Archive for May, 2009

5/29/09…trouble in paradise

May 29, 2009 at 5:09 am · Filed under economy, financial, markets ·Tagged , , ,

…if this is paradise, TB sure doesn’t want to see hell! The dollar just gave up after five days of trying to find a bottom and is weak against all major currencies! If you are planning  a trip across the pond note the Euro is $1.41 and the Pound is nearing $1.62.

The bond market vigilantes, a term coined by Ed Yardeni in 1984 are on the warpath. What happened that year? The long bond peaked in 1981 under Volcker but after rates dipped, bond investors became bearish and drove the 10 year yield back up to 16%. The banks were a mess and that was when a young Bill Gross went long bonds in the belief that the Fed would have to re-liquify the banks….which they did and earned him the title of the ‘Bond King.’ The vigilantes are back today and we have just watched the long end of the treasury market weaken…erasing the gains of last year. Veteran economist Richard Hoey and an original bond market vigilante notes that since 1984: 10 year bond yields fell from 16% to 2% (now back to 3.64%), a great run, never to be repeated – the bull market in bonds is over! But note that does not imply a bull market in stocks is dawning!

Treasury issuance of debt…$110 billion this week alone in just 3 auctions (2,5, and 7 year), will far exceed Bernanke’s promised $300 billion buyback, and we have little to show for it. The vigilantes see inflation rising in 3-4 years (making it far too early to buy TIPS, the long bond is now forecasting 2.5% inflation and the 10 yr 1.8%…during the flight to quality it was near a 1% spread making TIPS the ones to buy).

In fact, 30 yr treasury bond returns are now only slightly positive over the past 12 months (+5%), after being the best performing sector last year (+26%). Year to date the long bond is off 26% and the 10 yr down 10.2% while investment grade corporates are up only slightly and junk bonds are the winner +28%….go figure. But bonds provided small protection last year other than 10 years out as their low single digit returns beat stocks massive decline but that advantage has now been erased on average (Dow still -4.25% ytd, S&P 500 flat, but Nasdaq 100 is +17% and the Composite +11%…while the Russell 2000 small cap is off 1.5%).

Now for yesterday’s markets. The dollar weakened again and the 40 day and 200 day moving averages converged 3 points above the close, yet commodities staged only a modest gain (<2%), and that was focused in Energy. Even that may be fleeting as supplies are big and at best in balance so crude should trade in a $60-65 dollar range, meaning that run is over too. Bonds staged a feeble rally after the last of the three auctions this week was a fait accompli. Besides they don’t have to pay for that mess until Monday…next month. Now for stocks: little better than a ‘dead cat bounce’. Please do not ignore the fact that if you look at the ‘movers’ each day they are generally the same stocks but up one day and down the next. Most are hovering around their 200 day moving averages with no momentum in either direction for now. Worse yet, more than two-thirds of the volume on the NYSE the past two days has been concentrated in a few financial stocks…mainly BofA, which has alone equaled about 1/3 of the total volume! The others, rotating in and out have been Wells Fargo, Citi, AIG, GE, and a few others. Is this a sign of a strong market? Not. Meanwhile however we saw a peak in the broad indices and have tested and retested and can’t go higher…in fact Dow Transports are actually in decline and not only below the 200 day moving average are struggling with the 340 day!

Is there any bright spot? Yes, believe it or not…TB chose ‘or not’ but with the dollars re-emerged decline, is rethinking that in favor of emerging markets (formerly submerging markets). Year to date Japan’s Nikkei is up just 7.5% but the Hang Seng is now +20%, Korean KOSPI +24%, and India’s Sensex +51%…it is hard to jump into India with all of their social problems and the fact that the gain has all occurred since March 6, with one third of it just since the elections on March 17…yet it is still down almost 30% from the 1/10/08 highs, and has merely retraced half of the decline…yes, it fell 64%! Latin America is also rallying with Brazil +41%, 65% in dollar terms (but they have pledged to stabilize the Real), and is still down 28% from the 5/29/08 highs…time will tell.

We just got the Q1 Preliminary GDP numbers and it fell 5.7% revised from -6.1% in the advance number but Consumer Spending was up just 1.5% down from the 2.2% estimate. This doesn’t sound good for consumer discretionary, does it?…even if Starbuck’s is trying to get  their leases reprived at lower rates.

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The Obama administration is foundering, hopefully recover from it. Part of the problem appears to be focusing on the problems with society rather than the economy and the financial crisis. But the main problem is the rescue plans along with constant rule changing that is making the banks want to return the money far too early, thanks to Congressional knob-twisting, which is what happens when you enact law too fast.

The PPIP program to dispose of toxic waste is a huge failure which many said it would be. First, it would have been possible for a bank to sell it’s toxic assets at auction and replace them with similar by bidding on someone else’s, thus regaining much of the loss and now owning partially government guaranteed paper…if this sounds like the CMS problem where S&P took pools of average to weak mortgages and then labeled some of the tranches AAA…it is because it would be. However, realizing this the government has attached strict ‘conflict of interest’ rules which have not only dwarfed the eligible bidders but reduced participation. This is one failed program! Today, Bloomberg is reporting that IF the banks were to sell the problem assets the losses incurred would eradicate all that capital they just raised. Not only that, lending more will only worsen the capital problem.

Yesterday, TB discussed the windfall profits caused by remarking problem assets to market which in JPMorgan’s case alone would reap them $29 billion due to a write-up of WaMu loans. TB gave you an example, here is a better one we can all relate to:

Suppose you paid $300,000 for your home and you were forced to market to market. During the collapse it fell to $150,000 so if you had income of $200,000 your net income would show up as just $50,000…making you and anyone you choose to borrow from  unhappy. But then it rises $100,000 and your income surges to $300,000 due to the price appreciation. Do you spend more? Well, you at least feel better but the $150,000 loss and $100,000 gain are mere paper entries…paper not dollars! So how can JPMorgan use that $29 billion when all it did was improve the balance sheet? It can’t! True, the banks financial condition looks better but nothing else does. You can’t lend it, you can’t pay more dividends with it…simply an accounting entry. That is why bank stocks initially surged as giddy sell-side analysts went ga-ga. They were wrong and the banks still face problems in credit cards and commercial real estate…and what happens to that write-up if the economy deteriorates further…or even stagnates as TB expects? It will be all she wrote. Our problems will be with us for much longer than 6 months or a year as some bulls say…perhaps 3-5 years or more…you can’t increase earnings while you are decreasing leverage…you can only mitigate against further losses.

So emerging markets may be the place to play…for now, but no man or market is an island, right?

Now get out of here and enjoy the weather….have a nice, relaxing weekend!…oh you already did?

TB

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 29, 2009.

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5/28/09…bankers are bonkers!

May 28, 2009 at 4:04 am · Filed under economy, financial, markets

…or they as sly as foxes? (TB meant to include this with yesterday’s missive) One thing for sure: they can outsmart the bank analysts…Meredith Whitney, Nouriel Roubini, TB and a few others excepted!

Take that $29 billion gain JPMorgan will get from just the stroke of a pen. Now $29 billion is a lot of money but let’s sort out just what that means. To understand it we have to go thru the whole concept of ‘book’ accounting in a mark-to-market environment:

1. Write-downs are made when the value of the asset (loose definition when some assets have become toxic and thus liabilities to future earnings).

