Wednesday, December 24, 2008

2009 The Year of the Pork Barrel

I want to start off with my 2009 prediction...
My best guess is that 2009 is the Year of the Hog on the Chinese calendar, because that $1 trillion “Stimulus Package” will be the biggest pork barrel transfer of wealth from taxpayer to political cronies in the history of mankind.

I have been telling clients all year that Hedge Funds have a history of inflating their performance numbers and then fessing up by taking an artificially large loss early in the following year. The fact that any entity in the investment community has the capability to fudge performance numbers is a really by indication of how lax regulations are and how bad oversight is.

The implosion of the Madoff Hedge Fund is the canary in the coal mine for the Hedge Fund/Fund of Funds/Alternate Investment/Managed Futures industry. Either regulators will have to start taking the auditing of Hedge Fund performance numbers seriously, or investors will pull their money from that investment product.

The big question for me right now is – how much of the performance numbers for Hedge Fund and Managed Futures Indexes were the result of Madoff’s bogus numbers? The big argument for owning this asset class is that it performs well during times where stocks are down. This improves the overall performance of the portfolio during bad years.

But what if a significant amount of the outperformance for Hedge Funds during down years was actually generated by the bogus numbers of Madoff’s Fund? I am going to email some people about this topic and will relay their thoughts to you.

On to the Markets
I hear a lot of people on TV telling me that the markets have found their “bottom”, that stocks are “cheap” values” “bargains” and that their targets for 2009 are someplace well above where we are now. My crystal ball is cloudy… I have no clue where we end 2009, and neither do the guys on TV.

I just want to look at the charts of the sectors to gauge the health of the markets, as we enter 2009. I see two patterns right now. Indexes have either made narrow rallies into declining moving averages (wedges) or they are stuck in narrow trading ranges. Now, things can change very quickly, but neither pattern is very promising.

Here is the chart of the S&P 500 Index (SPY). I see a bounce up into the declining 50-day moving average (Black Line) after a crash, on declining volume (Red Line and Arrow). That is very bearish.

Basic Materials (XLB), Financials (XLF), Industrials (XLI), Technology (XLK), Retail (XRT), Housing (XHB) and Semiconductors (SMH) each have patterns similar to the S&P 500.

Healthcare (XLV) and Consumer Discretionary (XLY), have similar patterns, but have held up better, in relation to the October lows.

Couldn’t Even Bounce
These sectors could not bounce, while the markets were able to make sharp bounces from recent lows. That is not a good sign for these sectors – Energy (XLE), Consumer Products (XLP) and Utilities (XLU).

Individual Stocks
Here are some stocks that scare me as we enter into the new year.

Microsoft (MSFT) is still well below key resistance ($20.68). It can’t get even get to the 50-day and has appeared to have broken its recent uptrend. I just saw some guy on CNBC tell viewers that Microsoft is now a “utility” and is his low risk pick for 2009. Who are these clowns who run these TV shows…

American Express (AXP)
Here is another stock that can’t get anywhere near its 50-day. I consider AmEx to be an important company. I don’t think its performance is a good thing for the markets.

Apple (AAPL)
This former darling looks like it is setting up for another leg down.

Now, onto the leading names, with strong growth, breaking out of trading ranges on heavy volume.

There aren’t any…

Tuesday, December 23, 2008

Keep Your Losses Small

I wanted to follow up on my last post.

Small losses are a part of the business. Not all setup that trigger become profitable. I always assume that I will have more losing trades than winners (I am not sure if that is the case), so my losses per trade have to be smaller than my gains per trade.

Crude Oil
I got stopped into Oil (USO) and then got stopped out at $31.80 yesterday. USO has been as low at 29.13 this morning. I still expect a real strong bounce on Oil at some point. To give you example of the power of the potential bounce, Natural Gas (UNG) has rallied 9.5% intraday. So I will be looking for other setups in the future.

A few days ago, I added to my short positions on Financials via SKF at $109 or so. I took half of my SKF out this morning. That gives me about a 3% exposure to SKF.

I had stops in to buy QQQQ (Bullish NASDAQ) and PSQ (Bearish NASDAQ). PSQ triggered and I now hold it. PSQ did its annual distribution of dividends and capital gains today. The distributions were a total of $4.2547 per share. So I am up a few percent on PSQ. The distribution will hit my account on 12/30.