Market Summary

Market has weakened considerably since last Wed. Media says that is technical selling of momo’s and bubbly stuff and I agree. But overall the market has been frothy – and fewer stocks are driving the indices – and the technical weakness here indicates a real lack of non-nano buyers. Next day or two may bounce a bit around the 50 day averages – but the weakness indicates that a 200 day retest is likely (and LONG overdue). Intermediate-term, a sector rotation is more likely than a more serious decline. I just don’t see any indicators of the sort of crisis-type event that would precipitate that. Longer-term, valuations suck and the stock market remains a poor place to deploy anything that isn’t trading capital.

Ideas to look at further (technicals look safe for trade at least) – Unilever (UN or UL); Pepsi (PEP); BritAm Tobacco (BTI); Philippine Long Distance (PHI); Ritchie Bros (RBA); Peabody Energy (BTU); Cullen Frost (CFR); HDFC Bank (HDB); Toronto Dominion (TD); TransCanada Pipeline (TRP); Grupo Aeroportuario del Pacifico (PAC)

 

 

 

Europe End Game

So the EU has taken the first steps towards fiscal union. Economists, ever ignorant of actual history, are repeating a mantra that currency unions and fiscal unions must go together and if they don’t a currency union is doomed. So the stock markets are happy and the can has apparently been kicked again.

To a degree, this can kicking is significant. As long as the periphery countries engage in actual serious austerity, then it is highly likely that the ECB will monetize bonds right around significant rollover dates and actual default of the insolvent can be pushed back. And since this perma-austerity means that Europe is now going to head into a deep recession/depression, it is likely that the price manifestations of monetary inflation won’t appear. Why stock markets think this is good news is baffling. It is good news for debt markets and for the euro currency (short-term) — but not for equities.

What this can kicking does do is really change the politics. Greece is now basically irrelevant. They will agree on some default – when default is deemed to be non-contagious. Greek bonds are probably a good speculation here. They are already pricing in a large default – and the profit would arise from this taking a bit longer than people think. Once they default, Greece is again irrelevant.

Italy is now being run by ECB and Goldman Sachs. The technocrats will wear out their welcome – and, most likely, screw things up. But for now, Italy was weary of bunga-bunga Berlusconi and is glad to be rid of him. Short-term, Italian bond rollovers will be “taken care of” (read monetized to some degree) and very short-term Italian debt (less than two years) may be OK – in small doses. If/when Italy defaults; the Italian equity market is really really cheap already. The only thing it isn’t pricing in is perma-austerity and the nationalization of banks. But still – I’m in wait/watch mode.

France is now the AAA country on the chopping block. If they lose that – via having to nationalize a bank probably – then all bets are off for everything. Avoid French banks via any channel – via French equity indices, French government debt, US money market funds, companies with callable loans, etc. When the ratings agencies do move on this, things may be different. But that is for the future. French elections (April 2012) also play a big short-term role. If Sarkozy is re-elected (35% chance); then things remain the same. If the Socialists are elected (55% chance), then the whole euro negotiation stuff rolls back to square one and, best case, we get to relive Groundhog Day (all the euro can-kicking since May 2010). Worst case, the markets say “enough” – and force the crisis endgame in a disorderly way. If Marine LePen is elected (10% chance); then watch out below because everything will become disorderly fast. IOW – there is no real positive outcome here — so this election uncertainty is likely to weigh on markets until April.

Spain actually looks OK here. They really don’t have much government debt – far less than the US. They do have a serious housing bubble that hasn’t burst yet and that could be a problem for large parts of the economy. But Spain also has very large financing exposure to Latin America and that can really be a positive for many companies (including banks). I kind of like the Spanish equity markets here – if I can avoid the Spanish banks/housing stuff.

Germany is in the catbird seat for now. Or so they think. Everyone else in Europe will have to undergo serious government austerity if they want bailout/fiscal transfers from Germany. And the morons in the US seem willing to bailout the eurozone if the Germans hesitate (which is bad news for the US – but not for Germany). However, Germany has relied on exporting to the rest of the eurozone for its economic health. That is going to disappear with austerity — and fast. German companies that export to the non-eurozone seem to be the best positioned for now. But if the US does bailout the eurozone via the IMF, then the DAX is the place to be. Germany will NOT pull out of the eurozone. At least not first. Any rumors to the contrary are complete and utter BS. It won’t happen – for a host of reasons.

