only further.  Main Street is hurting in a way that Wall Street just cannot relate to.

Wall Street's view of the economy extends about 20 miles around New York City.  New York malls are packed, the city is flush with bailout bonuses and Hampton sales are booming.  Housing prices have not declined as the average New Yorker's net worth coupled with generous severance packages positions them to survive the downturn well.  Until now. 

Unemployment benefits will start to run out soon.  While Main Street recession started in 2006-7, Wall Street's recession started in October 2008.  We are just now entering the period where New Yorkers will start to feel the pain. 

Living in New York, it is evident the city is faring well, but not so much that it can survive unscathed.  Many stores are empty, even on thoroughfares like Broadway & Madison Ave.

What Wall streeters are missing is that the economy is a reflection of Main Street.  The government had an opportunity to fix this problem.  It will now be apparent that we are headed down a path of dollar debasement, debt explosion.

Despite the street's view that this will lead to inflationary asset prices, they are about to find out that the consumer will refuse to participate, earnings will suffer and certain asset prices will correct substantially.

The true bottom lies ahead of  us, unfortunately. 

Finerman Does Not Get Gold, Paulson Launches Gold Fund

Finerman? on the Fast Money show does not understand. Gold isn't necessarily just an inflation trade as Finerman believes.  She is afraid of Gold "look out below" on inflation expectations.  She is clueless.

Gold does well in environments when fiat money is being abused and vulnerable and being debased.  Can we say with certainty that is exactly what is happening in the U.S., Japan, Europe and China, yes, China?  The answer in my opinion is definitively Yes.

Meanwhile Paulson, billionaire hedge manager, is launching a gold fund.

I should not have sold my miners earlier.  I am now scaling in very gradually into Gold miners.
A great site to learn about gold stocks is Gold Versus Paper

Taking Profits at S&P 1092.03

Sold QQQQs for now
Took partial profits on TZA and EDZ
Entire position is in profit, up roughly 6%

I will be looking to take some more off later today & tomorrow

Wednesday, November 18, 2009

Out On Positions Initiated This Morning

Edit: 3:00 pm - Back in Shorts

Creative Destruction at Amazon

Amazon has expanded its potential market base to world wide with the introduction of the Amazon Kindle for PC and Amazon Kindle for Mac software products.

While everyone is focused on the Kindle, the more exciting opportunity is in the software for the computer in my opinion.  Kindle is still expensive and will only be adopted by first adopters while the PC and MAC software is FREE and easy to use.

If you're a resident of  a country that Amazon does not deliver to, say India, the Middle East, Africa and you need a title, all you need is a PC.  Think about what that does to their model.

We're looking at a worldwide technology delivery company, lower COGS, larger market and electronic delivery model.

The impacts of this surge towards electronic delivery will be felt starting immediately in my opinion.  I'm late to the stock as the market has obviously recognized this and the stock is expensive. But this is a story that I will be looking to accumulate on dips.

A similar type of model extends to NetFlix along with similar competitive advantages. Valuation for Netflix is far more reasonable than Amazon and it is a stock I have owned since it was in the mid 30s.

Concern: One of the concerns that does get raised is that this does potentially lower the barriers of entry for amazon.com.  So what's to prevent Google or Apple or Walmart from entering the digital book selling space? To date, Amazon has succeeded on fulfillment and execution.  So will the expansion of the addressable market override the competitive concerns.  At the end of the day, the web will be controlled by dominant brand names and this is a net positive for Google and the like and a positive for Amazon for now.

Adding Short Exposure to Smallcaps & Tech at S&P 1105

Initiated short position via QID in tech stocks
Added to small cap position via TZA
S&P 1105

Tuesday, November 17, 2009

Could It Be This Simple?

From Prechter:

The blue-chip stock indexes appear very close to the start of a decline, if one did not already start today. The structure and strength of the decline will determine whether Primary 2 (circle) is complete or if it still retains upside potential.
Friday night we said, "The subdivisions of the rise would count best with a new high early next week, above Wednesday's high, but we'll see." The market's delivered today, with the Dow and S&P rising above last Wednesday's high in what has the earmarks of a fifth wave, an ending wave, from at least November 2. Today's 10,434.20 Dow high, as well as the 1113.68 S&P high, falls within the time frame and price parameters that we've been discussing throughout all of last week.
Kenny had a similar observation.  The five wave structure seems too easy.  Markets are rarely this easy and that is the one thing that concerns me about this count.  In hindsight we will see where the trap possibly was and the structure will reveal itself.

Elliott wave aside, the technical conditions and fundamentals are ripe for a reversal as well which is why I continue to be exposed to the short side, reasons discussed and listed in my previous post.

But because of the multiple traps that have been laid by the bulls I continue to be cautious in terms of my exposure and am ready to engage the bulls with plenty of ammunition to spare should they spring a surprise.

Moment of Truth - This time is no different

Conditions are in place across various indicators for a drop.  It does not matter where I look, the direction points down for me.
  • Technical Stochastic indicators such as the RSI are demonstrating huge divergences on multiple longer term timeframes.  Eventually this situation resolves itself, in this case, downard.
  • We have reached major fibonacci retraces on time and price that signify that this rally has met all anticipated targets and we are due to begin Wave C.
  • On a positive note, the market has now pierced a major trendline that has defined this market and it will be critical to see if this is a breakout or a fakeout.
  • New Highs have not confirmed this recent rally.  The number of new highs is significantly lower than the prior high.
  • Volume is not confirming the rally across a variety of time frames, particularly on the daily.
  • The advance decline line is showing a large divergence
  • We are wedging yet again which has been a decent indicator
 Fundamentally, the news disappointed again this morning with the miss on Industrial Production.

