Tuesday, March 31, 2009

Fork On The Road

When you come to a fork in the road....Take it
(Yogi Berra)

Where are we going? Or, to be more to the point, where is the US economy is going? Todd Harrison of minyanville.com thinks that we have two possible outcomes: hyperinflation or deflation and depression.

I think that there are more possibilities and they are more nuanced. It's more like a real fork, we have four scenarios. They are listed below in reverse order of probability, estimated by me. As usual, I retain the right to be wrong and anybody is free to disagree with me.

Small note about money mass. People are talking (I'd say shouting) about huge amount of money issued by Fed and how it can cause high inflation. But they completely ignore even bigger amount of money destroyed in the crisis (credit contraction = money destruction) and sharply reduced money velocity. They also ignore the carry trade and the role it can play in the crisis.

Inflation and stagnation = stagflation

First of all, I should say that I don't believe that hyperinflation is possible in US in the nearest future. There are several different definitions, but the lowest defines hyperinflation as 100% or more in three years, the highest as 50% a month. I lived through 30% a month inflation and it's not pretty. But you need high wage inflation to get hyperinflation, and US companies don't raise wages and salaries now. They are more likely to cut them.

High inflation (up to 15% a year) might be possible. There are two possible sources of such inflation: wage inflation and commodity inflation. Wage inflation is off the table, commodity inflation needs growing economy, which is not here. However, combination of excessive money supply and commodity shortages, real or perceived, can create high inflation. Fed in such case will be forced to raise rates and maybe reserve requirements, killing any possibility of recovery for a while.

We don't have any inflation to speak of. In the Q4 2008 we had significant deflation. Inflation in the first two months of 2009 is very low. People are cutting expenses, prices are falling on many goods.

Probability: less than 10%

Japanese disease (Zero growth with zero inflation or low deflation)

This is much more dangerous. Japan fell into this trap in 1989 and still can't get out. There was hope, triggered by increased trade with China, but it was killed by current crisis. This is probably the longest depression in modern times in one country. This year we are celebrating 20 years since it started.

We started in 2007 almost like Japan: real estate market crash, total inaction of government and Federal Reserve, multiple claims by powers that be that "crisis is contained". Which led me to believe that we are going the same way, and I wrote an entry which predicted that by 2009 interest rates will be below 1% (here). But latest developments show that US is not Japan. Companies are laying off workers, banks don't pretend that everything is OK, bankruptcies are on the rise, so there is normal reaction of economic subjects to the crisis.

It's still a possibility, especially if there is a lack of political will. The biggest unknown is the interaction between inflation and carry trade. In case of Japan, carry trade consumed most of the money issued by Central Bank. Fed's declaration of quantitative easing is a very good development, in Japan it took government and Bank of Japan more than 10 years to start it.

Probability: around 15%.

Great Depression 2.0

I wrote about this possibility many times. This article explains my views on the problem and has links to my other articles. I'm starting to believe that we have a fighting chance to avoid this scenario. Ben "Helicopter" Bernanke is doing his job. The only problem I have with it is that he is late every time. So probability remains relatively high, around 30%.

Great Recession

I think it was Melissa Lee from CNBC who coined this definition first. Maybe I'm wrong. In this scenario, decisive actions of government and Fed prevent US economy from falling into scenarios 2 and 3 and lead to relatively quick, also painful, recovery in the beginning of 2010 or even in the end of 2008. This scenario seems to be more and more likely to me lately. Government and Fed are not kidding, measures adopted are radical and decisive. Do they have enough political will? It look like Fed is fighting to increase money mass with all tools available (well, I'd like to see temporary reduction of reserve requirements, which would increase money mass and also improve situation of many banks, making them liquid immediately). It's a little bit scary, because Fed might be forced by some information we don't know yet, so I'm waiting for minutes of the last meeting with impatience.

Best proof of this scenario would be if current stock rally continues for some time. If Dow Jones can keep running over 13 days moving average and bring it over 50 days MA, it will be a huge success. But even if this rally is another bear market rally, even if we get a new lows in summer or fall, things aren't looking as bad as they did in the beginning of March. Bonds are improving, and it's more important than stock market. Historically, bonds recovered first during recessions. If we don't get any unpleasant surprises, stocks should be up from now in the end of the year.

Probability: 45%.


I'm changing my stance because facts have changed. I was thinking Great Depression 2.0 scenario for more than a year. Now I think that we can get away with Great Recession.

