Did He Really Say That

"It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose,"
-Lou Jiwei, the chairman of China's $298 billion sovereign wealth fund from Reuters
It is very surprising to hear that the man in charge of investing the wealth of the world's largest country sounds like a day trading punter. Is it me or should he get fired for this statement? It seems that Mr. Jiwei is drinking the kool aid that the investment bankers sold him and buying whatever garbage they throw at him.

China Investment Corp. Chairman Lou Jiwei, speaking on the sidelines of an economics conference in Beijing on Saturday, said investment in CIC's global portfolio for "one month this year equaled that of the whole last year." He didn't clarify whether he was referring to a specific month or an average.
-from the Wall Street Journal

I guess we know who has been buying lately. I suspect they are done buying for now, otherwise he would not be broadcasting his intentions. However, judging by what comes out of his mouth its a bit of a wildcard.

Strange Happenings

There are some strange things occurring today that don't usually happen:
  • Commodities are weak yet so is the dollar.
  • Stocks are weak yet so are treasuries.
The negatives are:
  • Breadth is greater than 4 to 1 negative.
  • Too much call buying for a down day
The positives are:
  • Selected financials are hanging tough.
  • There were some part cash M&A deals announced this morning.
  • Its the last day of the month so the powers that be might not want to let this get out of hand.

Sideways Movement

I believe the market will turn lower during the month of September. However, I am not sure if the turn will come before or after Labor day. As such I set up my portfolio to benefit from sideways movement. Half my short exposure is unhedged, but the other half is via a short call structure. I will make money in a sideways and down environment.

Baby Steps

I am using this weakness to sell SPY Puts against 1/4 of my short position. I remain very short.

This Isn't Supposed To Happen

Good Morning. The large plunge in Chinese stocks is taking its toll on world markets. Traders and investors are not well positioned for a move lower. Rydex traders were holding aggressive long positions going into the weekend and we saw heavy call buying late last week.

While investors are not well positioned for this move lower, they do have seasonality on their side. Today is the final day of the month and the days before a holiday weekend have an upward bias.

Biderman Still Bearish

Charles Biderman of Trim Tabs has been very bearish and very wrong for a while now. He still has a good long term track record and the arguments he makes have merit.

Friday Was Ugly

The stats on Friday's trading were ugly even though the market was only down slightly. Maybe it doesn't mean much because of the light holiday trading but here's a list of why Friday looked awful.
  • The S&P 500 made a new high for the move Friday morning, even as new 52 week highs continue to contract. Friday saw 72 new 52 week highs while on August 3, with the S&P 500 40 points lower there were 177 new 52 week highs. Each time the market has been making a new high the new 52 week highs have been contracting. The move is becoming less broad based as fewer and fewer stocks make up the gains. This is known as an internal divergence.
  • Rydex traders covered shorts and added to long positions and are now positioned at a bullish extreme. Despite that the market fell.
  • The put call ratios showed heavy call buying and confirmed the Rydex data.
  • The most speculative stocks continue to fly in the face of reason. This typically occurs closer to the end of moves.
  • Six weeks ago the market flew on Intel's good news. Friday the market ended down despite Intel's good news.
Not much has mattered recently and the coming week will be seasonally strong both because it is the turn of the month and the week before a holiday. However, the list of warning signs is growing longer and a turn can happen at any moment.

I'll Have What He's Having

Lehman Brothers stock was up over 200% at one point today and sports a market cap of over $100 million. How long before Enron rises from the dead? The signs of froth and speculation are plain for everyone to see. If you are playing along make sure you get a chair before the music stops. Have a great weekend.

Market leaders

While still trading positive, recent market leaders Citigroup, AIG and Bank of America are trading at their lows for the day. I can't believe I just called those stocks market leaders.What does that tell you about the market?

A Note On Citigroup

While Citigroup seems cheap to some beacuse it is $5, I want to remind readers that after the government and sovereign wealth funds receive their shares there will be close to 25 billion shares outstanding. The current market cap is around $125 billion.

At its peak Citigroup was a $250 billion company and much of those earnings were a result of a credit bubble and off balance sheet games. Right now nobody really knows what Citigroup is worth.

The only positive thing Citigroup stock has going for it is that the current float is only $60 billion, because the US government and sovereign wealth funds have not received their shares. While it is debatable how quickly the US government will sell their shares, the sovereign wealth funds will likely take their money and run as soon as they receive their shares. At that point it will likely be game over.

Whats A Bear To Do

Good Morning. I have traded through the internet and real estate bubbles and thought I saw it all. In many ways the action of the past few weeks is even more amazing. In both bubbles the majority of people who bought into it actually believed in what they were doing. In the case of bankrupt companies like FNM, FRE and AIG people know that they are playing a shell game. They are buying any low priced stock not because they believe in a story but because they want to sell it to someone else at a higher price. I believe that without a good story there are only so many people that will buy in and we are reaching that limit.

The Money Quote

In a WSJ article the CEO of AIG is quoted as saying, "I've told the government that if we have to sell them right now [units of the company], we may not be able to pay back what we owe."

If I understand that correctly it means that AIG is not worth what it owes the government. From the horse's mouth. Can someone do the math for me and tell me what the stock is worth?

Another Day, Another Panic

We are once again witnessing a buying frenzy as everyone is searching for the greater fool, which as of now appears to be me. I have seen enough and am calling it a day early. Have a good night.

The US Peso

The reason for the rally seems to be the fact that the dollar completely fell out of bed. I pointed the weakness out earlier in the day.

Two Observations

  • Isn't it amazing that the same people who were certain all banks were going to zero six months ago are now so confident that all banks are going to the moon.
  • A lot of people are buying companies they know are worth nothing but planning to sell it to someone else for a higher price (FNM, FRE). Haven't we seen this movie before? Does anyone really believe there will be a surprise ending?

The Cash 4 Clunkers Rally

Cash for Clunkers gave car sales a boost in July and August but Edmunds is reporting that car buying intentions for September are 11% below June levels. Car sales now appear to be weaker than they were before Cash for Clunkers. What do you suppose will happen to home sales after the tax credit runs out for first time home buyers?

Pharma Outperforming Again

The recent performance in the pharmaceutical group is pretty amazing. If the market is recovering because of the economy than this group should be used as a source of funds. The fact that the stocks are performing so well indicate an underlying strength. I have modest positions in the group and will aggressively add during a market correction.

The Pluses and Minuses

  • The biggest plus this market has is the slightly weaker dollar. The dollar has led this market by the nose.
  • It is followed a close second by the relative strength in the financials.
  • Call buying is a negative as the market is heading lower despite it.
  • Breadth is more than three to one negative which does not bode well either.
  • Oil is once again headed in the wrong direction for the bulls.

