Many of the financial stocks such as Goldman Sachs, JPMorgan Chase and Wells Fargo are actually up on the day. The bank stocks have been leading the market for the past few months so this is a positive. While I am not buying into this market yet we are moving in the right direction and I would not be surprised if we rallied.
- The GDP report is backward looking. We know how the economy did in the 4th quarter and it wasn't pretty.
- These government reports are often inaccurate and subject to numerous revisions.
- The law of diminishing returns seems to work for bailout packages. This "bad bank" rally took a day to erase.
- There are improvements in the market. Fewer stocks are making new 52 week lows. There also seems to be more differentiation between good and bad companies.
- That said, I still believe the market will make new lows sometime this year.
- Despite yesterday's ugliness I am still in wait and see mode. I am patiently waiting for the Bulls or the Bears to push this market too far in one direction.
- In early January the market became maximum overbought. It used almost every last day of that reading to go down. Since the market became maximum oversold it has not made much headway. There are still a few days for the market to right itself but time is running out.
- The Market has bounced off its early morning low as investors are once again buying calls. As long as this remains the case I am not interested in the long side of this market
- How does Dryships plan to sell 500 million dollars worth of stock when the entire market cap of Dryships is 400 million dollars?
- Why is it such a great thing that Wells Fargo is keeping its dividend? Shouldn't they first be 100% sure that they will be able to make it through this credit crisis? Shouldn't taxpayers get their TARP money back before banks give dividends to shareholders?
- The stimulus plan is stuffed with pork. It is a politicians dream and a taxpayers nightmare. All in the name of helping Americans. Thanks.
The image below is the 10 day moving average of the NYSE advance decline line. I put an X to mark last weeks oversold reading. As you can see we are no longer oversold, but not yet overbought. This makes predicting the near term market direction difficult. The best setups are when the Bulls or the Bears push this indicator too far in one direction.
- Starbucks announced the closing of an additional 300 stores. With even the strongest retailers closing stores, commercial real estate vacancies will continue to skyrocket and more loans will go into default. Smaller banks managed to avoid the subprime and CDO crisis but are neck deep in commercial real estate lending.
- The Nasdaq has continued to outperform the broader market. Qualcomm's earnings miss will put the Nasdaq to the test today.
- Even pharmaceutical companies' revenues have been light this earnings season. People are cutting back on everything. This recession is different from previous ones.
- If the banks were willing to lend again, would that change anything?
- Another reason why I chose not to short the market today was the trade just seemed too obvious. I have learned over the years that if a trade seems too easy, RUN.
- If the market continues to rally, Wednesday (a week from today) would be a good time to consider some short sales. The market will be overbought and the seasonally strong period will be over.
- The overbought indicators I look at take both time and price into consideration. For years I focused solely on prices before I realized the importance of time.
- Why does focusing on time work? It takes the market going up a certain amount of time before it sucks everyone in. And vice versa.
- Treasuries got smoked on the FOMC announcement. It appears that some traders were expecting to hear more details on the Federal Reserve buying Treasuries.
- Have a good night.
- The market has until next week before it is maximum overbought. Waiting patiently for extremes has paid off.
- While the option indicators are showing that traders are over enthusiastic, anecdotally it doesn't seem that way to me.
- The Federal Reserve might pull a rabbit out of its hat. If so, "insiders" probably already know that and I am trading with an informational disadvantage.
- The banks are on fire.
Recently, I furnished my office as well. I went to a warehouse and bought new furniture that was slightly damaged. It couldn't be sold as new so I received a 75% discount. I figured that eventually I would put a scratch on my furniture anyway, so buying it with a scratch was not a big deal. What did the government give me for being frugal and doing the right thing? Hint: It rhymes with stick.
- The Resolution Trust was the "bad bank" formed to bail out the Savings & Loans in the early nineties.The S&L Bailout was also one of the first bailouts that led us down the road of moral hazard and a debt bubble. Why does the government believe that the same policies that got us into this mess will get us out?
- I noted yesterday that the banks were suspiciously strong. Do you believe that it is a coincidence that the "bad bank" plan is being unveiled today?
- If some people are trading with the equivalent of "inside information" doesn't that mean that those of us who are not "insiders" need to be especially careful?
- The way I have been protecting myself is to wait until the market reaches an extreme before trading.
Last week, when the market was maximum oversold, I sold some Puts on selected stocks that I would be happy to own. Since then, the market has worked off its oversold condition and I am sitting on a decent profit. I have no intention of buying into this rally today and am considering selling some of my positions into it.
The market has room to rally as it will not be maximum overbought until next week at the earliest (but it is no longer oversold either). This bad bank plan will suck some people over to the Bull side of the market. Additionally, a bunch of technical levels will be surpassed. As usual, people will get bullish when the market is already up. In my opinion, it is too late to buy but too early to sell.
Right now this market is too tough to call, as it does not seem to me that the Bulls or Bears have over reached. Therefore I continue to focus on individual situations rather than the market as a whole. Have a good night.
- The banks led the market down and are now showing strength. Ignoring the banks has been a big mistake.
- Every time we have seen this type of call activity on the CBOE, the market has nosedived shortly after.
- There are rumors of a huge stimulus package coming any day now.
- How could the enormous job cuts not lead to even weaker economic activity?
- Wanna flip a coin?
- Amgen, a stock I follow closely, is down on lower than expected revenues. While the stock is cheap at these levels, in the mid 40's it becomes a no brainer. In this market I am willing to wait for the no brainer.
- The banks are holding in positive ground while the market has gone flat. The banks have been leading the market. Additionally, breadth is still positive even though the market is flat.
- On the ISE call buying is subdued but on the CBOE call buying is running rampant.
- I am doing nothing for now and letting my positions run.
In the shorter term, the market remains oversold and we are approaching the seasonally strong turn of the month. On the sentiment front, the call buying of the past few days is starting to worry me. I have some modest profits in my Microsoft and Annaly positions (via short Puts). If the call buying persists I will likely book some gains just in case.
- The Wall Street Journal echoed my sentiments from yesterday on the Wyeth Pfizer deal. The reason a 12% merger spread is available is because the large brokers and hedge funds that would normally arbitrage this deal are hobbled.
