Thursday, May 31, 2007

Leading Indicators

I wanted to share with you 3 things that I think are crucial to determining the direction of this market. I call them my leading indicators. I don't want you to think that they are the be all and end all but I feel they have an excellent predictive value and are well worth watching. The 3 in no particular order are the Japanese Yen ($XJY), the 10 year treasury note ($TNX), and Merrill Lynch (MER)

Japanese Yen.
The yen is a critical piece of the puzzle. The carry trade is enormous, to such an extant that I read a few months back that the Japanese Finance minister said the Yen carry trade(borrow Yen at 0.5% and invest treasury-note at 4.5%, no add leverage derivative and shake well) was 10x larger than he was aware. Derivatives, wonderfully beneficial creation in the hands of sane, prudent individuals but also can be like a Ferrari 360 Spider and a bottle of Jack to a 16 yr. old. Buffett has called derivatives a ticking time bomb and he is right, especially when most of the cats using em' are playing with OPM (other people's money). Currently the yen is in a nice support zone with bullish divergences on the oscillators(chart top center). A turn here could be a serious blow to a prop of this market.

The 10 year treasury note.
Blogged on this the other day. Always was told bond guys much smarter than equity guys due to their being so sensitive to risk. Spread on crap over quality is narrowest in years. There is no risk premium because there is the perception there is no risk, what a joke, risk never goes away it just goes dormant. If 4.90 gets taken out and it looks that way then 5.00 is next resistance. Watch out.

Merrill Lynch.
2 generations of family have worked there so I knew Merrill quite well. This stock is my leading barometer for the market at all times. So goes Merrill so goes the market. Its that simple. Merrill's action was not impressive the 100+ point day for the Dow and it has still not bettered its high of 98.68 on Jan 18. This is not good to have Merrill lagging the market, it should lead for things to be swell in the bull camp. (chart top right)

The presidential election is getting interesting with Fred Thompson about to enter for the republicans. He quit Law and Order so he's as good as in. For the record I am a libertarian and proud of it and I will support anyone who has libertarian ideals regardless of skin, eye or hair color, ethnicity, religion, or party affiliation. While on the subject of libertarians, Ron Paul is the guy but the mainstream media will gut him on arrival. Although if you could take his words and just listen and analyse them, you might just might find they carry some resonance. Besides, he is one of the few on the hill that actually ask germane questions at those Senate banking and finance hearings.
I love to follow politics more for the sh ere entertainment value. It is fun to watch grown people come up with the most stupefying ideas for the country. Kinda like when you play charades and someone blurts out something so dumb everyone just stares at them. The problem is these people could and are at the helm of high levels of government. I guess it explains voter apathy. The AP carried a story this morning that John Edwards wants justice Dept. to investigate big oil and their role in rising gas prices." I pulled an excerpt below,

"Democratic presidential hopeful John Edwards says a wave of mergers in the oil industry should be investigated by the Justice Department to see what impact they have had on soaring gasoline prices.
During a planned campaign stop Thursday in Silicon Valley, Edwards planned to berate the oil industry for "anti competitive actions" and outline an energy plan he says would reduce oil imports "and get us on a path to be virtually petroleum-free within a generation."
"Vertically integrated companies like Exxon Mobil own every step of the production process - from extraction to refining to sale at the pump, enabling them to foreclose competition," says an outline of Edward's energy plan provided to The Associated Press by his campaign."

Maybe we should have a probe of ambulance chasing lawyers like Edwards by the Justice Dept. and their impact on rising prices of doing business in this country. Fat chance, that would make sense and we all know how void of common sense Washington is. Big oil has smaller profit margins than most tech stocks but that doesn't play well on the podium. To say this guy is what's wrong with this country is the understatement of the century.

Wachovia Bank
First they buy GoldenWest on the cusp of the subprime bubble and GoldenWest was one of THE subprime players out west. Now comes word they are buying A.G. Edwards. Not what I would call your typical VALUE play(chart top left) at all but wait, let me guess, synergies right ?? How many times do we need to hear that word before we wise up? Wasn't synergies Steve Case and AOL Time Warner's favorite word. Good luck to all the Wachovia shareholders and all that synergy, you're gonna need it! Better you than me. Remember those who don't learn from history are doomed to repeat it, so this is deja vu all over again and don't tell me 'its different this time', because those are without question the 4 most expensive words ever uttered in history. Caveat emptor and good trading to you all.

