Traderbill's Financial Markets Weblog

TB’s Quote of the Day: “Not to decide is to decide.” – Henry Cox

Bloomberg Quote of the Day: “History repeats itself; historians repeat each other.” – Philip Guedalla

“During the Republican National Convention TB learned that they have been trying to lose the moniker ‘GOP’ standing for Grand Old Party…some ‘party’. Rather than get rid of it they should rename it: Grand Obstructionist Partty.” – TB. (This is not an endorsement of the Democrats (who as usual are at the other end of the spectrum believing ‘never let a crisis go to waste’ but a statement of fact as they have done nothing to improve the situation since the election.)  

…and never brought to mind? Today is end of quarter and aren’t we supposed to review at the end of a year how we did? What we got wrong as well as right? Shouldn’t investment managers do the same rather than simply write an economic outlook for the next quarter which is 50/50 whether it is right or wrong?

It seems to TB that with two opposing camps…both with their heels dug firmly in…in a high stakes game of tug-of-war we damned well better do that. It is too easy to see how well we have done for the past nine months…but what about the past twelve months?

Also, how about the falling dollar? What does that mean?

TB used Bloomberg to compute the changes in the indices and as you can see you get quite a different picture. Note in particular not only the gains for year-to-date and 12 months for the indices with opposite signs (except the Nasdaq), but also the relationship of the major currencies. There are a lot of parables that speak similarly…but the point is that your enemy is not always your friend nor is your friend unable to be your enemy.

Are these even on the same planet? Without further ado…you decide what it means! OR What’s it all about, Alfie???

It seems to TB that we have scoffed at how tough September can be…a virtual cakewalk! On the other hand that does not imply that October, an even more treacherous month, will follow suit…in fact we might just be seeing it’s fangs emerge…or not.

With the end of the quarter goes the chance of a ‘settling’ sell-off…one that hopefully would not become ‘un-settling’. But if you did nothing, set sell-stops, or even outright sold over the past week you haven’t missed much. But it is all about maintaining flexibility in an illiquid world – although there is apparent but quickly-vanishing liquidity…just don’t count on it being there for you.

We are at the ‘two-minute warning’ (although there is none in football at the end of the third quarter. Overnight, stocks in most of the world are little changed but slightly better (more so in Mainland China and India) and U.S. stock futures are up solidly. Gold  is above $1,000 again for the first time in four sessions and Crude is up more than a dollar but still well below the 40 and 50 day moving averages. Bonds are slightly weaker (2 yr note is above 1% again), and the dollar is slipping but that is usually pretty meaningless on the last day of the quarter.

Will we be able to finish like Brett Favre…or just let it fizzle? Wait and see!

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95 banks have been taken over by the now bankrupt FDIC and it will probably pass 100 by Friday. Of course FDIC can’t go bankrupt because they have unlimited capital: yours and mine! The sad thing is that in our zeal over too big to fail we are helping the very banks that put the ones now going out of business where they are. These banks could not compete due to lower costs at the big money center banks with their massive and irresponsible leverage. None of them have clean hands. So the banks had to do what they could…construction loans…and now they are in trouble.

But wait…Sheila Bair has the solution…let’s have the banks pay three years of FDIC premiums up front…that’s the ticket! She had the audacity to call it taking advantage of the strong capital of the banking system – can you believe that??? Yet, nobody called here on it. Alan Meltzer, the senior consultant to the Fed for most of TB’s lifetime, put the entire blame on ‘too big to fail’ and yet we are at it again. For decades the Fed has been on a path to eliminate the community banks and merge them into big banks…the ultimate too big to fail…and they are not changing course despite having just been proven wrong…dead wrong! The community banks are up in arms over higher fees but the big banks love the idea…but of course: they have cheap money from the Feds and loan guarantees while the little guys are told they need more capital and are left swinging in the wind. This is what we have become…and if you believe that a recovery means our problems are now behind us you are sadly mistaken. If we continue on the course we are now on it is almost a foregone conclusion we will be back here again…but not likely before the 2010 elections…and isn’t that what it’s all about folks?

We are in great need of improved and stepped-up regulation of the financial system. Yet it is being turned into a joke by those who want things left as they are…obstructionists? Capitalists?…or those who give capitalism a bad name when personal greed it their main objective?

Watch JPMorgan….you know that bank where its CEO and illuminary Jamie Dimon says he opposes too big to fail…so long as there is plenty of flexibility to support the biggest banks (“we are big because we need to be”). TB only recalls one other banker in our lifetime who has achieved his status: John Bunting who turned First Pennsylvania into a megalith and then drove it into the ground and dropped from sight. The analysts were enamored with him – just as they are of Dimon – but banking is not a new artform…it was perfected over thousands of years…yet there is always someone who thinks they can do it better.

Yesterday’s surprise announcement by Dimon of the departure of superstar investment banker Bill Winters (due to his turning 56…afterall Dimon is only 54), and then restructuring the investment and asset management group. Why? TB believes you have to look at Winters as John Mack – the one of late – who ‘didn’t take enough risk’ while Goldman is taking on all they can find…why not? It’s other people’s money! Mack went round trip: from taking too much risk to not taking enough risk and was chastised for both. Winters, who did well as JPM did better than the others in the risk category, may not fit what Dimon is seeing: splitting the bank in two under a new form of Glass-Steagall, and thus wanting to position it against the only real competitor he perceives: Goldman Sachs. Thus a strong bank and investment bank would be left…much like FNB Boston spinning off First Boston 80 years ago or so (where is First Boston by the way?). Certainly the appointment of Jes Staley to head the Investment Bank and Steve Black to head Investment Banking  is a sign that risk-taking is back in vogue. Is that a good thing? You decide.

Did you see the near 25% jump in CIT stock yesterday? Second most active…why? Because of a rumor that Henry Paulsen is brokering a merger between them and IndyMac! …and you thought you had heard it all when he tried to merge Wachovia with Citi! Merge losers and you have a winner??? Positively crazy, but perhaps too big to fail!

Is it Friday yet? Oh no, that is the day we get payrolls for September…oh joy!

Have a good one!…if you can stomach it!

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, © September 30, 2009.

TB’s Quote of the Day: “It tsn’t that the baby-boomers are egocentric…they just think the world revolves around them.” – TB heard this on 60 Minutes several years ago, source unknown. By the way, google baby-boomers and egocentric and you won’t believe how many hits you get…and if you think they (TB was a year early) are so, what about the Gen X’ers???…after all they had better teachers!

…well, it would have been nothing if the Dow Utilities hadn’t put in a positive key reversal. The rest were higher highs and slightly higher lows. That is called no resistance …what do you expect for a day when they couldn’t even eke out 980 million shares? Pathetic. But the interesting thing is that the Utilities had a reversal on a day that stocks rallied – that should be a clue since usually they go down…also around 10am EDT with the Dow up nearly 160 points bonds were on a tear too…while the dollar was up slightly…something is dreadfully wrong with this picture.

TB was pleased when he heard a well-regarded technical service say exactly what he said after that key reversal in every major index last Wednesday: that it is the most powerful sign and it was decidedly negative. So how does that square with today’s action? Today was meaningless…there were no sellers…not only was overall volume low, Citi – remained the big cheese again today BUT on just 313 million shares – that’s it! That is a mere 32% of total NYSE volume: the big ‘C’ has been averaging 1 billion shares a day for weeks and this is the lowest volume since then…are you getting the picture? It isn’t pretty! Liquidity is drying up. True, advance/declines and breadth were good but volatility was mixed with the VIX (S&P options) declining slightly and the VXN (NDQ 100) rising similarly and is now higher than 26 while the VIX is a tad under 25. Looks pretty undecided…oh and after Wednesday’s quarter-end we get non-farm payrolls on Friday and if that takes us down further as TB suspects, then we have to wait and pray for the earnings reports coming out in the second half of the month…a long way to wait when you don’t know which way you are going, right?

But what should be truly alarming is why stocks and bonds rallied at the same time early in the session – then bonds unexpectedly sold off and at the end of the day were up only modestly – except the 30 year bond which was up a little more than a point. The Dollar was also up which should not be of help to stocks…thus the rally appears to be strictly the catalyst for the advance.

If buyouts were the reason for the rally what a  poor excuse for a rally – buyouts…how many of those do you think there will be and if you own the acquirer you lose! XRX GAPPED down $1 to $8 and the low was $7.25 just 30 cents above the 200 day moving average…now that is a great reason to rally! This is similar to Dell overpaying for Perot Systems last week: it too gapped down and is now within 50 cents of the 40 day moving average and 90 cents of the 50 day…this is what TB has been warning about…break them and you lose!…not only lose but lose bigtime!

