Tuesday, March 31, 2009

Consumer Confidence Still Near Record Lows

The market is getting a boost in early trading, following a stiff 2-day drubbing for stocks. Considering the market rallied nearly +25% from its intraday March lows, it is not surprising to experience a -5% pullback.

Consumer confidence came in at 26.0 for March, which I think is a record low for that reading. If stocks continue to work higher, they will be climbing the proverbial wall of worry that most bull markets initially endure.

The financials are leading the action so far. Market participants are hopeful that there will be some positive developments on the mark-to-market accounting front, which has been hinted at by Congressmen Frank. This would be a nice break for banks and the continued writedowns they have been forced to take. I have always argued that in tremendously illiquid markets, forced sales should be used for M2M purposes.

The Case-Shiller Home Price Index for January was 146.4, and the 20-city composite showed a -19% yr/yr decline. That's pretty steep, but it will be interesting to see if there has been any stabilization by March (this reading was for January). Anecdotally, I have heard about more housing activity, especially due to the very low mortgage rates. And this morning, Lennar (LEN) topped revenue expectations.

Across the pond, European bourses are stronger this morning, while Asian markets finished mixed overnight. The Asian Development Bank said that excluding Japan, Asia's economy will grow +3.4% this year, less than the +5.8% previously estimated. Japan's Prime Minister offered an outline for a new stimulus package for its declining economy.

The dollar is mixed today; oil is slightly lower near $48, after a big drop yesterday; gold is hovering near $915; the 10-year yield is lower to 2.69%; and the VIX is -4% lower to 43.5, and still above its 200-day average.

Trading comment: Yesterday I added some UWM (leverage small-cap etf) to my aggressive accounts, but that was it. I am still mulling adding to my SPX exposure, as I think this market has another push higher at some point.

My concern is what happens when we get into Q1 earnings season. I expect earnings to be subdued, and any guidance to be extremely cautious. Given that earnings season will commence about 6 weeks from the March bottom, this recent rally could have used up its time by then. But let's not put the cart before the horse, there is still a lot of trading sessions between now and then.

long UWM

Monday, March 30, 2009

Monday Morning Musings

This morning is day 2 of this selloff, and today's its the same fears as a couple of months ago that are leading the declines. Of course, the market had a big move off its recent lows, so some of this selloff is likely a move to take profits.

Geithner indicated over the weekend that banks may need even more bailout funds, even as some are returning their TARP loans. I don't see why this is such a big surprise, I think most people knew that bank balance sheets were still stressed. Otherwise there would have been no need to announce this new PPIP plan.

The other news item that is worrying the market is that the govt. auto task force said neither GM nor Chrysler submitted viable restructuring plans. The govt. forced the resignation of GM CEO Rick Wagoner, and said it doesn't believe Chrysler is a viable stand-alone company. Some are now worried that the use of bankruptcy may be required. At least the govt. is using a firm hand with these companies.

Additionally, news over the weekend that the Spanish central bank took control of a large savings bank has rekindled fears of bank nationalizations in Europe (and here). In Britain, Barclays (BCS) refused to partake in the government's toxic asset insurance plan.

The above news led to sharp selloffs in Asia, with many markets down in excess of -4%. The 10-year yield is lower at 2.71%; oil is trading lower near $50, while gold is higher; and the VIX is spiking +11% to 45.70.

Trading comment: I opined last week that the stubbornly high VIX made me think another short, sharp selloff could surface at anytime. This is one of the reasons I kept some small hedges on in the portfolio. The last 2 days certainly qualifies as a sharp selloff, with the SPX -5% off its recent highs.

Nonetheless, my near-term strategy remains to use these dips to put some cash to work and add some long exposure to the portfolios. Last week I added to our biotech (XBI) positions. This week I will look to add additional positions.

long XBI

Sunday, March 29, 2009

Weekly Wrap

Here is the weekly recap from Briefing.com:

The S&P 500 continued its rally off its March 6 lows, surging 6.2% on the week, led by gains in financials as Treasury Secretary Geithner unveiled his plan to purchase bad assets from banks and housing data came in better-than-expected.

The bulk of the gains were made on Monday with the major indices gaining around 6% and financials spiking 17.7% as the Treasury Department released details regarding its plan to remove troubled assets from the balance sheets of banks. The Treasury plans to create a series of public-private investment funds to buy $500 billion to $1 trillion in legacy loans and securities. To encourage participation from the private sector, the government is taking on much of the risk and offering subsidies. In a show of support, Bill Gross, co-Chief Investment Officer of the world's largest bond fund, told Reuters that Pimco plans to participate in the program.

Also giving the market a boost on Monday was news that existing home sales in February rose 5.1% month-over-month to a seasonally adjusted annual rate of 4.72 million, according to the National Association of Realtors. Economists expected a 0.9% month-over-month drop to 4.45 million. A substantial portion of the sales were from first time homebuyers and distressed properties.

Later in the week, the Census Bureau released upside new home sales reports. February new home sales increased 4.7% month-over-month at an annualized rate of 337,000, topping the consensus estimate that called for a 2.9% decline. Though the result was better-than-expected, it is important to note the increase is at 4.7% +-18.3% (range of -13.6% to +22.7% ), which the Census Bureau notes makes it not statistically significant because it is not clear if the sales rose or fell. Meanwhile, sales are still down 41.1% +-7.9% from the previous year and are at their second lowest rate on records dating back to 1963. Still, traders took the data as an encouraging sign of a potential bottoming in new home sales.

While low interest rates and increased affordability are encouraging developments, the housing sector continues to face high levels of inventory, tight credit conditions and the deleveraging of consumers.

