Friday, November 30, 2007
Wells Fargo risks its reputation by cutting corners
St. Louis Federal Reserve President Bill Poole on moral hazard
E*Trade asset firesale seen hurting Wall Street portfolios
Florida and Montana state investment pools are hemorrhaging
Florida schools struggle to pay teachers amid freeze
Abu Dhabi investment in Citigroup is 23B$ short of what they need
32 Million Americans could see a delayed tax refund in 2008
Consumer confidence plunges to the lowest level in four years
Stock market has it's best week in six months
Five things you need to know
I hate to sound so pessimistic, but the fact is that we are in a very depressing economic state and things seem to get worse as the days go by. In respect of all the bad news out there, Sarah Chang will perform this Saturday's rock blog, Zigeunerweisen:
Tuesday, November 27, 2007
"The investment seeks daily investment results, before fees and expenses, which correspond to the inverse of the daily performance of the NASDAQ-100 index. The fund normally invests 80% of assets to financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective."
While it doesn't explicitly say this above, the "Ultra" funds are supposed to return twice the return of the underlying investment. For example, if the Q's (nasdaq 1000 etf QQQQ) drops 1% then the UltraShort "QID" should go up 2%. If you look at a comparison between the two you can see that QID gets close but doesn't actually move quite that much. It looks more like 1.7x the inverse of QQQQ:
The idea is that investors can quickly and simply get short exposure in a way that moves faster than the broad market QQQQ. In some cases an investor might not have access to short selling, in an IRA account for example, so they can just buy QID instead.
Ok, what if you are crazy bearish and you want to make the most money possible. You might think that you could get extremely high leverage using options on an already more leveraged QID. In otherwords, you might expect that QID calls would move faster than than the QQQQ puts on a percentage basis. Well, you would be wrong. In fact, it seems like you would have even less leverage among other drawbacks to the idea.
I'll admit, I got excited when I heard about QID options and bought a few calls today. But after closer inspection using this free option calculator provided by the cboe, I realized that the extra volatility is priced into the UltraShort options. The QQQQ have around 30% implied volatility while the QID options have around 60%, so double. In othewords, the options have twice the percentage move priced in to their premium. That translates into roughly the same gain in contract value if the expected move occurs. So if QQQQ goes down 5%, and QID goes up 10% then the equivalent options on both will increase in value roughly 90%.
My results are summarized in the image of the option calculator above. I assumed the move in QQQQ's was about 5% lower and I picked the option that would be at the money after that move, similarly I assumed the move in the QID would be up 10% and picked the contract that would be closest to the money. I also assumed that the implied volatility would remain constant. There are errors in this calculation but the result implies that if QID does not actually move at twice the inverse of the QQQQ then the QID options will actually perform worse. And the thing I hate most about the UltraShort options is that they are very illiquid, there are very large spreads on some of these and the volume is super low. I can tell you that I will be getting out of my QID calls soon to try and replace them with QQQQ puts, its really the way to go.
Saturday, November 24, 2007
I suspect that the media and the market will get a real warm and fuzzy feeling tomorrow morning with the stronger than expected black Friday sales and the prospect of a Santa Claus rally from support. The market is sure to open broadly higher and I think there is a decent chance of the dow reaching that resistance area just above in the next few days, which would be a very safe entry or add point for shorts.
On the other hand I could be dead wrong about a rally early next week since there is an overwhelming number of reasons why the stock market should be dropping here. To worsen the prospect of a nice entry on shorts, the higher total retail sales masked a disturbing trend for post-Thanksgiving shopping. According to bloomberg,
"U.S. consumers spent an average of 3.5 percent less during the post-Thanksgiving Day holiday weekend than a year earlier as retailers slashed prices to lure customers grappling with higher food and energy costs. ... Store visits increased 4.8 percent.
Sales on Nov. 23, called Black Friday because it was the day that retailers traditionally turn a profit for the year, rose 8.3 percent from a year earlier to $10.3 billion, Chicago- based research firm ShopperTrak RCT Corp. said.
Combined sales for both Black Friday and yesterday rose 7.2 percent to $16.4 billion, the firm said today.
ShopperTrak measures foot traffic in shopping centers and malls using more than 50,000 video devices. BIGresearch, based in Worthington, Ohio, polled 2,395 consumers on Nov. 22-24."
