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Friday, October 10, 2008

Relax, Still Building Longs


"This market is worse than a divorce. I've lost half my networth, and still have my wife." -Over squawk this morning

Still have those longs I was talking about earlier this week. They're not underwater by any significant amount.


These last few days got a bit sloppy, but I think what I said yesterday still holds true: Too Far Too Fast, Its That Simple.

I've put up a few of the names I've scaled into long this week.

Thursday, October 9, 2008

I Found Rock Bottom



I guess I'm off by a few days and few points...

Too Far Too Fast, Its That Simple

“Valuations look attractive. It's time for a rebound, the stock market has just fallen too rapidly. IBM's numbers show that it's not all doom and gloom out there.” -Espen Furnes, Storebrand Asset Management

Yesterday I said, That’s the Bottom, For Now. On Tuesday I said, Oversold Bounce Time, Going Long. I am now long across the board.

Too far too fast. Its that simple. Equities will have an elastic bounce before heading back into the abyss.

Global Stocks, U.S. Futures Advance; IBM, Dexia, ICBC Rally: “Stocks rebounded in Europe and Asia and U.S. index futures rose after International Business Machines Corp. reaffirmed its profit forecast and investors speculated the worst five-day rout since 1987 was overdone.

IBM, the world's biggest computer-services company, jumped 6.3 percent in Germany after earnings topped analysts' estimates. Cap Gemini SA rallied 7.4 percent in Paris. BHP Billiton Ltd. led mining shares higher, jumping 10 percent as metals gained in London. Dexia SA surged 24 percent after Belgium, France and Luxembourg agreed to provide guarantees on borrowings of the world's largest lender to local governments.

The MSCI World Index added 0.6 percent to 1,009.35 at 11:34 a.m. in London. The index lost 15 percent in the previous five days, the biggest drop since October 1987. The sell-off left shares in the index at their cheapest relative to earnings in more than a decade.”

Wednesday, October 8, 2008

Reliable Investments

video

That's the Bottom, For Now

On Tuesday I said it was Oversold Bounce Time, Going Long: “So, I started going net long yesterday. That’s right LONG.

You can find my conversation here on the Slope of Hope and here on the Evil Speculator in the comments section.

I’ve gone long the NASDAQ and the S&P500 through QLD and SSO. I’ve picked up some of names the hedgies have puked hard: AGU, MON, MOS, POT and AAPL, BIDU, GOOG, RIMM.

These are all oversold bounce trades. If the wheels start to come off, I’ll hedge by slamming the Nasdaq and S&P 500 futures short.”

I picked up most of the positions near the Monday lows. I hedged those gains, although not perfectly, using futures on the gap up off the open Tuesday. Clearly the wheels starting coming off pretty quickly and I was glad for the hedges. I took them off a little early and flipped long on the S&P500 (ES DEC08).

I think this was the rinse. Everybody that had to get out, got out. The hedgies got their redemption notices and were forced sellers. Retail accounts got margin calls and were forced sellers. The weak hands have folded.

I’ve noticed Joe Sixpack has finally caught on after being smacked with headline after headline warning of a ‘financial crisis’ and ‘another great depression’. I’m pretty sure most of them have now sold their mutual funds now. Hell, even Jim Cramer capitulated hitting the “SELLSELLSELL” button. Jim Cramer Says Sell, Almost Guarantees a Bottom.

GLOBAL Rate Cut

There we go… GLOBALLY coordinated rate cuts.

I think that was the last bullet.

I don’t think the central banks of the world have any ammo left.

Fed, ECB, Central Banks Lower Rates in Coordinated Reduction: “The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented, emergency coordinated bid to ease the economic effects of the financial crisis.

The Fed cut its benchmark rate by a half point to 1.5 percent, the central bank in a statement. The ECB and central banks of the U.K., Canada, Sweden and Switzerland are also reducing rates, the Fed said in a statement.

“The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,” according to a joint statement by the central banks. “Some easing of global monetary conditions is therefore warranted.””

Tuesday, October 7, 2008

Jim Cramer Says Sell, Almost Guarantees a Bottom

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.” -Jim Cramer, 10/06/08

First of all, great timing. He tells people to bail out AFTER a massive collapse of epic proportions while PUMPING everything ALL THE WAY DOWN.

