Friday, September 28, 2007

Merrill Lynch

I thought it might be a good idea to touch on Merrill Lynch again. Dylan Ratigan can repeat it again and again that what's good for GM is good for America. Now that may have been true 50 years ago but today it is less so today. I know 1 in 12 jobs here is auto related according to many sources much smarter than I but what I do know is that as goes Merrill so goes the market. What we are seeing now is a MAJOR NEGATIVE DIVERGENCE between MER and the overall market.

The mass media and Wall St. pundits can ignore and cover it over but the fact remains that as the overall market has raced back from the abyss Merrill has floundered down here, looking worn and tired. Now maybe it is making a large base from which to catapult higher shortly. And maybe we are going to get another rate cut from uncle Ben, with the markets near all time highs !

There is a rot under the financials that is growing worse by the day. Waiting and hoping that these toxic paper positions will recover is folly of the first order. The mortgage re-sets are coming, and as the consumer retracts, much slower economic numbers will be the order of the day. Then instead of Merrill playing catch up with the overall market the reverse will be true. With the market playing catch up to Merrill, on the downside.

I wish I had better news for you but the weight of the factual evidence points to this. My question for the ultra ardent bulls is this, do you really want a stock market at 16,000, 18,000 or 20,000 if it means a dollar at 60,50 or 40. If so you should consider investing in Zimbabwean equities with double digit appreciation weekly if not daily. Forget the fact that in Zimbabwe, the former 'breadbasket of Africa', there is nothing on the grocery store shelves and prices on consumer goods(if you can get your hands on them) re-set every couple of hours. Mark my words, lower rates will be the death knell to equities over time and if devaluing the currency was the path to properity Latin America would rule the globe. Good trading to you all.

Charts of Ratheon, Sears, BMO, and Home Depot

Wednesday, September 26, 2007

Unloading Losers for Dummies

5 easy steps on how to create a market into which one can unload a monster losing position without punishing.

  • Step 1 Get into a position which you now find under water.
  • Step 2 Average down said position to lower your cost, dollar cost averaging.
  • Step 3 Repeat step 2 averaging down more as the stock falls, as it is a better deal now!
  • Step 4 Finally realise the writing is on the wall. What you should have seen earlier is now widely known, start planning exit strategy, before more bad news hits.
  • Step 5 Realise you can't get out without crushing the stock so put in call big newspaper and tell the lazy boob on the phone mucho financial magnet is buying into above losing position. As said imitation financial reporter spins story, to his investigatively challenged clones, amid dreams of the Pulitzer, you sell into nirvana.

The airwaves are full with stories, rumors and innuendo that Warren Buffett, among others, is taking a minority stake in Bear Stearns. It's one of those moments in time where watching bubble TV (CNBC) is better than comedy. Maria and Dylan fawning over each other about how they knew how cheap financials were and how the 'smart money' was buying the dip. Pure comedy ! My take on this is if you don't know already is this is nothing more than a pump and dump scheme.

Any of you out there still trading on news ?? If so you get what you deserve.

Now we get word from Charlie Gasparino that Jimmy Cayne(CEO of Bear Stearns) was soliciting Chinese investor(banks) interest in Bear Stearns. Should be a match made in heaven considering how Chinese banks cook their books. To the Chinese banks the Bear Stearns balance sheet(on and off) should look like Mother Theresa's check book. What a joke and to think there are people trading off this, gotta love the free markets. Now on the fat chance Warren Buffett is buying into Bear Stearns which I highly doubt, consider that he went into Solomon Bros. to bail out his old buddy Gutfreund. Now we have to assume that the same man who called financial derivatives weapons of mass destruction has now changed his mind and wants to climb in bed with them? Buffett is a master at his craft yet he has had messes(airlines) and has a mess on his hands with M&T Bank (MTB). Why would he want another one? Good trading to you all.

Ratheon, JC Penney, and the Financials Charts

The Fed versus The Facts

I read overnight about the new government panels on hedge funds and it got me to thinking that it might be more economically efficient to just completely turn over the Fed and the Treasury to Goldman Sachs. I mean rather than beat around the bush and do it piecemeal. Just gore the proverbial ox so to speak and do it in one fell swoop. There have to be 'synergies' in the deal, no? Could cut down on rent expense via the consolidation and we can all stop pretending the Chinese wall exists. And before you say it, yes, I am jealous as hell of Goldman's success(not to mention too stupid to work there). If you can call taking the other side of the trade of your clients success (according to the latest earnings report) So Goldman takes 2 and 20 on the hedge funds that get loaded with the toxic paper and subsequently tank, yet they copper the customer trades and short the heck out of it the same shit paper for the proprietary house accounts. I am no missile engineer with NASA but can someone explain this conflict to me or am I the holier than thou righteous ignoramus?

