Unabated Irrational Exuberance

The title says it all. Listening to the pundants, is there any chance this market will ever go down ever again? All you hear from this high school-ish reports from the so called experts is this market will continue to go up, banks are not only solvent but highly profitable. Copper will never ever go down and will pass Gold in price and as the international standard. OK, I am kidding about the last comment, but come on, listen to these people. This sounds like the Internet bubble all over again. Calling for higher highs, huge advances and telling shorts to get out of the way.

When everyone gets greedy, you get fearful. Everyone is greedy right now. The shorts are being squeezed and all the media is now a perma-bull.

So, what to do. First, use experience. Markets don't go straight up or down. While the market does show strength, moving heavy onto the long side is a retail investor mistake. I think the play right now is to sit out or lean to the short side. For me, I am leaning on the short side with SDS. I won't touch financials right now other than some select puts but it appears a nice hot-air bubble is being created.

What amazes me the most are the pundants who are completely convinced the banks are not only profitable, but grossly profitable. That their troubles are all behind them and no gov't help is needed. The toxic assets are completely gone. Just vanished into thin air.

Believe it if you want. But I am telling you that until unemployment slows dramatically, there is no turn around. 610K more jobs lost in the last report. That is HUGE people! I don't care if it is less than expected. It is huge. Many say unemployment is a trailing indicator. Bulls**t! (excuse the snap language). Unemployment is very much a leading indicator in a recession period. Every job lost means future less retail spending, more credit defaults, potential foreclosures, more gov't spending, and less taxes being collected by local gov'ts.

Did I mention local governments? State governments are headed for bankruptcy. This is the next shoe to drop. The Fed will need to focus on bailing out states. There is no way states like Florida, California, Arizona can withstand the unemployment numbers and the losses that come with less income taxes, less property taxes, and less sales tax. It will result in job cuts within the gov't itself causing a faster rate of unemployment.

I am very comfortable with my positions right now. I made no trades today (I avoid trades on OPEX) and very few this week. I am not willing to play the financials as a whole. I have some BAC puts but that is it. Financials are creating quite a bubble and it is probably a great gamble play for some of you but there can be huge gains or losses along the way.

TA clearly shows we have hit the upper trend line and 3 things can happen.

1. We can break through and the market has a free ride to about the 950 range
2. We can fall back to the lower trend line and break through looking for at least a 30% retrace
3. We can continue in the narrowing range.

I don't think #1 will happen although it if does, it is not entirely surprising. #3 is highly unlikely because the narrowing range has gotten extremely narrow and it has to break through. So my odds on favorite is #2 and I am playing it that way by playing SDS and SRS and also puts on FAS. I am well hedged in case of a sudden burst upward. I am also being somewhat defensive with holdings in GLL, TBT and EEM (OK, not defensive, but somewhat safe and diversified a bit).

One thing to note, a lot of stocks and indices are moving very close to their 200 day MA. This may be significant. They can bounce off or they can break through. A breakthrough would likely destroy any remaining shorts. I bounce off could result in some consolidation in a sideways move or could run the recent longs out via profit taking.

Bank Profits. The Good, The Bad and The Ugly

I just closed on a refinance today. Great rate (4.375), saves a lot of money short term and long term. Good for me. Good for the lawyer and... good for the mortgage company? Really?

So now the mortgage company is getting $380 less per month in interest payments. So how can this be good? So I had to pick the brains of the loan officer and the lawyer to understand what is going on here.

THE GOOD

This is good for the mortgage company because they really don't "hold" the loan. Yes I make payments to them but they actually sell off the loan to a loan holding company, usually overseas, usually china, and the mortgage company basically collects fees for the mortgage closing and for mortgage payments. So, the mortgage company basically makes money on the closing itself.

The mortgage company is thrilled with the new rates being offered since it has caused on explosion in refi's. They are making good money on these refi's and actually is creating jobs. The lawyer said he had to hire two additional assistants due to the load of work.

The loan holding company may make less but they reduce risk by having a good loan get even more solid. So they have reduced risk at a cost of less revenue.

It puts money in my pocket each month which I will either spend and help the economy, or I will save in the bank which helps the bank.

THE BAD

By allowing me to refinance, I am actually potentially taking away a refinance from someone who needs it more. But since it is not my job to help all the poor saps out there who got in over their heads, I don't care.