Tuesday, May 29, 2007

U.S. Real Estate Index

Time to revisit the U.S real estate index or the IYR. I touched on it in an earlier post see 'Opening Day'. The IYR initially broke the neckline of the H&S about 83.85 (May 16) on expanding volume which is a good thing, Today we are rallying and testing that neckline from underneath.We are getting a 2nd test of the 200day from underneath, this was support prior so if the trend has changed it should start to act as resistance. Today's action, currently 83.70 on IYR and 80.90 on SRS is an excellent 2nd chance for those who missed the first entry point and a good add point, for those who caught it. Always use stop losses. I am playing the SRS, ultrashort proshares real estate. For those who want/need news, you can attribute this rally to the Tishman Lehman buying Archstone for 12 bill. As former senator Everett Dirkson once said a billion here, a billion there and pretty soon you're talking about real money. Either way another indication of the easy money environment we trade in today, completely disconnected form reality.

Speaking of news, too many retail investors trade the news and by this I mean buy on a positive news event like today's Archstone news, or sell a negative event. What you must remember is that the news conforms to the tape, not the other way around. A stock is going down and there is no reason or news for it, be careful it usually is going down for a reason and while the reasons may not be evident immediately they will eventually show up and by then the flood gates may open. Trading news is going to cost you money sooner or later, more ofter sooner. All news is built into the tape by traders, fund managers, insiders, hedgies, etc. I could go on but you get the idea. By largely ignoring the news for trading purposes you will avoid falling into the trap of what I call "news justification syndrome". I know it all too well because it has caught me. Think back to a position you had, going against you by the way, and the news was good or neutral yet the stock kept going down. The charts patterns don't lie, they may fib or not reveal everything at once but over time (ie. longer term) chart patterns are to us what a lie detector is to law enforcement.
Naz - looking toppy but its done that before, like to see 45.90 broken on the downside.
Crude - need to see it get thru $67 and change with some conviction. fundys are glowing but still in correction mode.
Gold - another one just grinding, don't forget that commodities are an area of mucho profits and could easily get sold off heavy if the market rolls over. The shakeout will be fast and furious and will probably offer an excellent entry point for those liquid. Ditto for silver to the exponent 2. Watch the 10-11 neighborhood here.
Good trading to you.
None of this information is offered as a solicitation to purchase or sell rather just my thoughts out loud so in lawyerspeak, govern yourself accordingly.

Wednesday, May 23, 2007

Just Thinking out Loud

Too nice a day to post earlier so better late than never. I was re-reading some past work by Dr. Samsam Bakhtiari recently. For those that are not familiar with him or his work I humbly suggest you make some time to do so. Dr. Bakhtiari,now retired, is a former senior official of the Iranian National Oil Company. He holds a PhD in chemical engineering from SFIT in Zurich. His writing is anything but mainstream, which is in stark contrast to the CERA propaganda which I find shallow and regurgitated, and his facts will make you think about the issue of peak oil.

One aspect of his views I find intriguing and under the radar so to speak is his thoughts on Iran. Consensus estimates put Iran's reserves around 130-135 billion bbls. He believes the number to be closer to 35-45 billion. This 70% difference is staggering in and of itself let alone coming from someone from "the inside" like Dr. Bakhtiari. I recall reading somewhere back a while something Ari Fleischer, the former press Sec. said. He basically said that no country having that much oil develops nuclear technology for peaceful means. Now for a moment lets assume that we are not the only people on the planet with any IQ. I am not an apologist for the Iranian government or any of their statements,but just could it be possible that Iran, which like Saudi Arabia will not permit any outside auditing of their reserve numbers (we have to take them at their word so don't get me started there), really does want nuclear capability as an energy source because in fact the reserves are not anywhere near what the world believes them to be. That the mullahs running the show via their advisors see the writing on the wall and are actually being more proactive than most western governments. There is no where else I would rather live so don't misconstrue my writing as being a hater or country basher. But the fact is foreign governments don't have a corner on the market for corrupt and deceitful practices. Our government can go at it with the best of em' ,with cuff links and pressed shirt to boot so you don't see it coming ! Dr. Bakhtiari, who was in a position to know, believes the reserves are not there(to the extent the Iranians claim) or else they would not struggle to maintain production of 3-3.5 million bbls/day. There could be a lot of other excuses for this but in a world of $65 bbl oil I find it hard to believe that they cannot get production ramped up beyond this and address their unemployment situation. So now you have another major player on the world oil scene under the cloud of suspicion called reserves.

The mainstream press here whines about oil and gas prices but does little investigative journalism regarding the underlying issues of what is going on. Like the global warming debate, the case is closed to discussion once the media take their position, the facts be damned. Financial journalists are no different if not worse in this regard and if you need a case in point all you had to do was watch bubblevision a.k.a. CNBC during the tech bubble. They were great at the 'told you so' game after the fact. The press reports on the war on terror mainly Iraq and Afghanistan and little else. My apologies, they do report on missing children and C list celebrities ad nausiem. The politicians want a windfall profits tax on big oil yet the margins are less than plenty of companies in other industries. The reading of non-mainstream reports by Dr. Baktiari and others will at least make you consider all sides of the equation. You will definitely find yourself more informed and better equipped to map out your strategy. Deep down I hope Dr. Bakhtiari is wrong along with Matt Simmons and Colin Campbell but I have a nagging suspicion they are bang on and we are wasting valuable time where we could be repositioning ourselves to deal with the ramifications.
Good trading to you all.

