Friday, November 14, 2008

I’m just going to show you pictures today

On a day with a move of this magnitude, I want to take a step back and look at the big picture.

Today’s move started because Australia couldn’t take it any more and had its Central Bank go in and Buy Aussie Dollars and sell Japanese Yen. The selling of Yen makes it cheaper to borrow in Yen, which allows investors to borrow in Yen and buy risky asset in other countries (the Yen Carry Trade).
The Aussie Dollar (FXA) and The Euro (FXE) had nice moves today, but they are merely blips on the big picture. FXA has to get up through all of that volume in the Green Box. That is going to put a cap on the value of the Aussie Dollar for a long time. It could bounce all the way up to 75, but it is still in a Bear Market and any purchase is just a trade.
The Euro looks like it is consolidating the last leg down, before the next leg down. Another Bear Market.

The US Dollar ($USD) put in what may be a decent top today. Again, it was on Central Bank intervention, so take it with a grain of salt. But it could easily pull back towards 82 or 80.

I want to look at individual sectors, because the market is just a group of sectors.
Banks are on the brink of another Major leg lower. Everybody can see the chart and knows where the big boys will come in and protect price (the Green Line). So everybody has got their buy orders in place for a trade and the market has a huge, quick rally. Right into massive volume (Green Box).
I don’t think banks will be rallying much from here.

If you want to see a textbook Bear Market, then look at this chart of the Finance Sector (XLF). It is all sharp drops, followed by consolidation patterns into declining moving averages and then new legs down to lower lows.
Now there is that massive overhang of resistance (Red Dashed Line). But the red line is at 18 and price is at 13, so there could be some money to be made here in the near term, IF buyers show up. You could just as easily see a reversal of today and you get your head handed to you.

Here are Consumer Staples (XLP) (Food, Toothpaste, the stuff you use every day). They are just wedging up into massive volume and declining moving averages. That is one scary chart!

Energy (XLE) is no different. It could still rally a few more percent from here, but it looks very Bearish.
Same goes for Utilities (XLU) .
Basic Materials (XLB) look like Energy. Materials could rally sharply from 24 to 30ish, but the trend is down.

Same goes for Technology (XLK), Industrials (XLI), Consumer Discretionary (XLY) and Healthcare (XLV).

So what I see right now is an oversold market with the potential to rally back up into declining moving averages and gigantic volume.

The only thing that may have changed is the size of the next bounce may be bigger than the size of the last bounce. So I may be looking to buy some things for trades, with tight stops.
We’ll see how it plays out. I’ll take what the market gives me.

Wednesday, November 12, 2008

4 New Highs today and 1,075 New Lows

4 New Highs today and 1,075 New Lows
Maybe you have heard of a few of them – Berkshire Hathaway, General Electric, Citigroup, Microsoft, Bank of America, Intel, American Express, Goldman Sachs, Yahoo, Motorola, Applied Materials, Nokia, Micron, Dell, Disney, JA Solar, Freeport McMoran, Dow Chemical, International Paper, eBay, Amazon, US Steel, AK Steel, Google, Nike, Sears, Lockheed, Deckers, The Gap, Whirlpool, ConocoPhilips, Boston Properties, Black and Decker,

Remember when a bunch of these were the high fliers? The names Cramer told you that you had to own? Didn’t he have a $1,000 target on Google? Opinions are destructive. All they do is offer hope to those without a discipline for what and when to buy or sell. I deal in facts. I made a killing today. Remember those wedges that were breaking on Utilities and Energy? There was also one on Gold. Take a look at how SDP, DUG and DZZ did today!

The guys on TV must live in a parallel universe, because all I hear them talking about is how you need to buy. What planet do they live on? Almost 1,100 companies hit new lows today! The markets were down about -5.2% across the board! That’s the average annual return of the stock market over the last 108 years. And you lost it in a day.

All the clues you needed to keep your money safe were right there in front of you.

I will post on potential risks over the weekend.

Why are the Markets Crashing, Yet Again?

The government needs to cut the bull, because the markets have already figured things out.

