Traderbill's Financial Markets Weblog

…three more banks with about $2 billion in assets were taken over on Friday bringing the total to 84 this year. Also TB noted that the FDIC numbering system ‘skipped’ three numbers…perhaps meaning that those are in the works? Bank analyst Meredith Whitney, the only one to get the banking crisis right, sees 300 failures this year. Over the weekend TB saw two other forecasts for 500 (tying the 1994 banking crisis) and 1,000. The banks failing now are not big risk takers but banks who were competing for business with the big  banks (think Wells Fargo!), and mortgage lenders who were simply packaging up their new ‘crap’ loans and selling them without recourse to Wall Street to be resold to the unsuspecting public thanks to the unexcusable procedures used by the rating agencies.

On Friday, the FDIC lowered the capital requirements for buying troubled banks. this is a sign of how difficult it has become to find buyers. But they did not remove a restriction that the acquirers hold the asset for at least three years. Both decisions are right: the capital requirements were higher than for a new bank since the FDIC is guaranteeing most of the debt above a set limit for that very reason, but with more banks to fail…we are only 25% of the way if we use the conservative estime and less than 10% if we use the worst case; with this kind of backing the government doesn’t want ‘investor’s to ‘flip’ the banks as soon as things pick up….Wilbur Ross argued for these points although he was less interested in the three year rule unlike most distressed asset buyers. But somehow they will have to attract significantly more buyers or they will look like a banks balance sheet loaded with OREO’s (other real estate owned). This is all the legacy of ‘too big to fail’ which we discussed last week.  

This entire era will best be summed up by: everyone else was doing it so I had to do it to compete. This goes from the realtors (who received kickbacks from mortgage companies for steering business to them…often for subprime when they could have qualified for prime), to the appraisers (the good ones refused to inflate appraisals and even reported it to Congress where it fell on deaf ears), to FNM and FRE (who claimed they held few subprime loans because they were in the form of AAA-rated mortgage-backed securities), to the regulators (who were blind to all of this happening), to the Congress (who were paid to not interfere), to the Bush Administration (who told the regulators to stand down because it was boosting the economy). Oh yeah, and the borrowers who were either ignorant and lied to or gambled on making a bundle.

As for Congress Bloomberg reported a poll where more than 80% would like to see the entire Congress replaced (TB has been saying this ever since this mess started). Liar loans equals liar Congress. How much hubris does it take for those moron’s to think that they are doing a job that only they can do and doing it well? Sounds like some CEO’s.

It is within this framework that TB has to shake his head at how stupid we are as investors. We cannot see that there is a difference between the economy ‘bottoming’ (if in fact it is and this isn’t a bounce), and a bonafide recovery – meaning solid growth. We cannot get it through our thick skulls that rising federal deficits and the biggest deleveraging of financial assets in history are going to make sustainable growth impossible until we get our personal and corporate financial affairs in order.

TB directs you to John Mauldin’s latest commentary from Friday and not only hopes you will read it but that you will stop and think about what he is saying…it is brilliantly written!  Here is the link…it is TB on steroids:

http://www.frontlinethoughts.com/printarticle.asp?id=mwo082809

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Thanks to all of you who sent your kind comments on TB’s wife’s surgery. The operation was a success and the patient is recovering nicely. Thankfully the operation was last week rather than this week because from Friday through TUESDAY of next week, the Bay Bridge will be closed while the move in the new span thus leaving San Francisco accessible from the East Bay only by BART or a very circuitous route.

Hope you have a great week and plans for a fun holiday weekend..

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, © August 31, 2009.

Bloomberg Quote of the Day: “When the eagles are silent the parrots begin to jabber.” – Winston Churchill

…they tried to take the stock market down yesterday but failed again, although it was a struggle all the way into the close. However there were two outside days incurred (higher high and lower low), Dow 30 and NYSE Energy, both of which closed up but just slightly  but the damage done was that in every index except the Nasdaq 100, which were equal, there were more losers than winners and very few winners overall. Are the winds beginning to change. Overnight markets were strong globally (except China) and U.S. futures are up but only slightly. It looks like from the ides of September the going will be considerably tougher, especially around quarterend 9/25-30, and then again in October when the earnings reports come in.

Most of you are too young to remember either ‘layaway’; or ‘Christmas club’. In TB’s era these were common, both being outmoded by credit cards. This morning there was a big story that Target and some others have re-instituted layaway, where you find something you like and with a small deposit of 10-15% put it away and make monthly payments until it is paid for usually withing 6-9 months. If you cancel the order you loee $10. There are too possible reasons: first, that it will encourage consumers to buy without having to resort to credit cards, or second, that the retailers are starting to sweat. TB chooses the latter but either way it gives the buyer time to decide whether they really want or need the item.

Christmas club was a boon for banks (and some companies who held back from employees pay)…but today would you want to risk leaving money with your employer? Banks also did this where you deposited a set amount each month thru November and then could take it all out at the end of that month but not before…in other words, forced savings. Of course, the banks did not pay you interest for the use of the money. TB became Chief Investment Officer at FNB Nevada (later First Interstate) in 1975, by the time he left in 1981 it was no longer a factor. This is a good thing however in a low interest rate environment as we have now since it forces savings.

In the end, both could be modest pluses for retailers…but ‘modest’ is the operative word.

Barton Biggs was interviewed on Bloomberg this morning and he is bullish…says the rally is for real and will continue. Now TB has no quarrel with Biggs and respects his experience which beats TB’s 37 years. But with all due respect to not even expect a correction after a rally of this magnitude and to overlook entirely the worst credit crisis since the Great Depression…and which still has not freed up money from the banks as they try to build capital thru earnings and deleveraging…seems naïve. Furthermore, delinquencies, foreclosures, and mounting commercial and credit card losses makes this seem optimistic. Biggs even sees not only a ‘V’ shaped recovery but a bigger V than others and he does not see stocks as overvalued…good luck, Barton! Meanwhile, UBS head of floor trading on the NYSE, Art Cashin, quipped, layaway could help but not for me. It seems ludicrous to TB that we will not have at least a major correction in stocks, and soon. Funny how few of those loaded with old market saws fail to note that in any major bear market selloff a big countertrend correction is a staple…sheesh!

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TB was out all day yesterday as his wife had surgery to remove an encapsulated staff infection from a prior surgery – 7 years ago. All went well but TB was relying on his Crackberry to get market updates.

Have a great weekend and thanks for reading.

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, © August 28, 2009.