A Question For The Bulls

How many people are positioned bullishly right now that don't really believe in this rally and the durability of the recovery but are just going with the flow?

1022 Here We Come

It looks like 1022 on the S&P 500 will be tested for a fourth time. The more a level is tested the more likely it will be broken.

The Real Gurus

There are many gurus out there who caught the market top or bottom. You have broken clocks like Nouriel Roubini and Abby Joseph Cohen with the former catching the top and the latter catching the bottom. However, I can only think of a handful of gurus that caught both. Doug Kass , Marc Faber and Jeremy Grantham. All three now believe the market is headed for a correction at minimum.

The Rubberband Market

Good Morning. The market remains stretched by almost any measure. Sentiment is at levels seen at market highs and cash levels of money managers are at the lowest level since the market peak in 2007. Valuation is very full as stocks trade 20% above fair value based on normalized profit margins and the average P/E since WWII.

I have been wrong about this market as I began shorting at 980 on the S&P 500 and we are perched about 5% higher. While I have been able to trade around my position successfully and raise my cost basis a couple of percent, my position is far from comfortable.

Looking back I am not sure I would have done anything differently as the market is at extremes not seen in years. Nine out of ten times the market does not reach these types of extremes and all I could do is play the odds.

The market is even more stretched now and even more vulnerable to a serious correction than when I began my short campaign. The type of speculation that is occurring, exemplified by stocks like FNM, FRE and AIG is rarely rewarded. I believe in due time my patience will be rewarded.

We are approaching month end, which could possibly extend the rally a little further. As such I adjusted my positioning slightly to account for that possibility. I am as confident as ever that this market has some serious downside ahead.

Waiting for Godot

I was expecting the market to turn today but instead it basically flatlined. I now have to leave room open for the possibility that a turn might not happen until September. I left my core short position intact but switched the overage from long Puts to short Calls. This way I make money if we meander sideways until September and I could always get more aggressive come September. Have a good night.

Adjusted My Portfolio

On Friday, I doubled down on my short position via SPY Puts. While we have not gone very far, I thought we would turn by today but that does not seem to be happening. When one is long options time decay is an issue. As a result, I have sold the Puts and instead sold some naked calls. This is a less aggressive posture. My core short position remains unchanged.

Some Items On The Economy

I haven't spoken much lately about the economy because the market has taken on a life of its own and disconnected from all news. I am not so convinced that the economy is on the mend just because the numbers have been showing some improvement.

Last year stimulus checks were sent out and that gave the economy a bump but as soon as the money was spent the economy fell flat its face. Much of the improvement in the home sales numbers are because of the $8,000 tax break for first time buyers. Closings must occur by November 30 to qualify and applying for a loan can take some time so first time buyers are in a rush to close. I have verified that this is occurring with my contacts in the industry. As we get closer to November the home sales numbers will likely get even better. But what will happen after that?

The same goes for "Cash For Clunkers". Undoubtedly, it will give a boost to the industrial economy as dealers look to rebuild inventory. But what then? We are hearing news that hedge funds and brokers are hiring. Great, we will money shuffle our way out of this.

I don't deny that the rate of decline has slowed and that the data in the months to come will get better. If you give out money it will be spent but that does not make the economy healthy. I'm going to take this argument one step further and say that the market is overvalued even if the economy does have a cyclical recovery. Using normalized profit margins and the average P/E of the market over the past century the market is 20% overvalued.

1022 Is The Level

1022 on the S&P 500 seems to be an important level. It held Friday afternoon, Monday and again this morning. It seems a lot of bulls are leaning against that level. If it goes we could see a quick move down.

That Empty Feeling

For what its worth, after the spike up on the New Home Sales number I got an empty feeling in the pit of my stomach and thought that breakfast might end up on the keyboard. That is usually is a good sign that a trade is about to go my way.

No Bulls Here

The Investors Intelligence survey is out and shows the bulls at 51.6% and bears at 19.8%. That is the lowest number of bears since October 2007. It is laughable that some bulls are claiming that they are bullish because nobody believes in the rally.

Is The Top In

Good morning. The market has now rallied 20%+ in the past 6 weeks and 50%+ in less than six months. At the bottom nobody was comfortable owning stocks and now nobody is comfortable not owning stocks. In my experience the market does not exist to make people feel comfortable. It has been so easy to buy, but I suspect that the market will soon test the buyers convictions and yesterday may have marked the top.

This market is exhausted as it has gone up for over six straight weeks without a rest and is running on fumes. The action of the past two days where the market shoots up when frenzied buying hits the tape then gives it up by days end is a sign of that exhaustion. I believe we have embarked on a 10%-20% correction. Dip buyers beware.

Panic Attacks

The action of the past three days has been remarkable. We have gapped up all three days and we had bouts of panic buying on all three days. On Friday the panic buying lasted most of the day, while today and yesterday there were brief spurts in the morning. There are only so many people who could panic and only so many shorts to squeeze. I believe tomorrow will be interesting. Have a good night.

Great News, Bernanke Reappointed

Here are some of his greatest hits.

Daily Sentiment Indicator

The Daily Sentiment Indicator reached 88% bulls last week, a level not seen since October 2007. This coincides with the Merrill report showing that managers were sitting on the lowest levels of cash since that period as well.

Good News Is Great News For Bears

What I am about to say is counter intuitive and I am sure I will be told that I am only rationalizing my position. I believe all the "good news" this morning is just what this market needs to top out. It gets everyone all in and clears the way for a drop. The news is always worst at the bottom and best at the top.

Resistance Is Futile

Good Morning. The bears managed to hold their ground yesterday but at some point will need to start playing some offense. The bulls are starting the day off with a gap up fourth day in a row.

I have little doubt that this will not end well but the timing is the key. This seems like as good a time as any for the bears to make their move. We are headed into the seasonally weakest part of the year and the intermediate term indicators have rolled over. The cash for clunkers deal expired and the tax credit for first time home buyers is set to expire.

The only thing the bulls have is momentum, which is a very powerful force. However, momentum is fickle and can disappear at a moments notice.

Small Step For The Bears

While the bears only managed a slightly negative close, the bulls threw a lot at them with a buying frenzy in the morning. The financials have been leading the market and suffered a nasty reversal, while defensive sectors such as pharmaceuticals outperformed. While the bulls always seem to manage to pull something out of their sleeve, today's session should make the bears feel a little better. Have a good night.