Lastly, we have commodities. The only sector that was up 1% – and only barely – was Livestock which was entirely due to Hogs which have been very volatile ever since the Swine Flu became a household name…funny…don’t people have a clue that it does not mean that eating pork is bad for you…in fact it is a healthier alternative to beef – but hold the bacon! Gold has now closed below $1,000 for the third straight session – in fact, yesterday’s high was just $998 and that was on a meaningless inside day. Then there is oil…not only do we have a global glut but demand is falling…should it still be near $70? More likely it should be in the mid-50’s if the speculators weren’t running the show…think how much of a drain $2.50 gasoline is – $3 plus in California! But that didn’t stop them from running energy along with everything else yesterday (it was an ‘up’ day). NYSE Energy Index was up 11.6% despite Crude still being weak and below both the 40 and 50 day moving averages which are converging around $70 – that’s a $3 premium to where it closed yesterday. Should oil stocks be up? Why do natural gas stocks trade independently of natural gas prices? Natural Gas fell 2.4% yesterday…the only loser in the energy group, yet Chesapeake (CHK) and Devon (DVN) both closed higher – +2% and +1% respectively…in fact, CHK hit a 6 month high a week ago and DVN in the prior week. These are things that should be making you ask questions instead of attributing everything to the ‘new normal’.

TB googled “new normal” as to who gets credit for it…believe it or not a guy created a blog of that name in March 2005. But Pimco’s Mohamed El-Erian gets credit for it, although he most accurately described it…but other’s have had their hand in the shaping from David Rosenberg to of all things The Girl Scouts who used it to title a pamphlet on health – last January! Doesn’t that constitute a cliché? At least everyone had a clear understanding of what the ‘perfect storm’ was. For TB, the ‘new normal’ is a 200.5(k) retirement plan!

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Saturday was TB’s ‘half-birthday’…so??? Well, it also meant he could enroll for Medicare and in fact was told by his wife’s employer that he must or risk losing his benefits there. So he googled that too and tried to see if there was a way to register on line…nope…you have to call and that process took nearly an hour!

But the good news is that after punching in numbers and being told that there was at least a 10 minute wait he got a prompt that offered to call back when someone was available. So he took a chance and incredibly was called back within ten minutes! This is a recent innovation there and more companies should implement it…good for customer relations.

Lastly, TB refuses to join AARP…to hell with the discounts…they are far too powerful as a lobbying group and making their executives rich…this group is just one more that doesn’t care about the future of America only sopping up everything it can for the now.

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, © September 29, 2009.

…isn’t it amazing how we are constantly ridiculed if we play the lottery? TB however, has never heard any of the winner say it was a bad bet…unlike the predecessor ‘numbers’ rackets which never had a winner except the Mafia (can you say that these days?) Recently there were two Mega Millions winners of $273 million (a multi-state lottery) and one of the winners was from Southern California – it still has not been claimed…perhaps he was one of those who was parking money in Swiss banks and wants that settled first? On Saturday an SF Bay Area woman won $33 million on SuperLotto. She stepped forward immediately…also no complaint from her about the futile odds.

Hmmm….do you ever hear anyone who goes to Vegas called a fool? Excluding rooms and expenses you go there planning to lose $50 (that was the old days before the 1980’s), $500, $1,000 and face it very few come home with money after covering expenses…but it was fun – let’s do it again!  Those are pretty bad odds and with it being impossible down there to find less than a $25 table you can lose your money pretty fast. (TB was talking to a restaurant manager recently who took his wife there for their anniversary. Dinner was $300 and since he had a great time and being in the business he tipped him $100 (33%!)…rather than be thrilled the waiter padded it changing the one to a FOUR making the tip more than the meal…when he called to complain the manager said oh his finger just slipped to the 4 instead of the one…come back again and we will make it up to you…uh huh!)

What happens in Vegas stays in Vegas…especially with your money!

On CNBC the other day they were debating whether a study showing that gambling is more popular in recessions. The study said yes, but the other side said fewer people have money to gamble. Au contraire mon ami…that is not the issue here. In his former life as a banker, TB worked for five years as Chief Investment officer of FNB Nevada, and even Standard & Poors and Moody’s cited this phenomena saying it made Nevada recession-proof…little did they know that bad loans and overbuilding casinos could destroy that.

TB asked the CEO who had originally been in Las Vegas and he said it was totally untrue. Nevada did have serious recessions but because the casinos cut expenses not because of fewer gamblers although they spent less money. Those of us older than 50 longingly recall the 99 cent buffets and shrimp cocktails not to mention free drinks that were delivered to you in five minutes not a half an hour which keeps you where you are.

Then there is the stock market…the sacrosanct stock market! Don’t waste your money on bonds, preferred stocks, it makes no difference whether a stock pays a dividend or not…you know the drill. That and over any twenty year period you cannot lose money in the stock market (identified as the ‘fluid’ S&P 500 which dumps the losers and replaces with up and comers). Well yes you can when you adjust for inflation and taxes and as studies by Crestmont Research have shown, the single best determinant of whether you will make money depends on the p/e multiple at the time of purchase…of course most of us don’t put all the money in at once – unless we just one the lottery or something similar, if you buy above a 20 multiple (as it is now) you lose, below 10 you win…kind of like black and white in roulette! In the middle you get mediocre returns and as for dollar cost averaging etc. the problem is the market goes up for long periods of time then plunges quickly for short periods making it difficult to ‘win.’

So what is the best investment? Long term treasury’s! An oversimplification since it is long-term treasury ZERO coupon bonds but only when yields are 7% or higher AND you hold them in a tax-advantaged account…a pension fund would be ideal and IF said pension funds hadn’t ignored the sage advice of their overpaid consultants they could have bought ladders of zero’s effectively matching their assets to their liabilities back in 1981 at yields of 12% or higher  – compounded to maturity! Nothing beats that – nothing and default proof! But did the ‘eggspurts’ recommend this? Nope…nor did they in 2000 BEFORE the crash when you get 8% yields on long term treasury’s – zero’s included! They are stock peddlers despite proof that the only effective way to match assets to liabilities is through bonds NOT equities….especially in the low dividend yield era of the late 1990’s to early 2000’s that is only rising now due to signficantly lower stock prices.

Now for the reason TB shuns companies with defined benefit retirement plans: their consultants are STILL using an 8% return forever to calculate the unfunded liabilities – do you honestly believe we will have 8% returns for as far as the eye can see? Even if the recent rally holds relieving some of the under funding they will still be underfunded and not only that get even more underfunded each and every year. But that is private pension funds where you can choose to invest in the company or not. Much worse are the public pension funds which have growing liabilities and lucrative retirement contracts thanks to their greedy – yes, greedy – municipal unions. While union membership is declining and has been since Reagan was President…although we could see an upswing now due to the management has treated workers…just when the back of the unions had been broken as evidenced by the concessions they have had to make with GM and others, municipal unions are growing in power. TB’s wife works at UC Berkeley in the student health center. In that facility alone there are NINE unions. Yesterday there was a boycott of some students, faculty, and employees at the university over budget cuts and a proposed 33% increase in tuition so they don’t have to do layoffs, cut professors pay, or eliminate classes. They don’t get it! It is not their tuition that pays the expenses it is the largesse of the State of California…which also borrowed billions from them in the last budget crisis and now will not return it.  The point is that none of this had to happen if there had been at least a higher proportion of bonds in the portfolio.

After the 2000 crash TB was at an investment conference in London and there was a panel of consultants – actuaries there. In the Q and A, TB asked why, when they had strayed from the old 60% stocks/ 40% bonds standard did they not cut back when the market was roaring – i.e. rebalance as we are all told do to? The answer was…after much hemming and hawing…there simply weren’t enough bonds to satisfy the demand. TB was dumbstruck – not a totally unusual occurrence by the way. These highly paid individuals and their firms could not see the obvious – that they were putting the retirements of the beneficiaries at risk when they were GROSSLY overfunded (GE and other companies did not make payments for several years leading up to the crash and in fact were able to add the savings to earnings! What a sham! To their credit, GE denounced the practice in 2000…finally!). TB knows of only two people who were bold enough to make a statement: TB’s friend John Ralfe who as Comptroller of Boots PLC convinced the board – over the objections of management to convert to 100% bonds, and money manager Jeremy Grantham who pared back sharply on stocks. Ralfe was ridiculed in Pensions & Investments and other publications while Grantham saw the consultants take away 25% of assets under management from him. Both of course were vindicated.

By the way, until recently, pension consultants penalized managers for holding cash…they wanted them 100% invested at all times…a recipe for disaster and yet another reason the pre-hedge fund dominance, markets rallied or at least did not decline sharply at the end of the quarter and especially year end – window dressing!

