Friday, November 28, 2008

Black Friday Is Underway

I don't know what happened to the tryprophan in my turkey yesterday, but I barely slept last night. I'm glad I'm not braving the crowds of Black Friday today.

Speaking of Black Friday, reports show that shoppers are certainly out there in droves again, but as retailers have already started to slash prices, most shoppers will likely spend less than last year. And retailers sales will likely be well below last year. I think most retailers are more interested in trimming down their inventories ahead of what will likely be a very weak start to 2009.

The market is pretty flat this morning after a huge 4-day rally. The last four days were the first 4-day up string since May. Moreover, it was reported that the Dow had its biggest 4-day gain since 1932. The downside is that the indexes are still down for November, and deeply in negative territory for the year.

Asian markets were mostly higher overnight. Oil is lower this morning, near $52, ahead of an OPEC meeting this weekend. The dollar is higher vs. the Euro today, which is weighing on commodities. BHP said demand for commodities is weak due to waning demand.

In corporate news, the British govt. is taking a near 58% stake in Royal Bank of Scotland (RBS). Also, GM is looking at divesting its Saturn, Pontiac, and Saab brands to save money. I think they should have done this years ago.

In hedge fund news, a hedge fund for billionaire Ross Perot and his family is being shut down after experiencing -40% losses this year. What is more surprising about this story is that the fund is supposedly a fixed income fund. This highlights the widespread carnage in the financial markets this year, and how no asset class escaped unscathed.

Wednesday, November 26, 2008

Trio of Economic Data Weigh On Early Trading

The market is lower in the first hour of trading, although unlike yesterday, the Nasdaq is bucking the broad weakness and trading nicely higher.

In economic news, new home sales fell -5.3% in October to the lowest level since 1991. The bottom in the housing market remains elusive, but the pace of declines does appear to be slowing. I think that the many policy initiatives by the Administration should speed up the recovery.

Durable goods fell -6.2% in October, a huge decline. And personal spending fell -1.0% in October, a 7-year low. The large decline in consumer spending sets a negative tone for Q4 GDP, which is expected to show its largest decline in decades.

In corporate news, Tiffany (TIF) and Deere (DE) both gave disappointing outlooks. DE stock is taking the news harder, although both stocks are lower.

In overseas news, Asian markets were mixed overnight. China cut its benchmark rate 1.08% to 5.58% (where do they get these numbers?), and Europe is considering a 200 billion euro fiscal stimulus package.

Also, Toyota Motor (TM) had its AAA credit rating cut at Fitch, with a negative outlook, as Fitch worries about the negative developments in the auto industry. TM still has a AAA rating at S&P, which it has had since 1985.

The dollar is higher this morning, and commodities are mixed. Oil is a bit higher, which is helping many of the energy stocks. The 10-year yield has plummeted all the way down to 3.00%. I'll have to look for the last time it was that low, but let's just say it was well before I was born.

The VIX is also -3% lower again, hitting 59.0. 50-day support comes into play around 57.50, so we are getting close.

Tech stocks are leading the early action, but retail stocks are higher also. Go figure. Bank stocks are mostly lower, as are drugs and consumer staples.

Tuesday, November 25, 2008

Charts of the Day: VIX and the Euro/Yen Cross

Today, the S&P 500 put together its first 3-day win streak since September 10th. Pretty surprising. I have still not put my cash to work, but if the market pulls back on light volume, without breaking back below the 800 level, I will likely begin to dip my toes in the water. Now to the charts--

I talk a lot about the Yen and the "yen carry-trade", and its effects on global markets. I harped on it back in March, the last time the Yen was really spiking. And lately I have been watching it again, as it has surpassed its March highs.

Today the Yen was higher, but the Euro was higher as well. You see, you can't really look at one currency in isolation. They all trade relative to other currencies. So the key metric right now that is correlating to global risk taking is the relationship of the Euro/Yen, known in the business as the "cross".

The chart below shows that although the Yen was higher today, the cross was still up, due to a big bounce in the euro. Looking further at the chart below, one could make a good case that the cross is tracing out a triple bottom, a bullish sign. I will continue to monitor this one, but if the cross continues higher, it means that global players have stopped selling assets across the board and may be putting "risk" (i.e. new investments) back on their books.

The next chart is for another indicator that I have talked about a lot lately, and that is the volatility index (VIX). The VIX declined another -6% today to a still high 61. But the picture is getting better.

The chart below shows the VIX made a lower high last week even though the market briefly touched new lows. That is a positive divergence. It now looks like it has technically made a double-top, and should soon test its 50-day average support (blue line).

A break below this support would provide a bullish backdrop for equities, although the VIX still needs to fall all the way back below 30 before we can say that the market has returned to somewhat "normal" levels of volatility. Until then, we can continue to expect big swings in both directions. Let's just hope the up days begin to outnumber the down days.

Fed Rolls Out Additional Programs, Market Rallies

The Dow is up another 100 points in early trading on a positive reaction to two new programs that are being rolled out by the Fed and supported by Treasury.

The first program is aimed at purchasing direct obligations from Fannie and Freddie, and is aimed at reducing the cost and increasing the availability of credit to purchase houses. The Fed will buy up to $100 billion in direct GSE obligations and up to $500 billion in mortgage-backed securities.

The second program is aimed at supporting asset-backed securities collaterized by student loans, auto loans, credit card loans, and Small Business Admin. loans. Here is what Treasury Secretary Paulson just said about this program in his press conference:

"Issuance of ABS in these areas reached $240 billion in 2007, but credit market stresses led to a steep decline in the third quarter of 2008, and the market essentially came to a halt in October. As a result, millions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy. To address this need and support the return of consumer lending, the Treasury will provide $20 billion of credit protection to the Federal Reserve in connection with its $200 billion Term Asset Backed Securities Loan Facility. By providing liquidity to issuers of consumer asset backed paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower cost consumer finance and small business loans."

In economic news, 3Q GDP was revised to -0.5% (in-line with consensus) from its advnaced reading of -0.3%. And November consumer confidence rose to 44.9 (vs. 38.0 consensus), which was a positive surprise. It is hard to imaging consumers becoming more positive with all the bleak news in the media, but maybe I just need to turn off CNBC once in a while.

In stock news:
  • BHP withdrew its $68 billion hostile takeover bid for Rio Tinto (RTP) due to falling commodity prices and the global recession.
  • GOOG is up $20 on news that it will dramatically scale back on the contract users it employs. It is not laying off employees, but taking steps to reduce operating expenses.
  • Starbucks said it expects negative same-store sales in 2009. Have you tried those McDonald's iced coffees?

Asian markets were higher across the board overnight. Oil is lower this morning after a big pop yesterday. The 10-year yield is falling 20 basis points, and is back down to 3.13%, one of the lowest levels in the last 50 years. And the VIX is -3% lower to 62.

I like the 2.5-day rally, but would really like to see the market consolidate its gains for once without fully giving them back. You know I have also said I want to see both the VIX and the Yen (FXY) fall further. Baby steps.

Monday, November 24, 2008

Recession Proof Jobs

The Jobfox Top 25 Most Recession-Proof U.S. Job Candidates: October 2008 rankings are out.

The report provides the first look at the most in-demand jobs following continued stock market plunges, federal bailout announcements and general consenses among everyone that, yes, we are indeed in a recession.

Each month, Jobfox produces a Top 25 “hot jobs” list based on a sample of the site’s employer activity. The new rankings are based on employer job postings that were initiated — and remain open — over a 120-day period ending October 28, 2008. In short, about the time we all realized we’re in a heep of trouble.

