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)



Election
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.







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