My strategies for trading are obviously going to be very different than Phil’s strategies. For one, I day-trade stocks and do not work with longer term option strategies. My specific investment style is focused on short term investments that gain 2-5%. These rapid fire lucrative trades start to build up into a profitable long term virtual portfolio over time. The keys to my trading strategy are early entry, short term holds, and the earliest exit as possible.
I enter a stock based on what it can do in one to two days (maximum). When I look at a stock, I want to decide where it can be at the end of the day and whether I will be able to enter and exit it in this short term period for a 2-5% gain. Finding winners is the hardest part of day trading, while the entry, to me, is more of a system.
My entry strategy for a given equity depends on whether it has good fundamentals or bad fundamentals, as well as, whether the stock market looks to be moving upwards or downwards for the day. If a stock has good fundamentals for the day (good earnings, upgrades, bullish sector news) and the market looks like it is going to be green, the given stock will most likely gap up. On that gap up, some traders that were in the stock prior to the day will take profits. Usually on any gap up of 2% or higher, there will be a slight pullback in the first ten to fifteen minutes. This pullback is where I want to enter, because it will likely present the most discounted price that I will be able to get for the day, unless for some reason the market turns south.
If the market is looking particularly weak, I tend to stay away from stocks that have strong fundamentals because they probably won’t be able to have a lot of upward movement. Instead, I look to enter short on a stock that is either extremely overvalued, opening 10% up or more, or a stock that has bad fundamentals. When the market is looking red, I enter the stock almost right away. If there are poor fundamentals combined with a bad market, the stock has no reason to move up at the open…
A number of increasing stories and analysts seem to be growing more and more cautious about the stock market. It is not that most agree we are in a great position and the economy is recovering. What they all seem to be saying is that we moved pretty fast, and the market has become a bit OVERVALUED.
For example, I took a quick glance at Seeking Alpha tonight. On their "Macro View" section, the company has a market outlook section with stories about what direction writers believe the market is going. On it, the stories are 2:1 in a negative view of the market. Now, it is always easier to be a bear when the market gets much higher and looks ready for a correction, but if most people are thinking like this…doesn’t that mean its most likely market sentiment.
The market has made some ridiculously great profits, but this week might be a bit of a weaker week. Let’s rundown what is happening this week, what to expect, and what will shape this market’s red and green days.
To start, over the weekend, the big news we got was the shutting down of Colonial Bank. Colonial Bank was a major mortgage lender out of Montgomery, AL. The bank closing was the largest of the year, and the sixth largest of all time. The company had over $20 billion in assets. This is not some measly mom and pop joint. This was a large, second tier, regional bank. BB&T Corp. will be taking over the bank, but this should have some very adverse effects in the market. Especially, since financials have had such a strong run as of late.
One of the most defining economic data points for the week will be housing data. Monthly information on building permits, housing starts, and existing home sales for the month of July will be released. While I cannot venture to guess which way they will go, my one worry is that housing has had a great run. If the data is not exceptional, will it mean the housing sector could come unwinding. Plus, with how exceptional and unexpected last month’s numbers were, could the data be a bit overreaching.
Another important aspect of this week is the retail earnings. Big names in retail continue to release earnings. What we saw last week…
Here’s an interesting article by Graham Summers that touches on an issue discussed earlier today – it does not take $2.7 trillion actual dollars to move the stock market up $2.7 trillion in apparent value. As a corollary, it wouldn’t take that much selling to move it back down. – Ilene
Roughly 30% of US household wealth was destroyed by the collapse in housing and the 2008 Crash. Currently it stands at about $15 trillion, down % from $22 trillion at the 2007 peak. For simplicity’s sake, we’ll call this “assets.”
Now, consider that total US household debt stands at $13 trillion ($2.5 trillion in credit and $10.4 trillion in mortgage). As we noted in previous issues, consumers have only paid off about $50 billion in credit (about 2% of this). Thus we have US household equity at about $2 trillion.
