Musical Costume

The fed lowered interest rates by .25% today, as expected, adding further to upside inflationary pressure on commodities and other currencies. The stock market's reaction has thusfar been confused with some wild action in both directions. Clearly the leaders (ICE, LULU) popped big and the weakest stocks fell hard (ABK, MBI).

On a Halloween related note, here is something phish used to do on their 10/31 shows called a musical costume. They would play another band's entire album all the way through or in some cases just a few songs. The show that this clip is from was performed in Las Vegas on October 31st, 2005 where they played the entire White Album (The Beatles).

This one goes out to Ben Bernanke...

And now the lawsuits start

You knew this was only a matter of time...

Merrill hit with shareholder lawsuit over subprime

I'm sure this won't be the only one.

Nightmare on Wall Street

When the Ben Bernanke's FOMC releases their benchmark interest rate decision and statement this Halloween at 2:15PM ET something will die. The big question is, is it going to be the US Dollar or the US stock market? Recent actions indicate that Bernanke wants to be Freddy Kruger this year and shred the US dollar, which is already in free fall, by cutting interest rates. On the other hand, the fed knows inflation is picking up like crazy (look at food and oil prices) and there is always a possibility they could go back to their hawkish bias. A return to hawkish mode would send the stock market into a grave while saving the dollar. We will all be watching at that fateful hour but don't hold your breath for things to be all dreamy after they do whatever it is that they do do.



Disclosure: I am Long FXY (Japanese Yen) Calls, more on that later.

The Euro (redux)

Last weeks strong move by the euro, to new highs is continuing in early trading today. At the time I'm writing this one euro is buying 1.4417 dollars and the high for the day so far is 1.4436. The quote, in terms of dollars purchasing euros is well below the 70 cent figure at 0.6934.

What is unusual so far in todays trading is the lack of a big intra-day move in early European trading. Early morning moves of half or cent or more are common as the European exchanges open for business for the day, and we haven't seen that today.

The continuation of last weeks trading comes on speculation that the Fed will reduce benchmark interest at their Wednesday meeting. News from Europe and Germany in particular indicates that inflation may actually be accelerating, raising expectations that the ECB may be forced to raise rates at the November 8 monetary policy meeting.

In terms of the long-term chart, the euro has broken out of the channel that has been almost two years in the making. This weeks continuation could be considered confirmation of the breakout. In related news, Gold and Light Sweet Crude are trading at long terms highs today, as is the Australian dollar.


(disclosure: I am long the euro with FXE march 08 calls.)

Some Nice Looking Charts

Have I gone mad? (posting only bullish charts this weekend) No, I'm not bearish on every stock out there, just most of them. Each of these stocks has a great growth story and had some recent news to help create a breakout pattern . I don't have time to go into the details on each one, but they are worth looking into. They certainly each have a nice looking chart.

Disclosure: I own ICE and WFR calls.

LULU Under $50

Looks great for an entry next week but the options aren't cheap. I remember buying the Dec. 55 calls for 40% implied volatility less than a month ago but now they are twice as expensive at 80%. Probably the best way to play LULU here is to short the 50 puts or just go long the stock. However, being the option addict that I am I'll probably just buy some November or December 60 or 65 calls (I sold my previous position). Check out the daily chart above and the implied volatility below since LULU's IPO a few months ago.


Be aware that this is a volatile stock partially due to the growing bear camp on this stock. Technically it could fall as far as its rising 50 dma at $41.3 before ending the current uptrend but there are multiple support levels between here and there. In my opinion the best spot to load up on LULU would be around $47.50 but word is spreading about this stock and people want in so it might not get there. I think any price under $50 is worth nibbling, but really hope I'm not being too greedy here. As always YOU are responsible for your own investment decisions, I'm just telling you what I like.

The other side of the coin

Obviously I've been tracking the Eur/USD relationship for a long time, and at this time I'm long the Euro with FXE March calls. I posted earlier this month that 1.42 has become resistance, but that isn't quite true.

What I've discovered is the other side of the coin, the USD side. I tend to think of this exchange rate in euros because that's what I have in my pocket. For my one euro coin, I can buy $1.42 American. Many others think of this exchange from the other side.

