Friday, June 5, 2009

SRS vs. Long Term Rates

I wanted to overlay long term interest rates with SRS. You can see that SRS tends to react to interest rates when interest rates make a significant move. June shows a big spike in rates. Will SRS follow?

Lets Talk SRS

I have not really discussed SRS much since technicals really are not giving us any indication that it has life. But, I think now is the time to start putting a bit into the long term portfolio, despite the so-called decay syndrome.

It may not do much for the next month or two or three, but there is a big red flag out there right now that may be a leading indicator that REITs are headed for troubled waters.

Interest rates. Interest rates are rising quickly and to the point that refinancing and getting loans in general are less attractive. REITs had their day with the fed's move of purchasing treasuries and driving down long term rates to a very attractive and affordable 4.50% range. Now they are well above 5.50% and pushing 5.75%.

I believe the drop in interest rates to 4.50% gave REITs and commercial real estate some hope. But as I always mention, every action has an equal and opposite reaction and with rates now back to more reasonable levels, the reaction may be that REITs really struggle in the months to come.

That said, the gov't is standing by to try to help bailout CRE if necessary. So far it has not been necessary because of low interest rates. And they can't ask congress for another trillion dollars to bail them out. So they have to wait to really insure banks are stable before offering help in CRE. Therefore, before jumping "all-in" on SRS, always keep that in mind.

My suggestion is, wait until SRS crosses its 20 day moving average before jumping in much. Whether you hit the bottom at 17 or at 20 really won't matter much if SRS gets back to more historical levels of 75-120. Notice the chart above. Decay really is not as big of a factor with SRS. It is being impacted dramatically by low Q1 interest rates which are now gone. I suspect we will re-enter the 75-120 range by end of Q3 as 5.75% interest rates take effect.

SRS is not dead, it is just hibernating and interest rates may be the ticket for its return. The CRE market is totally irrational now but it has been hiding behind the low interest rates as its safe haven. It can't do that any longer and thus cash flows will be shrinking, and quickly once the **it hits the fan.

Thursday, June 4, 2009

A VIX Chart Of Interest

As I have mentioned many times, I am not a chartists but I do watch charts closely. I found this interesting and hacked it up to show what I am seeing.

If the VIX just completed a 5 wave move down, then resistance at 28.80 will hold and the upper trend line will be broken soon, followed by the 20 dma. I would be surprised if the 28.80 resistance is broken. If it is, the SPX will see 1000. Otherwise, we may be in for a correction that so many have been looking for.

The VIX Pattern Continues... Or Does It?

As expected, the VIX continued its pattern of bouncing off of the 20 dma as the market has rebounded each and every time an attempt at the VIX 20 dma has happened since March 9th. Typically, after the VIX touches the 20 dma, within a few days the VIX hits another new 3 month low.

I don't expect that trend to stop here. I think the VIX is primed to dip below the 28.80 mark perhaps as early as tomorrow since the VIX is typically week on Fridays especially in a market rally.

But, if the VIX can hold 28.80 and make another run at the 20 dma, I think it will finally cross it and perhaps signal the end of the 3 month bear market rally. But until that happens, I will not make a play anticipating it.

I continue to stay heavy on energy, china and gold. Also going to run with TBT as a long term play. I really really really want to short something but until the VIX gives a signal or until the SPX gives a signal with a convergence of its 20 and 50 dma, I will continue to stay out of general U.S. company equities.

Wednesday, June 3, 2009

Dead Cats and Such

If you are thinking this is the beginning of a big decline, guess again. This is not it. Today's action was clearly just a normal pull back (reverse dead cat bounce) to an otherwise upward market. The VIX continues to bounce off of the continuing declining 20 dma just as it did today. The VIX at least touched it but bounced right off telling us the market is still not ready for a significant correction.

The SPX also is technically not showing signs it is totally exhausted. So you can be locked and loaded for bear here. You have to let the market continue its strength until the technicals clearly tell us a sell off is here
I hope you all were able to scalp off 10% on SKF or SRS today from Mondays prices where I mentioned a 10% gain was there for you. I took mine as soon as the VIX bounced off the 20dma and knew it was time to take profits.

UNG slide today which presented an interesting opportunity on July and Oct calls. I like the July 15's and the Oct 20's. I think UNG is going to be stellar this summer lets see.