Emotional Buying

The last time the buying felt as emotional as this morning was the Friday of the employment report. That eventually led to a 40 point pullback in the S&P 500. That doesn't mean history will repeat but it is definitely something to keep in mind.

At the time of the last dip the intermediate term indicators were still supporting this market while that is no longer the case. Like momentum, buying the dip works until it doesn't.


  • Its eerie that in nearly the same week that John Paulson is crowned "the next Warren Buffet", Eddie Lampert "the former next Warren Buffett" is called not that smart by Barrons.
  • Its eerie that after all the bubbles we have lived through and the destruction they have wrought to watch the speculation in stocks like FNM and FRE.
  • Its eerie to watch Ben Bernanke, the man who oversaw the largest debt bubble in history, declare victory while the seals clap.

Running Out Of Time

I want to point out that some financial stocks are starting to move in a vertical manner. Once stocks start moving in a vertical manner they either keep going up hard or start going down hard. Rarely do they just plateau. Keep your eyes peeled.

Peer Pressure

  • The pressure to buy into this market is enormous as its very difficult to argue with momentum. I would point out that we are up 20% in a straight line from the lows 6 weeks ago.
  • I have no facts to back the following statement up but the buying today feels very capitulatory.
  • Once again we are seeing call buying with reckless abandon.
  • FNM is up another 40% today. FRE is up another 20%. The more bankrupt, the better.
  • While all these are clear warning signs, there are few indications that we will turn today other than some strength in the dollar.

Both Sides

Good Morning. I will start out by highlighting the positives.
  • We are quickly approaching the turn of the month, which is the strongest part of the month.
  • The momentum is incredibly strong and rising prices lure more buyers and force shorts to cover. This self reinforcing process works until it doesn't.
  • In the shorter term the market is not overbought (because of the decline early last week).
The negatives
  • The intermediate term indicator (30 day moving average of NYSE advance/decline line) will rollover today. The market has historically had a tough time making headway when this occurs.
  • We had extreme readings on the put/call ratio late last week.
  • New 52 week highs are lagging the market.
  • We are headed into the seasonally weakest month of the year.
  • Anecdotally, the bulls are about as cocksure of themselves as I have ever seen.
  • Speculative stocks are gapping up and running every day. That type of throw caution to the wind attitude is seen a lot closer to tops than bottoms.

Looking Under The Hood Of Friday's Rally

I was updating my data when a couple of statistics from Friday's rally really stood out.
  • The S&P 500 closed Friday at 1026 and there were 96 new 52 week highs on the NYSE. On August 3 the S&P 500 closed at 1003 and there were 177 new 52 week highs. The S&P 500 climbed 20+ points and new highs contracted by over 40%. The stats are even more extreme for the Nasdaq.
  • The CBOE equity put/call ratio closed at .42. Granted, it was an option expiration but that is beyond extreme.

Magazine Cover Indicator?

What does it say about the state of sentiment that the lead article on the MarketWatch page is "Data to Drive Stocks Higher". How do they know?

Bubble 3.0

According to the Merrill Lynch fund manager survey, fund managers have gone from levels of record cash to pretty much all in. That is in large part why the market has been able to rally to such a degree. However, if the market is going to have additional upside it will need to find its fuel from another source. After all, one can't get much more invested than all in.

In the last bull market companies bought back their own shares by levering up and private equity firms were buying shares via LBOs. Now companies are delevering while private equity is actually trying to sell shares to the public. Recently, Dollar General and Dole Foods filed for IPOs. They were LBOd only a few years back. Expect more of that if these companies succeed.

It seems to me that the only group that is still somewhat cautious and has the cash to put to work are individual investors. If they jump into this market with both feet than the bubble can reinflate.

After the 1929 bubble and crash investors were risk averse for an entire generation. The current generation was burned twice, in the technology bubble and the housing/debt bubble. I have a hard time believing that they will get fooled again.

I have been wrong in the past. I didn't believe in 2003 that there would be a housing bubble so soon after the tech bubble. Not only was there one but it was the largest in history with many of the same investors suffering in both.

I believe that the American people have grown skeptical and will not be sold the same bill of goods again. Call me an optimist.


I was handed a beating today that I will not soon forget. That said, I have seen many rallies end on option expiration. I believe there is a good chance that this one will as well. As such, I added to my bearish bets today. I will try my best to relax this weekend but good luck to me. Have a great weekend.

Made My Bed

I have used the squeeze higher today to add my short positions after partially covering up into Monday's mess. My bets are laid down. This has morphed into a full on speculative frenzy. The risk/reward for owning stocks in this type of situation are very low as it usually ends badly. However, markets can remain irrational longer than I can remain solvent. That is why I laid my bets down via Puts. If this is one of the cases where the frenzy goes longer than anyone could imagine, I will still live to play another day.

Added To My Shorts

I added to my SPY short positions via the purchase of Puts. I also transferred my existing position to a long Put position, putting a limit on how much I could lose.

Lunatics Firmly In Control Of The Assylum

I don't know why I still watch the news because nothing really matters anymore. Companies are cheap based on "normalized" earnings. No news can disprove that because "normalized" earnings are not something tangible. They are like a nice fantasy that nobody can take away from you. Companies don't report changes to their "normalized" earnings.

So when a negative news report comes out about how Americans are losing jobs, losing their houses and municipalities are going bankrupt, just tell them that doesn't change "normalized" earnings. Then go out and buy your favorite bankrupt company like AIG, Fannie Mae, Freddie Mac or even GM. You'll be laughing all the way to the bank.

Its A Day Traders Market

Good Morning. The love affair with stocks continues this morning, with the market set to gap up once again. Today is option expiration and I have found it nearly impossible to game days like today. I laid out a number of reasons why I believe that stocks should turn next week. I just hope I don't get squeezed too badly between now and then.

Yesterday, I met with my friend Rich (we'll call him that for the purpose of this story). Rich is a self made man, a real American success story with an expensive stock market habit. He got caught owning a lot of stocks on the way down. Then he got caught in a bunch of the double short ETFs as the market started its ascent in March.

The last time I saw Rich he was asking me for advice and saying that as soon as the market bounces a little more he was getting out. He had enough of the market. It was rigged and he wanted no part of it.

I met with Rich yesterday and he was giving me advice on how easy it was to make money in the market. Just buy Bank of America or whatever other stock has a minor dip and sell it an hour later. Or better yet just hold onto it for a year. He even pulled out his confirms to show me how he did it.

It seems that everyone from professionals to day traders are wildly bullish. This never ends well but markets can stay irrational for longer than I could stay sane.