2. The write-downs are estimates which are particularly weak when the market is ‘thin’ or non-existent.

3. Write-downs are taken in the form of ‘reserves’ such as reserve for loan losses, reserve for legal suits, etc. When the exact amount of the loss is known…i.e. a $10 million lawsuit is settled for $1 million, the difference between the loss and the reserve is taken into income.

4. But just what is a reserve? Is it tangible? No, it is simply a reduction of earnings. Suppose a company’s total income came from a check on the last day of the quarter. Somewhere along the way that check for say, $1 million bounced. Then a reserve would have to be set up and if not paid deducted from the next quarter which if it was also $1 million would then be zero. But let’s also assume that the company had to reserve $500,000 for a lawsuit in that first quarter so the income would then be $500,000, not one million. In the second quarter the lawsuit is settled for $100,000 and $400,000 would be restored to earnings so that the income in the second quarter would be $400,000 instead of zero. Thus the average income for the two quarters in the first case would be $500,000 and in the second $450,000.

Now you see why mark-to-market on assets that are not being purchased or held for resale is ridiculous as it overstates earnings when the economy is roaring and understates it when the market is falling. It is like when a dollar used to say redeemable in gold, then silver, then in God we trust (which is probably the most accurate expression for a greenback!). Did you write off the dollar over any of those events? No.

Ok, back to the banks, specifically JPMorgan. When they acquired WaMu they took a huge write-down for bad loans at the time of purchase. This distinction is important as they were not loans they owned. Instead, it was a reduction in the purchase price of WaMu. Now had they held those loans TB would see it as more meaningful since it would attest to JPM’s high lending standards. The same goes for BofA’s purchase of Countrywide, and Wells’ acquisition of Wachovia (they took those loan losses at time of purchase as tax deductible losses). That is why the stocks rallied Tuesday and gave it back yesterday.

But these loans and the ‘write-ups’ are simply one-time occurences. Also, if the economy weakens they will have to be written down again. Remember a reserve does not imply whether the loans are better or worse…just that that is the combined loan loss experience for a given quarter. So even if the economy bottoms, it could go flat and from historical experience we know that unemployment will continue to rise. With the U-6 unemployment data already near 17% when you count part-time for economic reasons along with discouraged workers, more lost jobs will mean more bad loans…and we have not yet even addressed commercial real estate loans.

The banks need more capital…much more capital and ‘paper’ entries won’t do the job. Even if they could, would the banks make more loans? The sorry answer is ‘no.’ This is because making loans would only serve to increase assets and further dilute the capital ratio. The one and only answer for the banks is to grow their way out of this mess and that will take years…perhaps a decade or more with slow economic growth. We (they?) leveraged our future…and lost.   

It appears the market saw thru this sham yesterday as Financials fell by 3%, erasing most of Tuesday’s 3.8% gain. Both the KBW and Nasdaq Bank Stock indices fell by 3.8% vs. a 4.8% gain. Technicals are not helping here as we had an inside day on Friday followed by positive key reversals in virtually every index due to it being the last day for T+3 settlement for monthend and thus window-dressing for the hedge funds. This was followed yesterday with what would have been another inside day but instead was much worse for following those key reversals we inched higher on the open then proceeded down throughout the day – a false breakout! 

This bodes for a retest of the recent lows at best if not a full retest of the March lows! Compounding the problem is the low double digit prices of most bank stocks and the enormous gains that have been made so there are huge paper profits just dying to be taken on bad news. Also, despite below average trading volume in stocks since May 15, about six stocks, all financials (BAC, WFC, AXP, AIG, GE, and C), have comprised the bulk of that volume. Yesterday alone on a paltry 1.33 billion share day, 557 million of those shares were BofA alone! Add in Cit, AmEx, and Regions Bank and you had about 2/3 of the total volume. What gives?

 

HedgeWorld had an article yesterday on how investors in hedge funds have no idea of the risks that are being taken. Funds are trading for ‘nickels’, something TB has proposed months ago where they are day trading 50,000 or 100,000 shares at a pop for a ‘nickel’ or a dime to boost returns. The problem is that when the technicals don’t work and volatility is LOW as it is now, the chances of making one too many of these trades are very high. That is where losses occur…but the funds have no choice with nervous investors ready to yank their money on poor performance. That is also why the last day for T+3 settlement each month…not just each quarter as we saw in four of the last five quarters…is so important and why the market sells off right after that day. So while measured volatility (VIX/VXN) is low compared seven months ago when the VIX hit a record 89.53, at 32 it it is still at the high end of the range of the prior 13 months and that is high relative to the historical averages. More likely this is a result of reduced leverage and more day trading.

Bloomberg reports that the ‘rig count’ of oil and natural gas in the U.S. has fallen by 56% to 900 after hitting a 22 year high of 2,031 on Sept. 12 per Baker Hughes Inc. Meanwhile, OPEC voted to keep production levels unchanged today even as there is widespread cheating. Adding to this conflicting data is oil shipper Frontline

Note that despite the jump in oil prices, for two straight sessions, the Energy sector in commodities has not risen by more than 1% and that was just yesterday while on Tuesday it wasn’t even a mover due to offsetting moves. This was true of the entire GS and CRB commodities indices with NO movers Tuesday and only Industrials, along with Energy up 1% yesterday. This is not symptomatic of an area that will rally sharply, but more like a runup with a weaker dollar that is now searching for a bottom…four days now that is has built a base.

As for bonds, get this: the 30 yr Treasury bond is down 28% ytd while high yield bonds are up by a similar amount. Meanwhile investment grade corporates are off 6.9% (-1.4% with reinvested dividends). To TB this makes junk bonds very pricey and subject to a huge correction if the stock market fades as it becomes more apparent that this will be an ‘L’ shaped, rather than ’V’ shaped recovery. So regardless of inflection points, stocks are not attractive as a group (yesterday TB even heard: growth is the new value!), and subject to a major correction…or worse…as earnings stagnate or outright decline.

There are limits to how much new Treasury issuance the markets can sustain. On Tuesday $40 billion of 2 year notes were issued; $35 billion of 5 year notes, and today $35 billon of 7 year notes. The first two auctions were successes with huge indirect bids, mainly from foreign central banks and strong bid-to-cover ratios. Is this like a traditional refunding (which we had at the beginning of the month) where despite how the auctions go the market sells off…indeed, the bond market has plunged both days with the 10 year note yield rising by  16 basis points yesterday alone and losing 3-1/8 points in two days! The 30 year yield rose 13 basis points to 4.62% yesterday for a loss of 3-3/4 points in just two days. Over the past few months we have routinely seen 10-15 basis point moves in a single session so that the bond market has replaced the stock market in volatility (risk)! Is it any wonder that the dollar is weak? Watch today’s auction closely for signs of relief, but the auctions are light buses…another one will be by in a month or less…some stimulus! The government giveth and the government taketh away…a corollary to last weeks: the federal government giveth and the state governments taketh away. Like pushing on a string!

