Still No Sense In This Market

Taking a cue from Jim Cramer, I'm declaring this market too tough. Nothing is working. Sometimes I think that the only trade right now is to buy puts on major indices right before our president opens his mouth. No hard feelings to Mr Obama, yet.

Of course, I'll be looking for possible developments. There are possible trades out there, but they depend on answers to the questions below.

Is it really oil (meaning, of course, oil futures) bottom?

Can gold boom continue without India buying?

Can anybody in government get real about bank nationalization? Is it hard to understand that neither Citi (C) nor Bank of America (BAC) is solvent?

How many prime mortgages are subprime now?

Are we going to have corporate mortgage bailouts?

What about corporate long term lease bailouts?

And last, but not least: where is Tim Geithner?

My apologies to Todd Harrison for using his favorite format...


Full disclosure: at the time of publication author did not have any positions in C or BAC. Positions can change any time.

Strange Action in Gold

Last couple of months I'm closely watching action in gold. It doesn't stop amazing me. Below is a chart of streetTRACKS Gold Shares ETF (GLD).



(Click on picture to enlarge it).

GLD today crossed down its 13-day moving average. Usually it's a short term bearish signal. Add to that flat top on Feb 20 - Feb 23, another bearish sign. GLD might be a good short candidate, except for one little thing. Between Jan 23 and Feb 9 it formed an excellent head and shoulders pattern and also crossed down 13-day MA (marked on the chart). What did it do after that? Jumped right up. Means we already had perfect technical short case, and it was completely wrong call.

Now let's take look at fundamentals. Couple of known facts. First of all, India usually consumes about 30% of gold annually. But since last November, India sharply reduced gold imports and it didn't import any yet in February (data as of Feb 16). So we have buyer of 30% physical gold disappear from market and price is going up. The fact that future market volume exceeds volume of physical market by orders of magnitude is not surprising. But a little bit surprising is the fact that on NYMEX open interest of April contracts is almost five time bigger than that of June, which has second biggest open interest. It looks more like ETFs and other funds buying futures and rolling them over every month. Of course, it's hard to estimate the global future market, because NYMEX is not the biggest gold exchange.

Do we have a disconnect between physical and paper market of gold? If not, somebody came to market lately to take place of India. I can imagine only one country with money and possible desire to do that: China. But I didn't see any evidence that China is buying a lot of gold lately. If disconnect exists, then current price of gold is a function of pure paper market, caused by ETFs and other funds. In other words, a lot of hot money came to gold market lately.

It's very hard to predict behavior of hot money. That's why I'm very cautious about gold right now. If I'm going to enter short position, it's probably going to be GLD puts or something like that. And I'm not going to commit a lot of money to it. But chart looks tempting.


Full disclosure: at the time of publication author did not have any positions in GLD. Positions can change any time.

Stopped Out of Spiders

Today's action on the market stopped me out of Spiders (SPY). Well, this bear market rally was too small to make any meaningful money.


Full disclosure: at the time of publication author did not have any positions in SPY. Positions can change any time.

Buying Oversold Market

Bought some Spiders (SPY) today at the opening. Put a tight trading stop under. Market was way too oversold yesterday, time to try to make some money on it. Looks like I was right. Turnaround Tuesday worked this time.


Full disclosure: at the time of publication author had a long position in SPY. Positions can change any time.

Hidden Crisis

It's pretty bad now. I don't want to rub any salt into the wounds. But I'm quite surprised that all talks of current crisis miss out one critical component of it.

Structural crisis. All by itself it's not that scary. Often goes on unnoticed. Actually, after World War II we live in a permanent structural crisis. Just look how many new industries emerged, how many old ones died or changed completely, how completely life changed in the last 60 years. And it was the time of the fastest growth of economy in the known history. But bad things happened when structural crisis consides with financial one.

There are only two crises in US history which could be compared with the current one. It's Great Depression of 1930s and maybe even greater depression of 1873-1876. And both of those two crises had two things in common: structural crisis combined with financial one. In 1873 structural crisis was caused by railroad build up, which changed business radically and also overextended credit markets of the country and also overbuilt railroads. But it probably wouldn't be that bad without coinage act of 1873 which essentially introduced Gold Standard in the country and caused a severe deflation.

