Saturday, April 18, 2009

More Leverage Baby!!

It wasn't enough for Barney Frank to put the US Taxpayer on the hook for the US Mortgage Market, via Freddie, Fannie, TALF, TARP and PPIP, he now wants to have the US Taxpayer guarantee all Municipal Bond offerings.

This will lead to a bonanza of new debt offerings by municipalities. They will isssue infinite debt to raise as much money as they can before the Federal Government goes bankrupt under the weight of all the debt they create.

Credit Default Swap and derivatives were created to allow banks to issue debt at artificially low interest rates. The thought was that the investor could buy the bond with a low interest rate because the risk of losing money via default was offset by the insurance created in the CDS market.

How well did that work? Now that the system has blown up, the Government is trying to engineer a new wave of cheap debt financing via yet another round of CDS driven debt offerings. This itme though, they are using fraudulent accounting and pricing manipulation to hide risk and keep rates low.

Unintended (Intended) Consequences
The size of the Derivative Market actually INCREASED in size from $175.8 trillion to $200.4 trillion in Q4 2008 (page 9 of 33)!

I think that is because banks now recognize that if their derivative bet fails, then the US Government will bail them out. Sickening...

Goldman Sachs
Goldman had virtually zero derivative exposure in Q3 2008, but ended Q4 2008 with $30.2 trillion (4th largest exposure).

Their derivative exposure went from 4% of "Risk Based Capital" in Q3 2008 to 1,056% in Q4 2008 (page 13 of 33).

This is the leverage game again. I have no clue what Goldman is doing with all of this derivative exposure, but in my opinion, Goldman is the de facto trading arm of the US Treasury, so maybe the Treasury is using Goldman to buy derivative contracts from other banks at artificially high prices to pump them full of additional capital at taxpayer expense. Look for a new scandal.

This new wave of leverage will lead to significant asset appreciation (increasing prices) and significant inflation. As an investor, you need to make money to pay the higher taxes that will be coming AND to stay ahead of the consequences of rising inflation.

Wednesday, April 15, 2009

Some Point & Figure Charts

Here are some Point & Figure charts on a few of the things I really like. They are breaking out of multi-month bases, along with many other stocks in their sectors.

Now, with the size of the recent move and the inherent illiquidity in the current market, I am keeping tight stops on new positions. I want to add on a multi-week pullback, but all I am getting right now are 2-day pullbacks. So I am stopped into some holdings at a less than optimal time.

I may get stopped into and out of several holdings over the next month or two. It is the old "second mouse gets the cheese", where you may have to eat a few misfired before the real breakout occurs. The goal is to keep losses small and still be in when these multi-month bases get broken for good.

Tuesday, April 14, 2009

O'Neil Thinks This is a Replay of 1938

Here is a chart of the Dow Jones in the 1937-1938 Crash. I am posting this, because William O’Neil says that this Bear Market looks exactly like that Bear Market.
Below is a chart of the Dow Jones from Mid-2008 – Present.
The charts look similar, because human psychology is a constant. Fear and Greed run to quantifiable extremes and that is why charting stocks works.
We appear to be in that April – May 1938 timeframe, when the initial bounce off the Bear Market low runs out of gas.
The most important part of these charts is how in June 1938, massive volume showed up (2). That is how you know the Big Boys are in for real. I expect something similar to occur in the next few months, where the markets pull back into support, sit around and then take off on big volume.
I already know the areas I think will lead and I am starting to build positions, with tight stops.

Here are charts comparing the Dow Jones from 1920 – 1937, the NASDAQ from 1990 – Present and the Nikki from 1984 - 2003. They are essentially the same chart – illustrating extreme greed and the many years of non-productive trading. Does anybody still think “Buy and Hold” is going to fund their retirement?

