Common view: this market is defined mostly by Europe, and metrics don't matter. Common view is usually wrong. Well, I correct myself: common view is usually right, but you can't make money off it. You make money when common view is wrong and you can see it before others. Disclaimer: I don't claim such powers, just trying to make a penny. And another.
Technicals
Ugly. The only bright spot was perfect reverse head and shoulders formation in S&P, but it's got broken today.
Fundamentals
US is surprisingly robust. Stocks should reflect future earnings, right? Well, earnings are great, and they might be even better in the nearest future. The main problem is Europe. Some people say: "so what, US only exports about 5% to Europe, even 10% drop is peanuts", Well, US and Europe are tied together with millions of different connections. Physical goods is just a small part of those connections. Money flows between us are much, much bigger. Europe is going into recession next year with high probability. I think market is trying to discount effect on US markets.
In short, fundamentals are good short term, but uncertain long term.
Sentiment
Funny. I don't have other definition for it. Every time S&P is close to 1250, sentiment is bullish. Every time index drops close to 1200, it's bearish. Sentiment follow market now, I think we can safely ignore it.
And here's the problem: market doesn't have a direction. Doug Kass mad a great call for this year, predicting range bound market. So it is. Even Santa Claus rally failed to materialize so far.
I'm keeping oversized cash cushion and trading the range. Today I opened 3D Systems (DDD) long position again. I think it moved into 14.50 - 16.50 range for now.
Wednesday, December 14, 2011
Friday, December 2, 2011
Blame Dollar Carry Trade
Financial press looks like blind wise men from the old story: when asked to describe and elephant, one said it was a rope, another one, a column, and a third one, a pipe. What to we see in press lately? European debt crisis, withdrawals from hedge funds, (hyper)inflation which can't ever materialize and intervention of Central Banks. And nobody can see an elephant in the room. Well, almost nobody.. Howard Simons of minyanville.com has this article and couple of others.
In short, in the last couple of years, banks, hedge funds and anybody who wanted and could do it, borrowed dollars (cheap) and bought securities around the world with much higher yield. Underlying idea was that Fed is printing dollars like crazy, that dollar has nowhere to go but down and it looks like an easy and sure way to make huge money. Of course, people always forget that there is no easy and sure way to make money. Fast forward to July 2011. Hedge funds started big attack on Eurozone sovereign debt. There were lots of publications in press how this debt is unsustainable and why some (or many) countries will be forced into default. I don't think all of this press was paid for by hedgies. But significant part of it certainly was. Result: yields on debt are up, but, what is more important, Euro fell more than 10% related to dollar. And this is the level of currency fluctuation which kills carry trade dead. I don't know all the details, they are mystery even for SEC, but it looks like the main reason for MF Global collapse.
I'm afraid, that MF Global collapse is just peanuts comparing to the size of the problem. We are talking hundreds of billions, if not trillions, of dollars. Coordinated intervention by Central Banks tells me that trillions is a better guess. And dollar carry trade is not restricted to Europe.
We are not out of the woods. Eurozone politicians still don't understand the size of the problem. The other parts of the world are still to find out.
Commenting on the action of Thanksgiving week, I wrote that it looked like margin call action. I think I can further qualify it as a margin call related to dollar carry trade unwinding. Some people think that this problem is not related to US. After all, Europe is only about 10% of US exports. Yeah, right. And one collapse of a big European bank can easily topple all world financial system. If dollar carry trade to unwind fast, we will import huge, massive deflation from Europe.
What investment decisions can be made? The only thing I can think of is to increase cash cushion and hope for the better. Big bank collapse is not a tradable event, everybody would suffer, the question is: how much.
In short, in the last couple of years, banks, hedge funds and anybody who wanted and could do it, borrowed dollars (cheap) and bought securities around the world with much higher yield. Underlying idea was that Fed is printing dollars like crazy, that dollar has nowhere to go but down and it looks like an easy and sure way to make huge money. Of course, people always forget that there is no easy and sure way to make money. Fast forward to July 2011. Hedge funds started big attack on Eurozone sovereign debt. There were lots of publications in press how this debt is unsustainable and why some (or many) countries will be forced into default. I don't think all of this press was paid for by hedgies. But significant part of it certainly was. Result: yields on debt are up, but, what is more important, Euro fell more than 10% related to dollar. And this is the level of currency fluctuation which kills carry trade dead. I don't know all the details, they are mystery even for SEC, but it looks like the main reason for MF Global collapse.