Great Depression is closer, there were a lot ob books written about it, but not many people point to structural crisis behind it. Yes, there was a huge financial crisis, caused by credit destruction and some political errors. But structural crisis was there as well, caused by shift from horse to automobile in transportation and to tractor in agriculture. This crisis was bigger than that of 1873, because structural change behind it literally changed everybody's life in developed world.

Current structural crisis is a little bit different. It has two causes: the Internet and globalization. And they should be taken together, because some aspects of globalization are impossible without the Internet. As with previous structural crises, you can't undo it's causes. It's impossible to shut down the Internet, and it's equally impossible to stop globalization. Those who think that protectionism is possible now just don't understand how tightly our world is interconnected now. Take apart any piece of more or less complex machinery made anywhere in the world, and you'll find parts from at least five countries in it. Railroads were here to stay in 1873, cars and tractors were here to stay in 1929, Internet and globalization are here to stay now.

The lesson from previous structural crises is simple: it takes time to get through it. No matter what measures anybody is taking, we need time to work it out. Political decisions can make crisis longer or shorter, they can make it much worse or soften its effects, but they can't magically make it go away. In time we will get through.

From investment perspective, structural crises can create huge opportunities. So far not that many businesses take full advantage of the Internet. We have very successful ones, like Google (GOOG) and Amazon (AMZN), not very successful but viable Yahoo (YHOO) and very promising Netflix (NFLX). There are some travel and niche retail businesses, but I expect many more to emerge soon. Our task as investors is to find winners.


Full disclosure: at the time of publication author had a long position in GOOG and no positions in other stocks mentioned, considering buying AMZN and NFLX on weakness. Positions can change any time.

In The New Range

Dow Jones index quietly moved below November 20 low. On slightly below average volume at that. Technically what we see right now is as bad as possible. Remember, in November Dow only spent two days below 8000. Now it's sitting there since February 11 without any intention of going back up. It's going down mostly slowly, but surely.

Looks like Dow is settling in a new range. In October, we saw it in 8500-10000 range, since November, in range of 8000-9000. Now it's in 7000-8000 range if we are lucky.

Just amazing how this is similar to Dow's behavior in 1929-1932. Same picture: drop, oscillation in range, another drop, another range.

But there is a silver lining in current storm. There are almost no bulls in media right now. Probably they are sitting licking their wounds. Good. That means when current range is settled, we will have another period of range trading. I'm almost optimistic. Just remember, when not every cloud has a silver lining, every silver lining has a cloud.

Random musings: who is buying all that gold? If Indians are mostly out of the market, who replaced them? Maybe China quietly buys gold instead of Treasuries? Unfortunately, no way to know right now. We'll find out, eventually. Of course, China can't completely retire from Treasuries market, but they might redirect just a little bit to gold, and that'll be enough to cause current bull market. Pure speculation on my part, of course.

Economics Is Not Rocket Science

In fact, Economics is much more complex than rocket science. Many people don't know that actually rocket science is extremely simple: it's described by relatively simple differential equation, which has an exact analytical solution, which is called "Tsiolkovsky equation". Rocket technology is extremely complex, but science under it is simple.
Economics is not simple. It's not simple for two reasons. First, the most important reason: economy is interaction of people. You can never create exact math describing people interaction. Second reason is that all math describing economy is always oversimplified. Even the most complex math found in some papers is simplified and many assumptions are doubtful, to say the least.
Here's the example. Let's take the simplest equation:

M * V = P * Q

It supposedly describes relation between money mass, money velocity, amount of goods and prices of said goods. Every component of this equation is oversimplified. First of all, all goods are different, and similar goods are sometimes sold at different prices, so equation should possibly look like:

M * V = SUM(PQ)

Next comes M. What kind of money mass is it? Is it M1, M2, M3 or something completely different?

V isn't much better. Thing is, different industries have different money velocities. They also have different velocities in different time of year.

All together, the more you look at it, the less sense it makes. This equation, obviously, should be taken for some period of time. But time periods are different, and how you can compare Q1 with Q3 of any given year? And situation is changing all the time, but dynamics is not reflected in this equation.

