Friday, February 27, 2009

Economic Growth Contracts At Fastest Rate Since 1982

The market is disappointed with this morning's economic news, which showed that Q4 GDP contracted at a rate of -6.2% (vs. -5.4% consensus). This is the steepest drop in economic activity since 1982. Given that consumer spending is a big part of this calculation, and that it remained weak well into Jan-Feb, it is likely that Q109 GDP will also show significant weakness.

Nonetheless, I have been saying that the massive monetary and fiscal stimulus will begin to produce its desired effect, and GDP growth should begin to rebound later this year and into 2010. These stimulus programs always have a considerable lag before they start to kick in, and given the severity of the contraction, it is taking a little longer this time around.

While the market is in a rough spot right now, I also believe it will begin to price in the rebound in economic growth sooner than later, and the second half of the year should be stronger as a result. My forecast is for the market to actually sqeak out a positive year by December 31st. I know that seems heretical now, but it is still early in the year.

Asian markets were mixed overnight, with Japan higher and China lower; the dollar is mixed today vs. the Yen and the Euro; oil is trading lower (near $43.50), while gold is back above $950; the 10-year yield is higher for a 5th straight day, to 3.02%; and the VIX is slightly higher to 45.7.

Trading comment: The S&P 500 broke below its November lows this morning, but has since rebounded. The Nasdaq and Russell 2000 have actually climbed back into positive territory. While I have said that a break of these November levels could lead to new lows, I think we could see a bounce first.

The market is very oversold at this juncture, so piling on additional shorts into this weakness is a high risk proposition. I think a more prudent strategy will be to wait for a bounce, and add back some hedges into any market strength.

Thursday, February 26, 2009

FDIC Report Shows That More Banks Pop Up On "Problem List"

At year-end, 252 insured institutions with combined assets of $159 bln were on the FDIC's "Problem List." These totals are up from 171 institutions with $116 bln in assets at the end of the third quarter, and 76 institutions with $22 bln in assets at the end of 2007.

Expenses associated with rising loan losses and declining asset values overwhelmed revenues in the fourth quarter of 2008, producing a net loss of $26.2 bln at insured commercial banks and savings institutions. This is the first time since the fourth quarter of 1990 that the industry has posted an aggregate net loss for a quarter.

High expenses for loan-loss provisions, sizable losses in trading accounts, and large writedowns of goodwill and other assets all contributed to the industry's net loss. A few very large losses were reported during the quarter—four institutions accounted for half of the total industry loss—but earnings problems were widespread. Almost one out of every three institutions (32%) reported a net loss in the fourth quarter.

Only 36 percent of institutions reported year-over-year increases in quarterly earnings, and only 34 percent reported higher quarterly ROAs

UK Unveils Plan To Insure Banks

The market is getting a nice bounce this morning, although you know I generally prefer a market that opens weak and closes strong. A strong market open like this too often runs the risk of fading by the closing bell. Let's hope I'm wrong this time.

Yesterday's session was not that bad. Consider that the previous day the S&P rallied a strong +4% on heavy volume. 90% of the volume was "up" volume (stocks rising). Yesterday's 1% pullback on lower volume looks like it was just consolidating the previous day's rally.

Europe is also up on the news that the UK government will insure assets at banks to help protect against future losses. The FT said the plan is expected to cover as much as 600 billion British pounds of assets.

In economic news, new home sales for January were down -10.2% for the month. And January durable goods orders fell -5.2%. But we know January was weak. The question for the market is will we see signs of improvement later this year? And if so, the market will surely begin to move higher in advance of this.

In corporate news, IBM reaffirmed its earnings guidance for 2009, which is helping the stock bounce +4%. Flour (FLR) and American Tower (AMT) both reported better than expected earnings, and their stocks are higher as well.

The financials (banks) are leading the way today, with the bank index surging +9.6%. Health insurers are leading on the downside, suffering big drops on the news that Obamas budget plan will cut HMO payments, etc.

Trading comment: The SPX is still trying to lift above recent resistance. I took profits on some of our etf hedges around SPX 750, and will likely look to put some of those positions back on near SPX 800 (if and when).

We are only in day 3 of our short bond etf (TBT), but that position is already +6% in our favor. Aside from that, what makes this market more difficult than the obvious is that there are no real leadership groups. That means we need to be more active in trading the indexes, using hedges, and broadening our asset class exposure to include bonds, gold, commodities, etc.

long GLD, TBT

Wednesday, February 25, 2009

Stocks Have Mild Pullback, Close Above Morning Lows

With an hour left in trading, the market had climbed all the way back to positive territory. A late day selloff caused the major indexes to close with -1% declines, but this isn't all bad considering yesterday's +4% surge. Volume also looks to have run lighter than yesterday's levels, a plus.