The sickening incompetence or outright graft which led to the handling of the likes of AIG, Freddie and Fannie by the US Government has led to a collapse in the economy – in consumption, in lending, in asset prices and in production. A clean sweep.

The US Government does not want to bring the debt of AIG onto the books of Uncle Sam. So what did they do.

What did this do? It hurt the taxpayer. The Government had the ability to just take over AIG. That would offer the taxpayer two benefits –

1. You will know how much you need to put in to make AIG solvent
2. You will own the entity after it is capitalized and you will be able to sell it to make up for some of the losses you sustained while getting the company healthy again

But what did the Government do? They played their typical accounting games. They bought the most of AIG they could buy (79.99%), without having to actually take over the company. This allowed the Government to –
1. Overpay for AIG’s assets
2. Keep the debt of AIG off the balance Sheet of the US Treasury
3. Stick the taxpayer with an open-ended obligation for untold $100’s of billions

I think it also allowed the management of AIG to hide a bunch of the illegal stuff they did, which got the company into its mess in the first place.

Who benefits from this? The shareholders. The US Government not only left them with 20% ownership in the company, they also guaranteed ALL of the Preferred stock! Are you freakin kidding me?

The markets are crashing, because this is idiocy. Idiocy! All it does is put in a middle man who’s goals are polar opposites from those of the taxpayer. The taxpayer wants to get lending going again in a manner which costs them as little as possible. The banks want to suck as much cash as they can out of the taxpayer to prop up their “earnings” and their stock prices.

This is failure by definition. I haven’t been in an Econ class in 20 years and I could write a book on this stuff. But you’re telling me that there isn’t somebody smart enough in Washington to fix what is wrong?

What do the markets want?
They want the Government to fix the problem.
The citizens voted for Obama to fix the problem.

What is the problem?
Insolvent banks can’t lend money, because nobody is buying their worthless debt anymore (more on this in a minute).

How do you fix it?
Cut the accounting games.
Stop promising payouts on shares of preferred stock in companies that are worthless.
Put the taxpayer first! The goal of this plan should be minimize the cost to the taxpayer, while getting banks solvent and lending again.

This is simple. Take over the banks and take all the bad debt off of their books. Give them a bunch of money and tell them to start making good loans immediately.

What does this do? It creates a network of healthy banks. These banks wont need FDIC to bail out their money market funds. They will become safe havens for peoples’ safe money. You don’t have any risk if your bank is solvent and backed directly by the government.

This will allow the banks to make money and rebuild their businesses. At some point, you sell the banks to the public markets and use the proceeds to repay the taxpayer for the staggering losses they will take for bringing all that toxic debt onto the balance sheet of the US Government.

The big problem with that solution is that you need to change the culture of the banks. They can’t operate anymore like they want to. The markets just aren’t buying what they are selling.

So what does the Fed do? You’re not going to believe this one. Instead of fixing the problem, it promises to buy what the banks are selling, with taxpayer money. It promised today to do so, even though the Fed knows it won’t work.

What do the markets do? They crash, yet again!

American Express
The other day, American Express became what is called a “Bank Holding Company”. Funny, I always thought they were a credit card company. You know why they did this?

Let me explain how Amex and the other credit card companies work. They lend money to card holders. Say they loan $100 million today. In order to make loans tomorrow, they either need to raise new cash by borrowing themselves, or they need to package up that $100 million and sell it. This packaging process is called “securitization”, as in you create a security to trade.

There just isn’t anybody willing to buy these bundled credit card loans from Amex. Just as there aren’t buyers for bundled mortgages or car loans or student loans...

So what happens, Amex becomes a “Bank Holding Company”. They do this, so that they can the credit card loans nobody else want to the taxpayer, via the Fed checkbook.

Do you see why I am so mad? We are getting stuck with a bunch of worthless (stuff) that nobody else wants, and we’re overpaying for it.

Did you see the other day that Bloomberg sued the Fed to get the Fed to tell them what they did with the first $2 trillion it has already used to buy toxic debt from banks, hedge funds, and other countries?

The Fed won’t tell us what they bought or what they paid for it. A news agency is actually suing them to get them to divulge the information. With the markets crashing, you know the numbers aren’t good.

