Friday, May 8, 2009

The Clear Signal To Go Long

No, not right now. I have been thinking of when is the clear signal to go long. It certainly is not now, even though we may go higher from hear.

The clear signal is if the S&P goes down to the 680 level within the next few months, that is the signal to go long and not worry about it. I want to see the double bottom so many bear markets end with. I don't see this bear market ending with a single bottom and then a V recovery. Show me a W and I will be the bullest of the bulls. The tech bubble bottomed with a double bottom as did the bear market of the 80's. Who are we to say this one won't end with a double bottom?

Until then, I will play this market very tentatively short term. I want to ride the slide down for sure but until the VIX shows life and until the SPX's 20 day MA starts to move toward the 50 day MA, I will stay cautious. The signal to go more aggressively short is when the 20 and 50 day MA's start to converge. This may not happen until the 200 MA is touched or sniffed.

Thursday, May 7, 2009

Dillution is Good

Don't ask me why, but many analysts will claim dilution is good on the banks because it raises capital and thus strengthens the bank. Therefore, you should be investing in these troubled banks now. You just go right ahead. Party on, Garth!

I just watched Lou Dobbs say, "New jobless claims dropped dramatically to 600,000 down 34,000 from the previous month, signaling the end of the recession." Any idea how much he was paid by the gov't to say that? There is no way a reporter like Lou Dobbs says something like that from his own mouth without either a gun to his head or serious money under the table.

Do any of these guys have any idea the impact of 600,000 more unemployed workers in this economy? It's like the 34,000 fewer unemployed have a bigger impact than the 600,000 who are unemployed. Insane.

The banks all went up after hours, no matter how bad of shape they are in. AXP had the highest debt exposure. BAC has the highest potential losses. But what is really amazing is, all the banks are allowed to move on. None are insolvent!

OK, right. They are solvent only because their toxic assets are not being accounted for correctly. If they were, many banks would be insolvent and there would need to be mergers and acquisitions. But that would create banks bigger than too big to fail. And that can't happen. The reason all banks had to pass the test was to avoid creating even bigger banks. So this is no surprise.

The banks are a mess. A former Fed Chairman said on CNBC today that he has no idea why anyone would be investing in banks after this. Someone, who finally knows what they are talking about.

In the mean time, banks stock prices will probably go higher for no other reason than adrenaline by bulls trying to hold onto the bull market. That's fine. There will be plenty of opportunity.

The unemployment number doesn't matter tomorrow. Whether it is 450K, 600K or 650K it will be spun such that it is a good number even though any 6 digit number is very very bad.

I Was Starting To Feel Good About the Economy

I really was starting to feel good about the economy until I saw the NFP job losses today. I actually believed the ADP numbers posted yesterday of 451K was a sign that unemployment was going to settle down faster than I thought. Instead, today the number of non-farm payroll filed unemployment insurance claims remains over 600K for the month. Yes it is dropping, but at such a a slow pace that it is insignificant.

At the pace we are on, if the NFP number drops, lets say, 10K each week for the next year, we will have unemployment at or near 12%. 12%!!!! Stick that into your stress test numbers and smoke it. What happens to our financials, to our retail, to house pricing if unemployment hits 12%?

Look at the chart below. There is no give in the unemployment numbers. This chart alone should have you scared to death.

OK, if that doesn't have you scared to death. How about the following chart which takes the current data and extrapolates out with new NFP numbers dropping by 40K per month for the next 12 months. And that is conservative. Economists say starting this month, the number needs to go down 30K per month.

What this shows is that by September of 2009, we will hit the 10.5% unemployment number economists are predicting to be the peak. And this is the number the gov't used for stress tests on banks.
What happens when, if we go to 11.8%? What does that do to the banks? Do they need more capital? If so, where does that come from?
I don't have answers to these questions but I find these charts interesting and even more interesting how the media portrays the jobs number as positive.

The Cause of the Run will Cause the Pullback

First, I gotta point out a headline that just shocked me today...

"New jobless claims unexpectedly plunge to 601,000"

Yeah, thats great. Only 600K more people out of work. Great freaking news!!! This after ADP reported *only 451K lost their jobs. The runup in the market yesterday was fueled by the ADP numbers which proved once again to be inaccurate. Even so, with 150K more than the ADP number, 600K in job losses is seen as great news. We are all doomed.

The main reason for the recent run is lower earnings estimates, higher unemployment estimates, lower expectations in general. In fact, expectations were so grim, we would truly need to be in a near depression state not to meet or exceed them. Thus a jobless rate of 600K new unemployed workers is seen as positive and a sign of the bottom. Go figure. Unemployment insurance claims is now at 9% not including those who no longer unqualified for unemployment insurance and those working part time or low paying jobs while they look for other work. So we are approaching a 18% rate overall of unemployment.