Bloomberg Quote of the Day: “Never believe anything until it has been officially denied.” – Claud Cockburn

…in yesterday’s discussion on why earnings growth would slow (business to business continuing weak, more costcutting, fewer jobs, fewer pay increases which are all essential to increased demand/consumption), TB neglected to state that while the ‘cash for clunkers’ program which expired and was a disaster in terms of rapidly putting money in the hands of dealers to keep them and the auto industry afloat…and in violation of the law, and the $8,000 tax credit for first-time homebuyers which expires November 30, both served to increase demand, a significant amount of those sales were ‘borrowed’ from future sales. This is not as significant in cars as they drastically lowered inventories while removing polluting cars from circulation, albeit at a high cost, but more so with home sales as inventories remain high, and will not decline as banks ‘dribble’ out their foreclosed inventories. At best this will stabilize the market because you cannot get much more price appreciation without the aforementioned jobs and higher earnings to support the loan payments. Therefore, TB sees it as John Burns, a real estate brokers consultant, reported in John Mauldin’s column as a ‘temporary’ bottom (TB calls it a ‘faux’ bottom), that Burns sees peaking in November with the expiration of the tax credit (unless they extend it), and then a decline to the eventual bottom in Summer 2010, meaning the speculators are way ahead of themselves and their financing is running out. Then both of us see a slow, steady recovery that will take years to get anywhere near the old highs, especially in areas like Las Vegas, Florida, and California…think about it.

TB also left out of the discussion an unfortunate offshoot from the efficient markets hypothesis: the scholars devined that dividneds don’t count…there is no difference between valuing a company that relies on growth for capital gains and paying out regular (and hopefully increasing dividends). One reason for this is that they look at the taxability of them in. This is wrong when you have pension funds and IRA/401(k)’s  of immense proportions which at the very least defer the taxes allowing reinvetment and thus compounding but allow the investor to decide whether he is so enamored with management that he wants to reinvest them with the company or go elsewhere. This is jus one more reason that long-term investors are being overwhelmed by what can only be called speculators. Even the average mutual fund holding is well short of one year. In the 60’s this was referred to as ‘go-go’ investing. Add to this management motivated at keeping their jobs, getting their bonuses, and cashing their stock options and you have a recipe for disaster. This is the reason that Milton Friedman’s idea that capitalism will do the most good is flawed: because companies (or at least those running them are not concerned with the long-run…only the present That is also what has allowed such a sharp recovery in stocks as we are totally ignoring future earnings growth…or the possibility that they can actually decline again…and they can!

Guess who is financing all the real estate sales? You are! FHA is doing all the financing. Banks are extending little of no credit to individuals, small businesses, etc. Aren’t you glad we bailed them out from the errors (numerous ones), of their ways? They still have loan losses mounting and will see more even into 2010 as those 5 yr fixed mortgages still have to reset and if your credit isn’t impeccable you are at the mercy of the lender. Then there are the creeping commercial RE loans that are just rearing their ugly little heads and even business loans. TB heard a business consultant yesterday on Bloomberg tell of a profitable company in the Chicago area. After making numerous presentations to local banks he finally got ONE to approve the loan…those aren’t great odds, in fact, they stink.

Bernanke knows exactly what the problem was in the Depression and it is with us again but this time it isn’t the Fed that is the culprit by raising reserve requirements but it is similar in that overleveraged banks are caught in a massive deleveraging which amounts to the same thing…well, similar as they aren’t calling loans, they just aren’t making them!

How can you make a consumer-based economy grow at trend (get back to trend actually, Bloomberg says today that to do so would require several quarters of 7% GDP growth and that is not going to happen) without increasing leverage if there is widespread unemployment and wages are stagnant? Usually, we solve this with a World War, but that is not in the cards this time…thankfully…but that doesn’t mean trade wars aren’t, and they usually preclude real wars.

Some people talk of a double dip recession and TB believes this is possible, yet a money manager said yesterday that he had studied all previous recessions and we have never had a double dip…duh!!! Since 1945 we have also never seen housing prices decline nationally, we never had a mortgage default rate averaging more than 0.5%, Get real! This is unlike anything any of us have ever seen: a full-blown credit crisis. But remember the stock market is always right…well usually…but eventually it does get it right. The problem is knowing what that ‘right’ really is. Markets are really not efficient and they aren’t transparent. But then you knew that, right? The academics were the last to admit they were wrong.

The point is our economy cannot grow without the consumer, yet nobody wants to loan to him…so how then can the stock market…other than recover from a fear-based sell-off and we have already done that…and then some…witness the financial stocks!

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TB has never seen a market that is so polarized between bulls and bears. A major problem is the income gap: while the wealthy feel some pain it isn’t that bad, meanwhile the next 8% aren’t sure, and the bottom 90% are feeling it and witnessing it daily. For this reason  you cannot accept what you hear…even from TB…you have to make your own decisions and then live with them, so be flexible. Your future and your children’s future depends on it.

Have a great day and thanks for reading.

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, © August 27, 2009.

Bloomberg Quote of the Day: “My mother loved children…she would have given anything if I had been one.” – Groucho Marx

…one of TB’s favorite expressions is that in writing a daily financial column if you never get writer’s block because there is so much to write about. That can present problems sometimes as you go to bed with an idea for the morning but a) either forget it during the night, or b) you pick up something more newsworthy in the morning. So usually you just try to keep the blackboard clean and open to suggestion. This morning was such a case.

TB was listening to Bloomberg News and they had Smith Barney strategist, Tobias Levtkovich on discussing the stock market. There is one commentator who every time he gets a chance has to use the term ‘EBITDA’ (earnings before interest, taxes, depreciation, and amortization)…not only does he like to use it abut the entire industry is infatuated with it which is why we have bubbles. To TB it is as if you say I make $100,000, before, mortgage and credit card payments, payroll taxes, social security, and medicare, and before deducting depreciation on my car and other fixed assets. Tell that to a banker and see how far you get! Tell it to a securities analyst and they might take you public!

What prompted it was a discussion of price/earnings ratio’s (p/e’s), where the questioner said do you think the ‘p’s are too high on an EBITDA basis (EBITDUH! To TB)? Levkovich responded that he does not find EBITDA useful in stock valuation unless you are buying the entire entity. Thank you! TB has argued this point with his CFA friends for years since these are factors that cannot be deferred if the company is to continue to operate. Thus they are not an indicator of the viability of the business, but merely its earnings potential. Today, that is a very misleading figure, unless you are planning to dismantle the entity as private equity firms do…usually by creating more debt and making that ‘I’ even more significant. But there is another problem, as TB sees, it in the current environment of tight credit: debt or the need for debt is more significant than anything else on the table. That is why TB follows a less catchy acronym NEBMDPFC (net earnings before debt maturing over the next two years and pension fund contrubutions – if the company has a defined benefit plan. This is not a literal acronym but rather it means can the companies earnings and earnings growth (organic is the term the analysts are enamored with), allow them to operate even with debt maturities and a constant stream of payments to the pension plan? For this reason, TB has been avoiding companies that have both of these problems. Also, if they are paying a dividend, can they sustain the payments even if earnings decline?…better still, can they increase them?