From investment point of view, this is a change from bear market behavior to bull market behavior. In bear market, you sell the rips. In bull market, you buy the dips.

I am going to put more money to work in April and May. Mostly in tech, because there are a lot of tech companies which are swimming in money and don't need credit. But also in financials, because they are beaten almost to death and government is clear that they won't be allowed to fail.

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Shorting Gold

Today I decided to go short on gold. For a purely technical reason. As I noted yesterday here, all technicals are bearish for gold. If you look at GLD chart, only support at 90 holds, all bullish support levels are broken: 13 days moving average, 50 days moving average. There is a perfect head and shoulders formation.

Fortunately, it's easy to select a good tool. My choice today is DB Gold Short ETN (DGZ). Of course, I put a tight trailing stop on my position. Bar some big political events, gold should go down from here, but you never know...

Full disclosure: at the time of publication author had a short position in gold by holding DGZ. Positions can change any time.

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Monday, March 30, 2009

This Rally Might Still Have a Chance

This rally almost fizzled. Today's Dow drop brought it under Nov 20 low and under 50 days moving average. Things aren't looking good. But one critical level is holding: Dow is still over 13 days moving average.

It still doesn't look good. I was looking at 1932, and July 1932 rally was running over 13 days MA for more than 2 months, crossing on the way over 50 days and 200 days moving averages. Now Dow is under 50 days MA and long way under 200 days MA.

But there is still hope while 13 days MA isn't broken. Tomorrow is a critical day. If Dow manages to stay over 13 days MA, rally still might have legs. If it closes under, the rally is over.

I am not happy with this rally. It looks pretty much like typical bear market rally. But one thing was giving me some hope: sentiment was and still is extremely bearish.

Gold looking bearish. GLD closed under 50 days moving average today, and that's after picture perfect head and shoulder formation. If GLD closes under 50 days MA tomorrow, it might be good time to short.

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

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Sunday, March 29, 2009

Wagoner Is Out. Is Nardelli Next?

My congratulations to President and his administration. They did the right thing: GM CEO Rick Wagoner had to go before government commits more money to saving the company. I wrote here that before government commits any money, Wagoner has to go.

I still think that GM can't survive as is, with or without Wagoner. It needs deep restructuring, something that would be like chapter 11 bankruptcy.

Now it's time for Nardelli. Chrysler thinks that it can survive by combining with FIAT and becoming mostly FIAT superdealer. Maybe. But Nardelli has to go. He doesn't have qualifications to run auto company. He doesn't have any qualifications to run any company. He was middle manager at General Electric (GE) and his CEO experience at Home Depot (HD) was a total disaster for a company, including 200+ million golden parachute.

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

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Tuesday, March 24, 2009

Has Nasdaq Bottomed?

I'm enjoying current all-out rally. Dow Jones and S&P 500 broke above November lows and trade above 13 days moving average and 50 days moving average. But there is a bigger story here.

Nasdaq 200 index is also trading above 13 and 50 day moving averages. But there is a difference: Naz didn't make a significant new low in March. It's low on March 9 is 1260, it was at 1314 on Nov 20 (4%). Compare that to Dow Jones, which was 13% lower on March 9 than on November 20, or to S&P (10%).

Naz also returned to it's old range 1400-1600, in which it has been trading since November, when both Dow and S&P are now at the bottom of the old ranges.

This behavior has good fundamental background. When Dow includes several financial disasters, like CitiGroup (C), Bank of America (BAC) or industrial disaster GM, Nasdaq doesn't have big percentage of banks in it. On other hand, it has a lot of tech companies, many of which have excellent balance sheets, no debt, quite often huge piles of cash, like Apple (AAPL) Google (GOOG) or Microsoft (MSFT). Valuations of tech companies are ridiculous, unlike many others, they make real big profits.

Of course, there is a giant question: can Naz grow if Dow and S&P stop in the current range? I think it can. Yes, current market is mostly technical. But sooner or later any market returns to fundamentals, and tech fundamentals are so much better than anybody else's.

I'm going to scale in tech now. Obvious targets would be: increasing Google and maybe Apple positions, starting Netflix (NFLX) and Amazon.com (AMZN). But I'm going to look into new names in tech as well.

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

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Monday, March 23, 2009

Distressed Asset REITs

Well, after searching for couple of weeks for some way to invest in distressed assets, first of all CDOs (mentioned in my blog here), I was reminded by Jim Cramer today that there are REITs which are invested in CDOs. In the end of 2007 Jim recommended Annaly Mortgage Management Inc. (NLY) and Chimera Investment (CIM) as REITs buying distressed mortgage-backed securities. CIM was actually created by Annaly management team and is managed by Annaly's subsidiary. The only problem with both is that they got into distressed market too soon and as a result their investments are down now.

Annaly has a good yield, more than 14%. Chimera's yield is about 7.5%, way too low in current market conditions. Both are leveraged.

I can't say I like either company. Will be looking for more options on this market. Now, when distressed securities are for all purposes guaranteed by government, they should go up in price.

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

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Bravo Geithner! I don't think today's rally can be attributed to something else than toxic assets plan from Treasury Department. President's words that IRS is not to be used for punishment helps too.

And it might be a game changer. In one shot, Dow Jones crossed above 50 days MA, downtrend and Nov 20 low (more about it here). If it crosses 8000, everything is possible.

I'm staying with my long portfolio intact for now. It would be prudent to take some profits, but this rally still feels great.

What kind of window dressing are we going to see this week? Stocks might be it, but even now market is well below January levels. Although tech looks much better. And, it looks like oil is there big time. Action in oil shows big ETF participation, so it might be main window dressing material.

Gold is done. Nothing can make it go up. It looks like Indians discovered big item purchases, especially autos, and gold is going out of favor there. That might be a huge game changer for gold market. Of course, current action is more influenced by paper trading. but derivative market can't exist for long separated from real one.

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Friday, March 20, 2009

Where From Here?

I enjoyed this rally as much as everyone. Now let's see what we can expect in the nearest future.


Here's the chart of Dow Jones index, represented by DIAMONDS Trust, Series 1 ETF (DIA). Click on the chart to see bigger picture.

The only plus I see on this chart is that DIA is still above 13 days moving average. Other indicators are negative. DIA failed to break through Nov 20 low, break through downtrend and through 50 days moving average. Technicals are mostly bearish.


Sentiment remains extremely bearish. Almost nobody believes that this is more than bear market rally. I agree with majority here, but have to admit that such bearish sentiment is actually a contrarian indicator. Sentiment is bullish for the market.


Fundamentals don't matter much in current market. But they matter. Most fundamentals are related to the government actions. So far we have:

Strong statements from Fed and government that banks won't be nationalized and big banks won't be allowed to fail. Bullish.

Noise around AIG bonuses. Bearish.

Fed's decision to buy a lot of corporate debt and monetize government debt. Hard to estimate. It should be regarded as bullish, because Fed is injecting money into the system. But a week ago Bernanke said that Great Depression scenario is off the table, and government debt monetization is exactly what Fed did during Great Depression. Until I see FOMC meeting notes, let's call it neutral.

Technicals are bearish, sentiment is bullish, fundamentals look like neutral so far. It's a tough call. I'd say that technicals are most important in this market, so bearish case wins with a small score. Unless rally continues and breaks through Nov 20 lows, Dow remains in 6500-7500 range, with prevailing trend down.

We have two calls for global bottom in this market. Mark Haines from CNBC thinks that S&P 500 at 666 looks like a beautiful bottom. Doug Kass thinks that decisive government actions made March 9 low a bottom. I'm not sure. I'd love to see Mark and Doug right, but I still think that market bottom will be after we see "Great Depression II" headline on the front page of national newspaper or at least magazine. Or after signs outlined here. Of course I can be wrong, market can humble anybody.

Full disclosure: at the time of publication author didn't have any positions in DIA. Positions can change any time.

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Thursday, March 19, 2009

Palm: Dead Company Walking

Hype around Palm (PALM) is even more surprising than hype around its new product: Palm Pre. Product might be good. Company is not.

I always liked Palm products. Palm TX is my constant companion, combining functions of an organizer, calendar, calculator, spreadsheet, ebook reader, mobile web browser and many more. This is my fourth Palm. This is a great device, although a little bit obsolete. Most Palm products were great, both organizers and smart phones.

Company has great history. Palm created the first usable palmtop computer. Engineers who created Palm Pilot later went to create their own company, Handspring, and created the first smart phone. Later Handspring was acquired by Palm.

The only problem with company: it never found a way to make money. When Palm went public, I wanted to invest in it. This idea quickly died after I scrolled through balance sheet and income statement. Palm was on my watch list ever since, but balance sheet never looked good.

Fast forward to now. Palm shut down its palmtop line. There are several very good smart phones, but company loses to competitors: Research In Motion (RIMM) and Apple (AAPL). New smart phone comes to market, Palm Pre. Judging by reviews, product is very good, if not great. Palm representatives are trying to present is as iPhone killer, but that's too much hype. There are no features in this phone which make it much better than Apple's masterpiece. Even if Pre is a little bit better, it's not enough. If you are second on the market, you product should be much better.

But even if Pre was the best thing since sliced bread, I'm sure that management wouldn't be able to make a dime from it. For more than ten years, company created great products and destroyed capital. Tradition continues.

Full disclosure: at the time of publication author had a long position in AAPL and no positions in PALM or RIMM. Positions can change any time.

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Wednesday, March 18, 2009

Fed's Shocker

This is huge. This is what we wanted from Fed. Wednesday's announcement that Fed will buy more than a trillion of corporate debt and about 300 billion of Treasuries completely changes playing field.

All markets will be affected. Stocks, bonds, currencies, Treasuries, gold, commodities. Initial reaction was predictable: everything is up, dollar is down. Reality will set in the nearest future.

It might really take Great Depression 2.0 off the table. Jim Cramer said exactly that today. Well, Jim pronounced this same thing for the third time at least. Starting with rate cut in the end of 2007. There is one thing that confuses me though. Last week uncle Ben (Bernanke) said in the interview "we took Great Depression scenario off the table". If GD 2.0 was off the table already, why such drastic measures today? What pushed Fed, what information that we don't have yet? I'm waiting for FOMC meeting notes to look for the cues.

I could've been wrong in my multiple blog entries. Maybe decisive Fed action prevented GD 2.0 and we will see end of this recession in the end of this year. Maybe Mark Haines from CNBC and Doug Kass are right and we are past the global bottom. I would be happy. Little problem with Fed: it was late with the actions for the last two years. Every action was at least a month late, in most cases the lag was several months. Jim Cramer with his rant in August 2007 was well ahead of Fed. What if Fed is late again? What if this attempt to reflate is late and deflation will take hold anyway?

OK, let's leave doubts for now and enjoy the rally. And let's not forget to take some profits in the process, because you never know when this rally ends.

Random musings: Fed's action makes me wish even more to invest in CDOs. I wrote about it over the weekend (here). Why there is no specialized CDO ETF or closed end fund is beyond me.

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iPhone Software Update Is Overhyped

Completely agree with this video by Street.com press maven Marek Fuchs. New iPhone software is an evolutionary update, not a revolutionary thing. Apple (AAPL) is a great company, iPhone is a great product, but I also doubt that this software update can affect top and bottom numbers. And money is the only thing we care about when investing.

I sold part of my remaining Apple position today into strength.

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

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AIG Outrage

I am outraged. I'm almost mad with outrage. But not with AIG bonuses.

I am outraged with the way the whole thing was handled by US Government. Bonuses total about 175 million dollars. Total money lent by government to AIG totals more than 180 billions (with a B). We are crying about one thousands of money lost. It's totally insane.

AIG should've been bankrupted in a special way. I understand that house of cards called world financial system would fall apart if AIG just allowed to go bankrupt. OK, let's make a special deal: US govenrment takes over the company, sells viable insurance business and guarantees all that crazy CDS stuff. In that case, no bonuses would be given. No, government and congress created strange scheme in which government continues to pour money in that pit.

I am also outraged by current Congress hysteria about the bonuses. I'm afraid current Congress investigation would literally cost much more than bonuses themselves.

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

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Tuesday, March 17, 2009

Hot Money

To understand this market, we also need to understand behavior of hot money. This money is running around, sometimes radically changing markets. The usual source of hot money are hedge funds. But something happened lately. There was, and sometimes still is, a lot of money in funds which should be managed much more conservatively than hedge funds, but which were really managed the same way as hedge funds.

The biggest hot money effects happened in the end of 2007 and first half of 2008. Commodity bubbles were not completely synchronous: when most of commodities peaked in the end of 2007, oil peaked in July of 2008. There were more hot money sources then. Among those: pension fund of state of California, multiple endowment funds and a lot of sovereign wealth funds. When pension and endowment funds justly deserved what happened to them (and I don't understand why there is no investigation in California), sovereign wealth funds deserve special attention. Many of them were from OPEC countries. OPEC has a very strict provision: member countries either have to nationalize oil production or at least to nationalize oil export. We had a typical wash sale situation: different companies owned by the same government sold oil and bought oil futures. I don't know if it was a wash sale technically, by CFTC definition. If not, CFTC should make regulation changes. As far as I know, CFTC resisted any changes and Congress investigation didn't do much good. Bill Energy Markets Emergency Act of 2008 was blocked in the Senate. Even that bill was mostly toothless and failed to mention wash sales by OPEC countries.

Of course, market eventually crashed bubbles. No bubble can continue forever. Most endowment funds and pension funds left the area. I hope management was replaced. It was replaced at Harvard Endowment fund, although, judging by current holdings, new management isn't much better.

Next target of hot money was gold. I think "was" would be the right tense, although I'm not sure that gold bubble is over. But picture is pretty much the same: if in the end of 2007 multiple TV personas, TV, newspaper and internet ads flooded us with possibilities to earn immense fortunes buying commodities and commodity companies, now even more ads calls you to buy gold. Never mind that India, traditional buyer of 30% of gold for many years, walked out of gold market in February. Never mind that, according to some accounts, in the last couple of months US population is selling more gold jewelry as scrap than buying new gold jewelry. Gold is peddled as defense against inflation, which is nowhere in sight. But gold market is showing signs of exhaustion.

What is the next hot money target? That's a trillion dollar question. If guessed right, you can front run hot money and make a lot for yourself. Probable candidates:

Oil market (again): interesting picture, in the last couple of weeks, price goes up only during NYMEX floor trading hours, which might be a sign that ETFs and other funds are involved.

Stock market: current bear market rally might be a sign, but I'm not sure.

Commodities other than gold: there are some signs of warming up there.

Currency market.

Unfortunately, when you see a lot of TV ads, it's too late. It might be a sign of a bubble exhaustion. The problem with any bubble, you can't short it until it pops.

Full disclosure: at the time of publication author had no positions in commodities or commodity related stocks. Positions can change any time.

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Saturday, March 14, 2009

Jim Cramer, Genius of Self-Promotion

It's funny how mainstream media misses the point. Yes, Jim Cramer appeared on Jon Stewart show on Thursday. Yes, he was warm and fuzzy, agreed with almost everything Stewart said, commented that CNBC should be doing better job.

Mainstream media liked it. For two days in a row, there were comments on CNN, in New York Times, Washington Post and probably any other national media outfit. Everybody declared Stewart a winner.

And the real winner? Well, all media talks about Jim Cramer for two days in a row. White House press secretary decided to mention matter as well (I didn't know current administration can do such stupid things, well, you should never underestimate people's stupidity). Tell me, please, what media person wouldn't like to be mentioned in all mainstream media for two days in a row. I'll be surprised if Jim's audience wouldn't grow at least 50% soon. Because from Daily show any sensible person could make one conclusion: when Stewart was attacking, making fun of Cramer and declared by media a winner, he doesn't have any idea about investing. And Cramer knows something. That's enough to make people curious and draw their attention to Mad Money show.

Of course, Jon Stewart had his day, too. It's OK. I might even watch his show once in a while. But I watch Cramer's show every day, and will continue doing so. I can watch Stewart for laughs, but for investment ideas I'm watching Mad Money. I might agree with Jim Cramer, I might disagree, sometimes I disagree publicly in my articles. But at least he has investment ideas. As for Jon Stewart investment ideas or ideas from mainstream media, I've never seen any.

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CDO ETF Anyone?

One of the biggest problems in economy right now: illiquid market for CDOs, collaterized debt obligations. Actually, these are collaterized mortgages. Banks are technically insolvent (at least, many of them) because, according to "mark to market" rules, COOs on their account worth about 20-25 cents per dollar. Banks don't want to sell for this price, they think that fair price is in 60-70 cents per dollar range. But market doesn't agree.

Maybe somebody will create CDO ETF? At 50 cents per dollar it should yield in range 8-10%, there should be a lot of investors willing. At 30 cents per dollar I will probably buy. At least such ETF will increase demand for CDOs, making market more liquid.

I know that idea of CDOs was wrong. Risk was greatly underestimated and AAA rating assigned to most of them isn't even laughable. But they exist, they worth something, why not let individual investors participate in the market?

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Wednesday, March 11, 2009

Dow Is Over 13 Days MA!

Still I don't believe that we have a global bottom. I'm not even sure about local one. But at least there is a good reason to believe that sell-off which started on Feb 10 has now finished. Which would mean that Dow is settling in the new range. Bottom of the range is around 6500, top is to be defined. Usually during bear markets bottom of the previous range becomes top of the next one, but last sell-off was way too steep for that. Top of the range is probably between 7000 and 7500.

Usually I'm astonished looking at dancing bull Cramer. But tonight I'm kinda agree with him. Whether market goes up or down from here, latest quick drop finished.

Gold action is interesting. streetTRACKS Gold Shares ETF (GLD) managed to stay above 50 days moving average. As you can see on the chart below, GLD has a classic triangle formation. Click on chart to see bigger picture.

Today Dow managed to cross over 13 days moving average. This is a crucial event, as I mentioned yesterday here.

Technicals tell me that GLD poised to go higher. Of course, fundamentals are still bearish for gold. But current market is technical, and unless GLD breaks down 50 days MA, it's in a bull run. And probably it makes sense, there is a lot of hot money on sidelines right now, small fracture of it can make or break any market, never mind such sensitive one as gold.

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

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Closing ANZ

Sold remaining part of Australian And New Zealand Bank Group (ANZBY.PK) today. Maybe some banks are OK now, but Australian ones are way too connected to two dangerous places: commodities, especially gold, and China. Of course, most of my readers would say that these places are great. So be it.

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

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Tuesday, March 10, 2009

The Signs of The Bottom: Technicals

Anybody enjoyed today's bear market rally? Huge yawn.

I did some digging into technicals of Great Depression market. Looks like 13 days moving average (MA13) can tell you something. There were several short bull market periods between Oct 21, 1929 and July 5, 1932. All of them had one thing in common: Dow stayed above MA13. Any time Dow dropped below MA13 for more than one day, you could safely sell market short. Big rally which started on July 5, 1932, also quickly crossed MA13 and ran above it until Sep 12, crossing on the way MA50 and MA200. Until August of 1937 Dow and MA13 oscillated around MA200, then there was another bear market. In June 1938 Dow and MA13 crossed up MA200 and the rest is history.

How does it correlate with current market? So far quick drops followed Great Depression patterns: Dow stayed below 13 days MA. Unlike Great Depression time we didn't have any bull market periods though. So analogy is not complete. Of course, any historical recourse should be taken with caution.

Where are we now? Since Feb 9, Dow didn't cross MA13 up once. It failed to cross it today. We are still in the fast drop phase of this bear market. If GD analogy is correct, we need to see Dow crossing MA13 and staying above it for a week, at least. And to make global bottom, Dow has to cross up MA50 and then MA200, staying above MA13. Of course, by the time of crossing MA200 we are going to miss about 20%...

Tomorrow is a crucial day. If Dow crosses up MA13, it might be the end of the fast fall and even sign of the local bottom. Especially if it stays above MA13 for one more day.

Of course, technicals can be deceiving. We need to look at bigger picture. I think that contrarian indicators outlined here and here are more important. But picture looks interesting.

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Sunday, March 8, 2009

Depression, Sentiment and Market Tells

I already wrote what would be the most important "tell" that we reached the bottom here: headline in the major newspaper, better yet on the front page, proclaiming Great Depression 2.0. But I also wanted to come with some other "tells".

Any crisis, including depression, however bad it is for many people, does some good work of cleaning up economy from inefficient businesses and sometimes, the whole industries. Structural crisis definitely puts industries out. We already have one dead industry as a result of current crisis: newspapers. They might not recognize that, but they are all dead, maybe with some small exceptions. And those exceptions are probably in local, freely distributed press, not in nationalwide monsters. New York Times, Washington Post and USA Today probably think they can save themselves by using Internet better, but they are wrong. Internet business model is completely different and they have no idea how to use it.

But Great Depression have to kill more than one industry. Well, investment banks of the old style are dead, but they just changed their skins and continue as kinda general purpose banks. No, we need something else. Don't know what is it yet. But one more failing industry would be a good tell of a bottom.

Commodity prices. They fell hard in 2008, but there is still room. The news that fertilizer prices are likely to go down is welcome, but we need most commodities prices to fall about 50% from here to get to the bottom. Oil might be an exception. I know, and wrote about it several times, that current price of oil doesn't reflect current cost of production. It's a tail of last year's pop of oil speculation bubble. But sooner or later oil should stabilize around 50 dollars per barrel. Although we might get big surprises on the way, including downward ones. But if oil drops to 30, it would be a sign of a close bottom as well.

China. It's one of the biggest imbalances in the world by itself. Export oriented country, which is bad in depression. Country producing half of the steel in the world, nobody every tried to explain why. Lot's of inefficient state owned enterprises. Still very inefficient agriculture. China might have a very bright future, but I don't believe such future is near. Of course, I don't believe that China will be a savior of the world economy. Reports of crisis in China would be one more sign of the bottom for me.

Emerging countries defaults. We need several of them. Apart from basket cases, like Venezuela or Zimbabwe, there are a lot of other candidates: Baltic states, Ukraine, half of Latin America, three quarters of Africa. Default of Equador last year doesn't count, they have money, just don't want to pay.

I don't expect to see all these "tells" at or near the market bottom. But of four listed, I expect at least two.

Having said all of the above and giving my readers more doom and gloom feelings, I have the feeling that market is about to turn in the nearest days. I have no idea why such gut feeling formed, I don't believe that it's a global bottom. But I feel some kind of local bottom is overdue. Do I believe this feeling? Common sense tells me "NO". Analysis of market tells me "NO". I don't know if I would act on this feeling. But honesty requires that I share this feeling with my readers.

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Friday, March 6, 2009

Buying More EAD

Bought more EAD on a drop today. Drop looked suspicious, but the news was that ETF is reducing leverage. Maybe it might have to reduce dividend as a result, but at least it won't have to suspend it.

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

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Thursday, March 5, 2009

Is It Obama? Or Something Else?

Everybody's blaming recent market performance (er, lack of thereof, to say the least) on our President. Or, more to the point, on the proposed budget. Well, I agree with critics on almost everything. It has more pork than entire state of Minnesota, it has a lot of new taxes some of which are business-killers or even industry-killers.

Maybe they (including Jim Cramer) are right. Maybe this budget will get accepted as is and make this depression much worse. But I don't believe it. This is not how budget moves through Congress. This budget will be changed in committees. The most stupid taxes will be blocked by Republicans in the Senate. Pork will stay, of course, but it's the way of this country. Anyway, final budget won't be as bad as market makes it look.

Maybe there are other factors at work? Hot money was in gold lately. Significant part of it should've came from stock market. Maybe redemptions from hedge funds started again. Maybe individual investors sell. I don't know. But the drop looks way too big to blame it on one reason only, even as big as US Government.

Let's wait and see. It's hard to understand direction of market when reasons are not clear.

Of course, on a day like today I had to buy something. Amazingly enough, nothing on my shopping list hit the target price. With one small exception: I bought Jim Cramer's recommendation, Allos Therapeutics (ALTH). It a speculative stock, but might be a winner. And by the way, I'm not recommending to buy or sell any stocks, just telling what I do.

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

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Wednesday, March 4, 2009

Selling The Rally

Jim Cramer was like a kid with a pound of candy. Hurrah! Mr. President said something about stock market! Something which even sounds sensible! So what? Barack Obama actually said that stocks are at low valuations and it might be a good time to buy. Sure, trailing P/E is very low right now. The problem is, E in that formula is going down hard. P/E might be low now, but after next round of quarterly reports it will be much higher. It's called multiple compression, explained in detail in the book of one James J Cramer "Real Money: Sane Investment in an Insane World".

I have deep respect for our President. He is one of the greatest politicians I know. And he inherited this mess, and his administration has to improvise, without any blueprint, because the we are in Great Depression 2.0 (I hope Larry Summers already explained that to Obama), last one happened 80 years ago and current economy is completely different from what was then. But so far anything President says about economy causes market to sell. And sell hard. He might pretend that stock market is not important, that Wall Street is the last of his worries, that Main Street shouldn't worry about stock market. Wrong! Main Street has majority of retirement money in stock or bond market, both are on Wall Street. Economy is too much interconnected.

I was wrong about bear market rally. I expected it yesterday, it happened today. Well, right or wrong, but in this market discipline requires selling into the rally. And sell I did. I sold my Research in Motion (RIMM) position, I think that 10% in two days qualifies for oversized gain. I also sold half of my Australian And New Zealand Banking Group (ANZYBY.PK). Banks aren't worth anything anymore, anywhere in the world, they are to be sold. There will be time to pick up remaining pieces of banking system. Maybe next year. Maybe in 2011. But not now.

I still think that RIMM is a terrific company, but discipline trumps conviction. I think I can buy it back somewhere in 30s. Opportunities are made up easier than losses.

I'm still not sure about direction of this market. I want to believe that we had local bottom on Tuesday, technicals are telling me that. But tiny voice in the back of my head is telling me that may be this rally happened (and didn't fade) because President didn't say a word publicly about economy today. In other words, this market is traded as much on government action as on technicals, and I'm not privy to what will be said tomorrow.

Full disclosure: at the time of publication author had a long position in ANZBY.PK and no positions in RIMM. Positions can change any time.

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Tuesday, March 3, 2009

No Bottom In Sight

I was wrong yesterday. What looked like capitulation wasn't. Market fell down more.

The picture was interesting. Market swallowed bad housing data without big problems. Then it ignored Be Bernanke. Then I was looking with big interest how market reacted to Tim Geithner's testimony before Congress committee. It looked like market liked it. Dow was at one point 80+ points higher than yesterday's close.

And then something happened. Market went down. And down. And down. And only half an hour later CNBC gave us the reason: our President, in his infinite wisdom, decided to say something about stock prices. First he said that stock prices are not among his first priorities. But of course, state of retirement savings of most Americans can't be among first priorities of administration, can it? Then he said that in his opinion, stocks are currently underpriced and it should be good time to buy.

Of course, market reacted to the first part and ignored the second.

What we see right now reminds me of October. Even local bottom is hard to reach. Even Turnaround Tuesday doesn't work. Doom and Gloom.

Sold SSO position today at a small loss. This is too hard. Let's wait for better opportunities.

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

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Monday, March 2, 2009


Dow down 300 points today. S&P at 700. Dow volume almost 50% higher than average. Lots of doom and gloom in all media. Is it capitulation? I'd like to see deeper drop on even higher volume, but beggars can't be choosers.

Tomorrow's action will show us what's really happening. Maybe. This is not a global bottom, but we might have a kind of local bottom, like we had on Nov 20. Maybe

Made couple of buys on this drop: started position in Research in Motion (RIMM) and bought Ultra S&P500 Proshares (SSO). I wanted to open RIMM for some time, it's a terrific company with clean balance sheet, growing profits and great management. It's medium to long term investment, although if it shows big profit fast, it will be sold immediately. Bulls make money, bears make money, pigs get slaughtered. SSO is bought for pure speculation. I think we'll see some bounce this week.

I still think we have some way to go down before we reach bottom. We need accept Great Depression 2.0 before things get any better. But local bottoms and bear market rallies happen during bear markets and we need to make money whenever we can.

Full disclosure: at the time of publication author had long positions in RIMM and SSO. Positions can change any time.

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Sunday, March 1, 2009

Who Pays Analysts? All of Us!

Once in a while somebody is publishing article, criticizing analysts forecasts and wondering why are they still being paid huge money. Let me clear the picture a little bit.

Everybody who has any investments with mutual funds pays analysts for their subpar performance. And also fund managers for their even less stellar performance. It's well known that 80% of funds underperform the market. And still there are millions of accounts with many hundred billions of dollars invested in mutual funds. Significant part of this money is invested by morons, oh, sorry, by people who are way too lazy to think. They just go with the flow, invest in what they saw in advertisements, or on advice of relatives and friends. Honestly, I don't feel too bad for these people and if they want to pay for analysts' Ferraris and boats, great.

Unfortunately, there is another source of income for these guys. It's everybody who has a 401k or 403b or any other plan which has a limited number of options. Let's say you work for company which provides 401k plan. And company matches, for example, first 5% of your income you put into the plan. It's just great, you get immediate 100% on your investment! But the problem is that most 401k plans have an agreement with some investment company which has a limited (about 15) number of investment choices. Usually they are mutual funds. And usually there are no index based funds among them. So the picture is simple: we invest in 401k because it's incredibly good investment for us, mutual funds get their money and pay analysts a good chunk of the management fee goes to analysts. Funds get fees as a percentage of managed money, so they don't care about performance. They pay analysts from that percentage, so they don't care about analysts' performance either.

One obvious problem here is that mutual funds aren't allowed to charge performance based fees. But another, bigger problem is that financial companies managing 401k and other plans usually do not provide an index fund option.

I don't know if there is a good solution for this. Disconnect happens first on the company level. Company provides you and me with 401k plan option, but it doesn't care about plan performance. We, 401k investors, are happy with instant 100% return, so we take 401k plan with subpar performance anyway. More regulation probably won't help either.

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