There is an article today on the actual pricing of Mortgage-Banked Securities (MBS). The numbers are scary. I want to tie it into the “Shovel Ready Bank” post from the other day.
In the post from the other day, I wrote about the disconnect between the way assets are being priced by Banks and the way they are being priced by the Markets. The Banks are pricing the high-quality mortgages in the mid-90s (90% of the maturity prices) and the Sub Prime mortgages at 100 (100% of the maturity prices).
Of all the mortgages originated since 2002, 42% of all securities have seen some level of default in their portfolios. Of the late 2005 – 2007 originations ($450 billion), $305 billion of them are in some state of default.
$102 billion have already been liquidated. The actual recover rates on defaulted paper are 32% on AAA paper (Top Quality Mortgages) and 5% on Sub-Prime (junk) paper.
http://www.ft.com/cms/s/0/ddaa47f4-f79b-11dd-a284-000077b07658.html
Regulators and Banks pretending that assets are worth more than they are really worth, helps nobody. It actually hurts confidence and paralyzes lending. The markets figured it out long ago.
This is becoming a replay of the “Lost Decade” in Japan (1992 – 1998).
Saturday, February 28, 2009
Wednesday, February 25, 2009
A Shovel Ready Bank
A buddy of mine asked be about a small bank today and I wanted to go through the numbers to illustrate the problems the banks face. I’m not going to name the bank or show a chart.
I wrote him the following –
Something isn’t working in their numbers for me. This is all from the 10Q dated 9/30/08, but you can extrapolate it into the latest 10Q which has not yet been filed.
They show Common Equity at $1.214 Billion
On 126 million shares, that is a Book Value of $9.36 per share
Yet the stock is trading at under a dollar a share.
Common Equity is essentially Assets - Liabilities
Why? Because something on the Asset side of the Balance Sheet is not properly priced and the markets know it.
Here is what I think it is –
Under Assets, you will find a position called “Securities Held for Sale, at Fair Value” $2.019 Billion
If you look at Note 4 of the 10Q, you see the breakdown and pricing of these securities.
$484 million CMOs priced at 96.4 cents on the Dollar
$745 million Mortgage Backed priced at 101 (above Par!)
$538 million Municipal Bonds priced at 100
$249 million Agency paper at 102 (implied backstop)
Some CMOs (Collateralized Mortgage Obligations) are trading at 6 cents.
Private origination Mortgage Backed Securities are trading way below Par (20 - 30 cents)
Try selling a Muni for Par right now. You will be lucky to get 68 cents.
So the disconnect between reality and the pricing of positions in the Balance Sheet is being reflected in the stock price.
The bottom line is this –
(the bank stock) is now a Call Option on a massive transfer of wealth from Taxpayer to Shareholder. That is what it would take to allow (the bank) to sell their holdings at the fantasy prices they show on their balance sheet.
If you think the Government will bail out this bank at Taxpayer expense, then buy the stock. If you don’t think so, then don’t buy it.
This bank’s “Balance Sheet” is “Shovel Ready”!
I wrote him the following –
Something isn’t working in their numbers for me. This is all from the 10Q dated 9/30/08, but you can extrapolate it into the latest 10Q which has not yet been filed.
They show Common Equity at $1.214 Billion
On 126 million shares, that is a Book Value of $9.36 per share
Yet the stock is trading at under a dollar a share.
Common Equity is essentially Assets - Liabilities
Why? Because something on the Asset side of the Balance Sheet is not properly priced and the markets know it.
Here is what I think it is –
Under Assets, you will find a position called “Securities Held for Sale, at Fair Value” $2.019 Billion
If you look at Note 4 of the 10Q, you see the breakdown and pricing of these securities.
$484 million CMOs priced at 96.4 cents on the Dollar
$745 million Mortgage Backed priced at 101 (above Par!)
$538 million Municipal Bonds priced at 100
$249 million Agency paper at 102 (implied backstop)
Some CMOs (Collateralized Mortgage Obligations) are trading at 6 cents.
Private origination Mortgage Backed Securities are trading way below Par (20 - 30 cents)
Try selling a Muni for Par right now. You will be lucky to get 68 cents.
So the disconnect between reality and the pricing of positions in the Balance Sheet is being reflected in the stock price.