It was the second part of Levkovich’s answer however, where they parted ways. He did not feel that the p/e’s were too high. TB believes however that the economy has bottomed…at least temporarily…but historically earnings continue to decline, especially now since layoffs will undoubtedly continue not to mention college graduates entering the labor force along with HS grads and dropouts of course. But more importantly, baby boomers are not retiring at the same rate creating fewer jobs and upward pay levels (which with 7 million unemployed seem doubtful to begin with). The CBO now says unemployment will be 10% in 2010-11…and they could be optimistic.

To those of you who still believe in fairy tales…oops, green shoots, remember that as John Mauldin says we will have a ‘statistical’ recovery…meaning things look better than they did but not THAT much better. Certainly not to justify, as a Bloomberg headline read this morning, ‘the rally of the century.’ This was said in the context that if you listened to Nouriel Roubini, you missed it.

To this TB would counter that the only reason for the rally is that we did not hit financial Armageddon so the fear as subsided and while trillions are sidelined in cash, time deposits and money market funds, banks continue to fail at an alarming rate and the big ones that survive remain grossly overleveraged by any historical basis…this includes the faux banks, Goldman Sachs and Morgan Stanley. If you believe the deleveraging is over, either by the bank or the individual (which is largely involuntary), you are deceiving yourself. It is for this reason that not only is the ‘p’ too high but so is the ‘e’! We also know that historically earnings decline even as we emerge from recession…which means more cost cutting, which in turn means less business investment, hiring, and pay increases – an essential part of any recovery…especially one with a decimated residential housing market…and soon to follow commercial real estate market. This also means companies buying less from other companies (IT included), in a vicious cycle.

It is no coincidence that the rally is stalling here…just shy of the levels where we plummeted from late last year…a second tier…third?…if you will. More importantly the ‘golden cross’ of the 50 day moving average above the battered 200 day is a double edged sword especially as the 200 day has bottomed and is slowly recovering around the levels of late April and should provide major…if not critical support while the 40 and 50 day continue to rise (S&P 500 by 2-3 points a day, Dow Industrials by 20-25!!!). This will be the canary in the coal mine as any sharp one day drop will soon be able to break thru both in a single session. When could that be?  If the market goes sideways it could take 30 trading days for the Dow or 21 for the S&P 500…and if TB is correct that the market is overpriced, September 25 (last day for T+3 settlement by hedge funds in Q3), or early October looks like a very good bet. You decide.

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Hope you found this useful in considering your investment decisions. Also, as you probably know, Ted Kennedy died last night…like him or not, he was one of the last voices of reason in this miserable Senate of ours as he knew how to deal and compromise, in the spirit of the great Everett Dirkson. Not many of those left. Any?

Have a great day and thanks for reading.

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, © August 26, 2009.

TB’s commentary can also be accessed at his blog www.traderbill.com with the market summary updated usually by 6pm EDT, 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.!  33,900 hits since 11/9/07. Note: the full closing summary is posted nightly, usually by 6pm EDT. TB

Bloomberg Quote of the Day: “Egotism is the anesthetic that dulls the pain of stupidity.” – Frank Leahy

…after the strong performance Friday, with a plethora of key reversals (higher highs, lower lows, and close above the prior day’s high), yesterday was a big disappointment with mixed results – unless of course you believe that a/ this is a countertrend rally (despite a bottoming of the recession), and 2/ the market is overpriced as the runup is based on better than expected earnings (in some cases) but based on reduced costs not higher revenues.

There was nothing significant either, except in almost all cases there was a slightly higher high and the range was very narrow. But look at this:

*There were 211 new 52 week highs up 24 from Friday while new lows were halved to 4! That is a ratio of 53:1. This despite the indices being little changed and mixed.

*Advance/declines and breadth were only slightly positive except the Nasdaq which was negative in both instances.

*In each index except NYSE Energy there were more losers than winners.

The most important thing to TB is that the 40 and 50 day m/a’s are continuing to rise and in the case of the Dow 30 they are rising rapidly. This is significant as technicians follow these and as TB has pointed out before they are very close together – close enough to be taken out in a single day if the market weakens. This further reinforces the idea that the market will continue to rally until it doesn’t. Remember, this rally is not based on sound fundamentals but rather a decrease in fear and to some extent money coming back into the market, but don’t expect those hundreds of billions in money market funds to be back soon…they are still hurting very badly.

Regardless of improvements (or declines at a slower rate) in most economic indicators, there will not be an end to job losses. There will not be large-scale hiring, and there won’t be pay raises…period! So if the consumer is buried in a mountain of debt and trying to pay it down and even save, where will significant increases in consumption come from…other than the purely stabilizing moves of cash for clunkers and the $8,000 tax credit for first time homeowners…both of which have been administered poorly, but in fairness that is due to their massive size and the speed of implementation.

But let’s talk about the banks. There have been 81 bank failures this year, the latest being Guaranty Bank (you know who guaranteed it) with $13 billion in assets, second only to Colonial Bank with $25 billion. Not only are the failures rising…there were just 25 in 2007….but there has not been a single Friday this year that the FDIC hasn’t swooped down to close at least one bank…there were three last Friday! Guaranty is the 11^th largest bank failure in history. How can that be? Continental Illinois failed in 1984 after the oil price bubble burst taking down Penn Square and their benefactor Continental. At the time Continental was the 8^th largest bank in the country with $30.5 billion in assets! A pipsqueak today! More importantly, Continental was the reason we have the problems we have today or more accurately the government was.

All of you Reagan lovers note this: the Gipper effectively nationalized the bank …yes, according to a 1985 Chicago Tribune article,  the father of deregulation did it and over the strenuous objection of Treasury Secretary Donald Regan (former Merrill Lynch CEO. That folks, was the birth of ‘too big to fail’ and this is what it has reaped.

Since then, the government has been on a crusade to build bigger banks…at the expense of the smaller community banks who know their clients and take care of the needs of small business. The banks failing this year for the most part did not do CDS, or derivatives…for the most part they were too small to be players. But as the big banks tighten and hold back credit to them they are having problems. Just as the mortgage lenders found they could not survive making sound loans with good margins due to the repackaging by the big lenders, the small banks were forced to compete for business with the big banks and that is now hitting them. Once again Wall Street…including its biggest banks who were also busy destroying cities and counties around the country with ill-advised interest rate swaps for incredible fees…is the villain and it was done with the blessing of the government…which was bought and paid for!

Today that has been abrogated to the credit card companies and the troubled CIT Financial which is a victim of the credit crisis NOT bad management like the big banks…who TB believes are waiting in the wings for CIT to fail so they can cherry pick CIT’s accounts. Before you say they were borrowing short and lending long, please take the time to understand what a ‘factor’ does. He finances inventories and CIT is not only the largest but effectively the only one left. When TB worked at Dun & Bradstreet in 1965 there were probably eight of them. CIT is not a Household Finance…the business of a factor is to know your customer and if you don’t, you die.