Beware the VIX

The VIX is once again kissing the 20 dma. Every time it has done this in the current 3 month rally, it has fallen back. Nothing feels different right now than it has for 3 months so you have to expect the same will happen. Keep an eye on 31.60 for the VIX, if we don't pass this by end of day, you have to assume the VIX will bounce back down. If we do pass this above 32, perhaps this is the signal.

And isn't it interesting to see the terrible numbers on mortgages and the media spins it as though, we really should have known this was coming so it should not be a surprise. Well, guess what, it is a surprise and it will be damaging to banks. Refi's are way down but so are approved mortgages on houses. Thus, we will see continued declines in home prices, more foreclosures and less new homes being built.

Green shoot my ass.

The Pinnacle of Technicals

I am not a chartist in that I don't create charts and I don't have any fancy subscriptions to create charts. But I do pay very close attention to charts.

What I am seeing for so many indices, stocks, ETFs is that they appear to be on the verge of a technical reversal. The SPX has the 20 and 50 day MA's converging and the SPX itself, on any down move, will likely fall below the 20 dma and soon after the 50 dma. It may not happen in the next week or so, but it is close.

Look at SRS and SKF. All are tracking with the 20 dma and on any moves up, will cross and likely cause the 20 dma's to cross the 50 dma's.

Look at UNG. It is my current favorite because it has already crossed critical technical indicators. The price has crossed both the 20 and 50 dma's, and the 20 dma has crossed the 50 dma.

The VIX is just tracking below the 20 dma with the 50 not too far away. A cross the of the 20dma will be followed by the cross of the 50, yada yada yada...

And my other favorite is AXP. It is trying hard to break through its 20 dma and soon after the 50 dma, along with the same crossing of the 20 and 60 dma's.

Is this coincidence? Or are all of these on the verge of a reversal? Don't jump too soon because this trend could continue in a consolidation phase for awhile longer before the technicals show a clear breakout.

Tuesday, June 2, 2009

Simon Property Group (SPG) : The next WorldCom?

This may be a conspiracy theory but the more I read about Simon Property Group, the more things do not add up. As a REIT, they base their earnings on Funds From Operations (FFO) such as rental income, royalties, sale of properties, etc., rather than earnings per share.

As you look at SPG's earnings reports and history, it is quite amazing how their FFO grows rather dramatically each quarter despite other REIT's struggling to stay in business. SPG's business model is not much different. They own similar properties, particularly malls and super-malls. They are exposed to the same toxic assets as the others. They have similar short and long term debt issues as the others.

Yet, their FFO grows while others fall. General Growth Properties (GGP) went bankrupt in April as it was obvious they could not keep up with upcoming debt maturities. there were no lines of credit available to them to refinance their debt. There was not enough equity to sell more shares to generate capital to pay off the debt.

For SPG, they were able to tap into more credit lines and also offer a secondary offering on the market due to the stock price so high based on FFO performance.

But is SPG really performing? Are they really generating higher rental income in the worst recession we have seen in our lifetime? Are they somehow able to reduce operation costs that much to offset lower rental income? Are their commercial properties really not losing value?

This goes against not only what experts are saying about commercial real estate, but also against the actions of SPG itself.
  • They issued a secondary offering which diluted their shares by close to 20% in order to raise enough cash to pay off some due short term debt.
  • They reduced their dividends from .90 to .60. But not only that, it is also no longer a cash dividend but a dividend in mostly stock but a little bit of cash, further diluting their shares by adding to the float.
  • Yet despite these actions, they claim to have record FFO and earnings.

Why does a company have to dilute stock if they have record growth in earnings? It is because their debt far outweighs their capital. SPG will have to have blow out earnings for many quarters to come in order to manage the growing debt and reduced values of properties. To do this, they have to show they are reducing costs and growing revenues from rents. And you can't tell me they are increasing rent growth.

This smells very much like a cooking of the books. I suspect SPG, if they continue to show 10% growth in FFO each quarter, has to be a red flag to the SEC. I am not long or short SPG although I do trade SRS once in awhile but I think SPG is a stock to keep your eye on for a possible WorldCom type collapse in not so distant future.

