Tuesday, September 30, 2008

Will The Bounce Hold?

The market is getting a nice bounce in the first hour of trading, with the S&P 500 up as much as +3.0%. The bank index is leading the way, after yesterday's drubbing, rallying +11.22%. Homebuilders and biotechs are lagging.

The selloff yesterday afternoon was sparked by the House rejecting the financial relief plan. They saw the stock market's response yesterday, and today they should look at the Libor market, which is the rates banks charge each other for short-term loans.

Libor has surged as much as 430 basis points this morning, to a high level of 6.88%, indicating that banks are highly reluctant to lend to each other. This tightening of the credit market impacts the entire global community, and is one of the reasons why even the Prime Minister of Australia was pleading with Congress to get this bill passed. Congress is expected to work on a new plan, with a vote coming as soon as Thursday.

Fed funds futures are now suggesting an 80% chance of a 50 basis point cut when the FOMC meets on 10/29, compared to no chance as of last week. This would be another response to the tightening credit markets.

The CashShiller index showed home prices in 20 major metro areas fell -16.3% yr/yr in July. This index peaked in July 2006, and is now some -20% below those levels.

Asian markets were mostly lower overnight, but China and Hong Kong shook off their losses to close in positive territory. This is one sign that the selling may have exhausted itself for now.

The dollar is surging this morning, pushing gold lower. But oil is higher, trading near $99.25. The 10-year yield is also higher after yesterday's flight to safety, up 8 bps to 3.71%.

The volatility index (VIX) is down -13.27% right now to 40.52. This is a good sign, but it still has a ways to go to signal normal levels of investor anxiety. I would like to see it get back below 30, but this could take a little while.

There has been no attempt to sell this early rally in the first hour. Let's hope that is a positive sign for the rest of the session.

long SDS

Monday, September 29, 2008

Memo to Congress: Thanks for Nothing

I hope those Congressmen (and women) are happy that they voted down the TARP plan today and caused the market to lose $1 trillion in market value. Do you think when the economy goes into recession and their constituents lose their jobs that they will be happy that their representative voted "No" on a plan that might have stabilized things? (Here is the list of how your reps voted)

The Dow lost -777 points today, the largest on record. But that headline that you will see all over the media is very misleading since in percentage terms the Dow fell -6.98%. That's a hefty one-day haircut, but it pales in comparison with the Crash of 1987, when the Dow plummeted -22% in one-day.

The VIX, or the fear index, spiked some +35% to 48.4 today, which I believe is its highest reading on record. Someone emailed me some stats that the last 4 times the VIX closed above 40, the S&P was +20% higher looking a month out. Let's hope for a recurrance.

Despair is rampant on the Street, but that is how it always is at bear market bottoms. I remember in 2002 having a tough time putting together any list of reasons why the market would rise again. But I suspect we will look back on this period in the same way.

I don't know when the exact bottom will hit, but I am fairly confident that we will look back on these prices a few years from now and ask ourselves why we were being more aggressive taking advantage of the fire sale.

Just go back and look at the low prices hit in October 2002 and you can see how much money you could have made. But you had to buy when your stomach was in knots, and your neighbor called you an idiot for buying.

That said, I have not put any cash to work yet. I want to see some signs of stabilization. Bottom fishing can be dangerous, and I am happy I have not been tempted to jump in these last few weeks.

Happy New Year to all those who will be celebrating. I will be here sweating it out for you.

long SDS

Monday Morning Musings

The market has opened under heavy selling pressure, despite what appears to be an agreement over the $700 billion rescue plan. There is certainly disappointment that the government was unable to pass the deal over the weekend.

I think that some in Congress are being obtuse, and simply don't understand the risk/reward of this plan. They are too focused on calling it a 'bailout', when really it is an investment in the financial system and the American economy. I reiterate that if done correctly, I think Treasury will actually make money on the plan, and even Warren Buffett and Bill Gross said they wish they were in the government's position.

Asian markets were down overnight, as concerns are now spreading to the European banking system. Three European governments had to bailout financial institutions over the weekend. Here in the U.S., Citi (C) is acquiring Wachovia's (WB) banking operations in a deal facilitated by the FDIC. WB didn't technically fail, but its stock fell to $1 today, so it feels like it might as well have.

The Fed has coordinated a huge liquidity injection with many of the world's biggest central banks this morning. This is another attempt to keep the capital markets functioning properly, and the size of the moves (hundreds of billions of dollars) underscores how important it is to get this plan passed. Then it will be up to Europe to address its financial markets in some manner. Interest rates there are still unrealistically high.

The VIX is spiking again today, rising nearly +15% to 40. This is just below last week's panic level of 42. It is rare to see two readings this high, but these are certainly not normal times.

The Nasdaq is the hardest hit this morning, with many big techs getting hit. The House is supposed to vote on the Plan today, so let's hope it adds some stability in the market. I have still not taken off the last of my hedges, nor put any cash to work.

Friday, September 26, 2008

Into The Stretch: Investors Await News on Plan Passage

The market opened under heavy selling pressure this morning, on the heels of RIMM's earnings announcement and the news that the FDIC took over Wamu (WM) and sold off its assets to JPMorgan (JPM).

But the declines just after the open have pretty much marked the lows for the day. The Nasdaq has been down the most, while the Dow has made back all of its early -150 point decline.

Given that the market breathed such a big sigh of relief yesterday on the news that the passage of the bill was close at hand, when I heard that talks had broken down, I though the market would take the news harder. Obviously, a lot of other investors felt the same way, which is why the market was so weak before and just after the open.

Let's hope that something gets done over the weekend, or I think that the market will selloff again next week. The credit markets are still extremely tight today, and some other bank stocks are down considerably after the Wamu news.

Second quarter GDP was revised lower this morning, to +2.8% from an original estimate of +3.3%. It is now consensus that Q4 GDP will be substantially weaker, and the longer this environment stays negative like this, the lower we are going to see estimates go for both economic growth as well as the upcoming earnings season.

The markets are deeply oversold, with the Nasdaq being down for 6 straight weeks. I think that some sort of relief rally is certainly in order, once the credit strains ease a bit, but I am getting more concerned about what the outlooks from management will look like when companies report earnings next month.

Right now, the S&P is struggling to hang on to the 1200 level into the weekend. The Dow is positive. The VIX is up another +8% to 35.44, a high level. I hate going into the weekend with my hopes hinging on Congress to get it right, but sometimes you have to accept the market as is, and not how you wish it were.

Have a good weekend--

long RIMM

Thursday, September 25, 2008

Market Bounces Amid Optimism Plan Gets Done

The odds of the big Plan getting done rose yesterday (on Intrade.com), and are higher again this morning. The market seems to be breathing a sigh of releif, although you know I am always nervous of a market that opens higher. Let's hope this rally holds into the close. The Dow is up +200 points as I write.

The market is higher despite some weak economic news. August new homes sales were down -11.5%, substantially below the -1.0% consensus expectations. Durable goods were also weak, falling -4.5% in August (vs. -1.9% consensus). Bill Gross said that the unemployment rate could hit 7% in 2009, which would not be good.

Nike (NKE) is +8% higher after reporting better-than-expected earnings last night. Bed Bath & Beyond is also higher despite reporting in-line earnings. But GE is trading lower after lowering its outlook for Q3 and FY08. The company also suspended its stock buyback program.