- For years arbitrageurs were picking up dimes in front of bulldozers. Now that real money is available with little downside nobody wants it.
- Everyone is talking about the importance of the 790-800 level on the S&P 500. Do we need a false breakdown below that level to shake out the renters?
- The trade for the past few days has been to buy weakness and sell strength. This works as long as we are stuck in a trading range.
- Will traders be caught leaning the wrong way when we finally break out of this trading range? That's how it usually happens, but I'm having a hard time figuring out which way folks are leaning.
- Wyeth is only $5 above where it traded for most of January. They will receive a $3 a share break up fee if Pfizer doesn't close the deal. By my calculation the downside is $3-$4 while the upside is $5. This means that the market is putting a less than 50% chance on this deal closing.
- I believe the reason this deal is trading where it is that arbs have been so devastated that there is simply not enough money out there to arbitrage this deal.
- Some readers have asked what an arbitrage is? Apon closing of the Pfizer-Wyeth deal each share of Wyeth will be exchanged for $33 in cash plus .985 shares of Pfizer stock. The value of that currently is $48.65. Wyeth can be bough for $43.35. There is $5.30 profit to be made if the deal closes. If the deal does not close for some reason Wyeth will likely go down. How much it would go down is debatable.
- I put on the Wyeth arbitrage trade. There is a 10% spread available and I can't see a reason why the deal would not go through. Additionally, the breakup fee is 4.5 billion dollars so I don't believe Wyeth would go down that much even if the deal were broken.
- I believe it pays to stick with large cap companies with solid balance sheets. They have underperformed for years, but the Wyeth takeover may mark a turning point.
- It appears that the Dow Chemical/Rohm and Haas deal is running into some problems. This is a negative for the market, but is offset by the Wyeth deal.
- Smurfit Stone, the cardboard maker, filed for bankruptcy defaulting on 5.6 billion dollars in debt.
Pfizer must believe that Wyeth is so cheap that it pays to pay a premium for the company and pay the additional taxes. It will be interesting to see if other multinationals follow suit. If so, it would be very bullish for the markets in that more cash would flow into the market and would show that valuations are just too cheap.
In the shorter term, the market remains oversold. In addition, we are approaching the turn of the month which is a seasonally strong time for the market. I am having a hard time wrapping my arms around sentiment. Anecdotally, it seems to me as if everyone is bearish and calling for a retest of the Novemeber lows. However, call buying was pretty heavy late last week, which tells a completely different story.
If it were not obvious by my commentary, I have mixed emotions about this market on both a short and long term basis. As such, I am focusing my concentration on individual situations and not on the market as whole.
Tishman Speyer Properties LP and BlackRock Realty, owner of Manhattan’s largest apartment complex, are relying on a reserve fund to pay debt on the property and have only six months of money left before it runs out, Fitch Ratings said in a report.
The fund for the Stuyvesant Town and Peter Cooper Village apartments has declined to $127.7 million as of Jan. 15, from $400 million when it was established. Property cash flow is not expected to improve from 2008 based on the borrower’s restated budget for 2009, the ratings company said.
Tishman Speyer and BlackRock paid $5.4 billion for the properties in 2006 with plans to convert rent-regulated units to market rates. A $3 billion loan to finance the acquisition was bundled with commercial mortgages and sold as bonds. Fitch, Standard & Poor’s and Moody’s Investors Service began to downgrade the commercial mortgage bonds in September because the owners were unable to convert as many units as planned.
A top official at China's central bank has dismissed U.S. Treasury Secretary-designate Timothy Geithner's comment that President Barack Obama believes Beijing is "manipulating" its currency, state media said Saturday.
Su Ning, a deputy governor of China's central bank, was cited as saying by the official Xinhua News Agency that the remarks were "not in line with the facts."
"We thought in the face of the financial crisis, there would be a spirit of self-criticism beneficial to finding ways of resolving the issue and overcoming the crisis," Su said, adding that it was imperative to avoid any excuses to encourage trade protectionism.
- At the beginning of January everyone was looking for a rally with the inauguration marking the top. Once again the market stumped everyone and it looks like the inauguration was instead a bottom.
- I also thought that we would rally into the inauguration. Luckily, the indicators I follow did not agree with me and kept me out of harms way.
- I wish there were a little less call buying today.
- If the S&P 500 rallies through 850 people will be calling this a succesful retest.
- What do I think? I am keeping an open mind.
- I believe the majority of companies will need to reset expectations this year as estimates are way too high. The reason I am comfortable owning Microsoft is because I believe they have already done so.
Additionally, while the S&P is testing its lows from earlier this week the financial indices are still a few percent above their lows. It has been a while since the financial sector outperformed and is a good sign. If Treasury secretary Geithner were not picking a fight with the Chinese I might actually be adding to my longs today.
In the here and now the market remains short term oversold. If the market is going to rally this is the time when it should do it. Instead of taking direct market exposure I have sold puts on individual stocks that I believe are trading cheap. This gives me some breathing room in case I am early. Addittionally, I believe these stocks will outperform the market and am comfortable owning them in the worst case scenario.
- Did Geithner really have to pick a fight with China his first day on the job?
- If Geithner can't comprehend that we need China to fund our deficits, is he the man for the one of the toughest jobs ever?
- Do you think anyone has ever been as happy as Hank Paulson to lose his job?
- Technology critic, Walt Mossberg gave Windows 7 a glowing review. This is the first time there is any hype surrounding a Microsoft product since Windows 98. While Windows 7 is just Vista with the bugs fixed, marketing is everything.
I believe that investors in private equity will have a similar experience. The track record of many private equity firms are excellent and anyone who invested in private equity for a long time will have benefitted. However, it was only in the past few years that money really started to flood in to private equity. The losses will be enormous and private equity might destroy more wealth than it ever created.
Harvard University didn’t sell most of the $1.5 billion of stakes in private-equity funds it put on the market last year because offers were too low, said three people familiar with the matter.
The university’s $28.8 billion endowment, the richest in higher education, rejected deals as sellers, including schools and pension funds, flooded the market and pushed down prices, said the people, who asked not to be identified because the bidding is private. The Cambridge, Massachusetts, university remains interested in unloading the private-equity investments.