This afternoon the Fed and Treasury released some key details pertaining to the bank stress-test plan, which will be conducted on the nations largest financial institutions -- those with over $100 bln in assets -- over the next two months. Here are some of the details (from

Essentially, govt supervisors will meet with the bank mgmt teams to assess the bank's potential losses and estimated resources to absorb those losses. If it is determined that the institution requires additional capital to absorb the estimated losses, it will enter into a commitment to issue a "CAP" (capital assessment program) convertible preferred security to the U.S. Treasury in an amount sufficient to meet the capital requirements.

Notably, the terms of these securities appear fair, with the capital provided under the CAP coming in the form of a preferred security that is convertible into common equity at a 10% discount to the price prevailing prior to February 9th (determined by the average closing price of the 20-day trading period prior to 2/9).

CAP securities will carry a 9% dividend yield and would be convertible at the issuer's option (the bank issuing the security will decide when it is converted). After 7 years, the security would automatically convert into common equity if not redeemed or converted before that date.

This Feb 9th conversion price fixes the amount of dilution to common shareholders upon conversion. Additionally, if the banks are determined to require additional capital, they have the option to obtain private capital if it is available to them... The plan essentially backstops the nations biggest financial institutions, with a few strings attached (although the restrictions are not surprising) -- the banks receiving capital will be required to submit to Treasury monthly reports on their lending and will be subject to restrictions on paying quarterly common stock dividends, repurchasing shares, and pursuing cash acquisitions.

Bottom line: The release of additional details is a clear positive for the financial sector, and thus the market. The terms appear to be non-punitive (a 9% yield is not egregious in the current environment), and the participating banks have flexibility with regards to the conversion decision.

A number of banks that could be participants in this program have moved higher in the wake of these details, including the following: RF, KEY, STI, BBT, BAC, JPM, WFC, PNC, USB, FITB.

Did Obama Come Up Short With Investors?

I'm not sure how much of this morning's decline is attributable to Obama's speech last night, but I did have a strong feeling going into his speech that it would be full of sound bites, light on details, and do little to inspire confidence in the markets.

I think one of the things that helped the markets yesterday was when Bernanke actually provided some details on his plans. Remember, the market hates uncertainty, and that is one of the reasons all of this guesswork by the Administration hasn't helped more to date. We need details - details of how the toxic asset plan may work, details on mortgage modifications, details on additional TARP-like capital injections, etc.

In corporate news, there were some earnings reports. Dollar Tree (DLTR) beat estimates, and that stock is higher. Smucker (SJM) lowered guidance and WYNN missed estimates, and those stocks are lower. Also, Agrium (AGU) has proposed to acquire CF Industries (CF) for a 30% premium to last night's close.

Trading comment: Yesterday I took profits on our short real estate etf (SRS) and added back our short bond etf (TBT) positions. Yesterday's bounce came on solid volume, and should last more than one day, imo. This morning's pullback is a bit disconcerting, but its still early.

long TBT

Tuesday, February 24, 2009

Bernanke Testimony Soothes Markets, For Once

Bernanke spoke before the Senate Banking Committee today, and surprisingly the market found solace in his comments. Here is a summary of Bernanke's testimony today:
  • The measures taken by the Federal Reserve, other U.S. government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets. In particular, strains in short-term funding markets have eased notably since the fall, and London interbank offered rates (Libor)--upon which borrowing costs for many households and businesses are based--have decreased sharply.
  • Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds seen in September have been replaced by modest inflows. Corporate risk spreads have declined somewhat from extraordinarily high levels, although these spreads remain elevated by historical standards. Likely spurred by the improvements in pricing and liquidity, issuance of investment-grade corporate bonds has been strong, and speculative-grade issuance, which was near zero in the fourth quarter, has picked up somewhat.
  • As I mentioned earlier, conforming fixed mortgage rates for households have declined. Nevertheless, despite these favorable developments, significant stresses persist in many markets. Notably, most securitization markets remain shut, other than that for conforming mortgages, and some financial institutions remain under pressure. In light of ongoing concerns over the health of financial institutions, the Secretary of the Treasury recently announced a plan for further actions.
  • This plan includes four principal elements: First, a new capital assistance program will be established to ensure that banks have adequate buffers of high-quality capital, based on the results of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve. Second is a public-private investment fund in which private capital will be leveraged with public funds to purchase legacy assets from financial institutions. Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially other types of asset-backed securities as well. Fourth, the plan includes a range of measures to help prevent unnecessary foreclosures.
  • Together, over time these initiatives should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery. The Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet.
  • In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside.
  • To further increase the information conveyed by the quarterly projections, FOMC participants agreed in January to begin publishing their estimates of the values to which they expect key economic variables to converge over the longer run (say, at a horizon of five or six years), under the assumption of appropriate monetary policy and in the absence of new shocks to the economy.
  • The central tendency for the participants' estimates of the longer-run growth rate of real GDP is 2-1/2 percent to 2-3/4 percent; the central tendency for the longer-run rate of unemployment is 4-3/4 percent to 5 percent; and the central tendency for the longer-run rate of inflation is 1-3/4 percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run.
  • These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than two or three years.

