3/11/11…just when they told you it was safe

Overnight Summary (note that the later comments describing the week were written yesterday morning but are included as useful to show the abrupt change that occurred yesterday. Today could be a bloodbath as longs try to get flat for weekend with so much turmoil…also next week is options expiry. See what happens when they run the  market in the last month of a strong quarter to pull the cash in from money managers…classic bear trap! We had a rally for the wrong reasons!

Yesterday morning when the Dow was -180, TB had a sick feeling that something was wrong and almost put out a note but then it snapped back in minutes to -130. It closed down 228 with 29 declining and only one up: MCD – which was the only LOSER on Wednesday…and for the two days a wash.

What alarmed TB was the dollar was rallying, Gold was falling as was crude….a big point of Don’s was strong commodities prices. During the Q and A TB specifically asked him about excess
speculation being the cause…based on the $30 drop in Copper prices from a record high three weeks ago…he shook that off along with the other commodities that have recently hit highs,
Corn, Wheat, and Cotton. TB also felt he was way overly bullish on residential and commercial real estate, ignoring the fact that most of the new mortgages are re-fi and more sales are on foreclosures
and short sales. A friend is one of the largest buyers of foreclosed properties in L.A. County, and has been for years. He told TB he is being deluged by calls from syndicates of wealthy
people who begging him to submit bids for him which he is gladly doing and making a nice commission for doing so…prior to that he was flipping his purchases for as little as $10k – the same day!

But what else felt wrong yesterday was that over the past three days the VIX and VXN have been increasingly volatile swinging by 3 points but rising…yesterday the VIX AND the VXN took out the
200 day moving average – VXN actually gapped up! This is an end to months of complacency.

Repeatedly, TB looked at Bloomberg top stories and all they had was stocks falling on perceived global slowing due to rising oil prices…a point Ratajczak dismissed due to historical time frames necessary to
slow demand. Where  TB feel she erred is that he is looking at all of these factors as independent and that the majority are showing growing economic strength…he barely mentioned jobs! So it is the implied weightings that are overwhelming the bullish indicators…and it appears the markets are now sensing it. Wednesday, on little news the Dow had eight up/down cycles which is very unusual and the emphasis from the open on was DOWN  with the indices all closing little changed but all down…too many casual investors look only at the Dow while the techs follow SPX and NDQ, both of which have been underperforming along with the Composite and Russell 2k.

Yesterday, every index closed below not only the 40 day but 50 day moving averages which, by the way, are still rising! Worse, NDQ and RTY gapped down to reach them and take them out.
Last night there was much discussion about the ‘Day of Rage’ in Saudi Arabia, but more importantly the 8.9 quake and tsunami in N. Japan was the worst since the 2004 Sumatra quake and the worst in Japan in 100 years. As for volume, it  was 1.14B shares, well above average as we have come to expect on  DOWN days. Advance/declines and breadth were horribly negative…panic selling???

Ratajczak (see below) was constructive on Japan which is hard to believe because its debt is more than 2x what would be expected to topple an economy. It has been all smoke and mirrors as the savings rate has been very positive for more than two decades and is declining rapidly ad expected to turn negative in the next couple of years due to the rapidly rising percent of the population over 60! This means that it won’t be the U.S. but Japan that will be the first to risk being able to roll over its bonds…good for the U.S. Treasury

Overnight, the global equity markets are all off at least 1% and most near 2% while now, 3am PST, DOW futures are -72 and NDQ -10. Now get this…U.S. bonds have fluctuated between BARELY positive and unchanged, while Europe is up 7/16 and even Japan +1/4…go figure! The Dollar Index, DXY is up to 77 while 78 is resistance at the 40/50 day m/a. Watch closely!
TB has over the past two weeks been instituting trailing stops WITH LIMITS on the most volatile holdings.