Over and Out

I have meetings for the remainder of the day. Have a good night.

One Last, Last Thing About The Survey

In regard to the Merrill Lynch survey, the media has chosen to focus on the level of optimism of fund managers. I focused on the levels of cash and equity allocations rather than how optimistic mangers said they were. In my book what people are doing is more important than what they are saying. What they are doing is much more comparable to the top in 2007 than 2003.

More On the Merrill Lynch Fund Manager Survey

The reason many are pointing to the Merrill Lynch survey as a positive is because the level of optimism is equal to that of 2003 and that was the beginning of a bull market. I would counter that by saying:
  • The survey came out in August 2003 which was a short term peak.
  • In 2003 cash balances were 3.9% and equity allocations were 22%. Today, cash balances are 3.5% and equity allocations are 34%. There is a lot less dry powder today than there was back then.
  • In 2003 investors kicked off the bull market but passed the torch onto corporations. There were record buybacks and LBO's fueled by a debt bubble. Today, companies are actually selling shares into the market.
  • Back then the economy recovered on the back of a debt and housing bubble. Today, there is no bubble to inflate the economy while the structural imbalances still exist.

More Warning Signs

  • Here is a link to the raw data from the Merrill Lynch fund manager survey I referenced earlier.
  • Barclay's research (formerly Lehman Brothers) put out a piece of research saying, "History suggest that trends established during periods of low trading volumes have swiftly petered out once volumes picked up. In a similar vane, we believe that the current summer jitters may not necessarily give way to a sell off in September."
  • That makes two brokerage firms putting out data suggesting that the market is likely in need of a correction (at minimum) and both saying this time is different. That should send a shiver down anyone's spine who has been doing this for a while.
  • There are more index calls than puts trading today on the CBOE. That has usually been a short term warning sign. However, with expiration tomorrow the signal might not be as strong.
  • I am trying to fight off boredom lest I do anything stupid before expiration.

A Positive Development For The Bears

People might have become too bearish too quickly during the recent drop, which is likely the reason we had this vicious bounce back. My sense is that sentiment has morphed back into bullishness which clears the way for eventual downside.


I covered a bunch of shorts into Monday's drop. I don't plan on putting them out again until expiration. I did hold onto a core short position, should the market turn before then. There is not much evidence pointing to a turn today, other than the dollar being very slightly stronger and commodities a little weak.

The Merril Lynch Fund Manager Survey

Merrill Lynch came out with their fund manager survey yesterday. There were 2 items that stuck out.
  • The first was that cash levels were back to July 2007 levels at 3.5%. July 2007 was the internal high for the previous bull market even though a marginal new high was made in October with divergences. There is not much lower to go from those cash allocations even if fund managers get more optimistic.
  • There were the highest equity allocations since October 2007 which was the actual bull market high.
The conclusion that Merrill Lynch came to was to buy dips. I, on the other hand, come to a different conclusion.


In the chart I posted earlier there were two similar peaks to the current one. In one instance the market turned straight down. In the other instance the market went sideways for two weeks before resuming its rise.

Reaching Overbought

Good Morning. The market is now getting overbought on a longer term basis. Below is a chart of the 30 day moving average of the NYSE Advancers - Decliners.

This chart will likely top out sometime by option expiration. The reason being that we will start dropping large readings from the beginning of this rally starting Monday. It will take even larger readings to keep this chart moving up. These are the readings we will be dropping over the coming days.

Today and tomorrow we will be dropping neutral readings (674, -94) so it is possible for the chart to continue higher or for it to roll over. But by Monday we will start dropping the readings highlighted in green and the chart will have a difficult time moving higher.

Readers will recall that I posted a similar chart a few weeks back that showed the market was overbought on a shorter term basis. The market worked off the overbought reading by going sideways for a week and then resuming its rise. I suppose this overbought reading can be worked off by going sideways as well, but higher prices will be a challenge.

Another factor pointing to next week as the turning point is option expiration. Trends tend to persist into option expiration and reverse shortly thereafter.

I Couldn't Stay Away

After a much needed midday trip to the gym I am back at my desk taking a fresh look at the market. The thing that jumped out at me is that Bank of America and the financials are lower even though the market is higher. These have been the major momentum stocks recently and might be yet another sign that the market is running out of steam.

Maximum Frustration

This market has me frustrated to the max. I am headed out early for the day to blow off some steam. The intermediate term indicators are set to roll over some time between the close today and option expiration. The wind will soon be at the bears back. Have a good night.

Tops Are Tricky

I still believe the market has topped out, today's surge not withstanding. Tops are tricky and the market might want to shake out the Johnny Come Lately shorts. Market bottoms are a lot quicker but tops can take some time to form.

Pharma Outperforming

The pharmaceutical sector is showing very nice outperformance. I believe it is the cheapest sector in the S&P 500 and is set to outperform over the coming years. I have previously laid out my views on the sector. I plan on bulking up on pharmaceutical stocks during the coming correction.

The fact that pharmaceuticals are the best performing sector in the S&P 500 today does not bode well for the market.

Bounce Showing Fatigue

  • The dollar and commodities are once again positives for stocks.
  • Market breadth is negative with more than 3 stocks declining for every 2 advancing.
  • The ISE is showing heavy call buying but the CBOE is showing the opposite.
  • If one believes that the trend has turned down than this counter trend rally is running out of time. In addition, the bounce is showing signs of fatigue. Buckle up.

Sold Pfizer

I sold the shares of Pfizer I bought on Monday for a small profit. This makes me shorter in that I decreased my long positions.

Buffet's Wisdom

Warren Buffett has an excellent op-ed piece in today's New York Times.

Not So Special Assessment

Banks failures have become common and the FDIC has been draining its reserves in order to cover the losses. There was only $13 billion left in the FDIC's reserve as of March 31. The FDIC will need to charge a "special assessment" to the surviving banks in order to cover its losses on the failing ones. The headline in this weeks American Banker says it all, "New Special Assessment Now Seen As Inevitable". These "special" assessments will not be so special in the future and will become quite common. This will serve as a drain on banks' earnings for many quarters to come.

A Developing Pattern

Good Morning. After a bit of a short squeeze into the close yesterday, the market has given up most of its gains overnight. It seems that a pattern is developing. That is the third time in the past week that a late day short squeeze has led to a morning sell off. We had a short squeeze late Thursday that led to the Friday sell off. Late Friday we had a short squeeze that led to Monday's sell off.

Hewlett Packard "beat the number" yesterday but the stock is off 3% anyway. Lowe's has been beaten mercilessly since it missed its estimates. Earlier in earnings season companies could do no wrong as investors looked for any reason to take stocks up. It seems there is a change of character.

