Dow 10,000 Hats On

3% gain secured.  I believe this to be the 5th such session since the selloff began in April.  This repeats the pattern of vicious rallies within the selloff.  Rinse. Wash. Repeat.

Risk on. Risk off.  Hats on.  Hats off.

Bookkeeping: Closing Cummins (CMI)

Cummins (CMI) is a company with one of the weaker charts as people have fled industrials en masse lately.  It is sort of funny to see how the lemmings have run away from the groups they were running into in February - March and April 2010, especially consumer discretionary and industrials... these were bullet proof sectors as the recovery 'playbook' was being used by the institutional masses.  [Mar 7, 2010: CBSMarketwatch - Riding the Rally, How to Money in the Bull Market's 2nd Year]   The ETF for retail was at an all time high!! (Not 52 week, but ALL TIME)   [Apr 14, 2010: SPDR S&P Retail ETF (XRT) Approaching All Time High]   Now you can barely give away a retail stock or most of the global industrials.  Who knows what the mood will be in 3 days or 3 weeks, all depends on if HAL9000 thinks the future reads "01101001010" or "110101000110".

There could be more upside here in Cummins, especially if the S&P 500 moves to near 1100 as the entire market is one big correlation with the index but I have plenty of other names to capture index related moves, and I want to stick with the highest relative strengths in a very tough market to play from the long side.  So with that I am going use today's surge to sell the last 0.4% exposure in Cummins for a 5% loss.  Once it broke support it's just been sitting around at the bottom of the portfolio and not a name I wanted to pile back into as the chart is broken.  If, indeed, the bipolar market believes in 1 month that everything is well again in the world I expect the stock to be back in favor, and on 2011 estimates its cheap.  I still love the exposure to Chindia in this name and it will be back at some time into the portfolio. [Feb 11, 2009: WSJ - Cummins Engine Shifts Gears Amid Stall]  [Sep 23, 2007: Stock to Watch: Cummings Hitting on all Cylinders] 

No position

x

Still Like the Long Side for At Least 15 S&P Handles

At about a 2.5% rally we still have a chance for the 3% day, which we have seen at least 4 of during the multi month selloff.  Yesterday was a horrible headfake for the bulls, and I am sure many wanted to give up and sell off exposure when the action was so poor.  I was tempted myself.

Below in picture form I am showing why I still see at least 15 S&P points (upper 1060s, if not 1070) before I will be selling much of anything.  As I wrote earlier in the week in a perfect world we see a rally to the 50/200 day moving average area closer to 1100 where one could put on very low risk entries to the short side.  If the S&P 500 is able to burst right through that area then one would need to reassess but the intermediate term chart does not call for that.  So this is my general game plan and with the velocity of the market to both the up and downside it seems to be playing out over days rather than weeks.

[click to enlarge]

This simply continues the same subranges we have been talking about for months now.  The big range of 1040 to 1100, with 2 subranges: 1040 to 1070, and 1070 to 1100.  They have changed little since April.  I am more interested in the 'easy trade' in 1040s to 1070.  It gets more tricky in the second subrange.

In the longer run, even if this is the Doug Kass bottom of the year we should go back to test 1010 as to create a 'double bottom', so hopefully we can be nimble enough to dump longs, get back 'shorty', and then re-assess the big picture the next time we revisit S&P 1010.  If it holds, I'd then agree that has a good chance for bottom of the year.  If it breaks, we should be talking mid S&P 900s... at least.

NYT: India Expands Role as Drug Producer

A nice overview in the New York Times on the growing drug industry in India; our recent purchase in Dr Reddy's Laboratories (RDY) gets a mention.    While a positive for the world and especially India, we read these stories week after week after month after month (years on end), and one needs to remember the effects for the U.S employment picture as more and more of the world's production moves away.   First goes production ("it's only low end work no American wants to do!") then high(er) end production, then goes much of the support operations (accounting for example), then the R&D (which is the stage we are currently in), and in the end you will have a hollowed out company with only the execs still in the U.S. (due to favorable tax structure and quality of life)  The same execs of course requesting tax cuts to "keep their business in the U.S." and armies of lobbyists to do their bidding ;)  Ah, progress!

It is difficult to have a service economy when you are moving to an end point in 20-30 years where you will make little outside of weapons, and movies.   In the nearer term it is just of one of thousands of stories that explains the structural unemployment situation we have and why the country is now dependent on a bloated healthcare system, bloated government and house churning as its main "industries". Of course the former 2 are bleeding the country from the inside with debt since its mostly just transfer payment from the dying private sector to the pseudo and pure public sectors.  But I digress! Go India.