When this mess is all sorted out, TB believes that in addition to not taking over Lehman Brothers (legal or not…why not? The Fed has been accused of overstepping its bounds anyway and that would have been for the public good…by the way Obama has just nominated Bernanke for a second term and already the GOP is claiming this), the failure to unconditionally guarantee CIT’s commercial paper will be the second biggest.

CIT is the lifeblood of hundreds of thousands of small businesses. A survey released this morning shows that 82% of small businesses are concerned about the economy while just 7% believe it is getting better. Think about that as you ponder when business investment will return which is crucial to hiring and that is crucial to a ‘real’ recovery, not just a bottoming. Goldman was the advisor to the Treasury through a subsidiary, when Lehman failed…Goldman’s biggest competition…and presumably still is. Did they advise not to bail out CIT…a  mere guarantee would actually do the job by reopening the commercial paper market to them… and if so was it a conflict of interest? Certainly the big banks would not mind seeing CIT fail so they can swoop down. This is sick!

Here is an excerpt from an article in City Journal, Summer 2009, that TB found while researching today’s missive:

Fifty years of policy died in 1984. That May, the nation’s eighth-largest commercial bank, Chicago’s Continental Illinois, found itself in deep trouble. Like any enterprising company in a capitalist society, it had exercised its right to establish a competitive edge and pursue greater profits—with a corresponding risk of failure, which had now struck. Continental’s biggest error was how it paid for its investments. All banks use depositors’ money and other sources of funding to make loans and other investments. But beyond using funds from FDIC-insured small depositors and other stable, long-term lenders (such as bondholders), Continental relied more than most banks on short-term, uninsured lenders from around the globe, particularly large depositors. Global corporations and other investors often park their money overnight or for a few weeks at a time in bank accounts that offer slightly higher rates because, once they’ve exceeded the FDIC limits, they carry risk. For a lender who doesn’t mind that risk, these short-term, uninsured accounts are attractive, since he can pull his money at any time if he needs cash, finds a better rate elsewhere, or perceives a new danger. For the borrower, like Continental, however, that ease of withdrawal made the funding source perilous. A sudden panic could leave the accounts depleted and the bank without money just when it needed it most.

Continental’s reliance on uninsured short-term lenders was especially negligent because it had invested heavily and unwisely in speculative loans, meaning that a drop in its lenders’ confidence was almost inevitable. Only long-term lenders or guaranteed depositors, who wouldn’t yank their money out immediately in a crisis, could insulate the bank in such a situation. As soon as rumors swirled that Continental’s investments were going bad, the short-term global lenders predictably pulled their funds. Fear of Continental’s books then metastasized into worldwide fear of all American banks’ books. The reason: many of those banks had also started to rely on uninsured short-term lenders for funds, and the lenders often didn’t make distinctions among individual banks.

After taking some modest and ultimately unsuccessful steps to calm the panic, the U.S. government did something radical. The Federal Reserve and the FDIC, in a “race to save Continental and thereby sustain confidence in the nation’s banking system,” the New York Times reported, pledged that no uninsured depositor or other lender, including bondholders, would lose money should the bank collapse. In July, to avoid “a major financial crisis,” as the Times put it, the Reagan administration outright nationalized the hobbled bank, with the FDIC taking 80 percent ownership and responsibility for its bad loans. The era of “too big to fail” had begun.

Here is the link:   http://city-journal.org/2009/19_3_financial-institutions.html

Fifty years of policy undone and 25 years later we have a rats nest. We believed in the government, believed in the banks, and they ‘screwed’ us…royally. Bush was the culmination of Reagan’s deregulation and in 8 short years we are facing a fiscal crisis of global proportions. Now they are about to repeat that with CIT. Good luck…and you wonder why TB is bearish on stocks and the financial sector specifically?

If you are afraid you missed the rally don’t make matters worse by jumping in now. Bear markets average seven years in length…not two! Also, a zigzag pattern is typical with big up moves followed by bigger down ones…at least we have to get back to mid-April levels and not only is that a long way down it would make returns for the year to day negative again. Just think it over…then you decide.

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While the rally or stag-rally may continue into September, it is doubtful to TB’s way of thinking that it can continue into October when earnings reports will be disappointing at least as far as revenues go. You cannot have a strong stock market with a weak financial system and weak is what it is.

Have a great day and thanks for reading.

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

…put yourself in TB’s place: you leave on vacation on July 31^st, the Friday before the last leg of the rally began. The market rallies the entire time you are gone but stalls at major resistance (S&P 500, 1014.14, the 38.2% Fibonacci retracement from the bear market low), you come back on Monday, August 17 and by the close stocks have plunged in one day to negate the entire 10 day rally! The market continues weak for three days only to rally on Thursday (S&P 500 closed above 1000), then continued to rally on Friday taking out that Fib retrace that had been so elusive for ten sessions. Why?

As regular readers know, TB made elaborate defenses of the bearish position all week. Also, returning from vacation he did not realize Friday was options expiration. When he did see that on Friday morning after the daily diatribe went out, he took a wait-see position since although the S&P broke thru 1014.14 about a half hour into the session and often on expiry the first break is a bad break only to be retraced a few hours later. That did not happen on Friday and volume was average – only the second time since July 31. Note that both 7/31 and the other day, 8/7, were all big up days…still average volume is nothing to hang your hat on…a summer rally?…a countertrend rally in a bear market? TB will let that be for now and you can ponder it but it is what it is…meaning the market will continue to rally until it doesn’t!

So TB was very retrospective on Friday and perplexed that he read things so wrong, but then while channel surfing Friday night he stumbled on PBS’s Nightly Business Report. Not only that but just as former Dallas Fed president Bob Mcteer was being interviewed.

So what did McTeer say? The same thing that TB has, as did John Mauldin in his commentary late in the day (one TB strongly urges you to read: http://www.frontlinethoughts.com/printarticle.asp?id=mwo082109), and was followed up partially in Barron’s. So TB suddenly felt better because his thoughts are in line with these people and not the string of analysts and managers trotted across on CNBC who either believe in the rally, are talking from position, or both.

As TB said last week, capacity utilization is at a record low -68%! The prior low in 1982 was 71%. In order to be a strong recovery it should be around 80%. Is this a good reason for a rally? First, we need to remember that the industrial sector was lagged in the 2004-07 rally…it was centered in financial stocks…that should have told us something. So should GDP when the financial sector became the driving force…and then the driving force on the way back down…but then you knew that. Then there is consumption which is 70% of the U.S. economy – or more accurately ‘was’ as whether we like it or not it cannot return to prior levels…not when consumption was running more than 100% of disposable income. Worse…or actually from a longer-term prospective, better…we are teaching two, perhaps three, generations the merits of saving as opposed to buy now, pay later. IF that succeeds…although it will come at the cost of a very gradual rebound in the economy…we will all be better off, but if you are an elected official you want it and you want it now! That includes Obama whose second term will be in jeopardy if the economy doesn’t pick up. But just exactly what does that mean?

Mauldin used a great analogy to the economy. Over the past two years we have dug ourselves into a 12 foot hole. We are no longer digging deeper but if it took us two years to dig this hole do we simply can refill it in a few months? Of course not – yet the stock market believes we can…it is ludicrous! But if you are at the bottom of that hole you feel a lot better that it is not getting deeper – especially if someone is pouring water into it…just keep shoveling in more dirt will ya and please don’t throw it on my head! The stock market is giddy that we are going to get out…but if we don’t keep our eyes open we could be buried alive, or drown.

Now the currency market. The dollar index closed at the lowest level since August 8 and is danger of breaking down. Is this a good reason for a rally??? Some say yes but this isn’t a normal problem – this is saturating foreigners with dollar holdings and when you own more you either don’t want to pay more for it, or you want to dump it. The one thing you don’t want to do is own more of it. Yet we are to believe there is an insatiable demand for dollars and treasuries

We have a string of auctions this week (2 yr, 5 and 7 year notes…it is like a coal train just going around in a circle: pick it up, move it, dump it. We are all sick of the auctions and now even short term treasury notes (not bills, not Libor) but two years and further out are feeling the pressure. Also, the volatility is so great that it makes anyone with a wish to buy to defer it (same for some of us in stocks), rather than suffer a one or even two percent loss by day’s end.

This brings us to gold. One of the things TB noted while on vacation was that on several days, stocks were up, commodities were up (mainly led by energy), AND bonds were up! In other words it was an ‘up’ day, and one thing for certain is it does not make sense that all of these sectors move in the same direction…even as the dollar falls. Something has to give. Note that on Friday, gold rallied $13 to $954.70, a huge spike and if it takes out $963 it can run to $974 and if it takes that out it will break the string of lower highs and lower lows and the next stop will be $993, then $1,000.

Mauldin has picked up or coined a term ‘the new normal’ which usually means that down is the new normal or if GDP picks up as he believes and it will be decided a few months from now that the recession ‘bottomed’ in June or so, then weak growth but with more job losses will also be the new normal. Inventories are so low that there has to be some restocking but remember thanks to Wal-Mart we have ‘just in time’ inventories or more accurately now ‘just in case’ inventories. That means wholesalers have to rebuild inventories, manufacturers too, but what it doesn’t mean is that there will be growth. First, look at the Cash For Clunkers program and the $8,000 tax credit for first time home buyers. Both are only moving future car and home purchases into this year but at the expense of robbing from future sales (although some of those sales would not have occurred). Both are good programs conceptually but if you can’t get the details out and get the sellers reimbursed quickly you are not helping the economy, or at least as much as you could. Probably less than 1% of the clunker rebates have been paid to the dealers when by law they were supposed to be paid in one week. Pay it out, this is not like a tax program where you can’t find fraudulent filers…we know where these guys are: pay now, adjust later! Mauldin cites John Burns who is a real estate consultant who believes we have not yet seen the lows in real estate prices, that we are getting a rally (similar to stocks) due to the rebates and we will have another downleg to the final lows. TB concurs, as where will the incomes come from to rally, not just stabilize real estate priees? The only way to pay down debt, save, and buy a homes is to see one’s incomes rise. With state and local taxes rising and so many unemployed, businesses will not have to pay up for employees for some time…perhaps years.

One of the reasons for the rally last week was the Philly Fed Survey which turned positive, albeit slightly. But why? Who cares, it turned positive…a green shoot! Well you better care because it was Prices Paid that caused it to be positive while Jobs and Hours Worked declined! That is one heck of a reason for a rally…probably inventory rebuilding just to keep something on hand…you can’t sell forever…or more accurately, liquidate!

On one of the talk shows yesterday, a former GOP strategist said that they are on a rush to spend half the stimulus by next years elections…as if that is wrong. The biggest problem with fiscal stimulus is it comes to late when the economy is already rebounding (that will not be a problem this time!). So sure it is politically advantageous but is it political?  

So TB believes you should read the column, in the meantime, don’t fight this rally! It could run until after Labor Day but September and October are the worst months for stocks and several crashes have begun then. TB thinks it is in the interest of hedge funds and money managers to run the market thru the quarter…remember though that for the hedge funds that means Friday, September 25^th, and we could see a selloff by then. Whether or not it is, the point is to examine your portfolio for potential losers. Meredith Whitney, the only analyst to get it right, says bank stocks are overvalued due to more write-offs (and TB would add not paying dividends for the most part). Here are some levels where might next find resistance:

These levels are definitely attainable, but are they sustainable. Note that both Nasdaq indices are already above the midpoint and headed for the 2^nd Fib retracement from the 2007 highs. NYSE Energy is the laggard closing at 10507 which is above the 23.6% retrace from the lows (9757.34), but well below the 38.2% Fib (11233.38). If oil continues to rise it has a lot of room but watch Crude, especially since the contango between the front contract to the Dec. ’15 contract has come in to $15.91 and TB is not sure what that means…be careful.

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TB is struggling to reconcile the rally with economic reality…whatever that means these days. He never intended that you accept his reasoning, only that you think about where YOU want to be positioned.

Hope the week is good for you and thanks for reading,

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, © August 24, 2009.

…in writing yesterday’s column TB should have mentioned that while he is bearish on a continuation of the rally, he does not think we will test the March 6 lows (666 on the S&P 500, the infamous hex sign). The reason for this is that the fear of a financial Armageddon has been erased – rightly or wrongly. While TB cannot believe a total global meltdown will not occur, thanks to the heroic (pyrrhic?) actions of the central bankers…as opposed to the bumbling of the four in the Depression and which would have occurred had we listened to the ‘let them fail’ crowd the impact of which we saw with the failure of Lehman Brothers – but will CIT fail and create even more pain for the economy (the fact that we wouldn’t even guarantee their commercial paper is to TB lunacy since CIT is the lifeblood of hundreds of thousands of small and mid-size businesses which are in turn the lifeblood of the economy…is it just another case of Goldman Sachs eliminating the competition? Note that no one has reached out to help those affected businesses…yet!)?

Yesterday also surprised TB with an S&P close above 1000, and lesser the Nasdaq 100 closing above 1800 (while the Composite remains short of 2000). The ‘hot’ Philly Semiconductor Index closed at 296, at its high but still short of 300. But a big stumbling block here is the dollar weakness (overnight dipped to lowest level since August 7) which is driving gold, crude and other commodities prices higher. Even worse is with German Investor Confidence rising, EU looking better along with the UK, China planning to tighten lending requirements of banks, U.S. interest rates could be forced higher – and of course there is the never-ending supply of treasuries…5 year and 7 year notes next week!

So the question is: do you believe stocks, and more importantly, corporate earnings can rise in this environment???    

