Thursday, January 21, 2010

Excuse Me Mr. Volker, But How Do I Save My Presidency?

I wrote the following yesterday -
“Here is the message to Washington from the election last night – either you fix it, or we will fire you and find somebody else who will.”

“(Senator) Brown won yesterday to send a message to Washington that they had better start siding with the populace and stop siding with the bankers.”

Clearly Obama Watches the Polls
It took him only ONE DAY to come out with this -

“While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse. My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.”

He laid the hammer down today. He told Wall Street that you can’t risk Taxpayer Money anymore. That’s all Goldman does. That is all Morgan Stanley is doing. And a huge part of the business at JPMorgan and Citi.

The goal is to stop banks from being able to create leverage by using Taxpayer Money to create off-balance sheet entities. The Securitization industry will officially die with this proposal.

It only took Barney Frank about 30 minutes to find his way onto CNBC to tell us that it will take 5 years to implement this plan. Bull. It might only take 5 weeks to get this plan in place. Obama is in panic mode and is trying to find an issue on which he can look tough and Presidential, so that we will all forget about how much of our money he allowed to get looted from the Treasury and about what a disaster his Healthcare Plan turned into.

If I am Barney Frank, I get out of Obama’s way, thank the banks for all of their bribes they have paid me over the years and tell them that it was nice knowing them, but it is time to save myself and move on.

Remember, Geithner has to go onto Capitol Hill next week and he is going to get pounded – POUNDED – from both side. Republicans smell blood and the public hates this guy. Democrats need to look tough and will want to upstage Republicans in looking like a tough anti-government Populist.

If I am Nancy Pelosi, I call a special hearing and bring in anybody associated with The Fed, The NY Fed and AIG and turn it into a witch hunt to hide my own incompetence.

Today Was a Bloodbath

Financials – For obvious reasons
Goldman Sachs (GS) and JPMorgan (JPM) are at the line of death. They got crushed today on massive volume –

Commodities – I am assuming that there will be pressure to diminish Leverage across the board, whether it be pressures from China or from Washington. Leading Commodity names got killed today on huge volume. In my opinion, Exxon Mobil is the single worst chart in the market. If you own it, you had better have a chat with your advisor about why…

China and those who sell into it –
China (FXI) broke the 200-day today! Time to dust off FXP and consider on rallies up into resistance on FXI…
Brazil (EWZ) broke down today. Latin American (ILF) looks exactly the same.

Last I checked, 578 stocks broke their 50-day average today. 490 broke theirs’ yesterday. Remember, the 50-day is where the big boys come in to defend price. Stocks lead markets, so the averages may hold here at the 50-day, but many individual holdings will not if this is a topping process.

It looks like the NYSE ($NYA) has put in a higher high, while the Bullish Percent ($BPNYA) and Summation Index ($NYSI) have put in lower highs. That means that fewer companies have been carrying the market higher. The early warning sign is the percent of stocks above their 50-day, which has fallen from 82 to 62 this year. Dust off the Defensive Playbook.

Timing Issues
Short term, the markets are oversold and at or near levels from which to expect a bounce to be attempted. Will the bounces work? Who knows, but they may be playable and the quality of the bounce will tell us a lot about whether or not we will get our much-anticipated correction.

Here are the support zones on SPX. The SPX Futures Contract hit a low today at 1,108.74, so you can see that price is right in the middle of all this support. SPX (Cash) closed today at 1,116.48 and the 50-day is at 1,114.52. I’d love to see it spike down hard tomorrow morning and then reverse back up on big volume.

The Euro has a time cycle today and key support at 1.399. FXE hit a low today of 140.09

The Dollar hit the 200-day today and closed at its December high. Watch the Dollar chart closely, because it sure looks like the 50-day (Black Line) is going to reverse back above the 200-day (Purple Line). They call that the “Golden Cross” and it is the definition of a Bull Market.

A Dollar Bull should be bad for Commodities, Gold and potentially Stocks and Junk Bonds. A Dollar Bull would force a lot of short covering in the Dollar and a lot of delivering of the “Dollar Carry Trade” – this would be real bad for risky assets! How many people are talking about a Dollar rally right now? Any retest of the December low would set up a really good risk/reward trade in the Dollar. I am watching it very closely!