In other economic data, February durable goods orders increased 3.4%, marking the first time in six months that orders increased. Excluding transportation, orders increased 3.9%. Economists expected respective declines of 2.5% and 2.0%, respectively. Separately, final fourth quarter GDP reading showed a 6.3% annualized rate of contraction, a slight decrease from the preliminary -6.2%, but better then the 6.6% decline that was expected.

Though not normally stock market-moving events, Treasury auctions were widely watched after a U.K. offering failed on Wednesday and a U.S. five year offering had disappointing demand, resulting in a sharp drop in Treasuries and a brief pullback in the stock market. But a 7-year auction on Thursday had solid demand, giving the stock market a boost and easing concerns that the U.S. cost of borrowing will increase in the face of record borrowing.

On a related note, there was some speculation the movement in Treasuries had to do with China, which this week said it wants an international currency instead of using U.S. dollars. In addition, the Federal Reserve said began its $300 bln long-term Treasury purchase program on Wednesday.

As has been the case for the last several months, Capitol Hill was in focus throughout the week. Fed Chairman Bernanke and Treasury Secretary Geithner testified before the House Financial Services Committee hearing regarding the rescue of AIG (AIG ). Bernanke and Geithner expressed their own frustrations and opinions regarding executive compensation, efforts to protect the economy, and risk-taking constraints.

Separately, Treasury Secretary Geithner testified before the House Financial Services Committee that an overhaul of financial regulation is needed. The changes would aim to limit risk in order to prevent future financial crises.

World governments are likely to garner attention next week, as the G-20 meets April 2. Tighter regulation over the financial markets is expected to be an area of focus.

In corporate news, Best Buy (BBY) surged 17.8% on the week after posting better-than-expected fourth quarter earnings of $1.61, $0.21 better than the consensus. The retailer also provided full year guidance that was well above expectations. Accenture (ACN) lowered its outlook for the full year, sending its stock down 8.4% for the week.

In the end, all ten sectors posted solid gains for the week. Financials advanced 12.2% , industrials gained 10.5% and consumer discretionary advanced 8.8%. Defensive sectors underperformed on a relative basis, with utilities up 1.5%.

The S&P 500 is now up 22.4% from its March 6 low.

Friday, March 27, 2009

Stocks Pause After Another Strong Week

The market is lower in early trading, likely on profit taking after a huge rally this week. I heard on CNBC that this has been the strongest bounce (I think they said 20-day) over such a short period since 1938. Kudos to my buddy Doug Kass who nailed this bottom call.

The dollar is strong this morning, which is weighing on commodity prices, including oil and gold. The Baltic Dry Index has now fallen for the 11th straight day. This weakness is showing up in the energy and materials sectors, which are lagging.

There are no new Congressional testimonies today, but Obama is talking to some of the nation's top banking executives, so we could see some headlines come out of those meeting. These guys sure have been busy lately. I wonder what Hank Paulson is up to these days? Probably sunning in Hawaii, if that guy even knows how to relax.

Asian markets were mostly flat overnight; oil is down to $52 while gold is just below $925; the 10-year yield is lower to 2.72%; and the VIX is still hovering near 41.1, right at its 200-day support.

Trading comment: Yesterday I added more to our biotech (XBI) positions, which look good to me. I also bought a trading position in RIMM in our aggressive accounts. There still feels like there is a strong bid under the market, likely due to the large cash balances that portfolio managers are trying to invest prior to quarter end. No one wants to look like they missed out on this huge rally. So for now, 'buy the dips' is the strategy du jour.

As an aside, the rumors this morning are that CNBC's Dylan Ratigan has quit the network. If you Google "Dylan Ratigan quits", you can find some juicy snippets. I used to converse with Dylan via email, but I admit that I often found his rants from the floor of the NYSE unsettling, as I felt he should be focusing more on objective reporting and less on injecting his opinions. But maybe that's just me--


Thursday, March 26, 2009

Best Buy Trounces Estimates, Helps Sentiment

The market is strong again in early trading. Yesterday's action was impressive, in that the early rally completely reversed mid-day, but then a late day rally pulled the indexes back into positive territory by a wide margin. Felt like more short-covering to me, but I'll take it.

This morning, there were a couple of positive earnings reports. Best Buy (BBY) crushed estimates by reporting $1.61 vs. $1.40 estimates. The company also raised guidance for 2010, something analysts thought was unheard of in the consumer space. The positive news boosted BBY +15%, and is pulling other retail stocks higher.

ConAgra (CAG) also reported better than expected earnings, and its stock is higher as well.

In economic news, final 4Q GDP came in at -6.3%, which is a horrible figure, but better than the -6.6% economists were expecting. Q1 of this year will likely be another weak number, but I suspect that Q1 will mark the bottom of the contraction, and that GDP will begin to creep back towards positive territory as the year progresses.

Treasury Sec Geithner is testifying before the House Financial Services Committee this morning to discuss regulation and how the government oversees risk-taking.

Also, yesterday's market selloff was in part attributed to a weak 5-year bond auction (that is, weak demand). Today there is a 7-year Note auction, so it will be interesting to see if there is a similar outcome.

Asian markets were higher overnight; the dollar is higher, but so are oil and gold (go figure); the 10-year yield is up a bit to 2.80%; and the VIX is falling just below its 200-day average near 41.11.

Also, the put/call ratio is above 1.0 for the first time since Mar. 6th. This is probably option players wanting to buy put options to protect the gains they have made in the recent rally.