Wow did the home builders stink yesterday. August home sales drop 4.3% ! The markets response seems to say that it doesn't matter. Just like Fedex's warning last week, and more of the same with the retailers. Now this morning durable goods orders down 4.9%. I know price is the final arbiter and you cannot argue with the tape. But there are certain times when participation entails more risk than is warranted and I believe this is one of those times. Again I am not basing this on my opinion which can often be wrong but rather on the facts. The facts continue to point to an economy that is steadily deteriorating and a market whose leadership continues to narrow, which is never good, yet in the face of this the market chugs higher. Lets face it BIDU is trading with a 200 multiple right now and while it continues to make new highs only the most experienced and disciplined traders should be playing this right now. If not you risk life and limb if it reverses, either way on you.

A friend reminded me the other day of an oft uttered saying 'don't fight the fed' and while it carries weight of substantial value I am trying to balance it with a saying that rings in my head of 'don't fight the facts'. Now the tape can become de-coupled(to say the least) from facts for a time but like the drunk who continues to pound them back eventually he will hit the floor. Make no mistake this will happen as the market always does what it is supposed to just never when. We saw this with the tech bubble and with the housing bubble and now we are witnessing it with a global asset bubble. I mentioned shorting Ryland back in early 2005 to some former working colleagues who laughed their asses off at me. I never did it and was definitely too early for sure but I bring it up because there are so many examples of ideas that look so bizarre at the time only to become brilliant with time.

Ask yourself a question right now, will Apple and Amazon who are effectively retailers be immune to the housing induced consumer spending slowdown? If you believe yes, then you had better hope so because given the multiples that these 2 are trading for there is no room for error and if the tech bubble taught us anything it is that the market can be ruthless to high multiple stocks that disappoint. So which will win out, the Fed or the facts? My money is on the facts. Good trading to you all.

P.S. The financials continue to lag. I know the media will have you believe this and anything else that is negative doesn't matter, and if it does it will be spun positive for stocks. I continue to harp the financials are they are very important to the overall market(approx. 20% of the S&P)and continue to look very sick. They are no where near to making new highs and quite frankly look tired and poised for a failure here. Bubble TV reported yesterday that traders are expecting another rate cut in Oct.

Tuesday, September 25, 2007

Tuesday Thoughts

After a long weekend and then a computer problem early Monday (finally resolved), I am back in operation. I caught this article on Northern Rock over the weekend outlining their still reckless lending practices. Yes, those same lending practices that got them into the pickle they find themselves in. Are we supposed to be surprised and shocked they are still at it? What I am shocked at is that many are shocked that Northern Rock is still at it. What I am even more shocked at is Northern Rock showing as much as much responsibility as they are. They have nothing to lose and all lossese of covered as the Bank of England is behind them and the entire UK banking system. The BOE has de facto nationalised the banks which means all losses fall to the government(re: taxpayer) and all profits to the stock holders. We all know that the funds to guarantee the deposits do not exist, unless your idea of being made whole is being repaid with monopoly money.

I was at the Tiger game the other evening(they lost and sure don't look like the team they were last year) and had a conversation with a regional banking exec. whom I was a guest of. The conversation turned to housing/economy/markets and not knowing what I do for a living I asked their opinion of things, which was summed up in 5 words, 'the market can't go down' ! I broached some of the issues that I and many others have chronicled(housing, toxic paper,etc) and still the same, markets always go up. The blind faith in the Fed which sometimes borders on religion is fascinating to me, but more so is the absolute disregard of indisputable facts that are staring everyone in the face. The best part was when I mentioned the run on Northern Rock which resulting in a laugh, so I went on and mentioned the story of the hotelier and his wife who wanted their 1million pound sterling, and barricaded the branch manager in the office until a police orchestrated ending, again a hearty laugh. I am the weirdo for finding this stuff absolutely NOT FUNNY !