If the Dollar is putting in a short term top, then you would expect a short term bottom out of risky asset. Look at Gold trying to make a 2-Step pullback into support. Gold hit a low today of 1,088.80 and closed today at 1,094.80 Key support is at 1,092.60 – 1,095.30
I would love to be able to buy GLD near $105.

Crude Oil is fast approaching support at 75 – 75.37. Crude (WTIC) hit a low today of 75.66 and closed at 76.02

So you have a lot of Commodities at key support and the Dollar at key resistance.

US Treasuries are at first resistance and will over an interesting setup if they pull back into 116.20, with a close stop below 114.5

The Bottom Line
It takes a special kind of market to support breakouts by leaders. It requires new money to come into the markets and accumulation by the big boys.

We have seen too many failed breakouts to count. This has been a market rotation from leader to laggard and then back again.

The market is narrowing and lots of key leadership is not acting well. Accumulation ratings in IBD for the Indexes are bearish. Now the short term Percent above their 50-day has rolled over and Bullish Percent appears to have put in a lower top. If it rolls over too, then I am on full defense and may even short some things.

Don’t mess around with this market. If they want to take it down, they can do it quickly and painfully. Be on your toes and watch the quality of the bounce if we get it in the next few days.

Wednesday, January 20, 2010

Business As Usual?

Here is the message to Washington from the election last night – either you fix it, or we will fire you and find somebody else who will.

Politicians have one objective – to make themselves more powerful and wealthy. They cannot do this if they get voted out, so expect things to change soon in Washington. Somebody will go under the bus before they do…

What Change?
Let’s start with Bernanke. Bernanke is a pseudo-politician and he wants a new term. He changed his toon over the weekend on AIG. He is now calling on Congress’ investigation arm, the GAO (Government Accountability Office), to “conduct a full review” of the Fed’s role in the AIG CDS scandal – the one where the NY Fed told AIG to pay its counterparties 100% of their claims (versus much lower market prices) and then to not disclose this information in the SEC filings.

At some point, somebody will ask “who is responsible for this decision”? That person will be trotted out before Congress or a judge and he will then tell us that his superiors told him to do it, and uphill things will flow.

Geithner is to testify next week about what knows of the AIG free lunch. Expect more than one Congressman to call for his immediate resignation. Also expect Mr. Change (Obama) to seriously consider it. Obama is a politician, and he wants to get reelected too…

Goldman isn’t announcing its bonuses until after everybody else does. I think the country wants Llyod Blankfein’s head on a stick.

Healthcare “reform” is toast. That means no new handouts to healthcare companies and that Unions will not be able to pawn off the responsibility for the healthcare of their members onto the US Taxpayer.

The Markets Were Either Overbought Or They Are Scared
Yesterday, they took the QQQQ above an obvious breakout level (Green Line and Arrow), to suck a lot of new buys in. I didn’t buy, because the QQQQ was very overbought on the hourly chart (Black Arrow). This morning, QQQQ gapped down hard and are now below support (Blue Arrow). Trading ranges can be painful…

Here is the daily chart for QQQQ. 4 of the last 5 trading days have touched the 20-day (Dashed Line) and the uptrend from the November 1st bottom (Blue Dashed Line). It is no secret that when that line is broken, we get a short term correction (or worse – do not know for certain). Unless there is a huge rally this afternoon, the line is broken – be on the lookout for gap up openings tomorrow…

Obvious support is that $44.5 range. I will be watching this chart closely today.

The Euro Is Broken!
The uptrend (Blue Line) from the March low was broken in December. It is now crashing. It fell right to the 200-day (Purple Line), had a weak rally and then broke the 200-day this morning. That is very bearish.

Gold peaked the day the Euro peaked. It had a better rally that The Euro, but it is now breaking down out of this wedge as well.

I am now out of 65% of my Gold holdings, having sold 1/3 last week. I sold all of my Silver last week as well. GLD retraced 38% of its April to December rally (Blue Arrow), just like The Euro did. GLD then retraced 50% of its selloff (Black Arrow). It has now broken down below the recent trading range (Green Line and Arrow). I’ve been telling you that this is a really technical market and that these key levels are in play.

Next support on GLD might be the 200-day (Purple Line and Arrow). I’ll look to buy down there.