Trading comment: I added a little bit of long exposure (XBI, XLP) into yesterday's selloff, but I didn't add as much as I would have liked given how short-lived the selloff was. Today feels similar.

I hate to feel like I am chasing prices higher, but the longer the market trades sideways, the closer it could be to breaking out above that 825 level that has been resistance on the SPX for the last 4 days.

long XBI, XLP

Wednesday, March 25, 2009

Are Economists Too Bearish?

Economists have a long history of not being able to forecast economic data with all that much accuracy, but they were way off the mark today. Today's data came in much better than expected, especially in light of the consensus forecasts which called for more declines. Maybe economists are too bearish right now?

To wit, new home sales for February increased +4.7%, which is far better than the -2.9% decline that was expected by economists. The positive surprise is helping boost the housing index by roughly +8% this morning. Also, February durable goods orders increased +3.4%, vs. estimates which called for a decrease of -2.5%.

This was the first increase in durable goods in six months. What is interesting to me is that February was widely believed to be a horribly weak month for the economy. But if these datapoints are indicative of a trend, then maybe the economy didn't contract as much as widely believed.

Yesterday, Goldman Sachs (GS) said it would like to pay back the TARP funds to the govt. Today, Bank of America (BAC) is saying the same thing. It seems the banks don't like the onerous oversight and regulation that comes with receiving these bailout funds. If it doesn't worry the market, I say go for it.

Asian markets were mostly lower in overnight trading on profit taking; the dollar is lower this morning, while gold is higher; oil is also lower, but still hovering above $53; the 10-year yield is up to 2.72%; and the VIX is again testing its 200-day support around 41.82.

Trading comment: Was that it for the pullback?!?? One day?? Man, it looks like underinvested portfolio managers really want to put cash to work ahead of quarter end. Add to that a dose of performance anxiety and this rally really didn't give the bulls a good chance to jump on board.

Yesterday, we were stopped out of our short bond etf (TBT) at break even after the Treasury said it would begin buying long-term Treasury notes today. While I still think bond yields will move higher longer-term, this buying pressure in the market from the Fed could keep yields low for the time being.

I will be looking to start dipping my toe in the water today by adding some biotech (XBI) exposure. I like the growth profile for this group, as well as the acquisition activity coming from big pharma. I might also look to add to our consumer staple stocks (XLP).

Tuesday, March 24, 2009

SEC Mulls Uptick Rule, While Congress Focuses on AIG

The market is pulling back in early trading, which is not surprising given yesterday's outsized rally. I heard that the S&P 500 had its biggest two-week rally since 1938. Impressive, but many wonder if this will be the bear market rally that actually sticks.

I suspect that we will have one more retest of the market lows at some point this year, but I am hopeful that given the plethora of govt. programs and monetary stimulus taking hold that the March bottom will be the ultimate low.

Yesterday's public-private investment plan was a big step, as the market's reaction confirmed, as is the TALF plan aimed at reviving the securitization market (credit cards, auto loans, student loans, small business, etc). Today there is news that the SEC is considering modifying the "uptick rule", which is meant to help slow the decline in stocks under pressure from short sellers. I think at the margin this could be helpful.

In other news, Goldman (GS) is looking to pay back its TARP funds as soon as possible. I guess they didn't like the implications of being told how to pay out bonuses to employees. CNBC is reporting that GE won't be forced to raise additional equity, and Dow Jones is saying that Deutsche Bank (DB) does not need fresh capital either. All of these signs, in addition to the huge rallies in the stocks, lend themselves to the notion that banks are stabilizing.

Asian markets were higher across the board overnight; the dollar is higher today, weighing on oil and gold prices; the 10-year yield is a bit higher to 2.71%; and the VIX is roughly flat around 43.15. I am surprised that the VIX isn't lower after yesterday's huge gains. The fact that it is still above 40 makes me think we could see some additional sharp selloffs in the near future.

Trading comment: Boy, it sure doesn't feel good to have any hedges on a day like yesterday. Thankfully, they are small, and outweighed by our long positions. With the S&P back above its 50-day, I will look to add my first buys near any test of this support, which would equate to something near the SPX 800 level. I suspect we could see another wave of buying into quarter end.

I will likely start with our index etf positions, but am also interested in adding back to the oil services (IEZ) group (including Schlumberger (SLB)), as well as Gilead (GILD) and the biotechs (XBI). Gold (GLD) has not been acting well, and is one area I might look to trim.

Monday, March 23, 2009

Market Screams Higher After Treasury Plan and Better Housing Stats

The chart above shows the spike higher in the S&P 500 today. The index closed above its 50-day moving average for the first time since Jan. 28th. The last 2 times the SPX got above its 50-day, it was a brief affair before the market rolled over again.

If the SPX can start to hold ground above this key moving average, it would be a noticeable change. Moreover, if this moving average can change direction from pointing downward to stabilizing and turning higher, that would mark a change in the short-term trend in the market for the first time since around June 2008.