I truly believe that the masses do not want to hear the truth if it is negative or sour. Just this morning I caught some bubble TV (CNBC) and the had on a real estate guru Barbara Corcoran. She really disliked what another guest had to say about retail and the consumer (he was very bearish). To the point where she wanted his mic turned off. Isn't that quaint, turn his mic off, silence him, we don't want to hear it. She then went on to suggest that people who can afford their homes should take them off the market. Managed economies anyone, anyone, comrade !! She then, (laughing) suggested we all hold hands. That's it hold hands and have a seance, that'll fix everything. Good trading to you all.

Thursday, September 20, 2007

Bear Market ?

I came across the following article earlier today and have lifted it from MSN money in its entirety. It is worth your time as it is an interview with a true derivative "insider". What he has to say is not what many out there 'want to hear'. This type of information will not be presented to you by the mainstream financial media and if it is it will be subjected to ridicule and derision.

I applaud Jon Markman for seeking out Mr. Das and passing on his thoughts and observations. Is this derivatives cat overhyping the risk, is he self-promoting? Please read the article and decide for yourself. At worst you will waste 5 minutes of your time. Good trading to you all.

Are we headed for an epic bear market?
September 20,2007

The credit bubble is just starting to unwind, a credit-derivative insider says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game.

Jon Markman

Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying.
One of the world's leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years. He seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.

I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?"
Still too optimistic. Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.
An epic bear market Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions.
The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way.

He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.

Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.
Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.

"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."
The liquidity factory Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and create collateral during an era of a flat interest-rate curve. Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlays derivative securities many, many times their size.

Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheet for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan.

The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers now accused of predatory lending practices.
Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the United States, these managers leveraged up their bets by buying the CDOs with borrowed funds.

So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.
In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.

Turning $1 into $20 The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.
These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.

According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.
When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.
Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.

A painful unwinding Now here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because they were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.
Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.

One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle. In this context, banks' objective was to prevent customers from selling their derivates at a discount because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers already thin on cash.

Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments which go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works.

So to the extent that the structured finance market is coming undone, not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says.
That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time.

While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear.
The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.
Lower rates will not help that. "At best," Das says, "they help smooth the transition."
The fine print Das notes that Japan in the 1990s lowered interest rates to zero and the country still suffered through a prolonged recession. His timetable for the start of the next serious phase of the unwinding is later this year or early 2008. . . . Das' most readable book for laypeople is "
Traders, Guns & Money," an amusing exposé of high finance, published last year. Das occasionally writes a blog at his publisher's Web site. Also available are a boxed set of his reference books on derivatives and his book specifically on CDOs

. . . .
Perhaps the oddest line on the subject by a world leader was uttered by Luiz Inacio Lula da Silva, the president of Brazil. Asked if he was worried about the effects of the credit crunch in his country, he dismissively called it "an eminently American crisis" caused by people trying to make a lot of "third-class money." . . . CDOs were first widely used back in the late 1980s by Drexel Burnham Lambert junk-bond king Michael Milken to sell off damaged and previously unsellable debt in a way that was more palatable to customers.

The Transports, Fedex, and Moody's

Wednesday, September 19, 2007

An Issue of Confidence

I was sitting watching today's trading activity and starting thinking about the bank run over at Northern Rock in England, the issue of confidence and how fragile it truly is. Like good health, no one appreciates it until it is taken away. Everything is A-okay until one morning you wake up and it isn't anymore. Everything here is not A-okay. I consider the U.S. housing market to be the straw that has broke proverbial camels back. What it comes down to is this, the housing market charade is over. It is dead. Rate cuts are going to be completely ineffective as the damage is irreparable. To hear the politicians and pundits wax on about how the cuts are for the homeowner is disingenuous at best. They are instead a feeble, futile attempt to bail out hedge funds and Wall St. from their mistakes.

The housing bubble was spawned via an artificially low interest rate environment which was the result of a futile attempt to mitigate the fallout of out a prior bubble (tech, do you see a pattern here?) The housing charade was fostered by non-existent to completely fabricated borrower documentation environment which created phenomenal yet artificial demand. Now some may argue how could it be artificial? It was real, I saw the prices paid, the transactions are recorded and a matter of public record. Yes on all counts, but the wealth that was supposedly being created was and is fictional. Worse, all the economic growth this bubble fostered via mortgage equity withdrawals and job creation via home building is now working in reverse.

