Monday, June 25, 2007

Deja Vu

Deja Vu according to Wikipedia is a french for already seen, also called paramnesia from the Greek word para (παρα) for parallel and mnimi (μνήμη) for memory) describes the experience of feeling that one has witnessed or experienced a new situation previously. We often get this feeling of deja vu in the markets where a scenario has played out sometime before in history. The story (pattern) remains the same but the names change. Jesse Livermore the great trader said "there is nothing new in the markets because speculation is as old as the hills. The same mistakes made before will continue to be made again." This is why charts are such a valuable tool. Now for the application, you are familiar with the Dow Jones U.S. Real Estate Index ($djusre or IYR) from my previous posts but just in case here goes. It represents an extremely good looking head and shoulders pattern with the neckline now clearly broken and lower prices in sight. Now punch up the Dow Jones U.S. Consumer Goods Index ($djusnc or IYK). I had to do a double take at first but don't worry its not an error, you did not punch it in wrong, it is the consumer goods chart you are looking at. They look eerily similar do they not. The neckline on the IYK would be approximately $62.25 and on $DJUSNC would be just north of 310. Watch this level and then expect the traditional test from underneath along with a possible whip up thru the neckline just to shake out the late to the party, poorly capitalised, like they did with IYR. An aggressive was to play this is the Ultrashort consumer goods pro shares (ticker SZK). A move thru $69 here should suffice. Remember this one is thin so trade small (pyramiding up) and let it get insulated first.

I was told long ago that a great way to keep yourself honest, we all have a hard time looking in the mirror and identifying our deficiencies(especially male traders, lol), is to print a bunch of charts and cut the names and do your analysis. Unfortunately when we are bullish on something we see it the way want to see it and this is not always as objective as we need to be. This is a good exercise to periodically do just to make sure you're not playing favorites.

Housing - Look I am not gonna beat a dead horse but here is a quickie on whats going on in the housing market. The estimates are that there is about 6 trillion is mortgage backed securities out there with about 800 million being sub prime. About 13-15% of this 800 million is in default and the foreclosure numbers are soaring. Approximately 2 trillion of the 6 are of the ARM(adjustable rate mtg) variety that have been, are, or will be re-set to higher rates ( Libor plus 250 beeps which would put a high 7 handle on their rate, can you say OUCH). Home prices are falling, inventories are rising and to this we are expected to believe the governments May jobs report showing construction jobs essentially unchanged. I was born at night just not last night. It doesn't take a rocket scientist from NASA to figure out that when mortgage equity withdrawals (MEW) account for 30% of new car purchases in California and 16% in Florida the housing debacle cannot and will not be contained, no matter what Fed governor or treasury official says to the contrary. These are people who if they were exterminators coming to your house would see 1 cockroach, kill it and say that's it, problem contained. As my friend Dennis Gartman likes to say, there is never ever just 1 cockroach. The markets, like mother nature just need to run its course and any manipulation by outside forces (the FED, PPT or otherwise) only delay the inevitable and in many cases exacerbate the results. The spillover to the consumer is going to be disastrous when you consider that the consumer accounts for approximately 70% of the domestic economy, to claim otherwise is naivete of the first order. Trust your own judgement, do your own homework, you will be thankful you did. Good luck and good trading.


Ben said...

Absolutely great commentary. Hilarious. I love the cockroach analogy. I agree that even if home prices flatline the economy will grind to a halt. Just imagine what will happen with a massive decline in value.

Harleydog said...

Ben, thx for you kind words. makes me shudder to think about the effect of a sig. decline. Housing has accounted for approx 40-45% of employment in this economy. It WILL be the body blow.