Things That Make You Bang Your Head into a Wall

Thing # 47

When you mean to load up on calls for an intraday trade and instead load up on puts. 

Thing # 83

When you don't notice item #47 for about 30 minutes

First 'fat finger' trade I've managed in about 18 months.  Hate those. Ugh!

Market Spikes Higher as Euro Zone Agrees to Aid Greece

It was looking like another failed day, as the opening gap up was being sold furiously.... but about 20 minutes ago news hits that "it's official baby!" 

Via Reuters

• Euro zone countries have decided in principle to help debt-stricken Greece, a senior German ruling coalition source said on Tuesday.  "The decision on help for Greece has been taken in principle within the euro zone," said the source."
• Various options were being considered and no decision had yet been taken but the most likely possibility was to offer Greece "bilateral help," said the source.

Bilateral help means Germany (and perhaps France) will pony up.  At that point we'll just continue down the path, country after country until we hit Spain.  This reminds me so much of bailing out Bear Stearns.  The same glee in early 2008... "problem solved", "mission accomplished".

After mainland Europe come the big 3 of Japan, UK, and US will be the issues for the next 3-12 year time frame.  Once everyone is bailed out (I assume members of planet Mars will be asked to bailout Earth), the new bull market can ensue.

I am hoping the glee takes us to S&P 1090-1100 later in the week.

It's Not About Financing, It's About Lack of End Demand

A nice find by Calculated Risk blog, on the NIFB Small Business report.  Long time readers of FMMF will be struck by some of the quotes from the group; they could literally have been ripped from the virtual pages of this website 2-3 years ago. [Apr 14, 2008: Stuff I've been Negative on Since Fall 2007]  Written 2 years ago....

The subprime nation (us) is in trouble. Consumers make 70% of GDP. Its a consumption culture where the consumer is being drowned in negative wealth effect from housing, inflation from the Federal Reserve/global forces, and underemployment if not outright unemployment.  It is bad out there in the bottom 60% and it's creeping up to the formerly immune 20-40 percentile as well. So now it "matters" because that starts cutting into the bottom part of CNBC's audience. It is the perfect storm and I will utter the most dangerous words a financial commentator can ever utter - it *IS* different this time. Or at least it's certainly not like it's been in a long time...

People were asking me for individual names for shorts - I continue to stress the same themes I've stated since last summer - anything consumer related or based on American conspicuous consumption - it will all go.

Sorry to sound alarmist but this is the coming reality of a strapped, indebted US consumer whose real wages have been pummeled for years (this has not suddenly happened 18 months ago; it's just now catching up to us without the house ATM to hide the pain), and now is taking it on the chin with the Fed policy to devalue their currency to the tune of 1:5 ratio. Each dollar they now own becomes even more worthless.

We're heading into a long, drawn out recession... I've said it since last summer and as each month/week/quarter passes more denial will turn into acceptance and more earning cuts will have to happen across the board. The people in denial rely on government reports, which are for the most part another pile of fiction work.

  

Let us be clear, there is a problem in obtaining financing for smaller businesses as banks actually attempt to put some connection between risk and credit back together in the same sentence - I am not disputing that.  But it is not the *MAIN* problem as has been trumpeted in the press and the political class.  Which is why the "solutions" won't work - they are misdiagnosing the problem and using the convenient excuse of "banks won't lend".  The small business is reliant on the domestic consumer by and large.  The top problem is the lack of end customer demand.  Which is what we've been pounding the table on for years.  We've overbuilt everything in the LAST go around of trying to avoid a recession by giving out easy money in any direction.  It is not just housing.  America has 6x the shopping space of any other country.  Do we really need more?  [Sep 20, 2008: US News & World Report - The End of the Shopaholic Nation?] We are at the point we need government to bribel people to buy homes and cars...  there is a pattern here.

There has been too much of everything in this country.  Except for savings.  In a country where the median citizen has been losing ground on wages over the past decade, inflation adjusted.  Hence, end demand stinks - people completely underestimate how the house ATM was driving so much demand the past half decade.  They still understate it.  So is financing *an* issue?  Yes.  But it's not *the* issue.  Customers are.  As we said a few years ago it would be.

p.s. are the NIFB figures showing some bounce off all time low data points?  Yes - as are all economic data in the US.  Pump a few trillion dollars of our grandchildren's money into the economy, and you can make any economic figure bounce - not to mention the stock market.  (there are costs for the benefits we receive now from this generational theft)  But after that bounce off "abyss" levels, what's next?  This is the question the market is whistling past, believing that a credit implosion is no different than a typical recession.  The textbook says "from here private demand will take over from government".  And the textbook is *always right*... until it's not.  Small business says the textbook is not working.

Via Reuters:

•  The outlook of small business owners remained bleak at the start of the new year, according to a survey released on Tuesday by the National Federation of Independent Business.  "Small business owners entered 2010 the same way they left 2009 -- depressed," the group said, noting its Small Business Optimism Index reading for January was still below the 90 mark, the dividing line between positive and negative outlooks.  The quarterly Index readings have been below 90 for 7 quarters, indicative of the severity and pervasiveness of this recession.
• In January, small businesses had to cut prices despite tangling with inflation while profits remained weak, according to the survey of the federation's 2,114 members. 
• Swelling inventories have largely contributed to the recent growth in U.S. gross domestic product. But small business owners said they continue to liquidate inventories, and with weak sales trends, have little incentive to replenish their stocks.  There are "still more owners planning to reduce stocks than planning new orders," the group found.

So the above shows us the differencee between the big, multinational corporation (who has customers overseas - especially beneficial if exposure to Asia is high) and the typical small business which is going to be facing the domestic consumer.

Now for the killer quote - I believe this one could of been lifted directly out of the blog...

• "Too many houses were built, too many strip malls opened, too many restaurants started, too many new retail outlets were launched in the 2003-07 period and all of them cannot be supported by a consumer that now chooses to save," the group said. 

Last....

• Last week, President Barack Obama announced new assistance to small businesses, including a lending program through the Small Business Administration.  But the NFIB said the new aid is misdirected, as "only 5 percent of small business owners cite 'financing' as their top business problem but 31 percent cite 'poor sales.'"
• "Loans are not in short supply," it said, "but reasons to get loans certainly are."
• "The biggest problem continues to be a shortage of customers."

Let that sink is.  5% say financing is their main issue versus a third who say it's poor end demand. Ignore the dogma ("if only the banks would lend, we'd be fine!")... this is the reality.

Bloomberg:China Copper Imports to Halve

Notwithstanding the action today, which is prisoner to "dollar down, commodities up" (per HAL9000 programming) an interesting blurb overnight on copper via Bloomberg.  I was surprised how popular last week's post about a copper crash was [Feb 2, 2010: Trader Who Called 1996 Crash in Copper Says Prepare for Another - "Catastrophe" Awaits] and as the dollar strengthened, copper had a very bad week.  The Bloomberg piece continues on my multi year belief that commodity prices now have less and less to do with real supply and demand (economics 101) and relies much more on whether China is buying or not buying [May 13, 2009: Commodities - It's China's World: We Just Live in It] , along with 'financial innovations' in relatively shallow commodity markets. 

Projections call for China to return to 2008 levels of copper purchases after a huge influx of purchases in 2009.    A year ago at this time we were talking about the coming stockpiling by China - and copper had a year for the ages.  [Mar 23, 2009: FT.com - Chinese Stockpiling Spurs Copper Price Rally]   Now we're talking about the exact inverse - a 50%ish drop in imports.  If true, it cannot bode well for copper over the intermediate term.

• Copper imports by China may halve from last year’s record as the government rolls back stimulus spending and curbs credit growth, according to China Minmetals Nonferrous Metals Co., the nation’s largest metals trader.
• Shipments of refined copper may be about 1.5 million metric tons this year, down 53 percent from 2009, as China bids to prevent the economy from overheating, said Gu Liangmin, general manager of Minmetals’s copper department. That’s in line with 2008’s volumes of 1.46 million tons.  Futures more than doubled last year as government stockpiling in China and the country’s $586 billion stimulus package boosted demand for the metal used in autos and construction.
• “Without the liquidity and economic stimulus, we will not see a repeat of the exceptional year in 2009,” Gu said today in a phone interview from Beijing. “Demand last year was driven by stockpiling, investment demand and government spending.”
• China shipped in a record 3.18 million tons of refined copper last year, helping to boost stockpiles in the country by more than five times.
• “Imports will moderate and return to pre-stimulus levels,” Lin Yuhui, deputy general manager at Jinhui Futures Co., said from Shenzhen. Lin also forecasts that the country’s copper imports will be about 1.5 million tons this year.
• Copper inventories in warehouses monitored by the Shanghai Futures Exchange stood at 114,302 tons last week, the highest level since April 2004. Unreported stockpiles, including those held by producers and end-users, are “in excess of 1 million tons,” Minmetals’s Gu estimates.
• Three-month delivery copper on the London Metal Exchange traded today at $6,520 a ton compared with $7,375 at the end of last year. The contract surged 140 percent in 2009 as demand revived after the worst global recession since World War II.