Surprisingly, many of the old standards continued to hold up — despite economic woes. But there were also some changes in the Jobfox Top 25 rankings of jobs, including winners and losers. We’ll have to keep our eye on the next report to see if these are permanent trends or one-month deals.

See the full report if you want to peruse the details. Here are some highlights:

The Top 10

  1. Sales Representative/Business Development
  2. Account/Customer Support
  3. Accounting Staff
  4. Counseling/Social Work
  5. Software Design/Development
  6. Administrative Assistant
  7. Networking/System Administration
  8. Nursing
  9. Mechanical Engineering
  10. Sales Management

New to the Jobfox Top 25

  • No. 18 Medical Administrative Services
  • No. 20 IT Security
  • No. 22 Higher Education (Faculty)
  • No. 23 Product Management
  • No. 25 Human Resource Generalist

Exiting the Top 25

  • Database Administration
  • Advertising (Online and Offline)
  • Testing/Quality Assurance
  • Business Analysis (Research)
  • Business Analysis (Software Implementation)

Biggest Moves

  • Technology Executive (up 8 spots to No. 16)
  • Counseling/Social Work (up 7 spots to No. 4)
  • Mechanical Engineering (down 4 spots to No. 9)
  • Electrical Engineering (down 4 spots to No. 14)

Monday Morning Musings

The markets picked up where they ended on Friday with a rally. The market bounced from its Friday lows after Obama announced that Timothy Geitner would be named as Treasury Secretary.

Asian markets were lower overnight, but our markets shrugged off their weakness from the start. Of course, its still a long day, so let's hope this rally doesn't fade into the close.

One of the positive developments was the news that Citigroup (C) would receive another $20 billion from the Treasury, in return for preferred stocks and warrants (with a strike price of $10.61). The Treasury and FDIC will guarantee up to $306 billion of trouble assets, with Citi absorbing the first $29 billion in losses.

The market obviously likes the terms, because Citi's stock is bouncing nearly +60% on the news. It is also lifting the rest of the financials. Goldman is up +25%, MetLife is up +13%, BofA is +21%, and Wells Fargo is +13%.

Homebuilders are also getting a nice bounce (+8.8%), despite the existing home sales report that showed median home prices fell -11.3% yr/yr, the largest drop on record. The silver lining is that median home prices are now back to 2004 levels, so we've only erased the last few years of bubble prices.

Obama will be making a statement today laying out his economic plan, which will include a fiscal stimulus plan. Note that the market has often dipped lately when any elected official comes on and speaks.

The dollar is lower today, which is helping boost commodities. The Yen is also lower so far, though I would like to see it fall further. The 10-year yield is bouncing to 3.30%, up sharply from Friday's lows.

And the VIX is lower by -11% to 64.5, still an extremely high level. The next level I am watching is 56-57, which is the 50-day average. A break below that would be a nice start to the VIX moving back down to even somewhat more rational levels. As long as it stays this high, the market is telling us to continue to expect more volatile days, both up and down.

I covered my hedges on Friday, so I am no longer short anything. But since we have not had very many back-to-back up days in the last few months, I want to be prudent in putting my cash hoard to work. There is a lot of ETFs that look attractive down here, but I want to make sure the market doesn't rollover again. Easier said that done.

Sunday, November 23, 2008

Weekly Wrap

Here is the weekly recap from

A horrible experience this year for investors got even worse this week. The losses in the major indices were material and new lows were set in this bear market move.

In fact, with the losses seen this week, the entirety of the gains recorded during the bull market move from the October 2002 low to the October 2007 high were wiped out at one point and the S&P fell to levels seen in 1997.

Uncertainty continued to be the albatross around the market's neck as some key corporate developments (or lack thereof) and a number of economic releases fed the market's concerns about not knowing how deep and how long this economic slowdown will last.

Among the more stunning developments this week was the collapse in Citigroup's (C) stock price. To be exact, Citigroup plummeted 60% to $3.77 per share, or nearly the equivalent of its ATM fee.

Balance sheet concerns were at the heart of the sell-off as burgeoning reports of growing weakness in the commercial loan category fanned fears that Citigroup, and the financial sector, would need to raise a lot more capital to offset losses.

Citigroup bore the brunt of the selling, though, as its management rankled investors Monday when it didn't indicate senior managers would forego bonuses this year, yet announced plans to cut up to 52,000 jobs from the bank's payroll.

That was dumb corporate development #1. Dumb corporate development #2 was the CEOs of the major U.S. auto makers flying to Washington on private jets to beg Congress for billions of dollars of taxpayer bridge financing to avoid bankruptcy.

That PR debacle went hand-in-hand with an inability of the executives to provide any clear sense of how they would restructure their businesses so that they wouldn't have to return to Washington to ask for more money six months down the road... or ever.

Congress withheld any financial aid for the time being, saying it needs to see an actual turnaround plan from the auto makers before it can consider providing the auto makers a lifeline. Congress, reportedly, will take up the matter again in early December.

Despite that fiscally prudent position by Congress, the fear of the multiplier effect of a bankrupt auto industry prevailed and compounded this week's selling interest.

The Fed added to the market's concerns with sizable downward revisions to the central tendencies of its economic projections for next year. Specifically, it was noted in the minutes for the Oct. 28-29 FOMC meeting that the central tendencies for real GDP growth in 2009 were lowered from 2.0% to 2.8% to -0.2% to 1.1%. The projections for the unemployment rate, meanwhile, were raised from 5.3% to 5.8% to 7.1% to 7.6%.

Fed officials felt real GDP would contract somewhat in the first half of 2009 and then rise in the second half of the year.

Given recent economic and earnings reports, the market didn't embrace the forecast that conveniently anticipated the economy returning to growth mode in the second half of next year.
Right now the prevailing economic view for the market is half empty because it hasn't found much in the hard economic data to think otherwise and this week's reports didn't help at all in that respect.

Industrial production increased 1.3% in October, yet that move was regarded as aberrant since it reflected a snapback from the shutdowns related to hurricanes Gustav and Ike and given the market's understanding that the manufacturing sector is in retrenchment.

On a related note, housing starts continued to decline, falling 4.5% in October from the prior month to a seasonally adjusted annual rate of 791,000 units. Building permits, meanwhile, declined 12% to a seasonally adjusted annual rate of 708,000. The starts number provides another weak data point for fourth quarter GDP calculations while the permits number portends continued weakness for housing starts in the months ahead.

Separately, weekly initial jobless claims surged 27,000 to 542,000, ensuring that we'll see an 11th consecutive decline in nonfarm payrolls when the November data are released. Continuing claims jumped to 4.012 million from 3.903 million and reflected the difficulty of finding a new job.

The good economic news this week was found in the inflation reports. Producer prices declined 2.8% in October while consumer prices declined 1.0%. That good news didn't hold much sway, though, as a nervous market was quick to consider it a by-product of the economic weakness and a precursor possibly to a deflationary environment.

Good news was limited during the week. Hewlett-Packard (HPQ) provided some preliminary earnings guidance that was very reassuring, only it was soon discounted as being company-specific.

However, the market, which was languishing Friday, did cheer the news that New York Fed President Timothy Geithner is going to be nominated by President-elect Obama to be Treasury Secretary.

Geithner is highly regarded by the financial community and, given his current position at the Fed, is considered to have a very competent understanding of the issues gripping the capital markets. His appointment, then, was heralded as allowing for a smooth transition of what promises to be an extremely complex and important job in the immediate future.

Prior to the news of Geithner's selection, the S&P was down approximately 1.0% in Friday's trading. It ended the day up 6.3%.