I am anticipating a possible final 5th wave surge higher, but 5th waves can truncate as well.  Timing wise, this could be coinciding with a disappointing Thanksgiving sales season.  We'll see how the spin masters spin it.

Monday, November 16, 2009

Retail Sales - Not Rosy Despite What the News Media Tell You

Just how much consumers are spending can be an important window into the prospects of the economy.  However, there is a risk relying on advance retail sales as it is based on quite a small sampling.

That being said, here is the key takeaway on the "rosy" numbers reported this morning:

Lets look at the year over year numbers first.  Total retail sales are down around 3% year over  year from a terrible October last year.  What green shoots exactly are we talking about?

Ex Autos picture is even clearer and down worse than the total number.  What's up? Autos, courtesy of the clunker program.












Now for a review of the month over month:
Change from prior month for Total Retail Sales: +4.7
Change in autos: +4.0

The majority of the increase in retail sales was a result of a rise in auto sales.

What are Financials, Goldman Sachs, IBM Telling Us?

As the market zooms to new highs, leaders such as Goldman and IBM have failed to make new highs and Financials are telling a whole other story.

Expected Up Move Underway, Adding to Shorts 20%

S&P 1110.67

Short position initiated based on divergences that are developing in the S&P 500

Saturday, November 14, 2009

Anecdotal Stories from the Upper West Side of New York

These are personal stories I have heard or seen with my own eyes and ears the past 10 days:

Today at Gristede's Upper West Side:
I see a middle class guy leaving the store, despondent.  The counter clerk told me the guy was buying 2 packets of peanuts and the card only had $0.90 and the poor guy's bill was only able to cover 1 packet.   The guy told her that was all the money he had and the peanuts would be his dinner for tonight.  Happy Halloween, America.

Couple days ago Walking Down Broadway in the 80s:
A man walking down the street with his family of wife and two little girls.  I overhear the man say, "Sorry honey, I can't, I'm unemployed..."

Yesterday, was on my way back from Blockbuster and I looked into the faces of the people on a bus heading uptown and it broke my heart.  The saddest, most forlorn, broken, sad people that I can ever want to see.  Spirits broken.  Unhappy.

The coup de grace.  Today my landlord who happens to be Jere Burns - you can look him up on IMDB - has his third wife who is probably 20 years younger contact me and tell me that they are going to be taking over the apartment 1 month early.  No discussions, no nothing.  Why? Because Jere is going to be back in New York and wants the apartment.  I paid the guy for the full term upfront.  The wife maniacally called me every day while fedex was delivering the check, it felt so petty and embarassing to have to deal with her.  Obsessed with money.

I am back in New York after a few years.  I left during the dot com years because I was tired of the assholes that work here, tired of the hustlers.  But when I left people were happy.  You could still see people walking down the street laughing and cheerful.  Today it is hard to find people walking down the street smiling, at least where I live on the UWS.

Even so, I find that New York is far better than the rest of the country and is faring relatively well.  Prices of real estate have corrected but there are no foreclosures in Manhattan, a few in the suburbs.  The UWS is still a tough place to find an apartment, being one of the more desirable places in the city for families.

The city has become the poster child and in some ways always has been the poster child of what is right and wrong with our country.  We can all form our own conclusions. I would love to hear your thoughts.

What Could Possibly Go Wrong With the Recovery?

Debt
Just one month into the 2010 fiscal year, the U.S. government is on track for a record $2 trillion annual budget deficit.  That’s the word from the Treasury Department, which quietly announced a $176.4 billion October budget deficit yesterday.

The U.S. government finished its historic streak of debt sales today with a record $16 billion offering of 30-year bonds, auction results on the weak side. This was on top the $65 billion in 3-year and 10-year paper auctioned earlier this week, both records in their own right.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

“A failed auction for U.S. Treasuries, looking out over the next couple of years, is not out of the question. 

If this happens, conditions in the interest rate derivative market, with a notional value in the hundreds of trillions of dollars, could get ugly fast.

The question then becomes: who bails out the federal government? The Fed’s printing press could be cranked into overdrive, but if holders of dollars look to get rid of them as quickly as they’re created, this sort of policy route will losing its potency over time.

The U.S. is not Japan, We are Worse
the US economy is not exactly like the Japanese economy. Japan had high savings…and a positive trade balance. It could run up huge government debts and “owe it to itself.” It could finance its government debts with the savings of its own people, in other words. It never had to worry about foreigners refusing to buy its bonds…or selling them suddenly.

America’s government debt is different. The US doesn’t save enough to finance its own deficits. So it depends on the kindness of strangers. And if those strangers ever lose faith in America’s ability or willingness to repay its debts, they’ll drop the dollar like an annoying girlfriend. 

FHA Cash Reserves At All Time Low
The Federal Housing Administration said Thursday morning that its cash reserves had dwindled significantly in the last year after a record drop in home prices.

The results of the F.H.A.’s annual audit showed the agency’s capital reserves to be 0.53 percent, far under the 2 percent minimum mandated by Congress. A year ago, the capital reserves were 3 percent.

It is tightening loan standards in hopes it will not become another drain on the United States Treasury, but is reluctant to clamp down so much that it snuffs out the tentative recovery in housing.

During the news conference, Secretary Donovan and the agency’s commissioner, David H. Stevens, said that the cash reserve, the figure that has fallen to 0.53 percent of loans outstanding, was merely a supplement to a much larger fund that the F.H.A. was holding against expected losses. Between the two accounts, the agency has $31 billion to cover losses over the next 30 years.
Barofsky Says TARP ‘Almost Certainly’ Will Bring Loss to U.S.

New Mortgage Applications Plummet
Housing demand is not sustainable. Applications for new mortgages, announced Thursday morning, dropped sharply in the previous week to levels not seen in almost a decade. This decline was consistent with Toll Brothers' (TOL Quote) conference call on Wednesday, in which the company's Chairman described demand since Labor Day as uneven.