• Below an ancient hilltop temple to Kali, the Hindu goddess associated with destruction and change, Sun Pharmaceutical Industries churns out generic versions of cancer drugs and epilepsy medications bound for the United States.  Business is so brisk that Sun, with revenue of 41 billion rupees ($880 million) last year, predicts sales will grow 20 percent this year and is expanding its Halol factory. 
• India's drug industry — on track to grow about 13 percent this year, to just over $24 billion — was once notorious for making cheap knockoffs of Western medicines and selling them in developing countries. But India, seasoned in the basics of medicine making, is now starting to take on a more mainstream role in the global drug industry, as a result of recent strengthening of patent law here and cost pressures on name-brand drug makers in the West. 
• And while the Indian industry has had quality-control problems, it nonetheless benefits from growing wariness about the reliability of ingredients from that other historically low-cost drug provider — China. The United States is India’s top export customer for drugs. 
• India is becoming a “base for manufacturing for the global market,” said Ajay G. Piramal, the chairman of Piramal Healthcare, a drug maker based in Mumbai. Eventually, in Mr. Piramal’s perhaps overly optimistic forecast, only the very first and very last steps of the business — molecular drug discovery and marketing — will be run by the West’s global drug giants.  (good point, we'll still have marketing in the U.S. ... sales still needs to be done face to face.  Hence there will always be a market for attractive young(er) ladies to sit in offices of doctors to upsell their drugs)  It is not only Indian executives, though, who are bullish about the pharmaceuticals industry here. Analysts, research groups and consultants have been making similar predictions in recent months.
• Daiichi Sankyo of Japan helped kick off the foreign drug push into India in 2008 by buying a stake in Ranbaxy Laboratories, this country’s biggest drug maker. Last year, among other deals, GlaxoSmithKline formed a partnership with Dr. Reddy’s Laboratories; Pfizer tied up with Claris Lifesciences; Sanofi-Aventis took control of Shantha Biotechnics, and Bristol-Myers Squibb opened a research center in India with Biocon. 
• “There is a lot of good talent at a much lower price in India,” said Jim Worrell, the chief executive of Pharma Services Network, a Charlotte, N.C.-based consulting firm that is organizing tours of Indian factories for Western pharmaceutical executives who are considering outsourcing some of their business. “What I see happening now is manufacturing and even packaging and even formulation are moving to India,” Mr. Worrell said. 
• The shift to pharmaceuticals is part of a subtle, broader shift in the Indian economy. Moving beyond less sophisticated, outsourced services like telephone call centers, India has been advancing up the business value chain, particularly in law and medical diagnostics. Now it is showing a flair for manufacturing, particularly in goods demanding high-skill production and superlow prices. 
• While China is the undisputed low-cost maker of a multitude of consumer goods, India may have a rare edge in the drug industry. India’s long tradition of generics has fostered a robust educational system here for pharmaceutical scientists, as well as longer experience dealing with Western regulators. 
• The next opportunities for India could come at the more sophisticated end of the drug making spectrum, including research and development for the world’s drug giants and even development of proprietary medicines.  (again, when they sent away the the manufacturing they said the high value jobs in R&D will never leave the U.S. - but frankly the global multinationals are doing what is best for their business... if they can get similar talent for far lower prices, there is no need to pay for U.S. wage structure)  “We can crack the problem of patented drug discovery in India at a much lower cost” than in the West.
• At Piramal’s main laboratory in north Mumbai, about 300 scientists are researching new drugs aimed at inflammation, metabolic disorders and cancer. Mainly because of lower wages, if it costs big pharmaceutical companies “$1 billion to $1.5 billion to discover a new drug, we can do it in a tenth of the cost,” Mr. Piramal predicts.
• G. V. Prasad, chief executive of Dr. Reddy’s Laboratories, said that Indian drug makers had the “ability to handle product development on a massive scale at a low cost.” Dr. Reddy’s original diabetes drug has completed Phase 3 clinical trials — the last step before seeking Food and Drug Administration approval — the farthest of any of its peers. 
• The F.D.A., in response to India’s growing influence, has opened two offices in this country — in Delhi in early 2009 and another in Mumbai in June of last year. When fully staffed, the offices will have between them a dozen full-time employees, including inspectors and technical specialists, which is comparable to the F.D.A.’s presence in China.
• Until recently, pharmaceuticals has been “an incredibly arrogant industry that has never outsourced,” said Sujay Shetty, an associate director with PricewaterhouseCoopers in Mumbai. But over the next several years, he predicts, “everything in the value chain will move to different parts of the world that are cheaper,” with India a major beneficiary.  

I cannot stress, that without an explosion of innovation that creates tens of millions of U.S. jobs, we have serious STRUCTURAL unemployment that will not go away.  It *is* different this time. 

[Video] Doug Kass - Stocks Have Hit Bottom for the Year

Hedge fund maven Doug Kass reports stocks have hit a bottom for the year so set your phasers to "buy buy buy". 





New York City is in the midst of a serious heat wave, but on Wall Street the stock market is on a major cold streak. Stocks are down 9 of the past 11 sessions. Even Tuesday's higher close was still well off the highs of the day.

Doug Kass of Seabreeze Partners, famous for calling the market bottom in March 2009, isn't worried. In fact, he's bullish. "I think we've seen the lows of the year," he tells Tech Ticker guest host Jon Najarian of OptionMonster.com. "The market's are traveling on a path of fear and share prices have significantly disconnected from fundamentals," he says.

Kass predicts stocks will rise 10%-12% by year's end on the back of strong earnings and a better-than-expected economic recovery. He says positive trends in the ISM manufacturing and non-manufacturing index and improved labor market conditions point to "moderate domestic economic expansion, not a double dip."

Trading at around 11 times earnings, stocks are fairly inexpensive, says Kass. He notes stocks generally trade at around 15 times future earnings, and even higher in periods of tame inflation and low interest rates, as we're currently experiencing.

It may not be a V-shaped rally like that of 2009, but Kass says we've just started building a base, which could lead to a fundamentally stronger and longer-lasting rally in the future.

Bookkeeping: Adding Some Long Index Exposure

Yesterday's downside reversal was quite a bad sign for the market, at least by historical standards.  Thankfully, the stock market no longer has memory from day to day and each day is its own situation (I say that tongue in cheek).  This morning we had a hallmark of the rally from March 2009 to April 2010, that is the negative S&P futures at 7 AM that turned into flat or gains by 9 AM.... a -5ish handle turned to flattish.  On no news.  That was a signal to me that maybe "we're back baby".... at least for a short time.

We are now over yesterday's highs so for very short term purposes I am making long side index bets with TNA ETF and SPY calls.  My objective is a print near S&P 1070.   I am going to be relatively aggressive here since we have a lot of cash to play with - about a 7% allocation into TNA and 4% into SPY 104 July calls.  Downside "mental" stop is of course S&P 1040ish.

As an aside small caps had a horror of a day yesterday, the Russell 2000 was actually down 1.5%ish as the other indexes showed green prints.  So hopefully they have some 'catching up' to do, which should benefit TNA.

I always find it rare for the market to repeat itself 2 days in a row, which is why I have some confidance we will not see a downside reversal 2 days in a row.  Remember, these counter trend moves are swift and extreme.  We have had multiple +3% days during this downtrend since late April (I believe five 90%+ days) - it means nothing in the long run but it can make you some money.

I am not bothering much with individual names here because I am still short side oriented (even though I have almost zero short exposure) in the intermediate term.  I want to be in... and out... on this trade.  Much of my new long exposure was bought in S&P 1010 to 1020 range and as I said then I'd either sell that up at 1040 or assessing how the market was acting at that time, at the next level up which I think is 1070.  The stretch target for this move is 1100ish but I will leave that for the more nimble than I.  I plan to be selling there, and begin a course for the short side up there.