The Friday rally took some sting out of a hurtful week. Of course, we've seen relief rallies before end up being short-lived.

We don't know what the coming week brings, but taking things one week at a time is all the market appears capable of, or willing to do, at this point.

That's understandable given the fluidity of developments in the political, financial and economic spheres. Yet, for those willing to consider a longer-term view, it's hard not to be struck by the valuation disparity between stocks and bonds.

The earnings yield for the S&P 500, based on the latest available calendar 2009 consensus earnings estimate of $85.73 provided by Thomson Reuters, is 10.7% versus the 10-year Note yield of 3.20%!

Of course, investors know that consensus number is going to come down, so there isn't any faith in its value. Even so, if one took a draconian approach and assumed the consensus estimate comes down 50%, the earnings yield based on Friday's closing price would still be 5.4%.

The yield spread underscores the significant, long-term value stocks provide relative to bonds at current prices, but that matters little in emotion-charged markets where capital preservation is all anyone cares about.

Not that anyone can blame an investor for favoring such an approach. There are so many big, worrisome issues that need confronting right now that it makes it exceedingly difficult to have anything other than the most cautious view.

We will get through this period. We always do. How long it takes is the great unknown, so there isn't any strong conviction yet in buying stocks.

Still, the widening valuation disparity between stocks and bonds supports the notion in our estimation that an attractive buying opportunity is availing itself for the investor with a long-term orientation (i.e., someone who thinks in increments of 5 years rather than 5 days or 5 minutes).

Friday, November 21, 2008

Asian Markets Buck The Trend And Rally

The market is higher in early trading, following a strong showing from Asian markets overnight, which all rallied nicely. Today is options expiration, so I expect another volatile day. Let's just hope we don't see the same last hour selling that has surfaced the last couple of days.

Oil is getting a bounce, but now is hitting resistance around $50. The energy sector is leading the way so far, while financials are weak again.

The action in Citigroup (C) is hard to put into works. It has fallen roughly -60% this week alone, and now trades for less than $4. This is an amazing deterioration in share price, and demonstrates how volatile this market remains. Someone really needs to say something here, as the market will not like the lingering prospect of a huge financial concern like Citi in trouble.

Bank of New York (BK) said it will reduce its workforce by 4%. Honda said it is cutting production at factories. And auto makers are still hoping for a govt. bailout plan to get approved.

In earnings news, Dell topped estimates, as did HJ Heinz (HNZ). Ditto for Gap (GPS), which was a bit surprising given how poor retail sales have been.

The dollar is lower, which is helping commodities. And the Yen is lower too, although it rallied sharply yesterday afternoon and still needs to break its recent uptrend for the market to lift.

The 10-year yield is up slightly to 3.18%, after touching multi-decade lows earlier. And the VIX is down -5.2% to 76.7.

The market remains deeply oversold, and has been decimated by panic and forced selling. I think mutual fund and hedge fund redemptions are at the heart of the forced selling, which makes it difficult to gauge when they will cease.

Today I am bidding to sell the remaining shares of my ETF hedge that I have been holding. I still have outsized cash balances that I am holding, and the proceeds for these ETF sales will also go into cash for the time being.

I believe we are nearing a very sharp snapback rally, the timing of which will be difficult at best. But I think when it surfaces, stocks could bounce +10-20% in a matter of days. Sentiment is poor, but we have to continue to look for opportunities.

selling SDS

Thursday, November 20, 2008

Another Volatile First Hour of Trading

The market opened under more selling pressure, but has since climbed all the way back into positive territory. Go figure. Of course, we know that its how the market closes that counts, and we still have what feels like eternity to get there.

There were several levels reached this morning that will make for shocking headlines. The S&P 500 touched the same levels (776) as its lows from the bottom of the last bear market in October 2002. Oil traded below $50 this morning, down -66% from its July highs. And Citigroup (C) hit $5. The company also announced it will get another investment from Prince Alwaleed, who plans to boost his stake in the company.

Asian markets were down sharply overnight, with several experiencing declines of more than 6%. The Yen is higher this morning, as is the dollar. Commodities are lower on global economic concerns. And the flight to safety is on. The 10-year yield has plummeted to 3.20%, its lowest levels since June 2003. And the 3-month T-bill yield hit 0.015%. Hard to believe.

The put/call ratio is high again, and the VIX is up +4.3% to 77.5. But it is still below the 90 level that it nearly hit on 10/24, so maybe you can call that a positive divergence. Also, while the indexes hit new lows this morning, the number of stocks making new lows on the NYSE remains well below the record hit on 10/10, another small, positive divergence.

The market remains extremely oversold, but its inability to bounce speaks to the fact that buyers remain on strike. Yesterday, downside volume totalled 98% of the total volume. I'm not sure I've ever seen that.

I continue to believe a strong bounce is in the cards. Fortunately, I have kept my powder dry and not made any big bets on trying to time it. I had some buy allocations loaded up twice in the last week, but never pulled the trigger as the markets faded into the close. I would like to see the market close on strength for more than a single day.

Our accounts have held 20-30% cash since September. And with our fixed income positions and ETF hedges, overall equity exposure is below 50%. At some point, those high cash balances will put us in good shape to take advantage of the declines. But I have to admit it has been painful in the interim.

Wednesday, November 19, 2008

Fed Downgrades Its Outlook On The Economy

The FOMC minutes were just released from its recent 10/28 - 10/29 meeting. Here are the highlights:
  • The information reviewed at the October meeting indicated that economic conditions deteriorated in recent months. The labor market weakened further in September as private payrolls fell at a faster pace than earlier in the year and the unemployment rate remained above 6 percent.
  • Industrial production fell in September, although much of the drop was related to effects of recent hurricanes and a strike at an aircraft manufacturer. Consumer spending declined, reflecting stagnant real income, tighter credit, declining wealth, and concerns about economic conditions.
  • The housing market remained weak, with construction activity, new home sales, and home prices falling further. Business spending on equipment and software appeared to have declined again in the third quarter, and indicators of investment in structures weakened.
  • Economic activity in many foreign economies slowed in recent months. Headline consumer inflation measures, pulled down by declines in consumer energy prices, moderated in August and September.
  • Core consumer inflation measures also eased somewhat in these two months
  • Participants projections for real GDP growth in 2008 had a central tendency of 0-0.3%, compared with the central tendency of 1.0-1.6% for the growth projections that were made last June.
  • The downward revisions in their growth forecasts for the year as a whole were due almost entirely to substantial shifts in their views of second-half growth
  • Participants growth projections had a central tendency of -0.2 to 1.1% for 2009, 2.3 to 3.2% for 2010, and 2.8 to 3.6% for 2011, as most participants expected that the near-term weakness in economic activity would continue into next year and that the subsequent recovery would be relatively gradual
  • Participants agreed that inflation was likely to diminish materially in coming quarters. Commodity prices had fallen sharply, the dollar had strengthened notably, and considerable economic slack was anticipated.
  • Over the past year, the Federal Reserve's response to the financial turbulence had encompassed substantial monetary policy easing, the provision of large volumes of liquidity through standard and extraordinary means, and facilitating facilitating the resolution of troubled, systemically important financial institutions. Participants judged that the policy actions had been helpful and well calibrated to their assessment of the developing situation. Several participants observed that it would be crucial for such policy actions to be unwound appropriately as the financial situation normalized.
  • However, participants also observed that unfolding economic developments could require the FOMC to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities.

