Bookkeeping: Covering Half of Ultrashort Financial (SKF)

Wow. Sometimes you get good fortune and timing so I am going to take off half of this trade we started yesterday. I bought half my 2% short stake yesterday at $196 [Feb 23: Beginning Ultrashort Financial Short] (added another half mid day today @ $183) I was not at the computer this morning but had a limit buy order waiting at $210 that just missed executing, bummer.

The ETF is down to the $165s range so this is a 15% gain in 24 hours. I'll take the 1% allocation off the table and be cheery. The other half I will see if I can get a print nearer to $150 tomorrow. (if that gap fills in the $140s I'd be a happy camper) This would of course worked better with the Triple Short (or going long the Triple Long) but that's just out and out gambling.

My upside target for "this range" is S&P 783 (S&P 741 to 783) and we just might get there today - volatility immense and this is exactly why pressing shorts was scaring me yesterday. Not much buying out there today - just a lot of shorts being expelled. Good enough.

While it's nice when you catch these turns, it simply it not a world for investors anymore. Just nimble traders.

As an aside I cut back both Apple (AAPL) and Illumina (ILMN) shorts for now - still have some of them, but took off a good portion this afternoon since I did not want to lose all my gains in them. I will continue to trade "around" both positions until/when/if they break north of resistence areas; but if they do so now I have booked gains to offset any losses a reversal would bring.

Short Ultrashort Financial in fund and personal account

Reuters: Is it Time to Overhaul the Dow?

If you follow the blog for any period of time you will see I almost never reference the Dow Jones Industrial Average; instead focusing on the broader S&P 500. The Dow is only 30 stocks and unlike most logical indexes is price weighted; which means a stock that trades at $80 is 8x more important than one that trades at $10. If the Dow was equal weighted - the demolition of Bank of America (BAC) and Citigroup (C) would have had a much larger effect.

An interesting take, via Reuters on the need for overhaul.

• There was a time when a tumble below $10 in the share price of a company in the Dow Jones industrial average (DJI:^DJI - News) meant ignominy. Now, after vertiginous stock market falls in recent months, five of the venerable index's 30 components are trading under that price, including its two oldest members, conglomerate General Electric (NYSE:GE - News) and automaker General Motors (NYSE:GM - News).
• Citigroup (NYSE:C - News) stock plunged below $2 on Friday, making it cheaper than a medium cup of coffee at Starbucks. Continued membership in the Dow of these battered stocks, which include aluminum producer Alcoa (NYSE:AA - News) and Bank of America (NYSE:BAC - News), is raising questions over whether the index should overhaul its lineup to include the likes of bank Goldman Sachs (NYSE:GS - News) or Internet company Google (NasdaqGS:GOOG - News).
• It has also stoked a decades-old debate over whether the 112-year-old index is really an accurate snapshot of the overall U.S. economy. "It's been out of touch for a while," said Jocelynn Drake, an equities analyst at Schaeffer's Investment Research. "There are companies out there that are more significant to the market and they have not appeared in the Dow and there are others that should have been kicked out."
• Financial journalist Charles Dow created the index in 1896 to help investors track market trends in the absence of other metrics. Most investors, however, now use broader indexes such as the S&P 500 (^SPX - News) to follow stocks. Still, the Dow is the most widely watched measure of the U.S. stock market and its members are considered an elite fraternity representing the best names in corporate America. (errr, not so much)
• The index is rarely altered but when it is, it is done so at the discretion of a team of editors at The Wall Street Journal. It was last changed in September when food company Kraft Foods (NYSE:KFT - News) replaced American International Group (NYSE:AIG - News) after the U.S. government took a large stake in the insurer.
• Citigroup and Bank of America should be swapped for a financial company with a higher share price, such as insurer The Travelers Co (NYSE:TRV - News) or Goldman, said James Bianco, chief executive officer of Bianco Research Securities. This would paint a more accurate picture of the financial sector because the Dow is a price-weighted index, where cheaper stocks count for less. For every $1 lost on a Dow component's stock price, the index sheds roughly 8 points.
• That means if the three current cheapest stocks -- Citigroup, Bank of America and GM -- shrank to zero, the Dow would lose less than 60 points or 0.8 percent based on Friday's close, a sign of how much the sector has declined.

And that last point highlights why the DJIA is a poorly constructed index.

Bookkeeping: Buying Excel Maritime (EXM)

Truly, what is life without a dry bulk shipper. Also, China is back and everything is fine in the world. CEO resigned yesterday but that's ok.

(ok in reality just a high beta play) buying a 2.8% stake in the $3.70 range and hoping to "flip" it in the $5s. $6 if the Kool Aid is strong with this one. Talk about a "double bottom" chart formation.

Long Excel Maritime in fund and personal account

Robert Prechter of Elliott Wave Fame Advises Closing Shorts

I don't follow Elliott Wave theory, but I know it's a quite popular form of "black magic" ... so I thought I'd pass it along. Via Bloomberg

• Elliott Wave International Inc.’s Robert Prechter, who advised shorting U.S. stocks three months before the bear market began, said investors should end that bet after the Standard & Poor’s 500 Index tumbled to a 12-year low.
  
• He warned of a “sharp and scary” rebound for anyone still wagering on a retreat, according to this month’s “Elliott Wave Theorist.” Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.
• “This is an environment of escalating financial chaos,” wrote Prechter, famous for cautioning that stocks would crash two weeks before the Black Monday retreat in 1987. “Our main job is to keep the money we have. If we exit now, we will do that.”
• The 60-year-old former rock-and-roll drummer is an advocate of the wave principle, a theory developed by accountant Ralph Nelson Elliott during the Great Depression. Elliott concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back.
• In addition, the waves share a variety of features: Wave two never falls below the starting level of wave one; wave three is never the shortest; waves one and five tend to be of equal length; and wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.
• In July 2007, Prechter advised shorting U.S. stocks, saying “aggressive speculators should return to a fully leveraged short position.” He has now reversed that call.
• “The market is compressed,” Prechter said in the note published yesterday. “When it finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than late.”
• He has written or edited 13 books, including “Elliott Wave Principle: Key to Market Behavior” in 1978 and “Conquer the Crash” in 2002. His 1995 book “At the Crest of the Tidal Wave: A Forecast for the Great Bear Market,” was published five years before the Internet bubble burst, driving a 49 percent retreat in the S&P 500 through October 2002. Still, investors who followed his advice missed out on the index more than doubling.