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Citigroup took $45 billion in taxpayer money yet paid CEO Vikram Pandit  $38 million in salary and stock, making him number three among the best paid CEO’s of the top 50 financial companies. This despite his sworn statement to Congress that he would take only $1 a year and that “I get the new reality. This was only slightly behind number one, Lloyd Blankfein of Goldman Sach with $42.95 million, while AmEx’s Kenneth Chenault came in number two…and you know how Americans hate to be number two…earned $42.75 million. Please tell TB just what of value any of these three companies made or why they should pay the CEO’s so handsomely when they were losing money and taking public assistance? Warren Buffett, admittedly having a bad year but his salary averaged just $175,000 in 2009-08…although he does have most of his assets in Berkshire, and owns 33% of the ‘A’ shares. How about this? Berkshire is the largest shareholder (13%) of AmEx…making it more like ‘Berzerkshire Halfway’, no? After all, Buffett blames out of control executive compensation for poor performance…how about you?

Frontline (FRO) the big oil shipping line whose stock is off 59% over the past 12 months reported an earnings drop of two-thirds for their first quarter…still beating estimates and has canceled or delayed orders for new ships…what does this say about the glut in oil?

If this is a recovery, TB is a billionaire! Watch out for today’s action…again! T+3 rules!

TB

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 28, 2009.

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5/27/09…reversal of fortune?

May 27, 2009 at 4:58 am · Filed under economy, financial, markets ·Tagged ,

Bloomberg Quote of the Day: “It is easier to fight for one’s principles than to live up to them.” – Alfred Adler

TB’s Technical Dictionary of stock movements:

Inside Day: lower high and higher low than prior day – indicative of no conviction

  Outside Day: higher high and lower low than prior day – attempted breakout

  Key Reversal: an outside day with a high or low below that of the prior day

…whereas Friday was a day in which every major index had an ‘inside’ day (not surprising ahead of a three-day weekend), yesterday, every index had a positive key reversal. Not only is it unusual that every index have exactly the same pattern, TB has never seen that pattern back to back. Lately, we have seen a few inside days in one or more of the indices and in fact a couple of back to back inside days. We have also seen key reversals with no follow-thru the next day which is also unusual but a day like yesterday demands a continuation of the rally or it will be viewed as a massive ‘failed’ breakout.

The most impressive yesterday were the Nasdaq indices and the Russell 2000 Small Cap, which bounced of support at the 40 day moving average and approached the 200 day m/a at the session highs and closed near the highs. The Russell actually punched above the 200 day while with the Nasdaq Composite actually closed above it while the 200 and 40 day had converged for the Nasdaq 100 creating STRONG support that we do not want to see breached!

Look at the number of normally rare (especially before summer doldrums of these three technical indicators since 4/23/09:

*7 inside days on most indices plus two sessions where only the Dow Transports had inside days; Back to back inside days on all indices on 5/8-5/9, plus the Dow 30 and Transports on 5/14…very rare!

*5/7 was an outside day on the S&P 500 and negative reversal on all other key indices. The Dow also had negative reversals on 5/15 and 5/20.

The importance here is that despite these the market continues to go sideways (more or less), and sideways is something the market does not do well (there is no money in that!).

TB was perplexed at the strength yesterday…even as those green shoots turned out to be onions, weeds, or worse. But then he remmberd: hedge funds! …recall that their cutoff for monthend and quarterend is trade date plus three days (T+3)? Remember the FOUR consecutive quarters that they managed to drive the market lower…significantly lower…after T+3 and usually with a run-up leading into it (they did not do that at yearend but it was slammed just a few days later into the new year, and they drove it down again for the March quarter). Now normally a monthly T+3 is not important but with the massive withdrawals and poor performance many have suffered they need positive results for the monthly numbers too. Above and beyond that is their ability to make the mutual funds and money managers look worse by driving the market lower (if I can’t look good I can make YOU look worse!)…YESTERDAY was last day for T+3!

Bloomberg stories this morning about how Chrysler is almost ready to emerge from bankruptcy already…thus giving cheer to GM. Not much to cheer there, especially for we, the taxpayers, who will wind up owning more than 70% of a rusted out hulk. Also, the bondholders rejected, as expected GM’s final final offer to give them a stake in a swap for the bonds…a stake much smaller than the unions or the government…in a country where most don’t want to be number two, nobody wants to be number three, in anything!

Yesterday, TB meant to comment on a CNBC debate TB stumbled on to while at the inn on Monday morning before driving the 450 miles back to Denver from Sheridan. It was hosted by Maria Bartaromo and was one of the few meaningful events on CNBC (the last being the David Faber investigation of the mortgage crisis). Actually it would have been better if Maria had just shut up but that is not what she is paid to do. Besides had she done that Black Rock’s Larry Fink would have outshouted everyone anyway.

Besides Fink there was Mohammad El-Erian, the softspoken and brilliant CEO/CIO of Pimco and light years above Bill Gross in intellect. Also, Jack Welch (yawn), Shelly Lazurus, CEO of Ogilvy and Mather, Citi’s Vikram Pandit, and a few others. The takeway was that the government is failing miserably to end this as they are still treating it as a crisis rather than providing a game plan to get us back on our feet. Furthermore, as El-Erian pointed out anyone who believes we are going to go back to anything resembling normal GDP growth is a fool (no one disputed this point!). Fink made a fool of himself however by his shouting out the others, while Welch, as usual, spoke volumes without providing anything new. Pandit, of all people, talked about CEO leadership, and how it is those supporting them that produce the results…which seems to be overlooked by him and others when it comes to compensating the rank and file, right? But what was noticeably absent was any comment of CEO or board accountability to the shareholders!

Then TB heard that Paul Krugman had stated he felt the recession actually ended last August! Wait…what happened to that six month lead of the stock market over the economy? Yesterday, the business economists (NABE) said they felt it would end by this June. No matter, the point is that all of that blather about stock market predictability (it has predicted something like 17 of the last three recessions), is based on a ‘V’-shaped recovery. This one will undoubtedly be an ‘L’, and that won’t be good for stocks, or those green shoots as they turn into mulch or worse…either way it stinks.

The problem about an inflection point is that like a ‘head and shoulders’ formation you never know it until after the fact…it could be just a head fake. Take that record increase in Consumer Confidence yesterday…which was based on …what? The stock market rally! Besides, it was from an incredibly low level. True, it is above 50 again but still at or below levels not seen since 1992! Green shoots, humbug! By the way Fink said he believes we will see 20% unemployment (including discouraged workers and those working part-time who are seeking full time employment). How will that hit confidence?  

Lastly, gold was weaker as the dollar sought out a bottom, it has now had two slightly higher lows and if today holds three. Commodities had slight gains but not one sector was consistently higher (up 1% or more), including energy. Oil will not and cannot continue to rise…contracts from October 2010 out were down, not up, and the contango to December 2015 shrunk to $15.27…that is down from $38.76 on 1/15/09!  

The most important takeaway today is that yesterday was last day for T+3 so unless you want LOSER stamped all over your forehead, watch today’s action and better yet the rest of the week’s. TB checked several stocks yesterday…about 40…that he has been following. He last updated his table on May 15, most were around the same level, and more were lower than higher and less than a handful made him wish he had bought them.

This is why you have to follow charts, tables, whatever – to have some perspective of where you are. If not, you will get sucker-punched into the faux rallies. Don’t be!

TB

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 27, 2009.