A Return to 2008 Trading - Guess the Bailout

Much like 2008, and to a degree early 2009 where speculation about governmental, central bank interference into markets added a 4th dimension into what is an already difficult 3 dimensional puzzle, we're back at it again.  Futures are up smartly on "relief" that moral hazard reigns supreme and a new can will be kicked down the road.

• Greek and Portuguese government bonds rose as European Central Bank President Jean-Claude Trichet’s early return from an Australian meeting stoked speculation that policy makers will announce assistance for Greece this week.   The advance pushed the Portuguese two-year bond yield down the most in 14 months. Trichet will leave a gathering of policy makers in Sydney a day early today to attend a summit of European Union leaders
• “The markets are smelling a deal for Greece, and for that reason, we’re seeing some stabilization,” said Robin Marshall, director of fixed income in London at Smith & Williamson Investment Management, which oversees about $20 billion. “It’s hard to see there not being one, given the potential fallout and contagion effect.”

With the Euro so oversold, and a backdoor bailout of some sort almost certain (just a matter of timing) I might take some more US dollars (via calls) off the table this AM to lock in profits.  As I wrote last Friday:

 

But here is the risk to bears. The IMF (or Germany, but I believe it will be the IMF) is going to swoop in to save Greece ...... At which point, the "markets" which love moral hazard, will react much like when the US said you can no longer short US banks, and in fact we are not going to let any other major US bank fail - the taxpayer be damned. I expect when this event happens in Europe for speculators to rejoice and we could gap up 3%+ on any Monday. There is no way to game that as an investor - the type of things we have to adjust for have nothing to do with investing - it is just how it will go down one of these weekends in my opinion.

So under that thinking, the "risk trade" (moral hazard trade) would go back on - the dollar crushed, Euro surge - blah blah blah.

Does this have anything to do with investing? Fundamentals? Technicals?  Not one bit.  It's a whole new variable that is simply 50/50 coin flips in terms of timing.  It's truly a new world where we now take government / central bank intervention as a course of normalcy.  And as we did in 2008 & 2009 the speculator class will celebrate. Because their timeline is one where "long term" is next week, so whatever keeps the party going for another 24 hours, 24 days, or 24 weeks - whatever the cost - is all good.
 
Speaking to the currency movements, in the comments section of a post yesterday there was some good conversation going about how the bailout would affect the Euro.  As I wrote above, the knee jerk reaction would be a positive.  But one has to ask, these nonstop bailouts dilute the value of fiat money - along with now placing whomever is going to do the bailout on the hook for the future obligations of the region i.e. Portgual, and Spain as the next 2.  That is somehow good for the Euro?  Certainly not in the long run - but see preceding paragraph for what the 'long run' is, in the markets.
 
So for now, we backslap each other in glee as governments have "fixed" the problem yet again.  It's Groundhog Day.  Let us see how the markets react after the initial "happy happy! joy joy!" movements in the coming hours or days.  I just wonder when the day comes that people look around and think out more than the next 3 months, and realize we are simply continuing a pattern over and over.  Eventually there will be no more rugs left to sweep problems we don't want to face, under.  One of these times the bond vigilantes are simply going to say all you've done is moved the debt from under 1 shell to another, and done nothing to address the structural issues that brought us here in the first place.

WSJ: No Exit in Sight for US as Fannie (FNM), Freddie (FRE) Flail

This is a nice overview story in the Wall Street Journal on what FanFredron (Fannie + Freddie + Enron) have become:  a governmental warehouse of losses to subsidize the US housing market.  Supposedly 2010 was going to be the year the long term future of these entities was supposed to be determined - i.e.(a) fully socialize these 2 as permanent money losing apparatus as to keep housing prices elevated and "help" home ownership rates [that's working out great] (b) keep them as pseudo public-private monsters who have the impliciat backstop of the US government [worked like a charm] or (c) break them into smaller competitive companies and set them into the private marketplace to actually live and die on their own [the only one of the 3 that makes any sense in the long run unless you believe your grandchildren's money should go to subsidize others to buy homes on a permanent basis].  However, the federal government has decided - at least in budget terms - to "kick the can" (shocker) for another year with only a single line item in the budget.  In place of any serious decisions is an unlimited loss potential to Americans [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer] snuck in while most Americans were having holiday dinner ... and we'll call it a day!  [Feb 1, 2010: 2 Graphs Showing Part of the Reason for the Christmas Eve Taxpayer Massacre]

Even better, much as some of our most dysfunctional corportations - such as Enron a decade ago, or more recently our financial oligarchs - "special off balance sheet entities" are held off the main balance sheet of the government, out of the prying eyes of the public.  This eventually led to the implosion of Enron, and the implosion of such wonderful firms of Citigroup (they were called SIV's in Citi's case).  I wonder what this "transparency" will eventually lead to for the federal government?


The story has some nice graphs attached.... including the costs thus far to feeding the monster that is FanFredron.  After growing physically ill writing post after post tallying the losses; I'd much rather stick my head in the sand and sing great stories of 'recovery' (I am here to make the people smile)- so I enjoy when someone else keeps the totals. I've since ceased bothering, and let me tell you, the sand is awesome down here! [Nov 14, 2008: Freddie Mac First to the Trough] [Jan 25, 2009: Freddie Mac Saddles Up for Another $35B] [Mar 12, 2009: Fredie Mac is Back for More of Your Grandkids Money - $30.8B] [May 8, 2009: Fannie Mae with Next $19 Billion Bailout]  I do have to say, it must really stink to be a renter in this country; almost like a 2nd class citizen.  You are taken by the shoes, held upside down, shaken, and all the extra change is handed directly to your fellow citizen who 'owns' a home - even those who didn't put a dime down, or emptied all (bubble) equity via house ATM the past decade.  Perhaps we need to brand these renters with scarlet R's on their foreheads, while we talk of them in hushed whispers?

Anyhow, it's neither here nor there - it is not like anyone could see this (cough) coming.  [Sep 7, 2008: Bailout Nation Continues - Fannie/Freddie Now Owned by You]  Just remember, unlike what most in pundit-land or government would have you believe we do still need to do cost-benefit analysis; not benefit-benefit analysis as is the current status quo. Anyone below the age of 10 will be receiving the 'costs' of said policies, which seem to have no end in sight.  One can only wonder what new (cost free) 'innovations' are around the corner. [Nov 5, 2009: Fannie Mae's New Deed for Lease Program - Rent your Home from the Government]


Via WSJ:

