by Phil Davis - August 23rd, 2012 8:28 am
Long as you keep 'em way off balance
How can they spot you got no talents?
Razzle dazzle 'em
And they'll never catch wise!
When you're in trouble, go into your dance
Though you are stiffer than a girder
They let ya get away with a murder
Razzle dazzle 'em
That's the song that was playing through my head this morning as I composed an early Alert to our Members warning not to take the pre-market run-up seriously (already faded by 8am) because it was simply another misguided move up based on TERRIBLE data out of China that, in turn, sparks more rumors of QE/Stimulus. AGAIN!
As the great and powerful Bush the Second used to say: "Fool me once, shame on shame on you. Fool me you can't get fooled again." Apparently he was not talking to market participants who seem to be fooled by the same exact nonsense every day – it's like playing peek-a-boo with an infant, who is amazed every time you reappear from behind your own hands….
Not to get into it all over again but TODAY it's the usual China PMI falling off a cliff that got people excited that there must be QE coming from the PBOC at some point before the Chinese markets lose 50% of their value in 2 years (down 42% now). The problem with this "enthusiasm" is there is the assumption that the Chinese markets were ever worth 60% more than they are now and were not, in fact, a ridiculous and unsustainable bubble already propped up with misguided stimulus that simply can't be replicated in a Global downturn.
To bring it closer to home, this is like expecting the Fed to get the price of a 1,000 square foot New York City condo back to $2M because that's what it was at the height of the market ($2,000 a foot) and therefore we're not going to sit here and continue to pay $1,200 a foot for a condo and $97 for a barrel of oil when we KNOW they could be priced 60% higher. Isn't it the Fed's mandate to maintain price stability? Well – where are our high prices? STABILIZE THEM!!!
As I mentioned Tuesday, our favorite inflation hedge is currently silver – with the AGQ spread from…
by Phil Davis - August 22nd, 2012 8:06 am
Wheeee, this is fun!
As you can see from our Big Chart, we flopped right back to support lines on the Dow (13,200) and the Nasdaq (3,075) with AAPL dragging the Nasdaq down for a change, all the way to 3,067 but our dollar-adjusted support (at 82.50) was 3,060 so still strong despite the sell-off.
Our other watch levels are Dow 13,464, S&P 1,428, NYSE 8,160 and Russell 816 and the NYSE and the Russell were both over our lines yesterday – morning – briefly – before crashing back down to Earth.
Of course we were EXTREMELY skeptical of the morning rally, something I noted in the morning post as well as my 9:31 chat note, where I urged Members not to let themselves get scared out of position by a currency-driven rally, saying:
Step one before capitulating is getting yourself neutral with the aggressive longs – then you can decide what to cash out and what to press without panicking. Often we have blow-off spikes at the tops and bottoms and this sure feels like one but we'll have to respect our levels if they break over – although I'm tempted to adjust again for this BS 0.5% drop in the Dollar but, so far – we still haven't had one whole day of even holding 3 of 5.
We followed up in Member Chat at 9:57 with aggressively bearish adjustments to our $25,000 Portfolio, which had been up to almost $40,000 on Friday but dropped back to just under $34,000 into the morning rally as we were poised about 70/30 bearish in our short-term positions. Although we did look at another 3 bullish plays that can make us 300% in the morning post – we were not moved to add any of them on that ridiculous morning pump job and we instead took the opportunity to press those bear bets.
While we may be forced to capitulate if our levels do get broken and hold – the good news is those capitulation points are now so close that it will be a small loss to take if we do have to flip bullish. Also, looking at our index charts priced in Euros gives us some very different views of resistance indicating BIG TROUBLE for our markets if the Euro weakens and the Dollar rebounds:
by Phil Davis - August 21st, 2012 6:58 am
Here we go again (again)!
Yep, that's what I said last Tuesday and the Tuesday before that because Tuesday is a day they push the Futures higher and ditch the Dollar and tell you that this time it's different because of the same rumors they had the Tuesday before only this week – the data is getting worse and worse, as we know is better, right?
Last Tuesday we set levels to capitulate and go fully bullish at Dow 13,464, S&P 1,428, Nasdaq 3,060, NYSE 8,160 and Russell 816 and, as of yesterday's close we had the Nasdaq and the Russell over their marks needing just one confirmation to make it 3 of 5 and begin to flip our short-term portfolios (the $25KPs) bullish. We are soooo close but, so far – no cigar.