There is a debate going on about whether or not we are in a recession right now, which is really silly to me because is seems pretty obvious that we are already in one. The homebuilding sector is clearly recession, no need for me to explain right. The financial sector showed a 21.8% year over year decline in earnings last quarter, no doubts there. So how about overall? From Barron's,
"In a piece [Merrill Lynch's David Rosenberg] put out Friday, he says unequivocally that if you're looking for the earnings recession, you need look no more -- it's here. ...
With the tally now encompassing 90% of the companies reporting, third-quarter earnings per share dropped 8.5% from the third quarter last year. ...
David stresses that profits drive the business cycle -- capital spending and employment feed off them. And he sighs: "It has always been thus." Hence, he's ineluctably forced to the conclusion that a recession in the economy "is either here or no more than two quarters away.""
But ok, I'm willing to throw the bulls a bone. They seem to be convinced that stocks are historically cheap here and the collapsing dollar means that all dollar priced asset classes should be lifted, especially as exports become stronger. Plus, this time of year is seasonally strong and I love Christmas just as much as everyone else. So lets see what the bulls can do with this 8.3% headline, I will be watching the current market leaders for guidance.
The current king of the crop is GOOG (or BIDU), which led the recent tech rally then led the most recent reversal. As you can see from the chart below, GOOG has retraced almost 50 % of the pullback from all time highs and is poised to possibly test the 61.8% fib retrace just under $700 or if it breaks that level GOOG could head back into new high territory:
AAPL looks about the same except that it has already completed a 61.8% retrace of the initial decline. It currently seems to be hugging on to its 50 dma as it forms a bear flag. Any move over $177.61 though and I think AAPL could make a new high.
I almost did an entire post on GS this weekend as that stock has been on my mind for weeks. Anyhow, it is clearly the strongest wallstreet bank/broker, by a long shot, and it certainly leads the rest of the market. GS recently formed a triple top or head and shoulders top as seen below. If this pattern completes by roughly closing below it's 200 dma aroudn $210, then the price objective is $170 which coincides with strong support from August.
If US stocks are going to plunge into a full on bear market then these stocks are going to need to take a dive on big volume, and soon. While many market leaders have pulled back on above average volume, most remain in healthy uptrends above or near their rising 50 day moving averages. I think next week is really the pivot point where they need to either blast higher through resistance or rollover and make the next leg down, the latter would drag us into a bear market.
Will the bears go into hibernation as usual this Winter, or will they grab a sniper rifle and get busy?
Disclosure: I own GS puts
No, I'm not concerned about the arbitrary level of the yuan versus the dollar, or the euro. And I've known for quite some time that ECB chief Trichet will be meeting his Chinese colleagues next week. No, I'm talking about a simple bit of trade related material;
"...the Areva deal will be concluded in euros and not in the customary dollars..."
For the first time ever China will be paying in euros, meaning that they are now going to have to start collecting them. It's not that "collecting euros" will be a difficult thing for the Chinese, because Europe routinely runs a huge trade deficit with China just as America does. In the month of October alone that deficit was almost 14 Billion Dollars.
Dollars. Even the European trade deficit with China is measured in dollars. Even now European importers are forced to buy dollars in order to pay for products of Chinese origin, adding a small amount to the cost of doing business. The Euro was created to do away with this particular cost of doing business, and now that China will be paying for goods and services in euros, I'm sure that they will now start to accept payment in euros too.
This is just one more sign of the waning importance of the US Dollar.
Tuesday, November 20, 2007
Monday, November 19, 2007
What I mean is that the stock price made a new high but the OBV did not because the volume has been much higher on declining weeks than it has on rising weeks. You can see this is mostly due to the correction last March.
Sunday, November 18, 2007
I've been meaning to do a review on Tim Sykes's new book, An American Hedge Fund, for some time now. Tim contacted me this Summer, when he was still in the final draft stages and offered to send an pre-release copy of the book for review consideration. I actually read the draft within a few weeks of receiving it so I should have done this post a while ago, but I didn't feel all that bad when I noticed reviews popping up on just about every other blog I read. Tim has been pretty cool about the whole thing and actually sent me a copy of the final version, this is what I thought...
When I said I read the book in about two weeks of receiving it, that says a lot about my impression. I think I have ADHD or something because its not uncommon for me to wind up reading multiple books at once. Now that I think about it, I'm reading four books right now. Anyways, I read the book quickly because it kept my attention and was easy reading.