• When Charles E. Haldeman Jr. became Freddie Mac's chief executive officer in August, the ailing housing-finance giant had already consumed $51 billion of government money to stay afloat. (since we have become numb to large numbers in this country, that amount would effectively let Greece kick the can for a good half decade)  It's likely to need even more.  (likely?) Freddie's federal overseers nevertheless have instructed Mr. Haldeman to focus on something that isn't likely to make the bleak balance sheet look any better: carrying out the Obama administration plan to allow defaulted borrowers to hang onto their homes.
• On a recent afternoon, employees at Freddie's headquarters here peppered Mr. Haldeman with concerns about the company's future. He responded that they were "fortunate" to have such a clear mission—the government's foreclosure-prevention drive. "We're doing what's best for the country," he told them.  (viva el patriots!)  "We're making decisions on [loan modifications] and other issues, without being guided solely by profitability, that no purely private bank ever could," Mr. Haldeman said in late January in a speech to the Detroit Economic Club.
• Fannie and Freddie remain troubled wards of the state, with no blueprints for the future and no clear exit strategy for the government.
• Nearly a year and a half after the outbreak of the global economic crisis, many of the problems that contributed to it haven't yet been tamed. The U.S. has no system in place to tackle a failure of its largest financial institutions. Derivatives contracts of the kind that crippled American International Group Inc. still trade in the shadows. And investors remain heavily reliant on the same credit-ratings firms that gave AAA ratings to lousy mortgage securities. (but other than that, things are going swimmingly)
• On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. (which I would like to remind readers was originally sold to us by Secretary of US Treasury Paulson as $100B per company - max! Which we publicly scoffed at in these very same web pages) So far, the government has handed the two companies a total of about $111 billion.
• The government is willing to tolerate such open-ended exposure for two reasons. First, it sees the companies as essential cogs in the fragile housing market. Fannie and Freddie buy mortgages originated by others, holding some as investments and repackaging others for sale to investors as securities. Together with the Federal Housing Administration, they fund nine in 10 American mortgages. Worries about potential insolvency would cripple their ability to fund home loans, which would hamstring the market.  Second, the companies are a convenient tool for the administration to use in its campaign to clean up the housing mess.  (i.e. it's the closest thing we have to Chinese style central command directives - shhhh, I meant free market capitalism reigns in America)
• Besides playing a key role in the loan-modification program, Fannie and Freddie have jump-started lending by state and local housing-finance agencies by helping to guarantee $24 billion in debt. They also are lending support to the apartment sector by becoming the main funders of loans to builders and buyers of apartment buildings.
• By using Fannie and Freddie for such initiatives, the White House doesn't have to go to Congress for funding. The Treasury and White House can simply issue instructions to Fannie and Freddie via their federal regulator, the Federal Housing Finance Agency, or FHFA.  The government is "running Fannie and Freddie as an instrument of national economic policy, not as a business," says Daniel Mudd, who was forced out as Fannie Mae's chief executive in September 2008 when the government took control.

• Some housing experts contend that prolonged government intervention will make it more difficult and costly to eventually wean the companies off government support. "The more aggressively we continue kicking the can down the road, the larger the losses become and the harder it becomes" to address the companies' future, says Joshua Rosner, managing director at investment-research firm Graham Fisher & Co.
• As mortgage delinquencies rise, Fannie and Freddie are required to set aside more capital to cover anticipated losses. Each quarter, if their revenues are insufficient to meet those financial needs, the Treasury has to kick in more money.  With delinquencies still rising, the outlook is grim. At Freddie, 3.87% of single-family mortgages were at least 90 days past due at the end of December, up from 1.72% a year earlier. Fannie is worse: 5.29% were 90 days past due in November, up from 2.13% a year earlier.
• Both Fannie and Freddie have struggled at times to adjust to the new marching orders. Fannie has warned in financial filings that the modification program had shifted "significant levels of internal resources and management attention" from other parts of the business, which could lead to a "material adverse effect" on the business.
• The Obama administration had said it would weigh in on how to revamp the companies when it released its proposed budget earlier this month. Instead, the budget contained only a single line about the companies' future, promising to "monitor the situation" and to "provide updates…as appropriate."  (and that pretty much sums up American leadership on any issue - if it's difficult to deal with, kick it as far down the road as you can)

And what happens if you speak up in government and tell them the unvarnished truth?  As Jack Nicholson tells us... we can't handle the truth.

• At Freddie, David Moffett, the chief executive who took over when the federal government assumed control, left last March after only six months, partly because it became clear that regulators would be calling the shots.  He says he and others warned administration officials that the loan-modification goals were unrealistic, that borrowers whose homes weren't worth what they owed were unlikely to take part, and that many participants would be likely to re-default within months. "They really didn't want our views," Mr. Moffett says. 

Other issues - and why the housing 'recovery' is being subsidized in yet another way....

• As foreclosures mount, Freddie finds itself with title to more and more homes. The company wants to price them to sell, but doesn't want to put downward pressure on overall housing prices.

That's one way to help keep inventory lower than it otherwise would be, and overstate prices.   But oh, the costs...

• "Imagine having to keep the lawns mowed, the lights on, and the property secured for one house, let alone more than 40,000 homes all over the country," says Mr. Haldeman. "It's not an easy process."

Thankfully in Cramerica we only look at benefits.  Costs are for the birds.

US Bankruptcies Rise 7% Year over Year

Despite enjoying 2 full quarters of 'recovery', and coming off a hefty 5.7% GDP quarter - the reality is not so happy down on Main Street (business).  Keep in mind the year over year comparisons are versus the period of time (fall 2008/winter 2008-2009) when the recession was at its deepest, so to see continued "growth" in this area is certainly not a green shoot.  However, I am sure it can be explained away as all bad news is... let me think of an appropriate head in sand response.  Ah yes... let's throw this on the pile of "it's a lagging indicator".

Via Reuters:

• U.S. business bankruptcy filings rose 7 percent in January from a year ago, as the sluggish economy hurt sales and hindered businesses' ability to refinance heavy debt obligations.
• 6,502 companies filed for bankruptcy protection in January, (I wonder if the guys at the BLS were aware of that while they were insisting hundreds of thousands of jobs were being created by businesses too small to measure?) compared with 6,055 in the same month last year, according to Automated Access to Court Electronic Records (AACER), adatabase of U.S. bankruptcy statistics used by attorneys and lenders.
• AACER's count of commercial cases includes bankruptcy filings from companies, as well as individuals who say they are running a business.  "You don't see a recovering economy in bankruptcy numbers until 12 to 18 months after the economy has actually begun to recover," he said.

There is certainly a huge advantage right now to being a public company versus private and smaller.  The larger companies can issue shares - which apparently there is an almost limitless appetite for with all the free money being handed out @ 0.25% rates.  While it dilutes shareholders it does provide a lease on life. Meanwhile, the smaller private peers have no such luck as banks seem disinterested in taking that sort of credit risk.  Why bother when you borrow from the most generous Time Man of the Year at 0.25% and buy US Treasuries at over 3% and mint money for free, while speculating in the stock market on the side.

Oh well!  When there is bad news, as I wrote above - we can conveniently explain it all away as "backwards looking" or a "lagging indicator".  The path should be all uphill from here since the economy turned the corner a few quarters ago.

• "(The numbers) indicate that there's going to be more filings in 2010 than in 2009," said Mike Bickford, president of AACER.

Errr......

Bookkeeping: Closing Priceline (PCLN) - Will Return

I am closing the last of Priceline (PCLN) for now; one of our longest held positions initiated last May.  The overall gain is about 90% but we have not done much with the name since summer 2009, so some of those gains were on a small amount of shares.

I am very torn here as the leadership stocks such as Apple (AAPL), Visa (V), and Priceline (PCLN) all seem to be in weak condition, following the "high beta go to" names we outlined a few weeks ago (i.e. Google). 

To me the above charts all look like nice entries for short positions - not longs.

On the other hand things like silver (SLV) are so oversold you have to expect a bounce somewhere, especially with the US dollar so overextended to the upside. 

Overall, I'll feel more comfortable donning a bull suit if the S&P 500 jumps back over 1100 and the hedge funds "go to" stocks start recovering some of their moving averages.  Visa and Apple had 2 of the best reports in the large cap space and are not being rewarded for it.  A market without generals is something to keep at arm's length.  Even the so called rally today off that "awesome cool" reversal Friday has to be seriously disappointing to the bulls.  The follow through thus far is inept; especially disappointing because this is a Magical Monday.  You'd think with the 18 hours of analysis about the "bounce" Friday, we'd at least have seen a move over S&P 1080.  Personally, I was hoping for such a move to reacquire some short exposure closer to 1090-1100.

I remain unconvinced that Friday was anything more than short covering & a technical bounce off the 200 day moving average.  Otherwise, the generals would be marching upward - not sewing buttons on their uniforms.

No positions

Bookkeeping: Beginning Starter Stake in Seagate Technology (STX)

I have been discussing this name the past few weeks, and with our lack of long exposure - this is as good of time as any to begin a position.  My limit buy order at $15.50 does not seem likely unless the market begins another steep drop. I'll start a 0.9% position in the $18.50 area and give it perhaps a buck or so of leeway on the downside.  If the S&P 500 breaks over 1100 and stays there, this is a name we'll roll much more money into it.. Obviously the relative strength is high and at 6x earnings for the year, it's not expensive - but once more, this is a cyclical company.  The "cheapness" might be forecasting a much weaker disk drive sector in the year to come... we'll see.