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5/26/09…a memorable weekend

May 26, 2009 at 5:41 am · Filed under economy, financial, markets ·Tagged ,

Bloomberg Quote of the Day: “The easiest way for your children to learn about money if for you not to have any.” – Katharine Whithorn…so true. We never would have dug a hole this deep if so, right?

 …despite nearly everyone being absent from the market Friday, as evidenced by the low volume of trading, (1.05 billion shares), and an early close in a bond market highlighted by an absence of senior traders who were probably headed for the Hampton’s, there was some significance in insignificance: with the exception of the Dow Utilities, every index had an ‘inside day,’ …lower high and higher low than the prior day. While this lack of meaning may in itself seem meaningless, it saved the stock market from what appeared to be an undeniable down week…it sure felt like one! Instead the Dow closed down by only 0.52 points or rounded out to flat. Not so for most stocks and the reason we didn’t do worse is that the financials have been holding their ground while the industrial have been bearing the brunt of the pain.

The S&P 500 even managed a 5 point gain but is still down 22 over the past two weeks but still in an uptrend since that Friday high (929) was in itself up 52 from the prior week. Unfortunately, not so for the Dow Transports which peaked two weeks ago at 3404 and are down 399 since then to a level not seen since 4/15…a warning to Dow theorists!

Meanwhile the Russell 2000 Small Cap peaked at 511 on May 8 and is down 33 since then (6.4%), while both Nasdaq indices are off more than 4% from their May 4 highs. The Barron’s 400 Index of the ‘best companies’ is also off 5% from it’s May 8, high, prompting more cries of ‘sell in May and go away’…or did they already do that?

But it was not a good week for bonds, commodities and more importantly the dollar! Only gold had a consistently good week closing at $958.90 +$7.70 Friday, and up $27 for the week, with most calling for a test of $1,100 soon. It is off $15 this morning however.  Bonds are fading with a formidable $110 billion in bills and notes to be auctioned in just four days. Even if you don’t care about bonds you DO care how these auctions fare! The results will have an enormous impact on not only bonds, but stocks, the dollar, and most importantly mortgage rates.

While energy has been doing pretty well lately TB has cautioned that the rise in oil prices appears to be more seasonal ahead of the summer driving season since storage tanks have been bulging…a perplexing juxtaposition to TB. This morning Bloomie has been reporting that OPEC has been cheating and dumping oil…TB is shocked! Anyway, we may have seen the highs in energy for awhile along with stocks!

Well, that is enough for now…let’s let the market tell the story today, shall we? Oh, and the futures are pointing to a lower opening…whatever that’s worth.

As mentioned Thursday, TB and his wife flew to Denver where they met up with his brother/sister-in-law and drove to Sheridan, Wyoming for TB’s niece’s high school graduation. Despite over 1,000 miles of driving, the first half at night and with some fierce downpours, it was a nice weekend and reunion. What is amazing there is that the high school…as were other high schools he saw there…was modern and beautiful, not like the ones in the SF Bay Area.

There were 196 graduates listed…but one was not in the class. He was in a class all his own: Walter Abram Crook who was there to receive a belated high school diploma. Walter attended Sheridan High but due to World War II never graduated. Don’t call him a high school dropout because his is a Lieutenant General in the Air Force Reserves AND is up for Brigadier General! Don’t ask me his age but you do the math. He is a very nice man and very young for his years. It was very uplifting to see him there and so appropriate for Memorial Day, as was a tribute to a fallen classmate killed in an automobile accident while he was trying to return a stray cat to it’s owner. It was also a day to remember TB’s niece’s father, James Meyer, who was killed two years ago while flying a Civil Air Patrol rescue mission for a missing boy (who knew survival and walked out unscathed…too bad his parents hadn’t had faith in what they had taught their son so Jim would be alive today).

TB hopes all of you had a great weekend and that you had an experience that reminded you of why we celebrate Memorial Day…it is not just another day off from work!

Have a good holiday shortened week and hopefully treasury can get all of those $110 billion note and bill auctions off successfully…remember what happened after the last miserable 30 year bond auction two weeks ago! Not pretty…and worse if one ‘fails.’

TB

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 26, 2009.

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5/22/09…a stock breakdown that wasn’t…quite

May 22, 2009 at 4:26 am · Filed under economy, financial, markets

…this was not what the ‘ex-perts’ (as in formerly pertintent) predicted…but it was what TB feared would happen. Not gloating as he wishes he were wrong but far too many ‘long only’ managers became bullish and those that play options left positions uncovered. That is why, in TB’s humble opinion, volatility got so low…below 30! It is now back above 31 on both indices and will likely close above 32 tomorrow…we could be in for a test of the March lows. Most indices took out the 200 day moving average today – to the downside erasing all that had been accomplished. The 40 day is now support and many indices even tested that! Now we have a 4 day week ahead to take us into month end…anyone want to bet on a rally?

New 52 week highs plunged but still more than new lows by about 1.6:1 but advance/declines and breadth canceled that feeble metric out. Volume was back to below average at 1.44B shares…since last Friday we have had just one above average volume day (1.64B vs. 1.55B), and the average for those five days has been just 1.46B shares! It is difficult if not impossible to rally under those circumstances.

Not that the rating agencies are helping as they threaten to cut the UK’s AAA rating for having debt equal to 90% of GDP, and are close to do doing so on the U.S. which has a mere 80% level and rising as rapidly as the 40 day moving averages in stocks. Pimco’s Bill Gross says it is enevitable that the rating will be cut while the sharp rise in rates yesterday (the 30 yr bond yield hit 4.33% falling 3-1/8 while the 30 yr TIP yield rose to 2.17% for a 3 point loss…and the difference 2.16% is the implied inflation rate), shows fears of credit quality of the U.S. government.

Not so says Tiny Tim…oops, Treasury Secretary Geithner…who attributed the rise to more confidence the U.S. economy is improving. Also, he attempted to quell the frear of a rating cut by saying that he will work with Congress to reduce the budget! Wow! What a guy! Like Atlas with the world on his shoulders, but not nearly as strong. See that puts worry back in the stock market that the government will pull away the stimulus (what stimulus when the feds giveth and the states taketh away?), too soon. Notice that the big hit in stocks yesterday was in industrials, not financials, and in fact REITS rose 0.15%! In fact, they, along with gold/silver stocks were the only sector that closed higher!

Back to the banks. Of the 17 banks that have returned TARP funds thus far (don’t confuse this with the 19 largest financial institutions), only one has settled on the issue of the warrants to buy their stock bestowed on the federal government for their largesse: Old National Bank! But get this: they settled with the Feds for  for $1.2 million while they might have been worth as much as $5.81 million! Now you know why the government should stay out of the financial markets…either that or let TB, who claims no options brilliance, trade with them so he can pay off his mortgage…quickly! Furthermore, according to a Bloomberg article today using the standard Black-Scholes options pricing model they were worth $7.18 each yet the government was paid just $1.48 (the strike price was $18.45). Well, by settling, Old Nat might have cheesed it for the others as now even the government is becoming aware of options valuation tools. Using the Old Nat formula, Bloomberg suggests the following savings: BofA $1.48 BILLION; JPMorgan $1.46B; Morgan Stanley $983 million; Citi $965M; and Goldie $693M. for a combined total of about $4.5 billion. The downside for stock investors is that as the banks reach a settlement in their frenzy to pay back the money and thus give them the power to raise salaries that will also serve to lower earnings and don’t forget those pesky commercial real estate loans that haven’t even hit yet.