The slicing, dicing, packaging and offloading of this paper permitted abuses beyond compare. The mortgage originators had no skin in the game so they encouraged their representatives to aggressively pursue clients. Borrowers who would never have been given the time of day by a conventional lender under traditional normal circumstances were now shown the red carpet, aided and abetted by fraud laden paperwork, and deceit driven appraisals. Unwittingly the average homeowner has become participants in what I believe in hindsight will be considered the greatest swindle in financial history. Charles Ponzi would be proud.

This paper having been cycled through the Wall St. meat grinder was now given a AAA credit status by the ratings agencies, bought and paid for by the same firms the operate the meat grinder. How nice! This toxic paper now resides in hedge funds, off balance sheet investment vehicles, overseas pension, endowment and state sponsored institutional accounts. There is no market for this garbage, with many of the holders steadfastly refusing to mark to market, stubbornly still marking to fantasy. The tectonic nature of this chain of events cannot be overstated. The U.S. financial system considered premier has put the screws to their global bankers. To think they will let this slide is naivete of the first order.

Much like the Chicago 'Black' Sox throwing of the 1919 World Series this has now become an issue of confidence. Legitimate companies in need of financing have been shut out of the commercial paper market. No one trusts anyone right now and 50, 100 or 300 basis points will not change that. As evidenced by the LIBOR rate continually rising. LIBOR is especially important as it is the rate that banks will lend to one another. The Bank of England is stepping in to guarantee "all deposits" at Northern Rock and other banks. Will the government become the lender of last resort when all refuse to lend similar to how government has become insurer of last resort in Florida leaving taxpayers on the hook.

The Fed's cutting of rates will not solve this predicament but what it will do is seal the coffin on U.S. dollar. This rate cut means open season on the U.S. dollar. This will be the result of a short sighted, politically expedient decision to bail out bad investment decisions. I sure wish the fed would bail out my bad trades. The fed's actions to cut are the complete opposite of everything free market capitalism stands for. It is unjust and it is wrong. I believe the U.S. financial markets are at a crossroads. They are at a point where an overhaul of the U.S. financial system, including ratings agencies, banking rules, etc. is necessary so that confidence can be restored. Market participants need to be able to believe that no matter what document they read, it is true and accurate. Like I have said before, where the heck is Paul Volker when you need him, and believe me, the U.S. financial markets in particular the dollar needs a man like him now more than ever. Good trading to you all.

Rate Cuts and Economic Nirvana

Everyone seems to be weighing in on the Fed decision to cut both the discount and the funds rate by 50 basis points. Here is my take for what its worth. The cut in rates does absolutely nothing, nada, zilch to solve the existing problems that existing before the cuts and still remain after. The problems of mark to market vs mark to fantasy, home foreclosures, mortgage re-sets, housing oversupply, mistrust of credit ratings on all the hybrid debt, over leverage and simple access to funds all remain. You can lower rates all the way to 1% but if the lenders, having been burned absolutely refuse to lend then the rates become nothing but window dressing, like I have repeated countless times......ASK JAPAN !!!

Following the rate cuts all of the above conditions that around previously still exist and could actually be exacerbated by the cuts. This move only delays the inevitable day of reckoning when the paper must be priced. Like the bond investor who buys the 20 yr paper at 97 and watches it drop to 75 and claims he is a long term investor and will hold the paper til maturity. Seems to me one Robert Citron of Orange County fame proclaimed the same strategy. Unfortunately for him and the taxpayers there bankruptcy arrived before maturity.

As I have said previously, stock market players are not exactly the savviest around. Mr. and Mrs. Joe Six pack tend to play the stock market and avoid the debt and currency markets where the shrewdest participants reside. Sorry to rain on the equity parade but that's just the way it is. I am confounded that as the dollar tanks and oil , gold and bond yields rise, yet, in the face of this stocks soar on the rate cut news. Is this inherent strength ? Is it abject stupidity by stock traders? The answer will soon become evident. The one thing I do know is that continually rising oil prices will not be a stock market positive no matter how hard the shills try to spin it and as for the dollar, if a deteriorating currency was the path to economic nirvana, Latin American would rule the world, right next to Zimbabwe, and we would all bow our collective heads in reverence to the IMF.

Random Thoughts.

Do you really believe Lehman's numbers. Do you believe they have accounted for all the off balance sheet "stuff". Is everything marked to market. Is there a market? Just wondered.