Tuesday, May 22, 2007

Another One Bites the Dust

First it was Richard Russell, now reports come that the Aden sisters have thrown in the towel and gone bullish. As recently as reported recently by Marketwatch,
Next Stop ... the Stratosphere", the Aden sisters have reacted decisively. They write: "The market has spoken and the message is very clear ... Since the stock market looks ahead, it's telling us that it sees better times ahead. It's saying that existing problems will be worked out and good times will prevail.' The Adens acknowledge that there are signs of economic weakness. But, they say, "the bottom line is interest rates ... short-term interest rates confirmed a major reversal in early May. This is a huge deal because it means that for the first time in three years, the major trend for interest rates has turned down and interest rates are going lower, probably for a couple of years.

Now I am definitely not in the Aden's league but I have looked at all of the yield charts, 1, 3, and 6 month along with 1, 2, and 3 year.The 1, 3 and 6 month yields show a break of support with the 50dayMA south of the 200 (bearish) but the 3 and 6 month weekly charts both show a candlestick hammer bar which is a reversal formation. The 1year daily chart broke support about 4.87 for a lower low, The MACD had some positive divergence and since the yield has quickly whipped back now above support which should be resistance and is currently above the 50dayMA. The negative is that the 50 and 200day are in bear mode and pointing down. Further the 2year note never broke and may have put in a double bottom. It has retaken the 50 and 200day MA. The 2year yield needs to take out 5 to confidently say it has turned so it has some work to do. To say I am skeptical of lower rates given the fundamental economic data is an understatement. You cannot rule out anything with the Fed and considering the box they are in I would not want to be in Bernanke's shoes.

My point here is this, first Richard Russell throws it in, now the Adens. We need some more high profile names to capitulate and then this market will be ripe. Until then we need to continue to watch for a topping or reversal pattern that can send this market down. Remember, the markets can remain irrational for longer than you are I can remain solvent. Good trading to you all.

Friday, May 18, 2007

10 year note

Last thought before the weekend starts, check out the 10 year t-note yield above. Looks like a clear breakout of the downtrend from the highs back in June last summer. The 5.30-5.40 area is huge and is something to watch for. Could it be that rates go up to compensate for risk? Someone needs to explain to me how this can be good for stocks. But heck, why let facts get in the way of a good party.

Its Friday

Crude had a great day yesterday blasting upward. The 50 dma is north of the 200(chart top left) which is positive, MACD and RSI are turning up and best of all the fundamentals of the sector are mucho bullish long term. I try to keep it simple as the more complex it gets the more confused I get. Gotta like it when fundamentals line up with technicals. What is a great benefit here with oil is the stocks are leading the advance. By this I mean no matter what you follow to monitor the sector, be it the XLE, XOI, the OIX, or the OIH, (I follow them all) they have been leading the way and that is what you want to see. Conversely this is the concern I have with gold, the fact that the HUI, GDX or the XAU for that matter, are not leading the advance. This is a correction phase on gold digesting the big gains but for it to continue we need to see the gold shares resume leadership in a big way. Thats just the way it is. The stock market is the closest thing to a crystal ball we have on the planet, that is when its not being debauched by a Wall Street that can't see further than next quarter's bonus or debased by a Fed that can't see past the next Senate hearing.

Chinese stocks measured by the Shanghai Composite (top right) are completely disconnected from reality. This is no reflection on the Chinese people themselves who are a very hard working, industrious lot. They are gamblers though....dice, cards, you name it, they will gamble on it. (candlestick charting was found to be practiced by Chinese rice merchants hundreds of years ago). Now they have found discovered a new pasttime, the stock market. The majority of companies are state owned and run. and we all know how state run enterprises fare over here !! The companies listed are rarely innovators in their field, rather copycats and reverse engineers. Take for example BIDU which is just a cheap watered down version of Google. I have seen reports that claim if Chinese banks were held to our banking standards that north of 75% of their loan portfolios would be non-performing. Loans made based on your connections and status which would make a Chicago alderman blush . This being said stocks are being purchased for the sole reason that they are going up, which therefore draws more buying which becomes a self re-inforcing process. People are in a mad rush to join the millions who are making their forune. Like trying to get the water from a fire hydrant through a garden hose. This continues, until, well, until it can't any longer. Remind you of something, like maybe Japan circa 1989, the Dow 1929 or more recently Nasdaq in 2000. Those who dont learn from history are doomed to repeat it, sadly this act is playing out again only in a different venue. Pay close attention to this situation,(2750-3000 as a support area) if for no other reason than you a getting another front row seat preview of what is to come in the oil and gold markets. Have a great weekend and good trading you you all.

