Thursday, January 14, 2010

Watch How Intel Trades Tomorrow

I Sunday I noted that continuation of the breakouts by Intel and Cisco could have meaningful impacts on the Indexes.

Intel blew out numbers after hours today.

The old adage is that is it not the news, but how the market reacts to the news that counts. Intel is up in after-hours trading. I assume that it would be a sign of exhaustion by the Bulls if they cannot capitalize on Intel and ramp either it and/or the NASDAQ tomorrow.

I own Intel, so I hope that they blast it off to the moon...

There is a ton of stuff in bases right now. A lot of them are the Mega Cap names that tend to lead late in rallies, as Institutions plow their money into liquid names that offer them the best defense in a pullback. I hope the breakouts keep working.

Several restaurants are breaking out.

Wednesday, January 13, 2010

California Credit Downgraded By S&P

S&P thinks that California’s finances are bad. So they cut our credit rating –

They don’t think that Obama will be bailing out California, as requested by Arnold –

“We recognize they have enormous problems,” David Axelrod, senior adviser to President Barack Obama, said in an interview. “But we can’t solve all of those problems from Washington.”

California Municipal Bonds (MYC) have been in a consolidation since early October. My guess is that a breakout from here would be mean that California will again be able to monetize their debt and kick the can into 2011, or that Obama will come to the rescue and prevent Arnold from becoming a “Little Hoover” (per Krugman).

California and Stocks
There is a clear correlation between California Muni Bonds and stocks in 2009. In July, it became clear that California would be able to print a new currency (“IOUs”) with the blessing of the SEC and use accounting tricks and the borrowing of more money to cover its 2009 Budget shortfall. When stocks figured out that this would be the norm for how states would deal with the shortfalls in their 2009 Budgets, stocks when vertical – no pain this year means more leverage and stocks love that.

If California is forced balance its Budget, without issuing new debt and without Obama’s assistance, then that can only mean bad things for stocks. If Obama blinks or California kicks the can into 2011, then we may get another leg up for Muni Bonds and Stocks.

Keep an eye on California Muni Bonds to see where stocks may be heading next.

Tuesday, January 12, 2010

Key SPX Support at 1,123 – 1,124

Let’s see how the market reacts off of key support tomorrow.

Now Onto Global Cooling?

Some weather “experts” are now predicting Global Cooling over the next 20 – 30 years… I am certain that some of this new attitude stems from the leaked emails about how the last 160 years of temperature “data” was ginned up to make it look like humans causes the icebergs to melt. Blah Blah Blah…

I see it simply as this. Here is a list of the most profitable companies in the world. The top six are oil companies. If you are in government and you want to extort an industry, which one do you choose? I choose to target the one with the most money – oil companies.

In my opinion, the whole “Global Warming” thing is simply to try and make it appear that humans are going to destroy the world because of all the excess Carbon we put in the atmosphere, in order to provide cover for the looting of the oil industry by politicians.

If human-induced carbon is the cause for the world to warm, then why did temperatures fall the last decade, while another 1 billion humans were born and why then are temperatures now expected to fall for the next 20 – 30 years?

I think people know that Kyoto is designed to move wealth from rich countries to poor countries and that “Cap and Trade” is designed to extort money from oil companies and make banks like Goldman rich with yet another derivative market to create, over-leverage and screw up. The public sees it as another tax that will cost us jobs, wealth and freedom, and we don’t want it. Now the smart scientists are running for new grant money to study the cooling of the earth.

Sunday, January 10, 2010

Time and Price Square Out?

This is the chart that should define trading in the first half of 2010.

The markets have been heavily influenced by technicals. That seems to be due to the fact that computers account for about 80% of all trades. So plug in your algorithm and let the cash register ring…

Technicians would refer to this as a “square out” where you simultaneously reach key levels in time and price.

These situations are often setups for accelerations of trend or sharp, nasty reversals. Time cycles are expected to trigger +/- 2 periods from the key date, so sometime between now and the end of January will be a very important period of time.

If we are going to see a nasty correction, then the next week or two from the current price range or a few percentage points higher should offer a very good technical setup.

I think the two most likely scenarios are the following –

1. A spike up over the next two weeks into the 1,228 – 1,250 range
2. Price stalls out in the 1,140 – 1,158 range

You should be on high alert for a meaningful reversal if price becomes extended above here! For those interested in committing new Long Term capital, you should probably be looking for a better entry in the future - or have a very tight stop and expect a better than 50% chance of being stopped out of your position in the next few weeks.