Timothy Geithner’s warning that President Barack Obama believes China is “manipulating” its currency may trigger renewed tensions between two of the world’s three biggest economies.
Geithner, Obama’s nominee for Treasury secretary, also told senators the administration will press China to “adopt a more aggressive stimulus package” to boost its domestic economy. The remarks on manipulation were a shift from President George W. Bush’s team, which stopped short of using the term in criticizing China’s exchange-rate management.
In my experience one can only buy into a company on the cheap when the news is bad and everyone hates the stock. It is not easy to do so and may require some pain before a profit is seen. However, that is what one gets paid to do in the market. Buying in when the news is great and everyone is bullish on a stock is a lot easier but is not profitable in the long run. So while I might be drinking a nice stiff drink tonight, I believe I will be drinking some champagne in the future. Have a good night.
- Please note the action in Treasuries. Yields have been skyrocketing. All the bailouts and stimulus packages are contingent on rates staying low.
- Regional banks are blowing up all over the place this morning. I am not sure how much of this is already priced into the market.
- I have been digging a little deeper into Apple's earnings. The entire beat came from margins, taxes and iPods. All the while the iPhone and Macs missed estimates. This is significant in that the Mac and the iPhone are supposed to be the growth engine for the company and they are starting to lag. While this should be expected in a recession/depression and Apple is not expensive by any measure, I would not get too carried away with "Apple beat the number". The quality of the beat was quite low but to be expected in this type of environment.
- The fact that Mac sales missed estimates does not augur well for Microsoft. The areas that helped Apple beat estimates like lower component prices and higher iPod sales don't apply to Microsoft, unless you believe the Zune is coming back from the dead (if it ever were alive).
- I welcome a Microsoft shortfall as I believe it would allow me to buy in on the cheap.
I got somewhat long yesterday, but have plenty of room to add if the situation calls for it. I will be spending the majority of the day reading through conference calls and earnings reports.
- While Apple beat the earnings number, they guided well below expectations. Sentiment was so negative going into the report that any positives would do. A year ago, when everyone expected the world from Apple this would have killed the stock. That is why I prefer to buy beaten down, cheap stocks where expectations are low.
- Geithner said that the stimulus package will be ready within weeks. Will the announcement of that stimulus package mark the next high for this market?
- I still expect the S&P 500 to hit new lows some time in the first quarter. That doesn't mean its straight down.
- With IBM and Apple coming in better than expected are investors expectations now too high for the rest of earnings season?
I did not look at the numbers from Apple but judging by the stock's reaction they were good. Anyone who shorted Apple on Steve Jobs health issues is now sucking wind. Have a good night.
- How long could you live without a computer or Internet? How bad would your finances need to get before you gave that up?
- If Apple disappoints this evening I think it would create a great entry point into Apple or Microsoft stock. The stocks are ridiculously cheap, unless you believe that business will completely fall off a cliff. If you believe business will fall off a cliff please refer back to the first bullet point.
- Highly acquisitive, tech conglomerate IBM raised earnings expectaions for 2009 with most of the improvement coming from tax rates, margins and buybacks (ie. not from top line growth). They said they expect the second half of the year to be stronger than the first as the economy improves. Reading between the lines, that means that business is not great right now.
- IBM has many government contracts. Could the Obabma stimulus plan be the strength they are forecasting for the second half of the year?
- It looks like Wal Mart's stock price got outsourced to China.
- Is it weird that I'm so excited for Apple's earnings even though I don't own a share of their stock?
- Did yesterday's ugly close combined with the proximity to today's maximum oversold condition warrant putting on some exposure late yesterday? Probably, but hindsight is 20/20.
- That said, I am not going to compound my error by chasing the market higher. There should be a pullback at some point today where I will reconsider.
- Are some of the asset managers getting too cheap? They are being painted with the broad brush of the financial stocks but have no exposure to the bad loans. They are generally fee based businesses. Northern Trust demonstrated this today.
- Archie Mcallister, an excellent stock picker, was pushing Franklin Resources in Barrons. They are another excellent asset manager selling at a low multiple.
- Why are GE and Wal Mart down?
- Does anyone else find it ironic that the Royal Bank of Scotland failed because of subprime loans in America?
- Microsft sold their position in Comcast. That gives them close to three billion dollars more in cash. I was bullish on Microsoft before I heard this news.
- It will likely not matter as Microsoft is already ridculously cheap and investors choose to ignore it. In 2000 investors paid 80 times earning for Microsoft. Now they wont pay 8 times.
- Does it worry anyone else that IBM's earnings have GE like consistency?
- Apple is being investigated by the SEC for disclosures regarding the health of Steve Jobs. They missed Madoff but they will get Jobs, just like they got Martha Stewart.
- Can we just leave the poor man alone? He is dying from cancer and all the money in the World is not going to help him. He does not need this circus on top of it.
- There is very little put buying for a day that the S&P 500 is down over 3%. It seems that too many people are looking to catch a bottom.
- Apple reports earnings tomorrow. On the last quarter's conference call I believe Steve Jobs was too quick to dismiss the economic weakness and estimates might be too high. Steve Jobs said:
"Well, there’s a lot of prudence in there but it’s also October and October hasIt seems to me that it wasn't just the month of October and weakness probably carried through the quarter.
always been a little bit of a foggy month for us."
- That said, Apple is one good whack away from me taking a long hard look at the long side. Earnings might be the catalyst.
- It is possible that we will get an Obama bounce some time during the inauguration, although I am not playing it.
- If we sell off into the end of the day today and again tomorrow morning, I will likely do some buying.
- Why buy if I believe the market will eventually go lower?
- The market rarely goes anywhere in a straight line.
- The market will be maximum short term oversold tomorrow.
- Just because the market is going lower that doesn't mean that every stock will go lower.
- I prefer to buy when when stocks are on sale.
- The British pound is down 7% from yesterday as one of the largets banks in the World, Royal Bank of Scotland, essentially failed. I have never seen a developed country's currency move like that.
- Is that a tremor to a coming earthquake?