I was initially interested in reading the book when I saw Tim's bio on his website. While he was still an undergraduate (1999 to 2002), Tim took a $12,415 Bat Mitzvah gift and turned it into $1.65M. Sure, these were bubble days when every bull was a genius but Tim was a college kid. Can you imagine becoming a millionaire by the end of your Junior year of school? One of my favorite aspects of the book was hearing about how Tim coped with the stresses of trading and money management in the context of college life. He mentioned a painful lesson of sleeping in hungover one morning when he had a big position and his dorm mates huddled around his computer while he executed trades. I started trading during my softmore year of college so I know how tough it is to balance good grades with profits. Timing trades around class was always interesting. I was trading in a different market from Tim and started with less money, but I found a certain satisfaction from hearing what it might have been like if I had blown up like Tim. Clearly, he lived the dream of any young aspiring trader by making a fortune from nothing.
The book is really a two part story with the first part being about Tim blowing up in college and the second part being about his "hedge fund odyssey." I have always envisioned myself starting a hedge fund, so naturally I was interested in hearing Tim's story. The second half didn't resonate as much with me because I don't have any experience with the hedge fund industry, but it was still interesting. He basically turned himself into a hedge fund where he did all the trading and much of the fund's assets were his own. This enabled him to use his audited performance (323% annualized) from 1999 to 2002 to entice accredited investors to invest in him. Of course its more complicated than it seems and there are all sorts of issues with laws that effectively keep the smaller players out of the game. You get to hear about how difficult it actually is to build a hedge fund scratch, especially with zero industry experience. Tim portrays himself as a champion of free speech because he is telling a story about a restricted by law industry and there is some truth to that.
I really respect what Tim is trying to do by talking about his experience in a veiled industry, but it seems to me like there are plenty of hedge fund managers out there who talk about their positions. Without thinking too hard about it, I can think of two cases of managers making their argument for being in positions, and for free online. Amit Chokshi posted about his fund being short CROX before the plunge a few weeks ago, and this guy Zach posts about all sorts of ideas on his blog. So I didn't really buy into the free speech champion stuff as much, although I think he is probably unique in telling the story about how he created his fund.
All around, I did enjoy the book mostly for the story. Hearing about what it was like to make a huge pile of cash in college and create a hedge fund is awesome. While Tim has some good lessons for younger aspiring traders, I don't think it would be all that useful to anyone with 5 yrs or more experience in the markets. That doesn't mean that an experienced trader won't like the book, I just don't think you will be a better trader after reading this book. Other bloggers have compared the book to Reminisces of a Stock Operator (one of my favorite books of all time), but I think they are different kinds of stories, you can really compare them. An American Hedge Fund is great casual summer read for most, and an energizing tale of what hard work and perseverance can accomplish for young traders.
I think the bigger story is in what Tim has done in the online world through networking, but I'll leave that for another day.
Capital flows around the world constantly. In international trade it's mostly US dollars of course, but that is slowing changing. Products, or goods are also flowing around the world and in terms of the "dollar value of goods" America has been running a deficit for, well, forever. The value of goods arriving on American shores far exceeds the value of the goods being exported.
The difference in the value of those goods can be made up in capital that returns to America, invested from abroad. Recently though, the in-flowing capital isn't even coming close to making up the trade deficit, and the exchange rate of the dollar has been suffering as a result.
Here are a couple of links, and a couple of good quotes.
"These data confirm the U.S. is not financing its current account deficit with foreign portfolio inflows and this is pressuring the U.S. dollar."
"...Treasury International Capital data sparked the renewed dollar sell-off, as a mere $26.4 billion in net foreign investment entered the US through the month of September. Given consensus forecasts of a $60.0B gain, the result was hardly enough to quell fears of further foreign divestment of US financial assets."
The big fear in the dollar markets is that the biggest holders of dollars (the Chinese basically) could start to sell some of their holdings in favor of a stronger currency like the Euro. In reality, they don't have have to sell a thing. If the Chinese were simply to "re-invest less" of their trade balance in the US markets, the exchange rate of the dollar would come under huge pressure and apparently that is exactly what is happening. That $60.0B figure quoted above wasn't just picked from the air. That is the amount that America needs in order to fund its trade deficit. That comes out to 2.0 billion dollars per day! That figure is almost insane.
The Euro has gone parabolic lately, but I'm not calling any sort of a top here. No matter what happens in the interest rates of the various central banks, unless capital starts flowing more readily into the American markets, the exchange rate of the US dollar will continue to suffer.
Disclosure: I own FXE Mar08 calls.