Banc of America memo on "Nationalization"

WSJ Deal Journal provides BAC's internal memo from CEO Ken Lewis:

"I want to address any questions about Bank of America that may be arising as a result of the news that at least one of our competitors is now in discussions with the government to negotiate an enhanced public stake in their company. I have said repeatedly that our company does not need further assistance today and I don't believe we'll need any more in the future. That includes the potential conversion of the government's preferred shares into common shares that would dilute existing shareholders. You may have read that the first step in the government's broader plan to assist the banking industry will be a series of "stress tests" to evaluate the current financial condition of banks and their ability to withstand various economic scenarios. We are constantly running our own stress tests, which continue to show that our capital and liquidity are sufficient to meet today's economic challenges, as well as economic scenarios that include much higher unemployment rates than we have today. The final point I want to make is that our business prospects and financial condition are far superior to those of most of our competitors... While I would not want to try to predict how much we'll earn in 2009, we do expect to have revenues of more than $100 billion. Our tangible common equity ratio is currently about 2.68%, very close to investors' standard threshold of 3.0%..."

Market Bounces After Testing November Lows

The market is getting a small bounce in early trading, after a handful of better than expected earnings reports. Yesterday, the market declined significantly, testing the November 2008 lows. As I mentioned yesterday, whether this "retest" will be successful can only be known in hindsight. But for now, I would not be surprised to see a bounce into month-end.

Chairman Bernanke is giving his semiannual monetary policy report to the Senate Banking Committee today. I can't remember the last time the market rallied when one of these hearings was being televised, but maybe today will buck the trend.

In corporate news, there were several better than expected earnings reports, including Home Depot (HD), Heinz (HNZ), Macy's (M), and Nordstrom (JWN). Target (TGT) missed expectations, and its stock is slightly lower.

Also, JPMorgan (JPM) slashed its dividend from $0.38 to $0.05 to help protect the company's balance sheet. The company also said it expects to be profitable in 2009. The bank stocks are trading higher this morning as a group.

In economic news, the CaseShiller Home Price Index fell again in December, with the 20-City Composite showing a -18.6% decline. Stability in the housing market remains elusive. This is a key ingredient to stabilizing the markets, so new initiatives to help homeowners is key.

Also, I am hearing there might be an announcement on "mark-to-market" rules, which would be HUGE for banks. Let's keep our fingers crossed.

Asian markets were lower overnight; the dollar is mixed this morning; oil is slightly lower near $38, while gold is down for the 2nd day after touching $1000; the 10-year yield is lower to 2.74%; and the VIX is -5% lower, breaking just below the 50 level (a good sign).

Trading comment: Yesterday I took profits on our Nasdaq hedge (QID) as well as our emerging market etf hedge (EEV). So far, those look like good moves. I have not added any additional long exposure, but may look to do so if today's early strength can hold.

The market is now deeply oversold, and I expect a bounce into month-end at least, if not a bit more. I am also looking to reestablish my short bond position (TBT) now that bond yields have drifted lower again.

still long a little EEV

Monday, February 23, 2009

Monday Morning Musings

So much for blogging from Mexico. I got back late last night, and am still trying to shake off the cobwebs. And this market isn't helping!

I had been writing over the last week or so that the fact that the S&P couldn't bounce convincingly from the 800 level concerned me. When that level was broken last week, it opened the door to further selling last week and a retest of the November lows.

Whether said retest will be successful can only be determined in hindsight, so we need to watch the market carefully to see where it finds support. The constant deluge of news from the government makes it difficult to forecast beyond the very short-term. And this uncertainty is being reflected in the high volatility index (VIX), which is hovering above the 50 level.

The dollar is up today and the Yen continues to move lower, which should be a positive. Gold is also lower after brushing the $1000 level last week.

Financials are one of the few groups higher this morning, after the government said it will convert its preferred shares into common equity, which will increase its stake in the company to as much as 40%. The govt. also announced that the Capital Assistance Program will be initiated Feb. 25th, and serve to address the capital needs of banks.

Asian markets were mixed overnight. The 10-year yield is up to 2.81%, below last week's high of 2.88%.

Trading comment: Last week I put on additional hedges (before I left) as the market struggled. With the SPX testing the 750 level (it hit 754), I would think a bounce is in order. The question for me is whether to take profits on those hedges, add some new trading long positions, or some combination of both.

In a volatile market like the one we've had this year, trying to make numerous small trades will make a big difference vs. buy and hold strategies.

Tuesday, February 17, 2009

Gone Fishin'

The market took it on the chin today, and it appears we are in the "retest" phase of the November lows. Said retests are never fun, and usually cause more investors to capitulate as they can't take the pain. But this is how bottoms are made.

I continue to believe that investors, as a whole, are showing little patience with the huge fiscal and monetary stimulus programs. These things take time to have their desired effect on the economy. I suspect by late 2009 the market will begin moving higher as it anticipates renewed growth in 2010.

As for me, I am taking my daughter to Mexico tomorrow for a quick 'daddy & daughter' trip. I will try to do some blogging while I'm there, but those of you with 4 yr old kids know that they don't exactly give you much down time to get personal stuff done.