- Financial stocks are getting pounded again. No pun intended.
- Put that all together and thats enough to keep me in my bunker for now.
In the past year we reached a tipping point where the debt burden became too heavy. This process is now running in reverse. The imbalances that this has caused have been building for the past few decades. A new president will not be able to undue what has happened no matter who he is. Time will heal all wounds. It will take time to work our way out of this mess.
- The morning after expiration has not been kind to the stock market. By afternoon, the expiration influences should wear off.
- Oil is once again getting pummeled showing that the deflationary forces are still in control.
- Our country has come a long way in electing a black president. Don't mistake a social achievement for a financial one.
- I would love to see the S&P 500 go to 800. I have a shopping list ready.
- Earnings season starts in earnest this week. Everybody knows that earnings will be bad. The reaction to the news will tell us how much is priced in.
From Forbes, "China Not A Limitless Sponge For U.S. Debt"
In the past few years, the ballooning of China's foreign-exchange reserves seemed a given, the yin to the yang of rising U.S. debt. But growth of the country's forex reserves slowed last year for the first time in nearly a decade, leading many to wonder if Beijing will slow its Treasury purchases as the U.S. government seeks to ramp up debt issuance to fund stimulus spending.From Bloomberg, "‘Time to Sell’ Treasuries, Biggest Korean Fund Says"
A rally that sent U.S. Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said.
U.S. government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok, who oversees $160 billion as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14 percent last year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as investors sought the relative safety of debt.
“It’s time to sell U.S. Treasuries,” said Kim, who took over as head of investments at the start of the year. “The stimulus plan may cause inflation. The U.S. will raise the benchmark interest rate.”
Jim Rogers, chairman of Singapore- based Rogers Holdings, said investors should be “worried” about the U.S. dollar, and recommended selling government bonds and buying raw materials, China stocks and the yen.
“If I were you, I would be worried about the U.S. dollar,” said Rogers, 66, in a speech at the Asia Financial Forum in Hong Kong today. “The Americans are printing U.S. dollars. The Americans are going to do whatever they can to revive their economy, even if it means destroying the U.S. dollar.”
"The current rally will peter out sometime in the first quarter. It's the Obama hope rally. Obama is dangerous for the market in the sense that expectations that he can change the world are too high. He is a charismatic person, but a charismatic person with no track record. Eventually the market will grow disappointed that he can't change things as quickly and to the degree people hope.
The market will have a setback after this rally ends, with the next rally starting sometime in the second quarter. It will be more powerful and a bit more sustainable because some of the economic numbers will show positive momentum, and it will start from a new low. But you can't buy and hold equities for the long term. Investors will turn away from equities. They are fed up with negative returns over 10 years. In that period, as I said earlier today, risk was high and perceived risk was low. Now risk will be low, due in part to support from the world's central banks. But investors will perceive risk as high, and price financial assets accordingly."
Legendary investor, Felix Zulauf, is already being proven correct. This interview occured two weeks ago when the S&P 500 was close to its 2009 high. I agree that the "Obama Hope" rally will end sometime in the first quarter, if it did not end already. The World will not change overnight because a new president is sworn in. Eventually, reality will set in and the issues that brought us to this point will need to be dealt with.
The market will be maximum short term oversold at the end of the day Wednesday. If the market continues to rally until Wednesday, the oversold reading will be weak and it will make for a tough call. However, if the market goes down Tuesday and Wednesday, the market will be deeply oversold and a rally should ensue that would take us through the end of January.
Currently, I have a lot of dry powder that I am waiting to deploy if the market comes in early in the week. The market rarely does what I want it to but having a game plan does not hurt. While I believe the market will eventually go a lot lower, I am seeing individual stocks with compelling valuations. I believe these stocks have limited downside and will eventually show investors large gains. That is where I will be looking to deploy my money.
- The market was actually 1.5% lower at one point today. The bailout news is starting to lose its effect.
- The market is closed Monday for the Martin Luther King Jr. holiday. I have been saying that the market will be maximum oversold by the end of the day Tuesday. I did not realize Monday was a holiday, so make that Wednesday.
- A further market decline early next week would set up a favorable entry point.
- A rally early next week into the Obama inaugaration would make for a very tough call.
- There was very heavy call buying all through late December. Today those lottery tickets are probably being torn up.
- Have a great weekend.
- In this market you have to take gains before they disappear.
- The S&P is up almost 40 points from its low yesterday
- How many times can the market rally on bailouts? One day a rally will fail.
That said, I am hoping Microsoft comes back in so I can buy again. I am very comfortable with the stock
After several weeks of stabilisation and even some improvement, there have been renewed falls this week in the value of securities linked to subprime mortgages, leveraged loans and commercial mortgages.The Markit ABX index for triple A rated securities backed by subprime loans has dropped 13 per cent in the past week. The Markit CMBX index for triple A rated securities backed by commercial mortgages was also down 14.5 per cent in the past week.
The LCDX index, a barometer of leveraged loans, was down 4.6 per cent in the past week, back to levels it traded at about a month ago. Many of the assets tracked by these indices are hard to value, and banks’ exposures are far from clear.
There are so many people involved in these bailouts. The list includes: The Bush administration, the Obama administation, The Federal Reserve, The Treasury, Bank of America, Merril Lynch. Word got out ahead of time and people knew and traded on the information. Yesterday, when the news came out to the public they figured they no longer had an edge and covered their shorts. Welcome to the stock market.
- Intels earnings was not really news as they issued a warning a week ago. The stock is up nicely on this non event. This is a good sign that possibly a lot of bad news is already priced in.
- I was happy to see that Bank of America will not be allowed to pay a dividend. There is no reason that any company taking taxpayer money should pay a dividend to shareholders.
- Given the carnage in the financial stocks Goldman Sachs has been holding up extraordinarily well.
- There will be option expiration related forces at work until late Monday morning.
- The Nasdaq 100 continues to outperform the S&P. I continue to favor large cap tech because they carry little debt, have easy to understand balance sheets and good free cash flow.
- I sold some Microsoft February 18 Puts naked for 1.09 this morning. I can live with Microsoft at 16.91 even in a depression. (If you don't know what this means than ignore it, it is a bullish play on MSFT through options)
- We have been seeing heavy put buying all day.