[Feb 3, 2010: Seagate Technology Continues to Impress]

Long Seagate Technology in fund; no personal position

NYT: Asia Sails Smoothly Through Debt Waters

While I knew Japan's public finances were a mess, I did not realize India was neck in neck with the U.S. [Feb 5, 2010: Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale?] Also, I imagine after the massive loan growth of first half 2009, the Chinese governmen will be writing off a huge swathe of debt sometime in 2011-2013; but they have a massive annual surplus at this point so I assume much of the money will come from that, and not add to their smallish debt.

But overall, the lessons of the late 90s seemed to have given most Asian countries "financial religion".

Since we are on the general topic, the latest rumor is that the EU or IMF will somehow backstop all short term Greek debt, so that Greece can "kick the can" down the road a year.  I guess the idea is that the Greeks will stop their dissent to austerity measures more in 2011 than 2010.  [Feb 4, 2010: Greece's Biggest Union Sets Strike, Tax Collectors Stage 48 Hour Strike] Or... it's just part of the global kick the can party; we're doing the exact same things for the states here.  Hand them money via "stimulus" and give them another year to "work things out". 

Via NYT:

•  While rising government debt is a growing concern in Europe and the United States, Asia’s economies remain remarkably resilient, even buoyant, underscoring how economic might is shifting from West to East. 
• Even the Asian economies that have shrunk during the recession, like Malaysia and Cambodia, escaped the worst ravages — with the notable exception of Japan, Asia’s first industrialized country.
• Because of the Asian financial crisis of 1997, many Asian countries have been more conservative about borrowing and spending over the last decade than Western nations, which went on a debt binge during the good times and continued to increase their borrowing during the recession to try to turn around their economies.

• China has been repaying some of what little foreign debt it owes, even as economists wonder whether Greece will require an international bailout and ask how long the United States can sustain record budget deficits. “We took a pass on the economic crisis,” said Philip S. Carmichael, president of Asian operations at Haier, China’s biggest appliance maker.  China has been repaying some of its small external debt as it comes due, a luxury that a country with more than $2 trillion in foreign reserves can afford.   China showed a government budget surplus for the first 11 months of last year, but Western economists still expect a small deficit for the entire year because agencies tend to go on spending binges every December to avoid returning unspent money.
• Many economists say countries have to spend during recessions, increasing deficits and debts. But investors and economists alike worry about the long-term effect of mammoth debt on the vitality of Europe and the United States. The longer it takes Western capitals to confront their overspending, the higher and more rapid Asia’s rise will be, many economists say.  (on a relative basis yes, on an actual basis I'd argue the 2 regions are co-dependant so a sluggish West is not great for the East)
• Even though Asian stock markets fell last week, analysts say there is no obvious Asian equivalent to, say, Greece. Investors see little risk of default among even heavily indebted countries like India and Japan.  In India, the government’s debt is nearly 80 percent of the gross domestic product, but it owes more than 90 percent of that money to its own citizens. Of the rest, a big chunk is held by agencies like the World Bank, which, are not likely to press for quick repayment.
• Compared to Greece, “the threat of these two defaulting is nowhere close, and the reason is that, thanks to high domestic savings rates, their debt is almost all domestically financed,” said Kim Eng Tan, a sovereign debt analyst in the Singapore office of Standard and Poor’s.  “If you sell bonds to your own citizens, and you do it in your own currency, you don’t have much of a problem,” said Ajay Kapur, the chief global strategist for Mirae Asset, a big South Korean financial services company.

That last point is interesting, because the last time the US came anywhere near to this level of deficit was World War 2 when it was paying for a huge expenditure.  Much of the debt was financed by it's own citizens.  But that was in a simpler time when any extra money did not burn the pockets of the average American's pocket, and house ATM's were the season's "must have" item.  [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] [Dec 3, 2009: Debt to Income Ratio Essentially Doubles for All American Households Past 2 Years]
But not all is rosy even in Asia...

• Though the risk of a full-blown sovereign debt crisis in Asia may seem remote, economists say there are other reasons that investors and policy makers should be concerned about high deficits.  In India, the growing fiscal deficit — which reached 8 percent of G.D.P. last year, up from 3.3 percent in 2008 — could damp growth by making it harder and more expensive for corporations and individuals to borrow money, said Ila Patniak, a senior fellow at the National Institute of Public Finance and Policy in New Delhi.
• India’s policy makers have signaled that they intend to pare the deficit by selling stakes in government-owned companies and reducing subsidies on fuel and fertilizers. Analysts point out that Indian governments have long promised those reforms but have struggled to deliver them due to internal political pressures.
• A few smaller Asian nations have had difficulties in the last year and a half. But they have been hurt more often by political strains than by economic troubles. Like Greece, Pakistan and Sri Lanka have relied heavily over the years on overseas borrowing.
• Thailand and the Fiji Islands both had ratings downgrades last year because of civil unrest as well, although neither required I.M.F. assistance.

None of Last Week's Stop Loss Longs Look Particulary Attractive Yet

We entered last week with 4 major long positions, having been stopped out of some 15-20 others in the previous few weeks.  Since these were the last to go, I am keeping a close eye on them to push back in to at least give us some long exposure.  While other names might jump more on an any further oversold bounce, they are generally in completely awful technical conditions, whereas these 4 would have the best chance of "fixing" their situation efficiently.

Thus far, a couple have regained their 50 day moving average but to be safe I'd want to see a jump over the 20 day as well.  In these cases we'd be buying back at higher prices than we stopped out, but that's the price of being conservative and preserving capital.  In all other stocks the past month the price we stopped out will be higher - in many cases much - than what we would be able to garner today on the open market.

Almost there with Atheros Communications (ATHR); but over $32.50 would be better.

Same with DragonWave (DRWI)... close...

A little behind the other two, but on the same track with EnerNOC (ENOC)

Meanwhile, Assured Guaranty (AGO) is having a hard time recovering.

Long all names mentioned in fund; no personal position

New Nomenclature for Option Symbols

For those of you who trade options; or even those who simply follow our weekly updates - you might have noticed a change in the symbol for options.  I am surprised this did not get more press, since I was totally caught off guard by it - but there appears to be a new nomenclature for attaching symbols to puts and calls.

Frankly, other than putting the symbol at the front end of the option symbol (which I like) the rest of the changes appear more friendly to HAL9000 than a human mind.  I think the old system for the last 2 letters of the previous 5 letter symbol married with the stock symbol at the front end would of been a worthy marriage.  Instead we have this mess below, as explained by Investopedia blog.

************************

The Options Clearing Corporation has decided to remove the traditional 3-5 character option symbol formatting and introduce a new options symbology. The purpose of this change is to standardize the naming conventions of all options and to overcome the capacity limitations of the previous format.

The new structure of an option symbol will contain:

■Stock Symbol: The first 1-6 characters will indicate underlying stock. This will be the stock’s ticker symbol
■Year of expiration: next 2 character will indicates the option’s year of expiration
■Day of expiration: next 2 characters indicates the option’s Day of expiration
■Month of expiration and call/put indicator: The next character represents the month of expiration and whether the option is a call or put

■January: A (call), M (put)
■February: B (call), N (put)
■March: C (call), O (put)
■April: D (call), P (put)
■May: E (call), Q (put)
■June: F (call), R (put)
■July: G (call), S (put)
■August: H (call), T (put)
■September: I (call), U (put)
■October: J (call), V (put)
■November: K (call), W (put)
■December: L (call), X (put)

■Strike Price: the final characters represents the strike price with decimals, if necessary

For example: OUP AW is a GOOG call option with a strike price of $500 that expires January 21, 2011.  Under the new system, OUP AW will be represented as GOOG1021A500.

***********************

Clear as mud!  Somewhere HAL9000 is rubbing his microchips together in glee.

Even more confusing - brokerages don't have to even display this new system to you, so now your Etrade account may differ from your XYZ brokerage. 

"Brokerage firms and data providers are allowed to implement their own variant of the new format of option symbols for public use. Therefore, not all brokerages will show their options in this exact format"

Lovely.