The fiscal union pulls the UK into the political problem. The continent despises the Anglos and the institutions of the eurozone fiscal union seem like they will be the same institutions as the broader institutions of the EU. That presents a real problem for the UK. The eurozone could easily vote for increased taxes on things that mostly affect the UK (eg Tobin tax) and use that to fund their fiscal transfers. If that happens, the UK will have to seriously consider dropping out of the EU — which will in turn ignite trade wars and protectionism a la the 1930’s.

Likewise, the US is now to a lesser degree pulled into the problem via NATO. Eurozone “austerity” means that Euro defense spending will go from anemic to nonexistent. The US already carries NATO on its back anyway but these changes would make it obvious to even the moronic in the US. Unfortunately, “moronic” is what the powers-that-be ASPIRE to in the US – and no one except Ron Paul is talking about ending NATO subsidies or ending an alliance that has ceased to serve any actual function.

In sum, I do suspect that this can-kicking does “work” in the sense that it delays/hides the sovereign debt crisis and removes it from the headlines for awhile. Markets still need to price in a serious deep perma-recession in Europe – but that is a different dynamic. I think volatility is likely to drop a bit going forward. But equity markets will not be rising from here. An ugly slow steady grind-down in the first half of 2012 is the most likely scenario IMO. If the austerity actually works – and Europeans reduce government spending/entitlements and allow for semi-free markets again; then Europe is going to be a far far far better buy at the trough than the US is. We in the US have not even begun to face those problems and our longer-term outlook is currently just as bad as Europe.

Dec 7, 2011

New buy — Bed Bath Beyond (BBBY at 62.83 – (B)BBCD – CCI). SPY baseline at 126.73 . Among existing buys, INTC has moved to hold; others remain at buy.

Dec 6, 2011

Having had pretty poor luck on trades this year – and generally bearish on the likelihood of a positive longer-term trend developing anytime soon, I’m going to try a couple of tracking experiments for shorter-term trades. I’ve never been good at this but hopefully can develop the discipline here.

My trading universe is roughly 40 stocks (see JMVF).
Today’s buys are Lincoln Electric (LECO at 39.76 – rating (B)CCAB – Aroon/MAX); Centene (CNC at 37.95 – rating (A)BBAD – MAX); Sensient Technologies (SXT at 36.93 – rating (B)DCBA – MAX), Intel (INTC at 25.35 – rating (B)CCAD – CCI); and Westinghouse Air Brake (WAB at 68.83 – rating (B)CCAB – MAX). SPY baseline is 126.26.

Nov 30, 2011

Well we got the news event. A coordinated action by every central bank in the world to lower the cost of dollar-funding to big global banks following on yesterday’s ratings downgrade to a couple dozen of those same banks. Another kick of the can pretending that the problem is illiquidity rather than insolvency. It illustrates well how the world works now.

If you are Big M$%F$%# GlobalBank and your credit rating drops, then Big M$%^F$%^ CentralBank will lower your cost to incur additional debt. If you are anyone else and your credit rating drops to junk, you are shut off from all credit and are headed for bankruptcy. Too Big Too Fail means Just The Right Size To Subsidize.

No surprise that equity markets gapped up massively at open. Squeezing the weak shorts of the big financials who don’t realize that the world’s central banks (and most Western governments) are completely and utterly owned by those same banks. Combined with what has been a couple of surprisingly resilient economic indicators in the US, we may be in for a short/sharp rally.

Longer-term, this really is getting near the last call to get out of ALL financial assets denominated in fiat currencies. There is no safe haven fiat currency and there is ZERO safe haven for a minnow anywhere in any financial market rigged by the sharks. They will have no hesitation in stealing everything – if they aren’t already. And they are NOT subjects of the law anymore. They ARE the law. I do like food, physical PM’s, energy – but not the industrial commodities. If you are in debt, you are now screwed (unless you are one of the kleptos/cronies). If you are looking for safety within the system, you will soon be breakfast.

Nov 26, 2011

Equity markets completed the impulse selling wave on Friday. The next step is the follow-through/redemption wave which concludes in either a high volume dump or short-covering which will mark a tradeable bottom. Time-wise and magnitude-wise, the follow-through wave depends entirely on the specific news event which is driving the fear emotions now.