The bottom line is this –
(the bank stock) is now a Call Option on a massive transfer of wealth from Taxpayer to Shareholder. That is what it would take to allow (the bank) to sell their holdings at the fantasy prices they show on their balance sheet.
If you think the Government will bail out this bank at Taxpayer expense, then buy the stock. If you don’t think so, then don’t buy it.
This bank’s “Balance Sheet” is “Shovel Ready”!
Monday, February 23, 2009
So You Had a Bad Day...
The markets rallied at the open and then got crushed all day long.
I thought the markets would bounce, so I bought a little FAS (+300% the Financial Index) for me at $4.65. It was the classic setup – the markets were testing a low, CNBC had another leak via Gasparino and Obama was set to speak in 10 minutes. So I bought FAS near the lows for the day. FAS rallied hard for about 20 minutes and then rolled over hard. I got stopped out at $4.87.
The Markets were crushed, because the government insists upon playing financial accounting games, rather than fix the obvious problems.
Tangible Common Equity
This is the new “Stress Test” that the Government will use to determine which banks are solvent and which banks are insolvent. The idea is that the value of the Common Equity (Stock) must be worth at least 3% of the Total Assets held by the bank.
Let me explain what the Government is trying to pull with Citigroup to get them in compliance with this definition, so that they can get more handouts from the Government.
Under TARP, the Government invested $45 billion in Citigroup, by buying Preferred Stock. Preferred Stock is basically a bond, so it is classified as Debt. The Government is looking to convert their $45 Billion in Preferred Stock into a pile of Common Stock worth 40% of Citigroup. The total value of Citigroup stock is now worth about $11 Billion. So the Government would get $4.4 Billion worth of stock.
Nice trade!!
The reason why they want to book this $40.6 Billion loss for the taxpayers is as follows. Converting the Preferred Stock into Common Stock increases Citigroup’s “Tangible Common Equity” ratio to a level high enough to justify the Government throwing more Taxpayer money into the sink hole that is Citigroup.
Even better, the Preferred Stock would have paid the US Government $2.5 Billion a year in Dividends. The conversion of Preferred to Common benefits nobody but the Shareholders of Citigroup.
Yesterday I wrote the following –
“No doubt there will be another round of leaks about how the banks will not be nationalized and how Timmy Geithner will invent some new math to prove that banks are indeed solvent and don’t need to be taken over or stuffed full of another $2 trillion to be able to keep their doors open under their current ownership.”
I had no clue that this was their version of “New Math”. The market crashed today, because the Big Boys know that these accounting games do not fix the real problem.
More
In his Press Conference today, President Obama told us how his Administration would focus on Financial Responsibility. A week after he wasted $800 Billion in Taxpayer Money, Obama told us that his new Budget would be structured under the “Pay-Go” principle, where you pay as you go. Where was his fiscal conscience last week?
The markets are sick of the hypocrites. They will keep crashing until the Government takes actions to solve the real problem – Insolvent Banks Are Not Lending Money. That has paralyzed the economy and we are now in Depression, with imploding economic activity and imploding pricing.
Is this a retest of the November Lows?
Maybe.
Remember how much time I spent late last year telling you not to get antsy, because I never saw a Bear Market end without a retest of the first lows? This may “The Retest” of “The Bottom” or we may just get a bounce.
Was that 100 point rally before the open all we will see for the bounce from oversold conditions? Are the Big Boys just running for the hills at any price?? Today, the gap up Open was sold hard. That is not a good sign.
I thought the markets would bounce, so I bought a little FAS (+300% the Financial Index) for me at $4.65. It was the classic setup – the markets were testing a low, CNBC had another leak via Gasparino and Obama was set to speak in 10 minutes. So I bought FAS near the lows for the day. FAS rallied hard for about 20 minutes and then rolled over hard. I got stopped out at $4.87.
The Markets were crushed, because the government insists upon playing financial accounting games, rather than fix the obvious problems.
Tangible Common Equity
This is the new “Stress Test” that the Government will use to determine which banks are solvent and which banks are insolvent. The idea is that the value of the Common Equity (Stock) must be worth at least 3% of the Total Assets held by the bank.
Let me explain what the Government is trying to pull with Citigroup to get them in compliance with this definition, so that they can get more handouts from the Government.