Asian markets were mixed overnight. The dollar is lower after a 2-day bounce. Oil is slightly lower at $105. The 10-year yield is higher at 3.84%. And the VIX is down -5% to 33.46.

The biggest gainers so far are the bank stocks (+2.26%), followed by drug stocks (+2.25%). Housing stocks are lagging, -0.30%.

Wednesday, September 24, 2008

Chart of the Day: Fear Still Elevated

The market closed roughly flat today, with the S&P 500 a bit lower, but the Nasdaq a bit higher. Volume was once again pathetically low. NYSE volume was the lowest its been since the Friday before Labor Day weekend.

There was continued angst today in the credit markets. Most people don't follow these indicators, but if you look at things like the LIBOR swap rates or the TED spread, both were high and rising today, a sign that global credit markets are still extremely tight.

As for the equity market, I want to take a look at the volatility index (VIX), or the "fear" index. The VIX closed lower today, which was a good sign. But it is still very elevated at the level of 35.19. A look at the chart below shows that the VIX has had roughly a week's worth of closes above the 30 level, a rare occurrence.

Back in March 2008 (see below), at the "Bear Stearns bottom", the VIX also spiked above 30. But in March, it only had 2 closes above the 30 level before reversing lower. That signaled a good buying opportunity.

Ditto for August 2007, another panic low in the market spurred by the initial signs of this credit crisis. Last August, the VIX again broke above 30, but only had 2 closes above that level before reversing lower. Again, this was a good buying opportunity in the market.

The last chart goes all the way back to October 2002 to find another period when the VIX spiked north of 30. October 2002 was the bottom of the last great bear market. Notice that back then, like now, the VIX not only got above 30 but spiked all the way to 42. It also reached 42 last week.

You can see that the VIX stayed around these elevated levels for a couple of weeks, as there was widespread disbelief that the market had bottomed. But eventually the VIX began to work its way lower, and signal that fear had peaked and was easing. This was probably the best buying opportunity of the last 25 years.

I am not saying that last week was THE bottom of this bear market. We will only know that with hindsight. But I do think that if Congress acts quickly to pass this plan, the markets should stabilize. I am sure that the powers that be would like to do everything in their power to support a firmer market before the election and into year-end.

Yesterday, I took profits in the remaining SPX hedge I had on. So I am taking off my downside protection and looking for signs of stabilization in the market. I see lots of attractive opportunities in the market, but do not want to put cash to work until I see more positive price/volume action in the markets.

Morning Update: Buffett Backs Mortgage Plan

The markets are getting a small bounce in early trading, as Bernanke testifies again today to the Joint Economic Committee. Bernanke said the financial market crisis is affecting the broader economy, especially the availability of credit. He still expects GDP to expand in the second half, but Q4 is looking like it could be pretty weak.

He is urging Congress to act quickly to pass the plan. Bernanke is also trying to stress that this plan should be viewed as an investment, and not an expenditure. There should be a significant return of the $700 billion borrowed (I think the govt. will actually make money on this plan)

Warren Buffett entered the fray last night, when he made a $5 billion investment in Goldman Sachs (GS), buying a preferred stock position that will yeild 10%. Goldman will also raise another $5 billion through a common stock offering priced at $123.

Buffett said in 5-10 years we will look back and see that there were some extraordinary buying opportunities. Buffett added that Congress needs to pass Treasury's plan, and that he would not have invested in Goldman if he thought the govt. plan would not go through.

Asian markets were mostly higher overnight. The dollar is slighltly higher this morning, and oil is also higher, near $108. The 10-year yield is lower at 3.77%. And the VIX is still high at 36.24.

Tuesday, September 23, 2008

Early Look: Financials Lead Market Bounce

I think yesterday's selloff was part options expiration, part the drop in the dollar, and part concern over whether the bailout plan will be quickly passed, and if any of the details will change. Last week's market lows were pretty climactic, and I think that they will mark the lows for this year.

The market is bouncing in early trading, while most eyes are watching the Senate Banking Committee hearing where key officials are giving their testimony on the proposed plan. The media is calling this a Wall St. bailout plan, but I think that is putting a negative connotation on it.

Wall St. has already seen its landscape forever changed, as well as key investment bank failures. I'm not saying I feel bad for them, and the role they played, but I think this plan is needed to save Main Street, and I hope that comes across.

Oil had a big spike yesterday, but is was somewhat of a mirage. Oil trades in futures, and it was only the October contract that saw that big spike to $120. That contract expired yesterday, so there was likely a great deal of short covering. Today, the November contract is the prevailing contract, and it is trading closer to $108.

The dollar is bouncing today, after yesterday's sharp drubbing. This is pressuring commodity stocks, which were in the spotlight yesterday.

GE is lower after being downgraded by Merrill Lynch. Merrill said that earnings will be lower at GE's Commercial Finance and GE Money divisions. Bristol-Myer (BMY) raised its offer to buy Imclone (IMCL) to $62, or $4.7 billion.

The 10-year yield is steady at 3.81%. The volatility index (VIX) is -3.5% lower to 32.68, but I would like to see it drop below 30 as a sign some of this fear is subsiding. The Dow is currently +100 points.

Monday, September 22, 2008

Monday Morning Musings

The Treasury threw a figure on their plan to clean up the mortgage mess, saying they want to spend up to $700 billion to buy distressed mortgage-related debt from struggling financial institutions. President Bush urged Congress to quickly pass the bill approving the plan.

The dollar is weaker this morning, on concerns that the cost of the bailout plan could strain the financial strength of the US and push rates higher. While this could occur shorter-term, I think that longer-term it will strengthen the US as it will speed up the eventual resolution of this credit crisis and prevent further failures of large financial institutions.

The weak dollar is pushing oil and gold higher, as well as other commodities. Oil is trading near $108, while gold has pushed higher to $890. The 10-year yield is also higher to 3.89%, a huge leap from the 3.30% levels touched last week.

There were several share repurchase programs announced this morning: Microsoft (MSFT) announced an additional $40 billion buyback, Hewlett-Packard (HPQ) announced a $8 billion buyback, and Nike (NKE) announced a 4-year $5 billion buyback. These buybacks should support these shares, as well as spur other Boards to consider similar actions.

Also, the Fed agreed to convert Goldman Sachs (GS) and Morgan Stanley (MS) into bank holding companies, officially ending the era of the stand-alone investment bank. The move will allow them to take on more deposits, but will also place them under additional regulartory oversight, and prompt further deleveraging of their balance sheets.

Mitsubishi UFJ said it plans to buy between 10-20% of Morgan's common stock, which is pushing shares of MS +11% higher, while GS is only up slightly.

Most think that the market is lower this morning over uncertainty as to how the market views Paulson's $700 billion plan. But I think the market is simply lower due to the huge short squeeze we saw on Friday related to options expiration, and the normal post-expiration hangover that often shows up in the market in the ensuing week.

Saturday, September 20, 2008

The Week That Was

Stunning is a word that sums up this week's action. It fits because it can be used in proper context for all parties involved in the capital markets, regardless of whether they held short or long positions.

The behavior of stocks? Stunning. The behavior of Treasuries? Stunning. The behavior of commodities? Stunning. The behavior of currencies? Stunning. The behavior of the government? Stunning.

Recounting all that transpired with sufficient detail would make this wrap a rival to War and Peace in length. Accordingly, we'll spare you the nitty-gritty and will focus on the larger happenings.

