Archive for June, 2008

6/30/08…two minute warning! (published 6/29/08)

June 29, 2008 at 9:13 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , ,

…TB has no idea what you thought he was getting at but isn’t this a great football analogy: we (investors), have the ball…the last down was brutal in which we were blitzed and our QB (Bernanke) fell out of the pocket and backpedaled only to be tackled on the one yard line. Then the whistle blew, “two minute warning!”. This gave us time to regroup, take a quick look at the sickening instant replay on the huge monitor over the end zone, but fortunately our quarterback gave his usual wry smile and we huddled. Huddled from the cold, and the Bronx cheers of the fans…”remember,” Big Ben said, “it is only the end of the first half…and I still have a couple of plays in my quiver”…great! We are getting crucified and Ben is talking about bows and arrows. “I know you are skeptical, but I have a couple of plays the Bears don’t”…TB is so shaken up at this point he can’t remember if we are the Patriots or the Giants! Well, Ben, this would be a good time to use them as we haven’t had a decent play since the first quarter when you caught the Bears off guard!…briefly…and they have been on us like flies on manure ever since.
 
TB is sure you would all like him to complete the story with a happy ending for investors, but this is real time and it hasn’t been scripted yet…and then there will be the locker room pep talk at half time before we take the field again to booing fans and either they will end cheering our victory or calling for our heads! The Bears are always tough competitors!
 
This is much more than an analogy about football…and even a football game…this is ‘gaming’ for the future of the financial markets globally…and something needs to be done soon…the last two minutes would be a good time to narrow the scoring gap which looks dismal.
 
It is now time for a rehash of TB’s latest tirade that keeps getting stronger and stronger, yet no one seems to give a rat’s patooty about what he is saying. Indeed, on Friday, the Kudlow gang was touting how capitalism does best with little regulation…look at Sarbanes-Oxley and how it has been an over-reaction “to a few mistakes by Enron”…seriously! True, it was overkill but where was the SEC in preventing it?…the same place it is right now having failed to do anything more than put a long time frame on naked shorts and removed the ‘uptick’ rule which in TB’s mind would have prevented Friday’s massacre. But the market was only down 107 points you say, 0.9%…yes but it was down 495 points on the week or 4.4%, and -7.8% over the last two weeks…950 points! Final NYSE Volume was 2.3B shares, highest since 3/20…that is when the volume began to fall off…and fifth highest of the year  …eclipses that 1.7B April Fool’s rally!…how many times has TB pointed to the rallies being on much lower volume than the routs? Also, for the third straight quarter, the market has been trashed in the final five days…generally starting right after the last day for T+3 settlement for quarterend? Volume was slightly higher each day last week and both Thursday and Friday had huge volume on the close…when you are going down that is a sign of a continuance at least into the next session…with today being end of quarter it will definitely not be a boring session.
 
As shown in the summary however Advance/Declines and Breadth were not that negative…both categories averaged -1.5:1, despite the ratio of new 52 week highs to lows being -9:1, but even that was an improvement from more than -13:1 on Thursday. But here is the outlier: with a market that was simply going down all day…no 50% retracement in sign…volatility on BOTH the VIX and VXN declined by 2% and 1.3% respectively…and after both were in striking distance of the negative 25 and 30 levels. Was it because of quarterend?…or was it because of buying more out of the money calls than puts? One will have to watch the data closely next week to see if volatility rises again…but given the sentiment on Friday it is highly unlikely that there was a bullish bent! So as not to scare anyone…as we came to the brink of a bear market….why is that so hard to say…just as we have avoided the ugly ‘R’ word?
 
Now to TB’s biggest gripe: regulators not doing their job…and as usual this is due to an Administration who feels less is more…no rational company would do anything negative to it’s long term interests. But that masks the differences between investors and speculators and boards of directors who are woefully lacking in their stewardship of the companies they serve on…for the protection of shareholders. Ever since we got on this track of “if you don’t like the way we are running the company, sell it”, the long term investor has been disenfranchised. Is this the way American business operates? Apparently so, because even after Bob Nardelli lost his head for not allowing the directors to attend the shareholder meeting, Washington Mutual held their meeting without allowing shareholder questions! That takes gall when you have made blatant mistakes that have cost shareholders billions and all you can say is you plan to step up your credit card program…just as everyone else is restricting theirs in anticipation of heavy losses in that area. Meanwhile, on Tuesday, Bank of America will own title to Countrywide…and just as the ink dries there are at least three suits filed by states accusing fraud…this means they would assume liability for those suits…unlike the JPMorgan takeover of the Bear.
 
Who in their right mind believes that companies…most LARGE companies…care what happens 5 or 10 years down the road?…well, of course they care but their foremost concern is the present…then next quarter and the fiscal year. Keep those bonuses coming in boys and girls. Even 20 years ago and more, companies didn’t always do the right thing if they could get away with it…they skirted and fought against environmental reforms, frequently spending more to avoid them…especially after fines…than they would have to adapt to them…you don’t have to be green…only rational!
 
So now, having blasted the SEC for poor regulatory work, and the Fed and bank examiners let’s go to the latest culprit…the CFTC…which regulates all over the counter commodities trading…well almost all. Although TB has said this before, an article by Gene Epstein in this week’s Barron’s, A Simple Old Reg That Needs Dusting Off, makes several points that are crucial to this argument and TB strongly suggests you read it…if you don’t subscribe, TB will gladly forward it to you…it is that important. Here are the key points:
 
1. The Fed’s statement last week of increasing inflation concern ties in directly to excess speculation in the commodities markets.
2. Rather than paint speculators in a bad light…they serve a true purpose of clearing markets, Epstein suggests the CFTC should merely enforce rules that have been on the books since 1936.
    *whereas commercials and speculators have limits (about 2% of open interest), banks are being allowed to purchase or sell short unlimited amounts on the theory that they are hedges.
    *yet the CFTC defines a hedge as only one against the physical commodity, thus creating a derivative swap with a commodity index fund would and should not qualify.
    *an index fund by definition is an investor not a speculator…it does not react to market fundamentals or technical factors…only to flows in and out of the fund.
    *with pension funds scraping for returns they have flocked to the commodities index funds and that is what is distorting supply and demand, yet the blame is placed on China and India…a factor yes, but only a portion of the problem.
    *we are constantly told that they are a zero sum game and that hardly anyone takes delivery, most are settled in the final days before options expiration or else rolled out to a later month.
    *but in the case of indexers they just keep buying more contracts and rolling the front months so the price does not reflect reality but speculation.
    *the reason is that the total size of the commodities markets is only about $960 billion versus the stock market, even after a major selloff of more tan $13 trillion
    *a specific example of this ‘overtrading’ is in wheat alone is nearly 60% of the domestic wheat crop!
    *Jill Sommers, a CFTC commissioner, is a former Head of Government Affairs at the International Swaps and Derivatives Association…could she be persuading the others to not enforce the regulations?
    *the mere announcement of an intention to enforce would reduce the willingness of swaps traders to enter into agreements and thus begin to drive down prices…implementation would have to be scaled in over a period of months or even a year and even so would cause the swaps traders serious pain, but that is not the problem of the marketplace…note that it is the same firms and banks that created all those mortgage and subprime loan derivatives that are profiting from not enforcing the rules: read JPMorgan! 
 
