Thursday, September 3, 2009


There are a lot of asset classes, sectors and stocks sitting at key levels. Normally, this has led to fast moves in either direction. He is my list of what to watch. I will do more than watch.

Here is a chart of the ETFs for Emerging Markets (EEM), High Yield (Junk) Bonds (HYG) and The US Dollar (UUP). This chart covers the bottoming process of Late 2008 – Early 2009. I use Emerging Markets, because they are the high-growth and commodity-based economies. I use High Yield Bonds, because they are the worst of the worst, on the brink of defaulting. These are the riskiest asset classes.

As you can see, risk benefits when the Dollar falls. That is the game plan – Crash the Dollar to drive the Prices of risky assets higher. The tops in the Dollar and the bottoms in EEM and HYG are within a day or two of each other (Green Vertical Lines). The final low in EEM and HYG was also the final high for the US Dollar.

The Dollar is now testing its downtrend line (Black Line and Arrow) from its March highs. EEM is testing its uptrend line and HYG has actually broken below its uptrend line. You can also see that these three securities have been consolidating for six to eight weeks. Something needs to give. It probably will give soon and the move will probably be very violent. And then may quickly reverse with equal violence…

I want in on the move – regardless of which way things break. If the relationship holds, then a break lower in the Dollar drives risky assets to new highs. It also drives Foreign Currencies to new highs. My guess is that a break of the trendlines leads to all hell breaking loose in risky assets and probably a major short squeeze in the US Dollar.

Here is a chart comparing the ETF for the Metals & Mining Index (XME), Crude Oil ($WTIC) and the Baltic Dry Shipping Index ($BDI). You could substitute a number of commodities for XME (MOO for example). They have all peaked at about the same time and have been basing for over three months. $BDI is down 50% from recent highs! You’d better buy right in this market.

See how Crude and Metals bottomed at the same time the Dollar topped in March? Crude Oil ($WTIC) is now hugging the uptrend line. Something has to give soon. WATCH THE DOLLAR!!!!!!!

Oil Stocks (XLE) continue to hang out in a now eleven-month base. Remember, the bigger the base, the more fuel there is for the next breakout/breakdown. XLE has been lagging the other risky asset classes, but I am assuming that if it breaks out, then it will lead.

Here is the chart of the China “A Shares” Closed End Fund (CAF). It has broken support and now sits below its 5-month trading range. It seems to be an ideal short, but there have been so many of these false breakdowns lately that have led to massive short squeezes. I would not short anything until the markets top and roll over. Watch what happens if CAF trades above $32.50 over the next few days. I will be watching it closely!

South Korea (EWY) is closely tied to China. Look at how EWY is sitting tight here in a 6-week base. Note the big volume the last 2 days. I have seen a lot of breakouts preceded by big volume days like that.

Everybody is talking about Gold. Gold is the anti-paper Currency. Here is a chart of the Swiss Franc ($XSF), Gold ($GOLD) and the US Dollar ($USD). The Franc (and other currencies like the Euro, Loonie, Aussie) and Gold have the potential to break out of major trading ranges. The US Dollar has the potential of failing miserably.

Failure by the Dollar and a major breakout in Gold to new highs causes some significant policy problems for the USA, so I would not be surprised if some strange things happen to Gold and currencies on breakouts.

Stop Kicking the Trillion Dollar Can - per Bloomberg

My kingdom for a stiff, cool breeze… The sky has been orange for the better part of a week. Yuck.

Bloomberg fired the broadside this morning. The headline –

“Banks Need to End $1 Trillion Kick the Can Game”

Read the Op Ed.

“Banks have known for a while that they would eventually have to face up to some of the assets they had stashed in off-balance-sheet vehicles. Now that day is looming, and regulators are concerned that lenders might need even more time to deal with such items.

Enough already. It’s time for banks, and their regulators, to stop playing kick the can. Either banks have -- or can get -- the capital they need to support assets on their books, or government watchdogs should take action.”

Extend and Pretend…
Basically what has been going on is that the Banks have been allowed to take their bad assets and move them into Limited Partnerships that can be hidden from their Balance Sheets – “off Balance Sheet Accounting”. This is what Enron did and Skilling is still in jail for doing it. Now the FASB, The Fed, The FRBNY and the SEC have given their blessings to using this accounting trick. It only took Sarbanes-Oxley six years to die…

The goal of Team Obama is to let the banks lie about the value of their assets and use the earnings power of the banks to gradually write off their bad assets. Or they are going to just outright sell these toxic assets to the US Taxpayer (PPIP, GSE, TARP, TALF…).