But again, estimates were so dire, that there was no where to go but up. So, does the market just march on? It does if estimates stay so grim that they are just too easy to beat. If estimates start to move up, I think that will create a catalyst for a market correction. If the estimate for unemployment insurance filers falls to 550K, for example, I think we are setup to miss. If earnings estimates for banks go more inline with what was done in Q1, I think most miss in Q2.

This would setup the fall that many are watching out for. But if estimates remain at rock bottom lows, the market can continue to run. Makes you wonder if the analysts doing the estimates run the market or if fundamentals of companies do.

Sticking My Neck Out

I don't know where the market is going, I don't know where financials are going. But I am going to stick my neck out and say BAC will close below $11 this week.

Bank it, book it, ship it. The technicals nor the fundamentals support its current level. Not to mention dilution. Someone is going to throw cold water on the face of the bull and wake it up with regard to BAC.

Wednesday, May 6, 2009

A Bullish Chart Worth Considering

OK, last post of the night.

I have been watching Sirius/XM for about 6 months now. I bought into it about 5 months ago on a speculative play. Percentage wise, it has been my biggest gainer. But I invested very little and never added to it.

One thing I have been waiting for is a convergence of the 20, 50 and 200 day ma's. Today, SIRI hit the 200 day ma and the 20 day ma is converging on the 200 day ma.

This appears to be a very bullish chart and a breakout is imminent. Lets see if we get confirmation in the next few days. I believe SIRI reports earnings on Thursday.

The End of Wave P2

Many people are contemplating this. When is the end of wave P2. As though this is predictable and something to plan for.

The truth is, no one knows. And is P2 even real? Even if it is, are we even in P2? I offer an alternative here.

First, so many people are assuming primary wave 1 ended in early march at 666 and that we are in primary wave 2. Who is to say when P1 even started? Many say P1 started in Oct 2007 and ended in March 2009. A year and a half. So why do we think P2 will only last 3 months?

But again, is this P2? Was Oct 2007 thru March 2009 P1? By rights, a primary wave should end (it doesn't have to, but it should) in a double top or bottom. If that rule were strict and we used weekly charts, what if I said we are in the bottoming phase of P3? Not only are we not in P2 but we are in the downward bottoming of P3.

Take a look at the chart below. If EWT is moved out to years instead of months, perhaps this bear market started in August of 2000. P1 ended in a double bottom in October of 2002. P2 ended with a double top in October of 2007 and we are in the most destructive wave of all in P3 right now, but have not double bottomed.

Its a potential macro-level alternative primary wave count. I am not saying it is real but with wave theory, you really don't know what wave you are in until you are past the wave. You can't get 5 EW guys in a room and agree on all the primary, minor, secondary, mini waves.

More on B of A

I am still trying to figure out how B of A stock surged on the report they need $34 billion in equity capital, knowing this means at least 20% stock dilution if not 33%. I read a good blog on the reason for it based on gov't preferred shares being converted so shares had to be bought today to offset it, or something like that.


I found this article on business week which really says it all.

"BofA is poised to top the list of banks that need the most capital, at near $35 billion, because of its huge exposure to the consumer lending business, home mortgages, and credit cards, according to reports in The Wall Street Journal and elsewhere. The bank also has a portfolio of construction and commercial real estate loans that trumps those of JPMorgan Chase (JPM) and Citi. Still, despite the need for more capital, equity investors seemed to heave a sigh of relief on the eve of the announcement as the numbers appear below analysts' worst fears: New York bond shop CreditSights, for instance, had pegged the worst-case number for BofA at $39 billion. BofA's stock price closed up 17%, at 12.69. "

So Business Week claims the move up was due to the news being better than expected by $5B. Yeah, OK. Whatever.

Someday we will all look back at this and either laugh or say "what were we thinking?" Until then, BAC appears to be headed to its 200 day MA. I don't get it. Never will. I will stick with my pile of June puts and see where the chips fall.

Where Did All The Toxic Assets Go?

Has anyone stepped back and thought about all the toxic assets the banks have on their books and how they seem to have mysteriously and magically gone away?

They haven't. They are still there but no one is talking about them. PPIP is suppose to take care of them but that plan is failing miserably as there are not enough takers and no banks want to participate. If they did participate, they can prove to be insolvent.

Notice the local and regional banks going under. Do you know why? Toxic assets. Defaults on loans. Defaults on credit cards. All the things that caused the big banks to crash hard after Lehman.