Overall, the Fed is acknowledging that growth will slow for the next few quarters, and that a recovery could be gradual. Also, they realize that the current 1.0% fed funds rate could still be too high. Could the Fed actually take rates to 0%?!? (Japan did)

Consumer Prices Fall By Largest Amount Since 1947

Yesterday, I mentioned how the PPI was showing signs of deflation. Today, the CPI backed up that notion. October CPI fell -1.0%, which somehow is the largest drop in decades. Moreover, the owner's equivalent rent component was flat yr/yr, which seems silly. So the real change in consumer prices was likely more pronounced than the headline figure suggests.

The Big 3 auto companies are testifying before the Senate in an attempt to secure government loans. It is a sad state of affairs for those companies. Painful to watch. I am torn where I fall on the debate. I don't want to see good money thrown after bad, but the economy certainly doesn't need them to go BK right now.

Citigroup is liquidating a hedge fund which managed $4.2 billion at its peak, but has lost -53% of its value. had an interesting story on how much cash has already been raised by the big hedge funds (more on this later). Let's hope they're done selling.

Asian markets were lower overnight. The Yen is slightly lower today. Oil is flattish near $54.25. The 10-year yield is lower again, hitting 3.45%, highlighting growing concern with deflation, not inflation.

The VIX is up +2% to 69. And the put/call ratio opened at an incredibly high 1.99.

Tuesday, November 18, 2008

California Real Estate Declines Accelerate in Q3

The NAR Metropolitan home sales report came out today, and the numbers were not pretty. I always go down the list and look for the biggest gainers as well as decliners. As far as the decliners go this time around, California dominated the list.

Here is a sample of the largest declines in Q3 (these are the media sales prices for existing homes):

  • -39.4%: Riverside/San Bernadino, CA
  • -36.8%: Sacramento, CA
  • -36.0%: San Diego, CA
  • -35.1%: Los Angeles, CA
  • -31.0%: Cape-Coral/Ft. Myers, FL
  • -28.4%: Las Vegas, NV
  • -27.6%: Anaheim, CA
  • -27.6%: Phoenix, AZ

The gainers were a mixed bag of smaller cities:

  • +12.5%: Elmira, NY
  • +8.1%: Bloomington, IL
  • +5.5%: Wichita, KS
  • +5.1%: Tulsa, OK
  • +4.2%: Trenton, NJ
  • +4.1%: New Orleans, LA

And here are some other major cities fared:

  • Boston: -10.0%
  • Chicago: -12.4%
  • Miami: -16.9%
  • New York: -5.0%
  • San Fran.: -25.3%
  • Wash. DC: -24.0%

When we talk about the stabilization that is needed in the economy, and also for the consumer, these falling home values are at the heart of the matter. I hope the FDIC initiatives, as well as other home buying incentives, are enacted soon to stem the declines we are seeing.

When we start to see home prices stabilize, I think banks will feel better, and the markets will pick up on it and together will be a big first step at improving sentiment.

PPI Shows Nascent Signs of Deflation

The market is trading higher in the first hour, after Hewlett-Packard issued upside Q4 and 2009 earnings guidance. The strength for them is surprising, but welcome nonetheless. Home Depot also reported better-than-expected earnings. On the downside, Corning (GLW) expects its Q4 sales to be below guidance, citing the weak retail environment.

In economic news, the October PPI fell -2.8% month/month, larger than the -1.9% consensus. There were some large decreases in the report, indicating some early signs of deflation. This is likely a global phenomenon, which makes further rate cuts by central banks increasingly likely.

Treasury Secretary Paulson, Fed Chairman Bernanke, and FDIC Chair Blair are all testifying before Congress about the TARP plan. I reiterate that I think the disappointment that I am hearing with the Plan is short-sighted. These big fiscal plans take time.

But in the short-term, I think they have helped. We don't have a different financial institution each day that we are worried about it going under, and its stock falls -40% in a day reflective of the worries.

Yahoo (YHOO) CEO Jerry Yang is finally out after the many missteps he has made managing that company, including rejecting Microsoft's $47.5 billion buyout offer. The stock is higher on the news.

Asian markets were lower overnight. The Yen is also lower today, which should help the markets. Oil is flattish near $55. The 10-year yield is lower at 3.62%. And the VIX is a touch lower at a still very high 68.

The market feels like this rally could hold, but as we have seen lately, the last hour of trading is the only thing that counts.

Monday, November 17, 2008

Nothing Substantial From G-20 Meeting

The market may be expressing some disappointment with the fact that no major announcements came out of the G-20 meeting over the weekend, at least nothing investors can hang their hats on today.

The G-20 agreed to continue to use fiscal measures to help stimulate demand and help emerging markets gain access to credit. They also said no new trade barriers would be implemented for the next 12 months.

October industrial production rose more than expected, coming in at +1.3% (vs. +0.2% consensus). This was far better than September's decline of -3.7%.

Seperately, Citigroup (C) said it will cut 20% of its workforce, which is estimated at 50,000 jobs. Ouch. And the talks surrounding the auto makers continues.

Asian markets were mixed overnight, which is better than how the U.S. markets closed on Friday. The Yen is higher today, which we have been highlighting as pressuring the markets. Oil is up slightly to $58, but energy stocks are mixed.

The 10-year yield is down a bit to 3.71%. And the VIX is +3.4% higher, near last week's high, but still well below its 10/24 highs.

Calls for the week: Watch the VIX. I would like to see it break below 60 on any rallies. Also watch the Yen (FXY). It needs to break its recent uptrend, moving below 102. For the market, I want to see the S&P 500 (SPX) hold the 850 level and stabilize above 900.

Friday, November 14, 2008

Last Hour Selloff Erases Chance for Back-to-Back Gains; Paulson Responds To Criticism

I mentioned this morning that if the SPX closed above 880, it would still be considered a win for the bulls. The SPX closed at 873, so we didn't quite maintain the levels I was looking for. Once again, all of the selling came in the last hour. The Dow was up 50 points with an hour to go, but gave up more than 300 in that last hour.

CNBC interviewed Treasury Secretary Paulson today, and I thought his answers were very good, as well as forthright. The media (and Congress) is up in arms over what they say if flip-flopping on the original TARP plan.

But Paulson responded that he asked Congress for an "arsenal" of tools to use, and that is what he is doing. Moreover, as conditions continue to change, they want to have the flexibility to use what is most appropriate at amerliorating the credit crunch.

The public wants instant gratification in terms of seeing progress from these actions, but all fiscal stimulus takes time, and works its way into the economy with a lag. Always has, always will.

Here are some more highlights from his comments:
  • Paulson says the major purpose of the TARP was to stabilize financial system and to get lending going. Paulson says he thinks the system has clearly been stabilized... says this is a healthy bank program... says this was a comprehensive plan that has made a big difference.
  • Paulson says a change in strategy occurred when they saw the commercial paper markets freeze up altogether and good mainstream corporation were not able to raise money (highly rated commercial paper issuers)... also says change in strategy occurred because by the time Congress passed bailout, buying distressed assets was not viable... says they changed strategy to address a situation that had gotten much worse.
  • Says ultimately, the purpose of TARP is to get capital into banks... Paulson says the crisis was not just about the U.S. subprime market
  • On the question of ‘the talk is that banks are taking this money and hoarding it' (e.g. for acquisitions)... Paulson says the first goal was to stabilize the system, and second he says injections into banks will cause banks to lend more money than they normally would have done otherwise... says every bank in the system has benefited from the overall system.
  • Paulson says the objective remains the same, which is all about capital... says illiquid assets are still an issue. He thinks the prudent thing to do is not run out and invest all of your money quickly buying illiquid assets if he thinks there's another way to get at this.
  • Paulson says, discusses bank investments, says "we will make money." Says this $700 bln is the right amount...he's not saying they are going to need more, but as he evaluated the situation, he thinks be prepared to move ahead with other programs and he thinks it's highly likely that some time in the not-to-distant future to have another capital program within the current $700 bln plan.