I don't see what replaces housing as a driver to growth -- the sector was responsible for over 40% of job growth in the 2001-2007 period.

IEA Says Rising Oil Price Risks Derailing Economic Recovery
The International Energy Agency Thursday revised it 2010 world oil demand forecast slightly higher, but warned that rising crude prices, if sustained, risk smothering the fragile economic recovery underway.

Dollar Dying
We have a Federal Reserve and Treasury which have agreed to double team the ailing dollar as they print money to no end and effectively punish the prudent while rewarding the speculators (the same bastards that helped create this mess to begin with).  Our tax issues have not yet reared their ugly head, but trust me, they are coming.

Massive Govt Revenue Shortfalls
What we haven’t quite dealt with is how the government is going to overcome their massive revenue shortfalls and ever expanding debt.  As Jim Jubak recently described, they are going to come back to the consumer for another blow to the knees.  No, the bailouts weren’t enough.  Destroying the dollars in your pockets isn’t enough. Because of their fiscal irresponsibility they are going to raise your taxes in 2010.  And don’t be fooled.  The income tax may not spike, but they will get you in every other way they can. Sales tax, real estate taxes, etc etc. You are paying for their mistakes. Whether you were prudent or not.

Municipalities are in financial disarray and won't provide their normal anchor to growth - 10 states face financial peril
Dropping tax revenue, rising unemployment and yawning budget gaps are wreaking havoc in states from Arizona to Wisconsin, a new report shows. The 10 most troubled states are: Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

Other states -- including Colorado, Georgia, Kentucky, New York and Hawaii -- were not far behind.

Already, less than five months into fiscal 2010, several states are looking at additional budget cuts.

And in California, Gov. Arnold Schwarzenegger said Tuesday that his state is facing a budget gap of up to $7 billion.  Budget projections show that states could face deficits as large as $260 billion in 2011 and 2012 after stimulus funding is exhausted. State economies usually take up to two years longer to recover after the nation's fiscal health begins to improve.

Yet More Bubbles & A Warning from Donald Tsang

The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown…

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

“Where is the money going — it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

A sampling of recent inflationary developments
* A 15 percent increase in health insurance premiums for small businesses

* A 50 percent increase in car rental costs

* A 15 – 25 percent increase in long-term care insurance rates for California retirees

What Could Possibly Go Wrong? S&P 1200 here we come

Richard Russell - 6 Reasons to Own Gold

Richard Russell “There are a number of items favoring higher gold now.

(1) Interest rates are at zero, which means the ‘opportunity cost’ of owning gold now is highly favorable. You sacrifice no yield in owning gold vs. Treasury bills. T-bills pay you nothing, so you might as well have your money in gold.

(2) The Bernanke Fed will evidently stop at nothing in its all-out attempt to ‘jump start’ the wobbly US economy. This means spending and building debt at a never-seen-before rate. This will result in inflation. The Fed can create fiat money - any quantity at will, but it cannot direct where that money will go. So far, the money is not going into the economy, banks remain reluctant to lend and consumers are reluctant to spend.

The newly-created money has been going into bank reserves and into the stock market. Stocks have been rising on an ocean of liquidity. The sinking dollar has been a huge help to the big Dow-type stocks which benefit from their ability to export. This is resulting in world-wide central bank inflation as the banks seek to devalue their money in an effort to keep the dollar strong.

(3) The world’s central banks are now seeking to protect themselves from a falling dollar by buying gold. After years of selling gold, ironically, the central banks are now buying gold. In today’s Wall Street Journal we see the headline, ‘Central Banks Join A New Gold Rush’. This is indeed ironic. In swapping their own paper for gold, many central banks are admitting that gold is superior to the very paper they are creating out of thin air.

(4) Many nations are now seeking to boost the ratio of gold to paper in their reserves. The US has the largest ratio of gold to junk fiat paper, 77.4%. But the US stupidly only places the value of our gold at $42.22 an ounce. If the US marked our gold to market, it would be a tremendous help to our government’s balance sheet. But the US prefers to live in a fantasy world where gold is worth less than $50 an ounce!

Germany has 69.2% of its reserves in gold.
Italy has 66.6%.
France has 70.6%.
UK has 17.6% (after idiotically selling most of its gold near the low below $300 an ounce).
Japan has 2.3% of its reserves in gold.

India has 4.0%.
Russia has 4.3%.
China has 1.9%.

It’s easy to see that Russia, India and China are low on gold. All three would like to at least double the percentage of gold in their reserves. The race is on for these central banks to accumulate gold without running the price of gold sky-high.

(5) In the US, literally no one owns gold. Rather, US citizens are selling their gold (jewelry) to companies who are advertising that they’ll buy ‘your overpriced’ gold for cash.

(6) A few nations are actively promoting the ownership of gold. China, the world’s biggest miner of gold, has been encouraging its people to buy gold. In London, Harrod’s department store is now selling gold coins and bars to anyone who has the paper to buy gold. Within a year or so, I expect public buying of gold to reach a crescendo. Interestingly, most Americans have never seen a gold coin.”

Friday, November 13, 2009

Sold TZA added this morning for Small Profit

S&P 1094.68

Weekend Beer

Edit: Sold additional TZA at 1091

Hoping to add on move higher

Move below 108.75 on SPY will make me reevaluate my analysis

Confluence of Resistance



Three way confluence of resistance - trend line, time and retrace along with pattern completion of ABC pattern from March lows - dare I say that we are finally close to being done with the sharpest rally of the century?

Again, fighting the trend is not a wise move, therefore I am leaving plenty of ammo should I be wrong to average / manage my trade.

But if these indicators hold, then we're looking at a top sometime in the next few days.