On Monday, Paul Krugman wrote a piece on Oil and Copper…he said that of the two, only Copper is a sign of economic strength when rallying (oil is highly speculative but since the advent of the commodities ETF’s all have become more volatile. Copper peaked  at a record $462.55 on February 14th – need TB remind you that was Valentine’s Day? Support became $450 and that was quickly broken then retested as resistance for six sessions, followed by FIVE straight down days that have taken it back to $416…watch closely. Meanwhile, not a peep out of the CBOE, MERC, CFTC or Congress…what have we become? Worse, what does this say about the strength of our economy… TB can bet what positions Goldamn is taking! Back in early 2008 when Crude ran to a record $147.20 on July 11, before PLUNGING to $32.40 on December 19th of the same year!!! Could there be any better sign of the speculative nature of crude and that has now spread to other commodities. First, it was Rice two years ago that hit a record high…then recently Wheat, Corn, and Cotton, all now well off their record highs…and at the expense of the turmoil we are now seeing in the Middle East and Africa…for good or bad but people are starving because of actions taken in Chicago that defy the laws of supply and demand.

On Wednesday, TB heard economist Don Ratajczak speak in San Francisco. He was very bullish on the economy and the stock market…until 2012…this being the beginning of the third year of the stock market rally. The first it was up 75% but he points out that  40% of that was due to the downdraft prior to March 2009 caused by fear of collapse…so that makes it a normal 35% first year, the second was also fairly normal except for the violent downdraft in the fourth quarter that ended when the world didn’t. This year he is forecasting 10% growth, also as one might expect…and this is where TB disagrees…but as for 2012 the fourth year of a recovery is highly volatile in expected returns…and could end badly. At least, TB concurs on that point. As for the comparisons being made to the 1955 Eisenhower rally…,there is no similarity to the domestic or global state at that time…perhaps we should try hemline theory?

Also on Wednesday, TB heard that a commercial real estate mortgage company (can’t find name now) shut down…not for bad loans but for a shortage of supply as the banks are aggressively reentering the business…news to TB…also Ratajczak cited strength in commercial real estate…don’t know where he is seeing this but it isn’t in Northern California…there are 71 hotels in foreclosure in the state including some of the largest in the bay area…yet he cited strength in HOTELS??? Beats TB since a friend went to Hawaii and stayed at the Mauna Kea which was just 30% occupied…don’t let air fares tell you how strong the economy isn’t…higher due to fuel costs and more importantly REDUCED flights!

…along came glob al revolution (?) bringing on higher oil prices, and then a quake and tsunami in the country with the most impact on the global markets – Japan. As a result TB has to defer the promised highlights of the chapter on Fannie and Freddie from All the Devils are Here until Monday, due to the length and complexity of today’s market commentary…you would be better served to spend the day reviewing your portfolio to protect against possible large losses.

. . .  – – –  . . .  = S O S !!!

The GOP may well rue what it did yesterday in Wisconsin, destroying collective bargaining, despite at least three different sets of polls showing that the majority of Americans feel that focusing on labor unions and collective bargaining is not correct. It also appears they will have raised a firestorm by doing and end run around the Dems in wiping out collective bargaining…isn’t this the same type of hubris that cost the Dems control of the House?  Why can’t anyone see that it is jobs, Jobs, JOBS that are foremost in everyone’s minds?…except the super wealthy, where we learned yesterday that the wealth level of all Americans rose unexpectedly – due to the Bernanke-induced rise in stock prices. Hello…most stocks are held by the wealthiest 5% of Americans, while the rest are concentrated in …THEIR HOMES!!! The wealth gap is widening and there are limits to how far it can go before things snap…and in the worst possible way.

Wednesday, TB went to the city…San Francisco…is there any other real ‘city’ in America? It is the closest thing to Paris and London we have to offer…heck when Willy Brown was Mayor he went to Paris, came back and had the dome gilded after seeing it in Paris. He had lunch with a long-time friend at Per Baccco, the best Northern Italian (Piemontese) restaurant TB has ever found…except for Belvedere in the town of La Morra in Piemonte…of course Prima in Walnut Creek, where TB’s son-in-law was sous chef, or Bella in Excelsior MN, WHEN he was chef there and took it to the eighth best in Minneapolis…now however it would be a cold day in hell that TB would walk through that door.

Yesterday lunch with a client at Spenger’s in Berkeley. Also, last week I visited a client in the Central Coast wine country.

So some outstanding lunches, visiting clients, and  an economist meeting with great hors d’ouvre’s…does it get better than that? Not likely!  …or at least it was great until the events of yesterday. This weekend may bring a lot more bad news globally.

Put on your helmets and grin and bear it!



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: