31 December 2008

Put/Call Ratio Suggests Going Short

Yesterday's interweb surf-o-rama led me to the comments section of Barry Ritholtz' blog post on $1.17 gasoline in Wyoming. (If you don't find cheap gas in the middle of nowhere a compelling topic, then why are you reading, of all things, a post on the Put/Call ratio?) The following unrelated comment caught my eye:

Steve Barry Says:
December 30th, 2008 at 4:24 pm

With 10 day put call MA at 2 year lows…21 day at 2 year lows…and 10 day nicely below the 21 day (indicating it likely will rise in the short-term) you probably have a great short opportunity now. The other times in the last 2 years put/call was close to this were Oct 07 and May 08 (check what the market did those times). Right after the new year, we'll get tons of earnings warnings.

Before I follow Steve Barry's suggestion to check the market history in Oct07 and May08, I should figure out what is the Put/Call Ratio and why is it suggesting to go short?

Forget Investopedia's simplistic definition.

Here's a better one from Stockcharts.com:

Put/Call Ratio: Based on CBOE statistics, the Put/Call Ratio equals the total number of puts divided by the total number of calls. When more puts are traded than calls, the ratio will exceed 1. As an indicator, the Put/Call Ratio is used to measure market sentiment. When the ratio gets too low, it indicates that call volume is high relative to put volume and the market may be overly bullish or complacent. When the ratio gets too high, it indicates that put volume is high relative to call volume and the market may be overly bearish or in panic. StockCharts.com charts the Put/Call ratio under the symbol $CPC

And here's an annotated chart of the Put/Call ratio:

According to this $CPC chart and others I've created with additional layers of visually-cluttered data that I'm keeping off of the blog, the 10DMA is 0.83, the 20DMA is 0.89, and the 50DMA is 0.97.

Back-checking the charts, the 10DMA fell at or below 0.90. on 13May08 and broke back above 0.90 on 21May08. On 5Oct07, the 10DMA fell below 0.90, hitting ~0.83 on 16Oct07 before returning above 0.90 on 22Oct07.

Before this period, the 10DMA falling below 0.90 seems quite common. It happened during long stretches of 2006, and several times throughout 2007.

My major concern with cherry-picking/data-mining the two most recent drops in the put/call ratio, and matching them to declines in the market is: correlation without causation.

I looked at the 250DMA for the put/call ratio at the beginning of each year starting in 2001. A quick look at the following table will show you that we've moved from almost two calls traded for every put at the outset of 2001 to slightly more puts than calls traded in 2008:

First Day of Trading in Each Year - (Put/Call Ratio 250DMA):
2001 - 0.56
2002 - 0.70
2003 - 0.81
2004 - 0.79
2005 - 0.83
2006 - 0.90
2007 - 0.92
2008 - 1.01
End of 2008 - 1.03

Now the put/call ratio as a tool is starting to make more sense to me.

0.90 isn't a static magic number. The potential trading signal arises when the short-term put/call ratio (10DMA) strays far from the longer-term put/call ratio (50DMA or better, 250DMA).

It's another variety of the overbought/oversold oscillators I favor, like the RSI.

The 10DMA reading of 0.82 would be thoroughly ho-hum in 2005, as it would be just about at the long-term 250DMA. 0.82 would have been a screaming call to go long in 2001. Right now, 0.82 says the market is a bit too optimistic and ready to fall.

30 December 2008

Yo La Tengo --> Alex Chilton --> Big Star --> The Replacements

Due to this year's calendar, and a week-long trip in South Florida scheduled over Christmas, I could only get to the last night of Yo La Tengo's annual eight-night Hanukkah run of shows at Maxwell's in Hoboken.

Last year, I was entertained by comedian Todd Barry (as I was again this year). Yo La Tengo played a mellower, yet poppier set. Unfortunately, there were no surprise guests like last year's Alex Chilton:

Alex Chilton with Yo La Tengo, covering the Velvet Underground's Femme Fatale

If you don't recognize Alex Chilton, here is a clip of him with the reformed Big Star:

And here is the Replacements eponymous ode to the man:

2009 Projections and Other Readings

Working long, but not hard today, so I've had the opportunity to pluck some compelling pieces from the interweb.

The end of the year is a time to reflect on the past year, and to try to gauge what will come next. Paul Kedrosky's Infectious Greed blog, found via Seeking Alpha, maps out four possible 2009s for the market.

While reading each scenario, I kept thinking how plausible most of his arguments were to me, even though the market outcomes described in each scenario contradict the others. I also thought of Barry Ritholtz' refrain about the folly of forecasting. Kedrosky aptly sums up the goal of the exercise:

I generally think it's important to have in the back of your head what you're expecting, what you're worried may happen, and what you think is impossible.