Yet, suddenly, the banks are massively profitable and everyone is acting like there are no problems. The reason this is, is because we have lost visibility into the banks. Will the stress tests show us that visibility? Does the stress test take into account higher defaults, lower asset values, higher foreclosures?

The gov't did a great job of hiding reality with plan after plan after plan. M2M changes, uptick rules changes, PPIP, stress tests. They averted the focus from the real problem and it is working. Everyone has forgotten about it.

So when does it rear its ugly head again? It's hard to say. Probably when home sales numbers go down, or when consumer confidence goes down or when someone actually realizes that some of the regionals have to collapse. One regional bank collapsing will probably trigger reality again. Until that happens, you can't bet against financials. That said, you have to be semi-insane to bet on financials.

It's Like a Bad 1950's Horror Movie

You know the ones. Where everyone in the town become zombies or all become possessed, slowly but surely, and you don't know if your friends are one of them or not. Terrible movies but classic nonetheless.

That is what today feels like (along with the last 2 months) as news that B of A has to raise $34B in capital, meaning there tangible common equity is way too low if the economy goes to the lows it is expected to go.

B of A market cap is $70B. They are short $34B in capital. they are not insolvent but if asset values continue to fall, credit card and loan defaults rise, they are not far away from insolvency.

All of this and B of A is up sharply. Obviously investors have turned into zombies like in the old movies. They are not themselves but they are just drawn to buy BAC no matter how bad the news is. And more and more are popping up. Soon it will be you that turns into the zombie!

It all ends when the hero figures out what is happening and either destroys the entire town or finds the anecdote to cure everyone from this dreadful problem.

In the end, BAC will have to dilute their common shares by anywhere from 20-34%. That would tell us that their stock should be down, oh, 20%. but instead it is up 10% as the town zombies take over.

The Market Will Reverse When...

Everyone wants to know the answer. Wouldn't it be great to have a crystal ball just for a day and know exactly what the market is going to do. Easy money right? But, short of that, you are stuck using scientific wild-ass guesses based on what you read, hear and feel.

No one knows for sure where the market is going tomorrow, a month from now or a year from now. There are a lot of predictions and one person may get it right once in awhile but never consistently.

An excellent analyst will get it right 60% of the time. That's right. 60%. A good analyst may get it right 52% of the time. It may not seem like much but the difference between getting it right 60% and 52% of the time is huge. A normal person who is going alone and basing everything on their own beliefs may get it right 30% of the time. If you are reading this, you are likely in that category.

What's my point? My point is, the odds of you predicting where the market is going tomorrow or especially, hour to hour is very poor. And what the average person will do is play one side and put too much money on that side. No hedges, no protection. And since they get it wrong more than get it right, they slowly lose their money.

I don't advocate paying a professional to manage your money, although doing so may relieve a lot of stress and they are likely to get you better long term returns than you can do on your own. What I am suggesting is, you always always always have to be prepared to get it wrong. First, don't get over extended. Second, know what your short term and long term goals are. If you are buying AAPL, you are not buying it to sell it tomorrow on a 2 point gain. You have a long term plan. So don't buy it and sell it 3 days later because it is down 5 points.

If you are playing 2x and 3x ETFs, your goals should be much shorter and you have to be prepared to move quick and you HAVE TO, HAVE TO, HAVE TO, have a hedge unless you just like to gamble.

Third, always hedge your risky plays or set stops about 6% less than what you bought at if you are not comfortable. Speculative plays are small investments in risky plays so no need for a hedge. But if you are putting 20% of your money into a single 2x ETF, you better be playing some puts or covered calls. So many people loose so much money playing these etf's without a hedge. I have been guilty with SRS at times and most times I go without a hedge, I get burned.

OK, that was a bit of a rant, but something that was on my mind. Back to the title. When do we know the market will reverse. As I mentioned, no one really knows. Well, almost no one does. There are some people that know where it is going in the next hour or the next day. These people are the market makers. They decide what trades get executed, what bids and asks go by the board, and even will hold stock themselves and sell later in order to manipulate price movements.

You can't beat these guys day trading. You can have victories, but sooner or later, you will get beat. They know where the market is going. But, they will tell us some things based on market moves.

The market will reverse when there is enough volume on dips that will buy into any weakness causing the market to bounce off of any dips. When that happens and the market rewards these buyers consistently, it is time to destroy these buyers. Why do they do this? Simple.

The market maker, as mentioned before, may hold stock themselves and sell later. Or it may sell stock on loan and buy back later. So as markets pull back and buyers get in, they can sell stock to these buyers that are not actually there right now, but later in the day, buy that stock at a lower price as they drive down the price by manipulating bids and what orders get processed.