An American with a dollar bill in his pocket would get 70 euro cents from me. And that's where the resistance is. It's not 1.42 or 1.43 American to the Euro. Resistance is the 70 cents round number that many American traders are seeing daily on their screens. Many can't believe that their dollar would only buy 70 euro cents, so they are buying when trading gets to this important level.

I believe that it is only a matter of time until this psychological barrier is broken. We should see a pretty good move at that point.

Possible triggers for the event? The ECB is meeting tomorrow to decide on interest rates in Euro-land. The Fed meets next week to deal with their interest rates.

Housing Quotes

“We've never had a decline in housing prices on a nationwide basis. What I think is more likely is that house prices will slow, maybe stabilise.”

Ben Bernanke (2005), then economic adviser to the president, was asked about the possibility of a decline in house prices on CNBC. Source.

"But let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

Henry Paulson (2007), Treasury Secretary, in remarks prepared for delivery at Georgetown University's law school. Source.

"It could conceivably make [conditions affecting investor psychology] somewhat adverse because if you believe some form of artificial non-market force is propping up the market you don't believe the market price has exhausted itself."

Alan Greenspan (2007), Former Federal Reserve Chairman, comments on the proposed "Super SIV" - a $75 billion Master Liquidity Enhancement Conduit designed to take on the assets of troubled structured investment vehicles (SIV). Source.

MDC Holdings (MDC)

Nice long term chart huh? It seems to make sense to use a simple ABC target for this stock, like I did with DSL (very nice), because the last two waves were almost identical on a percentage basis. If MDC completes the C leg down it will touch $26.77. If we use the size of the recent triangle we get a target of roughly $17.50. Any way you slice it, a break of $38.50 on volume suggests a $10+ move to the downside.

How can a chart look so bearish? From yahoo:

"M.D.C. Holdings, Inc., through its subsidiaries, engages in building and financing homes in the United States. The company has two segments, Homebuilding, and Financial Services and Other. The Homebuilding segment builds and sells homes under the name Richmond American Homes in certain markets of the United States, including Arizona, California, Colorado, Delaware Valley, Florida, Illinois, Maryland, Nevada, Texas, Utah, and Virginia."

Yikes, these guys have been disappointing wall street analysts for years and their next report is on Wednesday Oct. 24th.

If you have been reading this blog then you know about how bad it is out there right now in the housing sector and it turns out these guys do business in the worst possible locations (in bold). We haven't seen a major homebuilder go bankrupt yet, but it can't be too far off. And when homebuilders start going under stocks like MDC will get cut in half over night. Or if they are the one going bankrupt I guess it would be more than half that gets cut.

Disclosure: I own MDC puts

Distribution

There are a few things that I wanted to post about this weekend and rather than do one long post it seems to make more sense to break it up. First, everyone is talking about how the market did a "re-enactment" of the 1987 crash on Friday (on the 20th anniversary Oct 19th 2007). The media is very good at making excuses, but the reason the market tanked really had alot more to do with disappointing earnings from major industrial companies like CAT (my feelings have not changed), MMM and HON rather than some superstitious traders. We actually had the cfo of CAT say the US is "near to, or even in a recession" led by an "ongoing recession in housing." Oh and thats not to mention oil at new record highs (priced in US dollars) and then theres crashing bank stocks. Well here's a look at the Dow Jones ETF (DIA):


For months now there has been significant distribution in the DIA with record volume days and no forward progress. The market has made higher highs but always on lower volume followed by much higher volume selling (and no net progress since late May). In the IBD method this type of action is very important to investment decisions and they track the number of recent distribution days as the "M" in the CANSLIM investing system. According to IBD:

"One way to spot that trend is to pay close attention to distribution days — days when the market is down more than 0.2% on higher volume than the previous session.

When the market piles up four or five of these over a few weeks, chances are that the market may reverse lower."

You can find their current count in the weekend issue paper and currently they show "4 for Nasdaq and S&P 500, 3 for the Dow." In other words we are getting there, and if you take into account the significant distribution that occurred in February and August then it certainly gives need for caution.