Why do we love stocks so when they treat us so shabbily…except those who make a living promoting them? The answer is in the question.  

So welcome to Casino Royale where you ‘makes your bets and you takes your chances.’ That is why TB shakes his head at those who can’t accept the huge returns since the March lows and say ‘trees don’t grow to the sky’ – by removing some of the bet. Some savvy managers are buying put protection which is cheap in this era of low volatility…although we saw a goodly surge in volatility yesterday. Others, like TB have put in trailing stops to protect profits. Not only is today last day for T+3 settlement but:

*Existing home sales unexpectedly fell yesterday,

*KB Homes this morning announced that sales for the quarter declined by 20%

*Durable Goods Orders were just released and unexpectedly fell by 2.4%…unchanged ex-transportation and well below consensus gain of 0.4%…worse, July was downward revised to 4.8% from 5.1% – is it any wonder that they are dubbed “Doubtful Orders?”

…oh well, TB could be wrong…you decide. Stay tuned – the quarter/year is not yet over.

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Here are some more quotes and headlines from Oh Yeah?

Roger Babson, economist:

“Sooner or Later a crash is coming which will take in the leading stocks and cause a decline of 60 to 80 point in the Dow-Jones Barometer.” September 5, 1929

“I believe that many who have been caught (in the first crash) could recoup some of their losses by now buying good bonds.” – October 22, 1929  

“In a big way, 1931 can be described as a year of opportunities. In 1929 we were living in a palace with a powder mine in the cellar.” – December 26, 1930

“Statistics show clearly that business reached its low point last year. Since then there has been a steady but constant improvement. Everything indicates the general business has turned the corner…I go further and say that 1931 should offer the greatest opportunities of any year for generations.” May 9, 1921 …haven’t we heard this recently???

SOME INVESTMENT TRUSTS

Sept 5, 1929    Oct. 25, 1931

American International Group         84              6         

Amer. Brit & Cont. Corp                 14.50                    1

Electric Power Associates                  74                       5.50

Goldman Sachs Trading Corp        110                       2.50

General Public Service                          83                      4.375

Selected Industries, Inc.                      25.50                 1

U.S. & Foreign Secs. Corp.                     64.50                 1.875

J.I. Case Co.                                                  176.25                 33.25

Int’l Harvester                                             75.50                 22.50

Sears-Roebuck                                             62                         31

Dec. Wheat                                                     88.125                44.625

Dec. Corn                                                        90.25                   32.875

Dec. Oats                                                         42.50                    20.25                                                                          

Poor ole Roger…he called it right at the outset only to find a false bottom…the way to get rich as a contrarian is to be the last contrarian. But holes also don’t drill thru the earth. There you have it in a nutshell: trees and holes!

Have we been a bit to quick to dismiss how tough September/October are for investors?

Have a fun and/or relaxing 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, © September 25, 2009.

…that must be what some…most?…of you gentle readers must be thinking…and some of you might even use a stronger form: come on TB get off this big correction coming kick!

Two of you have even chastised TB for crimes ranging from missing the rally to going so far as saying “you are doing a disservice to your readers.” But throughout the rants there have been two common themes:

*once the S&P 500 took out the 38.2% Fibonacci retrace from October 11, 2007 high (1576.09) to the March 6, 2009 low (1014.14), TB said that he would not fight the rally (passive resistance) is a more apt summing up, but wait for the  50% retracement at 1121.44. The closest we have come is yesterday’s 1080.15 which ended in a key reversal (higher high, lower low, and close below the prior day’s low) on every major index! A key reversal is possibly the strongest technical signal…although we have seen similar less significant ones in magnitude and in both directions throughout the long trip up. The rally has lasted six months during which the S&P 500 has rallied 57% (with dividends reinvested), nearly 20% year to date, but is still -9% for the 12 months and -28% from the record high! To get back to that high would require a rally of another 48%! So you must ask yourself if trees in fact do grow to the sky. For the Russell 2000 (small cap)  it would require another 40%, and for the mighty Nasdaq 100 another 30% from it’s low on 11/21/08 (lacking financial stocks it bottom earlier at what would have been the market low had we not been in and still are in a financial crisis although we averted Armageddon). This on top of the already achieved 60% bounce from the lows.

*That we have reached the third plateau of the rally (the first being in mid-June, the second and the second in August (which TB thought was the top of the bear market rally). Not until we take 1121.44 on the S&P can we consider it a ‘cyclical’ bull market in a secular bear market. The timing is like an alignment of the planets with this Friday’s quarterend for hedge funds giving them an additional three days to attack the conventional money managers who have no choice but to remain fully invested thru quarterend (window dressing), as clients do not like to pay for cash in their accounts even if it for their own good. Hedge funds have used this maneuver successfully in the past: buying more in the final three days when the market was strong but using it to sell in three of the past five quarters causing unprecedented declines for those periods which are normally strong.

Thus the timing of yesterday’s key reversals on volume about 100 million shares below average but also 100 million higher than the prior today’s (and volume picking up into the sell-off), suggests that there will be more to follow: remember all that matters for a hedge fund is performance and they could be 100% cash if they choose…unlikely but they could – so long as they are performing well…also their clients cannot leave as easily or often as those of a conventional money manager or mutual fund.

Remember also that TB has never…and won’t start now…told you to ‘sell’, or for that matter ‘buy’ the market, rather he has strongly suggested you look closely at your holdings (which you should do in any market at least quarterly…not weekly as Jim ‘the trader’ Cramer suggests), especially now with valuations running high (multiple on the S&P 500 is now 20x…is that a bargain?), and a frustrating slow recovery lying ahead (don’t take TB’s word for it, the Fed said it and Pimco refers to it as the ‘new normal’).

For the first time ever, the stock market has exceeded not one or two – but every analyst’s earnings forecast…think of that: first time ever! The analysts p/e estimate is 18 – at the 2007 peak it was just 16!…and that ignores the ‘quality’ and consistency of earnings …remember those record stock buybacks for five years that boosted per share earnings?

So if TB were the typical manager, he would be selling some of those stocks outright and selling 50% on others…in fact he did for his accounts, while adding ‘select’ REITS and preferred’s (which are now too expensive but if stocks decline they will fall too). This is because not only does he see the stock market as ‘euphoric’ but the chances of a ‘V’-shaped recovery as not only unlikely but impossible, and while ruling out a ‘W’ is more in favor of an ‘L’-shaped…a very lazy one at that…or even ‘saucer-shaped recovery as more likely.

Think about and you decide…after all you only have to worry for five more days, right?

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Here are some more quotes and headlines from Oh Yeah? Yesterday’s comparison of Bush Commerce Secretary Elaine Chau with Assistant Commerce Secretary Dr. Julius H. Barnes, elicited some favorable comments. Today we hear from then Commerce Secretary Robert P. Lamont:

“There undoubtedly will be an appreciable decrease in the number of unemployed by mid-summer.” – March 22, 1931

“I have canvassed the principal industries, and I find no movement to reduce the rate of wages. On the contrary, there is a desire to support the situation in every way.” – April 25, 1931

                                                       LAMONT PLANS CUTS IN HIS DEPARTMENT

He Urges Division Heads to Reduce Personnel in Economy Campaign

-New York Times, June 13, 1931

Operating schedules in many manufacturing establishments were cut still further and the number of part time workers increased in July, the monthly employment bulletin of the Federal Employment Service reported today. – NYT, August 3, 1931

 Secretary Lamont today described as “entirely without foundations” rumors that he was planning to resign.” – NYT July 2, 1931.

 …and so it goes. Note TB’s effort today to save a few trees! 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, © September 24, 2009.

TB’s Quotes of the Day: “I hasten to laugh at everything, for fear of being obliged to cry.” – The Barber of Seville, ACT 1, Scene 2

“You can’t fool all of the people all of the time.” – Abraham Lincoln…”but you can fool enough of them to get rich.” – TB

“The country is not in good condition.” – Calvin Coolidge, January 20, 1931  

…you are driving in the morning and you hear that the FBI has been warning every police department in the country to be on the alert for terrorist attacks at stadiums and malls – then when the press gets wind of it says it was not a specific warning just keeping them on their toes. Then the evening news is filled with the story of a suspected terrorist who was captured and admitted he planned to blow up something…and that he was acting alone. Larry Kudlow was very worried asking if this might derail the great stock market rally. Well, overnight stocks are mixed but doesn’t seem to be a concern.

Then there is HR 3548, a bill to extend jobless benefits by 13 weeks in states with more than 8.5% unemployment – that would be 27 states and counting. Why is the southeast quadrant of the U.S. representative of the entire country? First, we had a South Carolina Republican scream out “you lie!” at the President as he appeared before both houses of Congress. He immediately apologized profusely and ever since has been doing everything but call him a liar. So now Rep. Geoff Davis (R) Kentucky says that extending benefits is a sign of the ‘failure’ of the Obama administration to stimulate the economy. Yep, it is all Obama’s fault…just like it was all Herbert Hoover’s fault in 1929.