How Long Does This Bounce Have

We had a reflex bounce today after a fairly swift move down. I believe we can go either way tomorrow, but not much further after that. I would likely use a rally tomorrow as an opportunity to add to my short positions. Have a good night.

Why I Dislike The Financials

  • Jim Cramer looks like he cant breathe and that his head will explode when he speaks about how much he loves the financials. That is usually a pretty good warning sign that a move has gone too far.
  • Wall Street analysts are absolutely in love with the sector after recommending selling at a fraction of the price.
  • Why does the FDIC have to take such huge losses on banks that it takes over? Because the asset values that the banks are assigning are complete garbage.
  • Money managers are heavily overweight the sector. It is hard to get more overweight than they already are.
I am not shorting the sector quite yet, but I have no desire to buy.

Still Looking Good

While I believe we are at the point that rallies should be sold, I would be careful about shorting this one too quickly. The dollar is still weakening, while commodities are getting stronger and it seems that many are doubting this rally. The only positive for the bears is that we are up against resistance at 990 on the S&P 500. I would wait until the end of the day tomorrow before doing any shorting.

Some Positives Today

Most of what I am seeing today is positive:
  • The dollar is down while commodities are up.
  • We are seeing some put buying and yet the market is holding up quite nicely.
That said, after covering up a little yesterday I am holding the remainder of my short positions. I believe the intermediate term outlook is very negative and I don't want lose my short positions trying to catch a blip higher.

A Pause That Refreshes Or Just The Beginning

Good Morning. It is not surprising that we are getting a bounce this morning. The S&P 500 is down nearly 40 points from its highs and it has erased three weeks of gains in a matter of days. After a month long move up, yesterday's action looked more like the beginning of a larger move, bounces not withstanding.

There was a lot of exuberant buying in the past three weeks. Rydex traders had record long positions compared to their short positions. While they make up a small subset of traders I believe they are representative of the larger crowd. Leveraged traders likely just want to get back to even and will be sellers on a bounce. Bears were finally able to take nice profits yesterday and will also be looking for bounces to sell. Combine that with negative seasonality and a market that is reaching an intermediate term overbought reading and I believe it is a recipe for lower prices.

Normally a bounce like the current one can last a couple of days but because this is an option expiration week those types of calculations might be rendered useless.

Short Term Coin Toss

While the shorter term outlook is cloudy, I believe this market is headed lower in the medium term. I have covered some shorts today but am keeping a decent size core short position. How do readers think this market will trade through the end of the week and in the medium term?

The Expiration Wildcard

Option expiration this Friday is a huge wild card. While expirations have been positive events since this bear market began, it has the ability to exacerbate this decline and should be taken into consideration.

My Thinking on Pfizer and The Pharmaceuticals

Pharma stocks are cheap on any metric but have been a value trap for many years now. Cheap stocks and sectors can stay cheap but I believe there is a large catalyst on the horizon that will give the sector a boost.

There are two large acquisitions scheduled to close in the near future. Pfizer is buying Wyeth and Merck is buying Schering Plough. The two deals have a combined cash component of over $50 billion. That means $50 billion of pharma shares will be retired while other sectors are spitting out new issues by the day. That could be the catalyst that gets the sector going. I believe managers are heavily underweight the sector and will be forced to chase the sector higher once it gets going.

I believe the market will decline over the next few weeks. During that period I plan on building positions in cheap pharma stocks, primarily Pfizer (via Wyeth).

Long Pfizer

I have a large position in the Pfizer/Wyeth arbitrage trade. The trade entails me being long Wyeth and short Pfizer. I decided to cover the short Pfizer leg of the trade as Pfizer is acting very well today. It is a stock that I want to own in the longer term. Please note that this position is against a pretty large short position in the SPY and I remain net short.

This is The Norm

This is generally what occurs after a period of excess speculation like the past few weeks. Everyone believes they will be able to get out in time but the gains disappear very swiftly. Three weeks of gains were gone this morning.

Lowered My Short Positions

I have lowered my short positions. Still heavily short.

The Opposite Of March

The action in the market last week was the polar opposite of the March bottom.
  • Bank failures were being touted as positive. BB&T's takeover of Colonial was "great" news. This was one of the largest bank failures in history.
  • Bank of America rallied ahead of the master trust data coming out today. I remember in March when the bears would short every credit card company ahead of the master trust data.
  • Investors were using twisted logic to justify buying at any price. Good news was good news and bad news was good news because it was now behind us.

Wild Week

Good Morning. It looks like we are headed into a wild week as the S&P futures are down over 20 points. International markets are seeing heavy losses as commodities decline further and the dollar continues its recent rally. Risk assets have traded in tandem and it appears the dollar has broken out to the upside (which is a negative for risk assets).

Option expiration weeks have had a positive bias recently, but there is the possibility that expiration will exacerbate the move down. I would not be surprised to see a retest of the highs this week or a big move down. While I am not sure what to expect this week as tops are tricky, I expect that by next week this market should be firmly in a decline. As such, I will maintain a hefty core short position, but might gingerly cover a small portion of my shorts on declines and put them back out on rallies.

A Down Week

The S&P 500 was down less than 1% for the week. I made a minor nibble at my short positions earlier in the day, after increasing them into the Fed meeting. Commodities had a horrendous day, while the dollar was strong. That should put pressure on international markets Monday. Have a great weekend.

Selective Vision

John Paulson has a huge position in gold and the gold miners. Both had a pretty nasty spill today. Everyone is choosing to focus on his position in the banks instead, even though gold and the gold miners are likely closer to the price where Paulson purchased them. Bank of Americas is up over 70% from the secondary which he has been rumored to have participated in. People see what they want to see in order to justify following their gut.

Add and Subtract

  • Two days ago I added to my short positions when the market ramped into the Fed meeting. By the end of the day today I will likely subtract a little from my short position or sell some covered puts.
  • Tops are often choppy affairs and one can make money off of the volatility.
  • It seems that oil and the Euro are responding to the big drop in China this week.
  • The dollar and commodities have been leading the markets for the past few years and the message is not something the bulls want to hear.
  • BB&T is up 10% on news that it will buy Colonial Bank Group from the FDIC. What isn't a cause for celebration these days? I am tempted to buy some leap Puts in BB&T but I already have my hands full with short positions.
  • Remember when a press release would make internet stocks fly?
  • If the S&P 500 closes here it will be down 1.5% for the week. I would have been hard pressed to guess that given the case of IBS the market gave me this week.
  • Sorry for the gory details but such is the life of a trader with no salary other than what I pull out of the market. I wouldn't trade it for a real job any day of the week.