Early Look: Market Giving Back Some of Yesterday's Gains

The market is lower in the first hour of trading, but it is still early. I would say that if we give back half of yesterday's big move, that would be considered a "win" for the bulls. The levels I am watching would be for the S&P 500 to close above 880, and the Nasdaq to close around 1550.

The FDIC issued a proposal this morning for loan modifications. The plan includes having servicers cover the expenses and loss sharing in the event the modified loan falls back into default. The FDIC estimates the program could apply to some 1.4 million non-GSE loans.

Nokia (NOK) warned that Q4 industry volume would decline (gee, thanks for that). While the news isn't surprising, it is impacting stocks like Apple, RIMM, and QCOM.

Ditto for the warning from several retailers this morning. Kohl's, Nordstrom, JC Penney, and Abercrombie all said Q4 would be weaker than expected. No surprise there, as consumers are simply cutting back, and higher priced items will likely be the ones that see the biggest dropoffs in sales.

Asian markets were mostly higher overnight following the rally here in the U.S. The dollar is higher today, which is pressuring commodities. Oil is back down to $56.50 after a big pop yesterday. The 10-year yield is down to 3.71%. And the VIX is up +5% to 62.75.


Thursday, November 13, 2008

A Key Reversal Day?

Today was another example of the types of big single-day moves you see in the market with the volatility index (VIX) as high as it has been. Most of the big days have been to the downside, but we have also seen several huge upside moves as well, and today was an example.

The S&P 500 broke to new lows for the year this morning, but a late day rally quickly brought it back to even, and then a buying stampede led to huge gains into the close. The SPX finished the day +6.9%, quite a move. To put it in perspective, the Dow rallied back 900 points from its intraday lows.

Moreover, today looked like a key reversal day. No rallies lately have held, so its hard to get too excited about today, but one of these rallies attempts will stick. Who knows, maybe it will be this one. On the chart below, you can see that the market made a lower low (vs. yesterday) this morning, but then rallied and closed at a higher high. Volume rose sharply also, which means there was some conviction behind the move.

There was no real catalyst to speak of, but that is how it often is on days like today. Tomorrow is the G20 meeting in Washington, and it may have been that bears wanted to take profits and cover their shorts ahead of the meeting, in case heads of state make any big announcements. Most rally attempts start with short-covering, but we will need real buying to sustain it.

One other chart I wanted to show was that of the volatility index (VIX) below. The line I've drawn represents the uptrend that the VIX has been following early September. At the beginning of November, the VIX broke through this uptrend line. Since then, it has risen back towards this trend line, but has not broken back above it.

Today, despite the market breaking down to new lows, the VIX never came close to making a new high. It then staged a sharp, downside reversal, falling -10% on the day. This is another promosing development, but we need to see the downside confirmed by more lower lows.

The next piece of the puzzle that needs to fall into place is that the uptrend in the Yen needs to be broken, but I will save that for another day.

Market Opens Better Than Exepected After Intel Lowers Guidance

Last night, Intel (INTC) lowered its revenue guidance for Q4 by quite a bit. Also, Applied Materials (AMAT) gave a disappointing outlook as well. This pushed the futures lower, and spurred declines in Asian markets, especially in the tech sector, where many chip companies have operations in Asia.

This led most investors to expected a weak open for stocks in the U.S. But lo and behold, stocks opened higher, and the Dow was up +100 points in the first few minutes. Of course, volatility then set in, and the Dow has since given back those gains, and then rallied back again. It is how the market closes that counts, and we have a long day still.

With the markets bouncing, and Intel stock flat so far, it is reasonable to ask if the recent bad news is priced into stocks, at least for the short-term? When stocks (and the market) rally in the face of bad news, it is usually a good sign.

The financials remain weak, and Goldman Sachs (GS) and Morgan Stanley (MS) seem to go down every day. I'm not sure what these guys need to do to take the pressure off of their stock, but they need to do something.

The Yen is lower this morning, which should help take some pressure off of the market. The dollar is also a bit lower, which is helping commodities bounce. Oil is up near $58 after yesterday's big plunge.

The 10-year yield is higher at 3.77%. And the VIX is down -3% to 64.75.

I have not made any moves in portfolios today, long or short.

Wednesday, November 12, 2008

Paulson Changes Direction With TARP

The market declined steadily throughout the session today, amid more negative news on the consumer, and continued concerns about the global economy.

Best Buy (BBY) slashed its earnings guidance after management said that since mid-September changes in consumer behavior have created the most difficult climate the retailer has ever seen. That's a pretty bold statement, but indicative of a consumer that is in shock right now, and looking to tighten the purse strings wherever they can.

Thankfully, gas prices at the pump have come down a ton. Had energy prices remained high, the pinch on the consumer would be even worse right now. Oil continues to fall, despite OPEC cutting output in an attempt to support prices. Crude prices have slashed below $60, and closed today near $56. This is a sign that demand worldwide is decreasing.

The other news that seemed to frustrate investors was comments by Hank Paulson that the second half of the approved TARP funds will now be used towards supporting consumer credits, such as auto & student loans, instead of buying depressed mortgage assets as they had previously planned.

The initial reaction was, huh? After going before Congress and begging for this money, now you want to change how it is to be used. But I think that reaction is short-sighted. If conditions and circumstances change, I think it is better that the govt. be flexible and continually use the funds where they think they will be most effective. So I don't share the collective frustration, I applaud the flexibility. Let's just hope it starts to work at some point. Although these things always take time (i.e- govt. stimulus).

Pessimism remains palpable, but this is a normal and necessary ingredient to a market bottom. Said bottom remains elusive, and the lows will likely be tested tomorrow. I have been very cautious about putting cash to work recently, even as I expected a bounce. At this point, I will likely look to take partial profits on my downside hedges (inverse ETFs), and leave it in cash.

Tuesday, November 11, 2008

Fannie/Freddie To Announce Loan Modifications

The market is lower this morning on continued reductions in earnings estimates and general macroeconomic concern. Google (GOOG) had its earnings estimates reduced by Goldman, and several other companies are seeing reductions in their earnings estimates as well.

Starbucks (SBUX) reported earnings that were below expectations, and well down from last year's levels. Maybe consumers are even scaling back on $4 lattes, especially when you can get ones at McDonald's now.

On a positive note, the WSJ reported that Fannie and Freddie are expected to announce plans today to modify hundreds of thousands of loans held by the GSEs. The plan is also being backed by Treasury, with the aim of bringing down the ratio of household debt to income down to 38%.

Citigroup will also announce plans to help prevent foreclosures, including modifying mortgage terms for up to 500,000 homeowners. I have heard they might lower mortgage rates to 1-2% for up to 2 years. Um, can I get in on that?

Asian markets were lower across the board overnight. The dollar is up sharply vs. the Euro today, and the Yen is up slightly. This is pressuring commodities, with oil falling again, now below $59.

The 10-year yield is flat at 3.75%. And the VIX is up +7% to 64.

long C calls

Monday, November 10, 2008

Monday Humor

Someone sent this to me over the weekend. It was titled 'Morning After'.
I thought I would share it:

Monday Morning Musings

The market opened on a high note this morning after news that China would implement a huge stimulus package sparked rallies in Asian markets overnight. Also, the government said it was revising the terms of the aid package to AIG, which would give them better loan terms and more time to sell assets.