Let’s see if the reversal triggers.

In The Mean Time
I see lots of breakouts from trading ranges and as long as prices are working their way higher, the rest is just noise.

Railroads have broken out again. Also, watch how Cisco and Intel trade over the next few days. They are still big components of the Market Cap-Weighted Indexes and can have meaningful impacts on price if they continue their breakouts –

Government Has Taken Over

I was reading this weekend and I came across a chart that I couldn’t ignore. Sometimes I have a bunch of thoughts going through my head and it takes a chart to get my thoughts lined up in a manner that explains what I am seeing in the economy and the markets.

Here is the chart. Notice that the largest employer in California is Government. I looked through the data on a bunch of states and I could not find a state whose largest employer was the not Government.

In my line of work we have always believed that Management added nothing to profitability and were simply a structural cost to doing business. So we referred to them as “overhead”.

Government is “overhead”. It is a parasite to profits. It is a cost. In some cases it is obviously necessary, but to make it 17% of the economy is absurd.

Which gets me to my point – the government has taken over.

The number of United States Manufacturing Jobs has fallen -26.3% since 1989. The US has lost Manufacturing Jobs every single year since 1999! The falling Manufacturing Jobs number is considered to be a result of efficiency gains and a falling Dollar.

Checkout this chart - Manufacturing and Construction jobs have flat-lined for 40 years, while the number of Government Jobs has doubled. I guess “efficiency gains” have not quite made their way into the Government Sector the last 40 years…

Over the past 10 years, the employment base has shrunk, but the size of the government has grown – by 7 million jobs!

We’ve lost the productive guts of our country and become a gigantic tenured, unionized blob of overhead. And that overhead is expensive. The average Government Job paid $73,203 in 2008, for a total cost (yes it is a COST to taxpayers) $184.4 billion.

If California is broke and needs to save $28 billion in 2010, then simply fire 382,000 average Government workers and presto – a Balanced Budget with zero entitlement cuts and no new taxes. That would make California’s Civilian Unemployment Rate 12.3% and its Government Worker Unemployment Rate 15%. Close enough for Government Work, don’t you think…

Now Arnold is begging for another $7 billion handout from Washington, so as not to have to stop spending money we don’t have.

“Stimulus 2009”
$53.6 billion went to saving Government Jobs –

“State Fiscal Stabilization Fund to avoid cutbacks and layoffs (82% must be used for education while 18% may be used for public safety and other government services. The latter part may be used for repairs and modernization of K-12 schools and college and university buildings).”

Our taxes spent to save union jobs.

Credit Contraction
With high unemployment and insolvent banks, the government is concerned that contracting Consumer Credit will cause Deflation. Therefore, the Government is expanding its borrowing as Consumer borrowing decreases for the first time ever!

What concerns me is that at some point Interest Rates will go vertical and the US Taxpayer will have to pony up a lot more money in Interest payments on all this newly-borrowed money. The Fed has even been so kind as to warn banks that higher interest rates are indeed coming.

Yet at the same time, the US Government has bought about $1 trillion in new mortgages maturing between 2037 and 2039. When rates go up, these bonds will lose a ton of money. Maybe that is why Geithner has uncapped the losses at Freddie and Fannie. BTW, most of these bond were either bought from place like the Central Banks of Asia, financial institutions like PIMCO and Banks or newly created as people refinanced at artificially low interest rates over the past year.

What’s Next?
At some point they will have to crash the value of the US Dollar. Venezuela just did it.

Unless we are willing as a country to restructure all of our promised entitlements, then Hyper Inflation is inevitable.

The Social Contract will get rewritten and there won’t be lobbyists in the room when it is done.

Walk Away...

In the New York Times this week, there is an article entitled “Walk Away From Your Mortgage!”

“Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials.”

“And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.”

You could see this coming. I wrote the following on December 18, 2009 -

“How freakin' stupid is Morgan Stanley? If they are mailing in their keys, then what is to stop all of those Millions of homeowners currently with Negative Equity?”

“2010 will be a referendum on Washington's conduct towards Wall Street. So expect the anti-Wall Street rhetoric to pick up in Washington after the Health Care socialist-wealth-transfer-scam is passed or shelved.”

Geithner uncapped the losses at Freddie and Fannie, so that they can be turned into giant land banks that will own millions of vacant houses. This will be done to keep this excess supply off the market, to make it easier to artificially prop up housing prices via state-subsidized low interest rates.