To begin, the week began with a washout of sorts as the market dropped 4.7% in the wake of reports that investment bank Lehman Bros. was filing for bankruptcy, that Merrill Lynch (MER) agreed to sell itself to Bank of America (BAC) in a hastily arranged transaction, and that insurer AIG (AIG) might be headed for bankruptcy if it couldn't raise a large amount of capital in a hurry.

The focus on the financial sector on Monday was apropos since the Wall Street universe revolved all week around that area, which was both a black hole and shining star depending on the day, or even the hour, one looked at it.

All other developments, like a warning from Dell (DELL) about slowing demand, a disappointing earnings report from Best Buy (BBY), a reassuring report on consumer inflation, and a decision by the FOMC to leave the fed funds rate unchanged, were a distant second to the behavior of the financial sector and the credit market, which were inextricably linked.

After recouping a portion of Monday's losses on Tuesday, the market suffered another seizure Wednesday, dropping 4.7% in the wake of news the Fed agreed to a 2-year, $85 billion secured loan for AIG. Although that loan was structured on very attractive terms for the Fed, the major concern for the market Wednesday was that it failed to do anything to put the credit market at ease since it didn't fix the underlying problem.

Strikingly, the TED spread, which is a barometer of credit risk and is the difference between the 3-month Libor rate and the 3-month T-bill rate, blew out to 302 basis points. That level compared to a 135 basis point spread the preceding Friday and marked the widest spread since just before the stock market crash in 1987.

Other credit spreads also widened considerably, particularly the spreads on credit default swaps for investment banks Morgan Stanley (MS) and Goldman Sachs (GS). That widening reflected heightened anxiety about their ability to repay their debt which, in turn, reflected a pressing concern that those firms were at risk of going the way of Bear Stearns and Lehman Bros.
From their close last Friday to their lows for the week, the stocks of Morgan Stanley and Goldman Sachs plummeted 69% and 44%, respectively. Remarkably, that move occurred despite both firms posting better than expected fiscal third quarter earnings results.

Their losses were indicative of some of the panic selling that took place during the week as participants fretted about the government's inability to stem a collapse in the financial system (more on this in just a bit). That selling was exacerbated, too, by reports that the value of the Reserve Primary Fund, which is a money market fund, broke below $1.00 per share, an extremely rare happening for a money market fund.

The confluence of the disconcerting headlines surrounding the financial sector precipitated a massive flight-to-safety bid in gold and the U.S. Treasury market.

At their high on Thursday, gold futures were up $161.50, or 21.1%, from their close last Friday. Meanwhile, the yield on the 3-month T-bill hit 0.02% on Wednesday, marking a 149 basis point drop from where it went out last Friday.

The fear in the market was palpable. For traders it manifested itself in the VIX Index, commonly referred to as the fear gauge, which hit its highest level in six years Thursday.
Thursday and Friday, frankly, were two days for the trading ages.

Thursday began well enough as stocks initially reacted favorably to reports of a coordinated effort among central banks to inject more dollars into the global financial system. Those good feelings proved to be fleeting. Stocks rolled over upon seeing there had been no real improvement in the credit market and upon hearing more worrisome headlines about money market funds.

In an instant, though, the tone of the market again changed in favor of the bulls when the U.K. announced a temporary ban on the short-selling of financial stocks.

Sensing that the SEC might follow suit in the U.S., a short-covering rally ensued. However, it wasn't until a report late in the day that Treasury Secretary Paulson was entertaining the idea of a financial system fix equivalent to the Resolution Trust Corporation solution used during the S&L crisis that stocks really took off.

From its low on Thursday to its close, the S&P surged 6.4%.

Sure enough, Friday brought a tidal wave of news regarding government proposals to return stability to the financial system.

In particular, the SEC banned short-selling of 799 financial stocks until Oct. 2 and the Treasury provided a guaranty program for money market mutual funds. The big game changer, though, was a proposal put forth to have the government (er, the tax payer) take the illiquid mortgage assets off the balance sheets of financial companies.

Administrative officials and Congressional leaders intend to work over the weekend to iron out specific details of the plan, but it was clear in Friday's session that participants liked the implications of what was being discussed since it got to the heart of implementing a comprehensive and targeted solution to fixing the root of the financial system's problems, which is housing and mortgage-related assets.

By implementing a program that removes the illiquid assets from the balance sheet of the financial companies, the government is literally buying the time that is necessary to turn the illiquid assets into liquid assets again through a more rational price discovery process.
The cost of the program won't be cheap. Secretary Paulson estimates it will run into "the hundreds of billions of dollars" since it has to be sufficiently large to have a maximum impact. However, the cost entails buying actual assets which can deliver cash flow, possibly in excess of the amount of the price the government will pay.

Time will tell, but the thinking that this plan can succeed in stabilizing the financial system and the housing market translated into heavy buying interest Friday. In fact, Friday's session, which also happened to be a quarterly options expiration day, saw the most volume (2.98 bln shares) ever traded at the NYSE.

For some perspective on the magnitude of the rebound over the final two days, consider the following: from their low on Thursday to their high on Friday, the Dow, Nasdaq, S&P 500, Russell 2000 and S&P 400 Midcap Index surged 9.8%, 12.0%, 11.6%, 13.2% and 12.0%, respectively. As an aside, the stocks of Morgan Stanley and Goldman Sachs rebounded as much as 189% and 69%, respectively, from trough to peak.

If two lessons are to be learned by investors from this week's action, it is that panic selling isn't a recommended portfolio management strategy and that you can't try to time the market. Neither works in the ongoing effort to build long-term wealth by investing in the stock market.

--Patrick J. O'Hare, Briefing.com

Friday, September 19, 2008

The U.S. Mortgage Company

Wow, it has already been a historic morning. The Fed, Treasury, and the SEC have all announced major steps aimed at bolstering confidence in the financial system and easing the credit crisis.

Yesterday, there was significant concern about money market funds, heretofore thought to be among the safest investments out there. This morning, the Treasury is bringing back an arcane fund which will provide up to $50 billion to guarantee money market funds. Here is a link to the story: http://biz.yahoo.com/ap/080919/fund_rescue.html

Also, in a move following the FSA in London yesterday, the SEC is temporarily banning short selling on a list of 799 financial stocks. This move to put short sellers in a "time-out" is another emergency move aimed at lessening the financial strains that brought down Bear Stearns, Lehman, AIG, etc. Here is a link to that story: http://www.nytimes.com/2008/09/20/business/20sec.html?_r=1&ref=worldbusiness&oref=slogin

And most importantly, Treasury Secretary Paulson announced their plans this morning to shore up the mortgage crisis by dealing with these "illiquid assets that are choking off the flow of credit" and causing banks not to lend.

The plan will involve forcing Fannie and Freddie to increase their purchases of mortgage-backed securities, as well as the Treasury itself expanding the purchase of these illiquid securities. Paulson said the size would be in the hundreds of billions, and that it had to be sufficiently large enough to make a real difference. Here is more on that story: http://www.bloomberg.com/apps/news?pid=20601087&sid=avRorhlNRkWc&refer=home

Global markets soared on the news. London's FTSE spiked +9.4% and Hong Kong soared +9.6%, for example. The flight to safety in Treasury bonds also eased, with the price of the 10-year bond falling and the yield rising 30 basis points to 3.74%.