If the market can jump over 1100 then I will consider this a chink in the armor of the shorts and re-assess.  But that is longer term planning.  For now, I drink Kool Aid...you know what time it is.

x

Turkey - Where East Meets West, and Prospects are Improving

Last week, we took a drive by of 2 Asian countries whose stock markets were outperforming, India & Indonesia.  We also looked at some regional economies in Latin America that were holding up very well - namely, Peru & Chile. (Brazil goes without saying)  Today, we'll look at a country which was once considered the crossroads of the world, Turkey. (although in those times it was obviously not named Turkey).

Some quick and dirty facts - Turkey is the world's 37th largest country by land mass, about 1/3rd the size of Mexico; but the 18th largest by population at over 72 million people.   That's 7M more than France, 10M more than the UK and more than double Canada.  It's also a young demographic as the stories below will highlight.  GDP is similar to population, ranking it around 17 in the world at about $615B, about half that of India.  Much like Indonesia, political turmoil has been an issue for outside investors .... but specific to Turkey the large question go forward is continued secular government or a shift away.

It is not an easy place for U.S. investors to get to.  An ETF introduced in 2008, iShares MSCI Turkey (TUR) has about half a billion in assets and trades about 250,000 shares a day with a 0.65% expense ratio.  

Product information for this instrument can be found here; unfortunately it is extremely financial heavy at the top with 4 of the top 5 holdings being financials; these 4 names are over 1/3rd of the entire ETF's holdings.  The other of the top 5 holding is Turkcell (TKC) - a regional based telecom - which is the only Turkey based stock I can find listed in the U.S.

The country caught my eye in an April BusinessWeek piece which I never had time to bring to the site; a reader also mentioned it in comments last week.  The New York Times also had a piece yesterday and I am going to highlight a 3rd piece by a Seeking Alpha contributor below.   Some snippets from each:

1) BusinessWeek:  Turkey's Moment

• This kind of political turmoil long made Turkey radioactive as far as the financial markets were concerned. So what are investors, including foreigners, doing now? They're buying Turkish stocks and bonds in record amounts. The Istanbul Stock Exchange index hit an all-time high on Apr. 9, capping a 52-week run that has seen stocks double in value.
• Stoking investors' enthusiasm is the conviction that Turkey's economic fundamentals have improved so much in the past eight years that political strife won't stop the forward momentum. "This is an economy with a deep manufacturing base and a large middle class," says Murat Köprülü, the Turkish-born chairman of Multilateral Funding International in New York, which manages about $120 million of emerging-market assets. "[Turkey] is going to pick itself up again after a political crisis and show growth."
• Credit for this transformation goes to Erdogan and his deputy prime minister, Ali Babacan, who is a graduate of Northwestern's Kellogg School of Management. Erdogan's Justice & Development Party was elected with a strong majority in 2002. Speculative trading by Turkish banks in government bonds and the Turkish lira had triggered a financial crisis.
• Erdogan and Babacan used their majority and capitalized on the sense of emergency to ram through numerous reforms. They reined in government spending, sold $30 billion worth of state-owned companies, strengthened financial regulatory agencies, and tightened capital reserve requirements for banks.  "It was bitter medicine," recalls Ziya Akkurt, chief executive of Akbank, one of Turkey's largest banks.
• The medicine worked. Turkey had a prosperous decade as rates came down and banks started to lend after a period in which there was precious little lending. Foreign capital from Ford (F), Vodafone, General Electric (GE), and other multinationals poured in to build manufacturing in autos, appliances, and information technology. Trade with Europe and the Mideast boomed; exports have tripled since 2002, to $102 billion.
• The real test of Turkey's financial strength came last year, as the global crisis tipped the world into recession. The country's gross domestic product contracted almost 5%, a painful adjustment. But the lira did not crash as it once did in dire circumstances. Instead the currency has held close to 1.50 per dollar since October 2008, even as the central bank has slashed interest rates by more than half, to a record low of 6.5%.
• The cost of insuring against a default on Turkish debt has plunged in the past 12 months, to 160 basis points from more than 340 a year ago. Six EU member countries, including Turkey's neighbors Greece and Bulgaria, are more likely to default.
• Turkish businesses are now preparing for a strong year. GDP increased at an annualized rate of 6% in the fourth quarter of 2009, lagging behind only China among the Group of 20 nations.
• More than a quarter of Turkey's 72.6 million people are under 15 years of age, while just 6% are over 65. Turkey is younger than China, where 19% are under 15.
• For all its advances under Erdogan, the Turkish economy still has soft spots. Prices increased 9.6% in March compared with a 5.1% rise last year, prompting some economists to question whether Turkey has solved its long-term tendency to inflation, which was 39% in 2002.  This inflationary bent is all the more worrisome given that unemployment remains high at 14%. If the recovery really takes off and more workers are hired and wages rise, Turkey could find itself struggling with bad inflation again.
• The other soft spot, despite the market's tendency to shrug it off, is politics. Erdogan's battles with his adversaries aren't over. Nor is the big question of Turkish politics settled: Whether Turkey should preserve its strictly secular traditions or follow the pious Erdogan and embrace Islam more closely. 

2) NYT: Turning East, Turkey Asserts Economic Power

• Today, Turkey is a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return.
• Turkey’s economic renaissance — last week it reported a stunning 11.4 percent expansion for the first quarter, second only to China....
• In June, Turkish exports grew by 13% compared with the previous year, with much of the demand coming from countries on Turkey’s border or close to it, like Iraq, Iran and Russia. With their immature manufacturing bases, they are eager buyers of Turkish cookies, automobiles and flat-screen televisions.
• It is an astonishing transformation for an economy that just 10 years ago had a budget deficit of 16% of gross domestic product and inflation of 72%.  So complete has this evolution been that Turkey is now closer to fulfilling the criteria for adopting the euro — if it ever does get into the European Union — than most of the troubled economies already in the euro zone. It is well under the 60% ceiling on government debt (49% of G.D.P.) and could well get its annual budget deficit below the 3% benchmark next year. That leaves the reduction of inflation, now running at 8 percent, as the only remaining major policy goal.

