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)





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.

Sep 7 2011

Equity markets gapped up on no volume today to halt a few day Europe-emanating skid that threatened to get ugly. The big indexes are now in a “bear flag” pattern – the sharp drop to early Aug, followed by a choppy wide upwards channel. Traditionally, these are continuation patterns – not reversals. The thinking is that a sharp drop gets too oversold. Gets ahead of the bad news that is being anticipated. So the market drifts choppily upward for a few weeks on no news – and then fails on some bit of “good” news. And then another whoosh down. The key here is time. We are four weeks into the flag. Flags should be resolved within eight weeks. My SWAG for the “good news event” that fails is the Sep 21 FOMC meeting. Could be something earlier – (a G7 meeting this weekend?) The market is expecting to be saved by central bank liquidity – and here in the US the delusion that nothing in Europe will really affect the US. That is precisely the sort of expectation that deserves to be shattered. These flag patterns are even uglier in Europe. There it looks more like someone hanging on to a cliff with their fingernails. Asia doesn’t look very good either. And everything is completely correlated – except Indonesia which isn’t exactly where I’m gonna ride out any storm.

Sep 1 2011

The stock market has performed its oversold levitation bounce. Most of which I have not participated in and which is now too late and, as always, too extended. Volume was typical for August – ie non-existent. Apart from “oversold bounce”, there is absolutely no underlying reason for the bounce. Economic news has continued to deteriorate – but, as usual, headlines about it are spun into cotton candy. Credit/funding markets are continuing to worsen in Europe but everyone is on vacation there so who cares.

I suspect the real reason for the ramp in the last few days has been the expectation/certainty that the Fed will announce a new QE program. Only the insiders who rig these markets know what it will actually be but the volume in equities indicates that equities will not be the beneficiaries.

One rumor I have seen – – is that Obama/Fed/Fannie/etc will announce a massive homeowner refinance plan. The flow of funds is complicated – but basically the Fed would end up offloading a bunch of mortgage-backed securities to Fannie (ie govt) while buying longer-term Treasury debt in order to lower the yield curve. The immediate winners would be homeowners. The losers would be renters, future taxpayers, and owners of MBS (mostly future retirees via pensions). Politically, this is the sort of game the DC pols will love – and good for the Fed/Wall St too because they can avoid the spotlight here of being the “decision-maker”. Economically, the results would be disastrous for owners of MBS (who would find their existing bonds – currently trading over par – called in – at par and will be forced to reinvest the proceeds). Longer-term, this would create a credit crunch for housing. No one would finance new mortgages so housing prices will ultimately decline to cash-only prices. Banks will deteriorate sharply if they lose their steep yield curve. I suspect this creates a huge post-crash opportunity – in mortgage REITS – NLY, HTS, CMO, CIM may be some names. Whichever ones have the fewest losses on their current MBS portfolio and the most cash available to scarf up MBS’s that sell at distressed prices if too many owners dump them. Watch these names up to Sep 21. That may be the day they crash and become good long-term buys.

Another rumor – – is more direct. The Fed will simply sell gobs of short-term Treasuries and buy long-term ones. But in this case, Treasury would have to actually issue more 20-30 year bonds and fewer ST bills – for the Fed to have enough supply to be the only buyer. Again, bank balance sheets would deteriorate pretty sharply. Supposedly the biggest beneficiary would be 30 year bond owners – or TLT. In reality, this would also drive another big gob of free speculative money into commodity futures. Poss some spillover into projects re PM’s, rare earths, agriculture, energy.

Who’s to say. But some things here to track.

Weekend Update

Equity markets: My long-side trade earlier this week failed because it was one day early and I didn’t have the stomach for the downside volatility which was the first move. Short-term, equity markets are still neutral – with a slight upward bias absent headline news. That “absence of news” could last for the rest of the summer. But the volatility is going to remain. Equities are still not pricing in an economic slowdown – much less another deleveraging/crisis cycle. But they are heavily oversold. That said – half of the “oversold”ness has already been corrected – simply by going nowhere for a few days. So any new equity investment has to lean bullish rather than simply leaning towards an oversold scalp. And intermediate-term – I am more bearish than I was this time last week.