Once Burned, Twice Desperate To Make Money Back

Good Morning. This morning Bank of America upgraded Citigroup from SELL to BUY and Regions Financial from HOLD to BUY. Financials are once again being bid up in the pre market. It is nice to see that once again analysts and day traders are back on the same side, like the good old days of 1999. The saddest part of the situation is that the day traders had this nailed before the analysts did.

The same analysts who never saw this coming are sounding the all clear. Ditto for the economists who say we are out of the woods. These type of speculative environments never end well. Unfortunately, they often blow all the naysayers out of the water before turning tail.

Believe It Or Not

After the destruction that the financials have wrought, would you believe me if I told you that it is the sector which institutions are most heavily overweight?

From Bespoke:

The Unimportant Fundamentals

Right now the market is trading on pure animal spirits and paying attention to the fundamentals has not been very helpful. We received two negative fundamental data points today. While some are making a fuss about the retail sales number I believe they are unimportant as we already received same store sales numbers from individual retailers. The two negative data points are as follows:
  • Wal Mart same store sales were down 1.2% for the quarter. The expectations were for up 1%-2%. The American consumer is still being squeezed. It does not matter that much if someone broke has more confidence because he still has no money to spend. Wal Mart was able to cut costs and "beat the number".
  • The second is weekly unemployment claims which are showing some improvement from the free fall at the beginning of the year but still points to a very weak economy.
Psychology drives markets in the short run and right now the emperors clothes are absolutely magnificent.

The Positives

A reader on the message board brought up an excellent point and asked if options expiration week could carry the market further.
  • Recently option expiration weeks have tended to be very positive.
  • Trends often persist through options expiration and reverse thereafter.
  • Options expiration happens to fall exactly six weeks after the start of the most recent rally. Intermediate term moves often last six weeks. For instance, the November rally lasted six weeks (30 trading days) to the day.
All these factors bolster the case of the bulls. I am sticking to my short guns as I believe any further rally will be a final whimper rather than the start of something new.

The Smartest Guys In the Room

In late February, I went long Avalon Bay Communities at $40 (via short puts). Previously I had done very little research on REITs, but I suspected that the selling in the REITs was getting overdone. I decided that I wanted to own an apartment REIT because rents don't fluctuate as much as in office and retail. In addittion, I did not want leverage to be an issue. Avalon Bay was the only company that I found where that criteria was met.

The management of Avalon Bay were the only ones not to get carried away in the real estate bubble. I decided that is where I wanted my money as I thought it could be a long tough slog. The trade worked out well in a matter of weeks.

Fast forward to today and Avalon Bay mangement is issuing $400 million in shares with the stock recently hitting $70. I would not short Avalon Bay shares as I have a policy not to short well run companies just because the price is high. However, I do believe this is a warning flag for the REIT sector. If the smartest guys believe it is a good time to sell, investors should take notice.

How Did This Market Get So Stretched

Good Morning. In the past week I have cited a laundry list of indicators that show how extreme this move has become. In similar instances the market has not fared well, but nothing seems to phase this market. I believe there are a number of reasons the market has been able to stay so resilient even though it has reached extremes that would usually lead to a pullback:
  • Hedge funds make up a larger portion of investors than in any other recession while mutual funds are declining in popularity. Hedge funds have huge swings in their equity exposure. According to Morgan Stanley, as a group hedge funds lowered their equity exposure to 20% of assets at the beginning of the year and were at 49% at the end of July. A swing of 5% in mutual fund equity exposure is considered enormous. The swing in hedge fund exposure amounts to about $300 billion.
  • According to Schwab, investment advisors with accounts at Schwab went to record levels of cash. They have likely chosen to put that cash to work in intervals.
  • The advent of ultra short ETFs. Previously many investors did not short. With the advent of the ultra short ETFs, it became easy to short by buying. A larger short base actually helps the market on the upside.
  • Human nature. The more the market goes up, the more people want in. We have had a 50% run.
I was well aware of these factors when I went short, a little over two weeks back. That was the reason I sold calls instead of outright shorting. I wanted to give myself some wiggle room. Unfortunately, even that has not proven to be enough.

Trading is not easy and often one can make the higher probability bet and still lose. With the market so stretched, I continue to believe that the odds favor a very large move down. Unfortunately, it seems I might get squeezed a little more before that happens.

Paulson & Co. Owns 2% Of Bank of America

Paulson & Co. filed a 13-F showing a 2% ownership stake in Bank of America. The position makes up 13% of his portfolio. The 13-F is as of June 30 when Bank of America was $13. That is not stopping investors from running up the stock 3% in after hours to $16.50.

Logic Be Damned

  • When the Chinese market was rising everyone pointed to China as the reason markets were rising and the engine for growth. Now that the engine is sputtering (with the Chinese market off 10%), China is off everyone's radar.
  • Printing money has been sighted by many as the reason for the market's rise. Now that the government is taking its foot off the gas, shouldn't that be a negative.
  • There are the least number of bears since October 2007. Does that time mean anything to anybody?
  • Why are the leaders of this rally, the REITs and Bank of America, starting to lag?
  • Does arguing with an irrational beast make me crazy?

Government To Slow Down Printing Presses

The only part of the FOMC statement that was a surprise was that they will extend the period of time that they buy Treasuries and agency debt to the end of October. However, they are not increasing the dollar amount of the purchase programs. That means that purchases in the coming weeks will be less than expected. After a bad auction today, dealers might be stuck with more inventory than they want and will not be able to sell as much to the Fed. Treasuries are taking it on the chin as a result.

Still Scratching My Head

I am still scratching my head over the sudden strength in the market this morning. The Chinese market was down 5% overnight and yesterday's action was quite bearish. I am once again left speechless by this market.

Increasing Short Positions

I am using today's rally as an opportunity to increase short positions.

Bears An Endangered Species

There is more evidence that sentiment has become one sided. The Investors Intelligence numbers are out and are showing 49% bulls and 21% bears. 21% bears is a low number, even in the context of a strong bull market.

This is not a one off as extreme sentiment is seen in other sentiment surveys, put call ratios and positioning of Rydex traders.

Get Your Secondaries Here

Good Morning. It is turning out to be another busy week for secondary offerings. Over $4 billion in offerings were announced in the past two days. REITs have accounted for a nice chunk of the offerings. Normally, high levels of stock issuance pose a problem for the market as money that could have gone into existing stocks is diverted into the newly created stock. The laws of supply and demand work for stocks and this is definitely an increase in supply.