Young versus Old
The American People aren’t stupid and they don’t like what is going on in Washington. Obama was elected to change the way things are done. He was elected by the youth to take care of our future. Last night, Brown won the youth vote. Before it is all over, the youth will win this battle. The country will decide to focus on its future and not its past.

That means austerity – sacrifice. Stop borrowing and start living within your means. Are you listening California? I know that it sounds revolutionary, but it is the essence of this entire battle since the Credit Crisis started in 2007. The economy is broken – 17.3% U-6 Unemployment, a net loss of manufacturing jobs over the last 10 years, a crashing US Dollar, falling Real Wages, massive Taxes, future Government Promises 8 times larger than GDP…

Wall Street wants to save that model, because it makes them rich. It focuses the resources of the country on producing money via financial alchemy and is driven by exporting jobs to China, versus actually making stuff here, growing stuff and producing stuff here , then saving and using those savings to fund future investments.

The average American wants lower Unemployment, more manufacturing jobs, rising real wages, lower inflation and a Balanced Budget. Brown won yesterday to send a message to Washington that they had better start siding with the populace and stop siding with the bankers.

When the politicians finally do listen to the voters, there will be major changes for the markets. The most obvious is that we will want to get our money back from the banks. That are still lying about the values of their holdings and a new credit crisis is guaranteed. The Dollar will have to fall to bring those jobs back home. Interest Rates will have to go up significantly as the Fed will ultimately not be allowed to print piles of new money to support bond prices. It’s going to hurt.

For those of you who think you were geniuses for riding stocks all the way down and then back up again, remember that at the end of the day, it is not what you make, but what you keep. So when this sucker rolls over again, are you going to go back down on the roller coaster ride? Because, keep in mind, that the next sell off will probably be the last big one and if you get blown out, then you will miss the turn for the next Secular Bull Market- think 1982 - 2000.

Tuesday, January 19, 2010

Back To Resistance

On Sunday I wrote the following –

“Now how many times have we seen the markets break the uptrend line and then gap up above the obvious stop-loss level for the shorts (Blue Arrow)? Futures are up today, so do not be surprised to have SPX gap up above 1,142 at the open tomorrow.”

SPX didn’t gap open, but it went straight up most of the day and recaptured the Blue Line. No doubt the shorts were squeezed...

QQQQ held support and is back at the top of the recent trading range. I have stops in to buy a breakout. QQQQ has been a laggard over the last few weeks and I would not be surprised if it took over leadership again if the markets can break out of these trading ranges to new highs.

Developed International (EFA) has been lagging, but is now trying to break out of a 4-month trading range. I have seen a lot of laggards suddenly turn into leaders and will have stops in on to buy EFA.

The S&P 500 (SPY) is sitting in a 10-day trading range. I think it will outperform RSP if QQQQ takes over leadership and am looking to add to it.

Large Stocks are still more interesting to me, because we are so far into this rally and I want to own stuff that is very liquid.

I like several Large Individual Names like Visa (V), Hewlett Packard (HPQ) and Johnson & Johnson (JNJ) if they can break out of trading ranges. I have an entire page of other companies that have good potential. I also like how the Emerging Markets and commodity-based Countries are working out.

I am keeping an eye on The Euro (FXE) and the Long US Treasury Bond (TLT). Big moves may be coming real soon in these names, with big potential consequences for stocks.

Monday, January 18, 2010

Do The PIIGS Get Slaughtered?

PIIGS – Portugal, Italy, Ireland, Greece, Spain

These are the train wrecks in the Euro Zone.

Here is a chart showing the percentage of Government Debt held by foreign banks. The fattest of the PIIGS is no doubt Greece.

The real issue with all of this is that these countries are loaded with too much bad debt and have no way to print money to inflate away the debt, because their currency is now The Euro (Britain was smart enough to keep the Pound and is printing money as fast as it can make new ink).

This leaves the PIIGS with few options – default or leave The Euro and print piles of their new currency. Euro Land has told Greece that it will not eat their debt, so the cost of Greece’s Debt Insurance (Credit Default Swaps) has gone vertical over the last two weeks.

Why does this matter?

Because almost 30% of Greece’s Treasuries are held by foreign banks – no doubt concentrated in Europe. So if Greece defaults, then these banks have to eat massive write-downs. Moreover, I think that this would force Greece to leave The Euro. This would either crush the Euro, because it is no longer a valid Union, or send it vertical on speculation that it will ultimately only include the strongest members of Europe.