The loan holding company does loose a little in revenue as mentioned before so their bottom line is slightly hurt. But they are in China so what do we care.

The mortgage company did not require an appraisal. Even though it is the same mortgage company, you would think to avoid risk to the loan holding company, they would require it. The lawyer actually was surprised by this and not real happy that the mortgage company was doing this as he rolled his eyes when he found out.

THE UGLY

The ugly side of this is the future. Talking to both the lawyer and the mortgage officer, they were talking about the spike in the refi's in January when rates hit 5% and how that was great for business. But it tapered off in March. Then in late March with the fed driving down rates again, it has caused another spike in refi's. But what is interesting is, the spike is not as big as it was in January. Even though business is good, it seems to be falling off already even with rates around 4.75%. Both expect this to fizzle out in 60 days and it goes right back to pre-January levels of mortgage apps.

Also, very few non-foreclosed homes are being sold. Well over 80% of new mortgage apps they have processed over the last 60 days are foreclosures. The lawyer was disappointed in himself since he just bought a home in July thinking it was the bottom. He now sees the same homes in his neighborhood selling for significantly less via foreclosures. And he sees pricing continuing to get lower.

Both talked about this spike will end and cause stress on their businesses this year. They talked about the current rush and how quickly it faded in March. Unless rates go down under 4.5%, they think the credit market heads right back to where it was. They love the current business and they are taking advantage of it as much as possible. But it is not normal business for them. Refi's and foreclosures are not going to carry the mortgage business. They also said they do not see the light at the end of the tunnel for foreclosure property numbers to be reduced this year.

I was happy to get this done now. They don't see interest rates ever getting that low anytime soon. They see a clear bubble being created due to the euphoria of refi's and foreclosures. They both feel this period is creating a false sense that housing is improving but since 75% of loan apps are refi's, it is inflating the numbers.


I am not smart enough in real estate and mortgages to really know what this means long or short term. The key is, the numbers being thrown around may be misleading around housing, real estate and mortgage apps. So be careful.

Why You Should Avoid FAS and FAZ

I know you have all heard it. The 3x and 2x ETFs should be avoided because of decay. Yet, we all have the tendency to put money in to them looking for quick moves. The gambler in us wants to use these tools to make that big hit.

Many of us have experienced gains in very short periods playing FAS and or FAZ. But this blogger is officially done purchasing either. I got out a couple of weeks ago and will never go back.

Why? The decay is staggering. In fact, I don't see how either exist in 4-6 months. Lets look at their relative values to each other over the last few months.

You would think since FAZ is a 3x inverse and FAs is a 3x bull, they would make exact opposite moves. And they do, except for the decay. Currently, FAS is at 9.04. In late January, FAS was around 9.04 as well. But there is a difference. In January, when FAS was at 9.04, FAZ was at 62. Today, FAZ is at 9.32. A tremendous amount of decay.

Even in February, when FAS was around 9, FAZ was around 50. But as time goes on, decay takes hold to a much larger level than can be seen by the naked eye.

So taking 3 moments in time when FAS was about 9, FAZ went from 62, to 52, to 9. Eventually both will be in the 4 or 5 range and eventually both will be in the 1 to 2 range. By then they will have to be reset.

FAZ and FAS are perhaps good tools to play for a day trade to do some scalping, but certainly should not be invested in for any period of time at all. This is obvious to the experienced ultra ETF trader. But I want to reiterate it here with these examples.

FAS and FAZ are best played via puts or playing them short. The decay is then on your side.

SKF also has decay but not to the level of FAS and FAZ. Even so, all of the financial ultra ETF's should be avoided not only because of the decay, but because financials are so unpredictable. There are some bad banks out there. You are much better off playing those individually.

Full Tilt

With the market showing irrational exuberance, it can drive the bears nuts, causing them to make moves they would normally not make like selling out of all positions, doubling up, or even buying out of the money puts the day before OPEX.

In poker, we call this Full Tilt. And tilt is exactly what is happening to this market. The media is playing along by spinning any bad news into good news. 610K new job losses is suddenly a good thing. Lower retail numbers is good. Bankrupt REITs are good. It's all good.