Quick Update on Market

A quick follow up on this weekend's summary, below is the chart of the S&P 500. For now I've lightened up a lot of the short exposure (index and sector ETFs) as we've come a long way in a short time. Literally 15%+ of a drop in 2 weeks through yesterday's close. Talk yesterday that this was the worst February ever on record if we ended the month here, etc. I still am uncomfortable by the fact technology and healthcare only had 1 really bad day (yesterday) and still uncomfortable by any bounce off 741 that is "so perfect" as we had this morning. But I know this market is dominated by computers (program trading and quant funds) that play the percentages so of course they are buying off the "double bottom" with November 2008. I also know people like to run up the market near month end so I'm open to anything here; in fact leaning bull for a short term bounce.

My game plan is as follows - the new primary range is S&P 741 to 783 - in that space I'm ambivalent. It will be a bunch of daytraders and hedge funds coming in and flipping things and selling you songs and thesis about China recoveries, the double bottom, the government will save us blah blah. All white noise to me. Then a very small sliver just above that (if we get there) is 783 to 800 - 800 was the "floor" we held through January and early February.

North of S&P 800 we have room to run to S&P 830s to 840.

South of S&P 741 we get our dark side exposure on in a heavy way.

I'm uncomfortable pressing shorts here until we break that S&P 740 level, since so many individual stock charts are completely destroyed and are nowhere near any resistance level. We've escaped unscathed during this awful month so I'll be happy to catch part of any bounce and we'll play it from there. At this time, if we bounce to S&P 783 I'll see how the market is acting at that time - but if this is just an oversold bounce that would be a good place to start layering back in on the short side.

When/if we bounce all the serial bottom caller will be back telling you "I told you so". Ignore them - they're accounts (if they listened to their own advice) are down 50%+.

Once more - this bounce off November 2008 lows is "way too convenient" to me, but we'll see how it goes. I am not going to be buying much long exposure for now - just push out the shorts for a while and get them all back below 741 if this is Lucy pulling the ball away from Charlie.

p.s. I'm adding another layer onto my Ultrashort Financial (SKF) short adding to yesterday's initial purchase - doubling the stake to just over 2%. (in the real world this ETF is very hard to locate to short - but one advantage of a virtual account is its not) ;) Again, Ultra Financial (UYG) is the same way to play this trade without any issues of locating shares.

Bookkeeping: Selling some Lennar (LEN), Buying some Genoptix (GXDX)

Lennar (LEN) was strangely up in a very bad tape yesterday, and is up strongly again today... this has not been a market to buy "breakouts" but to buy dips and sell rips. The problem with buying dips is the floor gets taken out of you a lot. But Lennar (LEN) is my lower risk way to play "beta" if you will; instead of a dry bulk shipper (most of which laden with debt) or a financial (many on the way to the government's balance sheet) I am using Lennar and just selling when it bounces and trying to buy when it gets low. However, it usually goes lower (and higher) than I anticipate.

The stock has jumped from $5.50 to $7.00 the past 2 days so I'm cutting this from a 2.4% stake to 1.3% just under $6.90. The chart is pretty useless for a trading vehicle like this but $7.70s or so is some resistence (maybe). Again, I just try to layer in when it gets beaten down and sell when it rises; frankly on this batch I probably lost a bit since it went far lower than usual - once it broke below $6 I was worried it would drop to November lows, hence I did not add anymore. If the market begins to get giddy with love and hope I'll add back to this on a move over $7.80 and try to get out near double digits. But for now caution.

Genoptix (GXDX) has been a stalwart in this selloff - its basically been trading quietly in it's own parallel universe between $33 and $35. Today it's fallen to $31.60s so I'm going to materially increase the position from 1.2% to 1.9% of the portfolio. $31.90s is the 200 day moving average so we don't want to see the stock hang out too low below this level; the main fly in the ointment here is earnings on the 26th. I hate having a large position in anything going into earnings so this is as large as I will go with a market that is prone to tear the heads off of stocks for 1 wrong pronoun in an earnings report.

GXDX is a healthcare stock; if you are not familiar with it I laid out the thesis in the September 2008 entry below. Again let me stress this stock could be down 30% in the blink of an eye if the horde is not happy with earnings, so I cringe while I add.


I am still playing small as seen by the sizes of the positions above - in a healthy, normal market I'd be working with 3-4-5% stakes; everything is about half of normal since the volatility is so abnormal and fundamentals don't matter in this environment.

[Nov 7, 2008: Genoptix - Market Likes What it Hears]
[Sep 3, 2008: Starting Genoptix Position]

Long Lennar, Genoptix in fund; no personal positions

CNBC: AIG May Post $60 Billion Loss - Seeking More Taxpayer Help

The saga at AIG just gets more and more pathetic; the government is repeating the same pattern [Sep 16, 2008: Federal Reserve Considering Loan Package to AIG] - when they swoop in to rescue they claim losses will be limited, it's a long term "investment" and "heck we may even make money in the end". They said we'd be limited to $200 Billion in commitments "worst case" with FranFredron - already Freddie has come to the trough twice and Fannie is on its way.... now we go on with AIG. [Nov 9, 2008: AIG Needing More of Your Grandkids Money] My initial cynicism towards the "cost" of the AIG bailout has been more than justified - it started as $85 Billion, and before today had grown to $150 Billion.

As is typical with government the initial number floated is only a fraction of the final cost. Based on how involved AIG (AIG) is with the credit default swap market I don't even think $85 billion... err, $123 billion... err $150 billion will be sufficient.

.....the case of AIG is getting to be so egregious I want it in front of readers eyeballs. Why this sham of an "ongoing concern" is allowed to live, and suck off our money is a joke; we're going to take a loss on this deal so just take it over fully, sell it off piece by piece and hope that what we sell off pays off 20 cents on the dollar for the liabilities we are on the hook for. Throwing bad money after good is useless - we're subsidizing a zombie.

The sick thing is the original bailout, as reported by Bloomberg, was basically a payoff to Goldman Sachs (GS) and Morgan Stanley (MS) - i.e. direct transfer of taxpayer dollars to those firms (via conduit called AIG) - you really should read this one if you are a newer reader [Oct 17: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG]

Oh but we're not done yet - the absurdity of this all is much like Citi we are going to get common shares! (yee haw!) in return for our money! Joyous! Shares in what would be a stock worth $0 in return for taking on the risk of propping up said entity. A wonderful deal.