Oil is also rising this morning, though not related, and trading near $101. This is giving a big boost to the energy and material stocks. But the financials are taking center stage again this morning, with many stocks up over +20%. The Dow was up 400 earlier, but has given some back. This morning's spike open was surely influenced by options expiration, as those caught short the market scrambled minimize their losses.

Last, let me just reiterate how lucky we are to have Hank Paulson, the former CEO of Goldman Sachs (GS), as the Treasury Secretary during all of this. Can you imagine how bad it might have been if any of the last 2 or 3 jokers were still in that position? I remember one guy (I think O' Neill) crying on national TV. You may or may not agree, but I would say there are few people in the entire country that are as qualified and as smart as Paulson. I don't know how the Administration got him to take that position in the govt., but I am grateful.

Thursday, September 18, 2008

A Day of Relief

In some respects, today was a historic day. I could write a lot of words about how the day unfolded, but I think you will get a better sense of today's roller coaster session if I use a lot of charts. So I have included the graphs below to illustrate my points for today. (You can click on any graph to enlarge it and view it in full size)

The first chart is of the Bank Index (BKX) that investors follow. This morning, the financials were under pressure again. The shorts were gunning for Goldman (GS) and Morgan (MS), as well as driving stocks like Citi (C) to new lows.

Around midday came the news that the FSA (in Great Britain) was banning all short-selling of financial stocks in the UK until January. This is a crazy idea, but we are in crazy times. This sparked an initial short-covering rally in the financials, and the bank index rallied fully +25% from its lows. For the day, the BKX gained +13.8%. Also, and this is important, notice that the bank index remains fully 50% higher than its July lows, despite the barrage of negative headlines.

The next chart below is for the S&P Homebuilder ETF (XHB), which tracks housing stocks. This fund also bottomed midday, along with the financials, and began to rally. But late in the day it picked up an extra head of steam when the news came out that Treasury Secretary Paulson was having high level meetings to discuss forming some sort of Resolution Trust Corp., like the one created to help get out of the S&L crisis in 1989.

That news gave a boost to the overall market, and especially any real estate related stocks. The XHB rallied +21% from its intraday lows, and closed +11% on the day. This index is also well above its July lows, as the market finally seems to think that a bottom in the housing market is within sight.

The next chart is for the S&P 500 (SPX), which reflects how the overall market fared. The SPX made a new yearly low this morning, but also bottomed with the FSA news and rallied more on the RTC rumors.

The SPX rallied +6.8% from its intraday lows, and closed up +4.3% on the day, on a big rise in volume. Today's rally didn't completely erase yesterday's plunge, but we did close above Monday's closing levels (1192). From here follow-through will be key.

The next chart is of the volatility index (VIX), or what is called the "fear" index. The VIX often spikes when investors become fearful and panic selling hits the market. This was quite evident this week, and this morning, the VIX hits its highest level (42) since October 2002, the nadir of the last bear market.

Spikes of this nature have always marked a bottom in the market, at least within a short-period of time. It remains to be seen if this indicator will work again this time around, but today's action bodes well. Not only did the VIX spike to 42 intraday, but then it reversed lower into the close and declined a full -21% from its high.

The last chart I want to show is of Morgan Stanley (MS). This morning, MS was falling by a huge amount, just like its investment banking bretheren lately. But when the market bottomed, MS came roaring back. From its early lows near $12, the stock spiked up +100% and hit $24 with a half hour to go in today's session. I hope some shorts got badly burned on this one.

I am going to save my comments on the idea of banning short selling on stocks. I am a "free market" guy, but given what has transpired in the market, I'll let the regulators try anything briefly if it will help instill confidence back into the markets. We can talk about the moral hazards on the ethics blogs.

Tomorrow should be interesting, especially since it is the end of the week, and also an options expiraton day. I sold a little bit more of one of my hedges today (TWM), though I still own some of both. I need to see more than one day of stabilization before putting cash to work, even as I see lots of bargains that have been created by the indiscriminate selling.

I'm going for some good sushi tonight to try to recharge the batteries. Have a good night--

Can The Early Bounce Stick?

The market is bouncing at the open, but these days its how the market closes that matters. Late day selloffs have been brutal. Yesterday, the market looked like it was coming back around midday, but by the close that rally was just a mirage.

The S&P 500 is +2.04% right now, after news that the Fed had indeed coordinated a global liquidity injection. The Fed, the ECB, Bank of England, Bank of Japan, and the Swiss Natl. Bank together injected $180 billion into money markets to keep fearful banks from hoarding cash.

If you don't think there was an all out "flight to safety" yesterday, look no further than the action in the US T-bills. The yield on the T-bill at one point went all the way to zero!! That means investors were pouring money into these safe securities and getting NO yield in return. At the point, the return of capital trumped any return on capital concerns.

As I have said before, actions like this more often come toward the latter stages of panic selling, as opposed to being events that mark the beginning of a crisis.

Dow Jones said that Kraft (KFT) will replace AIG in the DJIA. And Morgan Stanley (MS) is mulling a big investment from China's CITIC. Also, Wamu (WM) is considering putting itself up for sale (finally).

Asian markets were lower overnight, but Hong Kong reversed a -7% decline after the coordinated effort by central banks to boost liquidity.

Oil spiked near $100 this morning, which is helping the energy and materials sector. Despite the bounce, oil is nowhere near breaking its recent downtrend.

The SEC also announced further initiatives to help curb excessive short selling, which could cause some short-covering. But the shorts have made so much money recently, they likely don't feel much pressure right now.

Let's hope this small rally can build on itself into the close. Engine room, more steam!!

Wednesday, September 17, 2008

Who Will Be Next?

I was swamped again all day, which accounts for the lack of blog posts. I really thought today would be better after the AIG bailout news last night. But today they went after Morgan Stanley (MS), and that seemed to unravel any inkling of positive sentiment.

The raids on these stocks that have driven large financial institutions to the brink of insolvency on little fundamental news is amazing. I don't know how to remedy the situation, but someone should come up with something regarding these credit derivative swaps.

Panic selling is taking hold, so remember to keep your emotions in check. The volatility index (VIX), or the "fear index" rose another 20% today, closing at 36.22. This is the first time the VIX has closed above 30 for 3 straight days since the bear market of 2002 ended.

The Goldman Sachs (GS) CFO said on their conference call yesterday that the world is awash with liquidity, but that fear is overwhelming participants willingness to put money to work. But when this bout of fear subsides, and it will, the huge amounts of cash on the sidelines could help things bounce back pretty quickly.

I did trim any of my hedges further today, nor did I put any cash to work. I am still waiting for signs of stabilization. But I know when the dust settles, there will be plenty of bargains, so keep your powder dry.

Have a good night.

Market Stresses Persist Despite AIG Bailout

The market has opened lower despite the Fed bailing out AIG with a big loan. To prevent systemic failure, the Fed gave AIG an $85 billion 2-year loan in exchange for an 80% stake in the insurance company. Unlike Lehman, the Fed felt the failure of AIG would weigh heavily on the already fragile markets.

The credit strains are high not just in the U.S., but across the globe this morning. The TED spread (the diff. between 3-month T-bills and 3-month LIBOR) spiked to its highest levels since the crisis began. Central banks in England and elsewhere are adding liquidity to the system to try to ameliorate current conditions.