TB would never have believed he would be against free markets but we cannot allow our financial markets to be destroyed for the benefit of a few…if rules and laws are not enforced they destroy respect for the entire process. TB is open to any and all views…dissenting or otherwise.
      
TB will be on the road all this week, which is why the column is being published early but will try to provide commentaries as time and Internet connections allow. Have you asked yourself why as energy prices rose, until recently, transportation stocks performed so well…and more importantly why despite surging to new record high, many energy stocks are showing signs of weakness?
 
A dear relative owns a stock Tel Offshore Trust (TELOZ). It has a 12 mo return of 232% despite declining by 25% Friday (-35% at the intraday low). As the stock went up TB was frequently asked if he should purchase more…at one time the stock fell 20% and we reduced the position in half, but then it rallied back over the last 3 months to a high of $42.87 on FRIDAY…TB always replied that there was absolutely no news or increased volume to support the rise in valuation. So what happened on Friday? It was the last day before going ex-dividend and the yield is 7.4% (indicated), down from 9.3% over the past 12 months. Thus, it became a dividend recapture and the volume on Friday was 844,000 shares, not only a new high but about equal to the sum of the five highest trading days of the past six months! The stock plunged to halfway between the 40 and 200 day moving averages and closed 2 below the 40 day. This is the kind of market we are in!…and it is an energy stock!

TGIF was TB’s closing remark Friday…but now it is Monday, midyear, and things are looking less than stellar. Perhaps it is time to hang Old Glory upside down on July Fourth…hopefully somebody, other than Congress, will do something to prevent an American tragedy of global proportions.

Americans are optimistic and resourceful…if we ever needed that the time is now…time to beat the Bears!

TB

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6/27/08…you know it’s bad when…

June 27, 2008 at 4:54 am · Filed under economy, financial, markets ·Tagged , , , ,

Bloomberg Quote of the Day: “Be wise to-day; ’tis madness to defer.” – Edward Young. Timely!
 
…energy prices are up huge and energy stocks decline. Bonds rally but the 10 yr has still only recovered about half of their losses since June 5, and a third since May 12, and the 30 yr TIP is even worse! Meanwhile commodities, as measured by the CRB broke their one day hiatus which included a sharp drop, and blew thru resistance to establish yet another record high, closing at the high. Specifically, precious metals and energy rallied with Gold gaining $33 on the session while Crude gained more than $5 and at the intraday high was just 3 cents short of the June 14 all-time high.(overnight it eclipsed that high by hitting $141.71). Back to Gold it had the highest close in 24 sessions an took out a quadruple top it has struggled with since 5/28. This came at a crucial time as TB pointed out yesterday as it had closed between the 40 and 200 day moving averages causing TB to remark: respect a break in either direction. While Crude was not nearly as visible after breakin to a new high on D-Day (6/6), it has gone sideways for 15 sessions…setting an imperceptibly higher high on 6/16 which yesterday became double top…so today’s close will be telling and if they can hold here the sights have to be set at $150!
 
Five of the six commodities groups had moves of more than 1% leaving only Industrials with a small gain yet most of the metals were leaders in declines, and Livestock lost 1.1%. TB has had numerous discussions with colleagues about commodities speculation. The commodities market is a zero sum game and would not exist without speculators… much as the NYSE needed specialists until the AMEX went electronic (although arguably computers can’t do the job when there is a mismatch). But the regulated options market was established to balance the needs of producers and users (commercials) with speculators. That worked for more than a hundred years but then along came the new improved derivatives market. First came financial futures which had limits to prevent speculators from overrunning everyone, then non-regulated markets such as interest rate swaps, swaptions, collateralized mortgage, debt, loans, and then credit default swaps. The growth of these areas has been off the charts and when you fuel that with high powered money (leveraged hedge funds), you drive the growth off the charts. When the appetite for these instruments gets that large, greed rears its ugly head…remember Wall Street never met an idea to make money it didn’t like. Thus trading limits, credit quality, judgement, all fall by the wayside in striving for higher earnings and returns. This is where the regulators become important and all have failed miserably…from the Greenspan Fed, to the bank examiners, to the SEC and now even the CFTC. Capitalism needs regulation to keep it in balance…what it does not need is malignant neglect and stupid rulemakers and worse is a Congress bent on curing the problem and thus creating more problems.
 
We have seen this repeatedly…from the S&L crisis…to LTCM and the Asian Crisis….to the misapproportion of funds and deceit by Enron, Tyco, Global Crossing and others…where were the regulators. Greenspan said he did not have the authority…but had he acted do you really believe that companies would have been willing to open their books to challenge him? Even if they did, that bubble would have burst. While the Democrats are involved in wanting to regulate everything, the GOP has become so opposed to regulating the growth of capitalism that it is they who have created the mess the US and now global markets are in. How do you cure it? TB has no idea at this stage…but it must be!
 
With this as a backdrop let’s look at what commodities markets are supposed to do: match the needs of producers and users so they can control costs in their respective businesses. But they are not doing that today. The farmer who sold his corn production forward has now been stopped out by margin calls, and his banker is refusing to front the money…thus he is stopped out, and now exposed to any drop in prices…is that an efficient market? In the past the banker would have provided the capital but when prices are exploding at double digit growth rates it looks like a bad bet….especially if prices tank again.
This is where excess speculation comes into play…TB is not talking about the ‘evil’ hedge funds…we saw what happened during Katrina and how the guys who made the money on that big bet (Amaranth) got wiped out a year later with the same bet. Markets are self-correcting…IF they are balanced.
 
Now comes the introduction of commodities index funds. Normally that might not be a big deal but with pension funds underfunded again (by the way Boeing just announced a shift to a defined contribution plan from defined benefit for all employees hired since the first of the year), and scrambling for returns.
 
Hedge fund inflows are up 28% over 2006 levels and it is coming despite poor performance but better than most conventional money managers…now think back to TB’s possible explanation to the market selloff at end of Dec, Mar, and now June! If you can’t make yourself look good…make someone else look worse! Meanwhile the growth in commodities index funds is also being fueled by pension funds. To meet the growth, the index funds enter into ’swap’ agreements with banks who can buy as many contracts as they like…the only ones with no limits since it was presumed that they would be hedging possible loan losses…but that was when a bank was a bank…these are really non-bank subs.
 
TB has heard repeatedly that we shouldn’t limit speculation as when the contracts expire it is all netted out so despite ‘blips’ commodities prices reflect the real world…balderdash! They used to…but once you throw them out of balance…and with index funds they can buy the longer dated contracts whereas conventional speculators use the first two to three contracts at most. The point is you can roll out…not just settle up…there is no way that demand exceeds supply in all these areas to this extent, China or no China! How else do you explain the longest dated futures contracts trading near or even higher than the front end in energy commodities? Limits must be imposed on banks but now it is a big problem as to how quickly you do so to prevent dislocations in the market…and Congress is not the one to do it…if they do, they will limit speculation…not just level the playing field.
 
TB has a friend at his gym who is a custom grain blender. TB has repeatedly asked him how business is and he is always calm and collected…that is until this week when he said that it has become impossible for him to set prices rationally. Now this is a guy who was a former floor trader on the Minneapolis Grain Exchange. He said the rule that curbed the Bass brothers cornering the silver market is still in place and could be invoked…his only question is why they haven’t yet at the commodities index funds – see, they are not speculators…they are INVESTORS…and as such are distorting the market! You know there is a problem when Dow Chemical in two weeks announces a 20% and a 25% increase in prices: the first due to materials inputs which have risen by 40% and the second due to fuel surcharges on deliveries….thankfully wages aren’t rising too…remember every business is being hit with those rising fuel costs…how much can you pass on?…certainly Dow’s combined 45% will lower demand at some point.
 