For numbers dorks like me, the Dow hit its 1938 low 102 months after its 1929 high. The NASDAQ hit its 2009 low (so far?) 104 months after its 2000 high. It is going to take time to repair…

If the markets are indeed replaying the 1938 rally, then we are looking at some really nasty trading in 2010-2014. But remember, that Bernanke has said on several occasion that his goal with all of this cheap liquidity is to replicate the 1933 – 1937 Bull Market.

Maybe we are merely replaying the 1970s – an era of high Taxes and rising Inflation, Interest Rates and Commodity prices. That was a choppy, nasty time to own stocks.

The moral to all of this is that you are going to need to be as good at protecting money as you are at growing money for the foreseeable future.

Sunday, April 12, 2009

Relative Strength

I know that you read a ton about asset allocation and buy and hold, but the key to outperformance is understanding Relative Strength.
That is why I use so many charts, because they give me a simple picture of what is working and what is not.

Relative Strength, as I use it, defines the areas that are receiving the most Institutional Money Flow – or simply what is Big Money buying and what is Big Money avoiding.

You can break the Stock Market down into simple groups –

Large vs Small
Growth vs Value
Capitalization Weighted vs Equal Weighted
Domestic vs Foreign

Large ($SPX) vs Small ($RUT)

When the line is rising, Large is outperforming Small. When the line is falling, Small is outperforming Large. You want to own the leader, because these trends of outperformance/underperformance historically run an average of 5 to 7 years.

Here are the performance numbers for $RUT and $SPX over the periods I have identified on the chart above.

If you only owned the area of outperformance (Always Better), you substantially outperformed both Large and Small. If you only owned the are of underperformance (Always Worse), you substantially underperformed but Large and Small.

Always Better 650.42%
Always Worse 152.80%

See how much you can benefit from following something as simple as chart above?

If you go back and look at the financial publications, you will discover that they sell past performance and by following their “top fund picks”, you end up loading up on the stuff that worked in the past and may not be positioned properly for what is to come.

I do not consider it “market timing” if I am positioning money for 5 to 7 years. Do you?

These periods of outperformance/underperformance have averaged 5 to 7 years. Past history is no guarantee of future performance, but I will us history as my guide until it proves itself wrong.

If you look at the charts above, you will notice that even if you miss the first year of the Bull Market, you still have a very good shot at outperforming the market over the entire Bull Market.

So I can afford to be patient when committing money. I will pick my spots and buy what is leading. I think Large Cap Growth will lead this Bull Market.

William Black In Barron's This Weekend

William Black was at it again, but this time in a major Wall Street publication.

People know what is going on and it is now simply a matter of whether they want sacrifice and fix the economy now, or put it off for others to have to fix at a much higher price in the future.

We all know that the Baby Boom lacks the capability to sacrifice and the generation which preceded them lacks the ability to make a decision (think John McCain), so the odds are high that the current government will not require the needed changes to be made.

It is sad, but it is what it is. The goal now of Washington is to inflate asset prices to drive "aggregate demand" and finance the new massive tax structure they plan to install. As investors, we all must now operate under the assumption that SEC-sanctioned numbers are rigged in an effort to manipulate stock prices higher.

Futures Games

This is a pretty amazing post on where the orders are originating that are driving the equities markets. A full third of all trading volume is now generated by futures-related programs. These trades are simply the big boys hitting the buy and sell buttons to drive price.

Futures trades are short-term in nature and designed to accelerate moves, maximizing profits and minimizing the amount of time a position needs to be held.

What is even more staggering is that for every share Goldman Sachs trades for its clients, it trades 5 shares for its own account! That is not healthy for the markets.

My fear all along has been that the public is giving up on the markets because they are so blatantly manipulated and rigged for the big players.

Here is another great post showing how the majority of the rally off of the Mach lows has been during the afterhours, when little volume is required to move prices higher. This is creating an air pocket below price and will most likely not end well. Every other rally in the Bear has had similar characteristics.

The economy is now becoming nothing more than a Third World, speculative trading casino.