The markets are pricing in several potential scenarios –
1. Obama tells the banks to get in line behind the taxpayer and just flat out nationalizes the banks (my preferred route)
2. Congress gets enough heat from voters that is forces the Fed to divulge what it did with the first $2 trillion and the game of buying toxic debt from banks ends
3. There just isn’t enough free capital floating around to buy all the new debt we need to sell. The US Budget Deficit is now $6 billion A DAY!!

I think there is a seismic shift coming and it will at the expense of the banks and their stock and bond holders.

I will buy assets when somebody, anybody, other than the US Government is willing to buy an asset, any asset.I still think that stock prices are too high and will need to fall further to find a place where investors are willing to buy stocks and hold them for more than an hour. That has been my overall thesis and it has been very profitable, so I will stick to it until I start to see evidence that the markets are changing.I think that bond prices are too high and rates will have to increase substantially to compensate bond investors for the risks they are buying.I think that real estate prices are too high and will need to fall down to a level where they are actually affordable relative to average levels of income.Prices will start to go up on a sustained basis, after they have fallen down to levels where investors are willing to buy them.One more thing on Real Estate
Yesterday, the Government made a proposal that would effectively make the US Government a vender of exotic mortgages.

The bottom line is that housing prices are still too high. You know this, because the goal of the Government plan is to break mortgages of defaulting homeowners into two parts, charging zero interest on one part and an artificially low rate on the other.

So by definition, the amount of the mortgage is so big, relative to income, that the government has to effectively write off part of it, and lower the rate on the other money to several points below the rate of inflation.I think the question that everybody but the media is asking is why isn't this being done on the back of the shareholders of the banks who made these loans? Why should the taxpayer be stuck with the liability?I'm telling you, people are irate! The truth is percolating to the surface. The stuff I have been writing about has been on target. At some point, there will be a change in policy and the shareholders and bondholders of banks will be left with nothing but maybe a handful of warrants.

Tuesday, November 11, 2008

Market Internals - At Key Support

The markets were on the precipice. They were staring into the eyes of yet another leg down. But today the cavalry rode to the rescue, in the form of the Freddie/Fannie mortgage restructure package. The Dow Jones Industrial Average held up for about an hour and then sold off 280 points, before rallying 140 in 14 minutes to close down about 170. The same think occurred on Monday, when China announced a $586 billion government spending package. That rally also lasted for about an hour.

This is the 6th or 7th time the Fed/Treasury/SEC has come in with a bullish plan designed to get the markets rallying, just as they coincidentally sat at key support. Each plan has had less and less of an impact in propping up the markets. The markets are wise to the game and the bottom line is that there just aren’t any real buyers at this level!

The Dow
Take a look at the Dow. All this rally has been is a reversion back into key moving averages after a crash. It is classic Bear Market action. Today we in the process of testing the support line (Green Line) and then the Fed came in to save the day. Look at how this is the fourth consolidation pattern to follow a plunge in prices in 2008 (Green Lines) and notice how each rally stopped at the 50-day (Black Line) or the 200-day (Blue Line).

If you have been reading my posts for a few weeks, then you know by now that that is not bullish. In the next few days, the Dow may retest the high of Election Day, at the Black Line at about 9,700 or it may crash. It sure looks to me like if it rallies, then all it will be doing is setting up for the next plunge. I think today’s announcement was supposed to induce that rally into 9,700. The fact that buyers just didn’t show up is very ominous.

Energy (XLE)
Energy stocks have been leading the markets recently. So I want to look at what is going on with energy. It is more Bearish plunges, followed by sharp rallies into key averages, followed by plunges to even lower lows. What is worse for energy is that line at $63 is now massive resistance, and will serve to cap any future rallies for a long time.
The charts of Exxon, Chevron and Total Fina look better, but similar to the XLE. The charts of the Oil Service companies like Schlumberger look substantially worse.

Healthcare ($HCX)
You already know my feelings about Johnson & Johnson, but here is the Healthcare Index. Yikes. Do you see why the Fed stepped in today? This index broke support. The Freddie/Fannie announcement saved the day for the time being.