Thus TB believes that we cannot have a sustainable rally…indeed, how can corporate profits continue to grow on flat to lower revenues except by cutting costs more and that means more job losses, but without the fear the worst we could do is return to the lows and TB does not believe even that will occur…unless the selloff is so sharp as to spur investor fears…again, and that could  be triggered by a failure of CIT and subsequent users of its funding failing in turn.

So where could we go from here? The table below shows the impact of the bear market and the subsequent ‘recovery’. Note that the percentage changes are deceiving as the percentages are exaggerated from the lows relative to the changes from the highs which are much more significant. We have had an incredible – it remains to be seen if it is a countertrend rally in a bear market – short swift rally…just 92 trading days from the lows to the highs in which we rallied nearly 53%. Overlays of the Japanese (Nikkei) descent and rallies from 1989 for more than ten years though show similar. 

So the downside here, to TB, is the 200 day/23.6% Fib retrace of 876-881 on the S&P 500…remember that since 12/31/1997 the only return has come from reinvested dividends…not a pleasant thought for retirees….worse if you have to pay taxes on it.

Tony Dwyer, a technical analyst with FTN Financials commodities group was interviewed on Bloomberg. He was more sanguine than TB stating that there has only been one time that we had a ‘golden cross’ (the 50 day crossing above the 200 day moving average) that didn’t end in a bull market (1941). He also reported that the 50 day has been below the 200 day for more than a year one other time (1916). TB notes that both of those were war years however! Do we want to start another world war? He believes we are in a bull market but will have a correction before a continuation – a retest of the March lows. Since the rally has been so sharp TB believes the levels set here will suffice – even a return to the 200 day would only take us back to early May levels and had been resistance but since taken out they have held as support despite being tested three times so TB will stick with that as the downside. Remember however that this is the broad market and overweighted in large cap growth stocks. Sectors will be all over the lot. The biggest gaining indices have the following downsides (Russell 2000 small cap 568 close, 476 support; Nasdaq Composite 1989: 1649; Nasdaq 100 1614:1321). In other words the S&P 500 has 13% downside while the big gainers have about 18% downside. Dwyer likes Healthcare and Information Technology and Financials only for the long run. TB believes you have to look at stocks in a sector individually (defined benefit plans, heavy maturing debt, dividend status) or buy the sector ETF – but know what you are buying…which stocks are members and what are their weightings?

While TB does not expect a repeat of the Japanese experience, do we honestly believe that an economy built on 70% of GDP coming from consumption can grow significantly as personal balance sheets are repaired and credit remains dear? Especially when their savings rate was high and has continued to fall and is now a drain on their economy due to the aged drawing down their savings to exist. Meanwhile, savings is rising here, at least temporarily, but the huge debt load will make that difficult to continue, and with low short term rates and unease about equities, what is the best investment one can make? Pay down debt…the credit card act just passed is a two edged sword and the card companies are already finding ways to gain revenues (user fees, high penalty rates of 27% and more), which will in turn only trigger more defaults.

While yesterday’s data was generally bullish – a surprise jump in Leading Economic Indicators and the Philly Fed Survey, weekly jobless claims had a surprise jump and mortgage delinquencies surged…this time by good borrowers…it ain’t over yet.

We also have to overcome huge excess capacity and nearly 7 million have lost their jobs plus untold others who have had to accept either lower-paying jobs, fewer hours, or both.

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Yesterday’s commentary on ultra ETF’s invoked several comments from agreement to it is the investor’s responsibility to read the prospectus, which it undoubtedly is. But it was the SEC’s responsibility to approve these securities and they allowed them to be issued without a thorough analysis. If FINRA and the SEC are now concerned, and yesterday some class-action suits were being prepared (some firms have already prohibited trading in them by their clients), the end must be near…and rightly so!

Also, Mark Haines interviewed a well-known economist and former Bush Administration staffer (sorry, forgot his name), who defended the commodities market saying speculation was not a problem in the run-up in oil and other commodities, countering an assertion last week by Haines. But to TB it is semantics, they are both wrong: it wasn’t speculation and it wasn’t manipulation (at least not intentionally), but it was the lack of position limits by the banks…yesterday Powershares said they will now operate within position limits…TB didn’t even know they were exempt! This was, IMHO, the reason for the increase in inflation that was the coup de grace for the global markets in 2008, following the CDS crisis of 2007, that destroyed the global economy…you decide.

Now get out of here and have a great weekend!

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, © August 21, 2009.

…over the past two and a half weeks (since July 30) we have had an opening gap up which began the move to higher levels using the Nasdaq Compoiste while similar occurred in the 100 and the Russell 200 (in fact the real beginning of the rally was an opening gap up on July 15 which would now be major support)…we have had outside days (higher highs and lower lows, probing for direction), inside days (lower highs and higher lows and a sign of market indecision), and it after ten straight attempts to move higher they threw in the towel culminating yesterday with key reversals (higher high, lower low and close above the prior day’s high…normally the strongest technical signal).

Not only that but we closed those huge down gaps suffered on Monday, another positive sign.

Now it is interesting that this occurred on a day that Bloomberg announced the beginning of a bear market in China (Shanghai down 20% from the highs…but that was intraday and the close was down ‘just’ 19% and that was over a two week period that only partially offset the last phase of the rally from the lows that began in early November then began a new sharper surge on June 18 as described in yesterday’s column…what does one expect when a market rose 103% in just nine months??? Now look at this headline overnight:

*Stocks Rise Worldwide as China Rebounds; Industrial Metals Gain, Yen Falls

Note that not only did China rebound and rebound big but it was a mere offset (percentagewise) to the loss Tuesday and was in fact an inside day. Not only that but for all markets it amounted to just about a reversal of yesterday’s losses…except Korea and Japan. You cannot make statements based on one day market action…it is sheer folly.

Well, isn’t that special! A one day drop that took an index to down 20% in just 12 sessions and failed to hold there caused a global stock market decline…except in the U.S. because of course…we are unique! The global economy and our own weakness be damned! Take that! So the U.S. instead posted a second day of rally including those stated key reversals and an outside day on the Dow30…marvelous…but we still didn’t close above Friday’s close on any of them. Furthermore, in the bear market the track record for what few key reversals –either positive or negative – has not been something you could hang your hat, or anything else, on. In fact, this strongest of technical signals has misled, repeatedly! But here is the evidence of continuing technical problems:

1. low volume…the last two trading days have had volume of less than 1 billion shares, the first such occurrence since 7/1-7/2/09. Since August 10 NYSE volume has averaged just 1.07 billion shares including a 777 million share day on 8/13. Contrast to the first half of the rally (7/31 to 8/7) of a near average 1.45 billion shares with no day less than 1.2 billion shares! It is hard to get much going with that.

2. Despite any rallies we are getting more and more into pressure. The 40 and 50 day moving averages continue to rise and the lows have been just above most of them. Meanwhile the 200 day has flatlined way below so don’t look down! It now takes less and will continue to take less to plunge us thru the 40/50 day which are virtually on top of one another and starting to plane…this leaves major resistance at the early August highs, especially after probing them for so many days…remember that 1014.14 38.2% Fibonacci retracement from the lows that was only bested, and briefly to 1018 on payrolls Friday…another pitiful reason for a rally.

Now take out all the ‘flash’ trading that is coming into question and staunchly defended by Wall Street…including former SEC Chairman Arthur Levitt…who thinks that and naked shorting provides liquidity…what is liquidity when a bid/offer exists for just 1/1000 of a second?…we should have a one second rule to cure the problem. Mr. Levitt also had no problem with ultra-short funds that leverage two to three times and have no bearing whatsoever on the long term market…long-term being any longer than the current trading day! Fortunately, many others disagree with him.

While on vacation, TB met with an old friend who now works for a hedge fund. He said they play at ‘flash trading’ in small size but do not have the access that shaves off milli-seconds by having your computer right next door to the exchange. He also said that he plays the ultra-shorts…intraday only and keeps his eye on the clock to be out before the close when they rebalance…and that is where all those hundreds of millions of shares come that don’t show up until five minutes or more after the close. Is that investing?

The real question, aside from causing misinformation in the marketplace about ultra-shorts is do they do what they say they do and the SEC says no…so does TB. If you are trying to hedge your portfolio against a decline…or buy an ultralong so you can take advantage of a rally you will be sadly disappointed. These funds are directional meaning that they do not reflect the overall trend of the market but only that day, hence the rebalancing at the end of each day. Yesterday, on CNBC they showed to of these funds so check them out and you decide if they provide value

Direxion Funds Daily Financial Bear 3x short (FAZ) vs. the Russell 2000

Direxion Funds Daily Financial Bull 3x long (FAS) vs. the Russell 2000

Note that both of these funds have fees of 96 basis points!!! (0.96%! So how have they done vs. the indices since their inception on 11/6/09 and year to date?

                        11/6-8/19         12/31-8/19

FAZ                   -96%                -97%

FAX                  -72%                -46%

Russell 2000     +15%                +14%

S&P 500            +12%               +12%

Unless you work for Direxion Funds and are getting rich can you give TB one reason you should own either of these funds…unless you are a masochist! These funds are misleading investors and you will only incur trading costs if you try to play them as an individual and are not glued to the screen for the entire session…you do not walk away from your desk when you have positions in ultra-shorts…yet both funds have market caps of just over $1 billion! Furthermore, average daily trading volume is low and averages about 500m shares a day or about 1% of the float…so people are holding them for the most part not investing in them! Another friend says he uses ultrashorts because he can hedge his portfolio with 1/3 or ½ the number of shares…but what is hedging on? …a daily basis? …and if you use a discount broker who cares how many shares you have to buy? IF you wish to hedge use a regular bull/bear fund, not an ultra-short. TB predicts they will be banned by yearend.

They have so many ways to get you, right?

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TB is passionate about investing and in case you wonder why he is so upset, consider:

*A few people made millions or even billions off of creating flawed derivatives that nearly destroyed the global economy…yet we are told to simply move on

*Those of us who invested for the long-term over the past decade have seen those gains wiped out by the above (true some did it with their greed and ignorance but for the most part they behaved rationally…whatever that means these days)

*People planning to retire have had those plans deferred which is also depriving younger people from getting jobs or promotions

*The flight to quality has destroyed money market and bond yields so that the returns do not even keep pace with inflation on the front end and cannot begin to replace the losses on the long end…furthermore, if you were invested in bonds before the yields dropped you simply cannot reinvest the interest to get the yield you think you have…and if you are using bond mutual funds premiums they are paying to buy more bonds are boosting income but much of it is actually a return of principal…another Wall Street game

*We continue to look for ‘green shoots’ that are only creating a floor, not a ‘V’ shaped recovery. Yet the stock market does not trade at the value levels of Ben Graham or Warren Buffett. We are also focusing on year to date or rally from the lows returns which cannot be replicated…in other words, we, and the markets are not rational…duh!

Think about the above and if you aren’t incensed you just don’t get it…and will continue to pay for that. We need to take back our markets from the wunderkind with their quantatative methods all learned with the same methodology and if everyone is doing the same thing…you become the market and there is little reward for that.

Just heard Mark Haines open his Squawk Box show with “live from the financial capital of the world” again…sorry Mark it is shifting away and fast.

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, © August 20, 2009.

…global equity markets are weak Why? Because Chinese stocks are off 20% (as measured by the Shanghai Index). The fact that this is dragging down the global markets is as stupid as yesterday’s rally (albeit a dead cat bounce) on a surprise jump in German investor confidence…are we so stupid that we don’t understand that psychology? If markets are rallying we feel better about investing…except perhaps in the doldrums and perhaps because few (other than the equity strategists) have little confidence in the sustainability of this rally…you know those illusive ‘green shoots.’

Now look how this Chinese bear market really looks…by the way it closed -19% so not even technically a bear market:

10/31/08 (low) – 8/4/09 (high): +103%!!!

7/15/09-8/4/09: +24%

8/4/09-8/19/09: -19%

Now ain’t that something to write home about! Worse from 7/15 it crossed 2800…the close today? 2785! Hard to believe that even Bloomberg fell for that one…perhaps it is just a shortage of news stories….but folks, these days you have to do your own homework…ok, TB has tried to simplify it and if you read the closing stock summaries provided you will see just how insane all this prophesying is…like counting the number of angels on the head of a pin…if you believe in angels and if so you are totally suited for this business! Note there was no real economic news here….only a perception (which has persisted for weeks) that the market had gone too far too fast. Gimme a break!

Yesterday, TB commented on the ‘round trip’ in stocks while he was away. Here is visual proof and before you read further take two minutes to study the tables and draw your own conclusions:

These indices were the most watched (S&P 500) and the biggest gainers. Note that the closes are nearly identical so we went round trip in two week…10 trading days. But look inside the numbers, folks. We have been in a massive rally from the March lows with just a slight hiccup from June 15 to June 23 but culminated in 49% to 68% gains (although they are all off about 20% over the last 12 months so don’t get too excited. Now while the closes are nearly identical, look at the moving averages surge.

Let’s go back to when we rallied off the lows and around the end of March broke above the 40 day and shortly after that the 50 day moving averages. But both were still declining and we didn’t see the 40 day bottom until April 14 and the 50 day until April 23. About 2 days prior to the latter the 40 day crossed above the 50 day (silver cross) and then both crossed the rapidly declining 200 day just before July 15…when you have no fundamentals to go on …and believe TB when he says there are no solid fundamentals…you have to rely on what you have: technicals and these three averages as well as the Fibonacci retracements are about as good as it gets. Note that the S&P 500 struggled the last 10 days with 1,000 and only traded briefly above the 38.2% retracement of the selloff from the 2007 highs one day!