Under TARP, the Government invested $45 billion in Citigroup, by buying Preferred Stock. Preferred Stock is basically a bond, so it is classified as Debt. The Government is looking to convert their $45 Billion in Preferred Stock into a pile of Common Stock worth 40% of Citigroup. The total value of Citigroup stock is now worth about $11 Billion. So the Government would get $4.4 Billion worth of stock.
Nice trade!!
The reason why they want to book this $40.6 Billion loss for the taxpayers is as follows. Converting the Preferred Stock into Common Stock increases Citigroup’s “Tangible Common Equity” ratio to a level high enough to justify the Government throwing more Taxpayer money into the sink hole that is Citigroup.
Even better, the Preferred Stock would have paid the US Government $2.5 Billion a year in Dividends. The conversion of Preferred to Common benefits nobody but the Shareholders of Citigroup.
Yesterday I wrote the following –
“No doubt there will be another round of leaks about how the banks will not be nationalized and how Timmy Geithner will invent some new math to prove that banks are indeed solvent and don’t need to be taken over or stuffed full of another $2 trillion to be able to keep their doors open under their current ownership.”
I had no clue that this was their version of “New Math”. The market crashed today, because the Big Boys know that these accounting games do not fix the real problem.
More
In his Press Conference today, President Obama told us how his Administration would focus on Financial Responsibility. A week after he wasted $800 Billion in Taxpayer Money, Obama told us that his new Budget would be structured under the “Pay-Go” principle, where you pay as you go. Where was his fiscal conscience last week?
The markets are sick of the hypocrites. They will keep crashing until the Government takes actions to solve the real problem – Insolvent Banks Are Not Lending Money. That has paralyzed the economy and we are now in Depression, with imploding economic activity and imploding pricing.
Is this a retest of the November Lows?
Maybe.
Remember how much time I spent late last year telling you not to get antsy, because I never saw a Bear Market end without a retest of the first lows? This may “The Retest” of “The Bottom” or we may just get a bounce.Was that 100 point rally before the open all we will see for the bounce from oversold conditions? Are the Big Boys just running for the hills at any price?? Today, the gap up Open was sold hard. That is not a good sign.
I figured that 2009 would be a difficult year to make money. Because I know full well that there will be a lot of potential set ups that must be played, but only the last one will pay off in a big way.
The problem is that nobody knows which one will work. So I will buy small probing positions at logical places, with tight stop loses. This is another one of those high-probability setups. So I need to nibble a little, just in case this is a meaningful low. I bought a little SSO today (200% the S&P 500).
If the November lows fail, then potential support for the S&P 500 lies at 710, 660 and 609. It would be a selling capitulation if we reached those numbers. I will be looking to nibble there too if the set ups occur.
The problem is that nobody knows which one will work. So I will buy small probing positions at logical places, with tight stop loses. This is another one of those high-probability setups. So I need to nibble a little, just in case this is a meaningful low. I bought a little SSO today (200% the S&P 500).
If the November lows fail, then potential support for the S&P 500 lies at 710, 660 and 609. It would be a selling capitulation if we reached those numbers. I will be looking to nibble there too if the set ups occur.
Sunday, February 22, 2009
Oversold and Due for A Bounce
On 2/05/2009, Senator Chris Dodd (Dem Conn) (Head of the Senate Finance Committee) told us, with a laugh, that Bank of America would not be nationalized. Then on 2/20/2009, he told us that they “may have to be nationalized for a short period of time”.
http://nbcharts.blogspot.com/2009/02/rumors-from-con-men.html
When will these guys just shut up and start taking action, executing the laws on the books. The markets are pricing in nationalization. The talk of politicians is proving to be folly and is eroding public confidence in our nation’s institutions and leadership – sort of a financial Hurricane Katrina…
Nationalizing the largest, insolvent banks is the first step in restructuring the World’s Financial Markets. That is the job of the FDIC! Their role is to protect depositors from the irresponsible actions of bank management. But they are nowhere to be found.
Counterparty Risk
Banks are afraid to lend to one another, because they know that the guy on the other side of the trade is insolvent. If the government nationalizes your counterparty or they go bankrupt, then you lose all of your money. So banks aren’t lending to one another. This has the economy paralyzed. All the talk is to try and keep confidence game going just another day longer.