So next time somebody tells you that Economics is not rocket science, agree immediately. It's much, much more complex.

An Ode To Jim Cramer

Market fell to the bottom and started digging
(New Russian joke).

Readers of my blog might have the impression that I am anti-Cramer. Nothing can be farther from truth. I started investing in 1998 because I learned from 2 sources: Motley Fool and Jim Cramer. His "Real Money: Sane Investing In Insane World" is literally my investing bible. I agree with Jim in most cases. The reason that there are articles in this blog which are critical of him and almost no articles praising him is simple: when I agree with Jim, I usually have nothing to say.

I have something to say today. Dow Jones closed at November 20 bottom. S&P is not far away. Jim raised alarm the only way he knows: instead of running his usual Mad Money show, he gathered CNBC people to try to analyze what's going on. I don't want to repeat what was said, because transcripts and reruns are available from several sources. But one fact was underscored by both Jim and Bob Pisani: there was no panic selling. Volume was somewhat elevated, but not 50-100% higher than average which is usual for panic. Bob Pisani said that market picture was like there are no buyers around. That's the scariest thing about today's trading. Panic selling usually creates bottom, at least a local bottom. Like it was on November 20. Today's picture is completely different. It doesn't look like bottom, it looks like we have a long ride down.

We are in Great Depression 2.0. Fundamentals are awful already. Technicals of this market just became equally awful. Where is the bottom? S&P 600? Or even lower?

I know that we can't get the real bottom until the fact of Great Depression 2.0 is accepted by majority. But discipline requires that I buy at least something during big drop. So I bought a small position in Evergreen Income Advantage Fund (EAD). I have a feeling that corporate bonds are way too underpriced now and want to build some position in them, and EAD looks like good fund to do that.


Full disclosure: at the time of publication author had a long position in EAD. Positions can change any time.

Oil is crashing to 30? Or to 20?

The message to all oil bugs out there: oil broke $40 support and confirmed it today. It's not a rollover effect of U.S. OIL FUND ETF (USO) described in this article, rollover happened on February 6. According to that article, USO now holds more than 20% of future oil contracts. Which accidentally means that it holds share of future oil contracts exceeding size of the physical market for Texas tea. So, rollovers are over, and price is going down. What's next?

I wrote here that I don't see any reasons for oil bottom now. I also provided chart of USO with very interesting downward triangle formation. Now this formation is broken down and break is confirmed. That's a very bearish signal. Granted, USO doesn't represent oil exactly, because effects of contango and rollover are killing this ETF right now. But together with fundamental data this signal is important anyway.

I think oil might go straight to $30 from here. And if it breaks that level, it can go even lower.

Please spare me lectures on how oil just can't be lower than $50 because it's a marginal cost of the production. Many marginal producers sold their current production last year at prices between $100 and $140. They don't care about current price, they sold that oil already. Real marginal oil is coming from Middle East, and real production costs on many fields there are still below $10.

How long can this low price last? I don't know. Unfortunately, not all oil producers are forthcoming about their hedging levels. One thing is for certain though: future market is a market of future contracts, not a market of real commodity. If investors start leaving USO and similar ETFs in droves, they can drive price down much, much more.

As usual, I retain the right to be wrong. But I wasn't wrong on oil since last May.


Full disclosure: at the time of publication author did not have any positions in USO. Positions can change any time.

Too Big To Fail? Make Them Smaller!

There are too many companies in our country which are "too big to fail". Practically all nationwide banks, now extinct big investment banks and some industrial corporations are in this category. Lehman Brothers collapse proved that for investment banks, and federal bailout of GM (GM) and Chrysler was done on the premise that bankruptcy of either of them can bring huge number of companies down. The other companies too big to fail are Boeing (BA) and General Electric(GE). Expect a bailout if something goes wrong there.

Is it possible to reduce number of companies too big to fail? Most of companies in this category are banks. What happens when small or even medium bank fails? It's quietly taken over by FDIC. So maybe increase banking regulation just a little bit and set an upper limit to the size of the banks so they are never too big to fail and always small enough to be taken over by FDIC? International operations are important here, so these limits shouldn't be set on international operations of the banks. And to make level playing field, restrict US operations of big foreign banks to the same level. No need to set this level in absolute numbers, percentage of US banking industry would do nicely.