As for the market…TB has been confused since early June….the selloff in bonds…nothing seems to be in proportion or trading as it normally does. With stocks we have only seen a handful of days where volume has been above average…1.5B shares since March 24th!…yet volatility has been huge even on low volume days…in both directions but mainly to the downside.
 
Any money manager knows that timing is everything…and that the worst situation is when you get a new account and try to get it to match your other accounts makeup. What works in the long run may look horrible in the shortrun. TB picked up some new accounts…in April and in May….despite moving slowly and taking advantage of market weakness…which worked well for the first two months, June is proving to be a disaster…that is because neither stocks (common or preferred), or bonds have performed well. Thus the balances he employed are only mitigating the decline…at best…and on some days add to it. The only asset class other than commodities that is performing well is CASH!…and that is an anethema to a money manager…people do not pay you to hold cash! For more than a month Jim Cramer has been saying “you always want to be involved in the markets…it is the only way to make money”. Now he is uncertain…and has revoked his buys on financial stocks…any financial…but is this still the time to jump into energy, conventional or alternative? Fertilizer stocks? You name it, there are risks out there…it is as bad to buy a hot market at the top as to ride it down. Yesterday, TB planned to take some money off the table in a few areas…he never got the chance…what started as down…just got downer…depressing.
 
If you really believe this is a strong economy then go out and buy stocks…if you don’t keep your head about you but realize there will be significant counter trend rallies to take advantage of to adjust your positions. But the main thing is: don’t panic! But if you are in the former camp ask yourself where the growth is going to come from when major financial institutions are struggling just to stay afloat.
We are in a mess and perhaps we would not be here if we had focused on the credit crisis and fixing it rather than on the presidential primaries for the past year…what fools we are…and were!
TGIF! 

TB

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6/16/08…the morning after the night before

June 26, 2008 at 5:22 am · Filed under economy, financial, markets ·Tagged , , , , , ,

…that was one of Shelley Berman’s great routines about waking up after a New Years Eve party with a severe hangover…quite appropriate don’t you think? Note how the gains dissipated on the close and at the highs hadn’t recovered more than 60% of last Friday’s losses…could be a setup for conventional money managers…hard to tell but it will be easy over the next three sessions…hedgies will be totally in control with little to lose since their books are now closed. Note: by taking back the morning gains today as we headed into the close that reduces their leverage…get it? No way for sure of predicting they can repeat the damage they caused in Dec. and March but TB wouldn’t recommend betting against it.
 
Stocks had held the morning gains until after the Fed statement when they became confused…rallied and sold off again three times afterwards and then sunk into the close, going out nearly at the lows of the day after being up over 115 points at the afternoon high. TB attributes the price action to the last day of T+3 as hedgies spiked the market then sold back into it in an effort to square their books for quarterend and likely reduce leverage due to market instability. Now they are done for the first half and while conventional money managers are praying for a rally will they fall prey to the hedgies making them look bad? At the least it will be volatile especially with the 30th falling on Monday…a lot can happen over the weekend these days.
 
As for the Fed’s decision to stress inflation over the economy it was not as much of a tweaking as appears as reading one of these is harder than tea leaves, but the fact that there was only one dissenting vote (Fisher), who wanted to tighten, gives them the appearance of having inflation concerns yet the flexibility to react to a weakening economy. TB still contends that the inflation we are having is of a different variety than in Europe…they have rising wages and low productivity while our wage growth is low or negative in real terms. Furthermore, a sharp drop in energy prices would cut inflation dramatically. After all it is harming discretionary income and isn’t that self-correcting? TB talked to his personal banker yesterday at BofA about loans…was told that they are getting tighter and tighter…even on re-fi of existing loans…perhaps they hope they will find a better deal elsewhere? Also, home equity limits are being lowered or frozen at the same time that credit card companies are lowering limits – even to good payers with high credit ratings. The massive commodities speculation must be stopped…fast!
 
TB believes in free markets but the creation of commodities ETF’s and index funds has dramatically increased the amount of speculation and thanks to swaps (derivatives) with banks who are exempt from trading limits there is no limit to how high commodities prices could go. The CFTC has the tools to stop this…but do they have the wherewithal to do so? TB scoffs at those who say speculation is not the problem, but it instead lies with the commodities indexers and cash flowing in from pension funds trying to boost returns that is the problem…and politicians are reluctant to jump on that group…preferring to blame the hedge funds…who have trading limits! The irony of this is that while one area of the bank is profiting from the swaps the rest of it is being placed at risk due to damage to the economy…why can’t they see this? Greed…as in bonuses TB would guess…hopefully that too will change…but will it?
 
Citigroup (C) may take another $8.9B in write-downs and cut the dividend again according to Goldman, while BofA’s purchase of Countrywide looks even more ominous for them…California has filed suit for fraudulent and misleading loan terms…more suits to follow…could they go after the largest subprime lender Wells Fargo? Time will tell but it is going to get pretty ugly…worst behind us? Downgrading brokers less than a week after they changed their minds on banks. Meanwhile Fortis, Belgium’s biggest financial services company eliminated their 1.3 billion euro dividend and will sell shares and assets. Oh and you have to love this: WAMU now plans to shore up their losing loan portfolios by making credit card loans! Are they fighting with Wachovia for the worst managed bank? Desperate people make bad decisions…and then it all comes home to roost! 
 
The baby however has been thrown out with the bath water but that may be changing as some regionals are showing signs of rebounding. IF estimates of loan losses are higher than they materialize there could be a rebound…the problem is forecasting them as they will vary dramatically from bank to bank.
 
Now another auction rate securities story. While brokers including Citi and UBS were telling investors they were good investments they were warning issuers that demand was softening. Bank of America and even Charles Schwab were putting investors into “money market funds” that had student loan backed ARS in them and were considered a ‘cash alternative’ instead of a ‘cash equivalent.’ This problem just won’t go away…there have been 24 suits filed so far…and growing. 
Be very careful for the rest of June…then continue to tread lightly.
Hope you all have a great day!
 

TB

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6/25/08…wreaking havoc

June 25, 2008 at 5:50 am · Filed under economy, financial, markets ·Tagged , , , , , ,

…as if the markets aren’t volatile enough, AOL let ole TB down this morning…tried to copy and paste to weblog and it had a mind of it’s own…copied another passage…then I tried to send to myself to see if that helped…message said “you can’t send a blank message”…then I hit ’send later’…that worked…sort of…until I opened it to a BLANK email! Finally had to switch to laptop and that is working but wasted over an hour and at 4am that is not fun! So today’s message will be brief…and might just as well be ahead of the FOMC meeting and statement at 2:15pm EDT. First a comment on that:
 
TB has been feeling pretty stupid since nobody has supported him on the dwelling on Fed Funds futures as a valuable indicator of where they will be 1, 3, or even 6 months forward…they are not only an indicator of investor psychology but HEDGING…thus they are meaningless as far as predictability, particularly at inflection points…real or assumed. On CNBC, Rick Santelli got into a heated argument with Steve Liesman…Liesman defending it as an indicator as if it was on a stone brought down from the hill…he looked very foolish and then Rick asked a floor trader what he would be doing at 2:15pm EDT. His answer was that he “would be on the 9th hole!” This illustrates how foolish our love of trivial data…including what the meaning of the word “is” is in the statement today…did they mention inflation first or growth…did they say leaning…the point is it has nothing to do with what went on in the meeting and just the perception the Fed wants to create…you can lose a lot of money betting on those statements as it is only infrequently they become reality! Remember the old saying: the stock market has predicted 13 of the last 3 recessions…psychology will do that…and leverage!
 