- The S&P broke through support at the 820 level this morning but the market did not seem to want to go down. All together it looks like the market wants to rally.
- The put buying and refusal to go down are bullish. I would not make too much of it because expiration might be influencing the market.
- I was expecting the market to begin to rally in the next few days and test its highs from last week. I expected that the rally would eventually fail and the market would hit new lows. I still think we will rally in the next few days but it is doubtful that we will rally that far. The facts changed.
- Look on the bright side. No more rumors about Steve Job's health.
- Is it me or are these bad times bringing out the worst in people?
- Once again there are rumors circulating about job cuts at Microsoft.
- David Swensen called fund of funds a cancer. From the WSJ:
Mr. Swensen: Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can't make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? There's also more fees on top of existing fees. And the best managers don't want fund-of-fund money because it is unreliable. You need to be in the top 10% of hedge funds to succeed. In a fund of funds, you will likely be excluded from the best managers. [Mr.] Madoff also relied enormously on these intermediaries. He wouldn't have had nearly as much resources were it not for fund of funds.
Consultants make money by giving advice to as many people as possible. But you outperform by finding inefficiencies most of the market has not yet uncovered. So consultants ultimately end up doing a disservice to investors.
For a few weeks Apple's stock would go down on rumors of Steve Job's health but only rally slightly on the denials from Apple. While the public did not know the truth the stock did.
Insider trading has become a big problem in the past year. While it always existed, up until this past year inside information was limited in its scope. Rarely could a piece of inside information move the entire market. That dynamic has changed in the past year with every bank problem and bailout moving the entire market. The market seems to trade ahead of these announcements, meaning that many are finding out this information ahead of time. Christopher Cox, Chairman of the SEC, could not care less. It is up to the investor to be aware of this dynamic and be extra careful.
Charlotte-based Bank of America will receive $25 billion of the $125 billion the government is providing nine major U.S. banks. The idea is to shore up these big banks and in turn free up money that can be lent to consumers, businesses and other financial institutions. Although the capital infusion comes with few strings attached, Lewis said his bank will use the money to make loans, noting this would boost the bank's bottom line. Bank of America has said it doesn't need the capital, but Lewis said the nine banks had to take the money as a group so as not to expose any institution that really needed the capital.
- The S&P is now down 12% from its highs last Tuesday. However, the market will not be maximum oversold until this coming Tuesday.
- Given that this market has been prone to extremes, I don't want to spend too much of my cash before the market reaches maximum oversold.
- Truth be told, I was probably too eager to trade after catching the top on the S&P 500 last Tuesday. I have not been as patient as I should have been on subsequent trades.
- Trading is one of the most competitive businesses in the World with the smartest minds. There is a constant need to improve oneself.
- Another positive I forgot to mention on Microsoft. Everyone in Microsoft's industry has already warned on earnings. Expectations are probably very low.
- I still believe we are in a Bear Market that has a long way to go but I prefer to focus on that when the market is rallying and giving me an opportunity to sell. Not much has changed between now and a week ago except for the price of the S&P 500.
- Microsoft trades at 8 times earnings excluding net cash. This is at a steep discount to the rest of the market despite their near monopoly position.
- Free cash flow is greater than earnings. For most companies free cash flow is lower than earnings as companies are forced to reinvest much of their earnings into their business. Microsoft actually collects and keeps more cash than it earns.
- Microsoft is able to buy back its own shares. I believe this puts a floor under the stock. Most other companies are not even in a position to consider a buyback. Some would even like to issue more stock.
- Microsoft still has a virtual monopoly. Apple has a niche at the high end of the market but most people are not willing to pay up. Linux has been floated as a threat for over a decade. Linux with support is not much cheaper than Windows and is generally not worth the hassle for all but the biggest tech geeks (Please note: I am one of those geeks that ran Linux on my computer).
- No matter how bad the economy gets people will need to replace computers. A computer is a necessity in this world, not a luxury. Yes, the replacement cycle will get longer but it will not disappear.
- Microsoft can cut a lot of fat. Microsoft has a number of divisions that continue to bleed cash. Shutting some of them down could combat a further decrease in revenue.
- Microsoft does not give out stock options. They give stock rewards which are fully deducted from earnings. Most tech companies still report pro forma results that exclude stock options. Often those options make up a good chunk of earnings.
- Microsoft is no longer interested in buying Yahoo outright. Combining search makes sense as they are both spending tremendous amounts of money on search technology that is inferior to Google's. At a minimum they could get rid of the redundant costs. At best, maybe two heads will be better than one.
- The Microsoft business division is making up more of their revenue. Aside from their Office domination they are low cost providers in networking and database technology.
- Fred Hickey of the High Tech Strategist likes them. He is the best technology analyst out there and not prone to bullishness.
- I am amazed that anyone trades on the government retail sales data. Last week all the auto companies and retailers already reported December sales. I am not sure what value the government data provides. It is stale.
- This week is options expiration so some of the activity we are seeing might be expiration related. On the ISE we saw the most call buying in years during December and this might be the markets way of punishing those call buyers for getting over excited.
- For the most part I am unwilling to own individual stocks. We have not faced a period like this in decades and I am unsure how individual companies earnings will hold up. Once earnings are reported there is a chance that I would be willing to own individual companies.
- Technology stocks continue to hold up best and RIMM is actually up on the day.
- Where are all the Bulls from a few days ago?
- It looks like the market took out my stop and is now rallying. It could be worse. I could be married to this woman.
- The fact that the financial stocks were able to rally back after a sizable down opening is a plus. They have been leading the market lower and the reversal is notable.
- Why am I being so cautious? Because I still believe that any rally is in the context of a bigger Bear Market. The downside to being wrong is enormous.
- Sentiment has corrected from its extreme at the beginning of the year. That is a plus for the market.
- While it seemed like a slow day, volume did pick up a little today. The real pickup should be when earnings season begins.
- Have a good night.
- First and foremost Ben Bernanke does not have the authority to guarantee assets. This is a democracy and he was never given such authority.