Saturday, November 17, 2007
Thursday, November 15, 2007
QQQQ (Nasdaq 100), note the dramatic increase in volume as the market distributed (at new highs) then sold off hard over the last seven days:
DIA (Dow Jones Industrials), a very bad sign is that it recently sliced through it's 50 and 200 day moving averages on above average volume:
SPY (S&P 500), it doesn't look much different than the dow jones except that it is further below the 200 dma:
IWM (Russel 2000), the small caps look worse than any other index with the 50 day below the 200 day moving average, both of which are sloping down:
This looks like it to me, the only reason why I am skeptical of this starting an all out bear market is that its too obvious. I'm sure there are now tons of people short and everyone sees the carnage in these charts that I do. When everybody is short who is left to sell?
Disclosure: I own QQQQ and DIA puts.
If you are idling ignoring the recent developments in the US economic landscape, including the credit, housing and now the stock markets (by not being short or even worse, holding stocks or mutual funds)... then this is all I have to say to you:
If you are bothered by the quality, as I would be, then use this link. The evil record label won't let me embed the youtube version here.
Monday, November 12, 2007
MA is one of the few "way up there in the sky" stocks that has been able to hold onto its earnings report gains but today's selloff brings the gap into play. If MA breaks $180, I think it will close that gap in the next four days by heading to $160 then pin to max pain at $165 or $170 on Friday. Currently, max pain is marginally at $165 ($170 is almost equivalently painful) but that could easily change as option volumes swell closer to the actual expiration on Friday. I'm looking at the 180 and 175 puts for a quick trade. This is a highly risky trade so don't play it with any size!
For more on max pain theory, here is a paper by a professor at the University of Illinois.
Sunday, November 11, 2007
I am not ready to declare a full scale bear market yet, but we are getting pretty close. The dow closed below it's 200 day moving average for the first time since mid 2006 on Friday, and while it is not the end of the world it is a huge red flag. The media is trying to spin it like this is just another "10% correction" but two of these in four months? At some point I think this market is going to run away to the downside fast and everyone will be left staring with their jaws open. It might not be tomorrow, it might not be this year, but at some point there will be a wide scale realization that the US is headed into a recession and that we have actually begun a bear market. When that day comes I think the dow will drop 1000 points or more.
The cracks are certainly showing but the stock market hasn't really begun any major hemoraging yet. While the 20 week money flow has turned negative, this wouldn't be a big problem so long as it rebounds quickly. And although the dow closed below its 40 week (200 day) moving average, so long as it regains it quickly the slope should stay positive. Long story short (no pun intended), the market needs to rebound quickly from Monday's ensured big gap down. If it does not rebound, and there is no reason why it fundamentally should... the the last six months will look like a gigantic bull trap. I'm drawing the line in the sand at $126.62 on the DIA or 12,795.93 on the dow jones industrial average. A weekly close below those levels and I am going to declare a secular bear market for US stocks.
For traders looking for some action, I ran into this nice looking DECK chart over the weekend. I think it has opportunity for longs and shorts alike. It could rebound nicely from the trendline test that occurred Friday or it could pullback further to some the fibonacci levels shown above or even test the recent low in the 90's. Which ever direction it moves, there could be some big swings in DECK this week for options expiration. And speaking of which, we could see some major upside in the mortgage insures (ABK, MBI, MTG, RDN, PMI) on put covering.
Ok, that was a bunch of technical stuff, for the more fundamental types check out this video of Jim Rogers I linkjacked from Ugly:
Or theres even more charts here.
Disclosure: I own December DIA 138 puts
Saturday, November 10, 2007
Australian Dollar ETF (FXA 1.5 year weekly):
Australian Stock Market (EWA 5 year weekly):
Thursday, November 08, 2007
Don't you just love that look on gentle Ben's face. Awwww, poor guy. Bernanke actually had some relatively responsible things to say today that Ron Paul didn't give him credit for, more on that here.
Wednesday, November 07, 2007
Capital One Financial:
Bank of America:
I'm actually pretty scared here and thats coming from a short. The way things are unfolding, it seems like the US is heading towards a deep recession and I am scared for the welfare of my friends and family. I have actually been telling my friends and family to not hold ANY US stocks or mutual funds for the long term for some time now. I have only grown more concerned over the last six months even as stocks mindlessly went higher.
Disclosure: I own BAC puts
The Royal Bank of Australia just raised rates and all three of the C$, the Euro, and the AUS$ got on an escalator. If the ECB does the same on Thursday? Oh boy...