More important to your investing sanity is that today is the end of the quarter for hedge funds. Due to their leverage factor they have to use trade date plus three settlement (T+3)…and that would be today. That does not mean they have their hands tied till month end but what it does is separate them from conventional money managers whose quarter does end on the last day…Monday! Now recall what happened in that void in December and March…a huge selloff…in December it just kept on going down until mid Jan and then rallied…in March it culminated with the famous…infamous? April Fool’s rally. Therefore, this is going to be the most dangerous time to invest in the quarter and with the FOMC today it increases the volatility…now note that both volatility indices…VIX and VNX are still below the pain thresholds of 25 and 30 respectively…those could rise sharply over the coming days…or not.
 
After three above average volume days including Friday’s 2B plus day which was that big trading disaster losing 220 points on the Dow and putting 11k within reach when a couple of weeks ago we were trying to break above 12k, volume the last two days has only reached 1B shares in the final 10 minutes of the sessions…that is a huge absence of liquidity!
 
Worse, where we were trying to get back above the 40 day moving averages we are now very close to the Jan and March lows…dangerously close…with the exception of Transports and Energy and even they are struggling! The Dow and S&P 500 are in lockstep…both tanking Friday, then having an inside day within a very narrow band at the low end of Friday’s band, and yesterday both suffered key reversals (higher highs and lower lows than Monday’s narrow band AND a lower close). That is extremely rare when you have had a narrow trading range…worse, it was to the downside but with quarterend at hand…this is where T+3 becomes important…it is sparking debate…strategist Don Hayes saying yesterday “you have to be a buyer here”…and others saying: we are in for a big move and it could be in either direction…you know which side of that bet TB would take…what about you?
 
Case Shiller survey showed a 15% decline in home prices yesterday…consumer sentiment was lowest since 1992….so who cares what the economists say as to whether or not this is a recession…even Greenspan yesterday called it a recession! It IS a recession and likely to get worse…much worse…and yet allegedly smart people want the Fed to tighten! Totally absurd. But the problem as TB sees it is we have inflation…and the world has inflation. With us, as TB explained yesterday it is the self-correcting (when it is strictly in non-discretionary items like food and energy…where you can cut back but not stop buying) cost/push…Dow chemical announced another 25% increase in prices following a 20% increase just two weeks ago…this time due to fuel surcharges. How can people tell us that airlines are a buy…even if fuel prices decline?  Meanwhile Europe has another problem…wages are still rising due to unions etc….we do not have that problem! As for emerging markets, rather than revalue against the dollar they are trying to hold the line so as not to lose market share to others…think China vs India vs Taiwan vs Korea. Also, they are subsidizing gasoline which is killing their budgets…a friend with a large yacht lives in Southern California…he takes it to Mexico…gets his 5,000 gallons which lasts him about a year for less than $2 a gallon vs. over $5 here….get the picture? In the Middle East, gas is well below $1 a gallon.
 
Now for the absurdity of the day: Rep. Charles Rangel (D-NY) debating Rep Bachman (R-MN) over the tax bill….as expected Rangel wants to raise taxes on the wealthiest and do nothing about the AMT (which the Dems created…and Rangel says never should have been enacted), while Bachman, a former tax attorney says that the AMT should be repealed and taxes simplified…along with spending cuts. Folks, can you believe we pay people to come up with these ideas??? 
 
First, remember that Bush created a tax commission with a mandate that everything was on the table so long as it was revenue neutral. That was under a GOP Congress that after the Gingrich Contract with America had reduced spending became more tax and spend then the Democrats. Thus the first thing the commission had to do was take the AMT off the table! Secondly, as for tax simplification, Bachman’s colleagues would be violently opposed to reforming taxes as they would be out of business! Rangel correctly pointed out that the only way to reduce the budget is to get out of Iraq…while Bachman alleged to have other places to cut…that is either ignorance or an outright lie! There is no other place to make significant cuts…and do you cut them in a major economic upheaval? Only if you want a Depression!
 
As for reforming the tax code…as in simplification…since Reagan that idea has been out…and gotten nowhere. TB has a friend…a former CPA…his colleague, more than a decade ago went back to head up the IRS…thought he could reform it…he got nowhere and left frustrated and disillusioned. On the AMT, a guest on CNBC made TB’s points: why can’t you deduct state and local taxes which are mandatory, yet you can deduct all charitable contributions which are voluntary…this is one of the worst pieces of legislation ever enacted…and the only ones who benefited were the ones who never paid taxes in the first place…the reason for the bill! They now have generation skipping and all kinds of other loopholes…plus those hedge fund managers being taxed at just 15%…it is unequivocally SICK!
 
That is where we now stand…and if you can tell TB a single reason to be bullish…write him…he will publish it for you…with or without attribution…your call!  

Sorry this is so late…but think how frustrated TB is! Don’t take any wooden nickels!

TB

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6/24/08…trickle down redux

June 24, 2008 at 4:53 am · Filed under economy, financial, markets

TB’s Quote of the Day: “Do you realize the greed that came to the forefront? The hogs were really feeding. The greed level, the level of opportunism, just got out of control. [The Administration's] basic strategy was to match or exceed the Democrats, and we did.” David Stockman in Atlantic Monthly referring to President Reagan’s tax cut. Stockman went on to become CEO of Collins & Aikman, an auto parts company that went bankrupt and he is under indictment…is greed really good?
 
…it can now safely be said that ‘trickle down’ was either a bad joke, said with a wink, or just a failure. The reason for bringing this up is a commentary by PIMCO’s Paul McCulley in John Mauldin’s Outside the Box which is particularly timely as the FOMC meeting begins today. Like trickle down, McCulley poses whether the working class must bear the burden of curbing inflation. Now that labor unions have been rendered useless (except in their ability to muster votes causing politicos to fawn over them), he argues that wages will not increase. He included a chart to show his concept that a better measure of oil than price is the hours worked per barrel of oil since that reflects purchasing power. With real wages not only under control but neutral or even negative…for the majority of Americans it is negative…he argues that higher interest rates only increase the misery index thus slowing the growth of discretionary income and thus spending. That means that there is little to overheat aggregate demand…this is the point that TB has been trying to make for weeks now…months? Demand/pull inflation, which was a product of labor unions with escalator clauses pushed up wages and demand which caused prices to rise…nothing new there, as Dubya says “it’s the law of supply and demand” (sic). Thus we had the wage price spirals of the ’80’s. Yet the other kind, cost/push, has proven to be self-correcting as we have watched double digit increase in crude and lower at the intermediate level then fade to low single digit as they reach the finished goods level…an indicator of a lack of pricing power (we can argue all day about how accurate CPI and PPI are due to hedonics, substitution effects, and homeowners equivalent rents but somehow despite slow growth of wages consumption has held in).
 