Utilities (XLU)
Does this remind you much of Healthcare? The Fed might have been too late on this one. It looks like it already broke. We’ll see how it acts over the next few days.

Real Estate (IYR), Financials (XLF) and Retail (XRT)
These all look the same. They are retesting the lows of late October.

So for the most part, markets and sectors are either rallying up into declining moving averages (Wedges), or they are retesting the lows of late October. Individual stocks are no different.

Wedges - Wal-Mart (WMT), 3M (MMM) and Apple (AAPL)

Retesting Lows - Microsoft (MSFT), Bank of America (BAC) and Google (GOOG)

The markets are set up to crack or rally sharply in the near term (a few percent either way over a few day period). I see so many companies failing and hitting new lows, but they are oversold and could see sharp rallies at any time.

New 52-Week Lows Today (635 in total) – Google, Goldman Sachs, Nike, Northern Trust, Boston Properties, Hormel, Lennox, Cleveland Cliffs, Abercrombie & Fitch, Gamestop, Disney, Carnival Cruise, Bed, Bath & Beyond, Autodesk, Harley Davidson, Time Warner, Conagra, Urban Outfitters, Ethan Allen, J Crew, Nokia, International Paper, Nordstrom, eBay, Echostar, Dry Ships, Yahoo, Royal Caribbean Cruises, Applied Materials, Corning, Limited, New York Times, Jones Apparel, Cheesecake Factory, Anntaylor, Xerox, Goodyear Tire, Seagate, Tyson Foods, Cooper Tire, General Motors…

New 52-Week Highs Today (4) – 99 Cent Store, US Tobacco, Eagle Test Systems

635 to 4! That is not good. But it is a typical day in a Bear Market. My concern is that the new lows are in retailers, travel/leisure, technology, real estate, consumer staples... These are key groups. You should not be seeing this in a new Bull Market.

The bottom line is that either buyers are going to show up or sellers are going to show up. Whoever shows up first will dictate the short term direction of the market. After reviewing the evidence today, I may have to keep shorting bounces.

I Think This Plan Bankrupts Us

Pretty typical stuff today
The market is on the brink of starting yet another leg down and what happens, the US Government throws 12 figures of US Taxpayer Dollars (it doesn’t have and needs to print) at the symptom of the problem in hopes of letting hedge funds and banks deleverage even more at an artificially high price.

Freddie and Fannie Go Countrywide
The plan announced today is that homeowners in default will have the opportunity to cut their monthly payments to 38% of their gross income. In order to make it possible to get monthly payments low enough to service the mortgage debt, the following solutions are offered –

1. Extend mortgages out from 30-year to 40-year loans
2. Offer low teaser rates
3. Reduce the principle amount on the loan and take the reduced amount and turn it into a balloon payment (think ARM) due when the house is sold or the mortgage is finally paid off at “maturity”.

It just looks to me like the US Government has become the creator of yet another round of exotic mortgage financing! Isn’t this the same stuff that got us into this mess in the first place? But now instead of the shareholders of Countrywide or Washington Mutual being on the hook, the US Taxpayer will be on the hook when these people default.

I figured that at some point the Government would come up with a plan that made so many taxpayers irate, that it would start a public backlash to unravel all the insane programs of Paulson and Bernanke and finally get the country on the path of fixing the problem and not bailing out the crooks and fools who got us into this mess. This may be the one.

This plan is insane!
Am I the only one who sees this? According to, the Maximum Housing Expense should be 28% of gross income and the “Maximum Allowable Debt-to-Income Ratio” should be 36%. But the US Government just put the taxpayer on the hook for several million deadbeats at a level of 38% on mortgages which do not even represent all of the debt of each individual mortgage. Holy cow, we are in deep dodo!

This program actual has the capability of bankrupting the country. You read that right, and wrote it exactly the way I intended. We are now issuing $2 trillion a year in new debt to cover our deficit spending and at some point soon, with the likes of China issuing $600 billion of their own new debt, there simply won’t be any new buyers for US Treasuries. At that point, we are bankrupt.

If this program goes forward, then I don’t like our chances. I think cooler heads will prevail and public outrage will escalate exponentially in the next few days. Let’s see how this plays out.