Morgan Stanley (MS) reported results that handily beat consensus estimates, but the stock is -15% lower nonetheless as its credit default swaps (the cost to protect debt) spike higher. These credit default swaps raise the costs for financial firms when they spike higher, and add to the liquidity strains. They have been a big problem, and are one of the main reasons the Fed felt the need to help AIG. AIG insures credit default swaps for large financial institutions across the entire globe.

The SEC also issued new short selling rules which apply to all public companies that should make it harder for short sellers to engage in some of the activities that have added pressure to some stocks this year.

On a positive note, SanDisk (SNDK) is trading +46% higher after receiving a buyout offer from Samsung, and telling them that the price is still too low.

Asian markets were mixed overnight. The dollar is lower this morning, while oil is rising $3 to $94. The 10-year yield is lower at 3.40%.

Tuesday, September 16, 2008

Fed Decides To Leave Rates Unchanged at 2.00%

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2%.

Here are some of their comments:
  • Strains in financial markets have increased significantly and labor markets have weakened further.
  • Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters.
  • Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
  • Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities.
  • The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
  • The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee.
  • The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

I thought they should have cut rates, if only because the fed funds rate in the marketplace is trading lower than their target levels. Now that they have not cut rates, let's hope they decide to help out AIG.

Cash Is King

The market opened under heavy selling pressure again, but that pressure has since subsided. This could be due to short-covering ahead of the Fed meeting this morning, but the indexes have all bounced more than +1.5% off their early lows. The Nasdaq 100 is positive right now.

AIG was down another -50% at the open (amazing) after the company had its credit ratings downgraded at S&P and Moody's. Wamu (WM) also had its outlook downgraded. These ratings agencies are unbelievable. First they greenlight millions of mortgages that should have never been written, and now with firms under severe stress they come out with downgrade after downgrade. Who needs them?

The financials are higher this morning, led by Wells Fargo (WFC) which is up +10%. Goldman Sachs (GS) was down more than 10% on its weak earnings report, but has since recouped much of that. And Monsanto (MON) is up +2.25% after raising its 2008 earnings guidance.

The Fed meets today, and has already pumped liquidity into the system today. Central banks have also added liquidity, with the Bank of Japan adding 1.5T Yen to their system, and China cut interest rates last night to boost its now slowing economy. But Asian markets were still down sharply overnight, with many of them losing more than -5%. Russia was hit especially hard.

In economic news, the August CPI fell -0.1% due to the drop in fuel costs. This is welcome news to consumers, and I heard that the drop in oil below $100 will act as the equivalent of a $100 billion tax cut.

The dollar is higher today vs. the Euro, which is helping pressure commodities further. Gold is down along with oil, which dipped below $91 this morning. The 10-year yield hit 3.25% this morning, its lowest level since June 2003, but has since bounced to around 3.34%.

In this environment, many investors are thinking that cash is king. Risk aversion begins to take over, but there is also significant deleveraging going on across the globe. So big players are raising cash and that is weighing down asset prices across the spectrum.

While some will say things are different now, I would argue they are not. When Drexel Burnham went under in the 80s, it was also a very big deal. And in 1990, over 1000 banks failed. That was a big deal as well, so big that the govt. had to create the RTC. So while the names and players change from one cycle to the next, fear and greed remain the primary drivers on the Street.

At some point, the markets will bottom and fear will have overbalanced on the scales. The markets will rally and all that cash sitting on the sidelines will come back into investments that can earn a higher rate of return. Just like after October 1987, just like in 1990, just like after 9/11, and just like after Oct. 2002. I still have some hedges on, and plenty of cash to weather this, but I will be ready to take advantage of these declines when I see signs of stabilization.

Monday, September 15, 2008

A Day For The Recordbooks

Sorry for the lack of posts today. Today was one of the busiest days in my career. I don't think my phone stopped ringing from the minute I walked in at 6am. And its only Monday! (Actually, I came into my office last night also)

The market did not take kindly to the news the Lehman Bros. was filing for Chapter 11. But after the market opened, it rallied modestly and spent much of the day around the -2% level. It looked for awhile like the market might close with just modest losses for the day.

But as we have seen many times this year, when the tape is weak, there are simply not enough buyers out there to sop up all the selling pressure. As such, the late day selloff picked up steam and pushed the indexes to close on their lows.

There were also concerns that AIG could be the next big financial to run into serious liquidity problems. AIG stock was down -60% today, so you can see how serious the situation is. And AIG is a much bigger company than Lehman.

The Fed has asked Goldman Sachs (GS) and JPMorgan (JPM) to head up a consortium that will raise $50-70 billion to help AIG live another day. Let's hope they get it done, and soon.

The Fed meets tomorrow, and there is suddenly a lot of talk that not only does the Fed need to cut rates more, but that they may actually do so soon. Some say that this won't help, but rate cuts do inject more liquidity into the system, and credit crunches need ample liquidity.

Amidst all of this negative talk, I would be remiss if I didn't point out at least a few silver linings:
  • The bank index (BKX) closed at 65, which is still +34% above July's lows; if I had told you today's news a month ago, I'm sure you would have predicted we'd be at new lows
  • The NYSE has 792 new lows today, far less than the 1304 new lows on July 15; another positive divergence
  • The volatility index (VIX), or the "fear" index, spiked +24% today; this surpassed July's highs, and the VIX above 30 has marked several market bottoms before
  • The volume in the QQQs was over 600 million shares, which I believe is a record; sometimes high-volume selloffs mark climactic market bottoms

The S&P 500 undercut its July lows by 8 points; the Nasdaq, mid-cap index and small-cap indexes are still above their March lows. fwiw.

I started to take small profits on one of my hedges (SDS), while maintaining my above-average cash balance. I have tried to be very defensive, although on days like today it never seems like enough.

long SDS

Friday, September 12, 2008

Chart of the Day: "Outside" reversals

The S&P 500 posted another "outside" day yesterday. These types of reversal days are defined by the stock or index trading below the previous day's low, and then reversing to close above the previous day's high (and vice versa). Thus, on the chart the range for the day is outside of the previous day, both on the upside and downside.

Looking at the chart above, we see that on 9/2, the S&P 500 posted an outside day to the downside (a negative reversal). This was a good signal that more downside was in store for the market in the near-term. Subsequent to that signal, the SPX fell another -5.1%.

Looking at yesterday's action, we see another outside day, this time a positive reversal. Traders will take this signal to mean that there could be some further upside in the market in the near-term. So far today, this signal is working. The market opened lower this morning, but then found support, and is currently working its way back into positive territory.

The energy and materials stocks have been leading the action all day. The dollar is down sharply today, which is not surpising given the run its had and how overbought it had gotten. This is helping spur a big bounce in commodities.

Also, the PPI showed a -0.9% drop in August, reflecting the recent move down in energy prices. I have said how this is a big positive for the consumer, and that is likely why the Univ. of Michigan Consumer Confidence report for September jumped to 73.1 from 63.0 last month.

There are still plenty of problems out there with financials, and this weekend should be busy for the guys working on deals for Lehman (LEH) and Wamu (WM), but it is always important to take note of the positive developments as well.

long SDS

Thursday, September 11, 2008

Is Lehman Close To Selling Itself?

There are rumors making the rounds that Goldman Sachs (GS) is in talks to buy (or save) Lehman. I don't know if it is true or not, but Lehman is now in sad shape. Here is an interesting story that I received this morning:

-- Lehman Bros. Chief Executive Officer Richard Fuld continued his high-wire act to try to save his firm Wednesday. Before the market opened, Lehman said that it was looking at a net loss of $3.9 billion for its preliminary third quarter results, following the $2.8 billion loss announced for the bank's second quarter. Estimated net revenues were $2.9 billion, Lehman said.