Contrast this to the EU where Germany and France have strong unions…thus is it any wonder that ECB President Trichet keeps rattling sabers over inflation? Meanwhile, on this side of the pond, Fed Chairman Bernanke upped the ante and has everyone convinced he is about to tighten…a bad spot to be in as he risks a deep recession if he does so…or maybe worse…you have been looking at those 30 year mortgage rates haven’t you…and the banks unwillingness to lend at any price (even Donald Trump was commenting last week on how difficult it is for developers to obtain funding…and the recent problems of Fremont Bank, WAMU, and Downey Savings…not to mention Wachovia, Key Banks, Fifth Third and others only makes the situation worse).
 
What is amazing about this is Bernanke knows exactly what will happen as he is the most knowledgeable on how the Fed caused the depression to worsen by effectively tightening by raising reserve requirements…and their logic was not to worry about unemployment because as more become unemployed labor prices would fall and thus create more jobs…we now know how flawed that logic was…do you see the parallel to where we are today? Not to mention that today we are a debtor nation…in the public, private and individual sectors.
 
Back to McCulley…he has a chart that sow that whereas it took 1 hour to purchase a barrel of oil in 2002, and less than three in mid-2007 it now requires almost seven hours! Also since the first oil shock in the 1970’s union membership has been cut from nearly 25% to about 10% (most of those now are likely government workers). Lastly, he has a chart of average hourly earnings and CPI. since Volcker declared war on inflation they have largely tracked except where wages were in fact sticky when inflation declined…not that even during the dotcom bubble both wages and inflation were contained. He concludes that low, even negative real rates of inflation will be with us for a long time.
 
TB read this morning that his wall of shamer, Sen. Chris Dodd (D-Conn), has said he may allow one of the nominees for Fed governor to come up for a vote soon…with Mishkin leaving the board soon and thus they will be short of a quorum thanks to the other two vacancies in the worst financial crisis of our time that would be prudent…what he has done to date is reckless, irresponsible, and political. TB firmly believes we would not be in this mess if banking and SEC regulators had done their job in the wake of the repeal of Glass-Steagall…a little regulation goes a long way and it is a lot less damaging than when the US Congress gets their hands on it. We are witnessing a travesty of epic proportions.
If you thought the tone of today’s commentary was harsh it was intended to be. We have not come down on the culprits in government or business who allowed this to happen on their watch on the premise that capitalism is good and therefore should be left alone…TB heard this again yesterday by Stephen Moore on Kudlow & Company…saying it would be irrational for business to not run itself responsibly…in this case he was referring to oil companies and offshore drilling…IF you believe that businesses exist for the long run that would be true…but if you believe…and TB has to think this is the case…businesses today are run for short-run rewards, especially for management, often at the expense of long term investors…how else does one explain the real estate, mortgage, and securities sectors allowing this crisis to become reality?
 
Where are the geniuses today that 9 months ago or less said that consumption in the US would not slow and even if it did the rest of the world could carry us? Have they looked at Chinese or Indian stocks lately? Have they noticed how in their zeal to maintain their own economies they have not let their own currencies revalue to the dollar? Yet yesterday TB heard someone say on CNBC that now is the time to buy consumer discretionary stocks…perhaps one day we will learn that Goldilocks was a fairy tale…and that economies cannot grow on borrowing alone…at all levels…forever.
 

TB

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6/23/08…a witching to remember!

June 23, 2008 at 4:36 am · Filed under economy, financial, markets ·Tagged , , , , , ,

TB’s Quote of the Day: “The price of food and energy is being driven by the ‘Law of supply and demand’.” President Bush Friday…please show me that law…TB
 
…TB had it right in warning you to not get in front of Friday’s quadruple witching…but he was wrong that after expiry the move might be able to be faded…it just keep dropping like a stone…no dead cat bounce, nothing! That could be particularly troublesome with this week’s FOMC meeting (Tues/Weds), $30B in 2 yr notes to be auctioned Tuesday and $20B in 5 yr notes auctioned Weds…auction will be before FOMC meeting is adjourned and statement released. Don’t forget that Wednesday is also last day for T+3 settlement for quarterend…affects hedge funds…meaning it will affect markets…since they sold off the market in Dec. and Mar. coming off of rallies…might they do the same this time?…or take it up if the market remains weak? Either way it is a big red caution flag. There will also be a slug of economic data (see below), and then next Monday is quarterend and half a year of performance is shot. 
 
Quel horror! That was the reaction to Winnebago’s earnings on Friday and if that doesn’t illustrate just how lame the current bevy of analysts is nothing does. They were shocked…shocked TB says that sales were so weak…and forecast was worse. What kind of Kool-Aid are they drinking? Do they really think that people are itching to buy a Minnie Winnie with gas prices this high and then watch your ‘investment’ shrink in value faster than an SUV? Wonder what repossessions look like on those puppies! There 3rd Qtr net fell 73%…listen to this: “Appetite for the product is extremely low,” said Ed Aaron, an analyst at RBC Capital Markets. Business is going “to be difficult for the next two to four quarters.” Give that boy a kewpie doll and also an award for optimism. Revenue was down 40% and the loss would have been much worse were it not for an $8.9 million gain from a tax settlement. Stock s down 60% y-o-y.
 
As for financial stocks it was time to throw out the baby with the bathwater again as banks, brokers and insurers were all trashed. Two of the best, PNC and USB are trading back at their January lows. We are at a critical juncture: the Dow put in its second lowest close of the selloff, breaking well below 12k and only supports left are 11740 a double bottom on the March 10 lows and the Jan 22 low of 11634 and 11644 the next day. The S&P 500 looks a bit better with a double bottom from 3/28-3/31 at 1312. Below that is the psychological 1300 barrier, then the March 17 cycle low at 1256…unlike the other indices the S&P took out the January lows and had two closes just above them. The NDQ 100 traded far enough above the 200 day to put the 40 day above it and then caved on Friday while the Russell 2000 (small cap) rally didn’t last long enough to do that…so it is below the 200 day and 40 day but both have been in a narrow band since April.
 
Bloomberg reports this morning that execs at refiners were the largest net buyers of their own stock in a decade suggesting they believe crude prices will fall sharply…and soon. Where is the CFTC and the SEC on this? Why do they sit back and leave it to Congress to gum up the works by prohibiting speculation in commodities instead of going after the real culprits…those lovable bankers with their index swaps. Can’t believe that George Soros who should know better is still blaming the problem in commodities on hedge funds…it is commodities index funds and ETF’s that have tacked on the last $30 or so to oil prices…how about that Congress…we send a delegation to talk to the Saudi’s and then threaten them at the same time…what a bunch of clowns run this country…in both parties!…but they aren’t funny!
 
If you watched This Week with George Stepanopolous Sunday you get the picture: there was Kay Bailey Hutchinson (R-Texas) talking about how the Bush Administration had secured millions in funding for alternative energy…that was blasted by Jeffrey Sachs saying it isn’t millions we need but billions and that nothing has been done for the past eight years…later he expanded that timeframe and rightly so. There was also the CEO of the American Petroleum Institute countering all those tried and untrue arguments of Rep. Markey (D-Mass), who looks a lot like Peter O’Toole but can’t act for beans! In 20 minutes you saw why we have no energy policy…everybody is in a different corner and staying there! By the way…lots of blame on hedge funds but no mention of commodities index funds/banks as the culprit!
 