The National Assoc. of Home builders index touched 20, a level not seen since 91. So what props the stock market, blind faith and hope?

Bank runs in England prompt the Bank of England to guarantee all deposits and the pound craters.

Seems to me we now live in a world where any and all news is stock market bullish.

  • Bad economic numbers, fed will cut, hence bullish for stocks.
  • Good economic numbers, earnings will rise, hence bullish for stocks.
  • Dollar tanking, exports will rise, hence bullish for stocks.
  • Dollar rising, will attract global capital, hence bullish for stocks.
  • Oil rising, indicative of strong economy, hence bullish for stocks.
  • Oil dropping, like a tax cut, hence bullish for stocks.
  • Low p/e multiples, stocks are cheap, bullish for stocks.
  • High p/e multiples, mean good growth prospects, hence bullish for stocks.

Everything,everywhere at all times is bullish for stocks. It could not be a bubble if this were not so. Remind you of 1929 or 2000 at all ? Good trading to you all.

Monday, September 17, 2007

Moody's Chart

Maybe Warren Buffett will buy out the company taking it private and save all the longs from a slow death. Failing that maybe a stock split might materialise, yeah, a 2 for 1, no check that, a 3 for 1. That should do the trick, besides, hat's more fundamentally bullish than a stock split ! I would normally suggest hoping for a leveraged buyout but unfortunately that well has run dry. Don't worry hope springs eternal.

Friday, September 14, 2007

British Pound, the Yen and the Bank of England

I would like to bring to your attention the chart of the British Pound. (chart below). Long term up trend still intact but today's action is disconcerting to say the least. This is what (today's action) happens when central bankers lie. Just when some might think the ghost of Paul Volker is alive via Mervyn King at the Bank of England and his refusal to bail out commercial banks today he does an about face and bails out Nortern Rock . Unbelievable, makes me think that prudence and risk management are not only obsolete but they an impediment to success today. The less you know, the less you fear and ergo the better you do, until you don't but then its not their money they're gambling with, right?

The chart of the Pound (above) shows the gap down today thru short term up trend after forming a lower high. Not good.

The chart above of the Yen paints a very bullish picture. The Yen carry trade, borrow in yen and convert to finance other investments Aussie dollar, U.S. stock, CDO's, etc. This is THE prop under this market and as the Yen goes(up), opposite shall go the markets(down). Good trading to you all.

Tuesday, September 11, 2007

Charts on Meritage Homes, JC Penney, and American Eagle

Countrywide needs more money reports the NY Post. Should we be a shocked at this. Maybe Bank America should average down since CFC was a bargain above 18 it must be a screaming bargain now at $16.50. I wish them luck, they will need it, just ask Nick Leeson if you doubt me.

Very nice looking descending triangle forming on Meritage (MTH chart above). A break of 15.50 spells more trouble.

The bear flag forming on JC Penney (JCP chart above) is compounded in significance due to its formation along a long standing trend line. Its breaking from here does not bode well for the retailers.

Yes I am aware the chairman of the company is buying stock hence the 'news follower bounce'. I would like to see the green trend line broken to the upside and we can start to talk turkey on this one. Until then the tape says down. Besides, I wonder if he bought the stock with his own bread or a low interest company guaranteed, forgivable loan. It wouldn't be the first time if so. Good trading to you all.

Monday, September 10, 2007

Getting Short Crocs and Las Vegas Sands

I posted a Crocs chart on this blog Aug 27th. My notes indicating it looked like good short and nothing has changed. I would like to claim that I got in that day as the top tick occurred on Crocs that morning but no such luck, I am not that good! Instead I am in today, short an initial exploratory position, into some modest intra day strength in the stock. (chart below), standing ready to add(pyramid down in this case) as the position moves in my favor or run like a chicken if it doesn't. Looks like an excellent risk/reward entry area.

Las Vegas Sands (LVS chart below)shows a larger double top and you can see the recent rally is dissipating. Again short here a small initial exploratory position, standing ready to add as it moves in my favor or cut and run if it proves me wrong, just as the above case.

We are always remined to let our winners run and cut our losses short. Good trading to you all.

* Remember these are not recommendations as I am NOT licensed to dispense investment advice.