On a conference call, Fuld tried to reassure Wall Street that Lehman was doing the right thing. "When you look at our segment businesses, you'll see that our client relationships remain strong," Fuld said. However, he acknowledged that the firm could not put the continued trust of its clients, counterparties and employees at risk. "It will be best to protect the core client franchise," Fuld said.

Lehman said that it remained committed to examining all strategic alternatives. Translation: Lehman may be up for sale. "I have always said that if anybody came with an attractive proposition that made it compelling for shareholder value, that would be discussed with the Board and evaluated," Fuld said.

Before the third quarter estimates were released, Ladenburg Thalmann analyst Dick Bove said he didn't believe Lehman is headed for insolvency because of the strength of its core businesses. The problem with a sale, Bove said, is the difference between what management believes the firm is worth and what the market is willing to pay.

"The argument is over value and the seller, in this case Lehman, is saying, we're good enough that we need book value and the buyer is saying, you've got to be out of your mind when the market is saying, $8 [per share]," Bove said. "I think HSBC would be a potential buyer because it wants to be a major player in the capital markets," he said.

Lehman decided to release its results a week early after its stock dropped more than 40% on Tuesday for a final close of $7.79 per share. The precipitous decline in stock price followed news that state-owned Korean Development Bank had pulled out of talks to provide Lehman with a much-needed capital infusion.

On Tuesday, Wall Street fellow banks, Citi, Goldman Sachs, Merrill Lynch and Morgan Stanley said they continued to do business with Lehman. Those statements were made with the memory of Bear Stearns whose shotgun sale to JPMorgan Chase in March was precipitated by counterparties pulling their business. Lehman's writedowns for its asset-backed securities in the third quarter total $7.8 billion. That comes on top of a $3.6 billion writedown in the second quarter and about $4.7 billion in the first.

The firm also announced a number of ways it intended to deal with the kind of mortgage-backed securities that have been dragging it down. It is setting up, Real Estate Investments Global, a publicly traded company to spin off $25 billion to $30 billion of its commercial real estate portfolio. It is also selling about $4 billion of the firm's U.K. residential mortgage portfolio in conjunction with asset manager BlackRock. When that deal goes through, Lehman said its exposure to residential assets would be reduced by 47% to $13.2 billion.

Short sellers, including Greenlight Capital founder David Einhorn, have said for months that Lehman had a long way to go before it will have written down all the illiquid securities on its books. Lehman also said it intends to sell a majority stake of its profitable investment management arm Neuberger Berman. Private equity firms Kohlberg Kravis Roberts, Hellman & Friedman and Bain Capital are said to be bidding on the division. That sale will not include Lehman's minority stakes in hedge fund firms, Chief Financial Officer Ian Lowitt said on the conference call.

Bove faulted Fuld for not reacting sooner and more aggressively to the crisis at Lehman. "Now, because of that stubbornness, the company has lost total control of its destiny," he said. "Fuld cannot be trusted; he has precipitated a crisis not only for Lehman but also for the financial system."

long GS

Financial Stocks Under Pressure Again

I feel like a broken record posting that title, but the financials are weighing on the market again. Lehman didn't do much to inspire confidence yesterday, and the stock is -40% lower again today, trading at just $4.50. Simply amazing.

It seems the problem at Lehman is simply that they continue to have way too much commerical real estate on their balance sheet. In hindsight, its kind of surprising that an investment bank would wind up with all of this real estate, but in the last several years these investment firms got into all sorts of different business segments.

Washington Mutual (WM) is also trading below $2, as regulators have started to take a closer look at that bank as well. Wamu has billions of pay-options ARMs and various home equity loans on their books, and these loans are likely well under water.

Asian markets were lower across the board overnight, on continuing credit concerns. The dollar is higher once again, which is pressuring gold and other commodities. Oil is also lower, and has reached $100 and change today. The 10-year yield is at 3.61%.

Lower oil and commodities are pressuring the energy and materials sectors in the short-term, but is a major positive for consumers and the economy longer-term.

The markets opened a lot lower, but have bounced nicely from their lows. The Nasdaq 100 is actually in positive territory, and the S&P 500 is near its highs of the morning. The put/call ratio opened at 1.36, which could help.

long SDS

Wednesday, September 10, 2008

Financials Lower Despite Lehman's Attempts To Shore Up Its Balance Sheet

The market is getting a small bounce in early trading, but the gains look paltry compared to yesterday's selloff. The financials are one of the few groups that are lower this morning, despite some announcement's by Lehman Bros. (LEH) that it is taking bold steps to strengthen its balance sheet. (LEH was down an eye-popping -45% yesterday)

The brokerage firm posted a $3.9 billion loss for the third quarter, and announced several initiatives: its cutting the dividend to $0.05 from $0.68; it plans to sell a 55% stake in its investment management business (maybe $3 billion); it will spin off its commercial real estate assets into a new company; and it is in talks to sell $4 billion of its UK residential mortgage portfolio.

Hopefully, these initiatives will raise enough capital to let the firm live another day. The action in the stock yesterday makes you think that there are many investors out there who aren't so sure, even as the Fed led us to believe that after Bear Stearns it would not let another big firm fail.

Fedex (FDX) is getting a nice bounce after guiding its earnings higher due to increased savings from the drop in fuel prices. ImClone (IMCL) said the $60 offer from Bristol-Myers (BMY) is inadequate. And semis are higher after Texas Instruments (TXN) tightened its guidance for the upcoming quarter.

Oil is higher this morning, after OPEC said it would stop producing above its quota (then why even have a quota?!?), which will mark an output cut of about 500,000 barrels per day. Oil bounced to $104, but still can't make much headway. The energy stocks are bouncing after yesterday's drubbing.

The volatility index (VIX) spiked +12.5% yesterday, but is lower this morning. The 10-year yield is hovering around 3.60%.

Tuesday, September 09, 2008

Early Look: Commodity Stocks Under Pressure Again

Commodity stocks are under heavy selling pressure yet again. The declines here have been shocking in that these stocks seem to have gone straight down without a bounce. That's not the way it usually works.

There are some signs that slowing growth in China is dampening demand for commodities, but I also think that hedge fund liquidations are also at work, possibly ahead of quarter-end (9/30) redemptions.

Financials are also lower this morning, being dragged down by Lehman Brothers (LEH), which is down a whopping -25% right now after news that the Korea Bank may no longer be in talks to acquire the firm. There is also chatter that if LEH sells it investment management business, the parts of the company that are left aren't worth very much.

Pending home sales for July fell -3.2%, more than forecast. This is causing some selling in the housing stocks, which have enjoyed a nice bounce since mid-July.

Tech stocks are holding up well this morning. CEO Michael Dell bought $100 million of DELL stock, which helped the tech sector before the market opened.

Asian stocks were lower overnight on concerns about slowing China growth. The dollar is higher again, adding pressure to commodity stocks. Oil is lower again, nearing $104. And the 10-year yield is lower at 3.63%, after Treasury bonds rallied late in the day yesterday.