Later, on Chris Matthews, Jim Cramer was a guest…and said taxes should be raised as Obama’s plan calls for on those with incomes of more than $250 million (TB has reported that he…and Clinton…had said they would only raise them on those earning more than $100,000 which was lunacy…but over the past week or so the Obama plan has been significantly modified…including a willingness to cut the corporate tax rate if loopholes are abolished). Now get this: Cramer said that the tax cuts for the wealthy have not worked (i.e. trickle down), and that most Americans don’t own or care about stock! Hello, Jim! When you were on Kudlow and Cramer you said the dividend tax cut must be made along with Sir Lawrence (who TB believes was the father of the entire plan), and said that 200 million Americans own stock…to which TB kept screaming…in their IRA’s and 401(k)’s where they will eventually be taxed as ordinary income! Cramer went on to state that definitely the housing slump will be over in nine months and if you haven’t bought by then you have made a big mistake. He based this on stopping building new homes and that will create a shortage of supply…if you can believe that! Jimbo…the problem is two-fold: credit or lack thereof…and wage increases…and neither looks to improve in the near future. Oh, TB read that the Treasury sent out $9 billion in tax rebates last week…so now they can go to Walmart and Costco and buy more food and gas and make the numbers look better than they really are.
 
Let’s stop there because TB is feeling a lot of negativity which he does not wish to impart on an already negative market…you know what the problems are…act accordingly.

We may be well on the way to revulsion…which beats all those clowns who have been saying “the worst is behind us” for the past six months as it gets worse and worse…the last stage of the Kindleberger theory on bursting of bubbles. That is when you are so sick of watching your stocks decline in value that you just dump them. Hopefully that won’t be the case but Friday was little consolation on that score…let’s hope it was just due to expiry…but at the very least we have to get past June 30…by the way Cramer says that if Obama is elected it will be good for stocks…while his former partner Kudlow says just the opposite. At least this time one of them will be right!
 
Hope you all have a great day and week!

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6/20/08…financial instability

June 20, 2008 at 5:02 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , ,

TB’s Quote of the Day: “Something’s happening here…what it is ain’t exactly clear…” Buffalo Springfield, “For What It’s Worth”…and that folks was 40 years ago, on the Hollywood strip.
 
…not much is clear today…things…sectors…get painted with a broad brush. Ignore the fact that housing is in the tank and not getting better…and once the rebates are spent, as most probably are, where do we get the pickup in retail sales…still amazes TB that they can’t see that if gas and food prices are higher you spend more and have to cut back in other areas.
 
All financial stocks are bad…just look at them…Goldman Sachs excepted of course because they are so brilliant, right? Where did the big jump in their earnings come from? Commodities trading and managed investments…which likely includes commodities index funds. How many times must former CEO John Corzine tell you that they do screw up…and cites examples. Their strength is diversification whereas Bear and Lehman were/are mainly bond houses. Still Goldman is down 17% over the past year and trading at 9x earnings which looks OK till you note that the estimated p/e is 11x which is not cheap. Of course, Merrill has negative earnings and is -56% over the past year so everything is relative. Lehman is down 69% and UBS down 58%…both with negative earnings.
 
Moving on to banking, Citi, which like the Prius is a hybrid but one you don’t want to own is down 60% with an estimated p/e of 138 times, 6.4% dividend yield. BofA is -40% with P/E of 12x trailing 10.5x estimated…and a 9.10% dividend which stands a good likelihood of being cut. Wachovia is off 64%, 9.4x trailing and 12.4x est with an already halved dividend yielding 8.4%…another cut candidate.
Wells Fargo…bless them as they are a major culprit for how we got in this mess with their subprime lending…of course they sold off all those loans, so the stock is down just 25% while the p/e sits at 11x with a 4.8% dividend. Now look at USBancorp which is down just 7.4% over the past year sells at 11.5x earnings and yields 5.7%.
 
Now hold all those numbers in your head because on Wednesday both Key Banks and Fifth Third (TB would rather have a third fifth of good wine) announced dividend cuts…this coming in the wake of Goldman…there’s that name again downgrading all bank stocks saying they must cut their dividend. For Wells and USB that would be pretty stupid, while for Citi and Wachovia, it may be mandatory. Yet all financial stocks were hammered…but then BB&T Corp, which is down 39% with an 8x p/e…yesterday they not only affirmed the dividend to be announced in July but indicated a similar increase to historical which should be about 4 to 6 cent and is currently 7.6%. That put in a floor for banking stocks and they went from deep negatives to the plus side on the day. Of course, Merrill…and why you would want to listen to anything their analysts tell you…cut price targets for all major banks and for the most part they were to where they are now trading…isn’t that special???
 
Would you sell your car just because another makers vehicle tended to blow up? Well, that is what we are doing as we have possibly and probably the worst analytical skills in the history of Wall Street! That, folks is the sign of a bear market…yell fire after the barn burns down…which is exactly what individuals so after a tornado, earthquake or hurricane…rush to get out and the price drops…only to rebound a year later (that is just an analogy and not a predictor of what will happen in real estate next year).
 
On the topic of gas, TB read an article in the SF Chron over the weekend that showed what the average household spends on gas…it was about $1200 a year before the runup and is now about $1800 and if gas hits $5 nationally about $2200. Now think of what we…you…are doing. Certainly this is imparting pain on families with low incomes…as is $2.79 a half gallon milk, and bibb lettuce for $1.89 a head and avocados for $2.29 EACH. But look at what we are doing: we are dumping our big SUV’s…and as the lots get fuller it only drives the resale value down more…so you bought that Yukon for $35,000 with a nice $15k discount and zero percent interest two years ago (since everybody loves a good conspiracy, did GM know gas prices were going to soar?), and what do you get on a trade-in? $10k…IF you are lucky…THEN you run out to buy a Prius and pay a premium of $5,000 over the sticker price, no bargaining there as they are in short supply…but at least the resale price is going to be good, right? It will be if the technology three years from now is the same which is doubtful…by the way you could go out and buy a non-hybrid but efficient Honda and come pretty close on mileage…you do the math.
 
The good thing about all of the above is that you can still buy your bottled water for $1.59 a litter, and if you buy Desani or Aquafina, the two most popular brands in the US, you didn’t get what you paid for you got water with no minerals nothing but H20…and you hurt the environment and wasted energy by making and recycling (hopefully) yet another plastic bottle. Tap water…in all areas of this country is safe (and in most places in Europe)…and tastes pretty good too…especially in the SF Bay Area. So why not trade in your bottled water for a nice designer bottle (so you don’t look cheap). TB bought a really nice one that holds 22 oz for an outrageous $9.45 but $1 goes to clean water efforts…just a thought.
 
Also on the gas side, TB went to Costco to buy gas a couple of weeks ago and lines were so long and not moving…newbies are now pumping gas for the first time there and really gumming up the works. So he left and went to the ARCO next door…gas was cheapest in the area, sans Costco, but cash only. So he went up to pay and the guy asked if he wanted to use a debit card…sure…just enter your pin…but on the machine it said…45 cent service charge…since he only needed about 12 gallons that’s 4 cents a gallon more…goodbye savings…he paid cash. This morning he read where soaring prices are causing more stations to not accept credit cards: 3% on $4.50 vs on $2.50 really cuts into margins! Note to Visa and Mastercard investors…transaction volume can…and will decline…V is selling for 41x est earnings and MA for 43x trailing and 33x forecast…please do the math and see what growth rate you need to justify those p/e’s…then come back in 10 years and tell TB they are great growth stocks.
 