Industrial companies are different. In some cases scale matters a lot. In aviation it became absolute, with only two companies in the world making big passenger planes (Boeing and Airbus). In other industries size is not that important. Looks like autos are up to a big restructuring, and I already wrote that GM must die, maybe with help of government here. GE should not exist in its current shape, time of conglomerates ended in 1950s.

I am usually not a big fan of regulation. In most cases it's wrong. But in some cases we need regulation and in some cases we need to increase it, otherwise we have situation like now, when the only solution is nationalization of losses, profits remaining private. Let's reduce losses.

Full disclosure: at the time of publication author did not have any positions in above mentioned companies. Positions can change any time.

Cramer Calls Bottom in Oil

This bottom call is strange. Jim bases it on "tell", that Exxon Mobil (XOM) is staying flat above it's bottom when oil is going down. The fact that oil futures can't break level of $40 for barrel also tells him that oil has bottomed.

Let's take a closer look at oil market. First of all, fundamentals. The only bullish development is OPEC cuts, which are really happening. But it doesn't look that OPEC cut enough to account for huge drop in demand. US inventories are full to the brim. A lot of oil is still stored in tankers by traders playing contango. US economy is not even close to recovery, ditto for Europe. I don't think China can change situation alone.

Next: fundamentals of the second order, or oil futures. I wrote several times already that because volume of the future market exceeds market of real oil by at least an order of magnitude, sometimes future markets disconnect from real supply and demand situation, they are driven by supply and demand of future contracts. The biggest disconnect happened in the beginning of the last year, and markets are still digesting results of oil futures bubble which burst. I outlined mechanisms here.

Last, but not least, technicals. You can't completely ignore technical analysis, because it shows you real market action. Let's never forget that markets are interactions between people. Technicals show us what traders are doing. Let's take a look at picture below.



This is a chart of U.S. OIL FUND ETF (USO) since January 1 (click on the chart to see bigger picture). This ETF represents oil prices even a little better than futures, because it ignores rollover effects. I don't see one bullish indicator on this chart. We have lower highs, lower lows and downwards triangle formation, it's as bearish as possible.

I don't see any oil bottom so far. Cramer's "tell" might be caused by some other action. Maybe hedge funds stopped selling Exxon, maybe some mutual funds are buying, who knows. There are no real fundamental or technical reasons to call bottom.


Full disclosure: at the time of publication author did not have any positions in USO or XOM. Positions can change any time.

Dansing Bull Cramer, Revisited.

Jim Cramer surprised me today, again. We already had one surprise conversion on December 5 (commented here), today we have another one.

What happened? Market rallied today. As far as I see, it's a typical bear market rally, we saw even bigger ones in the last 12 months. OK, it was rally on all bad news. So what, bear rallies happen for a lot of reasons or without any reason whatsoever. Even the fact that it was two days rally doesn't matter a thing: we saw four days rally between December 29 and January 2. And hope that China somehow can implement some smart infrastructure investment and save the world from the Great Depression 2.0 is just hope. Jim has an excellent commandment in his great book "Real Money: Sane Investment in an Insane World": "Hope is not a part of the equation".

Sorry Jim. It's still bear market. It will bottom when public accepts the fact that we are in Great Depression 2.0. And that would happen some time after you accept it.

Selling Into Strength

Sold a little bit of remaining Apple (AAPL) position today. I'm still thinking if it worth to keep some Apple or to sell it all, but stock is great for trading right now.

Full disclosure: at the time of publication author had a long position in AAPL. Positions can change any time.

Bad Feeling

This market action doesn't make me to feel good. Tech rally is good, sure. Apple (AAPL) and Google (GOOG) made new highs for the year, moving my portfolio a little bit up.

But I see problems with broad market. Despite today's rally we are way too close to the bottom of current Dow range. One slip and we are going down. I don't know where most of the traders keep their current stops, probably around Dow 7800. If we break this level, all hell might get loose. I just don't see any conviction in this market.