3) Seeking Alpha:  Turkey's Economic Prospects - As Good as It Gets?

• In the short term, the Euro area crisis, Turkey’s soaring current account deficit, and domestic politics pose the biggest risks. In the longer term, Turkey must address a low savings rate and weak education system if it hopes to catch up to the fastest-growing emerging markets.
• The other major long term constraint on growth is education. To improve labor force participation—currently about 50 % overall and less than 25% for women, compared with 71 and 63 %, respectively, in the EU—reform of and greater investment in the education system is needed. Turkey has largely reached quantitative targets in schooling, especially among boys; girls are lagging behind but catching up. On the other hand, the average quality of education is miserably low. The Program for International Student Assessment places Turkey second-to-last among OECD countries.

No position

Bookkeeping: Cutting Back Powershares DB Gold Double Long (DGP) by Half

I am fascinated with what is happening in the gold v euro v dollar market right now.  Whatever happened last Thursday has set off some sort of chain reaction to reverse trends that have been holding for quarters on end.  Gold and the US dollar reversed down, and the Euro reversed up.  I am sure we'll never find out the true story but as we saw last week when one drunk British trader could move oil $2 by himself, if some big fund had a trade gone awry a lot of things can change quickly.  I am going to take down my gold position by half until things stop moving so fast, gold has been hammered the past 3 sessions and is now down below its 50 day moving average. (which is about $1212) 

(note I am using the gold ETF chart simply because it updates in real time, whereas the gold commodity has a day delay)

Please note a potential "double top" in this chart (the commodity chart has the exact same pattern) - if true, that's bearish.

I had a 2.5% allocation in Powershares DB Gold Double Long (DGP) which is going down to about 1.2% at a 5% loss.  I had some pretty good unrealized gains here just 2 weeks ago.

Long Powershares DB Gold Double Long in fund; no personal position

Market Shrugs Off Weaker ISM Services Report; Sprints Right to S&P 1040

The market has become so technically oriented you really wonder some days if "news" matters.  This morning we had a jump to about S&P 1038... then ISM Services (which is the only major report of the week and most likely the 2nd most important report in the US right now) come in quite weak versus expectation.  The market sold off for about 90 seconds, down to 1035ish, then a ricochet right to S&P 1040.  Why? Because everyone knows we have to get to 1040.... the charts say so.

As of this typing we have sliced through 1040 as if it did not exist and popped to 1042.  So from here we can once again use 1040 as a pivot point.  As I wrote in the weekly summary, if this holds you have significant upside potential, perhaps 30 points to S&P 1070ish before any real issues arise.  Hence one could place long oriented plays with an understanding they are to be retracted if 1040 is broken.  One advantage for bulls today is as part of the changing nature of markets, I've noticed markets rarely go through intraday reversals anymore.  It still happens but nowhere near the rate 4-6-10 years ago, especially if the first hour is strong in one direction or the other.   Therefore, probability says a strong open almost guarantees a strong finish.  Or at worst sideways action for the other 6 hours as HAL9000 churns the market to "create liquidity" (and collect rebates).

Either way, one of these days where it just seems technically oriented computers are going to reach levels they were programmed to hit, news or no news. 

• Service industries in the U.S. expanded in June at a slower pace than forecast, indicating the economy was beginning to cool entering the second half.   The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90% of the economy, fell to four-month low of 53.8 from 55.4 in May. The June figure was less than the median forecast of 55 in a Bloomberg News survey. Readings above 50 signal expansion.
• Orders slowed and employment declined.  The group’s index of new orders for non-manufacturing industries declined to 54.4 in June, the lowest this year, from 57.1 a month earlier. The employment gauge fell to 49.7 last month from 50.4.

We talked about that big range, S&P 1040 to 1100, with 2 sub ranges : 1040 to 1070 and 1070 to 1100 for a few months.  That is now back in play as long as 1040 can be the floor.

x

[Video] It's Roubini Time

Bashing Nouriel Roubini is a quite fashionable thing to do nowadays.  I assume much of it with the envy that comes with this guy's amazing ability to score attractive women at his lavish parties despite looking like the typical economist. ;) 

Or it could be his market calls (S&P to 600!) which is not the place an economist should be sticking his nose.  I'm still a fan and think he is one of the few voices on infotainment financial TeeVee railing against

1. Those who live with head under sand
2. Those attached to the Matrix
3. Those who drink Kool Aid, or have a running IV attached to arm
4. Those who flutter in a land of mystical unicorns and mermaids (and butterflies)

If you are not familiar with the man, I have a bevy of Roubini posts - you can click on the tag at the bottom of the post with his name - since he was one of the few guys I could find in the mainstream in 2007 and 2008 whose views actually closely matched mine.   For one of the best views of the 'go forward' period I'd suggest readers review [Feb 12, 2010: (Video) Nouriel Roubini Crushes Kool Aid Drinkers]

----------------------------------------

For his latest views, here are some videos from this morning

[Video unavailable, I'll edit once it is fixed on CNBC website] - see commentary at end of this piece for written version


Later in the show, battling Rich Bernstein -  7 minutes


 
 
European governments face the quandary of being unable to afford to bail out banks that are still considered too big to fail, while the global economy is heading for a slowdown in the second half of the year, economist Nouriel Roubini of RGE Monitor told CNBC Tuesday.  Governments are running out of ways to counter a "massive slowdown" or the risk of a double-dip recession, Roubini said.

"A year ago we had all these policy bullets," he said. "We could push down rates to zero, we had (quantitative easing), we could do a budget deficit of 10 percent of GDP (or) backstop the financial system."

"Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there," he said.  (Mark's note: that's why you create a fake stress test that EVERYONE passes, U.S style - Geithner told them to do it, and they are doing it.  Presto magic... everyone is fine! Now buy some stock,)

Roubini said he was unimpressed with the June US employment report, pointing out that the jobless rate fell because of a large number of discouraged workers leaving the labor force, and also noted recently weak data on manufacturing, retail sales and housing.

"Everything signals a slowdown of the US, a slowdown of Europe, a slowdown of Japan and a slowdown of China," he said.