Monday Morning

Will someone please explain something to me as I am not that bright. When the tech bubble was in its full bubblicious glory and I (among countless others) complained of the disconnect regarding the underlying fundamentals I was told and heard countless times, "they don't matter", "it's the new economy it's different this time", and you don't understand tech and that old yardsticks don't apply". Little did the bulls realise how much they would matter eventually.

Now here we have the bulls pounding the table about stocks and valuations being cheap as they use the metrics of earnings estimates when in this speculator's opinion these estimates are far too generous given economic conditions. I love how the perma-bulls don't care a whit for fundamentals are missing or are ignored on the rise up yet whine about their importance on the way down. In the debacle of 1929, the economy measured by GDP recovered and bettered its pre-crash numbers by the late 30's yet stocks did not reclaim their high water marks till the 50's.

Are we to learn something from this? You bet ! That earnings and fundamentals will not matter a hoot when investor psychology has changed from bull to bear. In bull markets all news is bullish and in bear markets all news is bearish, remember, news conforms to the tape. How else do you explain a 2 for 1 stock split being a bullish event. I have been in this discussion more times than I care to count. The same people who would tell me to jump in the lake if I cut their 8 slice pizza into 16 smaller slices yet attempted to charge them a higher price will willingly ignore this fundamental law of nature when it happens in the stock market and readily pay up.

Also, markets are far from being rational beings as they are constantly swinging from one extreme of over optimism to over pessimism. So while the bulls rejoice in the swing to over exuberance they lament and whine over a natural and healthy swing to over pessimism. If they are the shrewd bargain hunters they say they are they should welcome this as their opportunity to take advantage of this blatant mispricing. Unfortunately the perma-bulls know only how to invest in bull markets and have no clue as to speculating in neutral or bear markets which take up 2/3's of market time.

Gotta love the gift on Intel this morning. Are you still listening to these people. Its called disinformation. These are paid cheerleaders, whether they be analysts, brokers, company insiders and the media alike. You need look only at the unfolding disaster in the real estate market to figure out that paid shills of NAR (National Assoc. of Realtors), agents, brokers, the housing industry, etc all spouted endless lies and anyone who following this self serving advice is in a world of pain. Look around you, do your own homework, educate yourself. You really think the Intel insiders are buying into this 'upward guidance' this morning or do you think they are selling? I posted the chart on Friday's blog and I encourage you to have a look. This way you won't be so upset when in 5 short weeks (or less) Intel recants the entire news, can you say Washington Mutual.? Good trading to you all.

Friday, September 7, 2007

CDO Losses Cannot be Quantifed

Warren Buffett called derivatives financial weapons of mass destruction. I quote him just so you don't think I am just a non-stop worrywart fretting about every little sound in the dark. This article by France's regulator that CDO losses can't be quantified does nothing to change my mind about it that's for sure. Please read through the article. The losses can't be quantified. I read it twice just to make sure I was actually reading what I thought I was reading.

Harley Davidson, Brunswick, and Cemex Charts

I thought I would have another look at the adult toy stocks Harley Davidson and Brunswick. Harley is self explanatory and for the uninitiated Brunswick makes the Sea Ray. The charts tell you all you need to know about the consumer. You can ignore it or you can listen and speculate accordingly, the choice is yours.

Harley on the weekly (above) has broke a major (8 year) trend line. Again the facts are the facts. Do you listen to the shills and charlatans promoting their own self interests or do you listen and hear the charts. They don't lie.

Brunswick on the daily(above) does not look good.

I had a look at Cemex the global cement maker. Trend lines breaking, moving averages heading down with a negative cross(50 across the 200), again nothing but a bad looking chart. Sorry I don't make the charts I just read em'
I know this is not good news, I wish I had some but our job is not to be bull or bear but to be right. I do not wish a recession or worse a depression but there are some many contradictions in this economy and the underpinnings so suspect that stating the facts as they are in front of our face does not make us bad people. Pompom television(aka CNBC) treats people with negative or bearish news, view or opinion as wackos or certifiable nut jobs. I wonder how they will be treated when the show is on the other foot and these current 'wack jobs' are enthusiastically bullish when all others are negative.
Dennis Gartman was on CNBC the other evening, he of 35 years trading the markets, had a great point for the listeners. When discussing the financials of which he is bearish, he suggested taping some charts of them up to the wall and stepping back and looking to see the direction from a distance, they all look the same. He has mentioned numerous times in his letter of asking young children what direction the line of the chart goes. Quite simple, don't you think. I know the intellectuals formerly of Long Term Capital, Sowood, Basis Capital et al would disagree but I like it, simple yet elegant ! Good trading to you all.