• American Insurance Group, the insurance giant that is 80-percent owned by the US government, is in discussions with the government to secure additional funds so it can keep operating after next Monday, when it will report the largest loss in U.S. corporate history, CNBC has learned. Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.
• That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn't have. In addition, if AIG's book value falls below a certain level, as it seems certain to do, it will trigger default in certain of its debt instruments, say people familiar with the situation.
• All of this adds up to a huge headache for the Federal Reserve and Treasury, which have already provided over $150 billion of assistance to AIG.
• Talks between the government and AIG are focussed on how the company can swap some of the debt held by the government for equity in AIG. (this is just absurd - the equity is worthless, just plain worthless) The problem is that the government's ownership stake cannot exceed its current 79.9 percent, leaving officials to try and find a creative way to transfer value to the US in exchange for AIG reducing its debt so that it can then borrow more from the government to meet its collateral calls.

Not only is this absurd but we are doing the same with Freddie, Fannie but it's not in the public light anymore - the losses are going to be massive there. And we'll be doing the same for Citigroup (C) and all those Countrywide loans and Merrill Lynch toxic assets sitting inside Bank of America (BAC). Not to mention the Bear Stearns adventure ($29B) that the Federal Reserve manages. It's plain amazing the concept of trading money for worthless shares is even contemplated. It's a zombie! I said so in November, and it's a zombie squared (or cubed!) now. What a sham. (again if you have time to read 1 article , read the October 17th piece about how the original infusion was basically Hank Paulson paying off the investment banks for counterparty risks - these dirty deeds are everywhere but not spoken about. "too complicated")

[Nov 11: AIG Executives Caught Again]
[Oct 8: AIG Executives Party it Up Post-Bailout]

No position

American Express (AXP) to its Customers: Please Go Away. Here's $300 to Spur You to Leave!

You know it's bad in credit card land when the companies are paying customers to "go away" - American Express (AXP) is out with a pilot program to pay customers $300 to close their account. Why would they do that? Because they fear what is coming down the road in terms of defaults - hence they can limit their exposure to losses if people simply close their accounts today - when they still "can".

Implications? For corporations it shows risk taking is OUT, and self preservation is IN (that's a multiple shrinking phenomenon in terms of stock prices). For consumers its just another arrow to the heart to their overspending ways; another brick taken away from the credit laden society.

Via Bloomberg

• American Express Co., the largest U.S. credit-card company by purchases, is paying some cardholders $300 each to close accounts so the lender can reduce the risk of defaults as the recession deepens.
• People who got the offer to “simplify” their finances must pay off their entire credit-card balance by April 30, according to New York-based American Express. Enrolling in the program cancels a customer’s account and may lead to forfeiture of reward points or rebates, the company said on its Web site.
• “What AmEx is trying to do is move to the front of the line in terms of getting paid back” by customers who owe debts to multiple lenders, said Michael Taiano, an analyst at Sandler O’Neill & Partners with a “hold” rating on the company. “They clearly grew loans faster than their competitors in the years leading up to this financial crisis.”
• Chief Executive Officer Kenneth Chenault is shedding customers as rivals reduce credit lines, raise interest rates and cut back on mail solicitations to brace for future losses. The industry’s defaults are set to break records and may reach as high as 11 percent by year-end in a stress scenario
• The offer is also a stark contrast to previous incentives, like frequent-flyer miles and cash-back deals, offered by card issuers to encourage consumers to open an account or spend more.

As we reported last week in [Feb 18, 2009: Trio of Consumer Death in Credit Card Market Marches On]

• Charge-offs, or loans that American Express deemed uncollectible, rose to 8.29 percent in January from 7 percent the month earlier, while payments at least 30 days overdue climbed to 5.28 percent from 4.86 percent, the company said last week in a filing for debt packaged into securities.
• The company blamed the charge-offs on faster loan growth than competitors in the past two years and a larger customer base in California and Florida, states hard hit by the housing bust, Chief Financial Officer Dan Henry said last month.

We've been huge bears of the 3 companies that are heavily focused on credit cards but at this point I would step away from the short side since they are extremely oversold and prone for huge bounces along the way when shorts get squeezed... the risk reward is not the same as 20, 30, 40 percent higher.

Strange that an intrepid blogger relying on nothing but macro views of the economy could see the risk long ago, while risk managers who live, breathe, and work inside the company were drinking the Kool Aid.

No position

[Sep 15 '07: Consumer Spending Continues, Where is the Money Coming From? Credit Cards]
[Dec 10, 07 - Consumers Increasingly Turning to Credit Cards]
[Dec 23, 07 - Unpaid Credit Cards Bedevil Americans]
[Jan 10, '08: Credit Card Warnings Here, Credit Card Warnings There]
[Apr 10, '08: Americans Keep Piling on Debt]
[Apr 4, '08: Late Payments on Consumer Loans at 16 Year Highs]
[Jun 3, '08: Credit Card Usage is Surging, Risking Another Debt Crisis]
[Jun 22, '08: Americans Running Out of Places to Hide Debt - Now Credit Cards Go]
[Sep 23, '08: Loan Delinquencies Continue their Path Upward]
[Oct 21, '08: Moody's - Credit Card Chargeoffs Rising Rapidly]
[Dec 15, 2008: Capital One (COF) Updated us on Delinquency Rates]

WSJ: Elderly Emerge as New Class of Workers - and the Jobless

While we don't spend too much time on some of our "really long" term thesis (that's for our future sister site: "People Wake Up and Take Back Your Country!"), but let me reiterate the one that revolves around a nation of Walmart greeters who will need to work until they drop. We discussed this in [Sep 1, 2008: Laboring Longer is Growing Trend for Americans]

This story highlights what I see as the very long term "emergency" in America - due to (long list ahead) financial illiteracy, spending over our heads, inflation costs that are far higher than wages, the "I deserve this even if I cannot afford it" ethos, healthcare costs, tuition costs, energy costs, food costs, not to mention making nothing in the stock market for at least a decade (if not outright losing a lot - see NASDAQ bubble) [Mar 26 - WSJ: Stocks Tarnished by Lost Decade], along with many losing in the real estate bubble, along with an average 401k balance in the United States of somewhere around $50K, along with the switch from company supported retirement benefits to "do it yourself" 401(k)s.

Well you get the idea - it simply is becoming much harder for the "middle class" or "working class" types to keep up in this country as more and more jobs being created are lower paying than those shipped overseas and many benefits their parents had are going the way of the dodo bird. In my opinion to make up for this many people are trying to take outsized risks to compensate which is feeding into multiple bubbles as people are "reaching" for ways to make up for the inability to save.