Tiny…oops…Tim, Geithner is expressing a concern today that TB had from the beginning of all those banks tripping over themselves to repay the TARP monies. Namely, what if they pay it back and then the economy sours and some, or even one of them, needs to go begging again…what would that do to the stock market? Don’t even think about that happening…after all…this is America…it can’t happen here!

Now let’s travel across the pond to Jolly Old England where Gordon Brown, the former Finance Minister cum Prime Minister, a man who pledged sustainable public finances, and reduced the debt dramatically has now through his own actions and the crisis, increased debt to the point of placing the UK at risk of losing its AAA rating. If you think transparency in the U.S. is pathetic get this: the U.K. Treasury has refused to release stress test scores on Royal Bank of Scotland and Lloyds citing the risk of increased instability! Wait, wasn’t that the point of the stress tests to increase confidence in them?  

Ah, summer in the Hampton’s…beautiful along with the beautiful people. Just heard this morning however that based on inventory levels of unsold homes it would take three years to sell your home (if you had one there), of course you could get lucky and do it in two, right?

Get going and enjoy that well-deserved three day weekend and stop to think of the lives lost or ruined to give you that three day holiday…that means you too, Dick Cheney.

TB

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 22, 2009.

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5/21/09…it’s all coming together…or apart!

May 21, 2009 at 4:28 am · Filed under economy, financial, markets ·Tagged , , , , ,

TB saiz: “It took nearly a decade to destroy the global economy by dismantling the laws of finance thru excessive leverage…but it only took a two-month bear market rally to dismantle a basic tenet of investing: stocks can continue to rally even as their intrinsic value is sharply diminished.” – TB said that??? Yep, just now!

…well, we finally had an average volume day yesterday. That’s the good news. The bad news is it was on a down day. Not that is was that bad a day percentagewise. But despite the Dow only being off 0.8% and the S%P 500 -0.5%, both had negative key reversals (higher high, lower low, and close below the prior day’s low). Not only that but The Russell 2000 Small Cap and Dow Transports both had outside days, narrowly missing the negative close necessary for a reversal. Both Nasdaq indices narrowly missed having outside days and both are back to flirting with the 200 day moving average…all others are below (the SOX is above and it gained but with 2:1 declining. The only two indices with advances were NYSE Energy and the Alternext Composite (formerly AMEX).

There is little doubt from the data that a three-day weekend is coming: three straight days of below average volume, starting with last Friday, each with lower volume. Yesterday’s final tally was 1.64 billion shares abut 100 million above average but came at a price: 400 million in the final 10 minutes of which 200 million were at the close and they were selling! The Dow after peaking at 8592 in the first hour, crossed into negative territory just after the final hour began as they deciphered the minutes of the last FOMC meeting and determined they still show economic weakness (duh!), despite alluding to an illusive inflection point (nice alliteration) and then slumped to 8405 before gaining back 17 of it.

BofA (BAC) managed to not only hold on to 24 cents of the gain ($11.49) but peaked at $12.24 or nearly $1.50 above the 1.5 million share offering price done in the twilight hours on Tuesday. TB thinks the reason these deals are getting done in the dark (another feeble attempt at an alliteration) is to prevent the shortsellers from catching wind of them. You announce after the close and simultaneously…good news travels fast you know…voila! The deal is done…in fact they originally talked of doing it at $10 but demand for dilution was so strong they did it at $10.77. Wells, Morgan Stanley, etc. did it now the others. Now troubled Regions Bank is trying to raise capital…doesn’t there have to be a squeezing out here at some point? Not as long as cash abounds TB would guess.

What is causing a continuation of the closing hour selloff this morning (Dow futures -57; SPX -6.30; NDQ -9.25) is that S&P announced they might cut the UK’s AAA rating which is why their bonds are down and the rest of Europe is up by a similar amount. It has also stabilized the dollar for now after dipping slightly to a new low and giving us 4.3% more downside before support at the Dec 18 low. The reason given was a deteriorating financial condition. Moody’s followed suit and we are awaiting Fitch’s comments. The U.S. is also at risk of losing it’s AAA rating…quel horror and sacre bleu!…that is if you believed over the past six months or so that it still is AAA! TB gives it a BBB- on credit watch for a downgrade. But seriously a loss of AAA would seriously impair both countries ability to sell bonds and that is especially critical for the U.S. of A.

One only has to look back to the last 30 year UST auction that some newscaster incorrectly labeled a ‘failed auction.’ That, thankfully, it was not…there were enough bids but the ‘tail’ was unusually long meaning some people got them who were hoping they wouldn’t…that is one of the responsibilities of being a primary government securities dealer – to support treasury so there are no failed auctions…hmmm, last TB looked, JPMorganChase, Citi, BofA, and Morgan Stanley were all primary dealers!

Is anyone else concerned that capital is being raised for the wrong reasons?…and you even more concerned about the speed with which they seek to repay those pesky TARP funds with strings attached? So far however, nobody is offering to pay back the FDIC guaranteed bonds…not yet. But to pay back the funds the Fed has to be convinced that these stellar institutions…all banks now thanks to a flick of a pen and one the Chairman of the NY Fed, now deposed, gained monetarily from by buying more Goldman shares, of which he is coincidentally a director. Aren’t revolving doors wonderful? You are totally shielded if you work for Goldman or JPMorganChase, right? The rest are sisty uglers and not worthy of government largesse! See the real reason they want to pay back the money is to remove the restrictions so they can retain those good people working for them…especially the CEO’s and CFO’s who got us here in the first place!

Here is something important: billions, perhaps trillions are in cash equivalents such as money market instruments. By now more than $400 billion has been added to savings and the banks are flush with cash which the don’t wish to lend – even to one another! But they have to do something with it so they lend it to other banks as discussed yesterday in the Libor market (London Interbank Borrowing Rate), which is monitored by the British Bankers Association. The benchmark 3 month rate fell 6 basis points overnight to 0.66% which follows a 3 basis point drop Wednesday, and it is down from 0.75% after breaking 1% for the first time on record a week ago! But as a friend pointed out to TB the banks are still so credit conscious that this ‘average’ rate is 25 basis points higher than what the best banks, such as JPMorganChase have to pay for funds. See how this adds to their profitability? The point is that fear is abating by investors and eventually even hand-wringing bankers will steel their nerve…perhaps they are doing that nightly at a local gin mill or wine bar.

There is hope, folks. Yesterday, Tiny Tim…aka Treasury Secretary Geithner, who is smart enough to understand international finance but can’t do his own taxes properly, was asked how much he earns. He said the government pays him a good salary. When pressed he said it was $200,000, which isn’t chump change exactly but far less than he could have (will?) earn on Wall Street. So perhaps, we can recruit some of those fine brains for the public sector and let them be investigators for the SEC…oops, they are disbanding it or at least stripping it of many of its duties….so better to try Treasury or the Fed, kids.

TB has run out of pertinent things to say and thinking about the weekend. Friday, he is leaving for Sheridan, Wyoming to attend his niece’s high school graduation and visit the world famous (why are so many remote places world famous?) Mint Bar…to pick up a new hat and t-shirt.

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Hope you all have plans for a great three day weekend and that they exceed your lofty expectations!