Because consumers can no longer use their homes as ATMs (the home equity line of credit era is over), if we’re going to track how much US household money has flowed into the stock market, we need to focus on money market funds: the proverbial “sidelines” of the stock market.
Well, since March 2009, only $400 billion has flowed out of money market funds. Even more interesting is the fact that individual investors are pouring more money into bonds and income plays rather than stocks: for July, only $4 billion flowed into stock mutual funds compared to $28 billion for bonds.
In spite of this lack of participation, the stock market has kicked off a $2.7 trillion rally since the March lows. With only $400 billion potentially coming from individual investors. we can deduce that US households have only contributed 14% or less of the market’s gains.
Where did the other 86% ($2.3 trillion) come from?
See the Fed’s Balance Sheet, Factors Supplying Reserve Funds. This is essentially the money the Fed has put into the system via various lending windows and liquidity swaps.
As of July 30, it stood at $2.01 trillion.
It’s not hard to see what’s going on here. The Fed lends out money to Wall Street banks. Wall Street banks then use the money to recapitalize their balance sheets and push the stock market higher, creating the illusion of “recovery” and “bull markets” in an effort to get US consumers to “buy in” or begin spending…
This leads to two consequences, one pessimistic and the other one more optimistic. The first one is the unavoidable evidence that extreme events occur much more often than would be predicted or expected from the observations of small, medium and even large events. Thus, catastrophes and crises are with us all the time. On the other hand, we have argued that the dragon-kings reveal the presence of special mechanisms. These processes provide clues that allow us to diagnose the maturation of a system towards a crisis, as we have documented in a series of examples in various systems.
We have emphasized the use of the concept of a “phase transition – bifurcation – catastrophe – tipping – point,” which is crucial to learn how to diagnose in advance the symptoms of the next great crisis, as most crises occur under only smooth changes of some control variables, without the need for an external shock of large magnitude.
The Financial Times is reporting that even as the FDIC probably managed to avert disaster by pushing off Colonial on to BB&T’s lap on Friday, its troubles keep escalating. Sheila Bair is trying hard to sell Texas’ Guaranty Financial ahead of a Monday deadline, however it may have used up its jokers on Colonial, which was supposed to be the “easy sell.”
Guaranty’s fate has become intertwined in recent weeks with that of Colonial Bank, an Alabama-based bank that was forcibly closed on Friday and largely sold to BB&T, another regional bank, in an FDIC-backed deal.
The FDIC, which is juggling failing banks around the US in an effort to minimise the fallout to consumers, had initially wanted to resolve Guaranty’s problems before Colonial’s by arranging a sale of Guaranty, which is struggling under the weight of burgeoning losses on homebuilder loans and mortgage-backed securities.
But regulators’ concerns over Colonial’s instability recently overtook their worries about Guaranty, because of Colonial’s deteriorating credit quality and its role in two federal investigations, so regulators contacted bidders and asked for offers for Colonial last week.
Regulators have been hoping that three banks that had bid for Colonial – Canada’s Toronto Dominion, JPMorgan and Spain’s BBVA – would step in instead as bidders for Guaranty.
Ironically, Sheila is doing as much as it can to prevent PE interest in the failed bank, effectively giving all the leverage in the hands of the banks, which are able to submit lowball bids, in the absence of other, truly interested parties:
At least one private equity consortium, which includes Blackstone, Carlyle, Oak Hill Capital, TPG and Gerald Ford, is considering a bid for Guaranty.
The FDIC, however, has long made clear that it prefers other banks as buyers of troubled financial institutions rather than private equity firms.
Heading into the weekend, the private equity firms had not been given access to Guaranty’s confidential financial data.
One wonders why the artificial barrier, but then one remembers that other BHC’s have access to the Fed’s discount window, and if the artificially inflated loans on Guaranty’s balance sheet actually have to get repriced to par, the banks will have much better access to capital than some mere, capitalist…
With everyone (well, almost everyone – I am one of the lonely skeptics) convinced that we have stepped back from the "edge of the abyss", the title of this article may be viewed as laughable. When you connect the dots, as I will in this article, you will at least stop laughing, and, maybe, realize that we still have a big problem.