To steal a line from Obama in this "ownership" society where in return for "the chance to strike it rich" (versus a much harder ability to do so in Europe for example) [Feb 18: Economic Woes Reveal a Long-Felt Unease & Denmark is the Happiest Place on Earth?] we rip apart most of the safety nets - you will see over the next 15-25 years the "cost" to the vast majority who won't strike it rich. Many of these people now will have to support both their aging parents along with helping their kids.

I call it the Walmart greeter generation (but you can throw Lowe's, Home Depot, Kmart, Target and a few others in there) People not in the upper 5-10% are simply being squeezed from every which angle and the long term trends are ominous. People will survive but it will be a drop in lifestyle or as I call it "The Pooring of America"

There is no "one moment" or even "12-18 month" emergency with this thesis; this will be a long drawn out crisis that will grow over time. Keep in mind in addition to the litany of crisis listed above, many homeowners of a generation or two ago retired with their home paid off; so they could bring in less money during retirement and be "ok". Much of the baby boomer generation? They've extracted cash over and over to pay for "bling bling" (live for today! tomorrow is not promised!) - so they're going to have a nice fat full mortgage note/rent payment due each month instead of a goose egg.

Already in 1 generation we've gone from 1 in 5 people in their late 60s working (in mid 80s) to nearly 1 in 3 (2006) - and that was BEFORE the financial crisis.

• Twenty-nine percent of people in their late 60s were working in 2006, up from 18 percent in 1985, according to the Bureau of Labor Statistics.

And these are among the people (in the story below) we are asking to subsidize those who put 0% down on their homes and extracted equity multiple times. I will repeat - I do not know when it all becomes too much for the "average Joe" to bear but the long path we're heading is not pretty.

The Wall Street Journal follows up with a new story

• Mary Appleby, 76 years old, lost her job in January as a cashier at a courthouse cafeteria here. She is now looking for minimum-wage work. Mary Bennett, 80, began filling out applications for fast-food restaurants and convenience stores after she was laid off last March as a machinist. Fred Dase, 81, a bartender until last summer, also needs another job.
• During past recessions, older workers simply would have retired rather than searching want ads and applying for jobs. But these days, with outstanding mortgages, bank loans and high medical bills, many of them can't afford to be out of work. With jobs so scarce, people in their seventh and eighth decades are up against those half their age in a desperate scramble for work.
• Among workers 65 and older, the jobless rate stands at 5.7%. That's below the national average, but well above what it was in previous recessions, including the recession of 1981, when it reached at 4.3%. (key point, even with the government's faulty employment statistics, now massaged to hide some of the pain - we are already worse in this statistic than in the pre Clinton era, when numbers were more pure)
• As people live longer and stay in better health, some of them merely want the stimulation and challenge of a job. But for workers like Ms. Appleby, Ms. Bennett and Mr. Dase, the motivation is financial necessity.
• Fewer people than in years past are covered by defined-benefit plans, such as company-sponsored pensions that guarantee them specific monthly income for life. (step 1) Those with retirement investments have seen their values erode with the stock-market tumble. (step 2) Others worked for smaller companies, or were self-employed, and never had pensions. Many are outliving whatever savings they might have had, especially by the time they reach their mid to late 70s. Mortgages and medical bills push others into the job market because Social Security and Medicare, though helpful and critical, aren't enough.

The rest of the story, if interested, speaks to a lot of individual cases and how the person got there and how they're trying to deal with it.

[Dec 2007: Do the Bottom 80% of Americans Stand a Chance?]

Bookkeeping: Starting Powershares Gold Double Short ETN (DZZ)

Despite signs of panic in the equity market, gold is NOT surging today. We mentioned in this weekend's summary the reasons for the short (crowded trade, everyone loves gold, double top with March 2008 highs) so I won't rehash it in detail; this will be a short term trade trying to get about 15% if I can. I will use GLD ETF as my trigger.


We're at $98 on GLD, I see it pulling back to lower $90s ($92?) - when we get there I'll exit out of Powershares Gold Double Short (DZZ)

I'm starting with a 1.4% stake around $18.90... if we get a panic open tomorrow and gold spikes I'll add more. First time I have touched this instrument so hence the relatively small position size.

I love crowded trades because I know the guy on the other side of this transaction was me about 9 years ago ;)

Long Powershares Gold Double Short in fund and personal account

Fed May Need to Recast TALF on Commercial Real Estate

Commercial real estate has been our radar as an area of major issues since latter 2007 as long time readers will attest. I think commercial real estate will be to 2009 what financials were to 2008. [Dec 4, 2007: Et tu, 1st half 2008? Predictions for the Coming 6 Months]

Commercial real estate will start to drop. Thus far it has held up, but in a slowing economy why would rental rates hold up? They won't. It won't be as bad as residential real estate, but it will be far worse than it is today.

The depths of the problems are finally starting to hit those in the know.... $1 Trillion of TALF money (which is supposed to create a market for credit cards, auto loans, student loans, personal loans and the like) might have to be pushed strongly to the commercial market. [Jan 13, 2009: Bailout Nation Continues in Commercial Real Estate Land - "Lemme In on that Money"] [Dec 22, 2008: Wall Street Journal - Property Developers Ask for Government Bailouts] But that's ok, we'll just create a new $1 Trillion TALF (TALFtoo!) for the autos, credit cards and like. It truly is amazing how the Federal Reserve is effectively the banking system...[Nov 26, 2008: Federal Reserve on Hook for $8+ Trillion]

Again let me reiterate the Federal Reserve is supposed to have a pristine balance sheet and only keep the "best of the best" in its accounts. As the financial crisis unfolds they are taking increasingly awful merchandise and assuring us "it's ok - AAA rated and all". Who bails out the Federal Reserve?