Here is a recap of the day, from the folks at Briefing.com:

  • The Treasury Department released details related to its plan to remove bad assets from banks' balance sheets, sparking a massive surge in the stock market. In addition, the market benefited from a better-than-expected existing home sales report.
  • In the end, the S&P 500 spiked 7.1%, settling at session highs thanks to a late afternoon rally.
  • The Treasury plans to create a series of public-private investments funds to buy $500 billion to $1 trillion in legacy loans and securities. To encourage participation from the private sector, the government is taking on much of the risk and offering subsidies.
  • In a show of support, Bill Gross, co-Chief Investment Officer of the world's largest bond fund, told Reuters that Pimco plans to participate in the program.
  • Meanwhile, FDIC Chairman Bair said that the public-private investment program will likely make money for the FDIC, according to Reuters. Bair also said that 6-to-1 is the outer range of leverage it will provide for the program, Reuters reported.
  • The financial sector rallied a massive 17.7% on the news, with diversified financial services climbing 24.5% and diversified banks up 22.3%.
  • The overall market's move was broad-based as all 10 of the economic sectors rose, with gains of at least 3.8% in each. The energy sector (+7.8%) finished second to financials, outperforming as May crude oil futures climbed 3.5%. Defensive sectors however, underperformed on a relative basis, but still posted solid advances.
  • In economic news, existing home sales in February rose 5.1% month-over-month to a seasonally adjusted annual rate of 4.72 million, according to the National Association of Realtors. Economists expected a 0.9% month-over-month drop to 4.45 million.
  • A substantial portion of the sales were from first time homebuyers and distressed properties. The increase is a positive for the market, though sales still remain at depressed levels. While low interest rates and increased affordability are encouraging developments, the housing sector continues to face high levels of inventory, tight credit conditions and the deleveraging of consumers.

Back In The Saddle

I was out of the office late last week, and didn't get a chance to do any blogging. The S&P 500 rallied right up to its 50-day average, and then pulled back. Pretty textbook.

Today, the market is getting a huge relief rally on the news that Treasury unveiled its "toxic asset" program to help banks improve their balance sheets. The program aims to create a series of public-private investment funds to buy $500 billion (could go to $1 trillion) in legacy loans and securities.

The private sector will put up a little of the money, and the govt. will foster the leverage to expand the investments. Moreover, the govt. will take on much of the risk, which should improve the participation from the private sector. Bond guru Bill Gross said he is very intrigued by the prospect of double-digit returns offered by the program.

The news is propelling the bank sector +10% higher so far. Let's hope this intricate program lives up to these expectations.

Asian markets rallied sharply overnight in anticipation of today's news. The 10-year yield is steady at 2.62%. The dollar is lower, and oil is moving higher, while gold is flat. The VIX is -5% lower to 43.3, but still above that 200-day support I have been writing about.

Trading comment: The market is still somewhat overbought, but could be a good buy this week. The SPX is consolidating just below that overhead 50-day, which is constructive. A strong close above this resistance sometime this week would be a bullish sign. I have not added any further long exposure yet, but will likely be looking to do so.

Wednesday, March 18, 2009

Will The Fed Make Any Surprise Announcements?

The market is lower in early trading, but given the outsized rally in recent days, some profit taking is in order. Also, the market is now overbought once again, so some consolidation would be healthy and lead to further gains down the road.

The FOMC meets today, where they are expected to leave rates unchanged between 0.00% and 0.25%. Their statement will be interesting to see if they make any comments about any new programs, or the progress of the TALF program that starts this week.

In corporate news, IBM may buy Sun Microsystems (JAVA) for $6.5 billion in cash. Adobe (ADBE) reported strong earnings and its stock is rallying. And Coke (KO) was denied by the Chinese govt. from buying a large Chinese juice maker for $2.4 billion. Protectionism?

Asian markets closed higher overnight. The dollar is lower today, but that is not helping commodity prices. Oil is trading lower, below $48. Gold is testing the $900 level, and the Baltic Dry Index is down for the 5th straight day.

The 10-year yield is lower to 2.97%. And the VIX is +2% higher to 41.63, hovering just above its 200-day, which looks like it could give way on the next rally.

Trading comment: This pullback is mild so far, and it is only day 1. I am still looking to add some long exposure, even as that is becoming a crowded trade. But it has not paid to chase stocks higher in this market in well over a year, and with the SPX still below its 50-day average, I don't think the train is leaving the station just yet.

Tuesday, March 17, 2009

Charts of the Day

The first chart that I wanted to highlight is of the Euro/Yen cross (the relationship of the Euro relative to the Yen), which I have mentioned in the past. Smart market watchers like Dennis Gartman have been talking about this "cross" and watching it as a barometer for global investors' willingness to take risk.

You can see below that the cross is now breaking to new highs since last October. The idea here is that the backdrop for financial assets is more benign now, and that should help equities move higher if cash continues to come off the sidelines.

The second chart is of crude oil prices. The chart below looks like it is painting a picture of a bottom in crude prices. The stochastic indicator at the bottom of the chart looks like oil is definitely overbought in the short-term, but could continue to work higher after a breather.

As oil is tied to the growth in the global economy, higher prices would lend themselves to the reflation theory, that the coordinated global stimulus packages are having their desired effect of stimulating economic growth again. Stay tuned.

The last chart is of the 10-year Treasury yield. If this were a chart of a stock, I would look at it and say it has been building a nice base, and looks like it is ready to move higher.

A move higher is okay in the sense that the big global recession and deflation worries are subsiding. I don't want to see rates run too high, because that would temper the economic recovery we are looking for. But I suspect the Fed would step in to buy Treasuries, as it has stated it would do, in order to keep a lid of rising rates.

Bears Finding It Difficult To Knock Market Down

The market pulled back sharply from its intraday highs yesterday, but the overall declines were mild compared to recent selloffs. Today, the bears are again finding it difficult to keep a lid on this market. If this market can simply trade sideways while working off its overbought condition, that would be bullish and portend more upside.

In corporate news, Alcoa (AA) slashed its dividend and announced a stock offering to help improve liquidity. This is weighing on most materials stocks, along with comments from Rio Tinto (RTP) who said that the slump in commodities will continue to weigh on financial results.