We have a confluence of five factors that have the potential to create damage to banking not seen in 80 years, and that includes the Great Depression. We’ll hit these factors one at a time.
First Factor: Banks Are Not Doing Enough Business
Commercial bank credit growth has dropped to 2%, according to Jesse’s Cafe Americain (here). The recent history of credit growth is shown in the following graph.
Now, it is a good thing that banks are conserving capital, since they need to increase capital to offset bad loans.
But, if asset valuations deteriorate (and that is quite possible), the banks need to increase earnings to "earn their way" out of their problem. Interest paid by the Fed for reserves on deposit there (by the commercial banks) are not producing nearly the same level of income as new credit issued commercially under our fractional reserve banking system with much higher interest .
If credit issuance does not increase year over year, banks can not improve their financial condition unless the quality of their existing loan portfolio improves.
As discussed in the third factor, below, just the opposite is anticipated for loan portfolios.
So the first factor in this perfect storm is that the banks are not doing enough business.
Second Factor: Banks Are Failing at a Rate Not Anticipated Two Months Ago
In his article, Jesse mentions reports by Bloomberg that 150 banks are in trouble. Some of these will be larger than many of the 77 (mostly community) banks that have gone under FDIC receivership so far in 2009.
Recent trends indicate that the pick up in corporate finance transactions, especially in the equity capital market may be petering off. After hitting an unprecedented high in June as the market reached the head of what had previously been seen as a fake head and shoulders formation, the July afterburners in the secondary market did not translate into primary market strength. Additionally, the August run rate indicates that the primary market may well have peaked in the May-June timeframe. In the current year the sector which has benefited the most from primary market issuance has unquestionably been Financials, where over $96 billion has been raised in the form of 251 issues. A distant second at less than half the total proceeds is Materials at $42 billion with 3968 unique deals, and bronze goes to real estate which managed to raise $37.5 billion in 162 deals. On the other end, the sector least in need (or least capable of raising) equity capital is telecommunications with just $3.6 billion in 29 deals and retail just above it at $3.8 billion in 43 deals. Yet retail is probably the sector that has benefited the most from the irrational exuberance over the past few months: could this be indicative that neither companies, nor potential investors take the overinflated retail valuations as conducive to a “value” primary entry point? If these companies are unable to capitalize on the ramp up in equities, what good is the use of company stock as valuation proxy? True, stocks can hit 1000x P/E but if this can not be converted into much needed corporate cash, what good is any such rally?
Yet what some may perceive as weakness in equity, has translated into strength for not only investment grade, but also high yield bonds. Primary market investors are gradually retracing and instead of looking at 20% returns promised by primary market operations, they are now content and much more interested with picking 5-10% returns.
LTM Investment grade bond issuance:
The sectors benefiting the most from a high yield issuance bonanza include Media and Entertainment, raising $15.6 billion in 36 deals, followed by Energy and Power and Materials, with $12.4 and $12.2 billion, in 38 and 28 deals, respectively.
Ironically, only 2 real estate high yield deals have been completed to date for $822 million, with consumer services, and retail both…
The Obama administration, in a major shift on housing policy, is abandoning George W. Bush’s vision of creating an “ownership society’’ and instead plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities.
The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.
Analysts say the approach takes a wrecking ball to Bush’s heavy emphasis on encouraging homeownership as a way to create national wealth and provide upward mobility for low- and working-class families, especially minorities. Housing and Urban Development Secretary Shaun Donovan’s recalibration of federal housing policy, they said, shows that the Obama White House has acknowledged that not everyone can or should own a home.
In addition to an ideological shift, the move is a practical response to skyrocketing foreclosure rates, tight credit, and the economic crisis.