LongTZA, Short EDZ - Short the Market

S&P 1096.79
Could be short term trade

Edit: Clarification: Long TZA Long EDZ, short the market - 1:47 pm

Financials Down, Russell Underperforming Dow, Dollar Down, Oil Down?

Financials are a good leading indicator and are negative for the day.

Russell is underperforming, the money is hiding in the large caps, believing the dollar weakness is going to help international earnings.  But the dollar could easily be poised for a snapback rally over the short term if market weakness is headed our way.

What's interesting is that oil is down and the dollar is down.  Usually the reverse relationship has been working. Will be something to watch going forward to see if this is the first sign of a breakdown in the U.S. dollar linkages to all asset classes.

Edit: Entered a very small Short Position in Financials

Last Move Up Underway - 1121 Target One Likely Scenario

The market is on its last move upwards, ignoring a turd like consumer sentiment reading, a rise in natural gas inventory this morning.

Time
Right now, November 19th looks like a good time target as a 50% retrace in terms of the final move upwards.  But it could extended to early December.  So much as I'd like to get back in, I'm going to twiddle my thumbs for a while this as this hopefully final move higher works its way through and start rebuilding short positions on strength.

Price
1121 is roughly the 50% retrace of the entire move down.  We are right now close to resistance on a down trend line from Oct 07.  A breakout through the trend line freaking technicians out and a fall back under looks to me to be one scenario to watch for.

Pattern
We are completing a 5 wave move up, the trend looks to be completing.

Consumer Sentiment One of the Few Accurate Econ Stats Is SkyDiving

Consumer Sentiment - Huge Miss


Released on 11/13/2009 9:55:00 AM For November, 2009

Prior
Consensus
Consensus Range
Actual
Sentiment Index - Level
70.6
71.0
69.0  to 72.0
66.0 


Highlights
Consumer confidence is having a fainting spell. The Reuters/University of Michigan's reading on confidence, the consumer sentiment index, fell back a very steep 4.6 points to a very weak 66.0. Weakness is split between current conditions and the outlook. Inflation expectations remain subdued. Consumer confidence is declining even as manufacturing, housing and even retail report concrete improvement. The weakness is rooted in the still contracting jobs market.  But note that movements in consumer confidence data don't always track movements in retail spending. The retail trade report for October, where the outlook is good, will be Monday's highlight.

Wednesday, November 11, 2009

China Riverboat Gambler - Part II

Seems that rational people are arriving at a similar conclusion about China:

“China has embarked on a capital-spending bubble the likes of which the world has never seen,” famed short seller Jim Chanos claimed recently. “Buildings are going up with no tenants, roads are built with no traffic, shopping centers are built with no tenants or customers, yet they continue to be built and they continue to be planned.”
Heh, here comes the money shot:“China is Dubai times 1,000, if not a million,” he said. “At some point, all of this (ill-advised) investment will come home to roost.”

Adding to Shorts

Adding to Technology, Real Estate, Small Cap shorts
S&P 1097

Gradually increasing short exposure as we continue to get overbought
If I am right, these are going to be intermediate term longs.

Monday, November 9, 2009

Short Term Sentiment Extreme

This level of optimism has usually marked short term tops in the past.  Looking for a correction and a final spike higher.

SPX:1093.77



Revising Upside Targets to 1123.15

Significant resistance exists at S&P 1123.  Any and all bears have been beaten to a pulp exactly what you would expect as the market reaches a topping point for this bear rally. The Fed and free money will fix everything.

The poorest consumers get hosed.  Americans will struggle mightly - all but the richest anyways - to take a trip outside the U.S.

At the rate the government is going, Walmart will become Whole Foods.

I am going to stay bearish until 1123.  Fortunately I took profits at 1046 and anticipated a ramp up to 1066.  At that point, if the market continues to demonstrate strength, I will take my lumps and move to the sidelines.

Momentum following idiots are making hay.  Any thoughtful analysis of the future impacts can be discarded.  One only need to look to the Fed and see that the money printing is out in the open.  Nothing else matters.

If the U.S. can extricate itself out of this by inflating their way, it will kill the field of economics as we know it and we can call the new science Bernankism, the science of inflating to prosperity.

Treasuries Not Confirming

This pretty much sums up my views at this point, coming back to the key question of inflation or deflation.  What will win in both scenarios is Gold.  I agree with Rosenberg below.  The finance mafia are going to inflate stock prices and destroy the dollar which in turn will unleash inflation on the masses.  This is exactly what the Fed wants.  Higher oil ditto.  A low US dollar makes Americans poorer.  While the U.S. wants to see inflation take hold, in the end, the U.S. consumer is unwilling to reflate.  Reference the consumer credit report last Friday. Easy money is chasing assets.

But treasuries are still signalling deflation.  And like Rosenberg, I still believe the deflationary forces in wages, consumer fear, layoffs, a weak consumer balance sheet, rising inflation in commodities and imports, are going to exert strong forces nearer term on consumers.  The Fed's linkage intended to come through housing and asset reflation will be offset by continued bankruptcies, option arm defaults etc. 

Via ZeroHedge & Rosenberg: Another reason to be bullish on gold is the recurring trade spats. Indeed, this is good news for the commodity complex as security of supply resurfaces — see China Attacks U.S. in Fresh Trade Spat” on page 2 of the weekend FT. If it’s not Chinese-made tires fingered by an increasingly protectionist U.S.A. one day, it’s steel pipe the next. This latest anti-dumping measure by the United States is facing a severe rebuke, as per the press reports, in China.