Bloomberg begs the regulators to put an end to these games and do their job to protect bank account holders. His pleas will fall upon deaf ears. Geithner runs the show and he is Wall Street to the core. The rally in Bank Stocks has been a matter of Public Policy and it will end when its purpose (allowing banks to sell shares at artificially high prices and use the proceeds to write off bad loans) has been served. I get the feeling this Bull will die when there is another massive round of Secondary offerings by the Banks and REITs.

Why the Need to Lie?
The rumor this week was that a major US Bank was in major trouble. The rumor I heard most was Wells Fargo. It is a rumor, not a fake – take it for what it is. The facts about Wells Fargo are scary enough without the rumor.

28% of Wells Fargo’s holdings are in 1-4 Unit Family Residences
These units in their loan Portfolio have a delinquency rate of 14.23%!
And these are the assets they are being forced to tell you about! How bad is the junk in the Limited Partnerships performing?

57.09% of Bank of America’s (BAC) listed assets have an average delinquency rate of 6.1%
BAC admits to having $972 billion has assets, but the SEC website EDGAR shows their assets at $2.321 trillion
Where is the other $1.2 trillion of their loan portfolio?

Citigroup also has over $1 trillion hidden “off the books”

If the FASB had not changed the rules and the SEC had not turned their back, these Banks would have been insolvent long ago. Now, they are simply wards of the State. They are parasites who suck in huge volumes of Capital and produce nothing in return. But at least we got a rally in stocks, right? Who says Faust is fiction…

They have been granted $800+ billion in free capital from the Fed and all they do is park it at the Fed to collect their 0.25% in Fed Funds Interest. They take even more risk now, leveraging up all over again, writing naked put options (CDS) against anything that moves and front running the trades of their clients. They got away with crimes that made themselves rich and stuck the US Taxpayer with what will probably be a $12 trillion bill.

“Extend and pretend” becomes “shut up and take your bonus and go bribe a few Congressmen and then hire them as lobbyists”

Do you wonder why Gold is starting to rally?

Not all banks are upside down in bad loans. Guess where my accounts are…

The Bottom Line
I looked at some yields yesterday and here is what I saw –

Bank of America Bond without FDIC Guarantee maturing 4/15/2012 is yielding 3.327%
Bank of America Bond with FDIC Guarantee maturing 4/20/2012 is yielding 1.223%
An FDIC Insured CD maturing 4/12/2012 is yielding 2.451%

Who in their right mind would be buying bonds in Banks, when you know what the Banks are doing with their “Accounting”, when you are only getting paid an extra 0.875%? It takes all kinds…

Wednesday, September 2, 2009

QE2? (not the boat)

When the crisis was in full swing last year, I kept mentioning that the goal was to offload all the bad mortgage debt from banks and the Central Banks of Foreign Governments and onto the books of the US Taxpayer, via the Fed and the Federal Reserve Bank of New York (FRBNY). I think I wrote something to the effect of “the only entity stupid enough to buy this garbage at these yields is the US Taxpayer and they are doing so because the Government has a literal gun to their collective heads.”

The Federal Reserve Bank of New York and GSE (Government-Sponsored Enterprises) Paper
In November 2008, the FRBNY set up a plan to buy lots of Mortgages issued by Freddie Mac, Fannie Mae and Ginnie Mae. The goal was simply to buy enough GSE Debt to keep prices high and by definition keep Mortgage Rates artificially low.

This would hopefully allow for a refinance wave out of Adjustable Rate Mortgages that were set to “recast” to substantially higher Interest Rates in 2009 and 2010. I think a secondary goal was to allow people to draw Equity out of their houses as they refinanced, ala 2003, where the new money would be used to increase consumption. Again, the only entity irresponsible enough to buy this junk at 50-year low yields, junk that is backed by assets at artificially high prices, is the US Government.

The program was designed to purchase $200 billion of GSE mortgages. The initial goal was to purchase old mortgages that could not find other buyers and thus provide “liquidity” to the markets – or prop up prices, depending on how jaded your view may be…

Oh yeah, and remember, the $200 billion that the FRBNY has to buy this GSE paper is not real cash, it is created by the FRBNY borrowing $20 billion from the TARP and levering it up 10 to 1. Borrowed, Levered Money buying Mortgages (which are by definition Borrowed, Levered Money), all designed to artificially prop up housing prices to levels that are otherwise impossible to sustain! Good stuff. Let’s re-nominate Bernanke!