I'm afraid, that MF Global collapse is just peanuts comparing to the size of the problem. We are talking hundreds of billions, if not trillions, of dollars. Coordinated intervention by Central Banks tells me that trillions is a better guess. And dollar carry trade is not restricted to Europe.
We are not out of the woods. Eurozone politicians still don't understand the size of the problem. The other parts of the world are still to find out.
Commenting on the action of Thanksgiving week, I wrote that it looked like margin call action. I think I can further qualify it as a margin call related to dollar carry trade unwinding. Some people think that this problem is not related to US. After all, Europe is only about 10% of US exports. Yeah, right. And one collapse of a big European bank can easily topple all world financial system. If dollar carry trade to unwind fast, we will import huge, massive deflation from Europe.
What investment decisions can be made? The only thing I can think of is to increase cash cushion and hope for the better. Big bank collapse is not a tradable event, everybody would suffer, the question is: how much.
Wednesday, November 30, 2011
Thank You, Uncle Ben!
This is what we really need: leadership. It looks like Bernanke persuaded heads of Central Banks to do something. They probably didn't have any choice, situation is really scary. It looks like dollar carry trade is unwinding right now. Banks, which borrowed dollars to buy Euro denominated bonds, now are forced to sell everything and buy dollars back, because Euro fell related to dollar and they are probably facing massive collateral calls. I wouldn't be surprised if a lot of hedge funds got caught the same way and now are faced with huge margin calls.
Central Banks action is good, but not enough. Not even close. We need coordinated QE from Fed and ECB. Soft default of Greece killed a lot of liquidity (talk about unintended consequences). Sharp rise of yields on Italian and Spanish bonds created huge strains. International financial system is in a huge trouble. If something big happens (default of one more country, failure of a big bank, exit from one country from Euro), everybody will suffer. We are not isolated in US. We can have much more trouble than in 2008.
Central Banks action is good, but not enough. Not even close. We need coordinated QE from Fed and ECB. Soft default of Greece killed a lot of liquidity (talk about unintended consequences). Sharp rise of yields on Italian and Spanish bonds created huge strains. International financial system is in a huge trouble. If something big happens (default of one more country, failure of a big bank, exit from one country from Euro), everybody will suffer. We are not isolated in US. We can have much more trouble than in 2008.
Friday, November 4, 2011
Why I Closed Position in 3D Systems
I closed position in 3D Systems (DDD) today. This is a change of plan. Initially, I wanted to accumulate position, trading around it. But I didn't like last earnings report and liked conference call even less. So I decided to make a pause and sold position.
This is a good company, with good growth and excellent balance sheet. But we don't invest in present, we invest in future. And last quarter somewhat reduced my confidence in future. Maybe it was one off quarter. If so, I will change my opinion.
Stock remains a great trading vehicle. I might buy it back when it trades lower.
This is a good company, with good growth and excellent balance sheet. But we don't invest in present, we invest in future. And last quarter somewhat reduced my confidence in future. Maybe it was one off quarter. If so, I will change my opinion.
Stock remains a great trading vehicle. I might buy it back when it trades lower.
Tuesday, October 25, 2011
Netflix's Bigger Problem
I closed my Netflix (NFLX) position today. Way too late. The only good thing is that I bought it when it wasn't on anybody "buy" list, well below $50. Sure, I should've sold it long time ago. Well, rear sight is always 20/20.
Yes, last quarter report was the trigger. Actually, one little thing in the report: it seems to me that Reed Hastings, CEO of Netflix, wants Netflix to be like HBO. Well, HBO is a part of Time Warner (TWC), and if you look at long term chart, it's not a good investment, to put it mildly. If Netflix wants to be HBO, I don't want to invest in it.