In addition to these trade protectionist actions, there is also the matter of more stimulus measures being undertaken in a mid-term election year at a time when the Treasury is expanding its debt issuance to new records right across the maturity spectrum. All anyone needs to do is have a look at the article Congress’s Blank Check For Housing in the weekend WSJ — to see this happening at a time of 10% budget deficit-to-GDP ratios, had indeed become a bottom-less fiscal pit.

Since the USA will not default, not raise taxes nor cut spending, the only logical recourse will be to print vast sums of U.S. dollars to fund this surreal foray into deficit finance. In other words, reflate. As we keep on saying, under Dr. Bernanke’s tenure, the monetary base has risen twice as much as nominal GDP has and the two lines continue to diverge. At the same time, gold production peaked a decade ago. It’s all about scarcity of supply, and as Sri Lanka’s central bank just reminded us, and India before that, there are buyers with deep pockets lining up to diversify into bullion. Here are the ‘what if’ realities stack up:
  • If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.
  • If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.
  • If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.
Now gold is in a secular bull market and by no means are we suggesting that everyone line up at the vaults right this second — for the time being, it is too much front page news and a crowded trade, so it won’t hurt to wait for a pullback and get in at better prices (as an example, see Inside the Global Gold Frenzy on the front page of the Sunday NYT business section).

You see, when Bob Farrell wrote “The 10 Market Rules to Remember” he made sure that they were interesting reading and in doing so, some people get a laugh out of Rule Number 9 (“When all the experts and forecasts agree, something else is going to happen”) and Rule Number 10 “Bull markets are more fun than bear markets”). Nevertheless, they are just as important as the other eight rules. The obvious reason why Rule 5 is important (“The public buys most at the top and least at the bottom”) is that it also captures the inverse relationship between sentiment and the position of the market (ie, bullish sentiment peaks when the market tops and turns down and bearish sentiment peaks when the market bottoms and turns up). All that “agreement” adds enormous credibility to conventional opinion, just when it is most important to envision and prepare for the contrary. Lately, (you) have been experiencing shock at the policy responses by the U.S. government relative to the credit crisis and economic slowdown. Policies that encourage increased indebtedness by households and businesses are combined with massive deficit spending and Federal Reserve balance sheet expansion and the latter particularly, has enormous inflationary implications while exerting downward pressure on the value of the U.S. dollar. The problem with this understanding is that most everyone agrees.

To wit: According to Consensus Inc., bulls on the U.S. dollar are currently at 28%. Bulls on Treasury bonds are currently at 59% after hitting a low of 21% in early June when rates peaked in this cycle. Bulls on gold are at 78%. Bulls on the stock market are at 74% and they haven’t been that high since October 2007. It has become a crowded trade, and something very contrary to the expected outcome is likely to occur, at least over the near term.

Walter Murphy, our favourite technical analyst, expects a substantial rally in the U.S. dollar and a decline in gold over the medium term, even if those moves are counter-trend. He thinks that the war is on inflation, but the battle is deflation and this is a bear market rally in stocks. We have said repeatedly that it seems too early to call for an economic expansion with so much unfinished business in the process of household balance sheet repair. And, keep in mind that the deflationary forces emanating from the household are much greater than the inflationary forces associated with government stimulus, at least so far.

Friday, November 6, 2009

Sold All Gold Miners Today

With the euphoria around Gold and Gold Miners and the market nearing a top, I think Gold is going to underperform over the short term.  Either way, taking 20%+ profits and moving to the sidelines is a wise move.

The Psychology of Investing & the Road Less Traveled

The news is relatively benign.  The ISM looks good.  The market held up well today despite a horrible unemployment number.  The economy could pick up steam as further stimulus makes its way through the system.

These are some of the thoughts going through the mind of most institutional and retail investors.  See, if you invest with an institution, there is a portfolio manager managing your money.  I used to be a portfolio manager at a large institution no longer in existence.  No it wasn't Bear Stearns.  I walked away from the rat race many years back.

The portfolio manager in his heart of hearts knows we are screwed.  But it is heresy to have a divergent view in an organization.  Particularly if you are a mutual fund manager, how can you not be bullish now?

I recently attended  a Deutsche Bank institutional conference.  Amazing how bullish the crowd was and the one hedge fund manager that was bearish was apologetically so.

These are the sentiments that tops are made from.  There was 2% bullishness at the bottom in March.  There was 92% bullishness recently.  The majority of investors are wrong at the turns.  Success in investing requires taking the road less travelled.

What's Ailing the Financials

Wondering what's been ailing the Financials?

First we had Citibank Raising Credit Card Interest Rates to 29.99% for Good Credit Customers
Sound desperate, right? It sounds like a gamble to me.  They're basically giving consumers two choices, pay a loan shark / mafia interest rate or default.  Think about what that does to consumer spending, foreclosures and default rates.  Citibank despite receiving billions in bailouts has decided to throw a hail mary and hope that enough cash strapped consumers will have no choice but to pay the huge interest rates giving the bank a chance at surviving.

Then Wells Fargo with this nugget Wells Fargo Modifying Option ARMs into Interest Only
To solve that conundrum, Wells Fargo is taking a gamble: The bank is issuing thousands of interest-only loans that will defer borrowers' balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the country's worst-hit regions, along with a rise in consumers' income, will eventually combine to cover the bank's billions in underwater Pick-A-Pay debt.
Now anyone that understands option arm mortgages knows that a majority of these buyers make the minimum payment.  Normally the difference between the minimum payment and the interest only payment is substantial and my guesstimate is an increase at minimum of roughly 30-40% over the existing negative amortizing payment.

We think this only incents homebuyers to walk away from their homes and enter strategic defaults.  What in heaven's sake would compel Wells to make this type of a drastic move?

Let me guess, they're thinking that the economy is recovering and consumers should be able to make the interest only payment.  Or could it be that by converting to interest only mortgages, it stops the balance from rising thereby helping Wells earnings?  Not an expert on financial earnings.  But whatever the reasons, the end result is more foreclosures.