China said it would use $586 billion for a fiscal stimulus package throught the end of 2010. This is the country's biggest move yet to support its slowing economy and promote the above average growth rates the country needs.

Asian markets rallied on the news, with China spiking +7.3%, Japan gaining +5.8%, and Hong Kong +3.5%. Commodities are also rallying on the news that Chinese demand could strengthen. Oil is back up above $63.50, and gold, copper, steel, and grains are also higher today.

McDonalds (MCD) continues to do well despite the economic slowdown. It posted October same-store sales in the U.S. of +5.3%, and global sales rose +8.2%.

The news isn't so good for retailer Circuit City, which filed for Chapter 11 bankruptcy. Also, Deutsche Bank downgraded General Motors (GM) to Sell and cuts its price target from $4 to $0. The firm said GM may not be able to fund its operations beyond year-end without government intervention. A sad and sorry state of affairs.

The dollar is lower vs. the Euro, and the Yen is lower as well, which is a good sign. The Yen still hasn't broken its recent uptrend, which bulls would like to see for this recent rally attempt to kick into high gear.

The 10-year yield is a bit higher at 3.80%. And the VIX is still high at 57.

Friday, November 07, 2008

The Obama Trade

Here is an article I wrote for this week:

With the election over, investors are clamoring for ideas and trades that will work under the new administration. That is, given the new policies proposed by Obama (or at least campaign promises), which investments will fare best? The media are as much to blame as anyone for this game, as they continue to drag out strategist after strategist and pose this very question.

The most oft-cited choices that you will hear bandied about include alternative energy, where the new administration is expected to push renewable energies such as wind and solar, but probably not nuclear and coal. Also, health care is mentioned quite a bit, with a likely push toward more generic drugs and affordable health care (think managed care companies and health care cost containment).

The reason I haven't started throwing out individual names of stocks is that I believe taking a different tack will serve investors better. I believe in letting the market show us the way. From every correction or bear market a new group of leaders emerges, and these new market leaders often go on to post outsized gains. So there is no need to guess at this point on the eventual winners; we just need to continue to closely monitor the market for clues.

At the moment, that is easier said than done. This is because there are very few "leaders" right now. Today, the Nasdaq posted just two new highs. And over the last several weeks, there were a handful of days where the new highs totaled zero.

One of the sources I like to use to look for leading stocks is Investor's Business Daily, which devotes much of its space to the search for leading stocks. Even the screens I run on IBD's software yield very few names right now. And the ones I do see don't have anything in common, in terms of hailing from similar sectors or industries. Some of the examples are Strayer Education (STRA) , Aerovironment (AVAV) , Almost Family (AFAM) and PetMed Express (PETS) . A small and random group.

Another screen that I regularly look at is for ETFs that are exhibiting high relative strength ratings (on the IBD scale of 1 to 99). If you pull up any list today, one of the first things you will notice is that the top of the list is littered with inverse ETFs. So if you want to bet on continued declines in the market, you have plenty of choices. But if you're looking for long ideas, only three ETFs on my screen have relative strength ratings of 80 or better.

The first fund is the SPDR Regional Banking ETF (KRE), which sports an RS rating of 86 right now. The fund invests in a broad basket of smaller, regional banks. With the TARP program kicking in, there is a lot of talk that consolidation within the banking industry will increase, with the big players acquiring many of the smaller regionals. So this fund gives you broad exposure to that trend without having to cherry-pick the individual names.

The next fund is the SPDR Biotech ETF (XBI), which has an RS rating of 84. This fund holds a basket of many of the well-known biotech companies, large and small. Biotech often fares well on a relative basis during difficult economic times because of the high growth rates for many of the companies, as well as the thesis that the products they are producing are in high demand from the big drug companies, which serve as well capitalized buyers. On the chart, the XBI looks to have put in a solid double bottom around 46, and it is now working on breaking above that downtrend, which has been in place since August.

The last idea is the Consumer Staples SPDR ETF (XLP) , which also has an RS rating of 84 right now. This fund holds a basket of consumer stocks, everything from beverage companies to tobacco, food and drugstore items. Consumer staple stocks are often considered recession plays, since they are the products that most consumers don't tend to cut back on during recessions. You still need to buy your medicine and cleaning products. And given the dour news in the media, you might even drink and smoke more (not that I am not endorsing such activities).

Payrolls Report Worse Than Expected, But Market Rallies

Today is another example of how difficult this market has become on a day-to-day basis. Yesterday was a dramatic selloff, and the whispers that today's jobs number could be really bad had many thinking the market could be down again this morning.

So how did it play out? The nonfarm payrolls report showed the economy lost 240,000 jobs in October, worse than the 200k estimates. The unemployment rate rose to 6.5%, which I heard is a 14-year high. But stocks rallied anyway, defying those that likely were betting on a continued market decline this morning.

The auto makers are also in the spotlight right now, as the Big 3 are racking up big losses, and are turning to the goverment for another bailout. The recent drop in monthly sales by the auto makers was breathtaking, down as much as -45% at GM.

I am torn on this one. Normally, I would say giving them money is throwing good money after bad. But if one or two of them fail right now, it could mean as many as 2.5 million people would lose their jobs, and that just isn't what the economy needs right now at all. Tough call.

Asian markets finished mixed overnight, after S. Korea joined the rate cut brigade and lowered interest rates. The dollar is lower today vs. the Euro, and that is helping commodities. Oil is back up above $62, but it has been very hard for oil prices to sustain any strength lately.

The 10-year yield is firm at 3.76%. And the VIX is falling -8% today to 58.6, a welcome sign.

Thursday, November 06, 2008

More On Retail Sales

As mentioned earlier, the retail sales reports this morning were largely weaker than expected, or at least weaker than consensus estimates. It is clear the the consumer is reigning in his and her purchases, so we should expect to see both weaker retail sales as well as weaker economic data in the near future.

There were only a few standouts in the reports this morning. BJ's Wholesale (BJ) posted +10.2% growth in same-store sales in October, but Costco (COST) posted a -1.0% decline. Children's Place (PLCE) also showed gains of +4.0%, as well as Wal-Mart (+2.4%).

One of the common themes above is value and discounts. BJ's is a big wholesaler, and PLCE is a place where you can get kids clothes at discounted prices (I wonder if I can get my wife to go there?).

By contract, traditional department stores, which are often sell full priced items, fared poorly. To wit, Nordstrom's (-15.7%), Saks (-16.6%), and Macy's (-6.3%) all posted healthy declines. And teen retailers like American Eagle (AEO) and Abercrombie (ANF) also posted declines for October of -12.0% and -20.0%, respectively. Ouch.

Americans aren't used to seeing this, given that consumer spending held up fairly well during the last recession from 2001-02. Low interest rates spurred rising home prices back then, so consumer still "felt" like their net worth was growing.

But this time around the severity of the credit crunch is serving as a wake up call to many of the need to reduce debt. And for the first time in ages, the average consumer may once again be starting to reign in spending and actually think towards increasing their savings.

Its hard to say how long this will last, as we all know that Americans in general have a higher propensity to spend than most other nations. My guess is that when consumers feel that the housing market has bottomed, and the stock market begins to look past the recession, households will once again loosen the purse strings. But it will be a tough ride in the interim.

Markets Refocus On Slowing Growth

The market is under pressure again this morning over concerns about how much economic growth is slowing. Asian markets were hit by heavy profit taking, with most bourses down more than 5%.