Yesterday, the FRBNY announced that they will be focusing their purchases on newly created GSE paper. So, you have one “Government-Sponsored Entity” class (Ginnie Mae, Fannie Mae and Freddie Mac) directly selling newly created paper to another arm of the US Government, the FRBNY, that is buying the newly created paper with newly printed Dollars. That is the definition of “Debt Monetization”, I’m sorry, I mean “Quantitative Easing”…

I think the first wave of GSE paper was purchased directly from the Foreign Central Banks and was part of a deal cut last year when the US Government refused to back Freddie Mac and Fannie Mae with an “explicit guarantee” from the US Government. Now the Fed is onto simply flat out printing money and Foreign Central Banks are happily swapping their GSE paper for US Treasuries.

I told you all along that if the Government did not force the risk takers to eat the losses, then the US Taxpayer would get stuck with them. As of right now, the US Taxpayer has over $1 trillion of these mortgages directly owned by the Fed or the FRBNY. Expect this number to keep climbing.

Treasury Repurchases
The FRBNY stated early this year that it would buy $300 billion in US Treasuries. Again, the FRBNY funded this program by borrowing TARP money and levering it 10 to 1. It has bought over $277 billion so far and will have completed its purchases in another 2 weeks or so. The FRBNY announced this plan in Mid March and started buy Treasuries on March 25th.

When did the Stock Market put in its low for the year? Early March. Do you think the $300 billion in newly printed money has found its way into the Stock Market? Do you think there may be a reason why the markets hit some indigestion yesterday and have seen multiple Distribution Days (Institutional Selling) the last few weeks?

Why is the Fed Doing All of This?
The Taylor Rule
The Taylor Rule is a Nobel Prize winning economic theory that tells the Fed where it should keep Interest Rates to maximize Economic Growth and Employment and minimize long term Inflation. Per Zerohedge, the Taylor Rule currently states that the Fed should keep the Fed Funds Rate at -6.55%!

What does that mean in English?
It means that prospects on returns on loans are so bad, that the Fed would have to penalize Banks -6.55% on their deposits before these Banks would actually take risks and start to lend the money. I think that implies that Banks figure they would lose 6.55 cents on every dollar they loaned over the next 12 months. That’s bad… How are you liking those Corporate Bond accounts?

Of course it is unrealistic for a Central bank to charge Negative Interest Rates, right? The Central bank of Sweden currently has their Fed Funds Rate at -0.25%! Holy cr*p. They have to jam so much free cash into the economy, that they actually push Interest Rates negative! How bad do things have to be in Sweden? If Economics is a study of profitability at the margins, then they are telling you that the Cost of Capital has to be negative before people are willing to make a “risk free investment”.

The Bank of England thinks it’s a swell idea and may follow suit…

The Fed has chosen another avenue to fill the Economy with excess cash. Rather than make short-term rates negative, they artificially cap long term rates by buying bonds in the open market – the so called “Bernanke Put”. Sell us your clunkers and we’ll issue you newly printed dollars and Treasuries… The actual practical manifestation of this is “Quantitative Easing (QE)”.

But the Fed is running out of ammo in QE round 1 ($300 billion cited above). So they will need to either reload at the feet of the FRBNY or cut rates to negative levels. The consequences of QE2 would be a falling US Dollar and rising Gold.

Look at how Gold traded today!
Gold is the anti-Dollar, so there could be intervention by the IMF (via an announcement to sell Gold), but in my opinion, the long term path for Gold is higher as more Dollars are printed. The only way out of this debt overhang is to inflate it away, because clearly the Government does not want any investor to ever lose a penny in a bad bond or derivative investment…

Gold (GLD) broke out of a 7-month trading range today on big volume (Red Arrow). On the monthly chart, you can see that Gold is sitting near the top of a 24-month trading range. Let’s see if the buyers are ready to break Gold above $1,000 on this move.

Tuesday, September 1, 2009

Real Selling Today

The S&P 500 ($SPX) broke its uptrend line from is July low. It did so on volume with abandon today! Stocks were up decently early and then got punk’d. They did so on what would be considered good economic news.

Today the selling felt real. I mean it was as if the big boys were selling with the intention of getting out of positions and not with the intentions of triggering stop losses before ramping prices higher. This was the 6th recent Distribution Day for the Dow – that is potentially meaningfully Bearish.