Second of all, he is a charmer that seems to have amassed a sizable audience of those less mentally able. With panic and fear in the air, his comments are enough to stampede these sheeple over the final cliff and hit the "SELLSELLSELL" button.

This kind of stuff is what tradable bottoms are made of.

When Jim Cramer says sell, that alone almost guarantees a bottom. (I don't like Jim Cramer. I think he's insane.)

Jim Cramer Sucks At Life: "Jim Cramer sucks at life.The best way to make 'mad money' is to stop watching Mad Money.

Don Harold DESTROYS Jim Cramer in this video. Watch it."

Other Stupid Jim Cramer Vidoes:
Cramer Off His Meds, Calls For Housing Shortage
Cramer: "We Have Armageddon!"Cramer With Amensia
Cramer Making Fun of Bears

Oversold Bounce Time, Going Long

So, I started going net long yesterday. That’s right LONG.

You can find my conversation here on the Slope of Hope and here on the Evil Speculator in the comments section.

I’ve gone long the NASDAQ and the S&P500 through QLD and SSO. I’ve picked up some of names the hedgies have puked hard: AGU, MON, MOS, POT and AAPL, BIDU, GOOG, RIMM.

These are all oversold bounce trades. If the wheels start to come off, I’ll hedge by slamming the Nasdaq and S&P 500 futures short.

That is one hell of a spike in volatility. Mind you, the Volatility Index (VIX) may be compromised due to the short selling ban. Still, this parabolic move to 60 on the index leads me to believe that we are near some kind of intermediate bottom.

Toss in a few other indicators and I'd say its bounce time in equities.

For example, the NYSE Bullish Percent Index (BPNYA) has plunged to the lowest low in 10 years. I think the very last Bulltard is about to commit hari kari. I like it. I like it a lot.

Also, less than 6% of stocks are above their 50 day simple moving averages on the NYSE as measured by the S&P500 Percent of Stocks Above the 50 Day Moving Average Index (SPXA50R).That is amazing.

On the weekly chart, the SPX fell out of the down channel... and went into free fall. Prices are now so oversold as to be ridiculous.

Maybe the SPX will find support around the 1060 level from 2004. Yesterdays late day rally shows up as a nice ‘buying tail’ on the daily candle. Volume was a little anemic for capitulation, but I’ll take it for now.

If the last Bear market is any indication the SPX is about half way there now. Since I believe this one has to be worse, I will only go long for trading purposes. There will be plenty of time later to build those long run investments.

Monday, October 6, 2008

DEFLATION is Here

I swear, this Bloomberg guy must be reading my blog…

Deflation Threat Returns as Asset Markets Decline (Update1): “As Federal Reserve Chairman Ben S. Bernanke and his global colleagues fight the worst financial crisis since the 1930s, one danger is looming larger by the day: deflation.

With asset markets tumbling, commodity prices plunging the most in 50 years and banks keeping a tighter grip on credit, the ingredients for a sustained period of falling prices are coalescing. While inflation is still a concern for many policy makers only months after oil and food prices peaked, the risk is their patchwork of rescue and stimulus packages will fail, and prices will start to fall throughout the broader economy.

“The ghost of deflation could be dragged out of the closet again in coming months,” says Joerg Kraemer, chief economist at Commerzbank AG in London.

A global recession is already looking more likely, with the credit freeze stirring memories of Japan's decade-long struggle with deflation in the 1990s. So European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King may be forced to follow Bernanke, whose Fed has chopped its benchmark rate by 3.25 percentage points since August 2007 to 2 percent -- its most aggressive round of easing in two decades.

[ My Related Posts:
Japan v2.0: GLOBAL Liquidity Trap
Japan v2.0 ]

The deflation scenario might go like this: Banks worldwide, stung by $588 billion in writedowns related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices.

A `Vicious' Cycle

“A vicious deflationary cycle” could then ensue, says Tony Tan, deputy chairman of Government of Singapore Investment Corp., a sovereign-wealth fund that oversees more than $100 billion.

Prices are already falling in parts of the world economy. Home values dropped more than 10 percent in the U.K. and in the U.S. in the past year. Oil, copper and corn drove commodities toward their biggest weekly decline since at least 1956 on Oct. 3, with the Reuters/Jefferies CRB Index of 19 raw materials tumbling 10.4 percent. The Baltic Dry Index, a measure of commodity shipping costs, has dropped 75 percent since May.

