Monday, August 27, 2007

Market Thoughts for Monday.

Do you feel better now. Does the lack of volatility have you saying 'boy am I glad I didn't panic'. We have seen this act before folks. You cannot sell into weakness, you must sell into strength. Look at any long term chart of a stock, commodity, or index and you will see what looks like the profile of a mountain. Rising up, the left side, the peak and the falling off, the right side. Now look to the volume. Is it mere coincidence that the volume occurs to the right of the peak. This is the distribution zone, the area where the 'smart money' distributes stock to the 'dumb money'. The average person measures value by how many points off the high tick he is purchasing the stock for. Wow, you say, that stock was $85 and now it's trading at $60, it must be a bargain. It's distinctly possible it may be a bargain, but often times the landscape has changed and many if not all do not see it. I ask again as I did last week, where is the volume? And stop using the everyone is on vacation excuse. They are all in front of their screen, remote or likewise, staying abreast of what is going on.

I came across the following quote from an ABC News article entitled "Real Estate Fool's Gold"

"It was going up so rapidly that I was fearful that if it went any higher I could not afford it anymore," she said. "So I needed to get it while it was still at a price I could afford…before it went out of my range.
"If we don't hurry up and buy something now," she said, "we're never going to be able to buy anything."

A doctoral thesis these could be conducted on the above statement alone. Read the quote again and think about what is being said. I am not trying to pick on the individual who made the statement or their IQ but it speaks to the emotionality of the issue. In broker training school they taught us that 90% of buying decisions are emotional. Hence most try to offer as much sizzle and as little steak as possible. Tops are made amidst euphoria, and exhilaration(think gold in 1980/tech in 2000 and bottoms amidst depression and despair.(think gold/oil in 2000).

The touts on television are going to start downplaying all the negatives on the economy. For example just today a commentator downplayed housing in this market as not as big a deal as the bears are making it out. Now this is an industry that according to very credible sources has been responsible for between 40-45% of all new job creation since 2000 ! Yet now that former evidence doesn't support their continued stance, they downplay the same facts that they rejoiced in previously when it suited them. These are not stupid people, though they may come across that way. Is this hypocrisy, is it bias, or is it ignorance. Whatever it is, it can be an exorbitantly high tuition to pay for learning something the hard way.

Crude Oil - This is economics 101, demand is increasing and supply is decreasing. It is really that simple. All the easy oil has been found. To those that believe that crude is in a bubble which is ready to pop and head back down to $30/barrel. Please provide me with the schematics on how we are going to ramp up production to meet the increasing demand out of the developing world. I know you are gonna tell me that 'the Arabs have it, they will just ramp up production'. Well, I don't operate like a Countrywide or Accredited Home lenders, or any of the other 136 mortgage lenders gone belly up. I need documented proof of reserves, audited proof ! I refuse to take you or especially them at their word because if the average homeowner overstated his income by 50% imagine what a monarchy desperate to maintain its tenuous hold on power would do. Suffice to say an 50% exaggeration may be mild. All that unexplored territory in Iran awash with unexplored reserves, so awash they are rationing gasoline among the citizenry. The Artic and the continental shelf you say, the easy oil has been found. Get used to these prices this is just a consolidation, and lord forbid some serious political strife globally, triple digits ASAP. Sorry, I'm just the messenger so don't shoot me.

Gold - We are getting close but just not yet. Silver the same.

The financials are an absolute joke. I keep seeing the dow up and the financials down or flat, or off their lows for the session. This market is going no where fast without the financials participating. I encourage you to look at the Ultrashort financials (ticker SKF) as a hedge to you long portfolio or an outright short. I hear about all these fund managers buying the financials on weakness. I keep hearing how fabulous these dividends are. I have a news flash for them, (remember news conforms to the tape), dividends can and do get cut when business gets bad. We'll have to see how enamored of financials these cats will be when the dividend is 1.5% Here is an advance headline from Sept 15th, 2007

"Business is go good we just had to borrow another billion or so at the discount window, of course as a show of support for the Fed !"

The breadth of this market stinks, the new high/new low list looks absolutely pathetic, these stock buybacks all done with borrowed money and with the stock price at or near all time highs, yet we are supposed to embrace this as a value market. Save me the rhetoric and give me the Charlie Prince of Citicorp line, "the music is still playing so we have to get up and dance." at least then I could give you credit for being witty. The tape still says down. good trading to you all.

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