Anyway, here are Kedrosky's four scenarios:

1) The Straight Line Lower
This one is the favorite of uber-bears and logicians and the Schiff-ian sorts, and it works out pretty much as described: The economy and markets sink deeper into depression as it becomes obvious to all sentient sorts (and most semi-sentients) how egregious credit market excesses have been. We see massive wipe-outs in retail, commercial real estate, tech (yes), insurance, etc., plus a give-up on GM later in the year. Bears are on TV non-stop, and at least one bear gets a column in a major magazine/newspaper/webthingie, assuming any sort of media industry still exists 12 months from now.

In terms of key bits and pieces of the financial machinery, the dollar tumbles, gold soars, Russia collapses, and global markets tank, with worldwide trade tumbling by something like what happened during the Great Depression, on the order of 30% or more. There are no signs of inflation, what with deflation everywhere we look. We maybe get out of the year without a new war though, and the Colorado snow pack looks decent, so we have that going for us.

Dow: 5,000. Nasdaq: 900. S&P 500: 500 Oil: $25 Gold: $1700

2) The Non-Boring Flat Line
No-one is talking about this, so it's at least worth throwing into the mix: The market races higher early in the year as Obama-nomics looks real and fun, and then tanks mid-year as the economy refuses to get off the floor despite lots of happy-talk, a few new bridges across things, and some state bailouts. Later in the year markets pick up again as strategists counsel patience, and chatter begins about a first-half 2010 recovery. We end the year essentially flat.
Turning to the financial bits, the dollar surprises by only falling 10% against the major currencies; gold strengthens and then falls off a little; trade is crummy, but there are strong spots. There are a few surprises, like some sovereign wipeouts – Spain? Italy? Australia? other? -- but essentially flat-lining the year is a big surprise to all concerned.

Dow: 8400 Nasdaq: 1500 S&P 500: 900 Oil: $60 Gold $1000

3) The Double Dip
In this scenario we mess with the 2008 lows early in the year as worries increase that this is Great Depression 2.0. And then, however, expectations mount that something good has to come out of all this stimulus stuff -- damn the bears, look at the credit spreads and the 30-year mortgage rates! We hit mid-year confounding the critics with a 30% gain in the major indices, perhaps even a few pro-Ben Bernanke magazine cover stories, like "How Ben Did It!"
Things turn south, however, in the second half, perhaps on renewed signs of U.S. weakness, perhaps on some outlier events, but the upshot being the same, that global trade is not going to come back anytime soon at levels that justify prices at then-current levels. Markets start saw-toothing lower, a process that accelerates into the end of the year, leaving us lower than where we started.
Turning to the bits and pieces, the dollar weakens a little in the first half, but surprises everyone by strengthening again in the second half, as dollar gets squeezed on renewed fears of Great Depression 2.0. Gold falls early in the year, and then surges in the second half, ending the year considerably higher. The long bond ends the year closer to 5%.

Dow: 7500 Nasdaq: 1330 S&P 500: 765 Oil: $50 Gold $1200

4) The Moonshot: Nouriel Who?
The markets, to a chorus of carping all year long, climb a wall of worry. Consumers spend a little, businesses buy a little, and the Fed bails a lot, and the result is a surprisingly strong economy-like thing. Investors can hardly believe their good fortune in having repealed financial gravity, so they celebrate by taking stocks higher at every provocation through the year, despite some sharp falls here and there. Wells Capital's Jim Paulsen is the hero of bulls everywhere, and "Nouriel Who?" pictures are on NYSE traders' end-of-year celebratory t-shirts.
Is it pure froth all the way? No, of course not. There will be some sharp declines here and there. There will also be plenty of bankruptcies to keep bear-ish sorts from feeling entirely left out, and those will be viewed, in moralizing fashion, as just the sort of thing the Schumpeterian/Austrian economist/doctor ordered (even if they aren't). There will also be a sharp increase in inflation, but that will be shrugged off as "the price you pay" and something that the Fed can manage by "mopping up" all the liquidity it introduced. The year will close in this surreal fashion, albeit with bears pointing to myriad signs that the market is propped up solely by government deficits, and that Treasury yields are climbing and this game can only go on so long …
Turning to the numbers, the markets soar in the U.S., if less so elsewhere; gold starts the year strong and then weakens; oil strengthens; the long bond yield climbs sharply; and global trade, while weak, is non-zero.

Dow: 12,000 Nasdaq: 2100 S&P 500: 1210 Oil: $90 Gold $700

Barry Ritholtz looked back at his outlook for 2008 in a Wallstrip video interview.