Via Bloomberg

• The Federal Reserve may need to loosen the terms of a new $1 trillion credit initiative aimed at averting a meltdown in commercial mortgage-backed securities, analysts and industry representatives said. The Fed would prop up the CMBS market by lending against the securities for a five-year term rather than three years, and taking as collateral existing debt rather than just new bonds, they said. The Fed initially proposed a one-year term for TALF loans it will make before revising to a three-year period in December. (1 year... to 3 years... to 5 years... just make it a 100 year loan - the taxpayer is good with it)
  
• “If we don’t get credit flowing again to commercial real estate” through programs like the TALF, “we’ll probably see a very significant increase in defaults on commercial mortgages and further stress on the balance sheets of banks,” said Richard Parkus, an analyst at Deutsche Bank AG in New York.
• Failure by the Fed and Treasury to rekindle private investment in the $760 billion CMBS market may worsen the longest U.S. recession since 1982. Fed Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner are promoting the TALF as a cornerstone of plans to revive credit, end a decline in home prices and cleanse toxic assets from banks’ balance sheets.
• The Fed, through the TALF, could reduce the cost of financing commercial real estate by taking as collateral CMBS already traded in the secondary market rather just new bonds, said RBS analyst Lisa Pendergast in Greenwich, Connecticut. Accepting bonds from the secondary market would be a “big deal” for reviving credit.
• Bernanke said on Feb. 18 that the first phase of the TALF will begin “shortly.” That includes as much as $200 billion in loans for the auto, education, credit-card and small-business markets. The Fed has yet to provide details on the second phase, which would include CMBS and expand to $1 trillion.
• Sales of CMBS plummeted to $12.2 billion last year, compared with a record $237 billion in 2007, according to estimates by JPMorgan Chase & Co. (that's a 95% drop for those playing at home) Top-rated commercial mortgage bonds are currently trading at about 10.79 percentage points more than benchmark interest rates, compared with 2.32 percentage points a year ago.
• Without the TALF, the high cost to sell the debt makes it unprofitable for investment banks to write new loans, choking off funding to commercial property owners. Banks can’t profitably originate new loans at attractive rates for refinancing because the cost to securitize the mortgages and sell the resulting bonds would be too high given the current trading price for the securities.
• The Fed may compound the long-term burden on its balance sheet by taking on CMBS. The central bank has already doubled its assets to $1.92 trillion in the past year by creating other emergency credit programs. (ah, that's ok - it's only money) The central bank may have to take losses on the assets or face higher costs of carrying them, he said.

[Jan 6: New York Times - As Vacant Office Space Grows, so Does Lenders' Crisis]
[Dec 15, 2008: Commercial Real Estate - You Can't Go Wrong]
[Nov 20, 2008: Commercial Real Estate Finally Hitting Home for Mainstream Media]
[Nov 12, 2008: REITs Continue to be a Gold Mine on the Short Side]
[Mar 4, 2008: WSJ - Building Slowdown Goes Commercial]
[Dec 2007: Credit Downturn Hits Malls]

Bookkeeping: Beginning Ultrashort Financial (SKF) Short

As mentioned Friday (before the CNBC news break ruined the trade) I was proposing beginning a short on Ultrashort Financial (SKF). The advantage of using this instrument rather than going long Ultra Financial (UYG) is the inherent dysfunction (time decay) of the ETF if it held over longer periods of time. Or in plain English - every day the market goes sideways these darn things seem to lose value - so I want to have that working on my end.

I've begun a modest 1.0% stake shorting Ultrashort Financial; if we get any sort of sustained rally this ETF should hit the $130-$150 range. If the market crumbles any further I'd actually be adding to this short (I won't stop out) as my time frame is longer in duration - it is not a technical scalp. If you are just betting on a quick jump in financials you'd rather go with the UYG... it's more of a difference of time frame...

Short Ultrashort Financial in fund and personal account

Bookkeeping: Small Purchases in 3/4 of my Commodities Basket

Again, the generals are now being shot - a good thing for becoming incrementally bullish. One area of strength of late were some commodity groups (ex oil), but especially agriculture. Someone messaged me that Obama said something negative in relation to farm subsidies - to which I say: hello! among the most powerful lobbying groups on Earth.

I am taking an incremental approach with the theory that the lower we go the larger and stronger the oversold rally will be. We've stayed safe this whole way down so we can take on some risk, and I don't mind losing "a bit" of money in the near term to begin scaling in on some long positions.

I've tossed some cookies to three of our four commodity names

1. James River Coal (JRCC) down 10%
2. Mosaic (MOS) down 10%
3. Potash (POT) down 7%

All told, I threw only about 0.5% of portfolio into each so its a 1.5% move from cash to "long" - both the fertilizer companies are back down to support levels (50 day moving averages) so in "non panic" mode these would be excellent entries. But if we have "sloppy" selling aka "get me out at any price", technical analysis becomes moot. James River Coal's chart is a mess but most coals are taking huge hits of late.



I cut all three of these positions last week at higher prices so we're simply trading around in small fashion, scalping some money here or there. When we reverse up, I plan to make the 2 fertilizer names a nice part of the portfolio since they have shown some excellent relative strength. Again this is all "1 position" to me in terms of "global growth/commodity" exposure - a commodity basket.

p.s. It's funny how the Baltic Dry Index strength "thesis" matters... until it doesn't. Not a peep of late of how fantastic of a rebound we are seeing there. Just another hedge fund thesis to create beta. (return)

Let me be clear here that for a tradeable countertrend rally I'm growing increasingly constructive. We will soon approach very oversold levels... the market is now down 15% since Tim Geithner opened his mouth. That doesn't mean we won't have lower lows later - but nothing in a straight line.

Long all names mentioned in fund; no personal position

George Soros: This is the End of the Free Market Era; Situation Similar to Disintegration of Soviet Union - Somewhere Phil Gramm Smirks

I won't get into the politics of it all but I just wonder what Phil Gramm is thinking - he of "hey it's just a mental recession" and whose workings to kill off almost any form of regulation helped set the seeds of our destruction. Ah yes, he is in one of those ex Congress folks who is now gainfully employed (at multiples of his Senate salary) by those who dutifully lobbied him for years - UBS Securities.

• The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, enacted November 12, 1999, is an Act of the United States Congress which repealed part of the Glass-Steagall Act of 1933, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services. The Act is most widely known for repealing portions of the Glass-Steagall Act, which had regulated the financial services industry.
• In 2002, as the full extent of the Enron scandal was emerging, The New York Times called Gramm “a demon for deregulation” as one of the chief engineers of the stealthy approval of a bill that exempted energy commodity trading from government regulation and public disclosure. Meanwhile, Gramm’s wife Wendy was paid over $1 million in salary, stock options, dividends and other goodies from 1993 to 2001 as an Enron board member, but of course was deaf, dumb and blind to the energy company’s rampant cooking its books with the acquiescence of the late unlamented Arthur Andersen accounting company.
• The Washington Post in 2008 named Gramm one of seven "key players" responsible for winning a 1998-1999 fight against regulation of derivatives trading.^[12] Gramm's support was later critical in the passage of the Commodity Futures Modernization Act of 2000, which kept derivatives transactions, including those involving credit default swaps, free of government regulation.
• 2008 Nobel Laureate in Economics Paul Krugman, a supporter of Barack Obama, described Gramm during the 2008 presidential race as "the high priest of deregulation," and has listed him as the number two person responsible for the economic crisis of 2008 behind only Alan Greenspan.^[14][15] On October 14, 2008, CNN ranked Gramm number seven in its list of the 10 individuals most responsible for the current economic crisis.^[16] In January 2009 Guardian City editor Julia Finch identified him as one of twenty-five people who were at the heart of the financial meltdown. ^[17] An Internet poll currently ranks Gramm #1 among 25 people selected by Time as candidates to blame for the economic crisis.