Five million people, nearly one-third of the unemployed have been out of work for more than six months, highest since they started keeping records in 1948. Yep, must be Obama’s fault. A CNBC poll yesterday shows 51% approve of the job Obama is doing, and get this: 21% are at least ‘somewhat satisfied’ with the economy. But we know that at least 50% are bullish on stocks – with the other 50% decidedly bearish. That is because the stock market climbs a wall of worry…until it doesn’t!

So let’s look at yesterday. Volume was just 1.27 billion shares but that is up from 1.22B on Monday. Most indices squeaked out slight new highs and infinitesimal new rally high closes. Now let’s look at the five most active NYSE stocks which, including their ETN trades comprised 106% of NYSE volume:

Citigroup(C): 657M shares (52%) but up from 477M Monday after averaging 980M shares since August 20 and at times being more than 70% of NYSE volume. It was up 4.7% yesterday for no apparent reason but when 21 cents moves you that much, so what?

CIT Group(CIT): Rallied 14.3% – to $1.68 –  on 166M shares (13%); short-covering ahead of the debt restructuring…the bonds went to the moon, Alice – the moon. Two Citi analysts said the move in low-credit issues is “starting to become a bit ridiculous.”

BofA (BAC): Up 2.2% or 38 cents to $17.63 despite the woes of the bank and its fearless leader Ken Lay…oops, Lewis. Volume was 155 million shares (12%)   

AIG: 122M shares and the most volatile stock of the day. It rallied to $54.40 – or $2.72 pre the 1:20 reverse split, then closed down 4.8% at $46.07 ($2.30) down $2.23 or 4.8%. The news was all negative except a WSJ article saying the stock is preferred by hedgies?

Fannie Mae(FNM): 106M shares (8%), stock was up one penny to $1.69 or 0.8%. Nothing specific but home prices rose 0.3%.

What a cast of characters the above list is. The gang that can’t shoot straight.

Gold rallied yesterday after gapping down on Monday due to renewed dollar weakness or so they say…TB thinks it is just specs moving in and out and there is more downside risk than upside.

About the dollar: we have been told that a weak dollar is good for stocks and it is – to a point…but not in a plunge. Overnight, it fell to 75.89, tying the September 22, 2008 low. Below that is a freefall that eventually leads to 70-71 and that won’t be good for stocks.

Friday is now just two days away and with it the end of the quarter for the hedge funds. Will they drive the market down starting then or Monday or be content with the status quo? Most likely they won’t be buying after that. You have to think that most managers have their portfolios positioned where they want them to be for quarterend – or where their clients expect them to be!

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TB was late by one day paying his Capital One account and got hit with a $29 late payment fee plus $4 in interest – at 29%…that’s $33 on a total bill of $176 that is 18.75% for one day!…or 684% annualized! So he called and after asking for a supervisor was told they would not reverse the charges…so he did what we should all do: closed the account paying off that final $46.20. This morning he read that JPMorgan is revamping their overdraft charges to be more user friendly…somewhat.

Anytime you have this happen to you – do the same! Be ‘mad as hell and not going to take it anymore!”  Let’s leave the banks and credit card companies to earn paper profits on accounts that cannot pay while giving away services to those who can. Be vocal!

Now for some more quotes from Oh Yeah? The compilation of newspapers clipping that was published in 1931:

“Tariff walls erected too rapidly by European nations and the demonetizing of silver by Great Britain were the two chief causes of the world depression.” – Julius H. Barnes, President U.S. Chamber of Commerce, November 7, 1930

“One of the most powerful influences working toward business recovery is the tariff act which Congress passed in 1930.” Reed Smoot, Chmn Senate Finance Comm. 4/18/1931

Dr. Julius Klein, Assistance Secretary of Commerce:

“The stock market crash affected approximately only 1 million persons, the speculative element.” Jan. 10, 1930…this was before pension funds, IRA’s and 401(k’)s – TB

“Business is gradually but unmistakably coming out of the depression…”  May 21, 1930

“There seems to be a fairly good chance that the United States will be out of the current economic depression by the end of October.” September 26, 1930

“We may confidently expect unfavorable corporation reports from various industries, but it must be borne in mind that these reports will refer to conditions which are behind us and will have little relation to actual conditions at the time they are made public. They should not be allowed to set up an fictitious pessimism.

Following the publication of these reports during the opening months of the new year, conditions will steadily improve all along the business front.” December 31, 1930

“The long decline has at last been halted.” March 19, 1931

“The depression has ended. The valley usually runs across six or seven months. If history repeats itself, this means that in July up we go.” June 9, 1931

“At the fag-end of a year and a half of business trials, the value of a vacation as a reconstructive expedient is indisputable. June 19, 1931 – was that capitulation??? TB

Dr. Klein was a cock-eyed optimist to put it bluntly…or a fool…Larry Kudlow and his Bush Administration senior Elaine Chou (“I am smarter than you, I have an MBA from Harvard”) must have studied his comments.

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, © September 23, 2009.

TB’s Quote of the Day: “If you increase risk for two decades it takes time to reduce that risk. Don’t think you can do it overnight.” – Mike Mayo, bank analyst (or 1 year??? TB)

…something just didn’t feel right yesterday. Was it the fact that so many have been forced in to buying when their gut feeling says we are due for a correction? Are more people becoming aware of Friday’s last day for T+3 settlement – although TB has heard no mention of it? Is it because the most bearish people on the planet are hedge fund managers and they may have jumped on board and are now about to do a rapid exit? Was it Dell paying a premium of nearly 70% for Perot Systems? We are rallying again overnight on renewed dollar weakness…with Gold and Crude benefitting…this despite Saudi Aramco saying that they will continue to idle fields thru 2010! Meanwhile, Omar Qaddafi is wending his way to the U.S. – more oil ties. When will we and the commodities markets realize there is now a worldwide glut in oil and more is being discovered every day??? Now TB’s bullish friends not to mention credit analyst, Jim Grant say that the economy is going to roar ahead…keep climbing that ‘wall of worry’, but bank loans are contracting as loan losses mount even more on commercial real estate (this time mainly impacting the REGIONAL banks and smaller), these are the ones that supply small to medium businesses capital…where is the growth to come from??? At the end of this column are some quotes you might find of interest regardless of your view.

Well, something is going on and for one it is that ‘flash trading’ as of today is now longer in vogue? The hell you say! Well explain to TB why Citi has averaged over a million shares a day for months and on Friday 1.17B shares traded between the exchanges and the ETN’s. Today: 478 million shares and rather than average 60% of NYSE volume it shrunk to just 39%! In fact adding in the other top four stocks  which were all around 9-10% (BofA, Fannie Mae, AIG, and GE)…you know the usual suspects that is less than 80% of NYSE volume. At times TB has seen well over 100%. As reported yesterday, according to Reuters Citi, BofA, Fannie Mae, and Freddie Mac were 40% of NYSE volume Friday – that excludes the ETN’s! It is as if someone said “yeah we can do this for another 60 days but it will only attract attention to us and we don’t need more regulation.” Game, set, match. So be careful…be VERY careful!

If there is one thing that burns TB it is touting something and not telling the whole story. TB has seen numerous stories in Barron’s touting Limited Partnerships. They are fine and pay out 95% of their income just like a REIT but you have to fill in a tax form for them and guess what: they are not IRA eligible! TB found out the hard way when he invested in Kinder Morgan some years back…he bought the LP for the higher dividend…and got notified by Schwab that LP’s are NOT IRA/401(k) eligible. Fortunately, the income was below the threshold to have to file the form but every time he reads a ‘tip’ on one of these he wants to scream out a warning because if you bought a lot of shares it might not be pretty when you get taxed on the income in your IRA!

An even more common one is touting a mutual fund without disclosing the fees. Barron’s did this in the current issue touting in their cover story the Pimco Global Multi-Asset Fund (PGMAX), run by Mohamed El-Erian. Now El-Erian is a bright guy (although TB has a friend who thinks he is scaring people away from stocks…whatever) so TB went on Bloomberg to see what the fees are on this open end fund. Here they are:

Front Load: 3.75%

Back Load:  1.00%

Mgmt Fee:   1.30%

Expenses:    1.12%

12(b)1 Fee:  0.25% – don’t ever pay one of these: ever, ever, ever! To your broker the gift that keeps on giving.

So the first year your fees are 5.42%!…and if you don’t like it you get to pay another 1% to exit gracefully. To TB this is unconscionable…at least hedge funds are honest about what they charge you and if it is 5.42% you were up 17% (2% +20). Actually, El-Erian wa up 11.9% or 15.72% if dividends were reinvested…but past performance is no predictor of future performance.