Trading comment: I added the emerging markets etf (EEV) as a hedge today.

long EEV

Investors Skeptical of Stimulus Plan Being Signed Today

The market is sharply lower in early trading, on the heels of weakness in overseas markets. There remains considerable concern about Europe's financial institutions, slowing economic growth in Asia (Japan), and a stimulus plan here in the U.S. that has done little to reassure investors.

Outside of the above issues, there is no real catalyst that is causing the weakness in the markets this morning. Safe havens are trading higher, namely Treasuries and gold. The 10-yr yield is down to 2.67% today (-7%) and gold is another 3% higher to $965 (its high last year was $1033).

There are a couple of stocks that are bucking the weakness. TEVA and WMT are both higher today after reporting solid earnings reports. TEVA also raised its dividend.

Oil is also very weak today, trading back down to $35. This is weighing heavily on the energy stocks, as well as material stocks.

And the VIX is spiking +14% right now, pushing it back above its 50-day near 49.21.

Trading comment: The S&P 500 has broken below that key support I have been watching (815-820). As such, I want to get more defensive. I still have half of the etf hedges I bought recently, but will look to add to them on any strength. I will look to add the eft that hedges emerging markets (EEV).

Friday, February 13, 2009

Joke of the Day

Here is a link to a funny cartoon that was making the rounds yesterday:

Stocks Firm Ahead of Long Weekend

Stocks opened a little soft, but quickly moved into positive territory as investors wonder if the market can build on yesterday's strong turnaround. This weekend is a 3-day weekend, and the stimulus plan vote is supposed to come tonight, so I doubt traders will be willing to take any big positions ahead of the weekend.

In corporate news, Pepsi (PEP) and Abercrombie (ANF) both reported solid earnings and their stocks are nicely higher. Outside of these reports, there is not much market moving news this morning.

Asian markets were positive overnight, with China nearning a five-month high. The dollar is mixed today, but the Yen is weaker which is a positive sign. Oil is higher, near $35.50, and gold is lower after hitting $950 yesterday.

The 10-year yield is up to 2.86% today, after a 3-day slide. And the VIX is lower again, to 40.85, following a big downside reversal yesterday. A break below 40 would be another positive development to watch for.

Trading comment: Yesterday's session was dicey, as the SPX broke below the 815 level, but then rebounded sharply late in the day to recoup all of its losses. I took partial profits in my inverse etf hedges, but still have half my positions on.

Unless the S&P 500 can recapture its overhead 50-day average in the near future, my inclination will be to add back to my hedges and get more defensive. But I want to give the market the benefit of the doubt first.

long SSO

Thursday, February 12, 2009

Stocks Get A Big Save From Obama Administration

Wow, what a turnaround. It seems the biggest turnarounds always come when things look the worst. I have been writing about how I was watching the SPX 815-820 level to hold, and that if it didn't we could be looking at a retest of the November lows.

So as the market broke below 820 and proceeded toward the SPX 800 level, I began to think about getting more defensive. But lo and behold, an announcement from the Obama Administration about stemming foreclosures sparked a huge short-covering rally.

If you look at the chart above, you can see how the SPX came down and tested the 808 level before rallying a full 3.3% in the last hour to close at its highs. With the market oversold, I suspect that this could lead to a bit more of a bounce. But unless we see real conviction on the part of buyers, I still think a retest of the lows could be in the cards for March. But one step at a time.

Here is the jist of the announcement that came in the last hour of trading and sparked the rally:
  • The market has staged an impressive afternoon rally, with the Dow surging more than 200 points off the afternoon lows, erasing most of the day's earlier losses. The rally was triggered by a Reuters report that the Obama administration is working on a program to subsidize mortgage payments for troubled homeowners who have gone through a standardized re-appraisal and affordability test.
  • Under the plan being contemplated, mortgage companies would use a uniform eligibility test even before a borrower becomes delinquent, sources said. This would set up a standardized mortgage modification process.
  • The financials, which were one of the weakest groups in the market, have seen the biggest lift on the news, likely fueled by short-covering. Banks with mortgage exposure (WFC, JPM, BAC, PNC, STI, BBT, FITB, KEY) saw a notable lift, as they will likely be the most heavily impacted by the plan.
long SSO

Treasuries Remain The Only Option In A Perilous World

No, I am not abandoning stocks in favor of U.S. Treasuries. The title for this post came from an article in the Financial Times, where a Chinese official was quoted as saying that China will continue to buy Treasuries since such investments are the "only option" in a perilous world.

There has been much concern that at some point, China would stop buying our bonds, and interest rates would rise. But given the state of the global economy, U.S. bonds still offer the best relative safety in the world, especially at the size of China's reserves.

As for the stock market, it is under heavy selling pressure this morning despite some positive news. January retail sales rose a much better than expected +1.0%, versus expectations for a decline of -0.8%. Maybe consumers are starting to come out of their bunker shelters after all.