Much of Ritholtz' gloom came true, but he did offer up the wise nugget that you rarely see market predictors get it right two years in a row. If that theory holds true, then Ritholtz' outlook for '09 should be suspect as well as sunshiney Nouriel Roubini's take on the next year:

Equity prices and other risky assets have fallen sharply from their peaks of late 2007, but there are still significant downside risks. An emerging consensus suggests that the prices of many risky assets - including equities - have fallen so much that we are at the bottom and a rapid recovery will occur.

But the worst is still ahead of us. In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.

While the risk of a total systemic financial meltdown has been reduced by the actions of the G-7 and other economies to backstop their financial systems, severe vulnerabilities remain. The credit crunch will get worse; deleveraging will continue, as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing more price falls and driving more insolvent financial institutions out of business. A few emerging-market economies will certainly enter a full-blown financial crisis.

So 2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies. Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.

Roubini's outlook seems to align with Kedrosky's scenario number three, the Double Dip. If my name were Randolph Duke, I'd bet a dollar on the Double Dip.

I have trouble taking anyone seriously who needlessly peppers conversations with the word "like." And, like, y'know, second to my distaste for, uh, the overuse of like, is, y'know, "you know." Specifically amongst Senate candidates.

Mickey Kaus is growling about unions and separately the two children of successful politicians up for New York's vacancy in the House of Lords.

Kausfiles pointed me to this interesting anecdotal teardown of UAW work rules and the Wagner Act.

Has the line "It's too big to fail." become as tiresome as "If you do x, the terrorists win."? Right now, it looks as if GMAC, and GM, are too big to fail.

And now more consumers will qualify for the right to not buy GM cars.

29 December 2008

House We Used to Live In

Today's video is another visit to the 80's, inspired by this weekend's Times article laying out WaMu's irresponsible loan practices. The opening quote from the Times, excerpted below, delivers quite a wallop:

"We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

— Kerry K. Killinger, chief executive of Washington Mutual, 2003

Another bit of inspiration, the infamous David Lereah, whom JVL and I disdainfully discussed this weekend, and on whom JVL posted.

So without further ado, here's a slice of Jersey power pop, courtesy of the Smithereens:

25 December 2008

Big Trouble in China?

This story from the FT is as fresh as the seafood special at that fluorescent-lit dive off of Canal Street. But it's quite foreboding (choicest bits, like the fish cheek, in bold):

Bank of America has shelved a $3bn sale of China Construction Bank stock following objections from Beijing, igniting fears that some cash-strapped overseas investors could struggle to offload their lucrative holdings in the country's banks.

The US bank, which in 2005 was part of a wave of foreign investment into Chinese banks, last week hired UBS to help sell a chunk of Hong Kong-listed shares to reduce its overall -holding in CCB to less than 17 per cent.

The offer was priced at a discount of 15 per cent to CCB's current share price and was quickly covered by US and European institutional investors, said people familiar with the matter.

However, only hours before it was due to be unveiled on Monday morning, the share sale was pulled on the instructions of Ken Lewis, BofA chairman and chief executive, following a phone call with Guo Shuqing, his CCB counterpart, according to people familiar with the situation.

The precise reason for the 11th-hour abandonment remains unclear, but dealmakers in the region believe that the Chinese government was unhappy about the timing of the share sale, the first such attempted divestment by a foreign investor following the expiry of a lock-in period.

The share sale could have triggered a fall in CCB's share price just as Beijing is trying to garner support for its largest banks and arrest a stock market slide.

Foreign financial institutions, including Goldman Sachs, Dresdner Bank, Temasek and Royal Bank of Scotland, hold shares in China's leading banks worth billions of dollars and analysts say they could be tempted to sell down stakes to raise capital when their three-year lock-in periods start to expire from next month.

"Bank of America cancelling those trades has made the other foreigners realise they don't exit at their discretion; they exit at the discretion of the Chinese government," said one Asian dealmaker who asked not to be identified.

The Chinese government cannot prevent trading of Hong Kong-listed shares, but deal-makers said it was likely that BofA was warned of repercussions to its future business on the mainland if it carried out the sale.

If it's true that the Chinese government interfered with BofA's sale of its CCB holding, then the coming months should be very interesting from the short-China perspective. China may want an orderly dispersal of foreign banks' Chinese assets, but I doubt the market will grant China its wish.

Bank of America's CCB position was initially offered at a 15% discount, presumably to the HK$4.63 that shares of CCB closed at last Thursday.