Fundamentals are awful. Some Tech companies are rallying because they have plenty of cash. They don't need any loans. Anybody who needs loans pays through the nose. Altria (MO) paid 587.5+ basic points over Treasuries for five year loan on February 3. That's one of the best companies in the world! Imagine what auto companies would have to pay! No wonder Ford (F) drew full amount from credit lines. They decided not to wait until those lines were closed under some pretext. And economic situation is simple: it's Great Depression 2.0.

Barely visible silver lining: corporate debt market started thawing. There is some movement up in bonds. If it's not a sucker's rally, things might start improving. Might. And Treasuries are down a little bit from their incredible high. Still very high though.

I'm waiting for January inflation data. If we see more deflation, as I expect, then we are in it for a long time.

One more strange thing is a movement in commodities. Most of them are up. Looks like China is doing some planned purchases. If it's true, all commodities might go down when China finished. Which also means that oil isn't going up any time soon, but might go down even more.

Last, but not least: gold is up. It's a huge mystery. India's import is down sharply, who's buying that 30% of production? Or maybe we see discrepancy between future market and real product again?

Let's wait and see.

Full disclosure: at the time of publication author had long positions in AAPL, GOOG, MO and no positions in other companies mentioned. Positions can change any time.

Closing Red Hat

Sold last portion of Red Hat (RHT). Sale was planned long time ago, selling today into strength.

Full disclosure: at the time of publication author had no positions in RHT. Positions can change any time.

Closing Ebay

Sold last portion of Ebay (EBAY) today. Company obviously lost its way. Internet commerce rocks, Amazon.com (AMZN) and Google (GOOG) report great results, even Overstock.com (OSTK) is doing fine. This is management problem. No sense in keeping this position anymore.

Full disclosure: at the time of publication author had a long position in GOOG and no positions in other companies mentioned. Positions can change any time.

Glimpse of The Future

Latest earning reports paint very interesting picture. Almost everything is bad. And here we have exceptions: Apple (AAPL), Google (GOOG), Amazon.com (AMZN), Research in Motion (RIMM).

All companies are getting revenue from the sectors which are hurt badly. Apple is in consumer products, which are also fashion accessories, RIMM is in cell phones (OK, smart ones, but cell phones anyway), Google is in advertising and Amazon.com is in retail. What's different? Two companies are Internet companies.The other two make devices to connect to the Internet. This is the future, predicted in 1990s. The future has arrived. The Internet business model, which was buried by countless commentators in 2000-2003, is working. And it's taking business from brick and mortar companies in many sectors of economy.

What's next? It's really easy to predict, just read what was written in 1990s. Almost everything was right, except the timing. It takes time for any revolution to develop. And first comers are quite often die in droves. But survivors strive.

In the next several years we'll see complete death of newspapers. Some of them will switch to Internet, but most will die. Printed edition will survive, but just a handful of them and most probably they will be much thinner. Local press will be mostly free, nobody's going to buy some county paper. They are free in many places already. I'm getting local papers for free, without even asking.

Next shoe to drop will be most of retail. We'll see many chains die. Brick and mortar retail will survive, but it will become much smaller. Computer shops are almost all dead now. Remember Egghead, CompUSA? Circuit City (CC) is next. Best Buy is the only big survivor. Of course, there is Microcenter, but it's a small niche player, and probably a survivor. It's the place geeks go to buy parts.

TV stations will go next. Unless they will be able to switch to Internet delivery. It won't happen soon, we need good broadband in most places for that, but it will happen. We'll see a lot of fight, attempts of cable companies to prevent video over IP, sabotage of traffic a la Comcast, but future always wins. Horse owners tried to fight cars too and sometimes succeeded (red flag laws in England). Never mind. in about 20 years, cable service will be replaced with TV over IP, and most of TV stations will die, to be replaced by unknown new companies.

There will be a lot of things impossible to predict. Just watch for opportunities. And if you see them, pounce. I lost money on several companies I bought in 1990s. Yahoo and Apple brought enough profits to make those investments wildly successful. Same will happen now. Internet is still in infancy.

Full disclosure: at the time of publication author had long positions in AAPL and GOOG and no positions in other companies mentioned. Positions can change any time.