Well, based on having some free cash and based on a little tilt action myself, and based on some TA that says this market needs a solid correction near 870, I am throwing some cash into the short side once again via SDS. SDS does not appear to have the same decay as other ultra short ETFs and there is certainly more downside risk in the market than upside potential from here.

So, call it Full Tilt if you want, but this poker player is playing the odds and entering the first new short position (other than put options) in a month.

As a disclosure, I currently hold SRS, SDS, EEM, GLL and TBT. I also have some June and May puts on VMW, GOOG.

I know this market has the shorts scared, but now is the time to start jumping in as a bear. I think this cycle is about over and a new bear cycle begins very soon if not tomorrow.

REITs are Cyborgs

REITs are indestructible animals in the current market. They go up on bad news, no matter how bad the news is. Stock dilution? Price goes up. Bankruptcies? Price goes up. Higher defaults? Price goes up. Asset values plummeting? Price goes up.

The result is shocked and frustrated traders who know CRE is a mess and there is no bailout, nor is the a reason for a bailout. REITs just have to make an announcement. Any announcement. No matter how good or bad and the stock price will go up.

GGP files for bankruptcy today. More REITs are likely to follow but the result is, REIT prices continue to clime. There are no fundamentals behind this rise. They have almost all diluted their shares by 20-30% during Q1. Revenues are going down each month and debt maturity is coming up fast. Yet the euphoria on REIT stock is staggering.

This is how the market works. The market makers can control a particular sector quite easily and insure the maximum pain. The reason this is happening is the high percentage of short interest in REITs. It makes the market makers jobs quite easy. It is much easier for them to move a price up in order to hit a stop price on a short covering than to move down hoping to hit a limit price on a buy.

Until shorts are flushed out to a level that evens the playing field. REITs will continue to go up and SRS will continue to go down. It will create an unbelievable opportunity once this happens, but obvious as of April 16th, the MM's are having too easy of a time squeezing the shorts.

Home Builders Declare Bottom?

Listening to the radio on the way home tonight, I heard there was some great news from home builders coming up. Waiting through the commercial break, I was dying to hear what the good news could possibly be. Another merger? New data? A bailout?

Then, after the break the reporter said that the home builders think this is a bottom because... They are seeing more traffic of viewers coming to see their model homes. They admit they are not signing any contracts, but they are getting more traffic. Wow! Great news! Lots of people looking at the houses they will be buying in 6 months at an additional 25% discount from current prices!

That is the world we live in. No matter how bad real estate is, any news can be spun as positive news. Its the trend of the market and the best thing to do is to play along with the game, but be prepared when it all collapses.

I was fortunate yesterday to get into SPG puts and sold at the end of the day. Today SPG spiked based on no news at all other than there may be some REIT takeovers. So I bought puts in SPG right at the close. If that is how they want to play the game, suit me up because I want in.

Banks are the same way. You have to be nimble and make quick moves. BAC options were very good to me and while I did not time my exit perfectly, I made out very well. Still holding the May options all on house money.

Tomorrow it is all about JPM earnings. If they knock it out, we gap up then fade back. If they miss, banks may have a rough day. Too risky to play either side other than a straddle or butterfly.

The VIX is at its lowest levels since September and showing no signs of reversing. I can't recommend making a big short position until it crosses the 20 dma. It has been below the 20 dma for 25 of the last 26 trading days. The last time it did this was from Dec 3rd to Jan 9th. I can't see we will see a reversal like we did in Jan and Feb but the VIX is not likely to keep up this trend much longer. The 20 dma is now a little over 41, its lowest level since September.

So, JPM will have a big say so on where the market goes from here. If they blow out, the market will go up but I don't believe it will go up much higher from here. Maybe 870. If JPM misses, we will see 815. I have to believe JPM has good earnings based on new accounting rules so you have to lean to the long side.

I am actually going to likely watch tomorrow. I got into EEM, GLL and also more TBT today. All pretty safe bets with little downside risk. Depending on what happens with the market tomorrow, I may play options on GOOG. It will be a pure gamble with earnings being reported the day before OPEX. Better than Vegas baby.

No One Cares

The banks are flashing some remarkable earnings reports and filling the media with optimism. Yet where's the rally? Well, they already rallied and all the good news appears to be priced in. That, and the fact no one believes the earnings reports. Skepticism reigns. Everyone knows the books are cooked making the earnings reports meaningless. JPM, C, BAC can all report blow out earnings, but no one cares. They are assumed to have blowout earnings based on new M2M accounting rules.