There are a lot of comments. People are rightly questioning latest moves, cost of streaming content, attempts of content providers to charge more and/or strangle Netflix as a competition to cable TV. Everybody is missing one thing: there is almost no content. I cancelled my Netflix DVD subscription not because of price increase, but because couldn't find anything on DVD I wanted to watch. I went through US and foreign classics, some new movies in 2009 and 2010. There are probably 3 movies released in 2011 I want to watch. I watched one in the theater. For 2 remaining I can use pay-per-view on Dish Network, much cheaper than keep Netflix subscription. I don't care about multiple remakes and remakes of remakes. I hate most of the comics based movies. Vampires and zombies are not even funny anymore. There is nothing else out there. I have the impression that content providers are reducing costs by dumbing down their production. Well, they are losing me as a customer.
Yes, last quarter report was the trigger. Actually, one little thing in the report: it seems to me that Reed Hastings, CEO of Netflix, wants Netflix to be like HBO. Well, HBO is a part of Time Warner (TWC), and if you look at long term chart, it's not a good investment, to put it mildly. If Netflix wants to be HBO, I don't want to invest in it.
There are a lot of comments. People are rightly questioning latest moves, cost of streaming content, attempts of content providers to charge more and/or strangle Netflix as a competition to cable TV. Everybody is missing one thing: there is almost no content. I cancelled my Netflix DVD subscription not because of price increase, but because couldn't find anything on DVD I wanted to watch. I went through US and foreign classics, some new movies in 2009 and 2010. There are probably 3 movies released in 2011 I want to watch. I watched one in the theater. For 2 remaining I can use pay-per-view on Dish Network, much cheaper than keep Netflix subscription. I don't care about multiple remakes and remakes of remakes. I hate most of the comics based movies. Vampires and zombies are not even funny anymore. There is nothing else out there. I have the impression that content providers are reducing costs by dumbing down their production. Well, they are losing me as a customer.
Somebody might say that my taste is not mainstream, that only fringe watches, for example, Woody Allen movies, that most people want to see transformers and vampires and zombies. Maybe. But I know for sure that there are a lot of people with diverse tastes which are (were) Netflix customers. And many of them have the same problem: there is nothing to watch.
Full disclosure: I don't have any positions in NFLX or TWC.
Saturday, October 22, 2011
This is a Breakout. Why am I not Happy?
As children say, the answer is "because".
First of all, breakout (S&P over resistance at 1220) is not confirmed. Let's wait until Monday. Second problem, bigger one: Nasdaq composite did not break out over its resistance level of 2670. Not even close. If you look at charts, during this depression Nazz was the leading index.
I will be happy if market is going up. I will be extremely happy. After all, my long positions exceed my cash and fixed income positions. But I have serious reasons to be careful. Current action doesn't look like bull market action.
Exhibit one: earnings reports and reaction. Google (GOOG) beats by a mile, stock jumps the next day, no follow up. Intuitive Surgical (ISRG) beats, stock jumps the next day, no follow up. Same picture with Intel (INTC), VmWare (VMW).
Exhibit two: market still pretend to depend on Europe. Well, it's a good excuse for market to not go up on great earnings. What would be a next excuse? And next after that?
Actually, Europe deserves extra deliberation. First of all, it's not going anywhere. Second, for better or for worse, but EU economy is bigger than US economy. Now, cutting through BS they feed us from all sides. EU is there to stay. There is no way to dissolve such union, not right now, not in the nearest future. Eurozone, i.e. currency union inside of EU, is there to stay as well. As much as Germans grumble, saving Eurozone is much (orders of magnitude) cheaper than dissolving it. Granted, currency unions of independent countries never survived long before. But Eurozone countries are not politically independent. They are part of EU.
Currently they are coming to a kind of soft bankruptcy for Greece. They will need to recapitalize banks, to create some kind of loan mechanism which can't be killed by speculators. In a year or two we will see something like QE from European Central Bank (ECB). They are moving slow, but they are moving. They will not fall apart, the price is way too high.
So, there is no end of the world coming from Europe. Why, or why am I not happy? Why don't I predict a huge bull market? Because we are in a Great Depression 2.0. Everything is moving faster now, so in 2008-2009 we quickly went through analogy of 1929-1932. Rally of 2009-2010 was quite like rally of 1932-1936. Now we are in analogy of 1937. Everybody tells about austerity, savings, cost cutting. Nobody (that is, except for Fed) is talking about stimulus. That's a huge mistake. We need stimulus. We need inflation. We need more debt, public and private. And everybody is talking austerity, cost cutting, deleveraging.