Countrywide, Las Vegas Sands and Intel

I will start by beating the same horse again, the financials. You can slice and dice them any way you want they are sick, sick, sick. This is a major problem that is not going away in a quarter like some may think. Do not let the value players who are purported buying financials sway your analysis in any way. They are cheerleaders and pump artists talking their own position. I have been reading reports of analysts watching insiders buying mortgage lenders(ie. Luminent ticker LUM) and viewing this as bullish. I agree that insider buying is favorable but you must remember that these 'insiders' are not immune to bias and color any more than the numerous zombie like football fans of the Detroit Lions (of which I must admit I am one) are. They are human and rooting for their stock(team) no matter how bad things have become, is natural. Besides they need to develop a market unto which they can unload their stock holdings a la Angelo Mozilo. Caveat emptor.

Speaking of Mr. Mozilo and Countrywide, is it not curious that the stock has fallen below the $18 strike of the convertible preferred Bank America took. Is it not curiouser the lack of coverage/commentary by CNBC on this issue, just another reminder to do your own homework and follow your own judgement. I surmise that their is some discussion going on at BAC right now. Maybe they are going to average down their position again, as if were a bargain before it must be a bigger bargain now ! I would humbly suggest they bring on Nick Leeson to help them co-ordinate this dollar cost averaging as he is expect at it. Just ask the Queen, she will vouch for him as he took down her bank doing it.

The above chart is a weekly view of Las Vegas Sands (LVS). Double top?

The above chart is a daily view of Las Vegas Sands. This low volume rally is classic, the longs should take it for what it is a gift to get out and if inclined go short.

The chart above is a daily view of tech bellwether Intel. I want to caution you that tech may not be the safe harbour that the financial media is portraying it as. Remember that little item of stock option backdating ? It has not gone away and will reappear soon, so be ready to deal with that if you are gonna play tech. I wish the SEC was a stock cause it is breaking out which is not good for this market. Good trading to you all.

Thursday, September 6, 2007

Deutsche Bank and Barclays Charts

The above chart of Deutsche Bank AG shows a very weak technical picture. Is it over due for a bounce of some consequence, of course. Therefore we not get impatient and guess but rather must remain patient, waiting to let the tape tell us what to do. To me $120 is speaking very loudly. I am reading that DB is #1 in foreclosures in the state of Florida. Now one can argue that California is ground zero as opposed to Florida, suffice to say both are problematic for years to come in the real estate arena. Now do we assume they have no sub prime, alt-A, conduit, SIV issues? I think the worst is yet to come here.

The above chart of Barclays paints a very bleak picture. Trend lines and moving averages broken and a stock consolidating its most recent plunge. The recent consolidation of the last 2 weeks may represent a bear flag. We will know as soon as 46.50 is broken convincingly that a new down leg has commenced and will trade it accordingly. Cat named Cahill who was the head of structured investments(oxy moron if ever I heard) recently resigned/fired, take your pick! Barclays also went to the Bank of England, AGAIN, for short term funding. This time due to a technical glitch, gosh don't you hate those, regardless the problems are slowing bubbling to the surface and they will be many and extremely unpleasant. Remember that news conforms to the tape and the tape on Barclays says down. Rallies are met with significant selling or distribution as some may call it.
The psychology of this market has changed and once it changes it is very hard to change it back. Many fund managers will be bottom fishing, fighting the last war so to speak. The financials will be a place to AVOID for the next many years to come. I do not make this statement lightly or with any malice but the facts are the facts. Just as it is and will continue to take years to repair the damage in the tech arena, post bubble, the same will be said of real estate and the financials. Yes Cisco is up 200% off the lows but tell that to the poor buy and hold boob who owns it north of $50. Good trading to you all.

Wednesday, September 5, 2007

Financials, Real Estate and Retailers.

The Dow Jones US Financials above tells a story that to me seems quite clear and that story is down. I will leave analysis of the how and why to others but the tape here spells bad news, bad earnings, etc. Bad, bad, bad. the news will conform to this tape, mark my words.

The financial spiders known as the XLF above shows the picture via a traded vehicle, which I prefer. Torrential volume comes in on the downside with only tepid volume at best on the up days. Just a consolidation before the next downside storm.