But the point is that we had a ‘gift’ rally in technical terms…not so if you, like TB, believe there are still serious economic problems including a continuing credit crisis. But now what? Those 40 and 50 day moving averages have risen sharply 10-20 points on most indices and are continuing to rise. That means that they can be easily broached and like the recent highs will provide major resistance once they have done so. Meanwhile the 200 day moving average has stabilized and will provide support but not until we get back to around the July 15 levels and we are less than 1/3 of the way there. Good luck.

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Hope today’s analysis helped your understanding of what is going on…you decide how to use it but some cash here just might not be a bad idea. Thank you to all of you who wrote yesterday and TB was amazed at how many had read at least one of the books he referenced…most read: Lords of Finance.

Have a good 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, © August 19, 2009.

…Amazing how little happened in the markets over the past two weeks…a pity to those of you chained to your desks awaiting the Abby Cohen (and others) huge rally. To recap:

TB left on July 31…after hitting a high of 996 the previous day the S&P 500 had an inside day (lower high and higher low) only to rally to 1003 on Monday and close at 1002 – the first close above 1000 since a one day foray on November 4 followed by a selloff to 741 by November 21 or down 26%! Then it played around the 1000 level until August 7 rallying on a better than expected July payrolls…as if a huge number of people giving up on looking for jobs (statistically speaking only), is just another ‘green shoot.’ That day it hit 1018 and closed at 1010. On August 6, TB took time out from his vacation to write a brief note warning that 1014.14 (the 38.2% Fibonacci retracement from the 10/11/07 high (1576) to the March 6 low (666), was the number to watch. The upshot was just the 8/7 high above 1014 in a total of TEN straight attempts. It all culminated with a vicious selloff yesterday there the high was just 998 and low  way down at 978, closing just 1 point above that low….’culminated’ is not to say the selloff is over as we have once again established massive resistance at the 1000 level (Note also that theeven stronger performing Nasdaq indices and the Philly Semiconductor Index (SOX) both GAPPED down significantly on the open yesterday and they along with the Russell 2000 small cap are now flirting with the 40 and 50 day moving averages again…a break of these would be devasting, yet TB believes this is about to happen…unless, as the low volume of the summer doldrums which was too light to take out the 1000 level on S&P is also too light to drive it down…time will tell…it always does!

Meanwhile, bonds were almost identical to the close on July 31…except for the 2 yr note closing 10 basis points lower in yield (1.01%) yesterday, despite getting thru a massive August refunding which settled yesterday! …a far cry from those days just preceding when stocks, bonds and commodities rallied in lockstep while the dollar tanked. If that makes sense to you TB has a beautiful bridge over SF bay for sale…cheap!

What is wrong with us? Are we so stupid as to believe that the biggest credit crisis in 80 years will be over instantly? That a country that has outsourced much of its manufacturing and just staged a recovery from the post 2000 crash and 9/11 on the strength of the financial sector alone…thanks to cheap credit, wonderfully devised flawed derivatives by Wall Street, and enthusiastic homebuyers and flippers…should suddenly feel good about itself after nearly destroying the global financial system for what? The greed of a few people in Manhattan!…not only that but we taxed many of them at rates less than the majority of Americans make…meanwhile their ownership of the Congress, and now both political parties, thus ensuring that nothing will be done to punish the offenders or make serious needed changes to the regulatory system that they so adamantly demanded was unnecessary…after all as Friedman, Greenspan, and so many other luminaries (sic) believe, capitalism is the best regulator…if so, at what cost???

TB spent about a week and a half relaxing and playing and then hit some books he has been trying to get to reading. Miraculously, they all dovetailed into one common theme.

The first, and most significant was The Myth of The Rational Market by Justin Fox exposing something that TB has felt was invalid since he studied the efficient market hypothesis in college in the early 1970’s. That is not to say it does not have value as an investing concept but that to believe one can make models and outperform the market over any time period is ludicrous…especially when everyone else is doing the same thing and the CFA institute is churning out thousands of new acolytes each year. What kind of fool believes this is earth-shattering information…particularly when the thesis is that all relevant news is reflected in the market price of stocks…how does one than explain the 1987 or 2000 crashes or more significantly the 2008 crash? …one can’t and doesn’t!

If you studied this subject, along with the closely-linked capital asset pricing model, you will be fascinated at the cast of characters and how much more significant pedigree is to the academic community than say…uh….er…common sense! Watch as the cast of characters defends their theories and finally succumbs to the realization (belatedly) that the model is correct in theory but other than diversification concepts has little value in the real world. Meanwhile, managers either too lacking in mathematical ability (like TB) or just too lazy (also like TB perhaps), to learn the fundamentals bought into the idea and hired newly graduated ‘quants’ with no significant market experience, who built models that nobody questioned…even when they were all based on the same formulas…nor did they realize the risks they were taking thru massive leverage (if a little is good, more is better), and then placated themselves by believing in value at risk models (VaR) that have proven disastrous in reality.

If there is one shortcoming to this book it is the lack of follow-thru on the impact of leverage in an over-leveraged society. Without that leverage the entire system would not be on the verge of collapse…and if you believe it isn’t you aren’t paying attention as the next book shows.

A friend gave TB this book months ago but he just got time to read it and while not finished the parallels to today are scary. It is Lords of Finance, the bankers who broke the world, by Liaquat Ahamed. It is a fascinating study into popular theory and how those who are entrusted with the public good can instead do serious harm (no good deed goes unpunished). In some parts of it you can take the comments out and they could just as easily be made today…in fact some have been. Remember three things about the Great Depression:

1. there was only one person working in a family…now with two and both incomes required just to stay above water we have double the odds of a family crisis

2. credit was limited to a mortgage…or the newly invented auto loan by Ford

3. people saved money in those days

Another topic in the book that has been widely overlooked was the financial impact of World War I…a war that most cognizanti…including John Maynard Keynes…believed could only last a few months as no country would destroy itself financially for a war…how wrong he was and the reparations of Germany brought on an even worse despot: Adolph Hitler, ironically bringing on an even bigger, more disastrous war, that produced the growth era that lasted for more than half a century…what now?

The last book was Bad Money by Kevin Phillips, which while not nearly as insightful, ties the other two together. It shows how the balance between incomes and spending got way out of line and why we are where we are today.

On the plane home from Minneapolis yesterday, TB saw a review of yet another book on how it was the fault of the consumer…which in fact it was as we have to accept responsibility for our actions but that the removal of usury laws and a lack of regulation by a bought and paid for Congress caused the whole problem.

The point is that there is no simple answer…or shortage of books recently released on the crisis yet we are not interested in dealing with it either individually or as a government, having just played musical chairs yet another sector of Wall Street has now insured that it will not be on trial for the disaster that they jointly caused. We are lost sheep and those who profited at the expense of the world continue to thrive.

It’s good to be back…at least so far….now let the games begin!…again!

Thanks for reading and 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, © August 18, 2009.