“We are certainly more worried about deflation than inflation,” says David Owen, chief European economist at Dresdner Kleinwort Group Ltd. in London. Central bankers need to “get rates down and keep them there for quite some time,” he says.

Aggressive Easing

Trichet said Oct. 2 that European policy makers have considered reversing their decision in July to raise their benchmark rate by a quarter point to 4.25 percent. Forty-six of the 61 economists surveyed by Bloomberg News expect the Bank of England to cut its key rate by at least a quarter point Oct. 9 from 5 percent.

The Fed has already responded to one deflationary scare this decade. With inflation approaching 1 percent in 2003, then- Chairman Alan Greenspan slashed its rate to a 45-year low of 1 percent and kept it there for a year, which its critics say helped fuel the property and credit boom that is now unraveling.

This time, the crisis is an increasingly dysfunctional banking system that may not be able to continue making loans that grease economic activity. Such a pullback, combined with slowing growth and falling asset and commodity prices, makes deflation more of a threat, Owen says.

Restricting Credit

Spooked by the collapse of Lehman Brothers Holdings Inc. and other institutions, banks are restricting access to credit. The London interbank offered rate, or Libor, they charge each other for three-month loans in dollars rose to 4.33 percent on Oct, 3, the highest since January.

Not all economists share Owen's gloomy outlook. Some say Bernanke and other central bankers have learned the lessons of Japan and the Great Depression so well they will do everything necessary to head off trouble.

Former Fed Governor Lyle Gramley says that while deflation is a risk "if we were to go into a very, very prolonged recession and nobody did anything about it,'' he is "not worried,'' because he's confident the Fed will act "very, very, very aggressively.''

Bernanke, who has studied the Great Depression since he was a graduate student, has said that one key reason the U.S. stock- market crash of 1929 had such severe consequences was that lenders were forced to close and the banking system was deprived of liquidity.

`Lost Decade'

[ My Related Posts:
The Lost Decade
Stimulus Package: Does it Even Work ]

He has also studied Japan's “lost decade” of deflation, which was partly caused by a banking crisis, and has argued that its policy makers waited too long to respond to a stock-and- property price crash at the start of the 1990s. In a 2002 speech that earned him the nickname “Helicopter Ben,” he said governments and central banks must respond immediately to such a deflationary shock by dropping money into the banking system.

The caution of Japan's leaders -- who waited until 1999 before using taxpayers' money to bail out the banks -- cost their economy dearly. Lending shrank, unemployment more than doubled to 5.5 percent, and Japan experienced three recessions between 1990 and 2002. From 1997 to 2007, consumer prices dropped 2.2 percent. In the U.S., prices climbed 29 percent in the same period.

When credit markets started seizing up in August 2007, Bernanke set up more than $1.4 trillion in emergency borrowing for financial institutions. Today, the Fed said it's doubling emergency loans to commercial banks to as much as $900 billion.

The ECB, the Bank of Japan and other central banks have set up similar lifelines. On Oct. 3, President George W. Bush signed into law Treasury Secretary Henry Paulson's $700 billion bank- rescue plan.

`Last Resort'

Commerzbank's Kraemer says the Fed might also consider further easing collateral requirements or purchases of government bonds “as a last resort.”

Kraemer says he thinks a slowdown in inflation is more likely than deflation. The surge in commodity prices earlier this year drove inflation in the U.S., Europe and Asia to the strongest pace in at least a decade. Strategists have pointed to Paulson's rescue plan as an additional risk.

Japanese core consumer prices, which exclude fresh food, climbed 2.4 percent in August from August 2007. The U.S. core rate, which strips out food and energy, rose 2.5 percent from a year earlier.

Still, deflationary forces are mounting in the U.S. and other parts of the world economy. In Britain, the Nationwide Building Society says house prices have dropped 12.4 percent in the past year as banks restrict the supply of mortgages, putting the economy on course for its first recession since the early 1990s.

Deflationary Consequences

“The risk we must be careful not to underestimate is the deflationary consequences of the credit crisis,'' Bank of England Deputy Governor John Gieve said last month.