In economic news, the PPI came in at +0.1%, below the 0.4% that was expected. Housing starts and building permits were above expectations, but I wouldn't mind seeing these figures remain low while the country works off the oversupply of homes on the market.

Asian markets rallied overnight. The dollar is slightly higher this morning, pushing gold prices lower. But oil is bucking the weakness in commodities and rising above $48. The 10-year yield is consolidating around 2.94%, and the VIX is -2% lower to 42.90, still just above its 200-day average.

Trading comment: I was hoping for more of a pullback, which we still might get this week. The VIX hovering above 42 makes me think a shakeout day could be in order. But I would like to use that weakness to add some long exposure to the portfolios. Patience has been key in this market, and I'm mindful not to chase an overbought market.

Monday, March 16, 2009

Monday Morning Musings

The market is higher in early trading for a 5th consecutive day. Actually, the S&P 500 is higher, led by the bank index (+4.9%), while the Nasdaq is lower.

There is talk that the Treasury will soon offer more details regarding its plan to address the bad assets on banks balance sheets. This is helping the positive sentiment in the financial sector, as well as further news that the government is also making plans to revamp its oversight for banks.

Oil is trading a bit lower, near $45, after OPEC decided to leave production unchanged. I was a bit surprised by this move, given how much oil prices have dropped, and I think the decision could leave oil prices trading below $50 for a while longer.

Asian markets closed nicely higher overnight. The dollar is mixed this morning, while oil and gold are lower so far. The 10-year yield is higher at 2.95%, looking like it wants to break north of the 3.0% level. And the VIX is higher, near 43, despite the overall gains in the market.

The VIX bounced off its 200-day last week near 40, and could break below that support on a further rally in the market. But in the short-term, its stubborness above this level makes me think we could have a big down day or two this week, which is also options expiration week.

Trading comment: I didn't alter my long or short exposure much last week. The small etf hedges that I left on from weeks earlier acted as dead weights in my portfolios, but that is always the case when you get sharp rallies.

I still want to have some protection on until the S&P 500 starts trading comfortably above its 50-day, and reverses this long downtrend that has been in place. That is a longer-term time frame, but I still want to trade the shorter-term moves as well. I would expect the market to pull back at some point, which I would likely buy into, before making another push higher towards its overhead 50-day.

Friday, March 13, 2009

Rumors Are That We Will See Changes In Mark-to-Market Rules

The market rallied sharply again yesterday, after the market got reassuring news that several major banks have been profitable so far this year. Citi (C) indicated that it will not need any additional government capital. This helped the financial stocks soar.

There is also a lot of hope surrounding both the mark-to-market accounting rules as well as the uptick rule. The SEC chair said she is hopeful that something can be done with the uptick rule, like reinstating it, which should help ease the speed of market declines (at least in theory). And there is also chatter that we will see meaningful changes in the M2M accounting rules, at least that's what the FASB executives told Congress yesterday after getting grilled in public.

The market has had a sharp 3-day bounce, so a bit of rest would not be surprising. The S&P 500 rallied right up to the level of its November lows (742). A moderate, low volume pullback from these levels would be textbook bullish action. All past rallies have quickly given back all of their gains, so a change in the action going forward would be noticeable.

Asian markets soared last night, led by Japan +5.2%. The dollar is up a little bit again today, but so are most commodities. Oil is up near $47.50. The 10-year yield is slighly lower to 2.85%. And the VIX tagged its 200-day at 40 and has bounced higher to 42.90 (+4%). I would expect the VIX to bounce from this support before eventually breaking below its 200-day, which would be very bullish.

Trading comment: Sentiment is hard to guage here. There are a lot of people who merely think this is a bear market rally, but there are also a lot of people with too much cash on the sidelines, looking to get in and participate. This is why any pullback could be brief. Further rallies next week will lead to more short covering, which could be exacerbated by options expiration next week. At least that's the setup.

I did not add any longs yesterday. I am still looking to do so on any pullback. At this juncture in the market, I am still looking to play the longside via etfs. The upcoming earnings season could be dicey, so I want to manage my risk carefully. But I am getting closer to the point where I think many of the prices of individual stocks will be offering one of the best buying opportunities of my lifetime. Like always, timing is key.

Thursday, March 12, 2009

GE's Triple-A Rating Gets Downgraded A Notch

The market is rallying nicely in early trading. GE finally had its credit rating downgraded a notch, but this action was widely anticipated in the market, so the shares of GE are actually rallying +10% today.

Advance retail sales declined by -0.1% for February, but this was less than the expected -0.5% forecast. Moreover, the prior month's reading was revised higher to a +1.8% increase. So it is possible that retail sales could be stabilizing.

Congress will hold its hearing this morning on the mark-to-market issue. The temporary suspension of this accounting rule would remove an overhang on many financial stocks, but it is a controversial issue. I think at the very least, some modifications to the rule are in order.

Last, the Madoff hearing is taking place today, and the testimony from his victims is heart-wrenching. There is no punishment sufficient for this man, which many are now calling a financial terrorist. For fear of offending any readers, I will not say what I think they should do with this guy.

Trading comment: The market continues to trade firm, and the fact that we have not given back any of Tuesday's outsized rally is a bit of a change in character from past one-day rallies. I still think the S&P 500 could run into a bit of resistance around the 740 level, but should continue higher after a pause around that area.

There are other parts of the market that have been really beaten down, and still look attractive. The first area I am looking to add exposure to is biotechs (XBI). Roche juse completed its offer to buy all of Genentech (DNA) for $95, Gilead (GILD) bought a company this morning, and action in the space is heating up.