While we waited, we looked at some upside hedges that would do well if the market continued higher. Just as we get downside protection when we're bullish – we use upside protection when we're bearish and I suggested taking 5% or 10% positions in aggressive upside plays to help balance a bearish portfolio against – well against exactly what happened in the past 7 days. Our trade ideas were:
- 2 FAS Oct $105/115 bull call spread at $2, selling 1 BBY 2014 $18 puts for $3.25 for net .75, now $1.15 – up 53%
- 2014 SHLD $32.50 puts sold for $7.50, now $6.40 – up 15%
- 6 EWJ Jan $9 calls at .53, selling 1 BBY 2014 $18 put at $3.25 for a net .07 credit, still net .07 credit – even
- TNA Oct $55/61 bull call spread at $2.50, selling Oct $42 puts for $1.90 for net .60, now $1.80 – up 200%
The BBY puts jumped over 20% yesterday, from below $3 to $3.75 and that killed two of our trades (and worse today after earnings!), that were up significantly in Friday's update (which is why we take quick gains like that off the table). The good news is the EWJ play gives us a nice, new entry at the same net price so that one is still good and, of course, we are done with TNA after making 200% in a week and we'll find a fresh horse for that money.
by Phil Davis - August 20th, 2012 8:24 am
I found this chart interesting from the Economist:
It shows, pretty CLEARLY that GLOBAL business sentiment has worsened sharply, according to the latest Economist/FT survey of over 1,500 senior executives. The balance of respondents who think the world economy will improve over those who think it will worsen fell from minus 5 percentage points in April to minus 25 in July.
Overall, 42% of executives now reckon business conditions will worsen. Most predicted, unsurprisingly, that Europe's biggest problem will be economic uncertainty. More than 60% believe economic conditions in the euro area will get worse in the next six months. The outlook for North America is more optimistic, though with a presidential election in November that could change. Barack Obama leads Mitt Romney in every region, and by 22 percentage points overall, on the question of which candidate would be better for the world economy. An Obama presidency is also considered better for business, with strongest support coming from those in government, education and health care, pharmaceuticals and biotechnology.
I did a lot of reading this weekend – looking for something to get bullish about but, other than the expectation of more stimulus (BECAUSE things are so bad) – I just can't find it. Even if we were to get enthusiastic about some sort of additional ECB stimulus AND QE3 – is that going to be enough to take us past America's fiscal cliff in 135 days or is 135 days just so far in the future that people simply are not going to worry about it? Clearly 135 days can seem like an eternity in a market where the average stock is held for 22 seconds.
As you can see from Dave Fry's SPY chart, the volume has simply gone away in this rally and Barry Ritholtz wrote an article in the WaPo this weekend asking "Where has the Mom and Pop Retail Investor Gone?" When you consider that about 90% of the volume we do see is nothing more than HFT systems trading with each other (hence the 22 second average hold), then we may well wonder where the institutional investor is as well.
While $8.87Tn is on deposit in US banks, only $7.11Tn is on loan. That gap of $1.77Tn represents a 15% expansion since May. The only thing banks are doing with their money (which they get at…
by Phil Davis - August 17th, 2012 8:28 am
That's how much money yesterday's rally cost. Spain got the green-light on $123Bn from the ECB, most of which goes to just ONE bank (Bankia Group). This news sent Bankia shares up 15% and did wonders for their creditors' stocks as well because, as we know, the best way to get money from a Central Banks is to owe a lot of money to other banks so – borrow, borrow, borrow if you want to survive the Financial Crisis. Spain led Europe higher with a 4% gain on the day and hit another 1.75% early this morning before pulling back.
Also in the Free Money train yesterday was Brazil, who initiated a $65.6Bn stimulus package aimed at much-needed infrastructure ahead of the 2016 Olympics. This is a "just in time" thing for Brazil as 32 of 58 reporting companies in the Bovespa Index missed sales projections this quarter – the worst performance since Q1 2009.
The Olympics have also greatly aided the UK's economy and July Retail Sales were the stars of Europe at +0.3% and August should be good too – it's September, October and November we're worried about. The entire Euro Zone is clearly in a Recession, but it could be argued that it's the same one that started 4 years ago, which some would call a Depression – but not if they want the MSM to listen to them or to keep their Government positions.