The DIA chart above shows that we smashed through support at $136, the 50 dma and lower Bollinger band to close down 2.8% Friday. Certainly, the action was intensified by options expiration and it is very rare for a trend to be sustained outside of the Bollinger bands. I suspect we will stabilize Monday but the Dow Jones is looking really toppy here, and why shouldn't we top?

Sure, US stocks are worth more as the dollar drops but it ain't dropping fast enough to make up for a recession. And inflation really is bad, by the way. From Wikipedia some of the negative effects include:

"

• Increasing uncertainty may discourage investment and saving.
• Redistribution
  • It will redistribute income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and profits which may keep pace with inflation.
  • Similarly it will redistribute wealth from those who lend a fixed amount of money to those who borrow. For example, where the government is a net debtor, as is usually the case, it will reduce this debt redistributing money towards the government. Thus inflation is sometimes viewed as similar to a hidden tax.
• International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be undermined through a weakening balance of trade.
• Shoe leather costs: Because the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. This imposes real costs, for example in more frequent trips to the bank. (The term is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank.)
• Menu costs: Firms must change their prices more frequently, which imposes costs, for example with restaurants having to reprint menus.
• Relative Price Distortions: Firms do not generally synchronize adjustment in prices. If there is higher inflation, firms that do not adjust their prices will have much lower prices relative to firms that do adjust them. This will distort economic decisions, since relative prices will not be reflecting relative scarcity of different goods.
• Hyperinflation: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply.
• Bracket Creep (also called fiscal drag) is related to the inflation tax. By allowing inflation to move upwards, certain sticky aspects of the tax code are met by more and more people. Commonly income tax brackets, where the next dollar of income is taxed at a higher rate than previous dollars. Governments that allow inflation to "bump" people over these thresholds are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate.

"
On the other hand, tech stocks remain strong and for good reason it seems. GOOG posted blowout earnings last week with other tech bellwethers reporting strong growth. The Nasdaq 100 tracking ETF QQQQ looks much better than the DIA but also shows clear signs of distribution. The QQQQ could fall quite a bit further before it started to look toppy like the DIA, heres a 2 year weekly chart:


More later.

EURUSD at 1.42 has become a resistance point

EURUSD at 1.42 has become a resistance point on the charts. Whenever the dollar has gotten to this point lately, buyers have stepped in. I certainly did. I bought a small number of US dollars in order to buy a leveraged options position against the dollar. Here is my thinking on the issues.

Interest rates here in Europe will have to rise in order to combat inflation.

Europe's September Inflation Rate Rises Above ECB's 2% Ceiling

Energy costs in particular have spiked here in Germany. Eon and RWE, two of the biggest gas and electricity distributors have just announced price increases of 8.8% and 9.9% respectively. Don't even get me started about the price of gas for the car. (EU1.399/liter, approx. 4 liters to the gallon, 1.42 euros to the dollar. You can do the math.)

The members of the European Central Bank have been preparing the way for a rate increase in regular comments to the press, "ECB president Jean-Claude Trichet reiterated that economic growth in the eurozone remained robust and that inflation was subject to upside risks."

And from ECB board member Axel Weber, "...the bank may need to raise interest rates to a level that restricts economic growth in order to keep price increases under control." The Wall Street Journal sums it all up nicely, in one article. Interest rates have been held steady for now, but don't expect that to continue. The next meeting of the ECB will be on the 25th of this month.


While in the US there is a completely different situation going on. The problem of the subprime mortgages isn't going to go away any time soon. Over just the next 3 months there is something like 150 Billion dollars worth of adjustable rate mortgages to be reset to current interest rates. There is a superb chart floating around the internet apparently from Credit Suisse, who've had their own problems the with subprime market.

Foreclosure rates are already at twice the 2006 rate, and by the looks of that Credit Suisse graphic this tidal wave is only just starting. Mortgage rate resets will continue well into 2008. US interest rates will have to come down in order to protect both the borrowers and the lenders. It's only a matter of time.

Treasury Secretary Henry Paulson may be saying that he "has no interest in bailing out lenders or property speculators", but he may not have any choice. In fact, a certain level of bailout may be exactly what he's planning, in co-ordination with several of the largest banks in America.