It is amazing how much damage one man could do... (his wife did an excellent job of creating loopholes for Enron on the commodity side, and weeks after leaving her post moving to its Board of Directors) But enough about business as usual in Reverse Robin Hood nation. (steal from the many to give to the upper 0.2%)

As for George Soros, he definitely has political leanings but while I believe "smart" regulation is a good thing; I also would argue against the tenet we ever had a free market. If we did, there would never have been a Fannie or Freddie and failure would be allowed to happen - and risk assessment of corporations would of taken onto a totally different flavor. There would not be a Federal Reserve to make sure the nanny state was always there in case the big boys run their companies into the ground... nor would there be a small group of people arbitrarily setting interest rates to try to move the economy "where it should go". Instead of a free market, we had a Cramerica market - for the corporation, by the corporation - almost all regulations to benefit of those who pay for political campaigns - that is very different than a "free market".

Remember, even Alan Greenspan himself admitted he was wrong and that he overestimated the guiding hand of self regulation/"free markets" to police itself - I'd argue that compensation is so excessive in the U.S. that it simply "pays" to "shoot for the moon" even if it brings down the company - you still "get yours" as a CEO. And what regulators we do have have proven to be toothless... we don't even need "new" regulation - we just need some adults who actually enforce the current ones.

Via Bloomberg

• Billionaire investor George Soros said the current economic crisis has its roots in the financial deregulation of the 1980s and marks the end of a free-market model that has since dominated capitalist countries.
• Liberalization of the financial industry begun by the Reagan administration has led to a series of breakdowns forcing government intervention, Soros told economists and bankers last night at a private dinner at Columbia University in New York. The global recession, triggered by the collapse of the U.S. housing market, has “damaged the financial system itself,” he said.
• Regulators are in part to blame because they “abrogated” their responsibilities, Soros, 78, said. The philosophy of “market-fundamentalism” was now under question as financial markets have proved to be inefficient and affected by biases rather than driven by all the available information, he said.
• “We’re in a crisis I think that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,” Soros said.

So should we expect a recovery in 6 months George? err I mean "2nd half 2009" (which starts in almost 4 months)

• ...the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
• Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

Ok, I'll take that as a "maybe". After all, I'm an aspiring pundit... always a bull market "right around the corner".

Roubini pitches in on a similar vein

• [W]hile this crisis does not imply the end of market economy capitalism it has shown the failure of a particular model of capitalism: the laissez faire unregulated (or aggressively deregulated) wild-west model of free market capitalism with lack of prudential regulation and supervision of financial markets and with the lack of proper provision of public goods by governments.

[Feb 18, 2009: Soros Increases Stakes in Potash, Petrobras; Culls Walmart, Research in Motion]
[Nov 26, 2008: Soros and Citadel Building up Coal Stakes]
[Apr 9, 2008: Soros Believes Global Subprime Costs to Reach $1 Trillion]
[Jan 22, 2008: Soros Says World Faces Worst Financial Crisis Since World War II]

Generals in Healthcare and Technology Starting to Take Bullets

The NASDAQ is finally under performing the S&Ps - as I wrote last night in the weekly summary this was one of the flies in my ointment of a trading low.

There have been places to hide out that have not been hit; that makes me worried. I always like to see all "generals" beaten during a selloff. But it depends on the nature of this selloff - is it more like November 2007 where some places were unaffected or more like January 2008 where the leaders (at the times commodities) were unaffected as the market tanked for a few weeks; so just as you gloated about how you escaped, the "generals" were sandblasted in the 3rd week of the selloff. The persistent strength in tech stocks and a few others like Visa (V)/Mastercard (M) complex still has me a bit wary.

Still no panic ....

Still no true panic aka "I feel like throwing up" moments for the longs - this has been a very bad two weeks but "orderly" in the selling.

If over the next 1-4 sessions we continue to see people who thought they were safe in technology and healthcare throw up their hands, that's how we get a very nice panic low.

For now, as I said Friday I'm not in a rush to do much [Staying on the Defensive] We *will* have an explosive bear market counter trend rally coming but too many people are gaming it for my tastes. In my perfect scenario the November 2008 lows break (S&P 741) - the "leadership" stocks such as technology and healthcare get pummeled as they are today for at least 2-3 more sessions, people throw up their hand in disgust and selling gets sloppy (as opposed to what has been very orderly)

These would be conditions that make me bullish for a nice tradeable rally. S&P 754 was Friday's intraday low - once that breaks I think we say hello to November 2008 lows (741) Apple continues its slow walk to $83.

p.s. notice how the drug addict gets less and less pleasure from each hit of the bailout from government? Bear Stearns "save" gave us weeks of rally, Fannie/Freddie days, AIG hours, and with "Citigroup save 3.0" it lasted long enough to take a restroom break.

Sometime later this year I expect the market to realize the government will not save them, and that might be out ultimate wash out low. Until then, we wait for CNBC news breaks on how those that walk on water will "fix it".

Short Apple in fund and personal account

American Science & Engineering Seeks Partial Termination of Army Order

Ugh. I am not so upset about this news from American Science & Engineering (ASEI) as I am by the fact I lifted a hedge I had against my long position; when the stock fell below its 50 day moving average I put the short position on [Feb 12: Bookkeeping - Partial Hedges on Sequenom and American Science & Engineering]

I think there is a lot of fuss over nothing in American Science & Engineering (ASEI) but let's protect ourselves a bit. The 50 day moving average is $75. After yesterday's hammering the stock bounces right back to that level; I had a limit buy to short placed at $73.50 for a 1.9% stake (so I'm quickly underwater but I'm good with that)

My long position is about 2.2% so this is almost fully hedged 1:1. Strategy here is if ASEI regains the 50 day moving average to get rid of the short and yesterday's Motley Fool flap was nothing but a short term blip. If ASEI continues downward my short exposure will offset just about all of my long exposure and I'll cover as we fall.