In the U.S., prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management's index dropping 23.5 points to 53.5 points.

The breakeven rate on U.S. 10-year Treasuries, a measure of price expectations, dropped to 1.4 percent from 2.6 percent in July. Japan is the only country whose bond market implies a lower inflation rate than the U.S. The rate represents the pace of inflation investors expect over the life of the securities.

All this is likely to make the Fed resume rate cuts, says Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.

“If we're going over a cliff, we're not going to go over a cliff with a 2 percent federal funds rate,'' he says. “What's the point of holding back?””

Wall Street's Shadow Market: "It's the Side Bets."

"It's the side bets."

Steve Kroft looks at some of the arcane Wall Street financial instruments that have magnified the economic crisis.


Watch CBS Videos Online

Recession, Commodities and Deflation


“The day of steadily rising commodity prices is over. A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.” -Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi

Commodities R.I.P. as Leverage Vanishes, Growth Slows (Update1): “Commodities markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials.

The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show. UBS AG, the Zurich-based bank that bought Enron Corp.'s energy unit in 2002, plans to exit most commodity trading. About 15 percent of investors in Boone Pickens's BP Capital LLC hedge fund may want their money back.

The same credit-market seizure that led to last month's bankruptcy of New York-based Lehman Brothers Holdings Inc. and the forced sale of Merrill Lynch & Co. is squeezing speculators who drove commodities to record highs. Slower expansion in the U.S., China and India is also undermining prices of crude oil, which fell 36 percent, and corn, down 43 percent.”

The obvious has come to pass.

“A global slowdown may cause crude oil to plunge another 47 percent to $50 a barrel next year, New York-based Merrill Lynch said in an Oct. 2 report. Goldman Sachs Group Inc. cut its forecast for copper next year by 12 percent to $8,265 a metric ton and aluminum by 18 percent to $2,920 a ton.”

In Smashing the ‘Perpetually’ Growing Oil Myth I said, “If you believe that demand from India and China will send the price of oil and commodities to “infinity and beyond” you’ll end up losing your shirt and your sanity.”

I argued that demand destruction will move the oil price significantly below $100 per barrel:

“Even at $100 a barrel, prices have the effect of crowding out the marginal consumer. In this case, the cost of oil rises just high enough such that it becomes unaffordable to the marginal consumer. The marginal consumer happens to be almost everybody NOT in the first world. Basically prices will settle just high enough to wipe out any consumer surplus for these consumers and thereby severely limit demand to the highest socio-economic echelons in those countries. That level is most assuredly below $100 a barrel.”

Oil was done when the heavily subsidized emerging economies had to start moving closer to paying real market rates. I say ‘closer’, because they are still ridiculously subsidized, and still have a long way to go. I presented the consequences in Oil Drops on Subsidy Cuts in China, India, Malaysia, Taiwan.While everybody is worried about the U.S., don’t forget: The Other Bigger Shoe: The Rest of The World

In my recent post Inflation, Deflation, Money Velocity and Gold I once again emphasized that I was firmly in the deflation camp. (This always gets the tinfoil hat wearing goldbugs to go flailing about in the comment section, which is always amusing. It is amazing how personally they take a downtick in gold.)

The Baltic Dry Index continues to confirm the evaporation of demand. Since my last post, Baltic Dry, Commodities and Bubbles the index has gone into free fall.

Last week in Commodities: Hedgies Puke, Almost Done I argued that the hedgies are being forced to liquidate and that this particular wave of forced selling will almost have run its course.

Don’t mistake another bounce for a resumption of the Bull market. These bounces will be large and tradeable, but that is all they are BOUNCES.

We haven’t seen nothing yet. There is a LOT of debt that still needs to be destroyed. The chart in Total US Debt illustrate just how much debt still needs to be wiped out:

The losses will be so large, that the current recession will be one of the largest, deepest and longest in history as I argue in Credit Losses and the Shape of the Recession:

“There is no way ANYTHING has bottomed. In fact, the slide down is about to ACCELERATE. This won’t be one a quick and shallow recession. This not a ‘V’ shaped recession. This almost certainly is a ‘U’ shaped or ‘L’ shaped recession with a very real possibility of a ‘\’ shaped damn near PERPETUAL recession.”