Unfortunately, analogy ends right here. In 1942, Great Depression was ended by stimulus package also known as World War II. World War now is so scary, it's almost impossible. Even if it happens, it will be the end of the world, not a stimulus package. And the only modern depression known to us after WWII is going on for 22 years already without any sign of ending any time soon. I mean Japanese Great Depression (1989 - ?).
That's why I am not happy. That's why I don't believe in any big rally. We might get to S&P 1400 by the year end, sure. I will be a seller then. Because austerity is coming, and bear market is coming with it.
First of all, breakout (S&P over resistance at 1220) is not confirmed. Let's wait until Monday. Second problem, bigger one: Nasdaq composite did not break out over its resistance level of 2670. Not even close. If you look at charts, during this depression Nazz was the leading index.
I will be happy if market is going up. I will be extremely happy. After all, my long positions exceed my cash and fixed income positions. But I have serious reasons to be careful. Current action doesn't look like bull market action.
Exhibit one: earnings reports and reaction. Google (GOOG) beats by a mile, stock jumps the next day, no follow up. Intuitive Surgical (ISRG) beats, stock jumps the next day, no follow up. Same picture with Intel (INTC), VmWare (VMW).
Exhibit two: market still pretend to depend on Europe. Well, it's a good excuse for market to not go up on great earnings. What would be a next excuse? And next after that?
Actually, Europe deserves extra deliberation. First of all, it's not going anywhere. Second, for better or for worse, but EU economy is bigger than US economy. Now, cutting through BS they feed us from all sides. EU is there to stay. There is no way to dissolve such union, not right now, not in the nearest future. Eurozone, i.e. currency union inside of EU, is there to stay as well. As much as Germans grumble, saving Eurozone is much (orders of magnitude) cheaper than dissolving it. Granted, currency unions of independent countries never survived long before. But Eurozone countries are not politically independent. They are part of EU.
Currently they are coming to a kind of soft bankruptcy for Greece. They will need to recapitalize banks, to create some kind of loan mechanism which can't be killed by speculators. In a year or two we will see something like QE from European Central Bank (ECB). They are moving slow, but they are moving. They will not fall apart, the price is way too high.
So, there is no end of the world coming from Europe. Why, or why am I not happy? Why don't I predict a huge bull market? Because we are in a Great Depression 2.0. Everything is moving faster now, so in 2008-2009 we quickly went through analogy of 1929-1932. Rally of 2009-2010 was quite like rally of 1932-1936. Now we are in analogy of 1937. Everybody tells about austerity, savings, cost cutting. Nobody (that is, except for Fed) is talking about stimulus. That's a huge mistake. We need stimulus. We need inflation. We need more debt, public and private. And everybody is talking austerity, cost cutting, deleveraging.
Unfortunately, analogy ends right here. In 1942, Great Depression was ended by stimulus package also known as World War II. World War now is so scary, it's almost impossible. Even if it happens, it will be the end of the world, not a stimulus package. And the only modern depression known to us after WWII is going on for 22 years already without any sign of ending any time soon. I mean Japanese Great Depression (1989 - ?).
That's why I am not happy. That's why I don't believe in any big rally. We might get to S&P 1400 by the year end, sure. I will be a seller then. Because austerity is coming, and bear market is coming with it.
Friday, August 5, 2011
US Downgrade is Stupid
I don't know what is used instead of brains at S&P. Up until 2007 they easily stamped AAA on collaterized debt obligations consisting of barely prime or even subprime mortgages. Now they slap downgrade on the country which paid its debts for more than 140 years! Yes, last debt limit debate was crazy, unnecessary and damaging US reputation. But memory of it will fade quickly. After all, there were similar partisan battles in 1979 and 1987 (first time republicans played the role of idiots, second time, democrats).
I agree with Barry Ritholtz. This doesn't say anything about US credibility. It says everything about rating agencies credibility. It's zero. And probably will be below pretty soon.
I agree with Barry Ritholtz. This doesn't say anything about US credibility. It says everything about rating agencies credibility. It's zero. And probably will be below pretty soon.
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