The only way to get lending going again is to get the risk out of the system by removing the insolvent banks. My story has not changed since October. Unfortunantely, the economy has crated since then, as the politicians and regulators have been paralyzed from doing what is needed and right.
This week, the big boys sold banks with abandon. Take a look at the Index for the Preferred Stocks of Banks (PFF). It took out major support on massive volume. That isn’t grandma and Aunt Betsie selling, that is Fidelity and CALPERS running for the hills!
I feel bad for those little old ladies who have been chasing yield and buying Preferreds. Just wait until Corporate Bonds roll over yet again…
Very Short-Term Oversold
That said, the markets have been pounded since February 9th and they are now very stretched and can rally sharply at any time.
No doubt there will be another round of leaks about how the banks will not be nationalized and how Timmy Geithner will invent some new math to prove that banks are indeed solvent and don’t need to be taken over or stuffed full of another $2 trillion to be able to keep their doors open under their current ownership.
We may be entering another crash leg, so I want to revisit the indicators I use to determining how oversold the markets are and from where they may bounce.
Daily Moving Average Envelopes
This chart plots lines for each 5% +/- the 150-day moving average. It worked very well in the 2000-2003 Bear Market and has done a decent job defining activity of the last few months.
I use the S&P 500 Index (Cash Price, Not Futures or SPY) as my proxy for stock market activity. You can see how the S&P 500 have been bound between the -15% Line (Green) and the -25% Line (Thick Blue). See how rallies have failed at the Green Line and the 50-day (Black Line). See how selloffs have stopped at the Blue Line (Black Arrows).
30-Minute Standard Deviation Chart
I use this chart to define oversold and overbought conditions in the shorter-term. When price stretches to + or – 3 Standard Deviations from the 50-day moving average (Black Arrow), then I expect at least a short-term reversal. We are now there, so I am looking for a bounce.
A bounce from here would be normal. I think this bounce will be aggressively shorted. I think the markets are broken and the governments around the world are in panic mode. I expect MASSIVE government intervention in the next few days of trading.
I would not be surprised to see the announcement of either explicit government support of stock prices or some new multi-trillion dollar transfer of money from taxpayer to shareholder. Nothing else will stop this market from crashing.
The potential for intervention is why I am not interested in shorting. Even on a bounce.
Scorecard
The S&P 500 was down -38.5% in 2008. I was +2.8%. In 2009, the S&P 500 is -13.76% and I am down about -0.50% (1st Quarter Fee Included). So I am 54.6% ahead of the market the last 14 months. So I have plenty of time to wait before I deploy money into stocks again.
http://nbcharts.blogspot.com/2009/02/rumors-from-con-men.html
When will these guys just shut up and start taking action, executing the laws on the books. The markets are pricing in nationalization. The talk of politicians is proving to be folly and is eroding public confidence in our nation’s institutions and leadership – sort of a financial Hurricane Katrina…
Nationalizing the largest, insolvent banks is the first step in restructuring the World’s Financial Markets. That is the job of the FDIC! Their role is to protect depositors from the irresponsible actions of bank management. But they are nowhere to be found.
Counterparty Risk
Banks are afraid to lend to one another, because they know that the guy on the other side of the trade is insolvent. If the government nationalizes your counterparty or they go bankrupt, then you lose all of your money. So banks aren’t lending to one another. This has the economy paralyzed. All the talk is to try and keep confidence game going just another day longer.
The only way to get lending going again is to get the risk out of the system by removing the insolvent banks. My story has not changed since October. Unfortunantely, the economy has crated since then, as the politicians and regulators have been paralyzed from doing what is needed and right.
This week, the big boys sold banks with abandon. Take a look at the Index for the Preferred Stocks of Banks (PFF). It took out major support on massive volume. That isn’t grandma and Aunt Betsie selling, that is Fidelity and CALPERS running for the hills!
I feel bad for those little old ladies who have been chasing yield and buying Preferreds. Just wait until Corporate Bonds roll over yet again…
Very Short-Term Oversold
That said, the markets have been pounded since February 9th and they are now very stretched and can rally sharply at any time.
No doubt there will be another round of leaks about how the banks will not be nationalized and how Timmy Geithner will invent some new math to prove that banks are indeed solvent and don’t need to be taken over or stuffed full of another $2 trillion to be able to keep their doors open under their current ownership.
