Traderbill’s Financial Markets Weblog

 

…how does the broad stock market have a nothing day on Friday despite a horrible payrolls report (oops, forgot it could have been worse), an inside day on Monday on the lowest volume of the year to date, a key reversal UP on Tuesday, and then a key reversal down on Wednesday…the latter two occurring on volumes of just 1.23B shares or about 230 million shares below an average day…even with the weak average since March 24 the volume is 120 million below average. As TB as frequently stated, inside days are a sign of indecision - nobody willing to commit funds, but outside days (higher high and lower low than the prior) and key reversal days (same as outside but with a close above or below the prior days range), are usually market altering events and come infrequently on some new information. What new information did we have on Tuesday or Wednesday? In fact the only real news we have had in this period was the jobs report and the Fed increasing the TAF auctions to $150B and allowing credit card obligations and student loans as collateral…a clear sign that the worst is not yet behind us? Yet the market is what it is…and right now it is a bear trap…or even a bull trap as the true believers dump more money into the market…yet as TB reported Tuesday a Deutsche Bank survey found almost a third of the largest hedge funds sitting on 5-10% cash reserves…record high levels! Do you get it? If they don’t know what to do…or are waiting for better opportunities…and they are penalized by holding cash since they are charging their investors 2% and thus losing money on each day they are in cash. Perhaps it was the announcement of this survey in Tuesday’s WSJ that caused the reversal as the hedgies tossed a bit of green into the market…selectively…to make it look like it was a lot more…and then reversed the entire game yesterday?

 

1. Stocks. TB monitors the ‘movers’ every day and reports them in the stock summary…a review of them shows little over time…up one day, down the next and due to the market weightings distorts the movements greatly. Exxon Mobil (XOM) has been the frequent flyer…like the four horsemen of last year (AAPL, AMZN, GOOG, and RIMM…but this year it has been reduced to just two consistently: AAPL/RIMM). Take a look at how XOM moved the NYSE Energy Index since 4/29/08…numbers are index points: -18; +35; 5/1-5/2 not a mover; +9;+14; -31. What possible news came out on XOM on all of these days? To TB this confirms his theory of major hedging in options so they can range trade key stocks and yet avoiding the big hits…this has pulled down volatility on both S&P 500 and NDQ 100 options to apparently safe levels when they are in fact not…but the reports show that the cost of options is rising sharply as more players enter and more traders get burned…in other words it is harder and harder to find value in an out of the money put or call…meanwhile the specs keep on playing…that is going to be the unseen culprit when we finally collapse as the costs keep on rising. Heck, we have destabilized the derivatives market already in OTC contracts why not in the real deal. Don’t just think stocks on this, we have all seen what is happening in commodities.  

 

2. Buffetted? Poor old Warren…has he lost it? Briefly he lost it in 2004 when he made that big bet against the dollar and it cost him dearly…yes him, as he is still principal investor in Berkshire Hathaway at 32.4% of the outstanding stock while his colleague Charlie Munger owns a mere 1.4%…on a $128,400 stock that is. So how mad can you get at a guy who took a third of the $15B hit? Think of it as a poor man’s hedge fund (the class B shares are just $4262: no 2% +20 fees! TB is revisiting Berkshire because they just held their annual outing in Omaha and CNBC’s Becky Quick has become enamored with Warren and he with her (get your minds out of the gutter…not that way!). In the week before the annual shindig the stock rallied off its near low for the year…since the 12/11/07 record high of $152,000, the ‘A’ shares are off 13.9%, but rallied 5.3% from 4/25 to 5/2…pretty typical before the meeting. Since then they have give back 3.9% of the gain putting them back near the lows.

 

The intriguing thing about Berkshire it people are always talking about it yet they don’t really understand it. It is the ultimate conglomerate with no dividends, no stock splits, and a license to invest in whatever Warren deems appropriate…witness the flawed currency ’strategy.’ But isn’t Berkshire a defensive stock? After all, look what happened after Y2k and how it didn’t even blink at 9/11…a true defensive stock…or is it? One reason that Berkshire performed well in 2000 was that it peaked at $84,000 on 6/22/98 then declined to $40,800 on 3/10/00…a 46.8% loss or 30.7% annualized…ouch! But from that low it rallied 219% to its high on 12/11/07, 15.5% annualized. Since then it has declined by 13.9%. So while it is a well-run company it should not be determined to be a defensive stock…and from the 6/22/98 high to the 12/11/07 peak the gain is reduced to 94.9% or 7.3% annualized…more than halving it. Would you have held on for that 46% loss? Doubtful.

 

The point is there are no defensive stocks over the long run…and when one believes they have found one they are usually disappointed. That is why technicals rather than fundamentals are more important, or should, be to investors. This is not to say that one shouldn’t base an investment decision on fundamentals but to really make money, buy and hold is simply not going to get you there…but having seen the ups and downs since 1998 you already knew that.

 

 

3. Commodities. TB has commented that most investors have no business investing in commodities, and that there is a distinct difference between a commodity and a commodity based stock. Most obvious of these are gold and silver stocks which are relatively thinly traded and thus very volatile with the biggest gains and losses coming just as a turnaround in the metals price occurs…then the small guy reads about it and invests and is ultimately disappointed, or worse. We are now seeing that in energy stocks and that is now migrating to ‘green’ stocks…again the early gains are always the best. Coal is on a tear and one of the big recipients of that is Arch Coal…but is it time to get in? Who knows, but one thing for sure, there is much more speculative interest in commodities than the underlying demand and it is feeding on itself.

The streetTRACKS Gold ETF (GLD) is an example of this: the trust buys gold as the fund grows and of course as the price of gold rises more gold has to be purchased a virtuous cycle but when the price drops and investors lose interest that causes more selling of the underlying commodity…a vicious cycle. Note also that since you are buying the actual commodity gains are ordinary, not capital!

 

Gold peaked on 3/17/08 at $1,038.60 ($1149 on the Dec ’12 longest dated contract since gold trades in contango)…a nice run from 8/16/07 when it was $669.70. But it is showing weakness having failed to support intraday at $850 and going down to $846.40 before recovering. The 50% retracement of the rally is $854.15 so another downdraft should be respected. Similar for Silver (SLV is the ETF) which also began the rally the same date at $11.55 and also peaked on March 17 at 21.50…then fell back to $16 and is last at $16.82. $16.53 is the 50% retrace so it too is at a critical juncture.

 

iShares has several commodities ETF’s that might be appropriate if you know what you are doing but you can’t just buy them willy-nilly. Since, other than gold and silver, they are linked to a commodity index they are eligible for capital gains…just be sure you look before you leap…could be expensive.

 

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC May 8, 2008