Wednesday, March 11, 2009

Bank Stocks Leading The Way For Second Day

Bank stocks are off to another strong start to the day, up nearly +5% in early trading. Treasury Sec Geithner said that the administration may use capital injections as an incentive to get banks to sell their bad assets.

Liquidity injections around the globe continue, with the Bank of England ready to step up its quantitative easing by purchasing government bonds.

Hedge fund investors withdrew $11 billion dollars from hedge funds in February, down from January levels but still a continuation of the industry contraction that began last year amid disappointing returns from many prominent hedgies.

Sources say the SEC won't seek to suspend the mark-to-market accounting rules. Congress will hold hearings about the subject tomorrow, and many say that M2M has exacerbated the recent credit crunch, including the Chamber of Commerce. Rep Barney Frank also seems in favor of at least modifying the rules to give banks more flexibility.

Asian markets followed the U.S. and rallied sharply overnight, led by Japan. The dollar is lower this morning, helping boost gold a bit. Oil prices are slightly lower also. The 10-year yield is higher to 3.03%, and the VIX is another -4% lower to 42.51, trading below its 50-day average.

The VIX has been unable to stay below the 40 level for more than a day or so since last September. So if it can get back down below those levels, it would be a notable change in market sentiment. The 200-day level is right around 40.2, so I would expect a bounce from those levels first.

Trading comment: I haven't added any long etfs to the portfolios yet, nor done anything with the small hedges I had left. I still think the market will work its way higher as it alleviates what had become an historic oversold condition, but it won't be a straight line up. As such, I want to continue to be active trading around our positions, both long and short.

Tuesday, March 10, 2009

Stocks Enjoy Biggest Rally Since November Bottom

I have been saying I thought a big rally was out there, but I did not expect such a big one-day rally. The +6.4% gain in the S&p 500 is the biggest since last November.

The bank index surged +15.6%, while big GE bounced back +20%. And volume was very strong today, indicating conviction behind the move. Here is a quick summary on the day:
  • Bank of America and General Electric were the most actively traded stocks on the Big Board. Bank of America was up 1.04 at 4.79. GE gained 1.46 to 8.87.
  • Comments from a key congressman kept the party going in the afternoon. Barney Frank, chairman of the House Financial Services Committee, called for accounting and trading rule changes that could decrease market volatility and allow companies to value assets differently.
  • The Dow soared 379 points to close at 6926.
  • NYSE volume totaled nearly 2.2 billion shares.
  • The S&P 500 was up 43 points.
  • The Nasdaq gained 89. Advancing issues swamped decliners by 12-1 on the NYSE and by 5-1 on the Nasdaq.
  • The 10-year Treasury note was down more than a point to yield 3.00%.

This rally should have more to go, such that I will look to add some (long) trading positions on any weakness. Past one-day bounces have given back the gains in relatively short order, so I will be looking for the market to add to today's gains to show me at least a near-term change in character.

Looking back at many past markets, March has often provided key pivot points. In March 2000, the last big bull market topped. And in March 2003, the last big bear market bottomed. I'm not saying yesterday was THE bottom, but it's possible.

Vikram Sings A Pleasing Tune

I have been dealing with IT issues this morning, which is always a fun way to start your day. There was not a lot of news before the open today, but the comments out of Citi (C) were enough.

CEO Vikram Pandit said that the first 2 months of this year for Citi have been the most profitable since the third quarter of 2007. Those comments sparked a rally in the bank stocks. Citi spiked +25% early on, and the bank index rallied roughly +10% (brokers too).

A little while ago, US Rep Barney Frank commented that the mark-to-mkt accounting rule must be improved, made more flexible He also said that he expects uptick rule to be restored in about a month. This would be a nice boost, as investors perceive that it would slow the ability of short-sellers to lean on the market.

The mark-to-mkt rules are going to be more difficult to suspend, given that Fed Chairman Bernanke said this morning he was not in favor of it. But Congress will hold hearings later this week to explore the idea, and maybe public opinion will be enough to sway the voting members and the SEC.

Asian markets were mostly higher overnight; the dollar is lower vs. the Yen and Euro today; oil is trading higher, while gold is lower on the day; the 10-yr yield is higher at 2.97%; and the VIX is plunging -10.7% to 44.35, breaking just below its 50-day average.

Trading comment: Patience is the key. The market continued to move a bit lower after I had taken profits on most of my hedges, but we were so oversold that the risk of a big bounce like today was high. I said I wanted to wait for a bounce, and it appears to be here today. The maket is up a huge +5.5% right now, but I actually think this rally should carry further over the next week or so.

The S&P 500 should run into resistance around the 740ish level, which is where I would look to buy back some of my etf hedges, or add to the partial positions that I still have on for the Nasdaq (QID) and emerging markets (EEV).

long EEV, QID

Monday, March 09, 2009

Monday Morning Musings

It's already been a volatile morning for the market, on little market moving news. The futures were considerably lower in pre-market trading, but when the market opened stocks rallied higher. The S&P 500 gained as much as +1.75% in the first hour, but has since given up those early gains. But it's still early.

There isn't much news this morning, with no economic reports to speak of. The big news was Schering-Plough (SGP) being bought by Merck (MRK) for $41 billion. That equates to roughly $23.61 a share. SGP is trading roughly +18% higher on the news.

Financials are higher so far, after Capital One (COF) became the latest financial company to cut its dividend (from $0.375 to $0.05).

Asian markets declined overnight, led by Hong Kong (-4.8%). Japan fell -1.2% to a 26-year low. Ouch. The dollar is higher today, which is weighing on gold prices. But oil is also trading higher, nearing $48. The 10-year yield is higher to 2.90%, and the VIX is roughly flat near 49.50.