We’ll see how it plays out, but I am watching it closely.

Was It Worth The Cost?

This is what would have happened to Residential Real Estate if the Fed had not printed $3 trillion propping up Housing prices and Mortgage Bond prices.

I simply ask – was it worth the cost? We will know in due time.

Not Good, California

California At The Brink Of Financial Disaster – by Michael C. Genest, California Director of Finance

Here is a breakdown of California’s finances. We took in $86.3 billion in Taxes but owed $14.8 from past borrowing. So we will bank $71.5 billion.

But we are set to spend $111.1 billion this year. That leaves a shortfall of $41.6 billion. That is 58% more than we expect to net in FY2010!

So who gets hit if California runs out of money – er can’t borrow anymore money?

No Tax Refunds! That’s right, first on the list for those who lose are those who PAY THEIR TAXES! Can you say TAXPAYER REVOLT?? Remember Grey Davis… Watch Massachusetts tomorrow…

Next up, Vendors will not get paid.

Social Services, Healthy Families, Development Services and College Students (Cal Grants)

What about Infrastructure?
$22.5 billion in construction, schools, transportation projects and water projects would be left unfunded. Didn’t we just go through this last year?

Where Do They Propose Closing the Deficit?

Cut $8.5 billion in Education spending – about half of all spending cuts proposed
Raise Taxes $17.4 billion (including raising the Sales Tax by 1.5%)
Borrow $5 billion from the Lottery
Cut the Tax Credit for having Dependents by $1.4 billion

So where does this all get us?
Best case estimates put future deficits at the following levels –

FY 2011 - $11.7 billion deficit
FY2012 - $9.9 billion deficit
FY2013 - $13.4 billion deficit

Phew. I’m glad they solved that problem…

Is it just me, or is California going about this the wrong way?

California is proposing putting the majority of the pain on families with young kids and young kids and school-age kids who receive public support.

I did not see a line item that noted how much Retired Employee Benefits would be cut or how many redundant public employees would be fired or how the current salaries for public employees would be brought back in line with economic reality.

At some point, the country will pick to favor our future over our past and throw these idiots in government into the unemployment lines with the 17.3% of Americans currently showing up on the U-6.

Intel Exhausted?

“I noted on Sunday how Intel and Cisco appeared to be breaking out of multi-month bases.
On Tuesday I noted key support on SPX at 1,123 - 1,124.

Support held and Intel blew away numbers today. There is meaningful resistance at 1,150. SPX closed today at 1,148.

So tomorrow will either be a story of the Bulls breaking prices out above resistance (probably on a gap Up Open), or the Bulls getting sucked in to the false breakout of an exhausted Market. “

“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.”

Intel traded over $22 (+ $0.60) in the after-market, but opened Friday trading down and then sold off the rest of the day - closing at the low.

The Dow closed the day down -100 points.

I think that qualifies as exhaustion…

I am watching Intel very closely, because Intel had a nasty Gap Up reversal in its last earnings release (Blue Arrow). Semiconductors lead, so it was not a surprise a few days later when SPX rolled over and then had a 7.3% correction in 11 days. QQQQ was -7% over the same period.

I am not saying that the same thing will happen here, but I am watching things closely. The trendlines off of the November 1st low are being tested, but are still intact. A break of these trendline will get my attention and probably stop me out of a few things.

Nine-Day Trading Range
Over the past nine trading days, SPX has been stuck in a fairly violent trading range. You can see that there is big resistance at 1,148 – 1,150 and big support in the 1,122 – 1,127 range.

You can see that there is a lot of support right below here at 1,130 and then a ton of volume in the 1,070 – 1,110 range.

Now how many times have we seen the markets break the uptrend line and then gap up above the obvious stop-loss level for the shorts (Blue Arrow)? Futures are up today, so do not be surprised to have SPX gap up above 1,142 at the open tomorrow.

The NASDAQ (QQQQ) has been in a 14-day trading range. See how over the 20-day (Dashed Line) has held over the last several days of trading (Black Arrows)? That is now obvious short-term support. Next support is not far below here at $44.5. A break above $46.5 is an clear breakout.