Thursday, May 17, 2007

My Head is Spinning

To call it merger mania would be an understatement. I guess this is what you get when you combine liquidity with fiction. I have read a lot of books on investing through my lifetime but I have to admit, liquidity was not something I was taught to follow. Sounds a lot to me like an excuse rather than a reason but hey as they say on Wall Street, "we don't pay you to think son, we pay you to sell !" So, Warburg Pincus wants Bausch and Lomb, Cerberus wants Chrysler, and now BCE, the list goes on. Fogive me skepticism but when lifelong car men can't make it work, what makes John Snow, Dan Quayle, et al think they can. Oh yeah, hubris. Almost forgot about that. Now this is the same Cerberus that purchased ResCap from GM and Option One of the subprime mess not too long ago. This from CNN Money, "In Cerberus's defense, "no one when they entered into the deal would have known where nonprime loans would be today," says Brad Rubin, an automotive trading specialist at BNP Paribas. And it's not as if the $23.5 billion private-equity firm didn't vet the deal. The GMAC deal went through a stringent diligence process, the most intense I've ever seen," says Tim Price, the senior operations manager of Cerberus. He says that more than 85 of the roughly 275 Cerberus employees pored over GMAC's books, and that "watching the number of people we had looking at the deal was like watching honeybees on a flower." Maybe they upped the colony numbers on the Chrysler deal.
I noticed Warren Buffett recently announce his stakes in Union Pacific(chart top right) and Norfolk Southern. Not exactly bargain basement priced based on the chart, but Warren definitely gets the benefit of the doubt.

Richard Russell recently through in the towel and went bullish on the Dow Theory, back in late April the big 3 Dow industrials, transports, and utilites all broke out. No problem there except doesn't factor in the Nasdaq and you can slice it any way you want but when the Naz is not leading, ya better watch out !!
The Saudi market more formally called the Tadawul All Share Index (chart top middle) has absolutely tanked since peaking north of 20,000 back in early 2006 to the current 7500 level. I should think that this does not bode well for our markets and is in the least not exactly a vote of confidence by the locals (who by the way are always smarter in any market) in the situation over there. What I find strange is the lack of coverage of this situation by the media over here.
Jumping over to crude it looks like an inverted head and shoulders on the weekly chart(top left) with head being the Jan 07 low. I would feel a lot better to see it take out 67 on the upside. I am a believer in peak oil and its attendant consequences. Cantarell is in decline, Saudi reserves are questionable as are Irans and demand in China is on the rise. Matt Simmons book Twilight in the Desert is a great read on the subject as is Samsam Bakhtiari's writings, He is formerly with the Iranian National oil company. Thats it for today.
Good trading to you all.

Wednesday, May 16, 2007

Opening Day

Welcome to my new blog. Not exactly like opening day at Tiger Stadium, ooops Comerica Park, but lets pretend there are balloons, clowns, streamers, the works.... hey, lets basically do like Wall St. does every day. I am new to this so please bear with me. I am learing this blogging thing as I go so any input would be greatly appreciated. I have not decided if I am going to post on a regular interval, but what I will do is post here each time I come across something of interest that I think by sharing might help some folks out. As the famous quote goes those who don't learn form history and doomed to repeat it.

Okay, here we go. For starters there is no need to chronicle the homies' woes, you'd have to be living under a rock to not know, not that there is anything wrong with livin' under a rock. But just in case you are, Aaron Krowne over at mtg lender implode-o-meter does a great job chronicling the escapades of the sector. No link here yet but I will, remember I'm new a this. Just google it. Anyway, homies still have some downside but today I want to focus in on the real estate index. (IYR top left). I like to see volume on a chart but you can use $DJUSRE if you like. You can make the case for a head & shoulder top with the neckline about 83.85 which given the peak of $95 would imply a break to 72.70. The 200 day is under assault and has held firm many times in the past. The ultra short real estate proshares (SRS top right), you can go to American Stock Exch website for details, which has taken out 80 today and now need to blast through 84, is a great way to play this out. With option expiration this week anythings possible, so if you don't have your sea legs take some dramamine and have another look next week. There are no guarantees in any market, least of all the current one, but keep this one your radar.
Quick Hits.
Naz - laggard and is usually a bad omen when it is not the leader
Gold -consolidating now $700 is big number, if mkt slips up gold could go overboard as the perverbial baby with the bathwater as there are lots of profits in this sector and they will be used to meet margin calls. Retail sells winners not losers to meet mgn calls. remember that.
Oil - still think its a inv. h&s but who knows, 50 crossing 200 is a step but still working here.
Well, thats it for my first post. Tried to make it as painless as possible. See you soon.
Good trading to you all.