The NYSE and Nasdaq reported fairly dramatic declines in the amount of shares sold short through the end of July. That was likely responsible for a portion of the rally of the past few weeks. Going forward, the market is unlikely to get much of a boost from short covering.

Robert Prechter Is Bearish

Order is restored to the World. After turning bullish in late February, Robert Prechter is now bearish.

Solid Day For The Bears

Today was a solid day for the bears. They finally managed to get a nice down day. All the while there was steady call buying all day, so not everyone is jumping on the downside train. Previously, every time the market went down a few points we started seeing everyone get negative.

My Game Plan

I believe the market has reached an intermediate term peak and that it has at least 10% downside from here into the Fall. However, there is the possibility that we will get a retest of the highs before the market rolls over. I am considering covering a small portion of my shorts so that I can put them out higher if a retest does arrive.

Before I cover any shorts I want to see some negativity creep into the market. At the current juncture market participants are buying the dip and buying calls. As long as this persists I will not be covering any shorts. Have a good night.

European Downturn

I am not sure what happened but a little before 9:00 AM European markets turned hard, taking our markets down with them. US investors have responded by piling into call options as everyone is conditioned to buy the dip. I remain short.

CIT Still Might File For Bankruptcy

One of the hallmarks of the past two weeks of trading has been the dramatic gains in low priced stocks. CIT has recently more than tripled. Reuters is now reporting that CIT is delaying its 10-Q and still might file for bankruptcy. Would a CIT bankruptcy matter? I don't know the answer to that question but I'm certain the bulls will say its good news because it is behind us. I believe its worth monitoring.

Buying Stampede

Good Morning. Today is day 22 of the buying stampede. According to Jeff Saut of Raymond James buying stampedes tend to last between 17 and 25 days. While it feels like this market just can't go down, the statistics actually say the market probably won't go up for much longer.

Yesterday, I counted the announcement of close to twenty secondary offerings looking to raise over $2 billion in total. Companies and insiders are increasingly looking to sell into this rally.

Additionally, valuations have now reached the overvalued area. From John Hussman:
Based on our standard methodology, which considers normalized earnings (not the far more depressed level of current earnings) the S&P 500 is now priced to deliver 10-year total returns in the area of 6.9% annually. This is a figure that has historically been associated with bull market peaks, including 1969 and 1987. In most instances, such valuations turned out badly in reasonably short order. It is, however, true that prospective returns were even worse prior to the 1929 crash, and during the bulk of the period since 1996, so there have been some historical periods where speculators have driven valuations to higher levels, and during these times, it has not been particularly effective to stand in front of speculators saying “no, stop, don't. “

Intelligent Discussion

An intelligent discussion between hedge fund heavyweights.

Abby The Bull

  • Abby Joseph Cohen and Alan Greenspan are bullish, while stocks of companies that lose money shoot up 40% in a day. Is anyone else getting a funny sense of dejavu?
  • Does the fact that heavy call buying has not been able to dent the market make today's call buying orgy any less significant?
  • I am seeing many people buying who don't believe in the market or the economy. They are just buying because the market is going up. What do you think these folks will do if the market starts to go down?
  • The dollar is slightly stronger, continuing its strength from late last week.
  • On the positive side, the banks are higher as is the Russell 2000.

The Smart Money

Mohammed El Erian and Mark Mobius are calling for a correction. They join other astute investors Paul Tudor Jones, Marc Faber, Jeremy Grantham and Michael Steinhardt in calling for an end to the rally. All the while, Abby Joseph Cohen and her Wall Street cohort are giddy as are retail investors. It seems to me that proven moneymakers are largely in the bear camp, while those are not always right, but never in doubt are wildly bullish.

In addittion, the single best contrary indicator out there, Alan Greenspan, said that he believes the recession is over.

Late Day Reversal To Continue?

Good morning. There are a wide array of indicators that are stretched, while there is rampant speculation in low priced stocks. Nothing has mattered for the past four weeks as the market has climbed over 15% in a straight line. Jeff Saut of Raymond James calls this a buying stampede. He observes that they tend to last 17-25 days. Today is day 21, so we are well within the time frame where the party should end.

The bears were in a state of despair on Friday and it felt like a lot of bears just gave up. All the while the bulls were becoming more brazen, running up the lowest quality stocks. Then there was a reversal into the close. I would not be surprised if that was the turning point.

There was a surge in the dollar on Friday. This is significant in that the dollar and equities have been trading inversely for the past few years. Sentiment on the dollar is very negative. A large move up with very negative sentiment is often indicative of a bottom.

A Final Observation

One final observation. Bank of America and Goldman Sachs have suffered nasty reversals. These stocks have been market leaders. Additionally, the dollar and oil have reversed as well. The reversal in the dollar looks like a major one.

This Is What A Top Feels Like

This is what a top feels like. The shorts have absolutely no hope and are covering, while those who are not long enough are buying. The only two issues I have is that markets rarely turn late on a Friday and that the media will be giddy over the weekend possibly bringing in new buyers for Monday. I remain short. Have a great weekend.

Utter Hopelessness

The feeling I have as a bear right now is utter hopelessness. Don't have much more to say.

Analyst Smoking Green Shoots

I almost fell out of my chair when I read a report by a Bank Of America analyst titled, "The Myth of the Overlevered Consumer". Tell me that the market is going to go higher because governments around the world are printing money. Or tell me the market is going to go higher because of strength in China and emerging markets. But don't try telling me that the American consumer is not overlevered. Why anyone still listens to these people when they missed the greatest debt bubble in history and were bearish at the March bottom is beyond my comprehension.

Paul Tudor Jones II Says This Is A Bear Market Rally

Good Morning. The Shanghai Composite has lost 4.5% this week. The Chinese have led world markets higher and it will be interesting to see if they now lead world markets to the downside. Additionally, Paul Tudor Jones II wrote in a letter to clients that he believes this is a bear market rally. From Bloomberg:
"Tudor Investment Corp., the $10.8 billion hedge-fund firm run by Paul Tudor Jones, said equity markets could decline later this year, creating buying opportunities.

Slowing growth in China and the return of front-page stories on swine flu may be “further catalysts for global equity markets to pause in September,” the Greenwich, Connecticut-based firm said in an Aug. 3 client letter, a copy of which was obtained by Bloomberg News"

Start Selling The News

  • Goldman Sachs lowered its estimates for the monthly unemployment number to 250,000 job losses. This increases the risk of a sell the news effect as expectations are being raised.
  • Here is a visual representation of the AAII survey figures
  • A class action lawsuit was announced against the "Ultra" ETFs. In related news Wells Fargo announced that these leveraged ETFs will no longer be marginable. That means that Wells Fargo has its doubts that the companies that stand behind these ETFs are credit worthy.
  • The Nasdaq has voluntarily banned flash orders. Flash orders amount to legal frontrunning. A single blogger was responsible for bringing this reprehensible practice to light. Kudos to Zero Hedge.