- Ben Bernanke is part of the problem. He was the chief advocate of easy money and 1% interest rates in 2003. His dropping money from helicopters speech earned him the nickname "Helicopter Ben". As chief of the Federal Reserve he allowed lending standards to reach lows never seen before.
- Too much debt is what got us into this mess. Bernanke's concoctions are all aimed at increasing debt with the side effect of distorting markets. Other than some very short term stimulus into the economy I don't understand how more debt solves the problem. It actually exacerbates the problem and makes the eventual resolution messier.
- Allowing bad actors to fail assures they will not be around in the next cycle to make more bad loans. Good actors are rewarded by not having to compete against banks making uneconomic loans. Under Bernanke failure is not an option.
- Bernanke did not see the current crisis coming. Up until a few months ago he said it was contained. Why anyone believes he has the foresight to be able to get us out of this crisis is beyond me. It is a shame he is not leaving with the rest of the Bush economic team next week.
- Gold is due for some upside relief after the selloff of the past few days. However, the contrarian in me feels uncomfortable owning gold because it seems to be the only asset where there is unanimous agreement that it is a buy.
- If the government is printing money does it matter that there is unanimous bullishness on gold?
- The financial stocks are lower in the pre-market. Thus far the market has not been able to shake off the weaker financial stocks.
- Speaking of a contrarian indicator the Marketwatch.com headline this morning is "Losses Have Further To Run". How do they know?
- Why am I still tempted to get long? Note to self: Erring on the side of caution and not trading unless everything lines up has been my best trade all year.
- According to Trim Tabs, flows into US mutual funds in the week ended Wednesday was 5.8 billion dollars. That helps partially explain the strength of the Santa Claus Rally.
- With stocks, gold, oil and commodities down it seems that deflation is beating inflation today.
- Did Obama ask Bush to request the TARP money because he knows something is wrong?
- With Citigroup and Bank of America down over 10%, I am getting a feeling of dejavu to November. Except with lighter volume and slower action.
- Earnings season is my Playoffs. Sad but true.
- An article in today's Wall Street Journal on retail bankruptcies mentions GE as one of the largest lenders to retailers.
- The next time your wife gets moody, remember that you could be married to this woman. From the New York Times:
One mother in TriBeCa, who is married, at least for now, to a Wall Street executive, put it rather bluntly: “My job was to run the household and the children’s lives,” she said. “His job is to provide us with a nice lifestyle.” But his bonus has disappeared, and his annual pay has dropped to $150,000 from $800,000 a year. “Let me just say this,” she said, “I’m still doing my job.”
- Health care was supposed to be resistant to a recession but in the past few days medical device makers like Hologic, Hansen Medical and Intuitive Surgical have reported slowdowns.
- The weak financial stocks and the the strength in the Yen versus the Euro might be telling us that something is amiss.
- I am getting closer to pulling the trigger on some long exposure for a trade. But the fetal position seems much more comfortable for now.
- I spent some time shopping this weekend. The number of stores shut down or going out of business was eye popping. Some stores were selling off the fixtures.
- Oil is much lower on news that Russia has resumed shipments of natural gas to Europe.
- S&P 888 is a technical level I have been hearing a lot about. It is the 50 day moving average. I have found that when everyone is talking about a technical level it rarely works.
"The recency effect, in psychology, is a cognitive bias that results from disproportionate salience of recent stimuli or observations. People tend to recall items that were at the end on a list rather than items that were in the middle on a list. For example, if a driver sees an equal total number of red cars as blue cars during a long journey, but there happens to be a glut of red cars at the end of the journey, he or she is likely to conclude that there were more red cars than blue cars throughout the drive."
The recency effect (or recency bias) goes a long way in explaining why Wall Street strategists claim the stock market is so cheap. In 1993 the S&P 500 first traded above 20 times earnings and peaked in 1999 at 42 times earnings. Ever since then the P/E of the S&P 500 has been coming down. When looking at valuations within this context the market does seem very cheap. However, when looking at a broader view of history the market does not seem as cheap. Prior to the late nineties bubble period the S&P 500 rarely traded above 20 times earnings. Further, previous Bear Markets ended with the S&P 500 at 11 times earnings on average.
The recency effect also helps to explain why investors were so bullish last week. The market had been going higher for the past month and so they concluded that the market would continue higher. As human beings we are hard wired to be subject to certain biases. The key is to recognize the effect it has on our decisions. I am certain that when the ultimate Bear Market bottom arrives, few will want to invest because all their investment experiences in recent memory will have been negative.
Focusing on the market at hand, I continue to believe that we are experiencing a Bear Market rally. The market had become maximum overbought on Tuesday and sentiment had become extreme. Since then the S&P 500 has declined by 6% from the top. This has gone a long way in bringing sentiment back to a lower level. However, the market remains overbought.
It appears that this Bear Market rally is in a corrective phase but is not yet over. The reason is that the overbought reading of the past week was extreme. Extreme overbought readings don't usually end rallies. I am not certain why extreme overbought readings have bullish medium term implications but I suspect that it is because if a market can get so overbought it means the market has underlying strength. In addition, we are seeing some positive divergences. The S&P 500 closed Friday at 890. The last time the S&P 500 closed at 890 was December 30. On December 30 the NYSE saw 31 stocks at new 52 week lows while on Friday the NYSE saw only 7 new lows. On December 30 the Nasdaq closed at 1550 while on Friday the Nasdaq closed at 1571. Nasdaq outperformance is another positive divergence.
Relationships that have held for decades have failed recently, so I am hesitant to rely on patterns that have worked in the past. If I do decide to try to catch more of this Bear Market rally it will be in very small size. In the next few weeks I expect to see another rally attempt. However, I expect the rally to ultimately fail and see fresh lows.
- It seems the late day buying yesterday afternoon were people looking to buy ahead of the bad news jobs report. You know trading has become tough when you have to fade the faders.
- Am I picking up pennies in front of a bulldozer by trying to catch these Bear Market rallies?
- On that note I took a few pennies gain on my Microsoft position and will reassess over the weekend.
- Cisco was down based on comments they made at a presentation this morning. Cisco has been releasing a steady stream of bad news the past few weeks and the stock has shrugged it off and gone higher. Is this a change in character?