There continues to be considerable angst over the economic stimulus plan. I almost get the feeling that investors don't even want the plan to pass. Every time it gets closer to a vote, the market sells off. I am not particularly enamored of this plan, as I think it is too full of pork, and too thin on real stimulus, but I would still take it over no stimulus plan at all. I think a year from now investors will be happier, as all this stimulus starts to produce results.

Asian markets were lower overnight. The dollar is higher, which is weighing on commodities. Oil is lower again, near $35, and just can't seem to rally as concerns over global demand persist. Gold is higher, nearing the $950 level.

The 10-year yield is slightly higher to 2.78%. And the VIX is just below its 50-day average at 44.50. I think the fact that it again turned lower after hitting its overhead 50-day is a small positive.

Trading comment: I am taking partial profits on my short hedges (inverse etfs), and thinking about adding back some long exposure if the market holds in. I have been watching the SPX 815-820 level for support. So far today, those levels are holding, but it is the market close that counts.

The biotech etf (XBI) continues to exhibit strong relative strength, and that is one place I am looking to add. The other would be the tech sector, which also continues to hold up better than the overall market.

long XBI; less long QID, SRS

Wednesday, February 11, 2009

Expectations Were Too High For Geithner

I think the selling yesterday was way overdone. Expectations had simply gotten too high relative to what Geithner had to deliver. I agree that he really didn't give us any new details on the bank rescue plan, and that was a letdown. But without any new negative news, I don't think the bank index deserved to be punished for -14%.

I had been commenting on how the put/call ratios were getting low, signaling that complacency was on the rise amongst investors. Conversely, the VIX was still high in the 40s, signaling that options players expected continued volatility. That was a prescription for a pullback yesterday, which could last for more than one day, but hopefully isn't a signal of a new leg down.

The market opened higher this morning, which always worries me in terms of its sustainability. Lo and behold, as soon as more Congressional testimony started, the market began to selloff. The market sure does hate when these Congressmen are on TV. Maybe we should just short every upcoming appearance for a trade? Probably would have worked well over the last 6 months.

In corporate news, Research In Motion (RIMM) reaffirmed guidance at the low end of estimates, which is being greeted with heavy selling in the stock. Arcelor Mittal (MT) and Credit Suisse (CS) missed earnings estimates, but the stocks are higher. Genzyme (GENZ) reported earnings that topped expectations.

Asian markets were mostly lower overnight. The dollar is mixed. Gold is higher, and oil is flat. Oil has been up the past 2 mornings, but reversed lower both days. The 10-year yield is lower at 2.77%. And the VIX is flat near 46.2.

Trading comment: I expected a pullback yesterday for the reasons I have been discussing, but I didn't not expect the extreme selling pressure we witnessed. Today I will be taking partial profits on some of the etf hedges I put on recently. I will not be taking full profits, as I want to see if the market can find some support and stabilize. Right now, I am watching the SPX 815-818 level to see if it holds.

less long QID, SRS, SDS

Tuesday, February 10, 2009

Stocks Open Lower Ahead of Geitner Speech

The market is opening lower ahead of the much anticipated speech by Treasury Sec Geitner about the bank rescue plan. The market has been moving higher over the last few days, so this looks like a bit of the old 'buy the rumor, sell the news' action.

Many are skeptical that the new plan will have any revolutionary details. Most think that he will talk about public and private funds coming in to support "bad assets" on banks balance sheets (estimates near $500 billion), expand existing lending facilities, and announce additional steps to stem deteriorating mortgage conditions.

It is this last proposal that has been the subject of the most debate. There seems to be no clear way to offer new, lower interest mortgages without someone on the line to take a loss on the value of the home still being worth less than it was purchased for.

Oil is trading higher this morning, near $41, after the WSJ reported that OPEC is considering postponing new production projects.

Asian markets were mixed overnight. The dollar is slightly lower this morning, while gold is higher. The 10-year yield is 10 bps lower to 2.92%. And the VIX is higher to 45.4.

Trading comment: Yesterday I took profits in some energy and materials etfs, and also wound up putting on a small hedge in the Nasdaq. The Nazz is handily outperforming the S&P so far this year, and that relative performance gap could narrow.

Speaking of the SPX, it once again bumped its head at its overhead 50-day average. We still need to see a close above that level before the SPX is ready to breakout of this recent trading range.

long QID

Monday, February 09, 2009

Companies That Might Not Survive

Yahoo Finance ran an article this morning that highlighted 15 companies that might not survive.

I was surprised to see some of the names on this list. Of course, even if some of these companies default on their debt they will likely go through restrucuring and continue to operate in some form.

Here is the list: 15 Companies That Might Not Survive 2009

Monday Morning Musings

There are no big earnings announcements or economic reports this morning, so the markets are awaiting news from the govt. about the various stimulus programs being discussed.

The Treasury (Geitner) was going to announce its bank rescue plan today, but they have pushed it back to tomorrow morning so that govt officials could focus on the economic stimulus bill. The Senate said the vote should come this week.

Separately, the Treasury said that the insurance companies will be eligible for TARP funds, and this is helping boost those stocks materially.