Even China is seeing declining exports, with August projected to come in at less than 1% according to ForexLive, who says "China's Government has underestimated the impact of the European debt crisis on trade flows." As you can see from the chart on the right for California, China's export woes are hitting us on this side of the Pacific as well as total state revenues are 10% below projections with HUGE misses in Sales Tax – indicating an extremely beaten-down West Coast consumer.
The state has avoided default by temporarily borrowing from state trust funds, but those accounts will soon need their cash back to continue operating. Today California quickly began trying to sell $10 billion in municipal bonds to fund the record $28 billion they need to keep the lights on. With tax revenue plummeting and the state already the second
by Phil Davis - August 16th, 2012 8:25 am
Now we have dueling Fed heads weighing in on QE talk.
CNBC interviewed both Boston's Rosengren (dove), who said not only is QE necessary but that "it needs to be substantial enough that it off sets some of the shocks that we're getting from abroad and some of the concerns that people have with how weak the world economy has been – so we're in a Global slow-down." Isn't that great? He thinks the Global economy is TERRIBLE and that means we should rush out and pay 5-year highs for equities, right? What a silly market we have.
Then CNBC brings on Richard Fisher, who said additional stimulus would have little impact, as we're already at 0.25% and that's clearly not helping and that additional Fed stimulus now would look political and it's the US lawmakers, not the Fed, that need to "get their act together" if they want to stimulate the economy. Elsewhere, Fisher was backed up by KC's Esther George, who said that, at $3Tn on the balance sheet already, the Fed is only buying a future crisis when it comes time to unload these assets on a market that is ill-prepared to absorb them. “It’s always easy to buy,” George said. “We’ve never had to go back into the market to sell this quantity of assets.
Gosh that makes sense!
She said the Fed’s bond holdings further would create a “steeper hill” once policy starts to shift in the face of a stronger recovery. Add to that the burden imposed on savers, George said, and the pressure on pension funds, banks and insurance companies to take investment risks they normally wouldn’t take to earn a bit of income.
She said she didn’t know how Europe’s struggle to save its common currency, the euro, would come out. “Either way they go, the results are going to be dramatic and will be painful,” she said. “I see no short-term solution.”
The drought is likely to drive up food prices globally, if not this year then next, she said. George also noted that rising prices for food, energy and apparel were particularly hard on low-income Americans because those essentials accounted for a relatively large portion of their spending. "We know inflation can move quickly, and we’ll have to watch for that,” she said. The federal deficit and last summer’s contentious effort to raise…
by Phil Davis - August 15th, 2012 7:56 am
"While QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion."
That's the word form Goldman's Jan Hatzius.
While projecting 2012 GDP to finish strong at 2.3%, GS is also projecting a drop in 2013 to 2% as consumer spending drops once again and Government spending remains a drag on the economy. Much more relevant, you will notice, is their forecast for the S&P, which they expect to fall to 1,300 by November and all the way to 1,250 in February – but back to 1,350 next August, as that QE kicks in.
Much as I hate to agree with Goldman, it makes perfect sense to me and keep in mind, this is the report that goes out to the World's top investors from their investment adviser. I would have said trusted but – well, come on….
The BOE was unanimous in their decision to leave rates unchanged (at a record-low 0.5% – still double the US rate) and also failed to raise their asset purchase program so it's not like Goldman is betting against the trend. Only China and Japan have actually stepped up to the plate since June with real money and, if the Fed is off the table, then it's all up to Mario Draghi to pull one Hell of a rabbit out of his hat to save the EU all by himself.
Of course rabbits (or at least our legs) are being pulled all over the place as the employment numbers we got last week were a joke with 195,000 LESS people working and the claim of 165,000 job gains. That's a 360,000 job discrepancy but it's all in the counting I guess. Speaking of counting, Dave Fry points out that the Census Bureau, aided by the Bank of Spain, altered their methodology for seasonal adjustments in yesterday's Retail Sales Data to arrive at that "surprising" 0.8% increase. Without these adjustments, using the same methodology they had used last month (which was -0.7%), this month would have been -0.9% – 215% WORSE than what the Government is telling you.
by Phil Davis - August 14th, 2012 8:29 am
Here we go again!