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 27

Year 3, Week 26 Major Position Changes


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

Cash: 83.5% (v 64.8% last week)
20 long bias: 7.8% (v 12.7% last week)
7 short bias: 8.7% (v 22.5% last week) [Includes 3 option positions, and 2 'long dollar' positions, 1 option related]

27 positions (vs 28 last week)

Weekly thoughts
It's been quite the volatile few weeks.  A week ago at this time we entered the week short term oversold expecting a bounce "soon", and it was delivered premarket Monday (right on schedule).  Most of the day's gains were concentrated in a small period of time, as they were Tuesday.  Volume was limp, but the market gained 2.5%.  That was all erased Thursday.  Friday started off slowly but after some initial confusion over labor data, the market fell off a cliff, and amazingly to our intermediate target of the 200 day moving average, in quick fashion.  A last hour bounce - most likely a combination of buyers loading in on first test of a key moving average, shorts gorging on their first real win in a few quarters, and "weekend risk" (i.e. moral hazard run amuck) by someone in Europe or the IMF in regards to Greece, saved the week - limiting losses.   While the volatility allows many more opportunities for gains (or losses) versus what was experienced in November and December 2009 when markets seemed comatose, the fact remains many individual stocks have completely broken down on their charts, and for the first time in a long time the major indexes have made new lower highs... and lower lows.

A quick review of the S&P 500 chart; the NASDAQ and Russell 2000 closely mirror this:

[click to enlarge]

We could see a textbook bounce off that green 200 day moving average which is barely visible at the bottom right of said chart. It's very rare to see support lines broken on the first attempt, which we saw in various instances the past 2 weeks.  It took repeated attempts to break 1100, and then 1085.   While some of the notes in the chart might make little sense to those who don't use technicals, the reality is aside from very short term oriented traders (minutes, hours, days) one does not want to get bullish until the 20, and 50 day moving averages are cleared - as represented by the orange arrow & text in above chart.  Just as one does not want to get bearish until the 200 day moving average is broken - as represented by green arrow & text.  From a fundamental standpoint that is probably the opposite of what you have been taught i.e. buy low, sell high.  It can be best be explained by strength begets strength and vice versa.  As key technical moving averages are regained more confidance returns; and if key technical moving averages are broken, institutional money will head for the hills.

At S&P 1066, we have about 35 points to upside and 20 points downisde in what I enjoy calling a "white noise area".  (I use this term alot)  To me, it simply signifies a spot that really means nothing other than a lot of huffing, puffing, and over analyzing by those who try to read something in every point movement in the markets.   Broadly speaking we have a 55 point range in the S&P 500 which is fine for daytraders to play with, but movements in that area really tell us little.  That factor, combined with a light economic news front & a marked slowing in large companies reporting will mean we might be in more of a drifting mode for the next bit.  Perhaps news overseas will matter more, than anything domestic.

On the economic news front, it's very quiet - a few reports that normally don't move the market one iota Wednesday, followed by Retail Sales Friday, and a Consumer Sentiment report Friday.  As for earnings, we now are nearing the back third of earnings season but frankly this season has been dominated by either political news or economic developments in Europe or Asia - specifically China.  For our purposes a few more of our companies should start reporting as we move away from the mega cap, and large caps and into the mid caps and smaller caps, especially foreign types.

Portfolio wise - it was a topsy turvey week for ourselves as well.  We came into the week with a bevy of unrealized gains from the large selloff a week ago Friday, but the premarket, and first 30 minute melt up stole many of them away & we finished with a rotten Monday.  After another concentrated surge Tuesday we cleared our index positions to have a fresh start and clear mind - which helped us pivot Wednesday and Thursday.  During the selloff Thursday all 4 of our major long positions hit stop losses, as they all broke the 50 day moving average.  They were 4 of the 5 remaining holdouts that had not yet hit that level; the 5th (Wyndham Worldwide) we had already sold off our positions at nice profit earlier, and were waiting for it to fall to this level so we could buy back our stake.   Long story short we are very heavy in cash as (a) the easy part of the sell off is done with (b) the major indexes are firmly in white noise area where there is a 50/50 probability of going up or down in any session and (c) just about our entire portfolio has broken key support levels.  Obviously the names we let go of exposure last Thursday would be the first candidates to bounce back over their broken support and give us a sensible entry point to rejoin their previous position size.  And if the market begins to whirlpool back down, we can jump right back out of these with clearly defined stop losses.  I'm also looking at a few new names  - especially interested in the small group of stocks that were able to keep above both the 50 and 200 day moving averages in this hailstorm.  Until proven otherwise we like the action in the dollar, as both a profitable long and a proxy low beta short position against the market.

While intermediate term it seems correct to still be a bear, due to technicals - the news event risk always seems to lie with bulls since desperate governments and world financial bodies are happy to intervene in short sightened nature rather than letting the rightful outcomes happen to the irresponsible of the world.

And with that said, we'll see if we have yet another Magical Monday... now up 17 of the last 19 Mondays. [Mondays Continue to be Wonderful]

Updated Position Sheet

Cash: 83.5% (v 64.8% last week)
Long: 7.8% (v 12.7%)
Short: 8.7% (v 22.5%)   [please consider most of this is currently long US dollar positions, which we're using as a hedge i.e. short]

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

[click to enlarge]

LONG (2 photo files)

SHORT

OPTIONS

Job Loss Rates Across Post WW2 Recessions [Chart]

I've posted this chart sometime in 2009 but trying to find old data within some 6000 historical posts is proving to be increasingly difficult!  However, with the newest data provided Friday - even with the caveat that the government's data is subject to being understated - we clearly see that "Houston, we have a problem."  So rather than arguing with people about 25K jobs here, or 50K jobs there - this type of graphical representation shows just how distressed the labor market in America is.  At this point in the (cough) recovery we should be creating 300-400K jobs a month, not debating whether the government is understating the data at -20K versus -100K.  This is like arguing if the deck chairs are arranged nicely enough, as we just hit that North Atlantic iceburg...

[click to enlarge]

Source: Economix, NYT

At this point, in nearly every recession post WWII, except the one that began in 2001, we had fully recovered all jobs lost.  Now we are celebrating "flat lining" at a level of massive job deficit.  While the 2001-2003 job destruction took a long time to recover from, the job losses were a shadow of the current implosion.  This graph dovetails nicely with my prediction in 2008 that as we begin to talk up "the recovery", the pundits will once again underestimate how big the issue is due to the structural problems in the country. [Dec 15, 2008: The Economic "Recovery"]  So many jobs were based on bubbles, while others (in large swathes) continue to be shed as cheaper labor does it overseas.  PIMCO now calls this the new normal... I did not have a cool name for it in 2008, but I described it:

We are right sizing industry after industry to what consumption SHOULD be, not what it WAS. What will that post super credit bubble world look like? What would a world of 1997 or 2002 level credit look like? Where do you think state, local, and federal taxes will be in 2 years? 5 years? 10? to pay for all we are promising? Is anyone paying attention to the structural global changes that are happening under the surface that are (mostly) unstoppable?

That said, just because this is a punishing era for American labor, does not mean capital (and thus stocks) cannot enjoy profits and the stock market can benefit.  [Jan 12, 2010: Jim Cramer is Right]  But let us stop the nonsense about Main Street = Wall Street.  The flattening of the globe, means continued global wage / labor arbitrage - especially among the middle and working class.  It's the era of capital, not labor.  For Americans to compensate, deflationatiornay measures need to be allowed to happen in the country, to put costs back in line with incomes.  [Aug 18, 2009: Bloomberg Opinion - Deflation Theory is Lemon We've Been Sold]  Instead both the federal government and Federal Reserve are doing everything in their power, and layering countless more debt on our children to increase costs (prices).  Which is part of the reason we got here in the first place (massive credit expansion i.e. debt - was needed to keep up with the growing costs caused by "beneficial" inflation, as income increases for the middle class began to falter over a decade ago).  Indeed, inflation is the most regressive of all 'taxes'.  Eventually the market will overwhelm these not so "invisible hands", but in the meantime they continue to do incredible damage - all under misguided economic precepts that have become consensus.  The idea that layering on more debt for future generations so as to regressively tax the lower tranches of society today... and that's a good thing... as economic gospel is beyond me, but I'm in a tiny minority.

So we'll continue down the path of more paper printing prosperity [May 19, 2009: Paper Printing Prosperity Defined], holding our hands out to government to pay us [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] [Jul 30, 2009: Cash for Clunkers a Bit Hit, Government Asks "What Can we Buy You Next?"] because the costs of goods is not allowed to self correct to the new normal of wage pressures in Cramerica.  [Sep 4, 2009: Job Seekers Across America Willing to Take Substantial Pay Cuts] While focusing most of our job creation in all areas of government and pseudo government, (healthcare, education) because unlike private business - government can add costs that it does not need to pay for anytime soon with its unlimited debt creation.  Until one day we look in the mirror and see Greece.  (technically we are already there!)