 TB

 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 21, 2009.

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5/20/09…starting the weekend early?

May 20, 2009 at 4:25 am · Filed under economy, financial, markets

TB’s Quote of the Day: “There’s more comfort, there’s more clarity, there’s less fear, there’s less panic.” – Neil Davies, volatility trader commenting on the plunge in the VIX: “Is there really more comfort, clarity…or is it just blind complacency?” – TB

 …TB believes that this market is far too complacent. How so? We have been totally ignoring dilution in the bank stocks for one thing…another is that we are totally ignoring the next crisis: commercial real estate. TB says ‘we’ because the banks are not ignoring the real estate problem…they are running from it. TB has talked to a few people active in commercial real estate and the banks are not willing to risk a dime. This at a time when capitalization rates on deals are attractive, but not to the lenders. Counterintuitive.

In another, typical of late, overnight deal faltering BofA issued $1.5 billion shares or about 25% dilution! At $10.77 a share or just 48 cents below Tuesday’s close. What time was the first announcement of this? 5:15pm EDT! Yet there was another feeding frenzy to buy the stock? The offering price is 425% above the Feb. 20 low ($2.53), and this from a company with no dividend and questions on its viability…there would be none if the government hadn’t stepped in (or perhaps it would have been better since Lewis might have reneged on the Merrill merger).

Here’s another one on clarity (transparency): the SEC had two lawyers sell stock they owned when they learned an investigation was to start. As TB always says “what good is insider information if you don’t use it?” But here is the troubling part: we only learned of it because Sen. Grassley leaked it to the press and guess what: nowhere were the names of the culpable attorneys listed! How is that for an incentive to cheat? Whatever happened to perp walks? We are living in a gross double standard. First, the private sector pillaged and still no one has gone to jail (aside from Bernie Madoff but his was a scam), then we have the Chairman of the NY Fed, Steven Friedman, and a director of Goldman Sachs buying stock when they were becoming a bank instead of a mere broker. Now we have two SEC employees and we don’t even know their names.

Friedman eventually resigned but if TB was Martha Stewart he would be mad as hell! All she did was listen to insider information and sell her shares (and the irony is had she held on the stock would have gone down but eventually turned profitable again), while these three geeks were involved in the insider information! Something is wrong with this picture…dreadfully wrong! Ah, but we are told there is more clarity in the market???

More insider trading and more lawyers: a former and a current partner at the London offices of two U.S. law firms face insider trading charges next month brought, not by the SEC, but by the Financial Services Authority in the U.K. This is the fifth criminal insider trading prosecuted in London and relates to Novartis’ takeover of Neutec in 2006. So the score is: FSA 5…SEC ZERO! Perhaps lawyers should be made to sit for the CFA so they can learn something about ethics too. What TB can never understand is how so many lawyers must have cut the class on conflicts of interest and ethics? Guess it just wasn’t that exciting, right? Back to Martha…the reason they were able to prosecute her criminally was that she was once a stockbroker…meaning she had to take the Series 7 exam which is not meant to test you practical knowledge but means that you KNOW the law…even if you took a crash course and forgot it the day after the exam!

Bloomberg reports overnight that the Obama administration is seriously considering stripping the SEC of some of its powers…this to TB would be a gross mistake! They want to transfer supervision of brokers and mutual funds to the Fed…this at a time when the Fed is losing its autonomy and becoming a tool of Treasury. Obama feels there are just too many regulatory agencies. TB and others believe that had Chris Cox not been derelict in his duties we would not be in this mess. He has no defense…other than Cheney told him to do it! Hopefully Mary Schapiro is doing something and we will not only have the uptick rule restored but it will be meaningful (10 ticks). Also, any naked shorts must be covered within five business days…that is two days past settlement.

With nobody around these days it appears that the stock market is particularly vulnerable. What with the low volatility caused by buying calls rather than put protection but that means a lot of positions are now ‘uncovered’ or naked. This tells TB that unless they can run this puppy soon we are in trouble of a serious correction…perhaps a test of the lows but TB puts a low probability on this and even less of one on taking out the March lows.

Consider the reasons for the rally attempts this week: Monday it was the Indian elections which caused the Sensex to surge over 17%…so…what? That is no reason for a rally or at least not a sustainable one. As for yesterday, the only plausible reason and it is even weaker than the India excuse, is that German investor confidence unexpectedly surged to the highest level in three years…and it can fall just as fast if there is a selloff.

Technically we are still in the doldrums in the U.S. markets…and the summer doldrums have not yet begun although we are sitting on a lofty perch to just go sideways, right? But there are two elements that need to be considered: first is the shrinking volume…yesterday’s 1.34 billion share day was the lowest since May1…Mayday! We have now had three consecutive sub 1.3 billion (six month average is 1.56B) share days, each lower than the previous. Worse, since January 15, the volume picked up and has averaged 1.64 billion shares with 5 days above 2 billion shares…two of them just after we put in the March lows; the other problem is the rapidly plunging 200 day moving average which, coupled with a rapidly rising 40 day moving average makes a perfect target for the speculative traders. The gap between the two has narrowed, converged in some cases, and in a few had a crossover where the 40 day is now above the 200 day, normally a bullish sign. This is true on all major indices and key stocks. Caution!

Crude prices are trying to rise but reaching resistance and the Saudi’s are apparently comfortable with $60 oil so you need to monitor closely. The other consistently strong commodity is Gold which, after bottoming out at $681 on October 24th peaked at $1,004.90 on February 20th  then put in a double bottom at  $855…right on its 200 day moving average and has since rallied back and traded at $932.80 overnight. Now, some analysts are calling for a test of $1,100 which could happen with the dollar weakening again and if stocks put in a big correction it could happen quite soon.

Libor’s recent plunge is also lifting some eyebrows…is it easier credit? Not so, apparently but is caused by a surge in saving (please don’t say this is money dying to be consumed or worse, invested in stocks). Overnight the 1 month rate was fixed at 0.31% while the 3 month rate dropped another 3 basis points to 90.73%…a week ago it broke 1% for the first time on record. TB was discussing this with a friend who wrote:

“…the majority of trading is occurring below this level [i.e. 3m fix], albeit to better names… Not only are trades in 3m taking place below Libor but recent trading in 6m maturities asks some questions of 6m Libor. Today saw trading at low as 0.55%
to better names (6m Libor 1.28%)…[but] there are still several of [sic]Llibor setters that would pay close to Libor to raise term money.”

The reason for this is that the ‘fixing’ is based on an average of eight U.K. and U.S. banks. But to see it trading that far below says two things: the rate is so low it doesn’t matter if you get 0.25% or more less, and second that credit quality is still paramount!

The bankers association has been struggling with this since the crisis peaked in October. Is this a good sign for the housing market? Bond market? Stock Market? You decide!

John Deere just reported and took a huge hit to earnings: -38% due to construction slowing. Lowered 2009 forecast to $1.1 billion from $1.5 billion…still they beat estimates of $1.07 by 4 cents…shows you how the bar has been lowered. Watch DE!

Yesterday was Tuesday and it felt like a Friday in the markets…now it is Wednesday and it is beginning to feel like Saturday! Can’t wait for Thursday and Friday! Ugh!

 

Have a great day!

 

TB

 

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 20, 2009.