Futhermore, Pimco, as warm and cuddly as Bill Gross is has a long record of different classes of stock (A,B,C) for different classes of investors with the little guy paying the big fees. But so do a lot of other managers and at least they deliver.

Now to something related that is NOT their fault. About a year and a half ago Gross was on the Barron’s Roundtable and when asked for his picks said the Pimco Global Opportunity Fund and the Pimco Global Corporate Bond Fund. Both were trading at a discount to the Net Asset Value (NAV). Gross added a caveat: do not buy them at a premium. Since these are closed end funds they are priced by supply and demand. The next week they had gone from about a 4% discount to the NAV to a 6% premium! Go figure…at least Gross’ skirt was clean, he warned them.

But what is so striking about paying a premium is this is not a growth fund…it is not like the two India funds that traded at premiums of more than 40% because at the time hedge funds were not allowed to buy Indian stocks! When the law was changed they plunged to a discount of around 10% but were saved by the rapidly advancing Indian market – that cannot and will not happen with a bond fund. Don’t take TB’s word for this but look at the closed end fund section in Barron’s and guess what: virtually all of them trade at a discount to the NAV – except Pimco! This is called sheer stupidity as if you look at the returns theirs are generally much better…particularly muni’s, but this is how people invest when they are scared…they go to guys they know…like Bernie Madoff…oops, bad comparison. Let’s take a look at one of the wildest ones you could imagine:

Pimco Global StocksPLUS & Income Fund. Sounds exciting and ‘PLUS’ means they can use options, etc. OK, count me in…but first let’s do a little homework. Thanks to TB’s trusty Bloomie, he noted that the 12 month return as of yesterday was MINUS 1.53%. But the PLUS is that if you reinvested the dividends the return became PLUS 50.8%. Now wait just a minute you say that is impossible…uh, no sadly…if you use the wonders of buying a fund at a deep discount to the net asset value and it goes not to neutral but to a huge premium!

On 10/10/08 it traded at its most negative spread to the NAV: -28.6% (guess they didn’t trust old Bill in a financial Armageddon), but then they began to like him…soooo they took it to a premium…at its widest 80.8% on 6/9/09…preposterous! Well, only a fool would pay that but as of last nights close it was back to a mere 57.7% premium. Hope someone didn’t buy that fund to put away for the kiddies as they will get more out of Social Security if and when they can retire. This is pathetic and shows just how lazy investors are! But at least there are no fees charged…right? Well, not that are reported anyway as it is a closed end fund. It is institutionally held too…Heck…good ole Snoopy’s company MetLife bought 32,560 shares in the second quarter…do people really pay them to do that? Apparently so as so did Merrill Lynch, First Allied, Citi, Fifth Third, while Wells Fargo bought 5,000 in one fund and sold 15,000 shares in another. The largest holder, Claymore Advisors with 4.7% after selling a small 19,180 shares in the 2^nd quarter is the largest shareholder. One has to ask what are they thinking? Do they get Christmas Cards from Gross??? It sure ain’t return except in the form of OPM (other people’s money). Minus 1.53%????

Also their Cal Muni Fund (PCK)…as in let’s get the puck out of here…traded at a discount of 26.1% on 12/15/08 and hit a premium of 43.4% at the peak on 10/30/08 and is currently trading at a 20% premium…the reutrn? -27% for the past 12 months and -20% if you reinvested those dividends…this is for a muni fund…got it? True, it was California and bonds got clobbered but they are now coming back. That loss was not due to Gross and company making bad investments – it was due to euphoric investors taking selling into it…the opposite of the StockPLUS & Income Fund. You know what is worse? You could have bought Nuveen, an excellent muni manager and had a positive return. Oh and that is one point with bond funds versus buying bonds…they don’t mature. Also, the ‘return’ provided by Barron’s is the current yield! It is meaningless! Want Proof? The Pimco Cal Muni Fund shows an 8.8% return for the past 12 months! But right next to it is that 20% premium to the NAV! Meanwhile all series of the Nuveen’s show a yield of about 5.8% but are trading at discounts of 5-8% to the net asset value.

OK, let’s see if you have been paying attention: which fund are you going to buy? Pimco! Because Bill Gross is running it! Aarrgghh….. 

The long-awaited Cal RAN’s are in the second day of their order period. Retail yesterday, institutional today. A total of $8.8 billion…is this the largest on record? Last year’s was about $6 billion. Why $6.6 billion? Because they couldn’t get a top rating from  Moody’s or S&P for anything bigger and they need that to sell it to the money market funds. They had wanted to issue $10 billion which surely would have been a record. There are two maturities: May 25 for $3.5B and June 23 with $5.3 billion. These settle on September 29 so with retail orders being priority we could see another drop in money market funds – just don’t try to say it went to stocks, yet someone will – undoubtedly!

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A friend loaned TB a book of quotations. Here are a few of them. They are timely.

“Never before has American business been as firmly entrenched for prosperity as it is today. Steel’s three biggest customers, the automobile, railroad and building industries, seem to me to justify a healthy outlook. This great speculative era in Wall Street, in which stocks have crashed, means nothing in the welfare of business.” – Charles M. Schwab, Chairman U.S. Steel (no relation to Charles R. Schwab), Dec. 10, 1929

“The outlook of the world today is for the greatest era f commercial expansion in history, The rest of the world will become better customers.” Herbert Hoover, speech in San Francisco, July 27, 1928…no wonder they have an institute named after him!

“Mr. Hoover is a practical economist and one to whom is due more largely than to any other one man improvement in our prosperity…Mr. Hoover knows as few men do the terrible evils of inflation and deflation, and te need of avoiding both if business and agriculture are to be stabilized.” Irving Fisher, economist, July 29, 1929, who predicted one year later that stocks would not and could not crash…the day before they did!

“If Smith should be elected with a Democratic Congress, we are almost certain to have a resulting business depression in 1929…the election of Hoover and a Republican Congress should result in continued prosperity for 1929.” Roger W. Babson, economist, September 17, 1928…yet in 1929 he said stocks were overvalued and was rebutted by Fisher – one day before the Crash.

Will give you some more quotes tomorrow…they are amusing and enlightening, right Edward R. Murrow?  

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, © September 22, 2009.

…that is the battle cry of everyone from Bernanke, to Geithner, to Yellen and now to Paul Krugman. The bottom may be in but the recovery will not surge like some, including amazingly perma-bear Jim Grant who says the farther the economy falls the more vigorous the recovery. For a guy who writes on credit this seems incomprehensible since he more than anyone should know the extent of the credit crisis and that for banks to rebuild capital amid mounting loan losses means less lending, not more. Right? Meanwhile consider the G-20 is on the warpath on financial regulation and compensation….while prudent, is it stimulative? Not hardly.

Five days and counting till last day for T+3 settlement for the quarter – hedge funds. Follow the bouncing ball!

TB was struck by some factoids last week:

*Over the past year 8 million people have attempted suicide. Almost 1MM succeeded.

*Financials are up 327% year to date; excluding Citi (C) and AIG, they are down 17%.

*Money market fund assets are now 30% of stock market, down from 46% at the peak of the crisis – back to levels just before. federal insurance on money market funds expired last Friday. Will that money go to stocks? Bank CD’s? Bonds? Gold? Or just sit?

*One in six Americans is underutilized (not full-time) and one in four is afraid of losing their job.

Seemingly unrelated but perhaps not.  Still trying to hash through just exactly what they meant by financials – certainly not the indices which are doing fine. TB went back to his closing quotes from March 6, the S&P 500 low, and calculated the returns on the major sectors and happened to look at the Most active NYSE stocks that day. Three of the five were the most active again on Friday: Citi, BofA and General Electric. The other two were Pfizer for the earlier date and SprintNextel Friday. Here are the returns for all five. Plus AIG, JPMorganChase, Wells Fargo, and USB with price ranges:

                                                3/6-9/18                Range                    9/30-9/18

Cit (C):                                     +266%             ($1.22-4.46)                   -79%

BofA (BAC):                            +376%             (3.71%-17.67)                -48%

General Electric (GE)*:      +142%             ($7.70-18.62)                 -31%

Pfizer (PDE):                             +42%             ($11.77-16.66)                 -5%

Sprint Nextel (S) 9/18:         +41%             ($3.04-4.28)                   -30%           

AIG (AIG)*:                            +370%             ($0.35-39.91)                 -31%

JPMorganChase (JPM):       +183%             ($15.93-44.95)                -2%           

Wells Fargo (WFC):                 +232%             ($8.61-$28.49)            -22%

USBancorp (USB)                   +160%             ($8.82-$22.76)             -35%

 *GE’s spurt has been recent due to use by spec accounts as a proxy for the S&P 500

*1 for 20 reverse split

Note that on March Citi’s volume was 956M shares – on Friday it was 1.17B shares. Total NYSE volume on 3/6 was 1.77B shares with city being 54% while on Friday’s 2.28B (due to options expiry and S&P 500 rebalance, with Citi still being 56% but excluding ETN trading it was probably 25%. On Friday, the SEC announced a ban on ‘flash trading’ which along with the rebates of ¼ cent a share the ETN’s give as rebates to promote trading by the largest hedge funds, should drive both volumes down significantly – however there is still a 60 day period for comments before it takes effect.