Viva la jobless recovery of the ages. [Aug 14, 2009: No New Normal Say Some Economists, Prosperity Without Jobs?]    Since we are almost out of private workers to get rid of to maintain a functioning economy (still need our Walmarts, bars, and lawyers), and stimulus after stimulus is being issues yearly to protect those in the public (pseudo or otherwise) sector - more hemorrhaging of jobs seems almost inconceivable.   But at this point in the business cycle we should not even be having these sort of discussions... we should be asking if the US economy is going to create 300 or 400K jobs this month?  And I don't mean census workers, or fake jobs created in the birth / death model (only to be revised away a year or more later).

Economic recovery?  Tracking quite nicely to my predictions in Dec 2008.

Horror Show

I have been looking at a bunch of stocks either sitting at the very bottom of the portfolio with 0.1% allocations, or old holdings I am interested in getting back into - and the charts read like a series of Stephen King novels.  Certainly these are going to dead cat bounce sooner or later but there is no intermediate term good vibes to be found.  I am amazed so much damage has been done and the S&P 500 is only down about 8% from peak; many of these stocks are down by a third or more in 2-3 weeks.  I am struggling to put together a list of "want to buys" when chart after chart looks like this:

As for the S&P 500, I didn't really think 1046 would be in play today with the sanguine opening but as I type this we suddenly dropped a few points and now are at -1% on the session.  1052s and falling fast. How quickly the tide has turned for a market that was impervious to any weakness.

If the 200 day moving average is reached this afternoon I'll probably sell the majority of the puts (this time I went with SPY 106) I bought this morning, as outlined at the end of the previous post.  The position size was not as large as what we were holding for the selloff yesterday, but I simply wanted to get some of the exposure we moved out of ahead of the "news event" of the labor reports.   I threw some sheckles shorting BGU (3x big cap levered ETF) this morning as well.  I do expect a bounce off the 200 day when and if.  I am struggling to figure out what aside from index plays to use for any such bounces - for reasons outlined in paragraph 1.

For your moment of Zen, Senator Dodd says biparisan financial reform is at an impasse.... oh joy.  When I read about our leadership I sometimes wonder why the S&P is not below 300.  Since Dodd is "retiring" I can only wonder what financial firm he will be landing at in 2011... when we find out, we'll know which oligarch was most responsible for creating the 'impasse'.

EDIT 1:42 PM - well that did not take long.  1146 (edit: 1046) is here. Let's see what sort of bounce happens here.

EDIT 2:15 PM - sold 3/4th of SPY 106 puts bought this morning, for very nice profit around 40%ish (for about 4 hrs of work) as S&P bounces back to S&P 1048 range.  Trying to avoid greed and avarice to finish off a tremendous week.  I will reconsider buying if the 200 day moving average breaks but going into a weekend, I might just sit on hands.  So at this point we have fractional positions in SPY 108, 107, 106 puts - each reduced about 75% from original size.  The remaining 25% is the "house's money". The SPY 108 and 107 puts are up 100%ish from the purchase point.  By taking profits into the close both yesterday and right now, we've been able to profit from intraday waterfall type selloffs, locking in majority of our gains WITHIN the day, which means we had little overnight risk.  I'm comfortable letting the rest ride for now and watching. When the bounce comes (and it will) I won't need to catch much of it, since we had such a huge past few days. 

If there is a late day bounce I'll probably cut these positions even further. 

EDIT 2:30 PM - covered the BGU (3x large cap bullish) ETF that I shorted this morning, 3%ish gain but it was with 7% of the portfolio.  Will re-introduce to the portfolio next week if the 200 day breaks.  Done with it for the day.

EDIT 3:10 PM - cut the remaining 25% in all 3 puts by another 2/3rds, before CNBC goes to 8 hours straight of excited coverage about how this bounce off the 200 day moving average ahead of "Magical Mondays" (97% of the time a rally) means the bottom is in and all is well in the world.  Greece? Smeesh! I will use the dollar exposure as most of my downside hedge from here.  I'll rebuy puts next week probably after the 2% rally on Magical Monday.  We are back in a "white noise" area as we reach for S&P 1060, can easily go 15-20 points in either direction - no feel for the next 10 points.

It truly amazes me how trillions of valuation from day to day, hour to hour, are based on squiggly lines on a chart.  Talk about a textbook bounce off support.

EDIT 4:00 PM - and that boys and girls is why it is NEVER wrong to take at least part of your profits when they are available.  Surely there will be times you leave some on the table (almost EVERY time in fact) but profits can be fleeting.  Look at the title of this post in fact, written around 1:30 PM.  Haha.  The SPY 106 puts I sold around 2:15 PM I made 40% on, they peaked over 50% and by end of the day they went negative.  Looking forward to drool coming off the lips of CNBC hosts and the Fast Money crew tonight as we hear "fantastic" "unbelievable" "that's a reversal - buy buy buy!" and "the bulls are back in town".  Buy copper! oil! China! Heck, buy Greek stocks! Yeehaw.

A fun week! Let's keep this volatility going, so many profitable opportunities each day.

Bookkeeping: Selling 1/3rd UUP March 23rd Calls

We bought a batch of Powershares DB US Dollar Bullish ETF (UUP) Calls one week ago.  [Jan 29, 2010: Bookkeeping - Long US Dollar with ETF and Calls]  Due to volume issues with Investopedia (which tracks my trades) it is difficult (nearly impossible) to trade lower volume instruments, so I had to buy the March 23 Calls, when in a real world environment I said I'd buy the March 24 Calls.  (The 23's had much more volume last week) Obviously both have run up in that time, after taking a hit Monday and Tuesday.  As I wrote last Friday:

 

Currency is generally "slow money" not "fast money" but I love the technicals on the dollar here.


I am going to go, for the second time in the past few months, long the dollar - this time via both UUP ETF and UUP Calls. I am putting 3% into the ETF, and 4% into the calls - we will use March 23's (UUPCW) - in the real world I'd most likely be using March 24's (UUPCY) as they will provide much more upside as a % gain, but the volume in the 23's is much higher so it's easier for me to move in and out of, in the simulator I use to track my moves (which does not work well in lower volume instruments). The 23's are trading in the low .50s while the 24s are around 14 cents.

I now have a 36%ish gain in a week on the calls, so I am going to trade around a core position (I plan on remaining a dollar bull until the chart tells me not to be) by taking 1/3rd off the table.  I will buy that 1/3rd back on any material pullback as we saw Monday/Tuesday of this week.  There is no technical reason to sell here - the chart looks splendid. 

But here is the risk to bears.  The IMF (or Germany, but I believe it will be the IMF) is going to swoop in to save Greece one of these weekends.  At which points, the "markets" which love moral hazard, will react much like when the US said you can no longer short US banks, and in fact we are not going to let any other major US bank fail - the taxpayer be damned.   I expect when this event happens in Europe for speculators to rejoice and we could gap up 3%+ on any Monday.  There is no way to game that as an investor - the type of things we have to adjust for have nothing to do with investing - it is just how it will go down one of these weekends in my opinion.  Could be this weekend or 6 months from now.

So under that thinking, the "risk trade" (moral hazard trade) would go back on - the dollar crushed, Euro surge - blah blah blah.  Hence I am going to take profits along the way and I am never unhappy with 35%ish gains in a week.  These are on the March 23 Calls.  For comparison purposes the March 24 Calls I would have used in the "real world" could of been bought at 14 cents last Friday, and now trade at 20 x 23 (very wide spread) which would of been a 42% gain on the bid and higher if you could sell them at 21 or 22 cents.  Indeed that would of been the better play over the March 23rds as I predicted, and each 0.1% the dollar rallies from here the 24s will do even better than the 23s...

But we're working with what we can do in this environment; the March 23s are much more liquid. I am selling 450 of 1400 contracts (about 30% technically) bought last week at 53 cents a contract for 72 cents.

I am curious what "magical Mondays" (market up 17 of the past 19 Mondays) will bring to us next week. For now I have added back some of the puts I sold into the close yesterday, let's see if we can get one more nice selloff to end the week. (still targeting S&P 1045)  If not, we'll liquidate and go into the weekend swimming in cash.

Long UUP ETF and calls in fund; no personal position

Bookkeeping: Limit Buy Order for Wyndam Worldwide (WYN) Finally Hits

Talk about relative strength; all through these past few weeks of selling Wyndham Worldwide (WYN) refused to either revisit its 50 day moving average nor fill a gap a sliver below that moving average.  It took a selloff of yesterday's magnitude to simply push it back down to the moving average - but as I stated in another post - my limit order did not hit since I was waiting for the gap to fill.  The gap was finally "filled" today, and my limit purchase order around $20.60 executed.  This replaces the stock we sold on January 21st at $22.60.  That was like pulling teeth.