More Green Shoots

  • Jeff Bezos sold $170 million worth of Amazon stock. He is a generous man and wants other investors to enjoy the imminent price rise.
  • There are reports that private equity shops are looking to re-IPO a bunch of companies they took private in the past few years. All they did was leverage the companies up the wazoo. Sorry, I meant created the optimal capital structure provided that nothing ever goes wrong.
  • The American Association of Individual Investors is showing 50% bulls, a new high for the current move.
  • Thank you from myself and my family to everyone for their thoughts and wishes.

Good News Bears

If rallies tend to end on good news, does today's better than expected jobless claims qualify as that good news?

The List

Good Morning. There is a growing list of warning signs flashing danger on the market. Thus far the market has shrugged off everything and plowed higher, not dissimilar from the way the market went down prior to the March low.
  • The most speculative names have start to run. This is something that typically occurs very late in the game.
  • Breadth has been excellent for the entire rally but yesterday it faltered.
  • The Russell 2000 was down 1% yesterday despite the major averages being slightly down. The Russell 2000 has outperformed the entire rally. The underperformance is related to market breadth.
  • The Nasdaq, which has been the market leader is starting to lag.
  • There are an enormous amount of secondaries announced every day.
  • Insiders are selling at a record pace.
  • Every sentiment survey is showing extreme sentiment.
  • Call buying has been extreme on several occasions in the past few weeks.
  • Rydex traders are in an extreme aggressive posture.

Speculative Blowoff

"What we learn from history is that we do not learn from history."
The rampant speculation in REITs and financials is a sight to behold. Fannie Mae, Freddie Mac, AIG and CIT are all up between 30% to 60%. The danger signs are clearly flashing but nobody seems to care. Have a good night.

Citigroup Buy Program

There is going to be an approximately $2 billion buy program for Citigroup at the close. Citigroup more than doubled its shares outstanding last week and will receive a larger weighting in the S&P 500. Shares in the remainder of the S&P 500 companies will be sold to make room for Citigroup.

This will be a net negative for the S&P 500 of $1 billion. The math is a little confusing. While the $2 billion will be going into Citigroup, index holders will only receive half the benefit because of Citigroup's current weighting in the S&P 500.

More Extremes

There has been more evidence of extreme sentiment in the past few days.
  • The Investors Intelligence survey came out showing Bulls at 47% and Bears at 25%.
  • As per Morgan Stanley research, hedge funds began the year with 22% net exposure to the stock market and that exposure reached 49% last week. I am guessing that number is higher after the rally of the past few days.
  • Anecdotally, nobody is willing to go short. Friends of mine who don't follow the market very closely have been calling to see if they should buy.

Goodbye Papa

I have spent the past couple of days with my family as my grandfather has passed away. He was a selfless man that always put his family before himself. He has been sick for a while but he rarely complained and always had smile on his face. He is already missed. I will be spending some time with my family for the remainder of the week but will try to give at least a daily update on my thought process.

A little over a week ago, with the S&P 500 at about 980 I decided to move my portfolio into an unhedged short position. At the time I put the trade on, I was aware of the possibility that we could see a further rally into the beginning of the month as fresh inflows enter the market. That rally has indeed occurred and has been pretty painful none the less. We are now passed the beginning of the month and are entering a period where we might finally see a correction.

There are many signs suggesting that this is the time to sell. Whether it be insiders selling at a record pace, the growing list of companies doing secondary offerings or the unanimous complacency on the part of investors. However, there is only so much I can justify losing on any given trade. I will give this trade some more rope but will eventually need to cut bait if it the rally continues at the current pace. While I believe in this trade, the most important thing is that I live to play another day.

Family Emergency

I have a family emergency and will return in a few days.

Accentuate The Negative

  • All the positives are well advertised, so I find little value in highlighting positives at this point.
  • I strongly believe that we will see a turn this week. I knew there was some risk of a rise with inflows at the beginning of the month and unfortunately my fears have proven to be correct. However, watching the equity love fest is only making me more bearish.
  • The Nasdaq has been losing relative strength for most of the day led by the semiconductors.
  • A regional bank, Hampton Roads Bankshares(HMPR), is seeing heavy losses on construction and commercial loans. They cut their dividend and are looking to sell shares amounting to 150% of their existing shares outstanding. The offering will likely be gobbled up.
  • Call buying is once again hot and heavy. Investors are happy to ignore the warning signs as ignoring them has paid off recently.
  • This market is so close to a turn that I could taste it.

The Jimmy Cayne Economy

Over the weekend I read the book, Street Fighters, about the downfall of Bear Stearns. I couldn't help but think that Bear Stearns serves as a microcosm for what has happened to the United States.

Bear Stearns was once run by Alan "Ace" Greenberg. He spent his days in the trenches among the other employees of the firm. He forced employees to reuse paper clips off of mail that was delivered to them. Employees only sealed one side of envelopes so that they could be reused by the recipient. "Ace" Greenberg was also known for his conservatism when it came to putting the firm's capital at risk.

"Ace" Greenberg was overthrown by Jimmy Cayne who built himself a lavish executive suite and took over two months of vacation a year. He argued to the board that Greenberg's conservatism was costing Bear Stearns opportunities and they agreed with him. For a while it looked as if they were correct as Bear Stearns prospered. We all know how the story ends with Jimmy Cayne running the firm into the ground and selling to JPMorgan Chase for a pittance. All along "Ace" Greenberg begged the firm to sell their mortgage positions but his pleas fell on deaf ears.

What made the United States great was the type of hard work and frugality that "Ace" Greenberg exhibited. But today, we live in a country taken over by Jimmy Caynes. People believe that prosperity is a God given right because we are called the United States and that more financial alchemy will get us out of the mess we are in. We are a country of personal trainers, massage therapists, baristas and psychology majors. Our hard work is outsourced to China and India.

For a while it seemed that there was nothing wrong with our finance based economy, until the recent credit crisis. Now, we are making believe that this is a typical recovery. However, few of the structural issues have been dealt with and might have even been made worse. It is my view that this will not be a typical recovery and that anxious buyers will be sorely disappointed.

Insiders Speaking

The chart below is from this week's Barrons. Insiders are selling over 50 times the amount of stock than they are buying.