Europe – and particularly the credit markets there – are the origin of the problem. That is where the news event is going to originate. If, however, nothing breaks in the next week or so; then sellers will simply exhaust themselves. Probably at or near the summer lows. If a news event breaks, then the markets will have to find the value which prices in that event – which could take a bit longer than a week or so.

Selling so far has been orderly. Technically, the equity markets are where they were on August 3 – but on much much lower volume. If volume ramps up from here, which is what really characterizes the follow-through wave, it is very possible that the follow-thru wave could hit an airpocket of no-bids. At any rate, volume is key in the equity markets.

The European credit markets OTOH may become very good buys pretty soon. As too, gold. The US dollar is catching a bid — but is surprisingly weak given the favorable tailwinds IMO. Once the bad news re Europe is truly priced in, the news cycle will likely shift over to the completely dysfunctional US. And you’ll want to get out of the dollar very fast when that happens.

Nov 21, 2011

All equity market indicators went negative in a big way last Thursday. So far, markets are not trading on any specific bad news but, like late Jul/Aug, on fears on something big. Those fears are entirely rational and the equity markets are merely catching up with the fears in the credit markets which didn’t have a bounce over the last six weeks.

Europe is clearly experiencing large-scale capital flight. Her sovereign bonds are falling like rocks. Her leaders make the Keystone Kops look like Sherlock Holmes. The technocrats have, basically, overthrown Greek sovereignty and installed an IMF/ECB technocracy. In Italy, Mr sex crazed bunga-bunga has been replaced by yet another technocrat. China is looking increasingly like it will experience a hard-landing — and perhaps far worse — as its housing bubble pops. Australia’s housing bubble is popping too. Canada’s won’t be far behind. And in the US, the “deficit” committee has, unsurprisingly, failed to agree on anything so attention will likely be paid to the unsustainable fiscal situation and the venal corrupt poisonous political environment here. Gold is sinking fast and it does not seem, for now, like anyone is viewing that as “cash” or a safe haven. Other commodities are complete garbage – as they have been for awhile now. And the dollar – and Treasuries – are catching a bid.

IOW — fear is now firmly in place. If some actual news event – a default, a bankruptcy, ECB monetization, etc – doesn’t occur in the next week or two – then the markets will likely tradeably bounce once they drag into oversold territory. Who knows what level that will be at – but it will occur within two weeks IF a news event does not occur. If there is some news event that manifests, then the downtrend could last longer depending on what that news is.

The best to-do for now is to pull together a core watch list of things to buy and watch them — from the sidelines. Because if/when a rally happens, it will be a rip-your-face-off rally. Europe itself may be getting to the point where it is pricing in some serious Armageddon. The biggest risk of sitting on the sidelines now is that “cash” itself may not be as safe as people assume it is. If the news event is something like a global money market freeze-up, then cash could easily turn into a unrecoverable illiquid asset with no upside and tons of downside. The masters of the universe have really screwed everyone — quite successfully.

Nov 15, 2011

A potential way of trading this market (exc options and such) — with low daily prob of big downside and high prob of small upside — is to fade volume. In this environment, investors are more likely to panic sell on a headline than to panic buy on lack of a headline. So high volume dump days (on news) may remain a good trading opportunity on the long side. This is usual.

More unusual, a better indicator for toppiness may be declining volume rather than more typical indicators like breadth or sentiment or chart action. Chart action is likely to whipsaw in this market. Breadth is too laggy for short-term trades. And sentiment is likely to be “headline-following” lagging/wrong.

If volume is indicative – either daily or some short-moving average of volume, then this current short-term upcycle may be over.

Nov 5, 2011

Equity markets have rebounded sharply since early Oct. But underneath the hood, all markets are showing increasing volatility, lack of equilibrium, and stress. US equity markets aren’t really looking toppy right now but how much upside is there.

Seems to me there are two conflicting forces at work. Headline risk – re Europe, Asia, and financials/credit/currency – is really high with the potential for “crash-like” (read 1987 or the 2010 flash-crash) conditions. Not so much because the news itself will be a disaster but because the market makers themselves are under stress and will pull bids and the markets will cease to function.