The idea floating around is to build an 80 Billion dollar fund to be used to purchase the credit worthy mortgages, but the problem is not the credit worthy mortgages. Besides the problematic subprime mortgages total more than 80 Billion dollars worth.

What we have here is in fact a risk to the capital base of several large banks, should they have to sell off risky mortgages at fire sale prices. I guess it would be a good idea to have cash on hand, in order to cherry pick the portfolio when the selling really gets going. Apparently Hank Paulson thinks so too.

Let the Crash begin! (or the Fed can lower interest rates, save the financial system, and devalue the dollar).


A devalued dollar will have plenty of side-effects, all over the world. Exporting nations (Germany and the rest of the EU) will be badly affected, as will those who depend on US tourists. Those nations who peg their currency to the dollar (China, Saudi, and other oil producing nations) will have to do some hard thinking too.

With a devalued dollar, European economic expansion will have to come from lower government debt, and corporate cost controls and careful investment. New markets will have to be found for exports because the USA cannot be "the customer to the world" any longer. It won't be easy.

The USA has already overspent and those countries who's currencies are pegged to the dollar will either have to give up that peg, or be willing to import US-related inflation to their own markets.

Some of those countries are already moving away from their currency peg, The Chinese have held steady so far, but even the Chinese know that they cannot afford hyperinflation. They need to be able to buy resources that they don't already own, and they will need a balanced, tradeable currency to buy what they need. So far, they've been buying those resources with US dollars, earned from trade with the USA.

With the dollar in decline, how long do you think they will maintain their own currency peg, when the dollars they own are buying less and less product every day? I'm not expecting that soon, by the way. Just sooner, or later.

In the mean time all the world will continue to play the biggest game of "pass the buck" that has ever been seen. It is a game that is attracting fewer and fewer players every day, as the value of the dollar drips slowly away.

Country Fried Financial T-Shirts

Its a funny graphic to post on a blog but who in their right mind would go around wearing the t-shirt? I can understand people getting excited about the money they made shorting that thing at $40 but sporting that shirt is just poor taste. And I don't think the "I watched the US mortgage market implode and all I got was this stinking t-shirt" argument works here. Plus I'd be at least a liitle worried about getting knocked out by some guy who recently got foreclosed on by Countrywide, its not as funny to those folks.

Its funny how Angelo Mozilo actually looks as fried (tan) in real life as he does in that image, heck I'd be pretty tan if I was making as much money as he is. You know on second thought it really isn't all that funny.

Ouch! (VLO Today)

If you bet Valero (crude oil refining and retailing) would drop today on the bad refining margin news by Chevron or their pre-open lowering of earnings forecasts, you thought wrong. And you got killed.

JASO Set Up

After recently breaking out of a perfect cup n handle, JASO has run into a confluence of bad news and counter trends. To start with, they announced a secondary offering to be priced based on today's closing price ($40.98). Second, Chinese solar plays have fallen hard as LDK Solar has been accused of cooking the books and essentially lying to investors. Barrons did a chop job on all Chinese solar this weekend and after recently exploding, many China stocks got hit today. All this bad news has merely pulled JASO back to the "neckline" of the cup n handle. From a chart perspective, this move looks like a typical throwback and a great low risk entry point with a measured rule target near $55.

And for anyone trying to call this a hype/momo/bs play as opposed to a true growth story, just take a look at some of these numbers.

Disclosure: I own JASO calls

Interesting Articles

• The Dow Jones Priced in Commodities
• Austrian Business Cycle Theory
• FDIC to mortgage servicers: Freeze ARM rates

The container is still leaking....

You hardly have to blog these things anymore. Just get up in the morning, scan the headlines, pick one, post it, and wait for the meltdown. You know it's coming.

JPM and BAC to write down $3 billion in loans

A Thing of Beauty

Isn't it?

In the News This Week

• Subprime Delinquencies Accelerating
• U.S. Initial Jobless Claims Rose 16,000 to 317,000 (higher than expected)
• Analysts Predict Even Larger Losses for Countrywide Financial (up to 4B$ in write downs)
• Washington Mutual Sees Profit Down 75%
• Merrill Lynch to Post 3Q Loss Up to 50 Cents Per Share After Taking $5 Billion in Writedowns
• August Factory Orders in U.S. Fall More Than Forecast
• China Enjoys Ben-Carry Trade Thanks to Bernanke
• Oh, and to be fair The Dow Made a Record High Monday
• Then, The S&P Hit an All-Time High of 1,561.91 Friday

Pay no attention to the economy behind the curtains, helicopter Ben will save us!