And thus the problem. There is no transparency. And the market hates that. Banks will likely continue their slide. And if, for some reason, either one of the 3 fail to meet expectations, it could be a long and swift slide.

Loading up on BAC puts today was very rewarding. I split it up between April 11's and May 10's and 9's. All did extremely well today. The smart trader in me said to sell at the end of the day, but I have to believe BAC is headed under 9 this week so I will hold the April's probably until end of day tomorrow. I will hold the May's a bit longer. I will be playing with house money by then.

SPG was a great play today too. I did exit the April 40's at the end of the day with a very nice double up. I thank Erik for turning me onto that.

Tomorrow I think banks continue their slide. Again BAC and JPM are not going to get hit by a short squeeze due to the low outstanding short positions. C, on the other hand has a heavy short percentage and we saw what happened today. A short squeeze on C.

I think C will tail off going into earnings but I am not going to short or buy puts on it since there just is not enough room.

It looks like GOOG may also be overbought at these levels. They will have to blow out earnings to just maintain where they are at. Mediocre or just good earnings will result in a 30 pt slide, just like what happened to INTC.

Obviously blow out earnings are not causing stocks to move up. It is a sure sign of an overbought market. Good news is meaningless, meaning bad news rules again. We should be headed to 800 if not lower in the next week or two.

I would stay away from health care and energy right now. they will probably not be effected by earnings and they are driven by future government policies. GLL is probably a good play right now as inflation is many months away.

I am also going to get my feet wet in EEM tomorrow. I think it is a good safe long term investment which won't make me rich, but it will allow me to sleep at night and get some decent gains on trades. Sell on any 15% gains and rebuy at lower levels. It will play out just like TBT. Good safe medium term plays to buy on dips, sell on small spikes.

And forget the VIX this week. OPEX can really screw around with it. It can go down on poor market days and up and market up days. And if you own any options on the VIX, remember VIX options expire on Wednesday of OPEX week, not Friday.

Trade on!

Will Retail Create Reality?

The March Retail numbers are out. And not good. Not only not good, but really bad. Analysts expected continued improvements in retail to build off of February partly due to tax refunds being at an all time high. They were wrong. 3% gain was the target number. The numbers were a 1.1% loss. That is quite a miss for an index like that.

Now, here is the kicker. Listening to the radio this morning, there was a stock analysts from UBS who said, "Perhaps the unemployment numbers are having a bigger effect than we realize". HELLO?????? REALLY??????? Shocker. Not a shocker that unemployment is having an effect. A shocker that a professional stock analyst suddenly realized that high unemployment is bad for the economy.

During this rally, you have heard the perma-optimistic media claiming that unemployment is a trailing indicator, not a leading one. That unemployment is the last thing that recovers.

I have been telling you all for awhile now that unemployment is key. Until unemployment slows down and starts going down, retail numbers will continue to go down. Real estate will continue to go down and foreclosures will continue to go up. You have to fix unemployment. Yet the professionals have been shrugging off unemployment as an important data point since credit lines are showing signs of thawing and the bank executives will all now get their huge fat bonuses again.

That's what this is all about, right? I mean, we have to give the banks trillions so they can give out billions in bonuses. Who cares about unemployment, or real estate? Well, main street cares. Wall Street doesn't give a damn. And neither does your government.

Deal with it folks. You are on the bottom of the food chain.

The retail numbers along with unemployment have got to start weighing in on the market. I know the banks are showing big earnings, but I am going to play BAC and JPM April and May puts today. Why? Because the odds are in my favor. Recent runups already price in perfect earnings. Less than 0% of shares are shorted meaning no short squeeze.

I am also going to finally take Erik's advice and play SPG puts. I still hold and I am strong on SRS but SPG has run its coarse and is primed for a slide.

When Should Shorts Dive In?

Make no mistake. This is a bear market and we are in a bear market rally. A good one, but it is a bear market rally. For this I am 100% confident. It is mostly created and propped up by changes in M2M, the fed generating low interest rates which creates a mass hysteria for refi's and the promise and hope that toxic assets will be moved off of the books of the larger banks.