The market maker wants your money. They will get most peoples money because they will fall into the trap. I am guilty of falling into the trap in April of insisting the market must go down. I was shorting on moves up and the stocks just kept moving up so I then got stooped out. The market maker bought my short stock at $10 and sold it back to me at $12. There were so many shorts doing this it was easy money. Thus, a short squeeze.

The reason this happened was there were not enough buyers in the market to make the market move on its own. So they fed off of the shorts. When buyers hit the market in stride, then you will start to initially see dips being bought in earnest. I think we are starting to see that. And then shortly after, the MM's will make these buyers pay buy letting the market slide as they keep buying, stopping out, buying again, etc.

The VIX is down today and is a signal that the market is not ready to reverse. No need to stick your neck out. I have a play I put together that I am liking very much. I own a block of SKF but had covered calls on it for protection. As SKF went down, I bought the covered calls back for a 60% gain on the calls. I lost on the stock, but as soon as I buy the covered calls, I buy out of the money puts for a small amount. If SKF goes up, I sell more covered calls and sell the puts at a 50% loss at the most.

I know this is not going to make me rich but it is basically using SKF as a vehicle to scalp via the options market. I am not making or losing anything on the stock but using it as a tool to trade and profit on options. So the SKF shares are actually a hedge against my options even though the investment is much higher.

OK, enough typing for one night. Watch out for a 890 head fake this week. If it breaks 890, I will be more bearish. Until then, I will actually buy on gaps down. With stops, of course.

Monday, May 4, 2009

Change of Heart

After today's avoidance of disaster via key hedges, I am probably not going to re-enter new short positions tomorrow. I will stick with my current holdings but will sell off the calls and puts that did so well for me today as hedges, then just sit tight with what I have in SRS and SDS and EEM. I want to see if this momentum can cause a capitulation and run every short of of town.

Or, I want to see if we get confirmation that a reversal is in order. I will take today's action as a blessing and play even safer than I have been. April was a brutal month for me and even though I had hedges, they were not near what I needed to cover my losses. I am sure many of you are the same.

There is potential of a capitulative move up to the 950 area and I am not getting in the way. If the market gets to 930, I will be jumping in with short positions. But until then, I am staying somewhat neutral. The key right now is shorts are getting fearful which is a sign the end of the run is near. But I want to see the fear of God in the bears and then it is a sign that the run is truly over.

I expect a head fake in the next couple of days though. Perhaps a dip down to 890 which could suck some bears in. Max pain is what the MM's are looking for. I am not going to be part of that pain.

How a Bear Makes Money On a Day Like Today

It was unintentional and not what I wanted to happen but it goes to show that a good hedge position and strategic stops can result in a bear making money on a day like today.

First, while I am short BAC and AXP, I also have May calls on both. Both of my short positions got stopped out early even though I thought they were safe. And the calls did very well. My covered calls on SDS and on SRS both helped tremendously to cushion the blow. But they key hit were the puts on SKF. Not a big position, but a position just in case a day like today happens and a position that paid off. EEM was also a good hit as was calls on AAI that I played at the open as a speculative play.

I plan on reentering short positions sometime tomorrow. This market is crazy and I will not be over extended. You have to have hedges set up in case of a big move the wrong way.

That all being said, this market did what I thought it would not do. It went up on a Monday. I am not sure when the last time it did that. The VIX stayed pretty healthy though and Gold went up. Also, volume was low again on the market. I missed it today for sure. I got lucky in that all my hedges did very well and eeked out a very slight gain for the day. But it was bloody and if someone told me financials would do what they did, and if someone told me BAC and AXP would make jumps like they did, I would have told that person they are insane. I was wrong.

Where have the bears gone? They have gone where the MM's want them to go. Far away, taking losses. All the while, the MM's suck in the longs in a setup to crush them.

Be careful. Do not jump all in if the market pulls back to 890. A reversal does not happen all of the sudden and right away. The MM's will play you until your last penny is gone if you try to play against them. Expect the unexpected.

We are at a key support level. If it breaks, we go higher, perhaps to 930. If it fails, we probably see 890 again but not sure what happens from there.

I will post later on some potential good plays for tomorrow.


New home sales up 3.2%. Media is pumping it as great news and that recession is close to over.

Let them pump it. They have no idea what is about to hit them. Unemployment continues to rise, these houses are selling and depressed prices, just lowering the avg house price. We have a looooooooooong way to go before the housing crisis is over. We are just in the beginning of it. Unemployment will destroy the housing market further.

This, my friends, is becoming a HUGE short opportunity. Don't fight it right now. Let them pump it up higher and higher. By June or July, reality will set in that this was all a mirage for the bulls. It may be painful for the bears at times but the bulls will get hurt much worse.