The US economy will grow at a rate of 1.5 percent, while the euro zone and Japan will see growth close to 0 and China will grow at a rate of 7 percent, he said.

Dr. Dismal?

While not predicting a double-dip recession, with economic growth at a rate of 1.5 percent "everything becomes worse," Roubini said.

The unemployment rate goes higher, the budget deficit is larger, home prices don't stabilize, but fall further and trade tensions with China will be bigger, he said.

"You don't need to have a double dip recession to have a situation that is dismal," he said.

The economy was strong in the first half because of the stimulus and inventory build-up, but "once these things become a drag on the economy, balance-sheet constraints imply deleveraging by houses, deleveraging by the financial system and deleveraging by governments," Roubini said.

"We're going to have a global slowdown," he said.

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 48

Year 3, Week 48 Major Position Changes

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

Cash: 78.3% (v 76.2% last week)
18 long bias: 21.1% (v 21.8% last week)
1 short bias: 0.6% (v 2.0% last week)

19 positions (vs 19 last week)


Weekly thoughts
Another very rough week for the markets, but one we were able to take advantage of to keep building up capital with some short term, short side forays. The Dow is now down 7 sessions in a row - a bit of a deceiving statistic since one single day of 0.2% gain can break other such streaks - but considering this is the worst performance since October 2008, you can see the dark action the past 2 weeks.  I continue to believe we are oversold and are due for a bounce.  What was necessary - and is begrudingly happening from the Kool Aid punditry - is a recognition that 'this time is different' and a credit inspired retraction is not your garden style recession.  Not to mention the structural issues facing the country in an increasingly competitive global marketplace.  I am now watching the economists scratch their head as they are shocked the "V shaped" recovery is not creating the 250-350K+ jobs it is "supposed to" aka what the "models tell us".  Of course, thinking for yourself and not just relying on historical models is apparently left to wacky bloggers such as this one. As this recognition happens, the prices in the market adjust and this is what has been happening in my opinion. 

Let's look at the 'action' from a technical standpoint.  Since bursting over the 50 day moving average 2 weeks ago Monday and creating a good old school 'head fake' the S&P 500 has essentially dropped 110 points straight down.  As the student body ran to the left and 'risk off' was the trade, it has been an unrelenting selloff; almost a full 20% correction in 2 weeks.  With old lows of S&P 1040 taken out it would seem unlikely this is over, but clearly an oversold bounce is past due.

Please note what is happening with those red and green lines above... we are about to experience what is called a 'death cross' in the technicians world, that is when a shorter duration moving average passes below a longer duration moving average - in this case the 2 most important MAs are involved, the 50 and 200 day.  Further, the slope of the 50 day is obviously down and the 200 day is now turning from flat to down - both bearish.  That said it's all about time frames - this is a longer term issue.  In the very near term, after "the bounce" ... whenever it comes, the action at S&P 1040 will be interesting.  If this bounce has no life, we will be rejected at or near 1040; if the bounce has some legs to it, a move to S&P 1070s or indeed even up to the 50/200 day moving averages is possible.  Depending on that 'action' near 1040 I'll make some forays either on the short side (if 1040 rejects) or long side (if 1040 is sliced).  In a perfect world, I'd love to see a move to the 50/200 day area to create some very low risk entries on the short side.   So let us see how the student body runs in the coming days and weeks.

The currency markets perked my ears last week as well.  I had been using the US dollar aka the best of the horses in the glue factory as a 'short' hedge against the market for many months.  It's worked out well, we had some options on UUP (a long dollar ETF) in the spring and then I just went with the ETF since then.  But I dropped that exposure last week since a "potential" sea change could be in the offing.  The dollar began to break support and indeed the Euro might be technically ready to break through some key resistance.

Now this could simply be the after shocks of a hedge fund blowing up some currency bets (forced to cover Euro short, dollar long) or it could be some crowded trades unwinding.  Or indeed world markets realizing there is only one horse in the world willing to spend like drunken sailor in face of yawning deficits.

For the portfolio, I actually went with the British pound as a replacement for the dollar long - mostly because I wanted to show moral support to our readers across the pond who now must have low self esteem after their awful showing in the World Cup the pound was well ahead of the Euro in any potential breakout to the upside. 

Also, the Euro still has some serious structural issues with 100 moving parts whereas the pound is one government, one country and easier to figure out.  That said, the Euro short is the consensus view (this morning's headline Bloomberg piece says so!) - so we'll see if the market punishes those on the crowded side of the trade.

• The most accurate foreign-exchange forecaster says the euro will continue to weaken and may approach parity with the dollar as the European Central Bank buys more government bonds to support the region’s economy.  “The ECB is moving towards its version of quantitative easing."
• The euro weakened 15% against the dollar in the first half on speculation record budget deficits from Ireland to Portugal and Greece will force governments to cut spending and reduce economic growth.

Again folks, none of these major currencies are in great shape.  It's all about relative badness.  If the Australian dollar or Canadian dollar did not get punished everytime the 'risk trade was off' they would be 2 options.  Another is the Norweigen krone (the only major govt running a surplus in Europe that I know of) but there is no ETF.  And as I said last week, the German mark would be a favorite of mine if there still was such a thing.  So to use another horse metaphor we're picking amongst manure - it's which manure is the flavor of the week/month.  At this point the market is heartily applauding Cameron's move to slash government spending.

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After a busy economic week, heightened by continued bad news on almost all fronts the calendar is much lighter this week.  In fact other than the Thursday weekly jobless claims which now probably take on more importance as the punditry can no longer say for the 17th month in a row "don't worry about employment, it's a lagging indicator" the only key reports are Tuesday's ISM Services (big one) and Thursday's Consumer Credit.  With services dominating the U.S. economy, the employment portion of ISM Services will also hold sway.

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For the fund, I took some short side trades on an intraday and overnight basis as I was first looking for a move down to S&P 1040 and then a break through.  I came into the week incorrectly looking for an oversold bounce... Monday was very quiet (even Monday magic is gone) and when Tuesday morning opened poorly I gave up on that long index trade.  Most of the damage to the market happened in the latter portions Tuesday but the break below S&P 1040 is actually when we made most of our money on the short side.  On the long side, I continued to change the shape of the portfolio - culling some weaker names and replacing with higher relative strength.  Will it matter?  With correlations at all time highs it seems doubtful but I'm still trying.  I also was able to buy some names that we missed in May as they finally relented.   Going into Friday's job report I was looking for a "ignore the news" reaction since the selloff the prior 2 weeks had discounted much of it, if not all.