We have already seen chicken prices rise because of corn…now it is pork…and next comes beef…due to longer growing cycles. It takes 1 pound of corn for a pound of chicken, 3 pounds for pork, and have no idea how much for cattle…so wait for those prices to rise. Already, restaurants struggling to raise prices are having to reduce portions…a plus since at least we will all eat less…hopefully. Trendy dieting.
 
If you are lucky it will be 1pm EDT by the time you finish reading this and thus will do nothing stupid in the path of options expiry…if you reread it and the subsequent columns you might also find your hands tied during the two day FOMC meeting next week, Wednesday’s last trading day for T+3 settlement and the TB forecasted selloff from then at least into month (quarter/midyear) end. Oh, TB read where the average hedge fund was up 2% last month according to HFR. Given year to date performance that isn’t good but bet most money managers would settle for that: another reason to sell off next week?
Obama is beginning to sound like a republican…cut corporate tax rates…but he still seems to think that $100k a year is big money…bet he couldn’t survive on it…but class warfare is alive and well as we are told by the GOP that we cannot cut taxes for the lower classes…didn’t we learn from their cuts that that does not put anymore money in their pockets? …and we can’t raise taxes on the wealthiest…to TB that is those with incomes over $500M…or even $1MM…certainly they shouldn’t be taxed at 15% just because they run a hedge/private equity fund! The economy is now foremost in everyone’s mind, not Iraq. IF you listened to Dubya yesterday you know that everything is the fault of the Dem led Congress. Thankfully he found his veto pen which was missing longer than the Rose law firm documents that the Clinton’s misplaced and later found sitting in the hall by their bedroom. We are being fed the biggest amount of crap of any electorate in the history of mankind…and they have not yet begun to fight.
 
This may be one of the toughest seven trading sessions due to volatility that we have experienced in ages. Furthermore, given the average trading volume of the past four sessions of 1.21B shares which is 90 million per day less than the average since 3/24 which in itself is about 200M below average, it is safe to say we are in the summer doldrums…meaning markets can be whipped on a whim. Take advantage of that to adjust positions not to speculate on the dawning of a new bull market.
 
Enjoy your weekend, 
 

TB

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6/19/08…the leaderboard

June 19, 2008 at 5:07 am · Filed under economy, financial, markets

TB’s Quote of the Day: “We did a good thing…and we pulled if off…and then we %#@&*$ up the end play.” – Charlie Wilson’s War…that was then but could also be said of Iraq. 
 
…after that heartstopping finish to the US Open, which has taken Tiger out of the game for the remainder of the season…attests to his stamina but Rocco Mediate would rather he had rested…no TB thinks he liked it just the way it was…but would have preferred to win…but what a way to lose! TB has mentioned how a few stocks have been moving the indices in every session. Most obvious is XOM which has added as much as 36 points to the NYSE Energy Index and subtracted as much as 55 over the past 12 sessions, but much longer. But here are a few others that are frequent fliers on the Dow:
XOM: -9; +5; nm; +8; n/a; -10; -21; nm; -14; n/a; -13
IBM: -8; -13; +3; +16; n/a; nm; -29; nm -8; +7; n/a -19
MCD -8; -6; nm; nm; n/a; -29; nm; -7
JPM: nm; -7; +3; +12; n/a; +6; -16; nm; nm; nm; +7; -5
AXP: nm; -15; nm; +9; n/a; nm; -23; +11; -6; n/a nm; -8; -3
Note the changes are in Index Points not actual stock prices…now look at NDQ 100 how the four horsemen of 2007 (AAPL, AMZN, GOOG, RIMM), have become the two horsemen plus 1:
AAPL: -4, +7; +6; nm; n/a; +6; -5; nm; -12; -4; +3
RIMM: +2; +1; +5; +2; n/a; nm; nm; -2; nm; -1; -1
QCOM +1; -2; -1; +2; n/a; nm; -5; +4; -1; +6; -2; -2
The only other contenders were GOOG; MSFT and CSCO which made the list 6 times or less. AMZN is no longer a contender for obvious reasons. The last area is the AMEX Composite TB has harped about repeatedly as a two stock index: British Tobacco (BTI) and Imperial Oil (IMO) these two stocks have consistently driven the index…during the entire period there have only been a handful of stocks that qualified as movers…generally by only 1 point…and this is in a 600 stock index!
BTI: -6; -9; +9; -2; n/a; +1; -19; -1; +4; nm; nm; nm; -14
IMO nm; -3; -2; nm; n/a; +10; -6; -15; nm; -14; nm; +8
So what? Look at the total changes in the AMEX: -5; -4;+7; +2; +0.3; -23; -13;-11;-9;-13;-19;-7; +6.
That is a very high percentage, and TB could take it back for months, not just to May 30 as shown. 
 
Looking at the data on the Dow, it is apparent that as we approach options expiry on Friday that positions are being squared and that allows for some big changes in either direction. Will the broad market be able to overcome the fear and lack of investment spending that is negatively impacting semiconductors lately?…they are close to retesting the lows. It just stresses the point along with bigger volume days being associated with major declines and negative advance/declines and breadth much more so than during those short rally bursts.
 
Greed may be good…but restraint will leave you to fight another day!
TB watched Charlie Wilson’s War last night. Tom Hanks did another morph into an incredible character for him. While it was enjoyable it was typical Hollywood which focused on the glitz and sex and not enough on the real story…if you get a chance to watch the documentary on the history channel,The Real Story Behind Charlie Wilson’s War…by all means do so. You might just learn something.
 
Happy trading…and that just as easily mean sitting on your hands until Friday after 1pm EDT!…or Monday!
 

TB

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6/18/08…mindless blather

June 18, 2008 at 4:54 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , ,

TB’s commentary can also be accessed at his blog www.traderbill.com with the market summary updated usually by 6pm EST, overnight markets at 7:30am, and then followed by the daily commentary. It also has an index of other features….you can put cursor on calendar date and by clicking get column for that date…back to Nov.!  Over 7,500 hits since 11/9/07. TB.
 
TB’s Quote of the Day: “All governments lie, but disaster lies in wait for countries whose officials smoke the same hashish they give out.” I.F. Stone (see end of column for background). TB.
 
…hopefully that is not what you think of this column but it is exactly what TB thinks of CNBC. There are two and only two people worth listening too on the entire network: Rick Santelli, a former pit trader who understands, futures and bonds as well as economics – at least in how it impacts trading, and Art Cashin, the senior floor trader…when he speaks listen. All day we heard the blather…portfolio managers marching up to say why the like stocks in general and some who even love financials. Only Cashin said we have options expiry on Friday and we have already had the move…then he made the same point TB did about the doldrums…came early this year…but the data is much worse than his comments suggest. Today was a day that opened slightly to the upside about 54 points then simply marched down with no lasting relief…as Cashin pointed out: there simply are no buyers out there and won’t be till after expiry at 1pm EDT on Friday…but don’t forget TB’s warning on Weds. June 25, last day for T+3 settlement by quarterend…then they can take them down at will…if they so choose and TB believes they will – afterall they did it at end of December and March! Those moves inflicted great pain on conventional managers.
 