Monday, September 08, 2008

Bearish Sentiment Ticked Higher Last Week

I have been focused a lot of the downside risk in the market lately, but I always like to look at both sides of the equation. On the bullish side, bearish sentiment ticked higher last week, which means there is still plenty of room for bullish sentiment to enter the market and push stocks higher.

Here are a few examples:

  • The bull/bear spread on the Investor's Intelligence survey declined to -2% (more bears than bulls)
  • The spread on the AAII survey declined to -6%
  • The spread on the Ticker Sense blogger survey fell to -31%, its 2nd most bearish reading this year
  • The public short ratio hit 72.9%, just shy of its 73.1% record a couple of weeks ago
  • The Rydex Nova/Ursa ratio, which measure funds flowing into Rydex's bullish or bearish funds, hit 0.60. This is the most bearish reading since August '07.

So bearish sentiment certainly ticked higher last week, and could have quite a way to unwind. Tech stocks, and growth stocks in general, are lagging today and the distinct lack of leadership in the market keeps me a bit cautious here. But if the market continues to consolidate at these low levels, without breaking the July lows, it could set up nicely for a much needed year-end rally.

Fannie Bailout Sparks Market Rally, But Is It Time To Buy?

The market is surging on the news of the Fannie/Freddie bailout by the Treasury. The Treasury Dept. is placing the companies under a conservatorship, and will provide up to $200 billion in capital. This sparked a big rally in the market, as investors hope it will help ease the credit crunch.

Bank stocks rallied strong, with the bank index up more than +5.5%. Housing stocks rallied even more, with that index up +6.7% on hopes that the mortgage market will start working again with capital and loans flowing more freely to people who want to take advantage of the price declines and start buying homes.

Fannie Mae (FNM) was created in 1938 (Freddie in 1970), and always had the implicit guarantee of the government. That's why it was called a "GSE" (govt.-sponsored entity). But until now, the government has never had to step up and make that implicit guarantee explicit to the markets. Of course, investors already knew these entities were too big to fail, given how many mortgages they have facilitated.

Asian markets also soared overnight, up anywhere from +3-5%. The dollar is also stronger again this morning. Bond yields are higher, with the 10-year yield at 3.76%. And oil is up, but struggling to hold the $107 level.

Every sector is now higher in the market, but the Nasdaq is lagging as many big-cap tech stocks are flat. To me, it still feels like some big funds are liquidating, and using any bounce in the market to sell. This is probably why the ARMS Index hit 2.62 this morning, even as the market was soaring.

The question now becomes, is this THE bottom? Hard to say. For now, the S&P 500 and Nasdaq aren't even above last Thursday's highs. So there is plenty of work ahead for the market to get through all of the overhead resistance from higher prices.

But on the plus side, the indexes have not violated their July lows, making for a constructive technical pattern. So the overall trend is still down, but at the margin it looks like things are improving. I have not taken off my hedges yet, and will continue to monitor the price/volume action from day to day. Also, there still is a lack or clear leadership emerging.

long SDS

Sunday, September 07, 2008

Fannie and Freddie Bailout

Here is all we know so far:

WASHINGTON (Reuters) - The U.S. government announced on Sunday that it was taking control of troubled mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE), effectively wiping out shareholders' interest in the publicly traded companies.

The regulator of the two companies, the Federal Housing Finance Agency (FHFA) will manage the two companies on a temporary basis.

The takeover is the second rescue bid engineered by the U.S. Treasury Department in little more than six weeks. It came as confidence in the firms' ability to keep operating amid a deepening housing crisis continued to erode.

Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart, regulator for the so-called GSEs or government-sponsored enterprises, called a Sunday-morning news conference to spell out the latest rescue effort.

The announcement followed an intense round of meetings on Friday and Saturday with directors and top leaders of the GSEs, who are expected to be dismissed after having come under stiff criticism for their high pay and management shortcomings.

The two mortgage companies are a vital cog in the United States housing industry because they own or guarantee almost half the nation's $12 trillion in outstanding home mortgage debt. The housing sector would have difficulty recovering from its deepest slump since the Great Depression unless Fannie or Freddie are stabilized and able to continue their role in buying mortgage loans and packaging them into securities sold around the world.


I'm sure this will lead to a big relief rally on Monday. But the rumors and expectations for this bailout have been building for some time. As such, this news is not a total surprise for the market, and thus I do not think it has the potential to completely change the bearish sentiment on Wall St. in one fell swoop.

But so far, the market has held above the July lows. We still have quite a bit of time before the Election, but if the market does not make new lows in the interim, it would be a bullish technical pattern that should support a nice year-end rally. Patience is key.

Friday, September 05, 2008

Weak Jobs Data Spurs Selling In Early Trading

The nonfarm payrolls report didn't inspire a lot of confidence this morning. Actually, it wasn't the headline figure, which came in at -84,000 jobs lost (vs. -75,000 consensus). This number is still below where it often is during recessionary periods. But the unemployment rate jumped up from 5.7% to 6.1%, which I believe is a 5-year high.

The 10-year yield is falling further, to 3.58% this morning. The other day I commented that lower yields were likely signaling reduced inflation expectations, but the continued drop to these levels surely is a sign that the bond market is growing more worried about economic growth.

2Q GDP was very high, above +3%, but it also had the benefit of the government stimulus checks. GDP in the second half of the year is likely to slow much more as the credit/housing malaise lingers.

The dollar is mixed this morning, and oil is falling for a 6th day, now below $107. I think the energy and materials stocks are getting way oversold, like the financials were in July, and a sharp rally could ensue at any time.

That said, I am staying defensive until I see signs of a more meaningful bottom, one that includes the spikes in bearish investor sentiment seen at prior bottoms.

Thursday, September 04, 2008

Will The July Lows Hold?

The market sold off with a vengeance today. I have to say it continues to feel like forced margin selling and liquidations among big hedge funds. We already know that $4B Osparie blew up, and today, an even bigger hedge fund (Atticus) had to publicly deny rumors they were liquidating.

Today's selloff puts us very close to the July lows. The question is: Will the July lows hold? The answer is a tough one. The bulls point to the fact that the July lows coincided with total panic in the financials, and that the sector has been acting much better since. I can't argue there.

But the bears will say that the rest of the market is now rolling over also, and that the September-October time frame is a notoriously difficult time period in the market, and one where market bottoms are often made. This argument holds a lot of water as well, and I would currently have to say that I think the July lows will ultimately be broken.

Tomorrow is Friday, and if the sellers emerge again ahead of the weekend, we could see the lows tested tomorrow. If not, I think there is a good change we bounce first, as today saw some panic selling. To wit:
  • 90% of today's volume was on the downside
  • The volatility index (VIX) spiked +12% to 24.03
  • The ARMS Index hit 2.89, an extreme level
  • Volume rose for a third straight session, signaling heavy distribution

I am still holding lots of cash as well as my SPX hedges. I do not anticipate putting that cash to work in a meaningful way until I see the typical signs of capitulation witnesses at prior trading bottoms. And if we bounce in the short-term, I would consider adding to my downside hedges. Risk management is an active process, but every little bit helps.

long SDS

Bearish Tone Pervasive In Early Trading

The economic reports were pretty good this morning, but the market has taken a decidedly bearish tone, and seems only focused on the negatives right now.

The ISM Services Index came in at 50.6 (vs. 49.5 consensus), which shows the services sector faring okay. Nonfarm productivity increased +4.3% (vs. +3.5% consensus), while unit labor costs fell -0.5%. So the inflation readings were also benign this morning.