We may be entering another crash leg, so I want to revisit the indicators I use to determining how oversold the markets are and from where they may bounce.
Daily Moving Average Envelopes
This chart plots lines for each 5% +/- the 150-day moving average. It worked very well in the 2000-2003 Bear Market and has done a decent job defining activity of the last few months.
I use the S&P 500 Index (Cash Price, Not Futures or SPY) as my proxy for stock market activity. You can see how the S&P 500 have been bound between the -15% Line (Green) and the -25% Line (Thick Blue). See how rallies have failed at the Green Line and the 50-day (Black Line). See how selloffs have stopped at the Blue Line (Black Arrows).
30-Minute Standard Deviation Chart
I use this chart to define oversold and overbought conditions in the shorter-term. When price stretches to + or – 3 Standard Deviations from the 50-day moving average (Black Arrow), then I expect at least a short-term reversal. We are now there, so I am looking for a bounce.
A bounce from here would be normal. I think this bounce will be aggressively shorted. I think the markets are broken and the governments around the world are in panic mode. I expect MASSIVE government intervention in the next few days of trading.
I would not be surprised to see the announcement of either explicit government support of stock prices or some new multi-trillion dollar transfer of money from taxpayer to shareholder. Nothing else will stop this market from crashing.
The potential for intervention is why I am not interested in shorting. Even on a bounce.
Scorecard
The S&P 500 was down -38.5% in 2008. I was +2.8%. In 2009, the S&P 500 is -13.76% and I am down about -0.50% (1st Quarter Fee Included). So I am 54.6% ahead of the market the last 14 months. So I have plenty of time to wait before I deploy money into stocks again.
Wednesday, February 18, 2009
No Opining From Me Today, Just Lots Of Pictures
New Lows (454)
Wells Fargo, US Bank, American Express, Capital One, BB&T, Huntington Bancshares, Suntrust, Discover, Synovus, Axa
FedEx, Disney, Alcoa, Nokia, Dow Chemical, Caterpillar, Kraft, International Paper, DuPont, Heinz, 3M, MGM, Unilever, Kodak, Saks, Hovnanian, Ryder, Sony
New Highs (3)
Pegasystems, SI International, Matrixx Initiatives
Take a Look at Bank Preferred Stock ETFs
PFF is The US Preferred Stock Index Fund
PFF holds 84% Financials. Yikes!
Wells Fargo, US Bank, American Express, Capital One, BB&T, Huntington Bancshares, Suntrust, Discover, Synovus, Axa
FedEx, Disney, Alcoa, Nokia, Dow Chemical, Caterpillar, Kraft, International Paper, DuPont, Heinz, 3M, MGM, Unilever, Kodak, Saks, Hovnanian, Ryder, Sony
New Highs (3)
Pegasystems, SI International, Matrixx Initiatives
Take a Look at Bank Preferred Stock ETFs
PFF is The US Preferred Stock Index Fund
PFF holds 84% Financials. Yikes!
HYG High Yield (Junk) Bond Index
Holds no Financials, but also holds only Junk Bonds
Holds no Financials, but also holds only Junk Bonds
LQD is the Investment Grade Bond Index
This is all the stuff that is rated higher than Junk
So you’d think that LQD only held good stuff, right?
Well, you know me and you know that I have to dig a little deeper and see what the real holdings are. It turns out that LQD has MASSIVE exposure to the Bond issued by Financials.
To emphasize just how risky some of the holdings are in the LQD, I used my matrix of the banks with the most exposure to derivatives. The column on the right shows the percent weighting each company has in the LQD.
These nasty companies make up 35.3% of the holdings in LQD. Holy cow! My real concern is that the LQD represents the Investment Grade Bond Mutual Fund universe. So there are loads of people who hold Mutual Funds that mirror the LQD and those investors think their money is safe!
Well, you know me and you know that I have to dig a little deeper and see what the real holdings are. It turns out that LQD has MASSIVE exposure to the Bond issued by Financials.
To emphasize just how risky some of the holdings are in the LQD, I used my matrix of the banks with the most exposure to derivatives. The column on the right shows the percent weighting each company has in the LQD.