The dollar is lower this morning, which is helping boost oil and commodities. Oil is trading near $42, and the energy stocks are leading the action so far. Schlumberger (SLB) was added to Goldman's Conviction Buy List, and the oil services stocks as a group are up +4% on average.

The Baltic Dry Index, a measure of global shipping activity, rallied again and is up 10% today. This is helping the materials stocks, and helped boost China's market overnight. The other Asian markets were mixed overnight.

The 10-year yield is back up over 3.00%, for the first time since last November. This could be construed as a sign that the bond market is starting to look past the recession. Although this view is complicated by the fact that the Fed has said it could start buying long-term Treasuries to keep a lid on rates.

Trading comment: The market is lifting as I finish this post, and I am finally taking partial profits on some of my etf positions. Both the oil service etf (IEZ) and the ag. etf (MOO) have lifted nicely since I added to them a few weeks ago, so I want to lock in some of the gains.

The 10-day put/call ratio has fallen back to levels that have preceded market pullbacks in the past. It is now down to 0.83. The last couple of times it hit these levels, the market experienced a sharp pullback in short order. A couple of times this signal was a few weeks early. But I am leaning towards adding some hedges to the portfolios nonetheless.

less long IEZ, MOO

Friday, February 06, 2009

Job Losses Grow, But Market Rallies In Anticipation of More Stimulus

Stocks are rallying in early trading, despite a weaker than expected jobs report. Nonfarm payrolls fell 598,000 in January, versus expectations for 540,000 jobs lost. The unemployment rate also ticked higher to 7.6%. That's still well below 1982 levels, even as I expect it to continue to tick higher in the coming months. But in the end, unemployment is still a lagging indicator. Don't use it to forecast the market.

With the jobs report behind us, investors are looking towards the announcements regarding the stimulus plan being proposed in the Senate, as well as a plan to help banks that is expected to be announced on Monday. Let's hope they address the mark-to-market issue that is hampering banks.

Bank stocks are leading the action, with the index spiking +8.7% so far. Banc of America (BAC) is rallying +22%, after several executives and the CEO bought more shares recently. I would think Ken Lewis wouldn't invest millions of dollars if the bank was about to be nationalized, or the common stock was going to be wiped out. The buying stands in stark contrast to Lehman Bros., where no one was doing any insider buying during the collapse.

Energy stocks are lagging, after oil fell back below the $40 level. Insurance stocks are also weak after Hartford Financial (HIG) reported earnings and said that it will look to reduce risk and cut its dividend.

Asian markets rallied overnight, with Hong Kong spiking +3.6%. The dollar is mixed this morning, while the Yen continues to drift lower. The 10-year yield is ticking higher to 2.94%. And the VIX is -2.5% lower to 42.65. I would like to see it get down below the 40 level in the near future.

Trading comment: I still have most of my trading etf long positions on, though I am getting closer to taking partial profits on MOO. The SPX might bump its head at resistance at its 50-day near 869. The put/call ratio has been low recently, so I also wouldn't be surprised to see a couple day pullback next week.

If we get a big Monday open on the heels of some bank news, I will probably look to put on some short-term hedges in trading accounts via inverse etfs. But let's not get ahead of ourselves.

long MOO, SSO

Thursday, February 05, 2009

Chart of the Day: New Trend for the Yen?

I think the above chart was the most important development of the day. This is the chart of the Japanese Yen etf (FXY). The direction of the yen has been highly correlated with the equity markets over the last several years.

You can see that it began to break out last September, right about the time the equity markets embarked on a waterfall selloff. Today was the first day that the FXY closed decisively below its 50-day average since September 8th. That's quite a stretch.

Today's break below the 50-day, on rising volume, could be a signal that a new trend is at hand-- a new downtrend. Such a downtrend would likely provide a friendlier backdrop for equities and correlate to a stronger market for global equities.

A closer look at the chart above shows that the peak in the FXY was reached on 12/17/08, when it hit $114.61. That high was retested on 1/21/09, when the FXY briefly hit $114.42, but closed well off that level at $111.40. Technicians would call this trading pattern a "double top", which has bearish implications.

With a double-top left behind on the charts, and a break below the 50-day moving average, it looks like lower prices are in store for the Yen. I would even contemplate getting short the FXY, something that no trader has been willing to do in months.

Retail Stocks Bounce Despite Mixed Retail Sales Reports

The market opened lower amid worries of job losses and more weakness in the financials. Banc of America (BAC) and Wells Fargo (WFC) are both down in excess of -10% in early trading, weighing on the bank index. But the brokers are bucking the weakness, led by Goldman (GS) and Morgan (MS).

Retail sales reports were mostly pretty weak, except for Wal-Mart (WMT) which surprised the market with a +2.1% rise in same-store sales. Despite the weak reports (I will try to post a wrap-up later), most retail stocks are higher. (URBN looks good for more of a bounce)

In earnings news, Cisco (CSCO) beat earnings last night, but lowered its revenue guidance for next quarter. The stock was down after hours last night, but is hanging in there this morning. Also, Visa and Mastercard (MA) both beat earnings expectations and those stocks are nicely higher.