The other issue with SPG is by reducing the dividend and moving it mostly to stock, it may create a bubble for SPG. As the stock goes up more investors may be diving in buying SPG wanting the stock dividend. This may be what we are seeing today. At the same time, insiders will be selling their shares to the company perhaps to payout the stock dividends. But in months to come, if SPG even falls 10% or more, it can create a spiral effect as investors heavy in SPG may opt out since their stock dividends are getting smaller and more risky. A stock like this will fall very quickly without regard to resistance levels.

SRS and SKF a Good Short Term Play?

First, the VIX continues its trend of teasing the 20 dma and then bouncing off. Today it opens less than 2 pts from the 20 dma and would seem primed to cross it as the market is clearly overbought. But the bulls seem to be clearly in control or bears just don't have it in them. You have to continue to play that trend and I think the VIX will likely move up close to a point today or tomorrow to once again sniff the 20 dma and then drop off once again.

So, from that, I think SRS and SKF could be good short term 10% plays today/tomorrow. But you can't play them longer term than that until the VIX does cross the 20 dma (yeah you are sick of me saying that but its just the way it is).

I took profits yesterday on UNG but plan a re-entry today. UNG may be technically breaking out and you really need to look at this ETF. It broke the 20 dma yesterday and the 20 dma broke the 50 dma late last week. Two very bullish indicators.

China and emerging markets continue to roll and if you missed it, you didn't miss it. These are good longer term plays that you have to have somewhere in your long term portfolio. The hell with the U.S. equities. They will underperform emerging markets and especially China.

I think Gold is due for a pullback here but not a big one. Perhaps fill a gap to 940 but for those playing GLL expecting a collapse in Gold, you are swimming upstream.

Bad data will come out today in the form of housing data and auto data. The question isn't whether the data is bad. The question is, how bad and how will the media spin it and how will market react. I will buy SRS at the open and watch for SRS to spike after 10am and if it does, it would be a good selling point or a point to hedge with puts or covered calls.

Monday, June 1, 2009

Why Not to Read Too Much Into VIX on Big Market Up Day

Today the market is making a pretty significant move, yet the VIX is up. Many will read that as a sign the move is a fake move and thus, it is time to move heavy into shorting stocks.

Don't read too much into the VIX moving up on a Monday when the market is moving up. The VIX is just showing that there is instability in the market making such a quick move and will probably have some sort of correction soon. The problem is, that correction could be small.

I do agree that longs should sell into this strength and the VIX is indicating this. But it does not mean it is time to short stocks or take a full bear stance. As I have been pounding and pounding, DO NOT take a big short stance until the VIX crosses the 20 dma. I can't stress this enough and so many people have been going all in on the short side expecting the market has topped. It is fine to play some on the short side and I have been all along but until the VIX gives a clear indicator that the sentiment has changed, you just can't over extend.

2 key indicators that the market is going to take a lot of the gains back...

1. The VIX passes the 20 dma for 2 days straight
2. the SPX 20 dma passes the 50 dma on the negative side.

Those two are sure TA signs that the market sentiment has changed. Until then, you have to sell into rallies and buy on dips.

For me, I am selling the small long positions I have as I write and also buying SDS looking for a 10% gain and then exit.

Hitting the Ceiling?

Here we are. The day we knew would come eventually and the day many have said the S&P was magnetized to. We will hit the 200 day MA today on the S&P. Theoretically, and the odds are that it will bounce off this number at least the first time since a 200 day MA is a strong resistance especially when it has been below the 200 dma for so long.

But the VIX remains solidly below it's 20 dma which would indicate the market is still not ready for a real correction.

So, we stay in a trading market where longs have to take profits on moves up and shorts have to take profits on moves down and I will continue to do this until the VIX breaks its 20 dma.

I have really moved mostly out of the U.S. equities and focused on energy, nat. gas, gold, china, and emerging markets. I exited my TBT positions early last week and looking to re-enter those this week at 52 or even lower.

Financials continue to be way to volatile and a completely unknown commodity. Some experts say the banks will have record earnings, others say the toxic assets (that no one is talking about) will eat them from within.

Long term, the market will have a huge correction and I still believe it will be this summer, starting in June. Unless you believe markets go straight up with unemployment at record levels, you can't bet on the markets continuing their march.