I do hope the market goes up to the 950 level as many are proclaiming. The higher it goes, the farther it will fall. A run like that may very well shake out bears and suck in bulls, just what the doctor ordered.

Sunday, May 3, 2009

The Analysis of a Failed Bank

As many of you already know if you follow me on the Yahoo message board, a good friend of mine who was an executive at Silverton Bank based in Atlanta, told me a bit about the bank failure and how the FDIC came in and took control with no warning.

This one hits home a little hard for me since he and his family are very close. My son grew up with his son, my wife plays tennis with his wife, his daughter baby sat my daughter, he was the one that got me into boating. I know how dedicated he was to making the bank as successful as possible.

To hear his voice in total defeat and in a state of shock was difficult for me. But I wanted to know how something like this could happen if banks are truly getting healthier as we have been hearing. This information could be considered inside information before the collapse but now that the collapse has happened, it is public knowledge.

His bank, like many others of the same size, just flat ran out of money. How does a bank run out of money? Basically, the losses out weigh the gains for so long that the amount of capital remaining is much lower than the paper losses on the books. For Silverton, they had some profitable divisions, much like B of A, JP Morgan, Wells Fargo, etc. These are the divisions that deal with everyday activities such as short term loans (less than a month), capital investments, and capital management (services). All were doing very well.

But the profits from these divisions, while at record levels, were far less than the paper losses with regard to defaulted loans and other bad assets. In fact, it isn't even close. I don't know the numbers but it sounds like the loan losses were so huge, the capitalization of the bank eroded very quickly. Basically, the bank become insolvent due to paper losses exceeding capitalization. The profitable divisions were helping the capitalization, but it was like using a garden hose to fill a lake which had a broken dame.

So the FDIC came in with suits, briefcases and weapons to take over the bank quickly, swiftly and with no doubt who was now in control. The FDIC agents work side by side with the bank workers to go through every account, go through every balance sheet, figure out how much liquid assets the bank has, transfer accounts to other banks, and all the bad loans end up with the FDIC for a total loss to the taxpayers of $1.3 billion.

The bankers in general did not see it coming. They knew they were in trouble. They tried to move the bad loans for months but there were no takers. They tried to get loans themselves to help with capitalization but there was no credit lines open. They were insolvent and the FDIC did what it had to do to protect the clients. They have to make the transition in 3 days so both the FDIC agents and the bankers work all weekend to move accounts and close up shop.

I want to make this clear, I know probably about 1% of what actually happened. So this is not gospel. But, this sure does sound, and feel like what the state is of many of the major banks. B of A, JP Morgan, Morgan Stanley, all reporting record earnings. But we don't know what is on their books. The Fed knows. The FDIC knows. And some day, we may know.

The FDIC can easily take over a small to medium sized bank. But taking over a major bank like B of A would be substantial and would take months, not a weekend. So the Fed and FDIC want to make sure these banks do not go under, even if they are insolvent. Bad assets need to move off of the books from these banks as soon as possible to avoid collapse via a run on the banks. You can be assured that your money in the bank has been loaned out many times over. The FDIC will continue to insure it as long as they have money to insure it.

But how deep are the FDIC pockets? Can they continue to take on these bad loans and pay out billions each week on bank collapses?

I think we will be getting more clarity in the situation as the weeks and months unfold. Commercial real estate loans are unravelling. Talking with a commercial real estate officer in my neighborhood, he said what you will find out there is the really good real estate is bringing in money still. What is collapsing right now are the strip malls that are not in prime locations. They are losing money at an accelerated pace. This is causing renegotiation's on leases for restaurants, hotels, retail shops, malls. He said they are very busy but a lot of the work revolves around renegotiating leases and moving retail shops out of poor locations and into better locations.

Well, my fingers are tired and I will close on my disclosure. I am short AXP, BAC and I feel good about both. I am looking at attacking REITs with puts but I do continue to hold SRS and feel decent about this but the market seems to be manipulated. I do believe we may have some run up on the market this week perhaps but I am not over extended so I can take the punishment so I also own SDS with covered calls.

If the SPX gets under 850, I will add to my short positions. Otherwise, I will hold and wait for the MM's to shake out more shorts before the big leg down starts. Good luck, and this is no position to get over extended on the short or long side.


I wanted to point out a few points about Silverton's collapse

1. They felt like they were capitalized enough. The FDIC shutdown was a surprise.
2. They were having record earnings in others parts of the business. Loans is what dragged them down.
3. They were not able to move any of the loans and were not able to raise capital on their own.

Does this sound similar to any other banks you know of?