Since the market is so iffy I am going to keep a tight leash, and place a stop loss at $19.75 which is below the intraday low of mid December 2009.  In a sideways or upward trending market I'd give it more leeway.  If you are a believer in relative strength like I am, this performance should bode well when the market regains its feet.  This is the last stock in our portfolio to resist falling below the 50 day moving average.

And with that we are back to 1 material long position ;)

Long Wyndham Worldwide in fund; no personal position

Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale? Also, Bill Gross Chimes In

A very nice chart via FT Alphaville - that cross references fiscal deficit as % of GDP versus total debt divided by GDP for the European nations.  As we often have discussed the P(ortugal)I(reland)I(taly)G(reece),S(pain) - it is nice to see how they stack up, in graphical format.

[click to enlarge]

What I decided to also show above was where the USA would stand if it were a European country - I used a range because if I just used a "dot" someone could come in and criticize the precise placement.  The reality is we are now running a fiscal deficit of 11-13% of GDP, with no end in sight in the near term... and EXCLUDING liabilities of Medicare, Social Security, and now Fannie and Freddie which the taxpayer has unlimited losses on for the next 3 years - we are at about a 80% debt to GDP ratio.  And with the recent increase in the debt ceiling which will take us through the end of 2010, we are on pace to reach 100% by this time next year.  (GDP is a bit over $14 Trillion in the US)

So what does the chart tell us?  The US is a disaster and aside from Greece, we are worse than all the "PIIGS" we are hand wringing about.  I think this is very important for Americans to understand...

Now you may ask - why do people flee into the US dollar and its bonds when we are a complete mess?  The same reason the UK is not under fire by the market (yet).  The ability to kick the can, throw its people under a bus, lower their standard of living, and effectively steal their money.  It's called a printing press - a central bank who is happy to print new fiat money to pay for debts.  

This is what has the member states of the European Union in trouble - they do not have their own "in country" printing press anymore.  So they face actual hard decisions.  America, Britain, and Japan (which would be WAY to the far right of the European states at 200% debt to GDP) are happy to go the backdoor route - rather than deal with the issues at hand they are happy to print money. [Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]  Which is why the value of your dollar, over the long run, has been crushed.  And effectively is the basis of inflation.

As investors, here is the other problem.  This is not a 1 week issue, or 1 month, or 1 year.  These are issues that will be hanging over us constantly.  We've been discussing them (specific to the US) since 2007 inception.  We've been discussing the European issues since mid 2009.  Many months it did not matter one iota - but as we like to say "it matters only when it matters".  Now it matters.  Maybe after the IMF comes in to rescue Greece the market will surge 5% overnight and we'll cheer! Problem solved!  Then what?  Then another decade of more sovereign debt issues - one country after another.  A massive headwind.

Bill Gross weighed in on this issue yesterday on CNBC ... he pretty much sums it up; please see 7 minute video below.  It's so very important to understand this, and how the awful decisions of our leadership - in cahoots with our Federal Reserve is helping to erode the American living standard in a very stealth manner.   We are Greece - but with money trees.

(email readers will need to come to site to view)

Trend No Longer Bulls Friend

When listening to most investors talk about the market, the thing that strikes me is how hard it is for people to change their directional bias.  We are raised to buy stocks, and therefore have a bias upward.  Each dip is greeted with "when should I buy?".  We are told over the long run stocks go up.  In the long run we are all dead however.

I would argue that right now, one must adjust their thinking 180 degrees.  Most of the time, including the past 11 months, the only question is what dip do I buy?  Now the question is what surge do I sell into?   For 11 months if you dared to be short it had to be quick, and precise or you got your teeth kicked in.  There were down days, and even a few corrections within the uptrend.  But now you have to think if you want to be long it has to be quick and precise.  There will be rallies along the way - but just as you had to take advantage of the few down days to cover shorts, now you have to take advantage of the up days to sell long exposure.  At least until the market changes its overall trend.

We are going to see oversold bounces along the way, and due to our natural bias everyone will constantly ask "was that the bottom?" "should I be buying here?"  But these bounces, which could be profitable for the extremely nimble are now akin to the drops we saw in the market the previous 11 months.  Only the agile need apply.

This is not a chart you'd want to show to small children or family pets.  The S&P 500 can rally a good 30 points from here and still be screaming "get the heck out of Dodge". 

Just remember Monday and Tuesday of this week if that bias inflicts you - yes there was a very short term opportunity to buy stocks but all it was, was oversold stocks bouncing into resistance. If you were not quick, you were dead - and aside from daytraders that sort of trading does not apply to the majority of the populace...


Nothing goes in a straight line and we now have a very obvious target of the 200 day moving average (S&P 1046) as an eventual goal.  That doesn't mean the S&P can not pop upward first.  But make no mistake, the easy bullish trend finally appears to be broken, at least using the (daily) technicals.  Those who rely on weekly measures still might be holding out hope; but I expect some of that hope was extinguished yesterday...

My strategy will be to pick at some stocks along the way here on the long side (but not yet) - many names in my watch list are now down 30%+ in just a few weeks.  I'll give them a whirl closer to the 200 day moving average on the S&P 500 and try to make a few sheckles, but with tight stop losses.  If this is a garden variety 10% correction we are about 3/4 of the way through.  If it's 20% type of correction we are 1/3rd of the way through.  But even a 10% correction will mean breaking through the very important 200 day moving average on the S&P 500...

Confusing Jobs Report

As always, the monthly jobs "report" is in fact 2 reports; on first glance it's a confusing batch of data.

The unemployment rate in the past has been falling in the more commonly cited survey due to massive numbers of people dropping out of the workforce in the less followed survey.  Remember, in America if you are not "actively seeking work" for 4 weeks you disappear.  This has been helping to surpress the unemployment RATE for the past 18+ months as people seem to be giving up... i.e. as job losses continue, the unemployment rate has been falling the past few months.  Will have to look to see if this is the reason for the drop of 0.3% in the unemployment rate (9.7% from 10.0%) or if there are other factors.

The "825,000" newly unemployed estimate via annual benchmark revision figure [Feb 3, 2010: US to "Find" Extra 825,000 Unemployed this Friday after Birth/Death Model Revised] seems to be a much higher 1.2 million on first glance but will have to investigate that one further as well... the quote was 7.2M unemployed was revised up to 8.4M.  If true, that is horrible - that's about 18ish full NFL stadiums of new jobless the government just found under a rock.

The workweek picked up a tad from 33.2 hours to 33.3 hours

Temporary worked added another 50Kish - what we won't know until a few years from now is if the new American workforce is turning into "disposable" - i.e. much more skewed to temporary workers, OR if this is the traditional early cycle surge you see in job growth, where temp workers are hired before full time.

Wages went up, I believe 0.3% which is in the higher range of the past 2+ years.

Other than those 3 items there is nothing in the report we can trust as we see by the massive annual benchmark revisions (over 800K last year and what looks to be 1.2? million this year)  How can we spend any time analyzing figures that are anywhere from 70 to 100K a month wrong?

So we won't.

From the market perespective which at this time is all that matters - a large drop in premarket seems like it will turn to a modest +/- to flattish open.  Works for me; I just prefer not to see huge moves up or down in premarket.  My gut tells me market players are as confused as I am by the data that seems wacky.

Pledge Update February 2010

February 2010 pledge update below; as mentioned in previous posts we are on track for a summer 2010 launch.  .

The last month was down from the previous few, but still a solid $430,000 of pledges; this takes the total amount to 101% of the initial goal of $7M.  The "fund is funded" - at least virtually, will need to wait until the real thing this summer for the real iteration. (need to change the website name now?)  The total number of investors is now about 220.  I will continue with my normal conservative projection of a $300-350K monthly run rate of pledges go forward for the next 4-5 months, which will take us to our goal for funds necessary by next summer.  From here, hopefully a buffer of pledges can be built in case some proportion of people will not follow through.

If you are a person potentially interested and new(er) to the website, here are the pertinent posts to become familiar with the specifics.