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5/19/09…when the going gets tough

May 19, 2009 at 4:37 am · Filed under economy, financial, markets

Bloomberg Quote of the Day: “If you are not criticized, you may not be doing much.” – Donald Rumsfeld…”or you might be doing too much” – TB

…the tough politicians start whining (you thought TB would say the tough go shopping?…not in this new world order). TB’s apologies to the U.S. Congress for all those bad things he said about America “having the best government money can buy.” Also, yesterday he struck at Speaker Nancy Pelosi. Well, not to be outdone, the Brits showed us how it’s done. U.K. House Speaker Michael Martin (no relation to Mary Martin), is under fire and being asked to step down…if he does it will be the first time in more than three centuries that this has happened. What did he do? Well, it seems there is a huge investigation into ‘expenses’ in the House of Commons…thanks to the press…and Martin was irked. Not at the MOP’s, no sir, at whoever leaked those expense accounts to the media! Not only irked but he has called in the police to investigate the leaks!

Sorry Mother England but we have you beat! Heck, in TB’s lifetime we have probably had  four Speakers step down…most starting with the Gingrich era. So just do the deed and be done with it until the next Speaker worthy of being expunged appears on the scene. You have to wonder if Obama secretly wishes Pelosi would step down so that our ship of state can ‘right’ ourselves a bit…needed if he is to be a unifier right?

Yesterday’s stock market rally blew TB away. Here we are at a critical juncture, May is almost over and we have a long weekend ahead, and if you believe the banking system is cured you are a cockeyed optimist. Yet, within seconds of the open, the Dow was up almost 100 points and climbed pretty steadily throughout the session before closing up 235 and only 7 points off the session high! But what’s wrong with this picture that included very positive advance/declines and breadth and new 52 week lows after being mired for a few days near even with new lows, swung to 3.5 times positive? Also, if you recall Friday was a key reversal for the Dow Industrials, and not the good kind. We had a higher high and lower low than Thursday and a close below the low…normally not a good thing but we live in strange and interesting times where technical rules are made to be broken…but since that cuts both ways be cautious about yesterday’s rally.

One problem the tekkie’s have is that the slope of the 200 day moving average is negative and in some cases still pretty steep. Meanwhile, the 40 day moving average has been rising sharply but both are now flattening and very close to convergence…in some cases the 40 day has ‘crossed over’ the 200 day which also is normally a positive sign but just as that is happening the rally is losing it’s steam. So what could signal a breakout could easily within a few sessions become formidable resistance…but first support, right? One other troubling point for the bulls is that it is the laggards that are now carrying the rally and also there are still a high number of the ‘movers’ (defined by TB as being up or down more than 1 index point) that are the down movers one day and up the next. Most notable among these are the stocks the hedgies play like XOM, AAPL, QCOM, RIMM, etc.

Libor continues to decline at a rapid pace. Today 1 month Libor fixing was at 0.31% while the 3 month rate is 0.75%…less than a week after falling below 1% for the first time on record! But do remember this is due to the banks being flush with cash, not being willing to lend. Ultimately of course they will have to do something with the money, like make loans…especially amidst huge asset sales and bond and stock issuance. But in the meantime, despite the beliefs of friends who argue that they have to make money with a sharply upward-sloping yield curve. Au contraire, mon amis. You have to not only look at the slope of the yield curve but at the underlying yields and with the 5 year treasury yielding just 2.79% and that after a sharp backup in rates. Even with the correction  we are only back to the low yields we saw in 2003 after the Greenspan panic easing which put us on the path to increased leverage and derivatives usage which got us here.

Here is something for you to ponder. With Morgan Stanley, JPMorganChase, and Goldman  Sachs, among others, set to pay back their TARP funds, what will happen with the money? We printed it…the Fed sterilized it through open market operations, but what now when it is back in Congress’ hot little hands? One can only imagine, but it won’t be good. Think of it as taking out a home equity loan due to some emergency and then when the emergency was over did you repay it? Uh, probably not, but you did buy a new car!

So the water remains murky and TB has a sneaking suspicion that this rally is going to end rather abruptly. Despite that nice move yesterday we are still up against the same old resistance levels that have plagued us for most of the month of May. Mayday! Mayday!  

Have you noticed lately the number of companies reporting earnings lately that are EXACTLY on the estimates? Started with Wal-Mart and there have been four or more since. TB is always leery of ‘just making it’…just how much juice did they squeeze out of the next quarter(s)? Then of course there are the banks that soundly beat the lowered bar estimates…most did that by not adding enough to loan loss reserves, etc. Just askin’.

In deference to your eyes and TB’s, he is going to put this column to bed now. Just remember: pigs do get slaughtered…always!

Have a terrific day!

TB

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 19, 2009.

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5/19/09…waterboarded!

May 18, 2009 at 4:22 am · Filed under economy, financial, markets

…as if Obama doesn’t have enough on his plate he now has to deal with l’affire Pelosi. What was she thinking? But the best thing from this could be for Obama to assert control over her and perhaps she is forced to step down. Ever since the waning days of the Bush administration she has had a free hand, as demonstrated when she chaired the late night meeting that got Congress on board for the TARP bill. She is a lightning rod for controversy and should go. We don’t need those kinds of distractions. Nor do we need Cheney mouthing off as an ex-VP or otherwise, especially when it is patently obvious that all he is trying to do is restore his own reputation…for trodding on the Constitution?

Once again the markets continued to waterboard us on Friday and options expiration snuck up on most of us…sorry about that…due to the 1st coming on a Friday. Still, it was a below average volume session, with weak advance/declines and breadth and after a week of the ratio of new 52 week highs to lows treading water around even, it turned negative on Friday for the first time since April 16…quite a run for an index that was grossly negative for months…it is amazing after the selloff we had that there can be any new 52 week highs, right?

Delving deeper into the data, the Dow Industrials had a negative key reversal (higher high, lower low, and close below the prior days low. But the index was only off 0.75% and the record of late for reversals, be they positive or negative, has been less than useful. There was little useful information on the day other than Transports were the only index that was up (just 0.58%), and the S&P 500 close down 1.14% on what was almost an inside day! The Russell 2000, Barron’s 400, and the Alternext (AMEX) Composite were both down on and DID have inside days (lower high, higher low than the prior session), indicative of a continued lack of conviction…and amazing on even a minor options expiry. Banks (-3%), and REITS (-4.2%!) were the big losers along with Utilities (-2.9%). The Nasdaq indices were off the least and the Composite had the third straight higher high and higher low…struggling to resume that uptrend, while the 100  has been mired between the narrowing 40 and 200 day moving averages about to converge at around 1350 (close was 1355), so our long wait for a signal may be nigh. TB’s bet, especially with a long weekend rapidly approaching (and an early close Friday for bonds), is that they take it down. Look at the overnight summary and you will see the number of stocks reporting earnings has dwindled. In addition, a lot of key stocks are going ex-dividend this week and early next week.