Add in to the mosaic, John Mack is looking to leave, Jaime Dimon is looking to leave and BAC's CEO just announced his retirement.  The picture isn't pretty.  The CEOs are bailing out, seeing no future potential for hundreds of billions in bonuses.

Sure, the recovery is going to be strong.  I can hear the printing presses already running into overdrive.  Only a matter of time before the Treasury Bailouts are back.

Transports Topping & Weakening



Volume can often speak far louder than patterns.  Notice the declining volume on subsequent peaks, classic signal that buyers are abandoning this rally, precisely the opposite of what you would want to see in a true recovery.  Meanwhile sellers are getting more confident and downside volume is rising.

Head & Shoulders Again. Will This Be the Real Thing?

The entire media was obsessed with the previous H&S we got in August that turned out to be a head fake.  Now everyone sees the pattern but no one is willing to give any weight to it.

Also the volume has markedly picked up on the declines and volume on the uptrends is anemic.  Despite what feels to most observers as a raging bull market, these are not the characteristics of a recovery rally.

Yet another data point in the mosaic that tells me that this rally is a mirage.


What Is Being Missed By the Unemployment Report & Structural Issues

One of the items that no one refers to that is different this time around is that over the past decade, businesses figured out a way to hire employees without having to take on the burden of payroll taxes, insurance etc on behalf of these employees.  For instance
  • All real estate companies hire real estate agents as independent contractors
  • All mortgage brokers hire mortgage agents as independent contractors
  • Recently, I have become aware that even small hedge funds are now involved in the practice of hiring employees as independent contractors
  • A huge number of freelancers in advertising, legal and other services industries are hired as independent contractors
  • and so on..
This is yet another way that businesses figured out to screw workers out of benefits, reduce costs, reduce legal benefits.  The practice is pervasive across a large number of industries.

My question is what happens to U6 when we add in all the brokers, mortgage agents, construction workers, graphic designers, legal associates etc that have quit.  Remember as an independent worker, the company that hires you has no costs incurred for keeping you on as an employee.  I don't need to remind you what a shamble real estate has been the past few years with a pickup only occurring in the past few months.

The real unemployment numbers, whether you look at U6 or the reported unemployment rate, is far worse that what is being reported.

Structural Destruction
As a bull, there really is nothing in this data, nor in the initial claims data that supports the optimism of the bulls.  Consumers continue to lose over 500,000 jobs a month.  We are now close to a point where the structural impacts become damaging.  Companies are thriving by laying off workers and reporting no top line growth but bottom line earnings.  But earnings are driven by consumer spending.  The feedback effects have been muted to date as a result of massive stimulus spending. 

What's Coming
Over the coming months, option arms will reset, commercial real estate is about to collapse, the states are in financial shambles and the consumer is dying.  Valuations are at ridiculous levels.

Enjoy the optimism.  Unfortunately, in coming months, the reality is about to hit and we will not get back to this level of confidence for many quarters.

Thursday, November 5, 2009

Possible Upside Targets








Typical targets for this upmove : 1074.04 - 1076.59

But I always remind myself that the market never does the obvious thing (hat tip Atilla) and always has something up its sleeve.

There Is Usually A Simple Explanation

Trader involved in insider trading worked at SAC Capital

I was at a large bank on Wall Street back in the Nasdaq heyday.  The internet analyst at our firm was Holly Becker and she was an axe on Internet stocks along with some others, Meeker, Blodget etc.

It was found out back then that Holly Becker had been feeding her calls pre-release  to her husband, who happened to work at SAC Capital.  Holly resigned, no prosecutions were made.  I found it unbelievable.  Such is the world that is Wall Street.

The point I want to make is that in the vast majority of cases of significant outperformance, there is usually a very simple explanation.  Our culture has no moral hazard.  Sports, Business, Politics.  Fame, fortune and power trump morals.  Period.

Market at Price, Time & Moving Average Resistances, But Pattern Not Yet There

Markets are now in an interesting setup.  We are approaching the 38% time retrace on the move down at the same time that unemployment is due.  Further, the market's progress today was halted at the 50% retrace.

Fundamentally a significant amount of optimistic expectations about the jobs report are embedded in the market.  Any disappointment would see a selloff.  On the other hand, given the optimistic move the past few days, a better than expected number would see a small rally and a sell the news type of event. 

This is not a projection, I don't make short term daily market forecasts, leave that to the traders.

But this does offer a juicy setup.  We're at an 50% retrace on the up move, a 38% time retrace, and also butting up the under side of the uptrend line.

Further, we are approaching the 20 day moving average.   And if the market manages to get past all this resistance, we have the mother of all trend lines sitting in the 1080s that repelled the market recently.

Edit: 4pm: Pattern is now nearing completion and we are in the last stages of the rally in my opinion.






Taking Profits In Gold Miners

While Gold certainly has a long way to go upwards, the bullishness for the yellow metal has gotten out of control. Following my contrarian investment philosophy, we got into Gold a few months ago when market participants were still high on equities and rode this smooth wave up for over 20% gains.  Now that the masses are joining in the trade, I think it's time to step away from this trade for a while and wait for a correction.

Specifically, this call also ties in with my expectation that the dollar may rally, leading to a drop in commodities, and a correction in stocks.  I'm not going to short this metal but step to the sidelines.

Rising Productivity, Euro Sales, Falling Wages - Consumer Is Getting Squeezed

Three pieces of news out today and while we all know the take that the media will take on these is wildly optimistic, bringing buyers into the market, my take is all three are actually a commentary on a European/U.S. consumer that is being squeezed at work, spending less, feeling less confident and making less money.  None of these are good signs for the bulls.