These nasty companies make up 35.3% of the holdings in LQD. Holy cow! My real concern is that the LQD represents the Investment Grade Bond Mutual Fund universe. So there are loads of people who hold Mutual Funds that mirror the LQD and those investors think their money is safe!
Be really careful if you hold a Bond Fund, because you may have a third of your money in these garbage companies.
Why does it matter?
Why does it matter?
Because LQD looks like it is about to crack. It is about to crack, because Big Money knows that there is a real high probability that a number of the companies on the above list will be nationalized in the very near future. When Lehman went bankrupt, the bond holders received 9 cents on every dollar invested. So if you are a bond holder in those companies, then you are running a high risk of losing a lot of money.
Be very careful. This is all about preserving capital!
The Stock Indexes
The New York Stock Exchange ($NYA) has broken below the bottom of the 4-month trading range (Green Lines) and is now at risk of at least testing the November 2008 lows (Red Line)
Be very careful. This is all about preserving capital!
The Stock Indexes
The New York Stock Exchange ($NYA) has broken below the bottom of the 4-month trading range (Green Lines) and is now at risk of at least testing the November 2008 lows (Red Line)
The S&P 500 ($SPX) the uptrend from its Bear Market Lows (Green Line) and now looks vulnerable to test the Bear Market Lows (Red Line)
The Dow Jones Industrial Index ($INDU) already broke below the 4-month trading range (Green Line) and is at it Bear Market lows (Red Line)
Transportion Stocks ($TRAN) have already broken to NEW BEAR MARKET LOWS! Do you think companies like FedEx, UPS, Burlington Northern et al are important to the US Economy? Not good…
The leader has been The NASDAQ ($COMPQ). It has barely broken the uptrend from the November 2008 lows (Green Line). The trendline may even hold tomorrow. You can goose this index higher by funneling money into a handful of tech stocks.
Hiding Places
Because Mutual Funds have to remain fully invested (usually 95% stocks), they tend to plow all of their money into a few companies that hold up during a Bear Market. This last leg, they have funneled into names like IBM, GOOG, Goldman Sachs, Morgan Stanley, Northern Trust, Chevron and Exxon.
Take look at the charts below and see how the stocks rally up in very narrow channels. That is characteristic of persistent Institutional accumulation. The Mutual Funds buy as many shares as they can each day, without launching the stock to prices at which they don’t want to buy. So the stock grinds higher virtually every day.
Bear Markets have the characteristic of destroying all stocks, so this next leg down will probably be the last and hammer these former safe havens. The trick will be looking for what holds up best during this next leg down, because those sectors will most likely lead the next Bull Market.
Because Mutual Funds have to remain fully invested (usually 95% stocks), they tend to plow all of their money into a few companies that hold up during a Bear Market. This last leg, they have funneled into names like IBM, GOOG, Goldman Sachs, Morgan Stanley, Northern Trust, Chevron and Exxon.
Take look at the charts below and see how the stocks rally up in very narrow channels. That is characteristic of persistent Institutional accumulation. The Mutual Funds buy as many shares as they can each day, without launching the stock to prices at which they don’t want to buy. So the stock grinds higher virtually every day.
Bear Markets have the characteristic of destroying all stocks, so this next leg down will probably be the last and hammer these former safe havens. The trick will be looking for what holds up best during this next leg down, because those sectors will most likely lead the next Bull Market.
Failing Safe Havens
You are starting to see selling in some of the recent safe havens. Utilities (XLU) and Energy (XLE) have broken support and may be starting another big leg lower. Healthcare (XLV) is on the brink, but may need more time before breaking down in earnest.
You are starting to see selling in some of the recent safe havens. Utilities (XLU) and Energy (XLE) have broken support and may be starting another big leg lower. Healthcare (XLV) is on the brink, but may need more time before breaking down in earnest.
Huge Tops
Johnson & Johnson (JNJ) is the single scariest chart in the stock market. If I shorted individual stocks, I would have a BIG short position in JNJ. I would be looking to add a rally into the $62 range and a retest of the highs near $70. But I don’t short individual companies, so this is an academic exercise.
See how JNJ broke the 14-year Bull Market (Green Line)? See how JNJ broke the trendline on gigantic volume (Black Arrow)? See how the stock now trades below key moving averages (Red and Blue Lines)? See how JNJ has been in a tight trading range the last 4 months, right below the Green, Red and Blue Lines? That is about as bearish as it gets!