By last Tuesday the stock has regained its 50 day moving average so I thought "coast is clear"! and I closed out the hedge (went long only) - then at the very end of last week the stock fell back BELOW the 50 day moving average (I missed it at the time; only noticed this weekend) and today *BAM* down 10%. Wow is that frustrating....

The news driver today is a partial termination on an Army order [Jan 9, 2009: American Science & Engineering Awarded $67M Defense Contract] - instead of $67M the company will receive $39M. The market seems to be overreacting with the stock down quite severely but its a bear market and mother bear is here to rip dollars from your wallet.

• American Science and Engineering, Inc. (AS&E^®) (NASDAQ: ASEI - News), a leading worldwide supplier of innovative X-ray detection solutions, announced today that it has received a Partial Termination for Convenience from the U.S. government involving its procurement of ZBV Military Trailers^™ (ZBV Mil Trailer^™) from AS&E. On January 15, 2009, AS&E announced it had received a $67.1 million contract from the U.S. government for a significant quantity of ZBV Mil Trailers — a ruggedized trailer version of the Company’s patented, top-selling Z Backscatter Van^™ (ZBV^™). As a result of the Partial Termination for Convenience, AS&E will realize $39.3 million of the original value of the contract. The U.S. government is expected to solicit for the remaining requirements to fulfill its immediate counterterrorism field requirements.
• Termination for Convenience is a standard clause in government contracts which gives the government the right to terminate the contract in whole or part, when the government determines that it is in its best interest, and without fault of the contractor.
• "We are confident in our unique Z Backscatter^™ product offering and look forward to participating and ultimately prevailing in the U.S. government’s expedited competition for the remaining requirements,” said Anthony Fabiano, AS&E’s President and CEO. “We believe the ruggedized ZBV Mil Trailer is the best solution to the U.S. government to fulfill its critical mission to secure checkpoints and borders from vehicle-borne explosives and other high-risk contraband.”

Long American Science & Engineering in fund; no personal position

Buffalo Wild Wings (BWLD) with Saucy Report

We're still playing catch up with numerous earning reports from the past few weeks; one name to highlight is restaurant Buffalo Wild Wings (BWLD). We were an owner of this stock for a short period last summer [Aug 11: Starting Buffalo Wild Wings Position] to early fall, entering around $36 and exiting around $36.

Panera Bread (PNRA) and Buffalo Wild Wings (BWLD) are both favorite places to eat, are reasonable cost places to eat for those who don't want just "fast food" and now have excellent charts. Both look like good purchases for the fund, and I've owned both these over the years in personal account, but I went with the latter - it's a bit more expensive but a higher growth rate and less saturated across the U.S

I continue to like this niche as people "move down" the (ahem) food chain into cheaper restaurant fare; this is also a place the McDonald's crowd can go to when they want something more traditional in terms of "sit down" experience. The price point fits both crowds. The company put out good results and solid guidance, and when compared to peers "solid" looks spectacular. The stock skyrocketed higher but even with this tremendous jump is quite a bit below where we sold out. Which just goes to show, even if you are "right" in a bear market (on a fundamental basis) it means very little. Anyone who stuck it through believing the thesis (which was not incorrect) sat on a huge unrealized loss, which is now just a medium unrealized loss. But it still is nice to see the thesis prove to be correct.

Let's see what they had to say that was so exciting.

Via AP

• Buffalo Wild Wings Inc. on Wednesday reported a 29 percent jump in its fourth-quarter profit that beat Wall Street's expectations. The restaurant chain said it earned $7.7 million, or 43 cents per share, up from $6 million, or 34 cents per share, in the same quarter last year. Revenue increased 32.6 percent to $121.2 million from $91.4 million.
• When Buffalo Wild Wings reported its results on Wednesday, the Minneapolis-based company said its same-store sales increased 4.5 percent at company-owned restaurants and 2.5 percent at franchised restaurants during the quarter.
• Buffalo Wild has also been benefitting from favorable chicken wing prices. Chicken wings made up about a fifth of the company's costs.
• In a note to clients, Jefferies & Co. analyst Jeff Farmer said same-store sales in the first quarter to date are already "off to a huge start" -- up over 8 percent -- "easily the best in casual dining." Farmer cited the company's strong brand and improved operations. Additionally, while wing prices have risen, the company has boosted prices on its menu to help offset the cost. "Buffalo Wild Wings has delivered and will likely continue to deliver the best same-store sales, traffic and new unit productivity in the casual dining sector," Farmer said.
• The company currently operates 567 Buffalo Wild Wings locations across 39 states

Guidance

• Coming off a strong fourth-quarter earnings report, Buffalo Wild Wings on Wednesday announced significant growth goals for 2009. The Minneapolis-based restaurant chain said it expects to increase its revenue by 25 percent and net income by 20 to 25 percent during the year. The company said its goals are achievable and it is already on the path with first-quarter same-store sales growing 8 percent at company-owned restaurants and a 7 percent increase at franchised locations.

While there is now a gap in the chart, I'd not chase something like this to the short side (on a technical basis) until I see it roll over and start to fill the gap created post earnings. Fundamentally however, if one has to buy consumer discretionary this is one of the few alluring names.

No position

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 29

Year 2, Week 29 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 52.8% (vs 64.9% last week)
26 long bias: 25.0% (vs 28.3% last week)
8 short bias: 22.2% (vs 6.3% last week)

40 positions (vs 34 last week)

Weekly thoughts
Another dog of a week hits the market as uncertainty reigns again; we've spoken countless times of the ping pong between hope and reality that we felt would be the trademarks of 2009 - with a nearly 13% loss since the morning Tim Geithner opened his mouth with plans to "save us" we've moved firmly back into the reality camp. Those that drank the Kool Aid of "government will save us" once again were subjected to Lucy pulling the football away [Feb 5: Charlie Brown Market] - but not to worry, they will resurface soon enough. I've been very pleased with our positioning the past 2 weeks as we've been able to offset any losses on the long side with shorts, and are almost exactly at the same NAV as we were pre-Geithner (within 0.3% I believe). But now it gets tricky....