I still am looking for that oversold bounce and as explained above I will analyze the action around S&P 1040 if and when to see what to do next.  I believe it is too aggressive to short here since an oversold bounce must come sooner or later, but I don't see enough to go 40-50% long, since the bounce could be very short lived.  In the intermediate term I would like to reduce the long exposure I put on last week either at 1040ish or 1070ish or up near the 50/200 days, and then focus on the short side again until this market can show enough strength to get back over the 200 day moving average.  So that's the game plan over the next month or two.

On the long side:

• Tuesday, first thing I sold my TNA (3x small cap long) ETF that I had purchased the previous Friday hoping for some Monday bounce.  S&P 1070 had been my pivot point and premarket futures looked to open below that level, so it was to be sold no questions asked - turned out to be one of the better moves of the week despite taking some losses.
• I closed the last of my Atheros Communications (ATHR) as the stock is trading as if orders are being cancelled by the hour.  Still like the name long term but right now it's simply not performing.
• Valassis Communications (VCI) held up very well in the May selloff, but the June selloff finally sniped it.  It finally broke support - I never had a chance to really build the name up to a good sized trading position so I never took any profits I had in the name.  Instead it was closed at a small loss.
• I restarted a position in Akamai Technologies (AKAM).
• Thursday as the market finally really broke down below 1040, I became constructive on the long side.  I began stakes in two "non hedge fund centric" names - Dr Reddy's Laboratories (RDY) and Polypore (PPO).  I am hoping these names can somewhat avoid the risk on, risk off trade that dominates everything.
• A bit later in the morning I began "high beta" hedge fund names VMWare (VMW) and Acme Packet (APKT) - these are high beta names that will trade with the market.  Risk on. Risk off types.
• I closed Polaris Industries (PII) for similar reasons to Valassis - held up great in May relative to market but finally broke down in the June selloff.
• Thursday afternoon I put on some index longs (TNA & SPY 103 calls) once the S&P 500 regained 1120 and seemed to hold it.   I bought some Netflix (NFLX) and Las Vegas Sands (LVS) - 1% allocations roughly, at the same time.
• The "meh" reaction to the labor report Friday had me selling the index longs bought Thursday afternoon for quite small gains in the mid S&P 1020s.  The market actually went on to fall below 1020 before doing some kind of snake dance in the last 30 minutes of the session Friday. 
• I closed Sandisk (SNDK) late Friday, since I had similar 'high beta' names that I was able to initiate or add to during the week, with better relative strength profiles.

On the short side:

• As the market was very weak Tuesday I bought some SPY puts, in the July 104 and 103 areas - I was late to the game that day and since the selling was quite heavy was a buyer way down at S&P 1046... I sold some around 3:59 Tuesday as S&P 1040 broke and then an 'urgent buyer' showed up in the closing minutes to help the S&P recapture 1040.  I had expected more of a cascading selloff.   I sold the rest the next morning as S&P 1040 seemed to hold, for small gains.
• The S&P 500 broke down below 1040 again Wednesday and I thought it too cute for the 'urgent buyer' to show up in the closing moments 2 days in a row to 'save the market', so I pressed a new round of shorts into the close.  Thursday a whole bunch of global manufacturing index reports came in weaker than expected and we had our moment....but the washout opening we were seeking was elusive.  Finally the weaker mfg & housng data in the U.S. circa 10 AM seemed to cause the sellers to show up.  In the 11 AM hour as the S&P drooped to 1110 and then bounced back closer to 1120 I let go of ALL short exposure, I had two 2.5% exposures into SPY puts along with a 4% exposure in "short TNA".  This was our big kill of the week.  
• I closed the Powershares US dollar (UUP) long position (which I consider a short), and replaced it with Currency Shares British Pound Sterling (FXB).  I don't consider those a 'short' position as I did the dollar since there is no 1:1 inverse relation with the S&P 500, as the dollar seemed to take on.

Most Popular Posts of the Quarter

In case you missed them, here are the posts most viewed by readers (excluding the tabs along the top of the webpage) for the second quarter.  Have a good holiday.

1. Who is Sylvain Raynes and How Did He Make it on CNBC?
2. Oh My... We're Crashing
3. John Paulson's Q1 2010 Moves
4. Goldman Sachs VP Email Jan 2007: "The whole building is about to collapse anytime now."
5. Kyle Bass of Hayman Capital: Japan Defaults on Debt or Devalues in 3-4 Years, United States in 10-12
6. A Picture Worth a Thousand Words
7. One in Ten U.S. Mortgages is Now Delinquent - Which is Great for Consumer Spending
8. [Video] Dylan Ratigan Explains Thursday's "Flash Crash"
9. Nouriel Roubini Calls Jim Cramer "a Buffoon"
10. Weekly Jobless Claims as a Stock Market Indicator

Extra: Hall of Fame Entertainment

• Holy Jeff Macke

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Random information - top 10 cities who view FMMF

1. NYC
2. San Francisco
3. L.A.
4. London
5. Chicago
6. Houston
7. Washington D.C.
8. Toronto
9. Seattle
10. Dallas

Updated Position Sheet

Cash: 78.3% (v 76.2% last week)
Long: 21.1% (v 21.8%)
Short: 0.6% (v 2.0%)

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 (1 photo file)

SHORT

OPTIONS

Bookkeeping: Closing Sandisk (SNDK)

Doing some mid summer cleaning, I'm taking my marbles and going home - although the bully named Mother Market took quite a few marbles from me (stole some lunch money as well) - and closing out Sandisk (SNDK) after a very short holding period.  I more or less top ticked this name by buying the "breakout" June 16th - classic.  As this market struggles for another day, SNDK  looks like it will close below the 50 day moving average for the 4th day in a row.  I thought there might be some life to it after it came down to "fill the gap" last Friday but this week has just been too difficult in the general market for this type of holding to keep afloat.  SNDK is a commodity high beta name (risk on, risk off) that was a purchase based on chart alone (a series of higher highs - now kaput)  and until the market shows life, this won't be the type of name to hold its own very well.