Companies are announcing layoffs on a daily basis that will show up in future employment reports. This report does not change the fact that the economic outlook is deteriorating. If investors get too excited about this report I will likely flatten out into the weekend.
- Yesterday was an excellent example of how important expectations are. Retailers whose same store sales were down over 20% and well below expectations ended the day with minor losses. Wal Mart, the Wall Street darling, had positive same store sales but missed estimates slightly and was down 8%. The reason is that everyone was bracing for bad news from the rest of the retailers but not from Wal Mart.
- While sentiment is on the high side, I don't believe investor's portfolios reflect their newfound bullishness. After the huge liquidations, there has not been enough time for large investors to rebuild positions.
- How confident am I of that statement? Not very, judging by my small position size.
- After Intel, Dell and Lenovo warned, is there anyone who will be surprised when Microsoft warns?
I am headed out to a meeting and will take my small Microsoft position with me. The fundamentals remain awful but that is always the case during Bear Market rallies. Have a good night.
- One of my concerns about this market was that it seemed everyone was bullish. Yesterday and thus far today we have seen heavy put buying, partly alleviating my concern.
- The dollar is extremely weak today. The disaster scenario is a run on the dollar. While it is an extremely unlikely event, it is worth monitoring.
- Wal Mart might be due for a technical bounce after its beating today but the stock is still not cheap. It trades at 15 times 2009 estimates, which are now in danger. Its not terribly expensive either.
- Tomorrow morning brings the employment report. How big of a number would it take to surprise people?
- Abercrombie & Fitch December same store sales down 24%
- Williams Sonoma 8 week sales down 24%
- Wal Mart misses and warns
- American Eagle December sales down 17%
- Gap same store sales down 14%
Unfortunately, I am not blind to the fundamentals and they continue to erode. Relationships that have held for decades are breaking down and once in a lifetime events occur regularly. While I am mindful of the positive technical setup, I am also weary of the current environment. This means sitting on my hands until things become clearer.
China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.
The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.
While I believe that we are experiencing a Bear Market rally, I think that it could potentially go further. The most troubling aspect of this rally is that it seems that everyone is bullish. It is hard to find anyone that is bearish. In addition, the fundamentals continue to deteriorate. At this point I am agnostic as to the near term direction of the market. Have a good night.
- It is impressive that AAPL and MSFT are only down a couple of percent even though the Intel news is certainly bad for them. The stocks are cheap and it is possible that the bad news is already priced in.
- Bloomberg reported that stock buybacks were down more than 50% year over year for 2008. However, buybacks for technology companies were actually flat. That is why I continue to prefer technology over S&P 500 names. They carry little debt and generate solid free cash.
- Retailers report same store sales tomorrow. The only question is how ugly they will be.
- Bloomberg is reporting that a government bond auction in Germany failed today. What if that happens here? How will we fund all our bailouts and stimulus plans?
- Lyondell Chemical declared bankruptcy yesterday defaulting on 19 billion dollars in debt. This is probably the tip of the iceberg in bankruptcies from LBOs gone bad.
- The new Investors Intelligence survey has Bulls at 41.8% and Bears at 34.1%. While sentiment has clearly turned positive, I am not sure that there has been enough time for investors to build enough positions to match their newfound bullishness.
- Alcoa announced more job cuts and ADP is predicting 693,000 job losses this month. Eventually bad news will matter.
- It appears that Manhattan apartment prices are not immune do the downturn. From the Wall Street Journal:
But the average prices of units that are under contract but haven't yet closed declined 20% since August 2008, a rapid reversal, according to Miller Samuel Real Estate Appraisers ...
- Let me get this straight. People are bullish because the government is going to borrow another 750 billion dollars and spend it? That is the solution to what is ailing us?
- Is the solution to a debt bubble more debt? Sounds similar to a college cure for a hangover.
- I know now is not the right time to take our medicine, but doesn't it get harder the further we let this go?
- I am following the 14 billion dollar Dow Chemical - Rohm and Haas deal very closely. A closing would have short-term positive market implications while a break of the deal would be a negative. The lenders and Dow Chemical should be fighting tooth and nail to get out of the deal.
- Isn't it ironic that Lyondell-Basell, another ill fated chemical takeover, is considering bankruptcy just as the Dow-Rohm deal is set to close? Do you think the irony is lost on the management of Dow?
- When will bad news matter again?
Currently, it is increasingly clear that investors are bullish. Whether looking at the media, option indicators or surveys it seems that the consensus is that we are going up. However, this might not mean that the current rally is over. In the past few months there have been numerous liquidations, as investors sold stocks in panic. It is hard to believe that in the past month investors have had enough time to rebuild all their positions. That may take some time and coincides with the idea that this rally will last longer.
In the past year whenever the 30 Day moving average of the Advance/Decline line has become maximum overbought the market has fallen apart. Since 30 trading days ago was the market low the market will be maximum overbought at the end of the day today. There is no law saying that the market has to go down when it is maximum overbought but in the past year it has. In a Bull Market the market gets overbought and stays overbought.
Given the very high overbought reading there is a good chance that the market will need to retest this reading in the following weeks, making a complete collapse in the market unlikely before that retest. That means I will be pretty quick to cover my short position if we get a pullback. On the retest I would likely reinitiate my short and hold it for longer.
- While I could see this rally lasting through the majority of the first quarter I believe it will end in tears. However, timing is everything.
- JNK, the junk bond ETF, trades at an 8% premium to NAV. People are now paying to take risk.
- A major roadblock to this rally will be issuance of new stock by over leveraged companies. This is likely to happen once companies report earnings.
- I am tempted to short this opening but am going to take a deep breath and watch for now. I will be report back after the open.
U.S. retail store traffic fell last week as steeper discounts failed to lure shoppers before and after Christmas, prompting a research firm to lower its forecasts and predict the worst holiday-shopping season it has seen. Holiday sales probably decreased 2.3 percent and traffic dropped 16 percent during November and December, ShopperTrak RCT Corp. estimated today.