I will have a very detailed look at the markets later this evening. Please email me with any questions.

Monday, November 10, 2008

Long Term Perspective

Johnson & Johnson (JNJ)
JNJ took out a 14-year uptrend (Black Line) last month on its biggest volume ever (Red Arrow)! It has now rallied up to “kiss the line goodbye” (Black Arrow), where it potentially rallies up from below to touch the trendline one last time before imploding. If you own this sucker, then you better have a defensive strategy in place, because Barack may take JNJ to the Phillip Morris extortion mill.

Microsoft (MSFT)
$20.68 is the key level for Microsoft. It is the 62% retracement level from the 1994 low to the 2000 high. It has tagged this line on several occasions over the 8 years of its current Bear Market. You can see how much volume has traded in this range (Green Arrows). If Microsoft takes out $20 on volume, then you need to be very concerned if you hold it, because at that point single digits become a very real possibility in a short period of time. Man, what would that do the NASDAQ, the Dow and the S&P 500?

The Nikki
Here is a chart of the Nikki over the last 28 years. Is it just me, or does this chart looks a whole lot like the chart of Microsoft?
If you hold Microsoft, then you should sear this chart into your brain, because you may look back in 10 years and realize that your money was sitting idol for a decade and you had a historical precedent to get out of it on the next retest of the highs of a potential 20-year trading range.

The Semiconductor Index ($SOX)
Most all the major semiconductor charts look like this (Applied Materials, Intel, Texas Instruments). I’m just gonna guess that one of these support levels will hold. So I am going to be on high alert for any further weakness in semiconductorland. I would love to get AMAT in the signal digits! I just might have to wait for $6, so I will be careful not to pull the trigger too early if it falls quickly to $8.

The Dow Jones Industrial Average
The Dow crashed in September and October on gigantic volume (Red Arrows). You know the drill. That is institutional investors running for the hills. The fact that they didn’t buy last month’s bounce with any conviction tells me that they are probably waiting for lower prices before they commit more money. The obvious target is the 1998 and 2002/2003 lows in the 7200 range.
That massive volume in the 10,000 – 11,300 range will take a long time to work through (Green Lines and Green Arrows)

Just some food for thought, but a break of 7,200 sets up a test of the trendline from the 1930 bottom at around 5,000. If 5,000 is tested in the near term, then I am here to tell you that it will probably turn out to be one of those once-in-a-lifetime entry points, and will most likely form THE low for the Secular Bear Market, which I expect to run from 2000 – 2016/2018. Keep that in the back of your mind. You should be licking your chops for that opportunity!

So the long term charts aren’t real compelling. Any more concerted selling will set up a test of long term support lines and should lines hold, then we may get a decent rally for what could be 6 months or could be 24 months. You’d better have a professional with a buying and selling discipline to guide you through it, because if you are left to your own devices, then you may end up trading on emotions.

By the way, the definition of an equilibrium between sellers and buyers is when buyers show up to defend a trendline. The only way those trendlines hold up for real is if big money shows up to buy stocks and take them home for an extended period of time.

It should be an interesting end of the year.

Where have I seen this before?

The Dow is falling and then out of nowhere, it rallies for 200 points in 23 minutes to close the week on a winning note. Gotta make the masses feel good over the weekend…
Then it opens up another 200 points on Monday morning.

Like I told you a few days ago, these are not the traits of Bull Markets. These are the traits of overt futures games (manipulation?) and are destined to fail in a sharp spike lower.

In the last three days, the Dow has rallied 5 points. ALL of the move was a result of spikes up in the last half hour of trading, or on gap up opens. That means that none of it was real. It’s all price fixing on no appreciable volume.

I still think that the only reason you can get these price moves with no volume is because the market is not at a level which attracts buyers who want to take stocks home at night or hold them for more than a few hours.

In my opinion, one of two things is going to happen –
1. All the buying of assets off the balance sheets of banks will get enough cash into the system that prices of assets will actually start to move up again
2. Prices will fall low enough to attract investors who want to hold for more than an hour

Today the Dow rallied 140 points in the last 24 minutes. So the games continue…