Also, note that according to Reuters (via John Mauldin), “four beaten-up financial companies – Bank of America (BAC), Citigroup ©, Fannie Mae (FNM) and Freddie Mac (FRE) – have accounted for upwards of 40% of the trading volume on the NYSE. This is what TB has been trying to tell and is directly related to ‘flash trading.’ It has to stop!

There will be a lot of whining but those microseconds provide a grossly unfair advantage. Hopefully the rule will require all bids/offers to be good for one second – is that too much to ask? Now if they just reinstate the ‘uptick’ rule which they will and hopefully it is for 10 cents or something significant and enforce rules on ‘naked shorts’ we might just have a market again. Also, there are going to be more rules on hedge fund reporting.

Now here are some key broad sectors. From 3/6 to 9/18 the VIX volatility index declined by 52% from 49.33 to 23.88 and from 9/30-9/18 -51%:

                                    3/6-9/18           9/30-9/18

NYSE Financials:         +135%                 -13%

KBW Bank Stocks:      +156%                   -24%           – major banks, money center/regional

NYSE REITS:                +110%                  -26%          

Nasdaq:

Bank Stocks:                   +45%                   -24%           – smaller regionalcommunity banks

 Insurance:                     +45%                     -2%          

Performance indices

Barron’s 400:                  +67%                  +1%          

FOX 50:                         +50%                        -5%         

Technology

NYSE ARCA Tech:       +58%                   +9%          

MS High Tech:              +75%                  +19%         

Nasdaq Computer:     +72%                  +20%

Nasdaq Telecom:        +69%                  +20%

Nasdaq Biotech:          +39%                  +14%         

CBOE Internet:              +63%                    n/a

Philly Semi (SOX)         +69%                 +10%         

Now consider the broad indices which have also been altered removing the dogs:         

Dow Industrials:              +48%                    -5%         

Dow Transports:             +81%                  -12%         

Dow Utilities:                    +29%                  -10%         

S&P 500:                             +56%*                  -4%

Nasdaq Composite:        +64%                    +8%

Nasdaq 100:                      +61%                  +15%

NYSE Energy:                   +46%                    -3%

Russell 2000:                  +76%                  +24%         

AMEX Composite:           +42%                    +1%         

*+41% ex financials and re-weighted         

Note the consistency of all sectors – excluding financials – and ask if the fix is in.

This is what TB meant by evaluating your portfolio to see which stocks were merely lifted by the rising tide…if so they should be sold.

From 2001-2007 financials ranged from 17-225 of the S&P 500 (largely due to the tech selloff) and as we know were the largest and fastest growing sector. At 12/31/08 they had fallen to 13.3% of the S&P , by Jan. 16 they were down to 11.6%. To put this in perspective in 1990 they were just 7.5% or not much more than Utilities which remain a small component. As of Friday they were back to 15.7% about double their historical  weighting. 47% of the financial sector is banks and 37% financial services, the rest being insurance.

If we back out financials from the S&P 500 and rebalance the return falls from +56% to 19%. Note also that there are only two banks in the S&P 500: BAC and JPM. Now you know just how much of the feel-good has been due to these two stocks.

There are two more phrases, the first TB detests, and the second he believes in::

*The stock market climbs a wall of worry – in other words shut up and buy! Isn’t it just possible that those worries are not only warranted but not discounted by the market? That certainly appears to be the case with bank stocks.

*Reversion to the mean – since markets perform in a random manner – per the efficient market hypothesis, the good returns must eventually be offset by bad returns. This is exacerbated by the lack of future planning by corporate management in favor of short-run rewards – for them! Still think the government overseeing bank compensation is a bad idea?…especially if it is implemented globally?

Why have we just gone thru the worst financial panic in anyone’s career…one that was caused by greed pure and simple and playing with other people’s money…and still we don’t think this is a fair concept? They exist (as does our society) from the largesse of the federal government and TB can think of numerous societies where they not only would not still have their jobs but would be in prison or dead. Can you prosecute greed if no law has been broken except integrity? Not a felony…not a misdemeanor…nada, zip.

So listen to your friendly analyst or mutual fund or money manager as he proudly trumpets on CNBC…or better not, don’t. Is this rational?…you decide.

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Obama while still appearing presidential is now reduced to a snake-oil salesman. His reputation is on the line and sadly he will sign any bill that is presented to him.

How about Senator Baucus’ plan to tax employers on those ‘Cadillac plans’? By that notion Congress should be taxed on their ‘Mercedes Benz plan’ that makes all others pale in comparison. Oops…we can’t do that because we, the people, are their employers. Is this the reason they are not proposing to tax employees on the incremental value of a Cadillac plan over a standard plan? That would also ignite employees if they were told they must chip in more or accept lesser coverage. Remember the elephant was invented by a committee…and now health care.

TB believes it does more harm than good to see the President of the United States of America on every TB channel promoting ‘the’ plan…even though it is not even his plan. God help us with what we get from those self-serving fools on the hill.

Then there are the banks. As of Friday, 92 banks have failed across the U.S. versus just 25 in 2008. FDIC sees 900 more failures. According to Barron’s: 1471 hedge funds closed in 2008; 668 in the first half of 2009 – 292 in the second quarter; 32% fewer hedge fund start-ups in the first half of 2009 versus 2008. New ones are requiring three-year lock-ups – if investors are concerned about the economy, transparency, and liquidity, does this make sense.

TB would not be so concerned if the government would make it plain who will be saved. Yes for the BIG banks (sic), Bear, Merrill, GE and AIG, no for Lehman and CIT. But what about the clients who rely on credit from them? Are the banks willing – or able – to take up the slack? Apparently not. Who bought the clunkers? The federal government? Who financed the $8,000 tax credit for first time homebuyers – which may rise to $10k with no income limit? The banks you say? No, failed Fannie and Freddie and FHA, but NOT the banks. Is this a recovery? Alan Abelson cites John Williams the CEO of Shadow Government Services that each of the past six recessions has had a rise in GDP in at least one quarter before turning negative again…when you drop so far so fast you have to find a bottom…but not necessarily the bottom. Credit is the one and only source of any lasting recovery. The last time we had it dissipate like this was in the 1930’s and we were only saved (sic) by World War II.

Hope you have a great day and week.

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, © September 21, 2009.

Bloomberg Quote of the Day: “Good people are good because they’ve come to wisdom through failure.” – William Saroyan

…that would be from today thru a week from today. It is time to see who blinks. Will it be you – or the hedge funds.

TB had a second conversation last night suggesting he ‘capitulate.’ To reiterate: IF, and that is a very big IF, the S&P 500 closes above 1121 (the 50% retracement of the entire selloff) he will take off his bear hat. But for the umpteenth time he did not tell you we are going back to the dregs, nor did he…personally, or for clients…tell you to short the market, go to cash, or do anything utterly foolish. What he did say is that we will have a significant correction and you should evaluate your portfolio for losers…especially stocks that have been lifted by the market – not their own merits. That is final.

One thing that was brought up in the conversation last night was that the market will not go below the 200 day moving average. If you take the Dow that would be to about 8,400 – a not insignificant 15% decline. Excuse me but that is more what TB has been looking for but is more concerned about the rapidly rising 40 day and 50 day moving averages which are now rising 22 and 32 points a day respectively! Also, if and when they are taken out it could be done in a single bad down session. Also, the 200 day arrested it’s decline on July 31 at 8,284 and is about 105 points above it. If that fails to hold the next support lies at about 8090 or another 4% lower. Note this is the support level we reached back on July 10 and is almost exactly to the 50% retracement of the rally from the March 6 lows. But the critical support would be at 7753 which was where we supported from  March 23 to April 23 – an entire month!  That is another 6% so to TB the worst case is a 25% decline and any of these points could be great buying levels – just not here or as TB said: trees don’t grow to the sky even if you spread manure around them.