Barney Frank The Hypocrite
"I’ve always said the American dream should be a home – not homeownership," said Representative Barney Frank, chairman of the House Financial Services Committee and one of the earliest critics of the Bush administration’s push to put mortgages in the hands of low- and moderate-income people.
What a distortion of reality. Barney Frank was in the pocket of Fannie Mae and Freddie make and their biggest supporter for years. Now he plays on semantics in an unbelievable lie. He would have been better off keeping his mouth shut, but political hacks seldom if ever can.
It’s Better To Rent
The "Rentership Society" as Calculated Risk dubs it, reminds me of a chart I put together way back in Spring of 2005. Note the lower right hand corner of the top chart.
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
The Second Estimate for Q2 GDP, to one decimal, came in at 4.2 percent, an upward revision from the Advance Estimate of 4.0 percent. The GDP deflator used to calculate real (inflation-adjusted) GDP rose to 2.2 percent, an upward revision from the Advance Estimate of 2.0 percent. Investing.com had forecast a downward revision to 3.9 percent for today's GDP estimate and the deflator to remain unchanged at 2.0 percent.
Here is an excerpt from the Bureau of Economic Analysis news release:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 4.2 percent in the second quarter of 2014, according to the "second" estimate released by the Bureau of Economic Analysis. In the firs...
In response to Jane's Defense vs. Colonel Cassad: Someone Seriously Wrong, a close friend wrote ... Jane’s has been in business giving good advice for a century and could only do so by giving good advice. Everything I have read suggests that the rebels (who include a lot of Russian paramilitary) would have been about finished this past week, but for supplies coming in through Russian interference. The captured Russian soldiers two days ago day only make the interference look more like direct assault. Colonel Cassad, on the other hand, appears to be a complete whack job who idolizes Joseph Stalin and thinks Putin is to weak. My Response
Mt Gox may be long gone in the annals of bankruptcy, but its founder refuses to go gentle into that insolvent night. And, as CoinDesk reports, the disgraced former CEO of the one-time premier bitcoin trading platform has decided to give it a second try by launching new web hosting service called Forever.net and is registered under both Karpeles’ name and that of Tibanne, the parent company of Mt Gox.
Bulls are having their way as summer draws to a close. Indeed, U.S. stocks and bonds seem to be the best and safest place to invest in a global economy that is at once hopeful and cautious, with lots of available cash hunting for attractive returns. But now the S&P 500 must deal with the ominous 2,000 level.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.
Bullish investors continue to ride the way of improved...
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Options volume on the provider of futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals and alternative investment products is well above average on Thursday morning, due in large part to a sizable put spread initiated in the 19Sep’14 expiry contracts. Shares in CME Group (Ticker: CME) are up slightly on the day, trading 0.25% higher at $74.34 as of the time of this writing.
The largest trade on CME today appears to be a bear put spread in which roughly 1,500 of the 19Sep’14 74.0 strike puts were purchased at a premium of $1.44 each against the sale of the same number of t...
Author Helen Davis Chaitman is a nationally recognized litigator with a diverse trial practice in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. In 1995, Ms. Chaitman was named one of the nation's top ten litigators by the National Law Journal for a jury verdict she obtained in an accountants' malpractice case. Ms. Chaitman is the author of The Law of Lender Liability (Warren, Gorham & Lamont 1990)... Since early 2009, Ms. Chaitman has been an outspoken advocate for investors in Bernard L. Madoff Investment Securities LLC (more here).
Reminder: Pharmboy is available to chat with Members, comments are found below each post.
Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
Note: The material presented in this commentary is provided for
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considered to be reliable. However, neither MaddJack Enterprises, LLC
d/b/a PhilStockWorld (PSW) nor its affiliates
warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither PSW nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance, including the tracking of virtual trades and portfolios for educational purposes, is not necessarily indicative of future results. Neither Phil, Optrader, or anyone related to PSW is a registered financial adviser and they may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only intended at the moment of their issue as conditions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.