Even if one believes the market is overpriced (hand raised) and many market participants STILL remain in denial about what is ahead of us (hand raised) it is not a straight shot down to the S&P 600s. Over the past month, we had been pointing to S&P 800 as a line in the sand (support), and once broken we'd quickly utilize to ramp our short exposure to offset any coming losses in the long portion of the portfolio. Worked very well. Now however we are quite overextended as 13% of lost index points in 9 sessions would be apt to do. Even worse are individual stocks in the worst sectors - I am a big reversion to mean proponent which means the farther we get from a resistance area the more apt we are to "snap back".... and this rubber band is getting pulled back sharply. Remember, a 20% drop in the market is a FULL bear market; we've been so bloodied and conditioned to selloffs we forget that - so in 9 days we've almost done 70% of a "bear market". (p.s. I find such rules as "20% down is a bear market but 19.6% would not be" as plain silly but just throwing it out there)


You know this market is aching for some sort of bounce when such hard hitting words as "we prefer a private banking system" out of the White House on a Friday afternoon sends the market screaming 2%+. However, it's a trader's market so shall we begin to rebound we'll toss offboard much of this short exposure and see if this train can get back to S&P 830s-840s range... we have two pit stops (resistance areas) I am looking at: S&P 783 and S&P 800. The former I expect the "invisible hand" to make sure we break above Monday in premarket to draw in HAL9000 and his army of hedge fund computers, along with the retail daytrader - because as you recall it's not the first 43,214 financial plans that save us, its the 43,215th. It's really all just Groundhog Day - and has been for a long time. We'll rally on plans, rescues, speeches, and news leaks to CNBC - and that lasts for a while, before reality sets in. The pattern is so clear it is almost absurd but the traders dominate this market and this is their MO.

So I'm looking at two broad ranges on the upside: (a) S&P 770 to 800 and (b) 800 to 50 day moving average (840ish). I'll keep a neutral stance in range (a) and then "bullish"once we enter (b) - hoping for a rally to top end of that range. Then if/when we reach the top of (b) you will hear all the Alleluiah's on CNBC and "the bottom is in" and "beautiful double bottom" and "I told you so! buy stocks!" - and we'll remember Lucy has the football as Charlie Brown is running for the 60th time in the past year and a half to kick it. There is actually a great irony here in the fact over S&P 840 we could actually have the best chart set up in a long while. I'd also like to mention even in the hell that was 2000-2002 we had some enormous rallies (before crumbling again) - aside from the herky jerk rallies of short duration (2 days in late November 2008) where almost all the gains were made in a span of 48 hours before a month of grinding sideways, we have not had a sustained upward move since summer of 08. We are overdue for one of these.

The only flies in the ointment are as follows

1. Holy smoke the news is bad out there - so many of our outlier predictions [13 Outlier 2009 Predictions] and roadmap [November 08 Thoughts/Roadmap] thoughts are playing out one after the other and it feels like it is accelerating not leveling off nor (banish the thought) receding - see John Maudlin's missive this week "While Rome Burns" for a "streak your underpants" moment. We tagged Eastern Europe as a big trouble spot in one of our 13 Outlier 2009 Predictions... it's happening. (as an aside on the menu bar of the blog is an item entitled Economic Forecast/Track Record with a lot of historical calls we've made on the website the past year and a half; if you are a newer reader it's worth a review of some of the major posts - I'm no Nouriel Roubini but we've been more accurate than 98% of the punditry who parade on financial TV)
   
2. Gosh it just seems too "perfect" to bounce in such a pretty manner off November 2008 lows and chug along. I never like perfect - I don't trust perfect.
3. There have been places to hide out that have not been hit; that makes me worried. I always like to see all "generals" beaten during a selloff. But it depends on the nature of this selloff - is it more like November 2007 where some places were unaffected or more like January 2008 where the leaders (at the times commodities) were unaffected as the market tanked for a few weeks; so just as you gloated about how you escaped, the "generals" were sandblasted in the 3rd week of the selloff. The persistent strength in tech stocks and a few others like Visa (V)/Mastercard (M) complex still has me a bit wary.
4. Still no true panic aka "I feel like throwing up" moments for the longs - this has been a very bad two weeks but "orderly" in the selling.
   

One area that we missed the last train on has been precious metals - this market has not rewarded chasing breakouts (strong charts, aka a stock/etf breaking out from a base) as they've reversed so often... but gold/silver has been a breakout to finally chase. This is also one crowded trade - EVERYONE is talking about gold; again the contrarian in me gets worried when I see that. But, we now are approaching March 2008 highs on gold, and a technical condition called a "double top" could be forming - that is simply when a stock/ETF hits an old high and then reverses. We have seen a parabolic move the past few weeks as panic begins to hit the market, and a parabolic move into an old high would point to a potential for a selloff.


If this happens there is a double reverse ETF that I have my eye on - but just for a trade until this overbought condition was worked off.


Eric Bolling who is a heck of a commodity trader also has been liquidating a good portion of his gold/silver holdings late last week - yet another reason to sniff the air of caution; the contrary in me wants to be short gold for at least a few days. If this market rallies on the next round of hope - this could be a heck of a trade.

So.... when/if we get this oversold rally - if you are an aggressive short term trader you want the old playbook of "junk" - financials, casinos, REITs, consumer discretionary/retail... the walking dead. Toss in a dry bulk shipper for grins. These are the items that will rally 30% in a day or two and then the pundits on CNBC can say "I told you to buy these!" not mentioning that they are down 70-80% from the first time they told you to buy these. Or the other pundits who say "the strength in said groups clearly indicates the market is telling is a rebound is coming in the 2nd half". Blah blah - we've heard those lines countless times. Ignore it - these are reversion to mean trades; nothing goes straight to zero.

In summary, this market is overpriced and headed lower in the future... but that does not mean if the government juices the trading community enough with "well timed" announcements that we cannot head higher first. The groups I've disliked the most since fall 2007 are so far away from any resistance area even I am feeling sorry for them. The riverboat gambler with short time frames can jump in on the long side as the next episode of hope returns... whereas those with intermediate time frames such as ourselves will wait for the "junk" groups to rally to a lower risk point to short. Our only 2 major short positions are in stocks I actually "like" but broke below support late last week with "gaps" to fill in their chart. If Kool Aid reigns because bank plan 34,215 is finally the "right one" we'll dismiss both positions quickly and in a snap move about 6.5% of our exposure from short to cash.

As you can see this entire post is about technicals - frankly, there is little to report on the fundamental side that is good. So we're left with charts, price action, and CNBC news leak via Uncle Timmy and Co. I will once again say if your time frame is longer than hours or at most days - this has been and continues to be a useless market to be involved with. Investors are being systematically dismembered - what is so awful about this downturn is unlike 2000-2002 the "widows and orphans" stocks are being destroyed. Yes they sold off in 2000-2002 but nothing like this - General Electric (GE) is one name that many old timers assumed would be a safe place to park. All assumptions are off....