But the weak showing of many retailers in today's retail sales reports, coupled with the news of a potential strike at Boeing, and the ongoing worries about the global economy are weighing heavily on everything this morning. Commodity and industrial stocks are down the most, followed by housing, brokers, and even technology.

The dollar is higher again this morning, putting additional pressure on commodities. Oil is lower, now below $109. The 10-year yield is also lower, touching nearly a 5-month low at 3.66%.

The VIX is up +5.5% to 22.60, which is still well below the 30 level reached in mid-July. The put/call ratio is at 0.91. Given the selling, I would have expected it to be above 1.0. This tells me investor complacency may have gotten too high. I have maintained my SPX hedges, but on a day like today I always wish I had more protection on.

long SDS

Wednesday, September 03, 2008

Factory Orders Remain Surprisingly Strong

The market is a bit lower in early trading, despite some positive economic news. Factory orders in July rose a stronger than expected +1.3%, the 5th straight month of positive growth. This supports the notion that while the finance/lending/housing markets are deep in recession, the industrial side of the economy is in okay shape, and has kept the overally economy out of a true recession.

I have written how the selling in commodity-related stocks has been relentless, and felt like some big funds were in trouble. Last night came the news that the hedge fund Osparie, which Lehman owns 20% of, lost -27% in August and will close down.

When a $4 billion fund is forced to liquidate, it creates massive selling pressure, not to mention that I'm sure this fund was not the only big hedge fund caught leading the wrong way recently.

Corning (GLW) is down -8% after issuing an earnings warning that Q3 results will come in below expectations due to lower LCD glass shipments (global slowdown?).

Asian markets were mixed overnight; oil is lower for the 4th day, near $107.85; and the 10-year yield is lower to 3.72%, a new multi-month low.

While some will point out that this could signal slower economic growth, I think the lower yields have more to do with inflation expectations falling, which is a long-term positive. Lower yields should also help mortgage rates come down a bit, which is another step in the right direction for the housing market and an eventual bottom for that industry, maybe sometime in 2009.

Tuesday, September 02, 2008

Major Indexes Stage Outside Reversal Day

Today's market action was not comforting if you are bullish. I often say that I dislike markets that open strongly, as they are prone to reversals. Never was that more true than today's session.

The Dow rallied roughly +245 points in early trading, but then fell by almost -300 points before bouncing slightly into the close. There was really no big news events that caused the reversal, it was just selling that began to feed on itself and gain momentum into the close.

If you look closely at the graphs above, you will see that the major indexes staged what are called 'outside reversals' today. That is, both the S&P 500 and the Nasdaq rallied above yesterday's high, but then reversed and close below yesterday's low. Hence, the moves for the day were outside of Friday's range, both on the upside as well as the downside.

This type of action usually leads to more weakness in the near-term. I would not be surprised by this, and actually have been looking for some near-term weakness, which is why I put those hedges on. I sold my financials hedge today, as that group has been acting much better, but I held onto my S&P 500 hedge.

The commodity selloff continues to weigh on things right now, even as it should be bullish for the market longer-term. If the market makes a higher low than the levels reached in July, it could set the stage for a nice year-end rally, which it seems like fewer and fewer people are calling for these days.

long SDS

Early Look: Oil Plummets As Gustav Weakens

The market is soaring in early trading, on the heels of another big drop in the price of oil. Hurricane Gustav failed to cause any serious damage over the weekend, and that has helped push oil prices -7% lower. Natural gas prices are also down sharply.

The energy sector is the weakest perfomer so far (-3.7%), while the bank index is soaring (+3.4%). Retail stocks are also faring well as the drop in oil and gas prices is seen as a boost to the consumer.

The dollar is also strong this morning, which is weighing on commodity prices across the board. Anything remotely related to commodities is being sold this morning, from oil to gold to ag to steel. The 10-year yield is higher at 3.82%.

Asian markets were mostly lower overnight, on the drop in energy prices and some political instability as Japan's PM stepped down.

Last week saw a lot of day-to-day volatility, but volume was very weak as many were on vacation. So this week's action will be viewed as more meaningful, and this morning's strong start is a welcome sign for the bulls.

I would say that we need to see the S&P 500 close above 1300 on strong volume for starts. I would also like to see the SPX take out 8/11 highs at 1313. For the Nasdaq, we need to close above the 200-day at 2411 for starts, and then see 2475 taken out.

Last week I mentioned that I had put on some hedges in our portfolios, as I was worried about the market. Those hedges weigh heavily on days like today, and I will most likely get stopped out on them by the close today.

long SDS, SKF

Monday, September 01, 2008

Weekly Wrap

Here is the weekly recap from Briefing.com:

We said at the beginning of the week that participation would be on the low side, but that low volume didn't preclude the market from making big swings. In fact, big swings in the major indices are an ordinary happening in thinly-traded markets.

As it turned out, the market stayed true to the form we predicted.

Volume totals at the NYSE were at their lows for the year in each of the first three sessions this week, and didn't exceed 1.0 billion shares all week. In that span, we saw the S&P 500 drop 2.0% on Monday, gain 0.4%, 0.8% and 1.5%, respectively, Tuesday through Thursday, and then drop 1.4% on Friday.

The net result is that the market ended the week down 0.7%.

A gloomy earnings report from Dell (DELL) after Thursday's close and a report that personal income fell by a larger-than-expected amount in July interrupted what was shaping up to be a winning week for the market. That combination led to a broad-based selling effort Friday ahead of the holiday weekend.

From an economic standpoint, the personal income report was the only true disappointment for the week. Outside of that report, the remaining notable releases -- existing home sales, new home sales, consumer confidence, durable goods, initial claims and revised Q2 GDP -- all brought relatively good news.

The biggest surprise of all was the latter report. Second quarter real GDP was revised up to 3.3% from 1.9%. Favorable revisions to net exports, inventories and personal consumption were the major drivers for the upgraded measure of growth.

The revised GDP number showed the economy was a long way from recession in the second quarter. Heck, the 3.3% rate of growth is even above the long-term trend.

Clearly, the fiscal stimulus package has helped in this period while the weaker dollar has been a major boon for exports. What's more is that the trends in the data so far suggest real GDP growth in the third quarter shouldn't be that far off from the second quarter.

Speaking of direction, Hurricane Gustav is moving its way through the Gulf of Mexico and is currently projected to make landfall somewhere along the Gulf Coast as a major hurricane early next week. Its impending arrival is forcing the closure of oil rigs in the Gulf, yet it was remarkable that oil prices gained less than 1.0% for the week in the face of that threat and a festering geopolitical situation with Russia.

Word from the Department of Energy that it will release oil from the Strategic Petroleum Reserve to combat the supply disruption from the hurricane proved to be a mitigating factor that kept oil prices in check.

Separately, neither Fannie Mae (FNM) nor Freddie Mac (FRE) was held back this week. Granted they ran into some profit taking on Friday, but the absence of any bailout news and some relatively successful debt offerings paved the way for big gains in the stocks. At their highs on Thursday, FNM and FRE were up 59% and 92% from the prior week's close.

Ahead of the Labor Day weekend then, it is evident that the real economy is functioning better than many reports suggest. Given the light volume, though, a verdict on the stock market's direction will have to wait until the conventional wisdom of the crowd returns from vacation to supplant the trading inclinations of a smaller group of participants.