As for the confusion in the marketplace it continues to revolve around a big game of he meant, he said. This reference of course to Bernanke and will he or won’t he tighten…only his hairdresser knows for sure. TB along with most who don’t want to just parade on CNBC see his quandary…some would call it a Hobson’s choice…have eyes…eyes to see that the bond market has tightened for them…see under overnight news below that the 30 yr mortgage rate has risen to 6.57% from 5.89% a month ago and that is shutting down the real estate market again…remember that is the base rate and rises as FICO scores decline. So go ahead and tighten Big Ben…ruin our day…and any chance of a recovery. Fortunately, he doesn’t care what people tell him to do…he knows what the Fed did wrong 75 years ago and is not about to make that mistake…who cares if this is the fastest easing since 1984…it is warranted as a global credit crisis trumps the collapse of Continental Illinois and Penn Square due to oil prices dropping sharply. TB swears that we have all forgotten how to think for ourselves…the point of this column. Instead because Bill Gross says TIPS are expensive (and may well be buying them as we speak), or because Jim Cramer says so, like sheep we obey. Then we wonder why our investments do so badly when it is pretty obvious we are chasing returns. Don’t take TB’s word for this or anything…he doesn’t want that responsibility…he has his opinion…go get your own.
 
Readers know that TB’s number one question regarding financial stocks isn’t whether all the losses are in but where the replacement revenues are going to come from. Well, it appears that situation is getting worse for the brokers…Goldman excepted after reporting blowout earnings again (Morgan Stanley just released and not so lucky)…well relative to consensus anyway, but due to commodities commissions…duh, duh, and duh…is that sustainable. Not to knock Goldie because they are well diversified in their approach in contrast to Bear Stearns and Lehman for example, but in case you didn’t notice they have let go 1 in 25 of their workers and this suggests the others are way behind the curve (TB reported in January that a former colleague, an admin assistant, was one of six let go in the SF office alone). Yesterday, TB read that hedge funds are dissatisfied with the level of service provided by prime brokers. Prime brokers serve two big purposes: camouflage trades by big hedge funds and by paying huge commissions per trade relative to what they could be paying, they expect the latest rumors, ideas, and news…just how much is anything a broker tells you worth these days? This could change things in an environment where brokers are scrambling for commissions having focused on trading of risk product for the past five years or so. So here is yet another area that may have lower margins as they fight to do business with the biggest, best, and brightest…whatever that means these days…the brain du jour?
 
The last thing for today is this: PLEASE…PLEASE…do not think you are smarter than the market not only between now and Friday but between now and quarterend…and after that remember we really WILL be in the summer doldrums…it is a good time to take profits, minimize losses, rebalance portfolios in favor of quality…but a lousy time to think you are the next Bernard Baruch!  
The quote today is from Izzy Stone who died nineteen years ago. Before that he had endless energy and interest in digging out the truth…not what we are told by politicians but digging in to research and get the truth. We owe him a lot…TB owes him a lot…an inspiration.

Today’s column is a bit shorter than usual…some will cheer that…but perhaps it will make you focus on what was said and how it may help you to invest over the rest of the month and the summer.

All the best,
 

TB

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6/17/08…making it up in volume?

June 17, 2008 at 5:34 am · Filed under economy, financial, markets ·Tagged , , , , , , ,

…as you know TB has been concerned about volume in the stockmarket since volume = liquidity. Since March 31…quite an early date for the summer doldrums to set in, average volume has plunged from 1.56B shares a day to 1.29B shares…hardly enough to pay the light bills on Wall Street. Contrast this to 12/31 to 3/24 which averaged 1.74B shares! The highest volume of the year was set on 1/23 at 2.83B shares, yet the highest volume since 3/24 was 1.7B shares on April Fool’s Day…that should have been a clue, right?…the fool’s rally…1/23 was the bounce from the cycle low by the way…have no clue what April 1 was, other than an in your face statement by hedge funds at conventional money managers who had been clobbered by the selloff in the last 5 days of March…just as happened in the last three days of December and TB predicts will happen again this month…sometime after the hedge funds close their books for the quarter on Wednesday, June 25th…could be wrong but when something is working you go for it…until it doesn’t, right?  Moral: If you don’t look good make the other guy look worse!
 
Since March 31 there have been 13 sessions of less than 1.2B shares…two under 1.1B. There have been just 8 sessions of more than 1.4B shares…pretty awful. During this period we have seen just about every imaginable technical condition yet we continue to struggle with any sustainable rally due to triple digit moves in either direction on low volume. The equity movers are just as likely to see a stock rally big one day then reverse the next…with XOM this is practically a daily occurrence! The entire Amex Composite is dominated and directed by just two stocks: British Tobacco (BTI) and Imperial Oil (IMO)…both exhibit the same up, down moves…usually opposite on a given day. There have been only two consistently good sectors: Energy and Transportation, although lately Transports are exhibiting more weakness and have broken their 40 day moving average…with fuel prices where they are, would you have guessed them to be this strong. The sector trades in clusters: rails, trucking, and airlines…and again there is no direction within each that is predictable on a day to day basis. As for Energy, the NYSE Energy Index has been tracing the 40 day moving average for the past nine session after consistently remaining well above it since the April Fool’s rally.
 
TB noted during the 1998-2000 bubble rally that stocks and indices supported on the 40 day moving average…until they didn’t…after that the 40 day became resistance and later they tested and broke the 200 day. A lot of stocks and indices are struggling with the 40 day. Despite three days of rally, the Philly Semiconductor Index (SOX) has juts gotten back to the 40 day moving average…8 points above is the 200 day and that is dropping at about a half point a day…so by monthend it will be make or break with TB betting on breaking down.
 
Whether you believe in the above it is important that you take it into consideration in a very THIN market that will historically get even thinner beginning in July and volume normally doesn’t reemerge until October…think how stocks and indices can be manipulated (especially with no uptick rule and naked shorting allowed…thank you Chris Cox and friends at the SEC), with low volume and leverage.   
 
All we hear about is oil having peaked yet despite a decline yesterday it briefly took out resistance it had struggled with for 6 sessions, briefly setting another record high of $139.89. While it is down today it is safely above $130…is this good for the economy and stocks…sans oil?…even oil has become selective with emphasis on producers and drillers…retailers, integrated, and refiners are weak…XOM has been below its 200 day m/a for 12 sessions and that is just a point below the 40 day moving average. While Gold appears to have peaked at $1040…same as the IRS form so easy to remember…it has traded between the 40 and 200 day now for 15 sessions…so watch for a break above $891 or below $869 which will quickly be followed by a test of $850, the May 2 low…take that out and it’s all she wrote. The big key here is if the CFTC enacts rules prohibiting banks from unlimited commodities positions which they are undertaking to enter swaps with index funds…if the market sniffs that they are about to do so look for a huge (temporary?) drop in commodities prices.
 
The other thing we hear negatives on is bonds…but that ignores the damage that has since the March 17 low of 3.3% on the 10 yr followed by a back up to support at 3.90% a double top. That was erased after being tested twice and on Friday it hit 4.2&% with the next support being 4.28% set on 12/26…note that was when the equity selloff began…so are bonds really such a bad investment? Traders have been burned every time they go long and then get stopped out but if we have a sustained rally back below 4% that could all change again…we do indeed live in interesting times…don’t we? 

Not only are we living in interesting times we are playing on the most uneven field that TB has seen since coming into this wonderful, whacky business in 1972…it is a license to steal on leverage…thus fundamentals and even technical analysis are useless as the algorithmic traders can beat you to the punch every time…either that or it runs way further and you don’t get to benefit from it…such a deal. You pays your money you takes your chances…

TB

 

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