Trading comment: My near-term outlook remains that the market is very oversold here, and has declined significantly in a short period. I am still looking for an oversold bounce in the market, which I will likely use to add to our etf hedges.

Friday, March 06, 2009

Sellers Fade The Opening Stength In Stocks

I have rarely seen the economist correctly forecast the monthly payrolls figure, but today they did. The February nonfarm payrolls report showed the economy lost 651,000 jobs (vs. consensus of -650k). The manufacturing sector shed 168,000 jobs, which was less than the 200,000 predicted. The market breathed a sigh of relief that the numbers weren't worse, and that allowed stocks to rally. But after about an hour, sellers reemerged and so far have erased those early gains.

Banks stocks were also higher after Wells Fargo (WFC) announced it is cutting its dividend to $0.05 from $0.34 per share. The decision was made in order to preserve capital and pay back the TARP funds as quickly as possible.

In overseas news, Asian markets were lower overnight. Japan's Financial Services Agency plans to extend its ban on short-selling stock beyond the end of this month.

The dollar is lower vs. the Yen and Euro so far, and oil and gold are both trading higher. The 10-year yield is lower to 2.78%; and the VIX is up slightly to 50.80.

Trading comment: I have not made any further adjustments to our hedges. The stock market has finished lower 12 of the last 14 days, and I still expect more of an oversold bounce.

Thursday, March 05, 2009

Bank Worries Trump Economic Reports Today

The bank index is trading sharply lower again after Moody's downgraded the outlook for JPMorgan (JPM), and said it is reviewing Wells Fargo (WFC). These concerns are trumping some better than expected economic reports this morning.

First, jobless claims for the week came in slightly below expectations. Second, factory orders for January fell -1.9%, less than the -3.5% expected. And finally, the Monster Employment Index actually rose 4 points in February, halting the downtrend seen in that index since last October.

In overseas news, China's Premier reaffirmed its economy would grow 8% in 2009, as the govt. will step up its stimulus measures to ensure this. In Europe, the ECB cuts its benchmark interest rate 50 basis points to 1.50%, and the Bank of England cut its rate to 0.50%. This should provide more monetary stimulus to those economies, albeit it with the normal lag.

Last, Wal-Mart (WMT) bucked the trend and reported an increase in Feb. same-store sales. The stock is +4% higher. There is also chatter that GM is closer to Chapter 11 after its auditors expressed concern.

Trading comment: I sure expected more than a one-day bounce, but maybe today is just one of those "misdirection" days that keep most traders off balance. We are still very oversold, so that hasn't changed. I have not made any changes to our hedges today or yesterday.

Wednesday, March 04, 2009

Bullish Chart Developments

Looking over my charts today, I noticed some potentially bullish developments. The first chart below is of Copper. Market strategists like to say that copper has a PhD in economics, in that it is a good leading indicator.

As such, it is constructive to notice that the steep downtrend from 2008 has ended, and a new sideways base-building pattern has been underway since late December. More recently, copper looks like it is attempting to break above the highs of its recent trading range.
This would have positive implications for the global economy, and the notion of reflation vs. deflation. I would expect stocks like Freeport (FCX) to do well if this trend continues, as well as emerging market stocks.
The next chart is of the Yen etf. I talked about this one a lot last year, highlighting that a rising yen made for a difficult backdrop for equities. In January, I highlighted the potential for a double-top in the chart, and that a break lower by the yen would be positive for stocks. I think we are starting to see that move lower in the yen .
The last chart is of the baltic dry index. This index is used as a proxy for the global shipping economy, which fell of the proverbial cliff late last year. But you can see that since the start of 2009, it has been rebounding. Moreover, instead of rolling over after that spike higher, it appears to be consolidating in a sideways fashion. Again, a resolution of this trading range to the upside would have bullish implications for the global economy.
I don't have any positions in this area, but today stocks like DryShips (DRYS) surged +40%.

Midday Update

Just back from a morning meeting, and the market seems to be hanging in there for a much needed bounce. The market had reached deeply oversold levels, so I think this bounce could have further to go.

Its good to see the market shrug off the negative ADP Employment report, which indicated 697,000 jobs were lost in February. That's a big number. Friday is the important payrolls report from the government, and the consensus there too is for -650k jobs. Ugly.

On a positive note, the Treasury finally unveiled some details on the Home Affordable Refinance program, which will be available to 4-5 million homeowners to try to help lower their mortgage payments and keep them in their homes.

In corporate news, Costco (COST) missed estimates, but the stock is slightly higher. Competitor BJ Wholesale (BJ) beat estimates. GE is trading lower again on concerns that the recent dividend cut will not be sufficient to help the company retain its AAA rating. And US Bancorp (USB) slashed its dividend to 3 cents from 42.5 cents.

Asian markets rallied overnight, led by China which is upping its fiscal stimulus measures. The dollar is mixed so far; oil is trading higher, near $45, while gold is flat ($913). The 10-year yield is up to 3.02%. And the VIX is -7% lower to 47.35. The VIX looks like it has left another lower low on the chart, relative to its January highs (and November and October before that).

