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.
Just when you thought the US regulators may have finally become less tone deaf to the shame of the revolving door, especially following last year's latest scandal confirming Goldman runs the New York Fed (and every other central bank), here comes the SEC with an absolute shocker, not only proving once and for all that when it comes to regulatory capture, there is nobody in charge quite like Lloyd Blankfein, but unv...
Yves here. One of the high potential areas for robot substitution that I see on the list below is staffing of fast food restaurants (as in cooking). Fast food restaurants have limited menus and pre-set, highly specified procedures, making them prime candidates for labor substitution. But notice also the high end professional on the list.
I have to differ a little with the cheery, “Better policy will create new/different jobs.” What passes for our leadership believes in the mantra of more education and more skilled workers as the answer. In fact, America is going in reverse in this category, as educational attainment has fallen and college and higher education costs rise into the stratosphere. Moreover, the notion that there is a raft of highly technical jobs with lots of unmet demand is a canard. A...
The tug of war between the bulls and bears has created an unusual situation this year, a historically tight trading range! The chart below reflects that the Dow Jones has traded within a 6.68% high to low trading range this year. That is the 4th tightest trading range through May, in the past 115 years.
CLICK ON CHART TO ENLARGE
The inset table to the right looks at future performance of the Dow following narrow trading ranges through May. As you can see, most of the time the market has ended the year to the upside. Will it be different this time?
Wednesday’s action was almost a 180 degree turn from Tuesday’s with the S&P 500 up 0.92% and the NASDAQ 1.47%. Sone vague belief in (yet another) resolution in Greece seemed to be the catalyst. Greek Prime Minister Alexis Tsipras said on Wednesday the negotiations are on the “final stretch” towards a positive deal, Reuters reported. Later in the day, German Finance Minister Wolfgang Schaeuble said there was not much progress in the Greek debt talks and he was surprised by the upbeat tone from some Greek government officials. Athens must make a 300 million euro payment to the International Monetary Fund on June 5, ahead of several other payments due to the IMF later in the month, for a total of 1.6 billion euros.
We’ll see if yesterday’s move was the head fake or today’s was shortly.
Early last week, stocks broke out, with the S&P 500 setting a new high with blue skies overhead. But then the market basically flat-lined for the rest of the week as bulls just couldn’t gather the fuel and conviction to take prices higher. In fact, the technical picture now has turned a bit defensive, at least for the short term, thus joining what has been a neutral-to-defensive tilt to our fundamentals-based Outlook rankings.
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 t...
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Understanding the new normal of a business model is key to the success of any company. The managment of companies need to adapt to the changing demand, but first they must recognize what changes are taking place. Big Pharma's business model is changing rapidly, and much like the airline industry, there will be but a handful of pharma companies left at the end of this path.
Most Big Pharma companies have traditionally done everything from research and development (R&D) through to commercialisation themselves. Research was proprietary, and diseases were cherry picked on the back of academic research that was done using NIH grants. This was in the heyday of research, where multiple companies had drugs for the same target (Mevocor, Zocor, Crestor, Lipitor), and could reap the rewards on multiple scales. However, in the c...
Bitcoin, the virtual digital currency, has been called the future of banking, a dangerous fad, and almost everything in between, but we're finally about to get some solid data to help settle the debate.
On Monday, the Nasdaq (NDAQ) stock exchange said it would ...
Chris Kimble likes the idea of shorting the US dollar if it bounces higher. Phil's likes the dollar better long here. These views are not inconsistent, actually, the dollar could bounce and drop again. We'll be watching.
Phil writes: If the Fed begins to tighten OR if Greece defaults OR if China begins to fall apart OR if Japan begins to unwind, then the Dollar could move 10% higher. Without any of those things happening – you still have the Fed pursuing a relatively stronger currency policy than the rest of the G8. So, if anything, I think the pressure should be up, not down.
UNLESS that 95 line does ultimately fail (as opposed to this being bullish consolidation at the prior breakout point), then I'd prefer to sell the UUP Jan $25 puts for $0.85 and buy the Sept $24 call...
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
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 firstname.lastname@example.org 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.
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