I'm not 100% certain that the ECB will raise rates, because the make up of the ECB isn't quite the same as that of the Australian or Canadian banks. Many of the members of the ECB don't even speak the same language, never mind subscribe to similar conservative fiscal policy. So we'll have to wait and see.
Still, the US dollar could become deeply unpopular but that would depend on some things that aren't very predictable. Like, how patient are the members of the Saudi royal family? Did you know they are the biggest shareholders in Citigroup? That investment hasn't been doing well and if you've been reading the Minyanville you'll understand that the Citigroup as such is in a fight for it's life at the moment.
Another unpredictable area are the Chinese. They hold over One Trillion in USD and if they were to engage in a hissy-fit over their suddenly lower buying power. the USD could become "deeply unpopular" overnight and it fact it did.
"Market players showed muted reaction to comments by a senior Chinese political figure who said that China should diversity (sic) its $1.43 trillion stockpile of foreign exchange by buying more strong currencies such as the euro."
That was from last night and that "senior Chinese political figure" might as well have yelled "fire" in the crowded theater. He apparently quickly retracted that statement as the exchange markets reacted. I'm watching the continuation of the market now, in Europe. So far, EURUSD has reached 1.47, in heavy trading.
In order to fight this, the FOMC would have to raise rates and kill the US economy for good. If the Fed doesn't fight this, the dollar will be comatose for a long time to come. Talk about a rock and a hard place.
(disclosure: I own FXECM, FXE 143 calls, expiring Mar08)
Tuesday, November 06, 2007
Sunday, November 04, 2007
Saturday, November 03, 2007
Well, we are currently below that level but fortunately LULU has a rising 50 dma at $42.91 and a trendline shown in blue just above. Those two levels should act as strong support for now and I'd be surprised to see LULU break $45 especially given the fundamentals but if it does I will likely hop out of these calls to buy some lower strike options at the 50 dma. If LULU breaks $40 I'm gone and won't look back for a while.
So why did LULU crack Thursday and Friday so bad? Well I have a few thoughts on this, first of all Cramer the clown came out Friday morning and said sell LULU because it could tank like CROX. Obviously, he just wants to buy back LULU cheaper after he sold early last week. Secondly, there was an extremely bullish push into the close on Wednesday and LULU moved almost 10% in about an hour on huge volume. My guess is that many of those buyers were technical traders that saw the fib bounce and the extreme uptrend that LULU is in. So I bet their stops were hit Friday morning when LULU cratered in the first 15 min. Finally, the entire market got slammed and retail was second only to the mortgage insurers for most pathetic stocks of the week.
I personally couldn't be more bullish on the fundamentals, especially given the strength in the Canadian dollar. Recall the press release a few weeks ago where LULU raised their estimates for this quarter, in part, because of the Canadian dollar's strength (earnings in Canada are now worth more US dollars). Well heres a look at the Canadian dollar over the last few months:
Maybe they should have raised guidance again? As far as I'm concerned buying LULU is a great play on the exploding Canadian dollar, what do you think indigo (currency trading Canuck) and betweenthebars (biggest LULU fan ever)?
Prior posts on LULU here.
Disclosure: I own LULU Dec 60c
Thursday, November 01, 2007
"``The subprime problems are not over yet at all,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second- largest publicly traded lender by assets. ` The yen will be buoyed by risk reduction.''"
"``The yen is benefiting from this unwind in carry trade positions,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``There's more bad news out there and U.S. stocks were hit pretty hard and Asian equities will have a soft lead.''"
"One-month implied volatility for the yen rose to 9.35 percent today, from 9.05 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades."
"The Bank of Japan kept its benchmark rate at 0.5 percent this week, the lowest among major economies."
So the Bank of Japan really can't go any lower with their interest rates, that will support the yen. And as investors pull money out of US assets they will buy back yen to repay their ultra low interest loans. That is the nature of the unwinding carry trade. That is a pretty strong argument that the yen will appreciate faster than the US dollar, the other side of the trade involves the falling US dollar. If the fed were to slash interest rates further then the argument would be that the US dollar will depreciate faster than the yen. Seems like a win-win to me.
Disclosure: I am long FXY calls
Lets start with the Dow Jones etf over the last two days (5 min time scale):
Then CROX over the last five days on a 15 minute time scale:
My goodness, MBI over the last two months:
Then theres DSL, a "savings and loan" corporation over the last two months :
And the current king of carnage is bond insurer ABK on a six month daily time scale:
With people focused so much on tech stocks these days its easy to not notice the recession/bear market already occurring in some sectors of our economy.
Disclosure: I own DIA puts
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