The Dow Jones US Real Estate above is in downtrend until proven otherwise. Even if the inverted head and shoulders comes to fruition it will be contained by the 200day.

The real estate Ishares above again show the picture via a traded vehicle with volume. Still in a downtrend until 78 is eclipsed with some conviction (volume).

The Dow Jones US Retailers above is in a downtrend and looks very weak.

JC Penny although not a bellwether by mainstream measures serves me as a decent middle of the road proxy. The bear flag forming is ominous as it is forming on a support trend line.

Just a few short weeks ago all you could hear from the market and political pundits that be, was how strong and resilient the economy was. Now a few short weeks later everything has changed to the extent that we need rate cuts. Not just the garden variety 1/4 point type but the 1/2 to 3/4 type. Who is fooling who here and why are you still listening to these people. They tell you inflation is contained yet all you need to do is venture out your door and prices are rising. Fuel, food, travel, entertainment, oops gotta calculate that ex food and energy, what a crock of you know what! Again I ask, why are you listening to them. These are the same people that told you the tech bubble was not a bubble, that it was different this time and you were stupid to not participate. These are the same people (Greenspan) who told people to take neg-am adjustable rate mortgages at generational lows in interest rates.

It is time to wake up and look around and see for yourself what is happening. You are your own best analyst, do your own homework, do not rely on these charlatans they drag on television to tell you all is well. Baron Rothschild was quoted as saying "I buy when there is blood running in the streets of Paris" Well, we are not even close to seeing blood in the street no matter what Cramer screams. This is just the opening act so if you can't stomach what has just transpired might I suggest the safety of short duration U.S. treasuries or the treasuries of your northern neighbor of Canada. Contrary to what the biased pundits tell you, YOU DO NOT HAVE TO BE IN MARKET, cash is, was and always will be an investment decision. The buy and hold crowd will try to convince you you are but going to cash does not in any way mean you are stupid. To the contrary, it is a compliment. Good trading to you all.

Wednesday Morning

I hope everyone had a safe and enjoyable long weekend, for some of us extra long so I will jump right into it. Over the weekend we received news that the hedge fund Synapse was closing. The news that another hedge fund imploded is significant as my concerns are the counter-party risk they have taken on. What do you think will happen when another institution who bought that arcane, illiquid credit default swap, for example with Synapse on the other end and now no Synapse. I am not an expert on the machinations of back office brokering but I know enough to know that developments such as this do not bode well for the system. By the way if you read through the Bloomberg article regarding the failure of Synapse you find out they had NO subprime paper, hence I continue to feel very comfortable being short in this low volume, short fueled, bear market rally.

I read something where a blogger/analyst called this market an issue of insolvency rather than illiquidity and that rate cuts are not going to help. I continue to encourage all of you to watch the debt and credit markets as this is where the brains of the market reside, not the equity market. Hence you know why I labor the commodity and equity market, plain ol' not smart enough. What I do know is that these 'smart players' see big trouble as evidenced by spreads. The equity market will eventually wake up to it but it may be too late. This is a big domino game and once a domino falls others eventually are affected to believe otherwise is naivete of the highest order. This is where our advantage comes in, the debt and credit markets are 'the tell' and we now know this stock market is bluffing, the question becomes are you prepared to call the bluff.

Countrywide continues to deteriorate since the BoA announcement. The CFC shareholders had a gift to get out on that news, which I hope they did. For those that like to trade news or even fresher news as some like, you get whats coming. Remember, news conforms to the tape. Insiders and management are cheerleaders for the stock, always over hyping the positive and downplaying the negative. Mr. Mozilo can be candid now as he has sold some 400+ million of stock. the last few years. Do you really think he would let you in on the negatives so you could cut in front of him to sell? If you do believe that and that management and insiders are on your side, always telling it as it is may I suggest the race track for you speculations as you will have more fun there.

I re-read Reminiscences of a Stock Operator over the weekend, for what is now somewhere in the mid twenties as to the number of times I have read it. What a refreshing, simple wonderful read on speculation. It is a valuable read, whether you are in a trading slump, staring into the abyss or riding high on all cylinders. I cannot recommend it highly enough to speculators out there, it is MUST reading for anyone considering or already in the markets. I will post some charts of interest a little later this morning. Good trading to you all.