But the mainly watched index remains the S&P 500: it closed at 1065 and the 200 day is 891 or 18% lower – it bottomed on July 27 at 870.57. so you can see it too is rather flat increasing the significance of it as a support level for technicians. The 50% retrace from the lows is at 870.78 which like the Dow was support from 7/8-7/15…and where the 200 day began its slow ascent. Critical support would be 822.64 the res/sup from 3/23-4/21 which is significantly the 61.8% Fibonacci retracement from yesterday’s high to the March 6 low.

TB’s friend says that 800 was the ‘real low’ on the S&P 500 technically and fundamentally and that the plunge from there to the 666 hex was a psychological blowout, or burnout and that could well be correct. After all from the 10/11/07 high (1576) that was a 50% decline. The 38.2% Fib retrace from that point would be: 1060 or almost exactly where we are today! Also 1158 would be half the decline which is not far from the 1121 50% retrace from the 666 low that TB pointed out. Either way, we have come along way but still have to get back to 1250 which is where we were on 9/15/08 the day of the fall of the house of cards…er Lehman. Note too that from his low 1257 represents the 61.8% Fib retrace from the 800 (741 intraday) level he is using.

Don’t forget how hard it was to get above the 38.2% Fib retracement of the sell-off at 1014…and falling below it would be a big sell signal flashing for technicians. 

Stop yawning and TB will conclude. You all know how TB hates the cliché ‘perfect storm’ but it appears that that is where we now are – especially if you are a money manager. Think like a money manager who saw revenues decline 35% last year while their fixed costs remained the same or possibly even rose. That is a huge hit. Then came the first quarter which was saved from a further decline by the bounce from March 6 lows but still hurt. Then came the rally and they are now up 20% or so for the year – definitely not out of the woods but at least they don’t have irate clients calling every day.

But now what do you do? Convince yourself that stocks are still cheap? Let’s assume you do and the market declines by the 15% cited above – due to the magic of math you have given up all of your gains for the year and you WILL lose clients. Another friend wrote TB yesterday that most managers would love to have the year end yesterday! He’s right!

So what’s a manager to do? With such a strong rally you can’t afford to go to cash before quarterend – you need to remain fully invested for window dressing purposes. But then wouldn’t you take some money off the table so you don’t give back those gains in the final quarter? That is what TB expects…but meanwhile there are the hedge funds who aren’t drinking the Kool-Aid and whose quarter ends three days before the rest of us.

What would you do? As TB has said and they have done frequently over the past 8 quarters, you take advantage of the fact that your books are closed and sell into quarterend leaving the other managers in the dust. At yearend they didn’t do it and the rally ended on January 6^th! Then the last two quarters they didn’t do either because the market was strong. But now? This is a golden opportunity to flex their muscles and they must have some withdrawals coming. Note also that they are trying to convince investors to take a three year lockup – TB thinks that would be foolhardy to expect that a managers performance can be replicated over the next three years and if he doesn’t it is you, the investor that has no way out…call it blind faith. So TB still maintains there will be a sell-off by quarterend and that could be further exacerbated by the earnings reports starting in mid-October: no top line growth (revenues), the stocks tank.  

Some good news for investors! Today the SEC banned ‘flash trading’ where the big boys can trade milliseconds before you see the last trade. Yesterday, TB was doing some trading for clients and couldn’t believe how many were at .001 above or below the quote.

This levels the playing field, now if they will just re-institute the uptick rule…one of the few things TB and Jim Cramer agree on by the way!

Speaking of Cramer…last night he was discussing today’s ‘fifth’ witching: expiration of the federal guarantee on money market funds. You should be watching this closely. With yields being where they are, you could move your money to an FDIC insured bank and have that guarantee again and probably earn a higher rate…perhaps a full 1% more and watch as the banks compete for this money. Also, as the costs of money then rise, the Fed will want to maintain the spread for them that is ‘helping’ to restore their capital base. That means that treasury bond yields could rise…a 4% 10 year note? By the way, Cramer also said ‘sell treasury’s’ for what it’s worth…not much but you should be aware of it.

So there you have it…watch closely how trading develops today as we approach expiry but beware of what happens next week and even more importantly Monday to Wednesday of the week leading to September 30. That is a lot to keep in mind but it is critical to do so.

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TB does not claim to be able to divine markets…his aim is not to convince you, rather it is to make YOU think for yourself, critical of him or not….and he welcomes and respects the opinions of others that conflict with his. The conversation last night caused him to revisit his prior assumptions and it convinced him we are still not in the dawning of a new bull market but still in a countertrend rally UNLESS the S&P 500 can trade and close above 1121.

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, © September 18, 2009.

…not to be confused with millstones (or gallstones) although there may be some similarities. Certainly you have noticed how people in failing health (failing being the operative word here as TB does not wish to depress anyone as he completes the thought), manage to hang on to their 100^th birthday and than expire. We tend to mark 10 year increments as milestones (except for 25 and 75 which as fractions of a century catch our attention) and celebrate them accordingly. 79 is just a birthday but 80 is a milestone.

So let’s say you are 97, you keep thinking that 100 is just ahead…and as a percentage of your life it is…and that gives you hope to ‘hang in there.’ Then comes 100 and that big celebration and now what? 110 sounds kind of empty and besides it is a long way off. Perhaps the quality of your life is so bad that the only thing that kept you alive was to turn 100…or is it to become the oldest living person? Dunno, what drives people but we do know that as investors we look at milestones similarly. Remember how long it took the Dow to reach 1,000 the first time…and then how long it took to reach 1,000 – again??? With the Dow Industrials at 9791, they are again talking about TEN thousand. We took out 10,000 for the first meaningful time in 1998 however and then shot to 11,000 and of course the book came out “Dow 35,000” – laughable now and laughable then to TB as the logic was totally flawed  Of course we peaked at 11,750 – couldn’t even hit 12,000 let alone 35,000 – on January 14, 2000 right after Y2k fizzled. But the important thing was that after breaking out over 10,000 it became support, tested in October 1999 before rallying back to the highs and then again in March 2000 before one last failed attempt to get back above 11,000 in October.on the tech bust but the Industrials made another futile attempt – briefly topping 11k before the broad selloff began in May 2001. Probably a bit too much history there but TB found it interesting.

In the rally that began in 2003 (and was fueled by record stock buybacks as much as anything else except mortgage equity withdrawals – MEW’s) and of course after crossing 11k the chant went out for Dow 15,000 – we barely made 14k before tumbling.

Once again we are approaching Dow 10,000 from the low side and some are quietly hoping that we can do it again..but if we do, then what? 14k? not likely following a massive rally built on the eradication of fear (some would say foolishly), and cost-cutting than on fundamentals. Now if you remove fundamentals from investing you have just two things left: psychology and it’s closely related cousin: technical analysis, which after all is a form of psychology.

But, technically speaking, 11,000 is light years away. The Dow is a laggard of late and just crossed the 38.2% retracement of the entire sell-off and IF we take out 10,000, 10,334 is the 50% retracement of the sell-off.

More important is the S&P 500 which was hexed (666) at the low, and after crossing 1,000 just crossed the 38.2% retracement at 1014.14, and at 1,068, the number to watch is 1121 – the 50% retracement of the entire sell-off.    

What prompted this discussion was a comment from a blog reader warning TB not to be so passionate as he might miss the rally:

“I remember in 1981 when Alan Abelson of Barron’s thought the DJIA at 800 was way too high. All through the bull market he remained bearish and missed 11,000 points on the DJIA…”

TB never said to sell the rally – except stocks that have rallied on the coattails of the market, which he believes to be the prudent thing to do. In fact, TB continued to buy on weakness, preferred stocks, some utilities (the least favored investment by the “pro’s”), and even a couple of sound REIT’s. But here is the counterpoint to the reader’s comment that is much more significant in the current environment:

Irving Fisher, one of the most revered economists of his day lost his briefcase in a phonebooth and it contained an “almost-completed manuscript that combined economics, probability theory, and real-world business practices in ways never seen before.”  That was in 1905, and was the basis for the term ‘business cycle.’ You remember what that is don’t you? The thing we eliminated thru ‘too big to fail’ and a failure to regulate the financial system – until we didn’t!

In September 1929, he wrote a rebuttal to a dire warning on stocks by Roger Babson, editor of the Wall Street Journal: “There may be a recession of stock prices, but nothing in the nature of a crash.” Then on October 15, two weeks before the crash, he said that stock prices had reached a “permanently high plateau.” The crash was just two weeks away. He then said:

 “It is significant that at this nadir of market despair and panic the market ‘averages’ had gone down only to those of February, 1928 – well above the old plateau of stock market prices, from the level of which the market had ascended after 1923.”