In overseas news, the Bank of England cut its key lending rate from 1.50% to 1.00%, while the ECB stood pat at 2.00%, as expected. Asian markets finished mixed overnight, amid weakness in tech stocks following CSCO guidance.

The 10-year yield is slighly lower at 2.90%. The dollar is higher, but oil and gold are both higher today as well. Go figure. The VIX is also up slightly near 45, but still in a downtrend (positive factor).

Trading comment: I am still long my trading etfs, as well as gold (GLD). I would really like to see the SPX recapture its 50-day to remain bullish. But if the SPX closes below 800-815, it could indicate a retest of the lows is in the cards.

Tomorrow is the big govt jobs report that often moves the market. Consensus is for a bad number, so let's hope that is already factored into the market and stocks can hold these levels into the weekend.

long GLD, SSO, WFC

Wednesday, February 04, 2009

Monthly Fund Update

January was a brutal month in the market, pulling back from the bounce off the 11/21 lows. The S&P 500 decline -8.6%, with many other markets faring worse. The EAFE Index (EFA) lost -13.7%. Here is a quick roundup of how some of the funds in our universe fared:

Top 5 mutual funds:
  • +3.4%: RiverNorth Core Opp
  • +1.5%: Nakoma Absolute Return
  • +0.6%: Ivy Global Natural Resources
  • +0.1%: Rydex Managed Futures
  • -0.7%: FPA Crescent

Bottom 5 mutual funds:

  • -13.7%: Marsico 21st Century
  • -13.6%: Trowe Emerg Europe
  • -11.7%: Hodges Fund
  • -11.6%: Artisan Internatl
  • -11.1%: Barons Partners

Amongst the international etfs that we use, only Brazil (EWZ) was higher for the month, rising +1.5%. All other markets were lower, with German, Australia, and Russia hit the hardest.

In fixed income, the high-yield funds performed the best (+5%), while preferreds fared worst (-11.7%). International bond funds also declined for the month (ave -4%), while US funds gained +0.5 - 2.0%.

By style, large-cap outperformed small-cap and growth outperformed value. The relative winner was large growth (-2.7%) while the hardest hit was small value (-13.7%).

Note: some Beverly Investment Advisor clients have positions in most of the funds mentioned

Stocks Rally In Early Trading, Led By Semis and Financials

The market is getting a nice bounce in early trading. The SPX is brushing right up against the 850 level again. If you look at the chart, you can see that the SPX has been magnetized by this level since Oct. 10th. But as the ranges continue to narrow, a breakout could be coming.

In economic news, the ADP payrolls report came in slightly less the expected, indicating 522,000 jobs were lost in January (vs. -535k consensus). The govt payroll report comes out on Friday. Also, the January ISM Services Index came in better-than-expected at 42.9 (vs. 39.0 consensus). This marks the second monthly rise. One more and we will have a trend!

In corporate news, more earnings reports rolled in:
  • Companies topping earnings expectations included: MetLife (MET), Clorox (CLX), and Yum Brands (YUM).
  • Companies missing expectations included Disney (DIS) and Kraft (KFT). Also, Costco (COST) didn't report earnings, but warned that profits would be well below consensus estimates. This has the stock trading sharply lower.

The strongest sectors so far are the semis and financials (led by the brokers). Retailers, drugs, and consumer staples are the laggards so far.

The dollar is higher this morning, but so are oil ($41) and gold ($906). The 10-year is also bouncing further, to 2.92%. The 10-year yield has been on a tear the last few weeks since bottoming at 2.20%. I think the higher yields are a positive indicator, reflective of future growth vs. a deepening recession.

The VIX is also 3% lower to 41.75. It has left another lower low on the charts, and is once again near the 40 level that it has bounced higher from the last 2 times.

Trading comment: I have still not taken any more profits on the recent etf positions I added (oil services, ag, etc). If they continue to bounce, I will look to take partial profits, but I want to give them a little room here.

I would also like to add to my biotech etf (XBI) positions on a pullback, as that group remains the relative strength leader. The medical devices etf (IHI) also looks positive, as does Apple (AAPL).


Tuesday, February 03, 2009

More Positive Reactions To Earnings Reports

The market is slightly higher in early trading, after a relatively flat open. There were a flurry of companies reporting earnings this morning, and while the reports themselves were mostly mixed, the majority of the stocks involved are reacting positively to the news.

We know that how stocks react to the news is often more important than the news itself, especially in this case when the earnings report is for last quarter, but the stocks are often looking ahead.

Here are some of the companies that topped consensus expectations this morning:
  • Schering-Plough (SGP)
  • Merck (MRK)
  • Archer-Daniels (ADM)
  • Northrop Grumman (NOC)
  • Emerson Electric (EMR)
  • Automatic Data Processing (ADP)
  • CME Group (CME)

But here are a handful of stocks that missed earnings estimates, but the stocks are still higher:

  • UPS (UPS)
  • Aflac (AFL)
  • Avon Products (AVP)
  • Dow Chemical (DOW)
  • BP Plc (BP)

Asian markets were mostly lower overnight. The dollar is lower today, which is helping boost oi, gold, and commodities overall. The 10-year yield is higher to 2.82%. And the VIX is -2% lower to 44.45.