Indian Prime Minister Singh’s (not Vijay) electoral win that nullified the Communists is viewed as a major victory and good for India and the world. As a result the Sensex Index, which had been very weak lately, rallied by 17.3% overnight and trading was so active it had to be suspended for a time. It is now up 48% year to date eclipsing Brazil’s Bovespa (+30.5%), for top honors in a world where single digit positive returns are above average (the Dow  is still -5.8% ytd, Dow Transports -13.7%, S&P 500 is -2.3%, Russell 2000 -4.7%, while the Nasdaq Composite is +6.5%, the 100 +11.8%. Elevating India to the top of the BRIC countries could be good for the global economy if reform takes place. Other than the Sensex however, little happened overnight. Japan’s Nikkei was -2.4%, Hang Seng +1.4%, Korea’s KOSPI -0.4%…all EXACT offsets to Friday’s moves! In Europe only the FTSE was up…presumably due to the strong link with India?

So there you have it…a week with little new economic information except the release of the minutes of the April FOMC meeting on Wednesday with little new information there.  

Have a great day and find ways to have fun in the bunker while you wait for direction. Just remember to respect any sharp breakout and watch the Dow today after Friday’s negative key reversal.

TB

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 18, 2009.

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5/15/09…waterboarding – posted 9pm…sorry didn’t go out!

May 15, 2009 at 5:01 pm · Filed under economy, financial, markets ·Tagged , , , , , , , , , ,

…TB thought that was banned again? Yet that is what the markets have been doing to us now since that nice May 4 rally. While the S&P 500 and Dow 30 don’t show it as much the Dow Transports, Nasdaq 100, Russell 2000, and especially the Sox have been producing some lower lows…three straight lower lows on Transports and FIVE straight lower highs. It is the lower highs that are telling the story though as all indices managed slightly higher lows yesterday. All other indices put in their fourth straight lower high –except the SOX which bounced but the 200 day is now at 249 and the 40 day is just 3 points lower so it is the canary in the coal mine.

Financials are troubled again – as if they looked down and started getting shaky. Take Wells Fargo for instance. On that May 4 rally it rose from $20 to $24.25 – just below the 200 day m/a. then it swing in a 4-1/2 point range for four days peaking at $28.34, it has since had three straight ‘slight’ lower lows centered around the 200 day moving average. Yesterday on a ‘key reversal’ it closed up at $25.69 but reversals have been head fakes lately for stocks. IF it fails today it could be back at $20 …a classic ‘head and shoulders’ pattern…and that is the most impressive of the bank stocks! USB is fighting to stay above the lower 40 day moving average while even the venerable JPM is looking ‘heady’ and had a low of $33.82 yesterday while the 200 day is at $32.38 and the 40 day $31.34 so you have major support and boy will they jump on it if it breaches the 200 day.

The Dow needs a 250 point rally today to avoid a down week to avoid having the first down week in 10, other than a couple of minor slips that should be viewed as flat. The S&P 500 needs a 37 point rally to avoid the first real drop in 11 weeks…that is NOT going to happen. It will take nearly 40 for the NDQ 100 to break a 10 week string, 22 points for the Russell 2000 for an 11 week continuation, and an incredible 315 points for the Dow Transports to make it 11 which set the Dow theorists all atwitter as having the steepest run. The Philly Semiconductor Index (SOX) had it’s run stop at 11 a week ago and needs a 5 point rally just to stay flat and that would be 9 points below the May 1 close. On the May 4 rally it gained 14 points to a high of 272. With the bad news on Intel this week with the record fine from the EU that appears highly unlikely.

TB has been calling your attention to the continued drop in Libor – especially 3 month which fell below 1% for the first time on May 4th (not coincidentally the day of that big up move in stocks), and is now down to 0.83%! In addition, overnight, the TED spread (bills to Libor) is at the narrowest since the global financial crisis began in August 2007. But as stated yesterday this is not due to an increased willingness of bankers to lend but a n increase of nearly $400 million in deposits driving both Libor and T-Bill yields lower. All of you ‘green shoots’ fans – this is not money sitting on the sidelines itching to be invested, lent, or spent!

Late yesterday we learned that it is now the insurers who need help. Big ones like Allstate (the good hands folks), Prudential, the Hartford, and Lincoln National as well as some smaller ones. Hartford will get $3.4 billion in TARP money, Lincoln $2.5 billion. Are we covering all the bases yet? Brokers, banks, casualty (AIG), and now life, what is left. Why the life insurers? They are having trouble covering annuities! You didn’t want to hear that if you are retired and living on one but not to worry…Geithner is here! Throw a TARP over it…but the stink is still there…is this the catalyst for another stock market drop?

Gold is getting toppy, but unlike Crude has built some rather strong support here. Even if it were to decline so long as it doesn’t break the $899-901 band it is fine. But Crude looks like it had a false rally. Note that last trade on June Crude ($57.86) is May 19, and July ($58.57) now has twice the open interest of June. What is of interest here is unwinding of hedges as the contango (where price is higher on longer contracts than on the front end) has narrowed to $19.33 for Dec 2015…at the peak this more than $32!

A big warning flag went up yesterday when Wal-Mart had earning right on the consensus. That suggests squeezing out every drop and doesn’t bode well going forward. Nordstrom’s earnings fell by 40%. Tiffany broke thru the 200 day and closed on the 40 day in just two sessions although that is a difference of about a dollar ($26-25). Even the hot and overpriced Blue Nile (NILE) after gapping up on May 8, closed it the very next day and plunged from a high of $51.23 to $42.38 yesterday. But it is WMT that worries TB. Like Chrysler shutting down a quarter of its dealers and inflicting great pain on small towns across the country, Wal-Mart who has displaced thousands of mom and pop businesses is cutting back in those very towns adding to unemployment…ain’t that great? Not only that but Wal-Mart brought us ‘just in time’ inventories, and even those aren’t low enough now. Green shoots turning into weeds?

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Yesterday, TB snuck up to the wine country…Dry Creek Valley, with a recently retired friend to pick up some wine at Montemaggiore and cult zin winemaker Rafanelli (www.arafanelliwinery.com) It was a beautiful day and not much was missed in the market, except the doldrums. Also made a stop at Ridge. All of these wines are in the $30-40 range and not seeing much of a decline in sales, unlike the high end wineries. Montemaggiore is a very small, beautiful, boutique winery in the hills on the south side of the valley. One thing they do that is unique. When you are a member of their wine club you can pick the wines you want including from their library which goes back to 2002…at the same price! All of these wines have never left their temperature controlled storage room and are tasting great. Vince and Lise Colini are wonderful people and making small lots of great wine at a reasonable price…check out their website www.montemaggiore.com.

 

In the Napa Valley, high atop Howell Mountain is another winery of a friend whose father was well-known for making exceptional zins, Lamborn Family Wines. While Mike has continued the tradition of his dad, Bob, he is now making a beautiful cab, thanks to winemaker Heidi Barrett Peterson who made the famous Screaming Eagle. If you are interested in more information go to their website at www.lamborn.com.

 

TB isn’t receiving any compensation for mentioning these fine wineries, only introducing you to some great wines at fair prices….let’s do what we can for this industry too. How about a TARP (Taste A Reasonably Priced wine) program for them too?

 

TB meant to mention the passing of former FDIC Chairman Bill Seidman who was largely responsible for the S&L bailout and the Resolution Trust Company (RTC) to dispose of bad assets…he favored doing similar with the banks as recently as a week ago before his unexpected death at 88…TB would never have guessed.

 

Have a great weekend.  Drink some wine, save a winemaker!

 

TB

 

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 15, 2009.

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