1. The overall goal and why I'm aiming for $7 approx million [Jan 7, 2008: Reader "Pledges" Toward Mutual Fund Launch]
2. Frequently Asked Questions [May 26, 2008: Frequently Asked Questions] Very important to read
3. Why I need your state [May 23, 2008: Investment Pledges by State] Keep in mind a state's eligibility can be turned "on" overnight once we're up and running
4. Most recent updates (this November)  [Nov 4, 2009: General Updates]
5. Our story in Barron's [A New Kind of Fund Manager]

Let me copy the same caveats for pledges as always:

1. Assume a pledge amount that is firm based on a fund opening in summer 2010.
   
2. Assume at any point in 2010 the market may be down 30% from here
3. Make your pledge based on liquid assets that are not currently in some high octane mutual fund that loses 40% when the market falls 30%, nor gains 50% when the market gains 40%. That money is not something that can be counted on in a volatile market.
4. Please have whatever monies are pledged to the fund, in money market or equivalent by April 2010 so it is not at risk in the market.
   

Format for fund pledge: first name, last initial, pledged amount, and state you live in. To be clear, you are not sending me money that I'm going to hold until launch when you 'pledge' - you are simply making a verbal commitment: "when you are up and running, I have $X amount ready to invest". You can attach a comment to this post or as most people do, send me an email (my email address is found on the upper right of the blog) with the above information. I'd prefer an email if possible.

Name	Amount	State/Country
Brian	5,000	???
Heather	10,000	???
Bob B	50,000	AR
Ed S	5,000	AZ
Alan N	15,000	AZ
Armour B	50,000	AZ
Dharminder M	100,000	AZ
Pat L	10,000	AZ
Ron G	10,000	AZ
Werner C	10,000	AZ
Art H	50,000	CA
Benjamin W	5,000	CA
Dave K	100,000	CA
Greg B	25,000	CA
Kurt C	10,000	CA
Ron W	10,000	CA
Tom L	25,000	CA
Ted C	5,000	CA
Brian L	50,000	CA
Rich P	30,000	CA
Shannon V	5,000	CA
Sunil K	10,000	CA
Anatoly S	10,000	CA
Wesley W	20,000	CA
Burt B	10,000	CA
John L	5,000	CA
Alven Y	5,000	CA
Piyush M	5,000	CA
Paresh P	5,000	CA
Dinesh K	5,000	CA
Naresh P	5,000	CA
Jay S*	5,000	CA
Shang C	50,000	CA
Henry C	3,000	CA
Charles Y	100,000	CA
George	5,000	CA
Ross T	5,000	CA
James H	5,000	CA
Dana K	25,000	CA
Walt C	30,000	CA
Charles L	20,000	CA
Greg W	20,000	CA
Raj	10,000	CA
Judy M	20,000	CA
Dave H	20,000	CA
Akash A	6,000	CA
Adam S	5,000	CA
F.A.	50,000	CA
Brian C	25,000	CA
Mark R	10,000	CA
Steven L	25,000	CA
Diane H	100,000	CA
Giancarlo S	2,500	CA
Scott W	50,000	CA
Henry C	8,500	CA
Jason N	30,000	CA
Marvin L	10,000	CA
Mike C	10,000	CA
Adam B	50,000	CO
Alecia C	75,000	CO
Seth	3,000	CO
Dieter	5,000	CO
Mike H	15,000	CT
Michelle T (Bob)	20,000	CT
Mark B*	25,000	D.C.
Elaine C	20,000	D.C.
Tom E	5,000	DE
Vic C	10,000	FL
Wes T	10,000	FL
Ron S*	100,000	FL (sailing)
Olivier N	10,000	FL
Bob H	3,500	FL
Chris I	20,000	FL
Dave C	25,000	FL
Kevin D	5,000	FL
Patrick L	100,000	FL
Sandy S	150,000	GA
Andrew L	5,000	GA
Mark L	2,500	IA
Jeff M	20,000	IA
Ian J	5,000	ID
Jay S	10,000	IL
Mike P	500,000	IL
Vivek G	75,000	IL
Ben	10,000	IN
Matt L	5,000	IN
Jake R	50,000	KS
Bill H	5,000	MA
Bruce W	2,500	MA
John B	20,000	MA
Don D	50,000	MA
MB	20,000	MD
Raeann	10,000	MD
Mark	60,000	MI
Ralph B	50,000	MI
May L	30,000	MI
Rich S	5,000	MI
Y.O.	15,000	MI
Scott L	7,500	MN
Tom S	20,000	MN
James W	5,000	MN
Marshall H	5,000	MO
Wolfgang S	7,500	MO
Nathan J	10,000	MO
George L	10,000	NC
Brian C	5,000	NC
Colleen P	5,000	NC
Paul F	5,000	NC
Adam B	10,000	NJ
David B	50,000	NJ
Frank G	500,000	NJ
Henric B	25,000	NJ
Ryan T	7,500	NJ
B Shah	2,500	NJ
Rama R	4,000	NJ
Richard H	100,000	NJ
Vijay K	75,000	NJ
Howard A	5,000	NJ
Jordan L	2,500	NJ
Andy/Diana H	12,000	NJ
Jack L	10,000	NJ
Josh R	5,000	NJ
Lisa W	50,000	NJ
Tony D	15,000	NJ
Andrew	100,000	NV
Arun K	25,000	NV
Tom S	25,000	NV
Gary M	10,000	NY
Rob T	20,000	NY
Igor O*	500,000	NY
Chris Y	10,000	NY
Tim C	20,000	NY
Atul R	5,000	NY
Rob #2	6,000	NY
Marc E	7,500	NY
Bob M	100,000	NY
Felipe V	5,000	NY
Lester B	100,000	NY
Matt Z	5,000	NY
Tariq	5,000	NY
Adam M	10,000	OH
Justin K	30,000	OH
Robert S	2,500	OH
Dan W	5,000	OH
Dilip K	5,000	OK
Blake V	100,000	OK
Ryan	3,000	OK
Michael G	2,500	OR
Joe V	50,000	OR
Bill G	10,000	PA
Jatinder M	10,000	PA
V.K.K.	20,000	PA
Bruce R	100,000	PA
Joe C	10,000	PA
Nathan S	3,000	PA
Robert T	75,000	RI
Heidi H	25,000	RI
Doris S*	100,000	SC
Steve	100,000	SD
Dave S	20,000	TN
Matt S	10,000	TN
Pankaj S	5,000	TN
Lukas V	5,000	TN
Joe P	10,000	TX
Doug M	40,000	TX
H.S.	2,500	TX
Ian*	50,000	TX
"Phong"	10,000	TX
Jason D	5,000	TX
AZ	10,000	TX
Glenn J	5,000	TX
Samba V	20,000	TX
Coby S	50,000	TX
Alex T	10,000	TX
Shane V	25,000	TX
Greg R	20,000	TX
Brian J	5,000	TX
C Dilber	5,000	TX
Scott V	30,000	UT
Chair	20,000	VA
Lisa	5,000	VA
Zhong L	10,000	VA
Madhu I	50,000	VA
Brian D	50,000	VA
Jake D	37,500	VA
Matt G	10,000	VA
Paul Z	10,000	VA
Robert W	5,000	VA
Kevin L*	125,000	VT
Ron	20,000	VT
Linda A	15,000	WA
Scott R	100,000	WA
Mike H	2,500	WA
Eric S	50,000	WA
Cathy K	20,000	WA
"Himalayas"	20,000	WA
Tyler	10,000	WA
Danny N	10,000	WA
Jason E	5,000	WI
Gary S	10,000	WI
Jason	10,000	WV
Paul	100,000	Z-Austria
Stan T	10,000	Z-Canada
Steve L	10,000	Z-Canada
Brian M	5,000	Z-Canada
Stockspeter	7,500	Z-Canada
Anurag V	20,000	Z-Germany
Ken	250,000	Z-Hong Kong
Kumar K	25,000	Z-India
Barry R	10,000	Z-Ireland
Antoine F	10,000	Z-Luxembourg
Nick E	30,000	Z-New Zealand
Adrian C	75,000	Z-Romania/EU
S.E.H.	12,500	Z-Singapore
Junyuan	2,500	Z-Singapore
Tomaz K	20,000	Z-Slovenia
Ward P	2,500	Z-Sweden
Anil	25,000	Z-Switzerland
KP	5,000	Z-UK
Howard L	10,000	Z-UK
David X	5,000	Z-UK
Nestor T	25,000	Z-Uruguay
Harsh N	5,000	Z-UAE
Total	$7,067,000
Goal	$7,000,000
% of Goal	101.0%
To Go	($67,000)