There is also a rumor going around that Citi (C) plans to use roughly $36.5 billion for loan modifications and new loans.

The President is talking about the proposed stimulus plan right now. My big worry is that the bill will be filled with too much pork that will do little to actually stimulate the economy, and merely result in higher interest rates, debt, and tax liabilities for Americans.

Trading comment: I didn't do much trading yesterday. The market has not really enjoyed the bounce I was hoping to see. If the SPX can't recapture its 50-day in the near-future, it may be time to look to add some more hedges to the portfolio. I still have my ag etf (MOO) and gold positions (GLD) on.

long MOO, GLD, SSO

Monday, February 02, 2009

Investment Discipline For The New Year

Here is a copy of an article I wrote last week for

While the month of January is usually the time people are making resolutions for the New Year, I recently spent some time reviewing all of my trades from 2008 and taking a look at how well I adhered to my own investment philosophy and trading discipline.

The market is still extremely difficult to navigate and volatility is well above “normal” levels. As such, investors cannot afford to be lazy or make mistakes by neglecting their discipline. So let’s take a look at some of my top trading commandments, with some comments about how well I followed them:

1. Discipline trumps conviction. Don't let your bad trades turn into investments.

I did a pretty good job utilizing stop-losses on my trades, but there is certainly room for improvement. One mistake I made was taking partial profits on winning positions, but then letting the remaining shares move to a loss. That won’t happen for me in 2009.

2. Perception is reality in the market. Adapt your style to the market; and learn to accept the market as it is, not how you wish it were.

In a bear market, you can’t use bull market strategies. My mistake was thinking that the ‘Bear Stearns bottom’ might be the lows for the year. The key is to respect the dominant trend, which was down for most of the year.

3. Play great defense, not great offense. Opportunities are made up easier than losses.

My short-term hedges, using inverse ETFs, were very successful last year. They were profitable 85% of the time, but the positions weren’t big enough to offset losses on my long positions. I would have been better off letting some of these positions run, instead of being quick to take profits.

4. Don’t confine your thinking in terms of boundaries. Expect the extreme, and don’t miss major profit opportunities.

I think Paul Tudor Jones came up with this one, and it would have made you a fortune last year. For many, including myself, it was hard to imagine the biggest investment banks going to zero, but that is what happened. Going forward, I need to be more open-minded to the notion that in the financial markets, anything can happen.

5. Risk control is important. Always quantify your risk going into a trade.

This relates to #1 also. I think where my risk control was too loose was in my fixed income positions. In a bear market, don’t wait for things to “come back”. When an asset looks distressed, take the loss and preserve capital.

6. Don’t get caught in a situation in which you could lose a great deal of money for reasons you don’t understand.

I did a good job on this one, but I know a lot of investors who use ETFs blindly, without knowing what the individual weightings in them are, how well the correlate to their index, as well as the quirks of inverse ETFs that Eric Oberg has writing about. The takeaway: Know what you own.

Overall, last year was definitely one I would like to forget. Instead, I will use it as a reminder to pay close attention to my disciplines and risk management. If the market stays in a trading range, we could see several mini bull and bear cycles over the next several years. Using 2008 as a template would be constructive to help investors navigate the waters under such a scenario.

I hope readers find some of these useful, and if there are any good ones that you think I forgot and should be included, shoot me a note. Happy trading--

Monday Morning Musings

The market is lower in early trading, on the heels of weakness in the Asian and European markets. But the major indexes have bounced from their early lows, with the Nasdaq already in positive territory.

The newsflow is fairly light for a Monday morning. In economic news, the January ISM Manufacturing index came in better-than-expected at 35.6 (vs. 32.5 consensus). This is a nice datapoint, as we know manufacturing has been weak. Now we need to see if we can turn this single reading into a multi-month trend.

In corporate news, BE Aerospace (BEAV) reported a mixed quarter, but offered full year EPS guidance above current expectations. That has helped the stock bounce as much as +15%. Also, Human (HUM) reported earnings and slightly raised its guidance for Q1. It's stock opened lower, but has since reversed sharply higher.

The dollar is slightly higher this morning, while oil and gold are both lower. Biotechs are the strongest group so far, followed by tech in general. Banks and brokers are again the weakest.

The 10-year yield is down to 2.79%, after a big spike last week. And the VIX is up 6% today, near 47.50, after briefly breaking beneath the 40 level last week. Volatility levels continue to remain too high for the bulls, although the trend since last October has been lower.

Trading comment: The market is neither overbought nor oversold at current levels. If we can muster a bounce this week, I will probably look to add some hedges (inverse etfs) to the portfolio. January was a very difficult month, and the only thing that helped me outperform was to continue to trade around my positions and be more active in locking in profits when they surfaced. No rest for the weary.

long BEAV