I have been watching JNJ closely for the last 4 years. I told the people who own it that they needed to sell on a failure of the Green Line, as it would most likely mean that the long-term Bull for JNJ was over. Remember, old leaders die ugly deaths!
Johnson & Johnson (JNJ) is the single scariest chart in the stock market. If I shorted individual stocks, I would have a BIG short position in JNJ. I would be looking to add a rally into the $62 range and a retest of the highs near $70. But I don’t short individual companies, so this is an academic exercise.
See how JNJ broke the 14-year Bull Market (Green Line)? See how JNJ broke the trendline on gigantic volume (Black Arrow)? See how the stock now trades below key moving averages (Red and Blue Lines)? See how JNJ has been in a tight trading range the last 4 months, right below the Green, Red and Blue Lines? That is about as bearish as it gets!
I have been watching JNJ closely for the last 4 years. I told the people who own it that they needed to sell on a failure of the Green Line, as it would most likely mean that the long-term Bull for JNJ was over. Remember, old leaders die ugly deaths!
Exxon Mobile (XOM) has also broken down and price is now sitting below declining moving averages. I will be shorting Energy soon (via DUG).
McDonalds (MCD) looks like it is putting in a major top. I will drink their coffee, but I will not own their stock.
Take a look at Utilities (XLU). Does the action in Utilities from 2007 – 2008 remind you of the action that McDonalds is currently going through? Charts are just a visual history of price, volume and sentiment. So charts bottom and top in very similar pattern, which visually reflect the emotional extremes of fear and greed.
Utilities put in their top and then crashed. They then sat around for 5 months and appear to be starting yet another leg lower. I will be looking to short Utilities too, via SDP.
Utilities put in their top and then crashed. They then sat around for 5 months and appear to be starting yet another leg lower. I will be looking to short Utilities too, via SDP.
These aren’t pretty pictures. I don’t see leadership. I don’t see new breakouts on massive volume. I don’t see any reason to own stocks. And I am now terrified of corporate bonds.
Thursday, February 12, 2009
More of Why I Don't Short
Today we had yet another goal line save on the back of yet another leaked policy proposal from the Obama Administration.
The leak was that the US Government will now start paying people’s mortgages. I am not making this up.
It is clear that each policy leak is but one more desperate stab at propping up the stock markets for just one day longer…
Look at how the markets reversed from key support levels on this “news”.
The NASDAQ 100 ($NDX) traded right down to the 50-day average (Blue Dotted Line) and then bounced 3%+ in the last hour of trading. Notice how NDX traded down to and held the 50% retracement level (Black Line) of the Jan 21 – Feb 9 Rally.
No rumor and the rally is over for the NASDAQ.
Look at how the S&P 500 had broken key support (Green Line) and the uptrend from the Bear Market Low of December 23 (Red Line). The markets were toast today, until the rumor came out in the last hour.
But the rumor came out, and the traders on CNBC cheered and the trendlines were recaptured and all was well on the CBS Evening news, as they could report that the Dow only closed down about 6 points.
Do you see why I’m not shorting stocks any more?
The leak was that the US Government will now start paying people’s mortgages. I am not making this up.
It is clear that each policy leak is but one more desperate stab at propping up the stock markets for just one day longer…
Look at how the markets reversed from key support levels on this “news”.
The NASDAQ 100 ($NDX) traded right down to the 50-day average (Blue Dotted Line) and then bounced 3%+ in the last hour of trading. Notice how NDX traded down to and held the 50% retracement level (Black Line) of the Jan 21 – Feb 9 Rally.
No rumor and the rally is over for the NASDAQ.
Look at how the S&P 500 had broken key support (Green Line) and the uptrend from the Bear Market Low of December 23 (Red Line). The markets were toast today, until the rumor came out in the last hour.
But the rumor came out, and the traders on CNBC cheered and the trendlines were recaptured and all was well on the CBS Evening news, as they could report that the Dow only closed down about 6 points.
Do you see why I’m not shorting stocks any more?
Wednesday, February 11, 2009
Gaming RIMM
I want to show you how Research In Motion (RIMM – The Blackberry maker) has traded the last few days, because it is a lesson in how Wall Street tries to take your money.