Trading comment: Today is only day 1 of a market bounce, if it holds. I will be looking to use further strength in the market to add to my recent etf hedges. Yesterday, I took partial profits on our short financial hedge (SKF). Financials continue to lag this market, which is not a great sign. But the strength in energy and materials is a positive.

less long SKF

Tuesday, March 03, 2009

Another Bernanke Testimony

Bernanke testified before another Congressional committee today. Here is a summary of his comments (from Briefing.com):

  • The recent near-term indicators show little sign of improvement. Businesses shed 600k jobs in January, about the same pace of job loss as in November and December, and the unemployment rate jumped to 7.6%. Moreover, the number of claims for unemployment insurance has moved higher since mid-January, suggesting that labor market conditions may have worsened further in recent weeks.
  • In reaction to the deteriorating job market, the sizable losses of equity and housing wealth, and the tightening of credit conditions, households have continued to rein in their spending. Home sales and new construction have continued to decline despite lower mortgage rates, reflecting the uncertain economic environment and the expectation of many potential buyers that home prices have further to fall. The manufacturing sector has also deteriorated further so far this year. Manufacturing output fell sharply again in January, bringing the rate of capacity utilization to its lowest level in the post-World War II period.
  • Although the near-term outlook for the economy is weak, over time, a number of factors should promote the return of solid gains in economic activity in the context of low and stable inflation. The effectiveness of the policy actions taken by the Federal Reserve, the Treasury, and other government entities in restoring a reasonable degree of financial stability will be critical determinants of the timing and strength of the recovery.
  • If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the beneficial effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.
  • As you are well aware, the Congress recently passed a major fiscal package, which is aimed at strengthening near-term economic activity. The goal of the fiscal package is not just to provide a one-time boost to the economy, but to lay the groundwork for a self-sustaining, broad-based recovery. Historical experience strongly suggests that without a reasonable degree of financial stability, a sustainable recovery will not occur.
  • Although progress has been made on the financial front since last fall, more needs to be done. As you know, in response to ongoing concerns about the health of financial institutions, the Treasury recently announced plans for further steps to ensure the strength and soundness of the financial system and to promote a more smooth flow of credit to households and businesses.
  • The plan would use the remaining resources appropriated to the Treasury under the Emergency Economic Stabilization Act--~$350 bln--and also involve additional spending to support the activities of Fannie Mae and Freddie Mac. Whether further funds will be needed depends on the results of the current supervisory assessment of banks, the evolution of the economy, and other factors. The Administration has included a placeholder in its budget for more funding for financial stabilization, should it be necessary.

An Outhouse Of A Market

My colleague Jim Cramer made a comment on his show yesterday that while gross, seems apropos. For those of you that have seen Slumdog Millionaire, Cramer said that after yesterday's session in the market, he felt like Jamal when he jumped out of the outhouse.

It has certainly been a frustrating period in the market, and defense is the best offense right now. It seems only last week we were discussing the S&P 500 holding the 800 level. Now, we are looking at the 700 level for support.

The market is incredibly oversold. It has been down in 10 of the last 11 sessions. By some measures it has only been this oversold two other times: one was last November, and the other was in 1933. My other colleague at TheStreet.com, Doug Kass, went out on a limb yesterday and said that he felt THE low for this bear market could come this week. Now that's sticking your neck out.

It would not surprise me one bit to see that forecast come to fruition, but calling bottoms ahead of time are more often than not losing propositions. That said, I have stated that I felt the market would be higher by year's end, possibly in positive territory for the year.

There are not a lot of headlines this morning to move the market. Both Bernanke and Geithner are testifying before Congress today. Let's hope the market doesn't have its usual reaction to Geithner.

Asian markets were lower overnight; the dollar is slightly higher, while gold is lower. Oil is up near $41. The 10-year yield is steady at 2.92%, and the VIX is -3.5% lower to 50.80.

Trading comment: The incessant weakness yesterday forced me to buy a half position on another etf hedge (QID). The Nasdaq has not fallen near as much as the other indexes, so using this index as a hedge seemed appropriate. All of my hedge positions are still small after taking profits last week, so I will look to use a further bounce in the market to add to those positions.

Gold prices have been pulling back after their strong run-up, but the uptrend remains intact for now. We are also still in positive territory on our short bond hedge (TBT). I know I have only been talking about our hedges recently, but hopefully this has helped readers protect their capital. There will be a time to get more aggressive on the long side, but not yet.

long GLD, QID, TBT

Monday, March 02, 2009

Monday Morning Musings

Continued concerns that large financials, like AIG, will need more government assistance is trumping some positive economic reports this morning and dragging the markets lower.

The S&P 500 has broken below its November lows, which likely opened the door to further technical selling. Interestingly, the Nasdaq is still above those November lows.

AIG posted a huge 4th quarter loss, and indicated that it will need more money from the government. This is pressuring the bank index to the tune of -4.9% this morning.

In economic news, January personal spending rose +0.6% vs. +0.4% expected. Personal income rose +0.4% vs. consensus of -0.2% decline. Also, the February ISM Manufacturing Index rose slightly to 35.8 vs. 33.8 consensus. It's nice to see a small uptick in personal spending at a time when all you hear about is the consumer retrenching and retail sales dropping.

In overseas news, Asian markets fell sharply overnight, except for China which bucked the weakness. The FT is reporting the the Bank of England is set to begin "printing money", in a quantitative easing effort to combat declining asset values and spark some reflation.

The dollar is mixed this morning; the 10-year yield is lower to 2.92%; oil and gold are both trading lower, weighing on the energy and materials stocks; and the VIX is +6.8% higher to 49.50, but still below levels it hit during the last several market selloffs-- a slight positive divergence.

Trading comment: I talked about wanting to get more defensive as the indexes broke their November lows. I still have on some of my etf hedges, but have not added to them yet. The market is very oversold here, and I am mindful of the potential for a sharp, snapback rally. I would prefer to use any such rally to add to my hedges.