Toxic assets are the key. First, they are being hidden by changes in M2M accounting rules. Fine, hide them. It gives the illusion that banks are solvent. Then there is PPIP, which the banks are not interested in and many investment firms have their doubts about only because gov't is much too involved in the process. It gives hope that the *currently* identified toxic assets can be washed away, magically, by moving them to private investment firms and then resold for profit and no longer a toxic asset.

I stress *currently* because the number of toxic assets is ever increasing each month. As unemployment continues to rise, businesses go out of business at a high rate and commercial real estate along with residential real estate continue to fall, the default number on loans and credit card bills will continue to rise, thus increasing the toxic assets on the banks books.

The Fed and the Treasury have been shooting at a target that they would like to believe is stationary. It is far from stationary. This is a moving target and thus, more money, more programs, more nationalization of the banks will need to happen over the next 2 quarters.

But, the bear market rally continues based on short sightedness by investors. Fine, let it rally. But when do bears jump back in? That is a very difficult question to answer. You don't want to fight the fed in the middle of the battle. But you also don't want to miss the next big leg down.

So you have to have a foot in the water. You should have some short positions, but not over extended. As a bear, I like to have short positions hedged by long positions. But in this market, it may be more prudent to have long positions hedged by short positions. Or even better, hedge both ways with no real stake in the market. Or, have mostly cash right now with some short positions and be ready to build on those as the market goes higher.

Well, what the hell does that mean? I gave a lot of options. The key is, if you have short positions that are not over extended, I think you hold those through the storm. As long as you can stomach some more paper losses potentially. If you have no short positions and you are long, you better be hedged short. And if you have no dogs in this race right now, it is not a bad place to be but you should consider some short positions for a longer term trade (30-60 days).

I still think SRS is a great buy right now even if it does go down further from here. SDS has to be a good play too for the 30-60 day trade, if not sooner. Having a little bit of short positions in financials is not a bad idea but I would be underweight on the financial shorts right now until this week is over to let some dust settle and as more analysts realize how much these books are cooked.

Anyways, don't get over extended right now but don't miss out on the next big leg down in the market.

Shortable Stocks

I think the following may be potentially good shorts this week.

JPM
BAC

Both have incredibly low levels of shorted shares (less than 1%) and with their current levels pricing in very good results, the risk level is low of a short squeeze of any kind. Comparing to water, the path of least resistance for both are down this week.

The VIX is due for a bounce off. The VIX and its PCR data are converging which is a sign of over optimism in the market.

Three On One Isn't Fair

For bears, this is a tough market to navigate. They know the economy is worse off than the media is portraying. They know earnings by banks are cooked. They know the government spending is going to bite us in the long run.

But the bulls, via the media, have created optimism. Optimism, when spread, is a force to be reckoned with and should not be taken lightly.

I believe a bubble is forming due to this false optimism based on government changing the rules in the middle of the game. The Fed, under Bernanke, are doing all they can and they should be commended. It comes with a lot of risk and it is very uncertain what it will do in the long run. In the short term though, it creates a facade of stability.

The Treasury is also doing all they can but at the cost of the tax payer in so many ways. It if succeeds, the tax payer will forgive and forget. If it fails, the backlash will be tremendous.

The bears are fighting 3 battles at once. The Fed, the Treasury and the tape. That is very difficult to win especially for financials. You really have to let this trend run its course in the financials. Many of the charts on the banks have the 20 day MA crossing the 50 day MA. That is a bullish indicator but does not tell you how long it will last. It is better to wait for the 20 and 50 day MA's converge a bit before trying to short financials again.

But earnings will dictate the market for these next two weeks. Remember, sentiment is positive so good earnings will cause big moves up, mediocre earnings will cause up movement, and negative news may be ignored unless it is really bad.

With the markets recent run, I don't see any need to make a stand in either direction right now. Especially in financials. Right now, cash is king. Betting heavy in one direction or the other is just gambling. We have to wait to see what the banks show this week. My feeling is at least 2 of the 3 major banks will show problems. WFC pre-announced because they had good earnings. If the others had the same, why didn't they pre-announce. But I can't bet on it.

AAI will have news this week but it will not be as major as I was expecting. I will wait to see how the market reacts before making a move or not.