Acknowledging the slowing growth, the Bank of England slashed its benchmark lending rate 150 basis points from 4.5% to 3.0%, a huge move and one that speaks to the fact the concerns about future growth should be trumping inflationary concerns at the moment. The ECB also cut rates, from 3.75% to 3.25%, and will likely have more cuts in the future.

The rate cuts in Europe are pressuring the Euro vs. the dollar, which is also weighing on commodity prices. Oil prices are down sharply. After briefly popping back above the $70 level earlier this week, crude oil prices are down more than $3 today back near $61.50.

Retailers reported October sales today, which were mostly weak (more on that later). But although the reports were weak, some of the stocks (JWN, TGT, etc) are actually bouncing. And Wal-Mart bucked the trend, poasting same-store sales growth of +2.4% last month. Seems that consumers are bargain hunting.

Tech stocks are lower today after Cisco (CSCO) lowered its guidance, saying that worldwide growth was slowing dramatically and forecasting future order growth right now is very difficult. The CEO also said that he expects the US to be the first to rebound from the economic slump, followed by the likes of India and China.

The put/call ratio is spiking to 1.45 right now, and the volatility index (VIX) is up 9% today to 59.75.

long VIX puts

Wednesday, November 05, 2008

Volatility Comes Back In A Big Way

Yesterday they said that the market had its biggest runup in history prior to an election. Today they said the market had its biggest post-election drop. Go figure.

Today started off as mild profit taking, but the sharp drop in commodities as well as in financials turned into a full fledged rout.

Volume wasn't that heavy today, so I don't want to make too much of today's action - yet. If the market can stabilize, I still think it has more room on the upside over the next 2-3 weeks. But we need to see buyers step up.

I did not put any money to work into today's decline. The ECB meets tonight, and I want to see how much they cut rates. I am hoping for at least 50 bps, if not more. They really need to do this.

Also, on Friday we will get the nonfarm payrolls report, which will likely be weak. This could hit the market also, as investors seem to be spooked by each and every weak economic report. At some point, they will develop thicker skin, as I see weak economic reports continuing for the near future.

Don't Overthink the "Obama Trade"

The markets are lower this morning on the heels of some worse than expected economic reports as well as profit taking. The Nasdaq had been up for 6 straight days, the first time that has happened in all of 2008. I was tempted to take some profits yesterday on recent trades I've made, but held off as I see more upside still.

The October ISM Services Index came in at 44.4 (vs. 47.0 consensus), indicating the 6th month of contraction in 2008. Also, the ADP employment report showed a decline of 157,000 jobs in October (vs. 100k consensus). I would note that the ADP report has a spotty track record vs. the govt. nonfarm payrolls report, which will be release Friday.

Weak economic reports should not be surprising, and we will continue to get many more of them in the months ahead. That is what the big decline in the markets has been signaling. But the market will start to look past them at some point, and that will signal a new uptrend could be at hand. Until then, I believe the markets will remain in a trading range.

Last night was an historic election for the U.S., and you will over and over again what are the "trades" that will do well under an Obama administration. The most obvious choices are things like alternative energy and managed care. While the least likely candidates are things like big oil, coal, and probably defense.

But I would say don't worry about trying to predict the winners ahead of time, leave that for the folks that come on CNBC and are forced to give predictions. The best bet is to let the market show you the way. I am looking closely for emerging leadership in the market. The strongest stocks and groups coming out of a major correction are usually the new leaders, and those are the areas to focus on. But you don't have to move until you get cues from the market. And I will continue to provide updates along the way.

Asian markets were up across the board overnight, a nice sign of approval for Obama from global markets. The dollar is lower today vs. the Euro and the Yen. Oil is also lower, trading below $69 after yesterday's huge surge. Natural gas is bucking the weakness.

The 10-year yield had a big drop yesterday, possibly on economic concerns. It is a bit lower again today, hitting 3.72%. And the VIX was higher after the open, but has since come back down to 47.2.

The market has cut its losses in half in the first hour of trading. For now, I am still a buyer on pullbacks and would like to put more cash to work.

long VIX puts

Tuesday, November 04, 2008

Charts of the Day

The market staged another big rally today. The S&P 500 rose +4.1% today. The bank index rallied +5.2%, the semis +4.5%, and the oil index +6.8%.

I have been saying I wanted to see the volatility index (VIX) move lower, and that is what we've seen over the last few days (see chart below). The VIX fell another -11.1% today, to 47.7. Interestingly, it touched its 50-day moving average midday, and then bounced higher off of it.

My guess is that we will see a short-term bounce higher in the VIX before it breaks below that 50-day average and works it way back below the 40 level.

Another supportive datapoint for the market is the Japanese Yen, which also continues to move lower. This is supportive that the Yen carry-trade unwind may be over, and the coincident selling pressure on equities and commodities may have subsided for now.

The chart above shows the Yen ETF (FXY). You can see how it spiked higher in early October, and then peaked a few weeks later. It is now moving lower, and still shows room on the downside before it finds support. When it looks like it has bottomed and is poised to move higher again, it might be time to reinstate some hedges.

The last chart I want to show is the outsized move in oil today. Crude oil prices spiked nearly +10%, an enormous 1-day move. This helped all energy related issue rise today, everything from oil & gas, drilling, steel, copper, agriculture, and infrastructure.

Looking at the chart above of the oil ETF (USO), you can see how oversold it was on the RSI indicator (top) as well as the stochastics (bottom). Both of those indicators are now curling higher, which should enable oil to continue to work higher, at least until it works off that oversold condition.

long VIX puts

An Obama Bounce?

Most investors believed that the market would have a more positive response to McCain, but today's action is looking like an Obama bounce, given that he is so far ahead in the polls. I am just happy to see the market trade better, and for volatility levels to fall.

The S&P 500 is leading the way so far, spiking +3.0%. Small-caps are lagging +1.3%. And the only sector I see that is lower are biotechs, which is likely weighing on the Nazz.

The dollar is down sharply this morning, coinciding with a big boost in commodities. Gold is up nicely, and oil is surging nearly $4 to $68. Natural gas is also up +4.8%, and that is helping the energy stocks trade sharply higher.

Asian markets were mixed overnight, despite Australia cutting its benchmark rate by a larger than expected 75 basis points to 5.25%. Credit markets continue to show improvement with both LIBOR rates and the TED spread declining, indicating an easing of bank lending. Our 10-year yield is flat at 3.90%.

The volatility index (VIX) is tanking -14.5% today to 45.85. The recent uptrend line has been broken sharply now (it broke first yesterday), and the VIX is approaching its 50-day average at 44.4.

The VIX is now down almost -50% from its intraday highs on 10/24. That said, it still needs to fall all the way below 30 to get back to "normal" levels of volatility.

I have added a bit more long-side exposure to the market in recent days, but I still would like to put more cash to work. I had to chase the market on huge up days like today, so I will wait for a pullback before committing new funds.

long VIX puts

Monday, November 03, 2008

Mutual Fund Monthly

October was an ugly month, not way to spin it. The S&P 500 experienced its biggest monthly decline in 21 years (since 1987). And many, many mutual funds are down well in excess of the market this year.

For October, I have 3 funds that bucked the weakness and were up for the month:
  • Rydex Managed Futures (+10.2%)
  • Nakoma Absolute Return (+3.7%)
  • Caldwell & Orkin Mkt Opportunity (+2.86%)

But only the Rydex fund is higher for the full year to date (+10.5%)

Among the worst performing funds on my list are:

  • Ivy Global Nat. Resources (-33.7%)
  • Winslow Green Growth (-32.4%)
  • CGM Focus (-29.8%)

The one that surprises me here is CGMFX. Ken Heebner has an excellent track record, and is a very good manager. But with a mandate that allows him to short, I have to wonder why he didn't have more shorts on to offset some of his long exposure?

