The Royal Bank of Australia raises rates.

And the Chinese have "foot in mouth disease".

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)

Freudian slip?

Or is she just mad C made her GS go down yesterday? Still funny.

Here's a nice linkfest I ran into tonight.

Who says we aren't in a bubble? (1.5 yr weeklies)

Here was my favorite chart in the blogosphere this weekend.

IBD Inflation

The top story in the Investor's Business Daily (IBD) weekend newspaper should have been about inflation because they hiked their cover price by 25% in the last week. I got the paper last weekend for $2.00 but today, just one week later at the same store, it cost me $2.50. Wtf? I can't really blame them since fuel and lumber prices are skyrocketing with all the other commodities, but still, thats a big jump. Indigo has noticed similar increased costs over in Germany.

Thoughts on LULU

Right now LULU Dec 60 calls are my largest position so naturally I am digging into the chart to figure out significant price points. Not coincidently, the fibonacci levels for the only two significant moves match up well with areas of congestion in the chart. I have the red fibonacci pullbacks shown for the entire move from IPO to peak and the less important blue fibonacci pullbacks for the most recent 50% move from $40.87 shown below. It looks to me like $48.44 is the most important price to watch and should act like resistance to upside but major support once we get above there. This price represents the 38.2% pullback for the entire LULU move from IPO to peak and the 61.8% pullback for the most recent move.


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

On the Yen

I just came across this article on the yen's recent strength and I think it just about sums up why I am bullish on the FXY (Japanese yen etf):

"``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

Nightmare on Wall Street 2: Credit's Revenge

Scary stuff was going down today, I hope everyone was being safe. Rather than talk about it, I've just got a few charts for you that are simply breathtaking. For commentary, I think Tim brings up some excellent points today.

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
A Nightmare On Elm Street 2 - Freddy's Revenge..... Trailer

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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.