In December, 1929 he said, “The worst panic in history had not destroyed this new price plateau.” Not then…but in 1930 and 1931 it did. (taken from The Myth of the Rational Market by Justin Fox). We are not only tracking this era but the decline of the Nikkei that began in 1989. Until we cross 1121 we cannot even claim more than a countertrend rally in a bear market. Then and only then can we claim a cyclical bull market imbedded within a secular bear market. The question you must ask if the fundamentals justify this?

Historically speaking a secular bear market averages 7-10 years – not one year – and can run for a quarter decade or more. This is what Warren Buffett meant when he said we have a bottom and have “plateaued” there when interviewed on CNBC yesterday. Markets do not plateau…it is in no one’s interest for them to…the worst markets are flat markets – nobody makes money. So ask yourself it the 20x p/e on the S&P 500 or the 24.5x p/e on the Nasdaq 100 represent value. TB thinks not.

A last point: while the p/e ratio is determined by price vs. earnings, it is not this quarter’s earnings, or the analysts ‘next quarter’ earnings but the string of earnings going forward. Thus in uncertainty future earnings should be discounted (analysts have been constantly downward revising earnings and the companies manage to equal or beat the lowest one to broad hurrah’s! A 25x multiple implies a 35% return for 10 years. That requires a lot of growth. But how can stocks grow by even 25% when the economy is expected to grow by just 2.5%??? …at best! Bulls get rich, bears get rich, pigs get slaughtered.

Yesterday, Oracle reported earning exactly at the estimate. The stock tumbled however, why? Because sales were lower on overseas demand. During severe cost cutting that means less money for business investment and less of that means lower revenues for other companies…why can’t we see this? Oracle’s p/e is just 14.5% and it pays a 0.9% dividend. It is also up 22.9% over the past 12 months…think about that!

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TB believes that the Obama administration, and the country is now in serious trouble over the primary focus being on health care. True, it needs to be reformed but only in conjunction with other stimulus moves. Instead , it is the stimulus. Not only did Obama speak to a union as though he is a member, he is scheduled for all five talk shows on Sunday, and the entire hour on Letterman tonight! Me believes he doth protesteth too much. The ratings are now proving it…this is not the change we sought.

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, © September 17, 2009.

The dollar broke down overnight and is just above critical support. Despite this Global Confidence held at a record high on signs the U.S. recession has ended…the comments below were written prior to this and TB stands by them. Will someone please explain why the 1 month T-Bill is at 0.2%, a new low), the 3 month Bill is at 0.11% (low is -0.16%), 3 month LIBOR is at a new low( 0.292%), bonds are rallying, stocks are rallying, and gold is rallying and within $10 of the record high of $1033.90! Irrational exuberance?…or just plain stupidity?

 …me, or your lying eyes? That is about where we are. Over the past several days, Treasury Secretary Geithner, Fed Chairman Bernanke, and SF Fed President Yellen, have all said that we are now in a recovery…yay! But…there’s always a but…all qualified it with the recovery will be weak, unlike any past ones we have seen, due to lower consumer demand and individuals still trying to repair their balance sheets. This is no small point in an economy that derives 70% of its growth from consumer spending, no? Warren Buffett said today: “We’ve sort of hit a plateau at bottom”…but what doe he know…we trot out his name when it suits us….this was a bullish statement? 

Yet the stock market is not only up, but daily we hear that it is not over. This from mostly money managers and analysts (more on that later) with a vested interest in a continuaton of the rally. Trust them or trust the Fed? Remember the expression, ‘don’t fight the Fed’? Is it OK to disagree with them now?…or how about the upward sloping yield curve with borrowing at near zero rates and lending (read investing these days) long is not the same as in the Volcker era (that made Bill Gross a household name) when banks could borrow cheap and buy treasury’s yielding 8% for five years…how about a 10 yr at 3.4% plus or minus 5 basis points a day – and with moves of sometimes a point in either direction in a single day. At those yields a one point loss could ruin that arbitrage. Also, there has never been a three month period where the bond market hasn’t had a 50 basis point move…and on a 10 year that is a lot of points! Also, we saw what happened to Japan for the last two decades with rates lower than ours!

David Rosenberg continues to be bearish and when asked how companies are beating the estimates he replied that they are beating the ‘latest’ estimates…which have been revised down three or four times during a quarter. Then there is the affliction known as EBITDA, which Tobias Levkovich dispelled as useless for valuing stocks – unless you are buying out the entire company…yet the analysts love it and depend on it.

Back to analysts, there are two types the good and the bad…ok, three: the ugly! We primarily had sell-side analysts prior to the 2000 crash, mainly because nobody would pay for research, after all you can get it for free from your friendly broker, right? Well, after all the scandals tied to the tech, and especially dot.com boom, it became fashionable to subscribe to buy-side analysts who are not just there to push stocks but to give honest evaluations…and institutional investors were willing to pay for it this time. A classic example is Meredith Whitney who was ridiculed for her bearish stance on the financial sector…until she was right. She remains bearish on bank stocks today. By the way, historically analysts picks were about as good as picking a coin…except in one area: sell recommendations which had a high likelihood of being right whether by virtue of everyone selling when they came out or because they were damned sure they were right when they issued one so as not to offend the firm’s corporate clients.

This discussion was prompted by several conversations with clients, and friends in the business…at least the good news is there are no middle of the roaders here: you are either a bull or a bear and decidedly so. So rather than argue the merits of either case, besides you know which side TB is on, TB compares two sectors, banks, and tech by using a few examples in each category, but before we do that let’s look at the performance of a few sectors over the past 12 months and since the March lows (dividends reinvested):

                        12 mos             Since 3/6/09

S&P 500          -10.9%                           +55.9%        

Dow Trans       -18.3%                           +85.2%

NDQ 100          -0.7%                           +60.2%

SOX                 +4.8%                +71.5%

This is particularly timely in light of the first anniversary of the Lehman collapse since as you can see the Nasdaq 100 is almost back to breakeven – don’t confuse this with the 10/31/07 high from which it is still down 48.9%!

So let’s look at 3 members of the Nasdaq 100 plus IBM to see if they are attractive:

            P/E       P/E est PEG    LT Growth       Div Yield  12 mos. Return        

IBM     13x        12x    1.2x       10.4%              1.8%               +5.0%  

MSFT  15x        15x    1.4x       11.0%              2.0%                -0.5%

AAPL  31x        30x    1.6x       18.9%                n/a               +23.0%

RIMM  24x        20x     0.9x        22.9%                n/a               -17.5%

IBM was chosen as an old line tech company while MSFT is huge and loaded with cash, AAPL for its innovations and growth plan, and RIMM as the fastest growing company in the world. As you can see there is little similarity to them and if you are a contrarian you would buy RIMM. TB does not own any of these stocks nor any of the banks in the next section, except WFC and preferred stock of BAC/WFC/USB/PNC in some of his clients accounts. These are shown for illustrational purposes only and do not constitute recommendations of any kind. They are to help you assess if there is value in any of them or the market as a whole.

            P/E       P/E est PEG    LT Growth       Div Yield  12 mos. Return        

JPM     42x        25x    2.3x       10.6%              0.5%               +8.5%

C         n/m         n/m     n/m           8.0%              0.0%             -73.5%

BAC    99x        27x    3.2x         8.7%              0.2%             -42.0%

WFC   14x         16x     1.2x        13.6%              0.7%             -15.4%

USB    22x        24x     2.4x        10.0%             0.9%              -34.9%

PNC    19x        23x     2.6x          9.0%             0.9%             -39.3%

What is clear from the above is that none of these banks, except Wells is attractive and JPM is grossly overvalued. Citi and BofA speak for themselves. But note theidfference ni returns of the two solid regionals, USBancorp and PNC Financial, both of which announced yesterday they will not return the TARP funds due to expected loan losses – are they the only ones that are being honest with us. This is just one more reason that ‘too big to fail’ is destroying the rest of the U.S. banking system and must be done away with, along with reinstating Glass-Steagall regulations separating brokerage from banking. That was an experiment that failed and nearly destroyed the global financial system.          (If you disagree and like the banks, TB suggests you take a hard look at preferred’s.)         

You can do this same exercise and should as you evaluate your portfolio for over-priced stocks you own…i.e. those that have been ‘lifted’ along with the market.

TB maintains that the market will peak with either 1121 on the S&P 500 (50% of the entire sell-off), options expiry on Friday could be a problem, as could the following Friday which is the day the hedge funds close their books, or mid October when the earnings reports come in and look out if there isn’t top line growth (revenues).

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TB has to wonder what Obama was thinking yesterday. He aligned himself so strongly with the unions – as if he hasn’t figured out that he is now President and not campaigning. He cannot buy votes that way (as Bush learned in Pennsylvania) and should show some semblance of impartiality. How else can he mediate between business and the unions. His approval rating last night was 56%…this is not a good thing.

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, © September 16, 2009.