Among the sector ETFs that I follow, none were higher in October. The SPDR Regional Bank ETF (KRE) was down the least, at -7.3%. And the Market Vectors Gold ETF (GDX) was down the most, -38.0%.

Ditto for the International ETFs. There were all down materially in October, with Japan (EWJ) down the least (-15.6%), and Russia (RSX) down the most (-34.6%). Ugly.

These declines took the market down to deeply oversold levels. While volatility could remain higher than normal, I do expect the market to fare better in the last 2 months of the year.


Monday Morning Musings

A pretty quiet open on Wall Street, which is welcome news for most people. Given the extreme volatility we witnessed over the last 2 months, I would be happy with any sort of semblance that we are returning to more rational trading.

Asian markets were higher overnight, although Japan was closed for a holiday. The dollar is mixed so far today, nearly flat vs. the Euro and down a bit vs. the Yen. Oil is trading nearly $2 lower to $65.70.

Credit markets continue to show improving conditions. LIBOR rates fell across most terms, and the TED spread is also down 24 basis points more today. Our 10-year yield is a bit lower to 3.93%.

Boeing's machinist union voted in favor of the new contract, which is good news. But Goldman Sachs still put the stock on their Conviction Sell list.

The ISM Manufacturing Index came in at 38.9 (vs. 41 consensus). This is a pretty low number. Anything below 50 represents contraction in the economy.

The volatility index (VIX) is -3.7% lower today to 57.66. The recent uptrend in the VIX is just about broken here, so it will be a good sign if the VIX can continue to work its way to lower levels.

Last, election talk will heat up today and tomorrow. The latest WSJ/NBC poll shows Obama leading by 51% to 43%. also shows Obama as a big favorite. Thus, my guess is that the market is already pricing in an Obama victory. So while that race might not move the market Tuesday night, the race in the House and Senate could. Stay tuned.

Many have asked me what sectors would do well under Obama. The most obvious choice is probably alternative energy. But before I run out and buy these stocks, I want to see confirmation in the market. Let the stocks start to prove themselves first, and then look for who is emerging as leaders. That is the best strategy.

long GS

Sunday, November 02, 2008

Weekly Wrap

Here is's weekly recap:

Students of stock market history know that the month of October has an infamous track record. It isn't the worst month, on average, for the stock market. That distinction belongs to September. However, the month of October has produced some of the most unsettling moments in stock market history. Unfortunately, October 2008 will forever fit the mold as one of those infamous periods.

For all intents and purposes, there was a market crash this October as the S&P 500 dropped as much as 23.6% between its closing level on Friday, Oct. 3, to its intra-day low on Friday, Oct. 10.

Amid a period of record volatility, the market managed to pare its losses and ended the month down "only" 16.9%. The latter qualifies as the eighth worst, one month percentage drop in the S&P 500 since 1930.

October, though, didn't end with a whimper. On the contrary, it ended with a big bang as the final week of trading culminated in a 10.5% gain for the S&P 500.

The positive move was secured by a massive 10.8% increase in Tuesday's session alone, as a mix of portfolio rebalancing among mutual funds near their fiscal year end, short covering, and bottom-fishing buying interest powered the advance. Prior to Tuesday's move, the S&P 500 had dropped 13.9% in the preceding five sessions.

One of the unique elements of the final week was that it brought another round of bad economic news. The stock market, though, moved on its accord, seemingly comfortable that this latest batch of bad news had already been priced in and uplifted by some encouraging developments in the term lending markets and further easing by central banks around the globe.

Briefly, the biggest piece of economic news was that real GDP declined 0.3% on an annualized basis in the third quarter, pulled down by a worrisome 3.1% decline in consumer spending that subtracted 2.25 percentage points from the GDP calculation.

The GDP data followed a report from the Conference Board that consumer confidence hit a record low in September and accompanied an initial jobless claims report that showed the 4-week moving average at a recession-like level of 475,500. The latter mark reinforced the thought that we'll see a tenth consecutive decline in nonfarm payrolls when they are reported next Friday.

New home sales, up 2.7% in September, provided some good news, as did the report that orders for durable goods increased 0.8% in September. There might have been a better response to the durables number if not for the added indication in the report that business investment, down 1.4%, declined for the second month in a row.

The Chicago Purchasing Managers Index didn't do anything to help improve the economic outlook. It fell from 56.7 in September to 37.8 in October. A number below 50 is considered to be a sign of contraction.

Still, like the other discouraging economic releases during the week, the market brushed aside the Chicago PMI news and finished Friday's session higher.

Incidentally, Friday's winning session produced the first back-to-back up days in the market since September 25-26. It didn't end up being an easy task either. The S&P declined 2.7% from its high in the final hour of trading Friday to leave it with a small gain, yet a closing rush of buying interest left it up 1.5% for the day.

The late move Friday was consistent with a series of final hour dramatics throughout the week. In fact, some of the swings, like the one seen in the final hour Wednesday, covered more ground than the S&P 500 did all of last year when it gained 3.50%.

Extreme volatility was the norm in October. This week was no exception, although there was a considerable pullback in the VIX Index (from 79.13 to 59.76). The VIX is referred to as the fear gauge, so it can be said investors' fears subsided some this week.

That is understandable when taking into account the drastic improvement in short-term lending rates.

To wit, the overnight Libor rate, which is what banks charge each other for dollar loans, dropped to 0.41% from 1.28% at the end of last week and from 6.88% at its Sept. 30 peak. In turn, 90-day commercial paper rates dropped 61 basis points to 2.73% following the Fed's implementation Monday of its Commercial Paper Funding Facility.

The improvement in term lending rates offers some evidence that the Fed's funding initiatives are having the intended effect of bolstering confidence in counterparty risk. This is a constructive sign for the credit market and the stock market, but as we have been reminded by the Fed Chairman himself, it doesn't mean there will be a quick economic recovery.

Fittingly, the FOMC voted unanimously Wednesday to cut the fed funds rate another 50 basis points to 1.00%, bringing it to its lowest level since 2004. The move was widely expected, yet the Fed left open the possibility that it could cut rates further by emphasizing the point that downside risks to growth remain while inflation is expected to moderate in coming quarters.

The last time the fed funds rate was below 1.00% was 1958.

The Federal Reserve followed up Wednesday's rate-cutting action with an announcement that it is establishing currency swap lines with Brazil, Mexico, South Korea and Singapore -- four emerging market economies that it deems to have systemic importance. On a related note, the central banks of Taiwan, Hong Kong, China and Japan all cut their key lending rates this week.

A statement from the G7 warning of the pratfalls of the excessive gains in the yen and talk of the BOJ rate cut helped cool the Japanese currency, which weakened 4.2% against the dollar this week and provided some measure of relief for Japanese exporters that get pinched by a stronger yen. The dollar index, meanwhile, slipped 0.9% after gaining 4.9% in the prior week.

So, October is in the history books and it offered a lot to be remembered as far as stock market history goes. This November will offer a lot to be remembered, too, as we will soon see more history made when we elect a new president on Tuesday.

What November brings for the stock market is anyone's best guess. Since 1950, November has typically marked the start of a very favorable six-month return period for the market.

Given the losses seen year-to-date, let's hope the favorable stock market history repeats itself in the next six months. To be sure, any bullish-minded investor, whether they are a Republican or a Democrat, wouldn't mind being a part of that history.