Some sobering data about the recovery:  Retail sales post surprise fall
As the recovery gets underway, the key component - the consumer - is missing.  This is primarily the result of the policies pursued both sides of the Atlantic - namely preserving the status quo structure, implementing policies that only benefit the few while increasing the debt burdens of the many.
LONDON -- Retail sales in the 16 countries that use the euro fell for the third straight month in September, indicating that, with unemployment on the rise, consumer spending has yet to provide a support for growth.

The European Union's statistics agency Eurostat said Thursday that sales volumes in the euro zone fell by 0.7% in September from August and declined 3.6% from September 2008. The decline was unexpected, with economists surveyed by Dow Jones Newswires last week estimating that sales grew 0.1% on a month-to-month basis.

The August data were revised to show a 0.1% fall on the month, having previously recorded a 0.2% drop.

Consumer confidence has rebounded from its collapse early in the year, but rising unemployment will likely be a drag on spending for many months to come.  Sales of food and drink fell 0.9% on the month and 2.3% on the year, while nonfood sales declined 0.6% on the month and 4.1% on the year. In the 27 EU member countries, sales fell 0.4% on the month and fell 2.5% on the year.

Productivity Surge Signals Job Growth to Follow was the headline.  
The Labor Department said on Thursday that productivity surged at a 9.5 percent annual rate, the quickest pace since the third quarter of 2003, as companies squeezed more output from a smaller pool of labor to hold the line on costs.
Isn't this a different way of saying that there is no topline growth in the economy and companies are squeezing profits by cutting costs.

Meanwhile, deflationary pressures continue to filter through wages.
Unit labor costs fell 5.2 percent last quarter after declining 6.1 percent the previous period. Analysts had forecast a drop of only 4 percent.

Adding to Shorts S&P 1062

Tuesday, November 3, 2009

Why Would Mike Bloomberg spend $100 million to run for Office for $1 wages?

I don't understand the economics of this... jus sayin'
Is anyone wondering the same question?

Hey Floridians, Las Vegans, Californians.... Sound Familiar?

It is not my intent to bring back past wounds or pour salt on them, but you have to read this to believe it...
Surging demand for residential units has in recent months seen potential buyers queue for hours before new house openings and anecdotally many have left blank checks with their property agents to fill out to secure their spots in new projects.
Private sector developers in July launched an all-time high of 2,878 new flats and an astounding 2,767 of those units were sold out within a month. That sales figure smashed by 52% the record of 1,825 units sold set the previous month
In case you haven't figured out where, this is Now, in Singapore
New heights for Singapore property 

http://www.atimes.com/atimes/Southeast_Asia/KK04Ae01.html

The China Bubble

The press is starting to warm up to our view that the Chinese situation resembles Japan in the 1980s. 

I'm not going to call it a bubble because the growth positioning of India is enviable, but the prices of property in Mumbai, Gurgaon and other parts of the country relative to income are astounding, humbling and shocking to me.

China rushes towards a Japan-style bubble

By Peter Tasker

Emerging markets, it seems, have had a good crisis. In contrast to the debt-ridden G7 economies, they have quickly resumed their growth trajectory. No surprise, then, that US emerging market mutual funds are experiencing record inflows. The stellar performance of the Brics markets - Brazil, Russia, Indian and China - is due to continue into the distant future.
Such is the narrative now forming among investors. To anyone who has lived through the rise and fall of the Japanese bubble economy, it should set off alarm bells.

Remember that it was in the years following the 1987 "Black Monday" crash that Japanese assets went from being expensive to absurdly overvalued and the Nikkei's dizzy rise to 39,000 forced the bears to throw in the towel.

Then, as now, the logic seemed unassailable. While the western world was stuck in the post-crash doldrums, the Japanese economy had got back on track with apparent ease. Japanese corporations were using their high market capitalisations to finance acquisitions of foreign trophy assets. Japanese banks boasted the world's strongest credit ratings.
But what you saw was decidedly not what you got. The crisis, far from leaving Japan unscathed, exacerbated its structural problems and laid the groundwork for a far greater disaster. And it was the weak western economies, not Japan, that produced healthy investment returns over the next decade.

In reality, 1980s Japan was never going to be terminally damaged by weakness in export markets. Its current account surplus and strong fiscal position provided the macro policy leeway to make any slowdown strictly temporary. The Bank of Japan duly put the pedal to the metal and the recently deregulated banks went on a patriotic lending spree. High-end consumption boomed but the real action was in the asset markets and capital investment, which soared as a proportion of gross domestic product.

Sound familiar? It should, because the same dynamic is evident today in China and some other emerging economies.
At the 2008 peak, the price-to-book ratio of the Shanghai stock exchange was over seven times, well above the five times achieved by Japanese stocks in 1989. After the turbulence of the past 18 months, the ratio has fallen to 3.3 times, still the world's second highest after India, and residential real estate trades at multiples of income that make the US housing boom look tame.
Why would China's rulers embark on a such a disastrous course? Because the alternative - unleashing deflationary forces stored up over years of mercantilist policies - would be too painful to contemplate. That was the choice made by Japanese policymakers, who had 100 years' experience of managing a quasi-capitalist economy.

While we can call these bubbles, based on anecdotal evidence emerging markets investors are convinced that they have survived and are immune to what ails the first world.  Time will tell, but a nagging feeling tells me I've seen this story before.


Cheap Option Strategies

I have started building a position in TZA DG, the option premium is around $1.50 per option on three times the small caps index.  That premium can be made up by the index on one good down day.  The option is good till April.  It is a good risk reward.  I plan to hold this for a while.

Edit : Added 20% position on Thursday Nov 12th

Gold Target 1250 to 1300



A classic inverse head and shoulders pattern projects the Gold price to 1250 to 1300.  Strong technical support, strong central banker emerging interest, strong public sentiment, strong Chinese demand.  Good luck to the two major institutions that are rumored to be short this currency.