S&P 500
You can see how there have been two multi-day trading ranges in the month of August. The most recent one was 6 trading days and had every possibility of breaking out to the upside. Instead, it broke down. Moreover, it broke down after breaking out in mid-August and sucking in money. My fear when stuff breaks out is that it is a headfake and the boys will pull the plug after all the buy orders are triggered and that appears to be what occurred the last two weeks. I had a lot of things stop out today. Lots of these tight trading ranges failed today on big volume!

On this chart, I can see that the Market Internals appear to be rolling over (Bullish Percent $BPNYA and Summation Index $NYSI). I also can see that the breakout point was at 950 (Red Line) and that a pullback to 950 would be a 50% retracement of the July/August rally.


China has been the leader since it bottomed in late 2008. It bottomed when the Chinese Central Bank set up their version of a “stimulus package” and more than half of the money ended up being leveraged and used to purchase speculative holdings in stocks and commodities.

Now the Chinese Government is trying to slow down the creation of new money via leverage and the ultimate investment of that money into stocks, commodities and derivatives. If the Chinese market led on the way up, then what does this chart of the Chinese markets ($SSEC) tell us is coming for our stock markets?

China had managed to retrace about 40% of its crash. It has retraced over 50% of the recent rally.

Today was a bad day for the Financials. They have been the strongest sector over the last 6 months. You have recently seen gigantic rallies in some of the truly pathetic Financials (AIG, Freddie Mac, Fannie Mae, CIT, Citigroup). They appear to have had a speculative blowoff and these stocks got torched today (AIG -20%, FRE -17%, FNM -17%, C -9%)! These are all dogsh*t companies effectively owned by the US Government.

CIT was -15% today on the revelation that it cannot issue new stock at the current price. There are simply no buyers for the new shares. The price is extraordinarily high, relative to fundaments and will need to fall before it is bought by investors. CIT closed today at $1.47…

Morgan Stanley (MS) broke its uptrend from its December 2008 bottom today on big volume. So did Northern Trust (NTRS). Goldman Sacks (GS) has been a leader and is on the verge of breaking down.

Intel has supposedly good news last week, as did Dell. They both got trashed today. Semiconductors (SMH) and Microsoft (MSFT) may be putting in Double tops. Amazon (AMZN), Cypress Semi (CY), BIDU, Juniper (JNPR) either broke down or on the verge of breaking support or moving averages. Growth outperformed Value today. More may follow in the near term.

I expect rotation in leadership. Here is what rotation looks like over the course of a Business Cycle. I am going to use the Marsico 21st Century Investment mutual fund. During the first stage few years of the last Bull Market, the Marsico Fund closely tracked the S&P 600 Small Cap Index.

On the Second Chart, there was a significant correction during the first half of 2006. During this period, the Marsico Fund switched their holdings and the Fund closely tracked the NASDAQ 100 during that last big move of the Bull Market from mid-2006 through late 2007.

On the third chart, you can see that while the markets were topping out during the first half of 2008, the Marsico Fund was switching its holdings into Large Cap Value.

Now you may be asking yourself why I am bringing this up, but I wanted to illustrate a couple of key points. First, Mutual Funds cheat. They don’t stick to their stated investment objectives, but instead chase returns in hopes of marginally beating the Index they are supposed to tract. This is called “Style Drift”.

The big consequence of “Style Drift” is that when stuff stops going up and starts to roll over, there are a lot of fund managers all in the same holdings who all need to sell at the same time. This is revered to as a “crowded Trade”.

In chart 2, when all of those managers try and sell the same stuff at the same time, they can get away with (like early 2006) because there is still appetite for new risk. This period of time is a choppy trading range, where prices will fall some and recover some and ultimately the markets work their way to higher highs, but the old leaders lag and the new leaders out-perform.

But in a true market top (like Chart 3), there is nobody left to buy stuff and the markets crash under all of the selling – as occurred in the Q1 2008. The markets then churn sideways as Mutual Funds buy “safe” stocks like Utilities and Healthcare, as they try and ride out the oncoming Bear Market. You see, most mutual funds have to remain at least 95% invested at all times. This forces them to own stocks, even when they may not want to own them. I don’t have to be fully invested and can get out of stocks when the markets tell me to run for the hills, as I did in 2008 and a lot of 2009.

I will be watching the markets to see what holds up and what cracks. I like pullbacks when I raise cash, because I then can buy strength when it breaks out again. I will be watching things closely and see how things shape up going forward. A pullback will let me buy Market-based ETF and maybe some sectors if they look good enough.