Credit markets: Like last week, these are the key markets. But these generally deteriorated a bit this week. In Europe, Italy/Spain yields fell (presumably because of ECB buying) while Germany/France yields rose. Interbank/overnight/TED spreads are still widening – but are not a problem yet. The ECB may have succeeded in buying a bit of time – but at the cost of directly revealing to Germans what the cost is going to be for them. Ultimately, any credit crisis from Europe is going to be indicated by a)debt auction timing from the four key eurozone sovereigns, b)spreads between the four, c)a banking collapse because of those spreads, and d)indications from Germany as to which way they (the taxpayers not the govt) are leaning re a longer-term fix. I suspect fiscal/transfer union may become the ultimate fix here but that is gonna be a tough sell to Germans who don’t work in banking/exports.

In the US, riskier credit bounced a bit. But the financial sector did not and the first post-AAA 30 year Treasury auction did not go well. And none of it has priced in another deleveraging/default cycle. Treasury funding could become a problem – but the bad news cycle on that is almost certainly over for a few months.

Currencies: The downgrade last week did not affect the dollar as much as it could have. The swissie was the worst performing currency after they intervened. So much for a post-downgrade safe haven. Followed by the two commodity currencies (C$ and A$). Gold was the best performer followed by the yen. The dollar and euro are now lashed together via swap lines. The safe haven trade is still the operative one which doesn’t bode well for equities or commodities. And since the dollar is not going to be downgraded again this week – and since gold/yen are, like the swissie, at/near their breaking points for intervention – I expect the dollar/euro links to weaken a bit and for the dollar to resume its role as safe haven. There simply is no alternative right now and until there is one – the dollar is both the reserve currency and the safe haven currency. Period.

Precious metals: All four performed better than currencies – in order gold (because of the gap up over last weekend), platinum, then a gap to silver, palladium. Going forward, I think the forces that are driving them and the price volatility that results are going to provide for good trades. Longer-term, they will all outperform currencies so offer good risk-reward v cash. Cash however still has the optionality value. All will get some safe haven demand. Gold/silver are the two most vulnerable to deleveraging in the very crowded Western “paper precious” market – and that WILL create big fast price swings. Silver/palladium are the two most vulnerable to poor economic outlooks. Gold/platinum have the lowest-risk downside – but gold’s potential downside is $300 lower than platinum’s – and both will likely respond first to whatever the central bank “trickle-down” (aka QE/bailout) response is to this deflation run. Platinum/palladium have the best response to either short-term supply shocks (S Africa strikes) or longer-term physical supply/demand bottlenecks. In a word – there is opportunity here, and if one is wrong about the shorter-term trade then its ok because the longer-term picture is good. But this applies mainly to the metal/physical itself — not to the miners or options or futures or ETF’s or anything else.

Aug 11, 2011

American and Asian markets want to bottom in here. Europe is the problem. Gold is dropping after CME hiked margins. Expect more of that as long as gold gets the attention as a safe haven. The SNB has announced its version of QE which makes short-term interest rates negative and which will hit margined currency traders the hardest. It has denied rumors that it might peg the swissie to the euro — but that might just be a trial balloon. The recognized “safe havens” are now extracting a very high price/risk for that “safety”. Unrecognized safe havens — pound, krona, platinum – are far better IMO. Once those “fill up”, then the world is gonna have to deal with the reality that the dollar is the only safe haven large enough to have big wide open doors. Course it won’t stop them whining and bitching and moaning about Fed policy or America.

The S&P is at a real crossroads at 1120. This is the 50% line of the entire 2007-2008 bear market. Below this, people may wake up to realize that the entire rally from the 2009 lows is merely a really long bear market rally with brutal downside ahead. If it holds and rallies here, then people can see the rally as something separate from the preceding bear market. 50% is an artificial number – kind of like the Fibonnaci numbers – but symbolically it matters. And symbols matter to chartists/technicians. Also, the US market has basically completly eliminated the post-QE rally. This is a HUGE vote of non-confidence in Fed policy.
Finally, we are, basically, right back where we were last summer when Europe had the first round of crises. So this is a HUGE vote of non-confidence in ECB policy.

Short-term, I am now neutral. The broader markets will be gut-wrenchingly volatile but go nowhere. Big fundamental issues need resolving and that resolution will point the way for the market. The stock market is supposedly a discounting and anticipatory mechanism. I’m not sure I believe that anymore with computer algorithms completely dominating all trading activity. Those algorithms are not programmed to anticipate anything more than 6 nanoseconds into the future.

Right now, until that resolution, it may actually be the time for individual ideas that de-correlate from the broader markets.