Gold & the Indians

We've been fortunate to be long this rally in Gold entering GLD at 920 and building positions in the Gold Miner Smallcaps which are rocketing higher today.  Favorite: New Gold NGD among the small miners.

Today marks a further confirmation.  The bull market in Gold for central bankers just got started today.  The forces of demand are gathering steam.

I have a 26% sector allocation to Gold in my portfolio, mostly in the miners and small caps which are really option plays on Gold.  The emerging market central bankers are now realizing that they need to be long this commodity.

Much has been made about Gold's move higher by those that don't get it.  Gold is not necessarily an inflation play, nor a deflation play, although I believe the miners are both, given deflationary trends in production costs and inflationary trends in pricing.

What Gold is simply, is a holding that gains in value when government policies erode the value of paper money.  Secondly it is a store of value and the only currency that has survived over 5000 years.  In an era where every major currency is a questionable value, Gold is the rock.

Out at S&P 1041

Monday, November 2, 2009

Investors Business Daily Sentiment - Bearish

Another respectable indicator moves over to the dark side.

Investors Business Daily’s Big Picture market tracker has been a remarkably prescient indicator over the course of the last year.  Following this indicator kept investors out of the major losses last year and got you back in the market early enough to capture the majority of the gains off the March bottom. 
They’ve been bullish throughout the massive rally and just changed their outlook to negative for the first time since the rally began.   They note the high volume of the recent sell-off, loss of leadership, and high number of distribution days as the reasons for their move to a bearish stance. They now recommend avoiding new stock purchases altogether until the market begins to exhibit some signs of strength

 Source: PragCap

Covered More Shorts, Long Small S&P 500 Position at 1035

Sunday, November 1, 2009

Breaking Down the Bull Argument from David Dreman

This Month in Forbes by David Dreman :

Is Recession Normal? No
David Dreman, 11.16.09, 12:00 AM ET
Let's look more closely at the bear case. While it's true the market has had an enormous rally since early March, it is important to remember that it had fallen more precipitously than at any time since the Great Depression. The financial sector of the S&P 500, for example, fell 83% between June 1, 2007 and Mar. 6, 2009. This sector's decline was steeper than the overall market's decline between September 1929 and the 1932 low. So yes, this rally is strong and sharp, but remember that it comes off the worst stock market drop since the 1930s. It still hasn't really come close to recovering the ground it has lost. The Financial Select Sector SPDR Fund (XLF) is trading at 60% below its 2007 high.
So please don't judge the current rally in the context of typical market cycles. Remember, about a year ago our global financial markets were in a state of panic. If you check market history, you will see that the rallies following such panic attacks tend to be sharper and swifter.
As I point out in one of my previous posts, we agree that rallies are sharp and vicious off severe selloffs.  No arguments there.  But neither has the case for a new bull market been made yet by Mr. Dreman.

And please don't fixate on trailing price/earnings ratios. Multiples are inflated because earnings are depressed. It's that simple. We are in a severe recession, and hundreds of companies have ailing income statements.
Stock market investors aim to see around corners, and they should be doing that now. Corporate earnings will be down sharply this year (particularly if you include writeoffs), but they will rebound over the next three years. I can't tell you how quickly the recovery in earnings will come, but I am sure it will come. Go back to that market of 1932, when the Dow Jones industrial average bottomed out at 41.22. The Dow almost tripled within the next three years, even though it took earnings almost five years to catch up to where they were before the crash. In short, it's normal for stocks to rebound ahead of earnings.
Mr. Dreman is comparing the current cycle against the Depression.  Fine.  It took the market three years to bottom and during that time there was in fact a 50% rally.  But the market fell another 80% after that.  Further, the market did not get back to the levels of that initial 50% rally of roughly 300 on the Dow until 1954!  That is 22 years later Mr. Dreman.  Not a convincing argument that we are to look blindly into the abyss and trust that earnings will recover, debts will be repaid, valuations will catch up to the market.

I'd be more inclined to be receptive if the market exhibited characteristics of a bottom.  The market was overvalued compared to historical metrics at bottoms on Price / Sales, Price / Earnings, Dividend Yield.  Bottoms are also usually accompanied by hatred, revulsion.  Markets tend to die a slow death and then are born anew when no one is watching.  Granted we got revulsion from a section of the market, but market participants were frothing at the bottom. That by definition is not a true bottom.  I am not convinced by a long short.

The bears have a different view. They think the economic malaise will last for years or even decades, as in post-1989 Japan. Get used to a new normal in our economy, they say, one in which growth is sluggish or nonexistent for a whole generation. I say rubbish.

The great global investor John Templeton (1912--2008) said that the four most dangerous words in investing are "This time it's different." In more than 30 years of managing money I have witnessed many a shift in market sentiment. It lurches from irrational exuberance (as with tech stocks a decade ago) to irrational gloom (bank stocks in March). I just don't accept today's gloomy view.
In fact Mr. Dreman you're the one asking for blind faith and telling us this time is different, that the market can avoid historical characteristics of stock market bottoms, that we can issue mountains of debt to work off a debt crisis, that there is a fundamental loss of moral hazard, that the consumer is tapped, that Japan is in a debt and demographic crisis and will not assist in this recovery, ditto U.K.

Finally you Mr. Dreman are another child of the bubble in U.S. prosperity of the past 30 years and your automatic assumption, similar to Washington Politicians, is that the U.S. will revive because it has always done so in the past 30 years.

I would point you to this weeks Barrons article on the Depression.  Everyone underestimated the depth of the correction because there hadn't been a severe correction in over 20 years.  Ignore history at your own peril, Mr. Dreman.