Last Tuesday we also had a big run-up in the Futures and I was skeptical, writing "Through the Roof or Smashed into a Thousand Pieces." Two stocks we did like that morning were SBUX and ABX – and both did quite well this past week but we have generally turned more bearish since then as we languish along the top of our range (see Big Chart).
Yesterday, we adjusted our breakout levels to account for the weaker Dollar to Dow 13,464, S&P 1,428, Nasdaq 3,060, NYSE 8,160 and Russell 816. If we do manage to break over 3 of these 5 lines and hold them for a day – it will be time to switch off our brains and run with the bulls. Since we are currently about 2/3 bearish – that means we'll need a few aggressive upside hedges to protect our bear positions – from Central Banksters printing money or MSM pundits promising the same….
Making money in a bull market is pretty easy. My top trade remains FAS, which is a 3x bullish tracking index of XLF. We are already long Financials in our FAS Money Portfolio but, as a new trade, you can play XLF to move up to $16.50 (up 10%), which should roughly give us a 30% increase in FAS (now $93) to $120 and that means that the Oct $105/115 bull call spread at $2 could return 500% at $10. That's a nice, simple trade with no margin requirement too.
If you do have spare margin, you can sell any put from our Twice in a Lifetime list (mentioned in yesterday's post). One trade idea we added more recently was selling BBY 2014 $18 puts for $3.25, which is a net $14.75 entry on BBY (now $19.50) and what we really like about selling BBY is that buy-out offer on the table – if that goes through and it's over $15 (supposedly $25), then the short puts cancel like an early Christmas gift. You can apply that cash to 1x or 2x the bull spread – if you buy 2x the spreads for $4 and sell 1x the puts for $3.25, then you are in $20 worth of FAS bullish spreads for net .75 with a 2,566% potential upside to the cash (there is about $5 of margin on the short puts).
by Phil Davis - August 13th, 2012 8:29 am
Think Mcfly, THINK!
Forget the rhetoric, forget what Cramer says – or any of the other idiots on what used to be accurately called "the idiot box." Just look at this one, simple chart (thanks Doug Short) and tell me – why on earth would the Fed step in and take emergency action when the market is at a multi-year high?
Have they EVER done this before? EVER? Has ANY Central Bank EVER taken emergency liquidity measures when their stock market was at or near their all-time highs? And look at the interest rates (the red line) – there's nowhere to go folks – not unless the Fed is going to start PAYING US to borrow money. In which case – sign me up for $10Bn…
This is the point that was made this week on the cover of Stock World Weekly, and my comments in "The Week Ahead" section were:
by Phil Davis - August 10th, 2012 8:26 am
Wheeeeee – I told you so!
Had to get that off my chest because I certainly did tell you so. We've been "ignoring and soaring" on the way back to our Must Hold Levels (and those are only halfway to a real bullish breakout – to keep things in perspective) and, while we have been able to put on a better show than we did last August – it's only the 10th and the volume that took us from 1,350 to 1,400 on this Bespoke Chart has been the lowest volume of the entire year – certainly not enough to break on through to the other side.
Without volume, we're just building a house of cards that can collapse at any moment – not really the environment in which we want to be paying top dollar for stocks, is it? And think about what happened in the fall of 2011 – we began "Operation Twist" – yet another form of QE in which the Fed purchased close to a TRILLION Dollars worth of long bonds over the past year to plow down interest rates and create another massive stealth bailout for the Financials.
And the Financials have led the market higher with XLF flying from $11.50 last Fall to $15 this week – a 30% recovery in a sector that makes up about 15% of the S&P so about 4.5% of the S&Ps move from 1,100 to 1,400 (27%) or 63 points is the result of the Financial Sector's recovery. Tech is 19% of the S&P and AAPL is 20% of Tech so, without doing a lot of math, let's give 60 points to AAPL as well – although maybe it should be more as AAPL is up from $360 to $620 – up 72%, while the entire Nasdaq (which AAPL is 20% of) is only up from 2,400 to 3,000 (25%).
That's why we call it the AAPLDaq – I mean really, what is the point of the rest of the index when all they do is drag AAPL down? In Stock World Weekly of July 15th, I was quoted as saying AAPL had become "too big to succeed" with their $600Bn market cap ahead of earnings and they are having tremendous trouble getting over that $620 line but also, they are holding up surprisingly well after a disappointing…