Absent those headlines however, the forces have a slight upward bias. Corporate profits are strong. They aren’t particularly leveraged nor exposed to short-term credit issues. The US consumer is spending their future income freely and will apparently shop til they keel over. I don’t see a huge new wave of layoffs and, for better or worse, those who have jobs can keep the economy going at a slow growth rate. Long-term, this can’t work. The gulf between those who are doing OK and those who are completely screwed is widening — and those who are being screwed have less chance of improving their economic conditions than a Third Worlder digging around in a garbage dump. The only thing keeping a lid on violent social upheaval – here or in Europe – are the various social welfare bribes/trinkets. And sovereign debt issues everywhere will force the conflict eventually. But until then, its delusion time.

Overall, a relatively low probability of an extremely big downside — and a relatively high probability of steady slow creep upwards. So — avoid financials and other things that are most vulnerable to headlines – and avoid the heavily cyclical stuff like basic materials. Defensive sectors seem a bit pricy in here.

One stock to watch that got hammered this week is Jefferies – JEF. A financial that avoided the whole bailout mess in 2008 – but NOT a “too-big-to-fail”. Is now the target of shorts questions (probably emanating from the Squid or other TBTF who want to get rid of competition) re its market-making exposure to European sovereign debt. The company is being very transparent about its holdings and their exposures make perfect sense for a market maker. If the end-game here is that market-making in European sovereign debt is deemed “too risky” in this credit environment; then batten the hatches for something far worse than 2008. And by “batten the hatches” I mean guns beans and gold.

International Equity Valuations

Not really interested in any longs right now but did want to see whether any markets have declined to actual “good value” levels. Countries are grouped with similar “risk” countries

True blue-chip countries — None.

AA rank countries:

Country P/S P/B P/CF ROE % Financials
Switzerland 1.5 2.18 10.72 15.1 18.8%
Sweden 1.19 1.33 10.97 14.6 27.9%
Finland .66 1.39 7.9 11.7 13.8%
Norway 1.27 1.63 9.38 11.4 13.3%
Canada 2.01 1.06 12.05 5.2 27.3%

A rank countries

Country P/S P/B P/CF ROE % Financials
Japan .56 .93 3.79 5.3 17.8%
Germany .63 1.34 6.82 12.3 15.4%
France .78 1.28 6.34 10.2 14.9%
Denmark 1.25 1.66 7.02 11.4 14.7%
Netherlands .83 1.33 10.71 11.3 17.9%
Austria .92 1.07 4.04 6.5 39.6%
Singapore 1.92 1.66 -22.2 12.8 46.8%
Hong Kong 2.36 1.52 386.3 13.9 47.0%
Taiwan .89 1.85 8.37 11.9 16.7%
Chile 1.91 2.5 19.94 14.7 18.6%
US 1.20 1.89 6.78 27.5 14.5%

Near Junk countries

Country P/S P/B P/CF ROE % Financials
UK 1.13 1.8 13.21 12.0 18.0%
Belgium .97 1.2 3.7 8.6 23.8%
Spain 1.37 1.26 3.09 14.9 37.8%
Italy .41 .55 9.31 5.44 33.2%
Australia 1.9 1.78 13.68 11.3 37.9%
New Zealand 1.24 1.55 8.2 6.6 12.7%
S Korea .47 1.21 6.27 12.9 14.5%
Czech Rep 2.15 1.95 6.8 18.3 20.0%
Israel 1.58 1.83 8.5 14.3 19.2%
Poland 1.15 1.52 15.35 11.1 37.8%
S Africa 1.36 2.00 11.65 12.5 25.3%
Malaysia 2.24 2.17 46.2 12.5 24.9%
Brazil 1.09 .95 22.04 15.2 24.4%
Mexico 1.82 2.63 10.43 13.9 8.5%

Included the % financials because that’s the sector of every economy that is most tied together and correlated with other countries. There’s some value already in some countries – but still a lot of potential downside in most. Given the total debt level in many of these countries, it’s hard to make a case that any returns will flow thru all that debt and to equity holders. What is most interesting is the fraud in the US re “earnings” – via the unsustainable outlier ROE. The US is now equivalent to – maybe worse than – China or Russia or other insider kleptocracies.

Follow

Get every new post delivered to your Inbox.