RIMM
RIMM had a sharp rally and then spent days in a trading range (Green and Blue Lines). That is normal. I’ve told you ad nausea that stocks make sharp moves, then consolidate and then make another sharp move in the direction of the previous move.
That is what RIMM appeared to be setting up to do. So the ideal trade would be to put a Stop Buy Order in above the recent consolidation, so that if Big Money showed up and started to buy, you would get stopped in and go along for the ride.
Everyone and their brother saw this obvious setup, but nobody was coming in with enough volume to break RIMM out of its trading range.
Analyst Upgrade
So what does Wall Street do to get things going? You guessed it. They have an Analyst upgrade the stock overnight. This allows the stock to trade higher, triggering all the Stop Buy Orders, which moves the stock even higher, which draws in the Momentum Trades and you get a nice pop.
The problem for the buyer is that the stock usually begins trading the following morning at a price well above where is closed the previous afternoon (Red Arrow). This makes risk management difficult, because you end up buying a much higher price than you wanted to. The other issue is that there was a reason why money was not being committed to break RIMM out of its trading range!
Earnings Release
RIMM announced bad numbers last night and the stock cratered at the open today (Black Arrows).
Conclusion
I know that the markets are highly gamed right now and I don’t want any part of them.
I saw the setup on RIMM and elected to not enter a Stop Buy Order.
Do you think that the Analyst will be investigated by the SEC? Do you think he had clients who were looking to unload RIMM shares ahead of their Earnings?
These are dangerous times and you need an advocate to watch your back, because Wall Street and the US Government are out to rob you of your money.
Executing Money Management
Anybody can go to Yahoo Finance and run a Financial Planning Model showing how much money they need to make each year to finance their goals, but few have the skills to execute the day-to-day money management required to achieve the desired returns.
To put things into perspective, here is what one of the Hedge Fund guys I follow wrote yesterday –
“It is nice to be in a Secular Bull market and just sit back and Buy & Hold, but unfortunately we are in a Secular Bear market until probably 2017, and the bull and bear cycles will be more like the 1970's, so market timing takes precedence for all but the young.”
RIMM
RIMM had a sharp rally and then spent days in a trading range (Green and Blue Lines). That is normal. I’ve told you ad nausea that stocks make sharp moves, then consolidate and then make another sharp move in the direction of the previous move.
That is what RIMM appeared to be setting up to do. So the ideal trade would be to put a Stop Buy Order in above the recent consolidation, so that if Big Money showed up and started to buy, you would get stopped in and go along for the ride.
Everyone and their brother saw this obvious setup, but nobody was coming in with enough volume to break RIMM out of its trading range.
Analyst Upgrade
So what does Wall Street do to get things going? You guessed it. They have an Analyst upgrade the stock overnight. This allows the stock to trade higher, triggering all the Stop Buy Orders, which moves the stock even higher, which draws in the Momentum Trades and you get a nice pop.
The problem for the buyer is that the stock usually begins trading the following morning at a price well above where is closed the previous afternoon (Red Arrow). This makes risk management difficult, because you end up buying a much higher price than you wanted to. The other issue is that there was a reason why money was not being committed to break RIMM out of its trading range!
Earnings Release
RIMM announced bad numbers last night and the stock cratered at the open today (Black Arrows).
Conclusion
I know that the markets are highly gamed right now and I don’t want any part of them.
I saw the setup on RIMM and elected to not enter a Stop Buy Order.
Do you think that the Analyst will be investigated by the SEC? Do you think he had clients who were looking to unload RIMM shares ahead of their Earnings?
These are dangerous times and you need an advocate to watch your back, because Wall Street and the US Government are out to rob you of your money.
Executing Money Management
Anybody can go to Yahoo Finance and run a Financial Planning Model showing how much money they need to make each year to finance their goals, but few have the skills to execute the day-to-day money management required to achieve the desired returns.
To put things into perspective, here is what one of the Hedge Fund guys I follow wrote yesterday –
“It is nice to be in a Secular Bull market and just sit back and Buy & Hold, but unfortunately we are in a Secular Bear market until probably 2017, and the bull and bear cycles will be more like the 1970's, so market timing takes precedence for all but the young.”
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