More from the Alien: Consumer borrowing up sharply in August

and that quite frankly is so freaking nutso, that we aliens are thinking to leave this particular Solar System.

DSL Long Term Chart

A few months ago DSL broke down out of a two year symmetric triangle. It dropped 42% on increasing volume to find a low at 43.55 on record volume. Since then, a mild euphoria has swept over share holders of the savings and loan company as it climbed 45% to touch the bottom side of the triangle at 63.17. If this 45% rule continues and the stock completes something of an ABC correction, then it could see 36.64.

Of course that might be alot to expect out of any ordinary stock, but then again...

Acording to yahoo, DSL "originates and invests in loans, such as residential real estate mortgage loans, investment securities, and mortgage-backed securities; and originates and sells loans to investors in the secondary markets." Oh, you know, that sector of our economy which has completely fallen apart this year as the housing market tumbled. And while wall street likes to huddle around and sing kumbuya to their god, Ben Bernanke, the fed's desperate rate cut to save the markets isn't going to reverse the popping housing bubble. Just wait until earnings start coming out for these mortgage companies. Did no one listen to what Citibank said earlier this week? Good grief!

Dunno, it looks like a golden short to me so I bought some 60 puts.

I rarely use charts alone

As the title says, I rarely use charts alone for my trading signals. In the case of FXE, the Euro CurrencyShares fund, I'm using the chart to keep me away from a stupid entry point.

Looking at a weekly chart for the last two years, every single technical indicator that I see says that the relationship between the Euro and US Dollar has topped, for the time being at least. FXE exceeded the top of the Bollinger Bands. Common wisdom says that it will retreat at least to the midline between the two outer edges, which coincidently at this time is also the level of the 20 week moving average. For the last two years FXE has reacted exactly like a stock bouncing off an important moving average, in this case the 40 week moving average, which is almost exactly the value of the 200 day moving average on a daily chart.

Of the other common momentum oriented calculations, RSI, CCI, and all the stochastic measurements are signaling a top, and for all of these reasons I'm holding off from buying the FXE calls that I was looking at. There should be some consolidation here, over the next few weeks and I intend to look at market sentiment again, shortly before the next Fed meetings at the end of this month.

Overall I am bullish on the Euro vs USD, but the continued "higher highs, and higher lows" trace out a beautiful channel that can be traded back and forth in the short time frames, but also suggests more strength to come in the FXE product.

Unlike Pythagoruz, I prefer the long setups. But I don't like buying at the top any more than anyone else, so I'll let the usual chart tools line up before I enter. I'm looking for $138 for an entry long, when the rising SAR meets the price figure.


Update: I have bought a small position in the FXE Mar 08 $143 calls. With the Fed minutes coming out today, and Poole talking about "fragile financial markets", it seemed to be time to get into this market.

The container is still leaking

It was a couple of months ago now that Hank Paulson, Secretary of the US Treasury made that famous quote telling us that the subprime problem was "largely contained", or something to that effect. I blogged it on 8/3, right here on StockGeometry, and while the I article I linked to at the time has gone dead, I've found the exact quote again on an MSNBC.com page. Specifically, he said;

"...that the market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades."

I bring this up today because of new reports from Switzerland where banks are now coming clean about their exposure to the problem, and the losses they're experiencing. On a combined basis UBS and Credit Suisse are going to be writing down close to 5 Billion dollars worth of assets. For UBS this will be the first quarterly loss in 9 years.

But this doesn't affect real people, right? The problem is contained? Tell that to my mother-in-law, who has about 25 thousand euros invested in a Credit Suisse bond fund. That's about 1 years worth of retirement income for her, and she's madder than a wet hen right now because she can't get even an account manager on the phone. Those guys were probably cleaning out their desks last Friday and while sympathy may be difficult, those are real people too.

The container is still leaking.