Manufacturing in the U.S. shrank in December at the fastest pace in almost three decades as the recession deepened and spread overseas. The Institute for Supply Management’s factory index fell to 32.4, below forecasts and the lowest level since 1980, from 36.2 the prior month, the Tempe, Arizona-based private group said today.
Meanwhile, the number of people collecting benefits in the week ended Dec. 20 rose 140,000 to hit 4.51 million -- the loftiest level since December 1982. The four-week average of continuing claims also increased, growing by 103,750 to 4.42 million -- also the highest since December 1982.
The news on the economy over the past month is decidedly worse. At the same time the S&P has rallied by 25% off of its lows. One would think that the combination of higher prices and bad news would give investors pause. If only investors were rational. On the contrary, as stocks are becoming more expensive investors are getting more bullish.
A lot of cash was raised in the past few months so there is fuel for a further rally. Bear Market rallies usually go further than most believe possible. However, there are some cautionary signals beginning to emerge. The seasonally strong period will be over by Tuesday. Option ratios are showing call buying not seen in years and the market will be maximum long term overbought by Wednesday.
I have written at length about the fair value value of the S&P 500. However, I have not spent much time writing about where the S&P 500 has traded during previous secular Bear Markets. In the last Secular Bear Market the S&P 500 trade at a P/E of 7.3 in 1982. It took until 1986 for the S&P 500 to trade above 11 times earnings. The S&P 500 spent the entire time between 1974 and 1985 trading at under 12 times earnings. During the prior secular Bear Market, which started in 1929, the S&P 500 spent 9 years trading at less than 12 times earnings (although not consecutively).
2008 S&P 500 earnings are expected to be $49, while 2009 estimates are for $42. If the S&P 500 would trade at previous Bear Market valuations the S&P 500 could potentially drop by more than half. I don't believe we will see such extreme valuations during this Bear Market. My point is that analysts, who were surprised by this Bear Market and claim this market is cheap, have a very narrow view of history. They focus on the past two decades, where we had bubble after bubble.Taking a longer view, the surprise would be if this Bear Market were over.
From this weeks Barron's "The Trader" column:
And it's quite a cache of capital. The amount of money stashed in money-market mutual funds had surpassed that in stock mutual funds as of the end of November, according to the Investment Company Institute, a national association of investment companies. In contrast, money-market funds were just 48% of stock funds when 2008 began. "If all the money currently sitting in U.S. money-market funds left and went into buying shares of the Standard & Poor's 500 index, it would absorb 42%" of that benchmark's market value -- the highest in at least 25 years, says Jason Goepfert of sentimentrader.com.This paragraph is very misleading for a number of reasons. It starts off by saying that a year ago money market accounts were 48% the size of mutual funds while now money market accounts exceed 100% the size of mutual funds. The implication is that cash hoards have doubled. However, the majority of the difference is because the stock market has gone down. Not because the amount of money in money market accounts has gone up. Lets assume that mutual funds matched stock market performance and were down 40% this year (including fees) and that money market accounts earned some interest. Without adding a dollar to money market accounts, money market accounts would be worth over 80% of mutual funds. The growth in actual cash is probably less than 20%.
Another flaw in this argument is the starting point. The beginning of 2008 was the end of a five year Bull Market. At the end of a Bull market cash levels are probably too low. Comparing to a time period where cash levels are too low is misleading.
The article then goes on to say that the ratio of money market accounts to the S&P is the highest in at least 25 years. However, money market accounts did not gain widespread acceptance until the late nineties so taking the comparison back 25 years is useless. Additionally, it is possible that the amount of cash people hold is also tied to inflation. While the S&P ended November in the same place it was eleven years ago, inflation over the past eleven years was probably about 40%. Therefore, it is possible that cash levels are justifiably higher.
I don't disagree that there is a lot of cash on the sidelines and that if this rally continues it will likely be because sidelined money gets sucked in. However, the statistics presented sound more impressive than they really are and don't say much. A more useful study would have shown that the statistics presented are somehow correlated to future returns of the stock market. Unfortunately, money market accounts have probably not been popular for long enough to make the study statistically significant.
- As the market is getting more stretched, I am getting tempted to take a swipe on the short side. Sooner or later the fundamentals are going to get in the way of the party. I will likely wait until the seasonally strong period passes.
- In hindsight, was there a way to see this rally coming? When I look back the most obvious signal that this rally was forthcoming was the large overbought reading we had a few weeks back. At the time I wrote the following:
"The market currently has a positive technical setup. We had a major overbought reading a week ago. The short term implications of an overbought reading are negative. However, a very high overbought reading has positive medium term implications, especially when it comes after a large decline. I believe the reason for this is that after such a long decline the fact that the market can get so overbought shows that the selling pressure is gone."
- The market played out according to the script. We had a pullback after the large overbought reading and we have re-rallied. Unfortunately I did not take my own advice. While there is no point of crying over spilled milk, I will take it as a lesson.
- Have a great weekend.
- Why does the market trade like everyone is still on vacation?
- Much of the action of the past few days has been tax related, portfolio rebalancing and mark ups. I expect the next couple of days to be similar, so I would not make too much of the action which ever way the market goes.
- GMAC is giving out 0% financing to people with credit scores as low as 620. The head of GMAC commented that 620 is not subprime. Your hard earned tax dollars at work.
- Investors enthusiasm continues with call buying again at an extreme.
- One of the headwinds I envision for the market is that companies will issue more stock in order to delever if prices go higher. The good news is that prices need to go higher before that occurs.
- The only way that this market is a bargain is if everything returns to normal. I don't believe in the tooth fairy and I don't believe that bailing everyone out makes everything normal.
- The strange thing about the stock market is that the higher it goes the more bullish people get. With a lot of money on the sidelines, that is the bull case.
- I will be moving today and Monday so posting will be sparse.
- The seasonally strong "Santa Claus Rally" period lasts through Monday.
- The market will be long term overbought by Wednesday and the put call ratios will likely roll over as well. These conditions should act as a headwind to the market.
- Apple was not able to gain any traction while the market rallied hard to close out the year. Either Steve Jobs is really sick this time or the stock is very weak.
- The biggest positive for this market is that credit rallied through the end of December.