From the original purchase around $50, I sold half at a 10% loss in the $45s once the stock broke down below the 20 day (to reduce risk), and the other half is going to go out the door today for a 17% loss.  Today's allocation was about 0.9%.

Since this purchase I have been able to buy some other names with the same 'high beta' characteristics but (thus far) more stable.  Of course in a wider selloff, they will take their medicine just the same.  After all, it's the 1:1 correlation market where almost every asset class is the same as the S&P 500.

No position


x

Attitudes Continue to Change in the Mutual Fund / Advisor World...Slowly

I like Harvey.  We need more Harvey's in the world.

4 minute video



[Jun 11, 2010: Marketwatch - More Investors Turning to Flexible Mutual Funds]

NYT: Economies in Latin America Race Ahead

A nice piece in the New York Times on the strength in some of the Latin American economies.  While we focus on Brazil here, we've also discussed Chile in the past; actually a fascinating article about how different the Chile financial leaders were than their American counterparts - saving for a rainy day is actually part of the vernacular. [May 28, 2009: WSJ - Prudent Chile Thrives Amid Downturn]

Peru is more of an issue since the ETF for the country is thinly traded (100K shares a day, with only $130M invested); to be frank until I was writing this story I did not even realize a Peru ETF had been approved..

Outside of that vehicle I can only find 2 stocks that are based on Peru, and one - Compania Mina Buenaventure (BVN) is essentially a precious metal name.  The other name is a financial that has been showing up on my relative strength list for a few months and I consider a missed opportunity - Credicorp (BAP).  That's about it for Peruvian stocks.  [Southern Peru Copper (PCU) ... now named Southern Copper (SCCO) is based in AZ]

What is interesting is both the Peruvian and Chilean markets seem to be holding up quite well considering the damage being done in most developing and developed markets the past 2 months.  Considering the perceived reliance on China in Latin America, this 'decoupling' sure raises an eyebrow as its different than in 2008 when every market was crushed together.

Via NYT:

• While the United States and Europe fret over huge deficits and threats to a fragile recovery, this region has a surprise in store. Latin America, beset in the past by debt defaults, currency devaluations and the need for bailouts from rich countries, is experiencing robust economic growth that is the envy of its northern counterparts.
• Strong demand in Asia for commodities like iron ore, tin and gold, combined with policies in several Latin American economies that help control deficits and keep inflation low, are encouraging investment and fueling much of the growth. The World Bank forecasts that the region’s economy will grow 4.5 percent this year.
• Recent growth spurts around Latin America have surpassed the expectations of many governments themselves. Brazil, the region’s rising power, is leading the regional recovery from the downturn of 2009, growing 9 percent in the first quarter from the same period last year.  After a sharp contraction last year, Mexico’s economy grew 4.3 percent in the first quarter and may reach 5 percent this year, the Mexican government has said, possibly outpacing the economy in the United States.
• Smaller countries are also growing fast. Here in Peru, where memories are still raw of an economy in tatters from hyperinflation and a brutal, two-decade war against Maoist rebels that left almost 70,000 people dead, gross domestic product surged 9.3 percent in April from the same month of last year.
• “We’re witnessing what are probably the best economic conditions in Peru in my lifetime,” said Mario Zamora, 70, who owns six pharmacies in Los Olivos, a bustling working-class district of northern Lima where thousands of poor migrants from Peru’s highlands have settled.
• Latin America’s growth largely reflects a deepening engagement with Asia, where China and other countries are also growing fast. China surpassed the United States last year as Brazil's top trading partner, and is the second largest trading partner in countries like Venezuela and Colombia, Washington’s top ally in the region.
• Michael Pettis, a specialist at Peking University in Beijing on China’s financial links with developing countries, said the region was especially exposed to Chinese policies that had driven up global demand for commodities, including what appears to be Chinese stockpiling of commodities.
• Even so, they applaud home-grown policies that are supporting growth.  Chile, for instance, saved revenues from copper exports when commodities prices climbed, allowing it to enact a stimulus plan last year and rebound from the February earthquake. Chile’s economy grew 8.2 percent in April from the previous month, its biggest increase since 1996.
• Latin America’s recovery is translating into new political sway, particularly for Brazil, which has paid its debt to the fund and is seeking to enhance its voting stake in it. As Brazil posts China-level growth, President Luiz Inacio Lula da Silva is nurturing soft-power ambitions, with ventures like a state television station that will broadcast to African nations.
• “Like other Latin American countries, Brazil needs to improve its infrastructure and train more engineers,” Mr. Rothkopf said, “but it embodies the rise of emerging powers, one of the great themes of this century.”
• Peru, whose economic growth is expected to rival or outstrip Brazil’s over the next several years, exemplifies the challenges remaining in a sizzling economy.  The country boasts nimble companies like Ajegroup, founded during the chaos of the 1980s. Now the company’s soft drinks compete with giants like Coca-Cola, not just in Peru but in other Latin American countries as well.  
• Foreign investment has flowed into Peru, largely in mining. But this investment reveals both weaknesses and strengths. Mining accounts for about 8 percent of economic activity, but about half of tax revenues, creating problems if commodities prices fall, said Pedro Pablo Kuczynski, a former finance minister here.
• Deep inequalities also persist, especially between the capital, Lima, and the Andean highlands and the forests of the Amazon basin, where factions of the Shining Path guerrilla group feed off the cocaine trade. As much as 70 percent of the labor force still works outside the tax system, depriving workers of benefits and the government of revenue.

Bookkeeping: Sold Index Longs for Now

I was hoping for a better session today (a more aggressive bounce closer to 1040) to sell these index longs I put on yesterday.   Perhaps the bounce will happen Tuesday... or not at all.  The action today is very sleepy (identical to last Friday in fact) and not very constructive as of 10:50 AM, it looks like one of those range bound sleepy summer Fridays.  Remember, Monday is a holiday so a lot of people are taking 4 day holidays so I'd expect it to be even more sleepy than usual.   Thankfully, silicon does not take vacations.

If the market just trades sideways for a few days below S&P 1040 that simply helps work off oversold conditions and sets up a new round of selling late next week or the week after.  But either way this long index play was more short term and thus far the bounce has been quite week.

I've sold the TNA ETF for about a 1.25% gain, and the SPY calls today for a small gain - however they are actually down today as the premium has been sucked out as volatility is down big time from yesterday.  Net net, a small gain between the two but lunch money.

If the S&P 500 breaks below 1120 I'd be interested in hedging short again.... conversely a move over the highs of the days (1033) might get me interested in an intraday play to the long side, otherwise I am going to be mostly sidelined.  All in all, a very good week on an absolute and relative basis.

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Overall, I have almost no short positioning on at this minute, and my main hedge is a huge wad of cash.  If I exclude gold and silver I entered yesterday with about 8% long exposure which I most likely doubled with yesterday's purchases.  I like the stocks I bought or added to but a general selloff will spare no one.  My goal is to get more long oriented down in the mid S&P 900s with sporadic purchases of individual long positions, while offsetting the losses that will come from that with short side hedges.  If we simply cannot bounce the short side hedges will be more index oriented (the usual SPY puts and "short TNA").  If the market can put in a nice 3-5% rally sometime next week, I'd like to add individual equities to the short side but almost all names I'd be interested in are nowhere near any resistance...  which is where I prefer to short things.  Hence if the market bounces I'd be taking a lot of losses on the short side so not interested in starting new individual shorts right here.  We're in a bit of no man's land for now.

Obviously the economic situation is poor, but I still think corporations (especially globally oriented multinationals) will have a good earnings season starting up in 2 weeks... the main issue again is going to be guidance.  Once people adjust to the fact the V shaped recovery is only a mirage and indeed malaise awaits us, a more intermediate term rally can occur.  Bigger picture, being aggressively long other than for a bounce does not work until we get back over the 200 day moving average(s).

No positions


x

Two Markets That Have Held Up Well in the Global Selloff: India and Indonesia

I follow global markets quite closely, and I've noticed 2 markets that have held in very well despite the global selloff.  Both are in Asia, and while many other markets there see days of -2% these will generally fall 0.3% or even be in the green many times.

India is well known... and by the way raised interest rates overnight for the 3rd time to try to reign in growth/inflation (talk about a bipolar world)

Less well knows is Indonesia which is my sleeper pick for the next half decade+. [Apr 1, 2010: Indonesian Market Continues to Shine in 2010; Market at All Time Highs as Country Opens Itself Further to Foreign Investment] [May 22, 2009: Indonesia: A Must Own Emerging Market]  [Jul 9, 2009: Indonesia's Star Continues to Rise on Back of Yudhoyono's Re-election]   I've had a limit order out there to buy the Indonesian ETF during the last week but the price simply won't come in.

If one believes the global selloff is over in the intermediate term (not a camp I am in) both have pulled back to attractive support levels.

Compare and contrast to China or Brazil....

With that said, unless China's economy is about to burst in U.S. like fashion circa 2008 (I've predicted a lot of bad loans coming from their "Alan Greenspan" like stimulus of early 09), [Feb 16 2009: Is China Pulling an Alan Greenspan?]  [May 27, 2009: How is China Spending Their Stimulus? ... and How Many Loans will go Bad?]  there has to be a valuation case here soon despite a necessary slowing the country is trying to engineer.  Unfortunately the technical set up is horrid and the year has been rough. [Mar 31, 2010:  China's Shangha Composite Falls 5.1% in Q1 2010, 5th Worst in the World]


No positions

Percent of Stocks Above 50 Day Moving Average Back to March 2009 Lows

We're definitely 'oversold'.  This measure is not only below the worst of May (which in and of itself was extreme) but within a hair of March 2009 lows.

Wax on.  Wax off.  Student body left. Student body right.  Risk on.  Risk off.

[click to enlarge]

June Unemployment Rate Falls to 9.5% ... For the Wrong Type of Reason

Initial view of employment data is a poor report.

Knee jerk reaction was upward as 83K private jobs were added, offset by some 225K census lost - hence a net -125K, which was a bit below consensus but not off much.  We need about 125K a month just to keep "flat" with population growth.

Unemployment rate fell to 9.5% (versus last month's 9.7%) which on the surface is improvement but once more it's all about the way America counts its unemployed... if you are not actively looking for 4 weeks you no longer are unemployed in the country.  We've stressed labor force participation is at all time lows... and it got worse.  652,000 people "left" the workforce.... dropped out, disappeared, poof, kazam, etc.  Hence the labor force participation shrunk even more...

The irony here is if the GOP does not pass extended benefits benefits, the unemployment rate might shrink even further as countless more drop out of the labor force ... which again, by American standards mean they are no longer unemployed.

The labor work week shrunk 0.1 back down to 34.1.... another negative.  The only positive the bulls had last month was this figure when they claimed an increase of 0.1 work week was equivalent to 300K new jobs.  Well, that just went away.

Hourly wages look like down 2 cents.

Birth death model added 147,000 jobs (you can't subtract this directly from any of the figures above)... i.e. the government is telling us small business formation & hiring is BOOMING across America yet again.

U-6 (a better reflection of national unemployment) dropped to 16.5% (from 16.6%) which is the only positive but I think its affected by the same drop off of 650K Americans.   I can only assume people are going into some form of underground economy to survive or joining programs (if eligible) like welfare or disability.... or simply desperate with nowhere to turn.

Temp workers increased only 20K which is the lowest I can remember for perhaps 6 months.

Summary: your local and national politicians will crow about the "improvement" in the economy due to the unemployment rate dropping to 9.5%.  Reality - hundreds of thousands of Americans are disappearing from the official labor force, and have been doing so this entire recession recovery.   No one knows where they are... and the % of Americans working versus the total population remains at levels we've not seen before.

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S&P futures jumped strongly in the opening moments based on the 9.5% print until details came out and then went back to flat and now a bit negative.  If market drops below S&P 1120 and stays there we'll exit the index long exposure and see how the day unfolds.  I am going to give some leeway since the market is grossly oversold and a ton of bad news has been discounted of late by the nearly 110 point straight S&P drop.