So what did shares of CCB close at yesterday? HK$4.31, down only 6.9%. From a CCB-shareholder's perspective, it looks like China's intervention preserved some value, at least in the short-term.

The paragraph suggesting that the likes of Goldman Sachs and RBS may start selling off their stakes in Chinese banks in January also compels me to stay the short course on China.

24 December 2008

Elf's Lament

Amusing holiday song.

Not that I approve of the message favoring unionization of Santa's elves contained in the lyric.

18 December 2008

Sloan - 4 Songs Not at the Palais Royale

Since my previous post focused on Canada, how aboot a Chinese-fire-drill-esque set of four Sloan songs not at the Palais Royale.

Let's start with the coolest-looking video, I've Gotta Try, with Andrew taking the lead:

Next up, Patrick takes off his ridiculous fur coat, straps on a Flying V and unleashes a sick riff in All Used Up:

Jay takes us down a notch with Lines You Amend:

And Chris celebrates Canada with Rest of My Life:

Buy the Loonie? With FXC.

While reading up on the computer-based closure of the Toronto Stock Exchange in the Globe & Mail, I spotted Goldman's call: Buy the Loonie. Key points in bold:

Buy Canada, Goldman Sachs says


Globe and Mail Update

December 17, 2008 at 4:52 PM EST

Now is a good time to buy Canadian dollars because the country's economic picture is less dire than in other Group of 10 nations, Goldman Sachs said Wednesday.

The report by the U.S.-based bank comes after the Canadian currency has tumbled 17 per cent against the U.S. dollar this year and has been little changed over the past month even as other currencies have strengthened.

"We think the Canadian dollar ... has potential to play catch up" as the U.S. currency sees broad declines, Goldman said in a note to clients.

It listed three factors for its recommendation. First, the economic picture has "deteriorated less" in Canada than in most other G10 economies, because of relatively strong consumer spending.

As well, the Canadian government continues to run a surplus, "which provides some cushion against deteriorating global credit markets."

And the banking system "appears to be in relatively good shape, in comparison with the rest of G10," the report said.

Lower commodity prices will limit gains, but much of the weakness in commodity prices is already reflected in the current level of the currency, it said.

Other currency strategists agreed that the Canadian dollar has room to strengthen. "The U.S. dollar is in a bit of a freefall and Canada has not appreciated as much as the euro, sterling or yen so I think we are seeing a catch up," said Firas Askari, head of currency trading at BMO Capital Markets.

"We are relatively better off in a couple of ways – our financial system is more sound, we don't have the same kinds of subprime problems as in the U.S. and also the huge appreciation in the housing market that happened in Ireland or Spain didn't happen here. So the bubble has less of a pop when it bursts."

The Canadian dollar strengthened to 83.56 cents (U.S.) Wednesday from the previous day's close of 83.21 cents. Mr. Askari said the currency could hit 87 cents in the weeks ahead.

With the U.S. dollar making a ZIRP sound, the Loonie looks lovely.

And as I write this, I have the late broadcast of Fast Money playing in the background, on the newly-added CNBC HD. ('Bout time, Time Warner.) As Ratigan et. al. discuss the dollar's fall, their guest suggests looking at buying dollars outside the U.S. Specifically, Canuckistan dollars, Aussie dollars, and Kiwi dollars:

[Dennis] Gartman's Currency Trade

"If you have to be long a currency, I’d get long Canada’s dollar or Australia’s or New Zealand’s dollar -- those outside the United States," counsels Gartman. "And I’d own a little gold just in case, but I would not have a speculative long position."

So how does one invest in the $CAD without making a trip to Montreal or opening a FOREX account?

An ETF, of course. FXC.

Time for some clickable charts. First up, the daily and weekly charts for FXC:

The Loonie looks overbought in the short-term, but the weekly chart shows the Canuck currency coming oot of a trough. My instinct says to favor the what the weekly chart is telling me over the daily chart's moves.

And here are the daily and weekly charts of the greenback:

A quick look at the daily dollar chart shows the ZIRP-y fall into oversold territory and a broken bullish trendline.

The weekly chart gives a better perspective. The dollar is coming off of a spike after a long bear run. With the Fed flooding the economy with freshly-printed Franklins, the dollar should continue downward, no matter the short-term technicals. Again, I'm finding the weekly chart more compelling.

17 December 2008

New Trashcan Sinatras

Oranges and Apples

16 December 2008

Late 80's New Order

This video made a very significant impression on me back in 1987:

New Order - True Faith

I'm not sure of the point of the single-frame disruptions in the following video. What these momentary images do is jar the viewer and turn the music video into something more than eye candy:

New Order - Round and Round

The Fed Put an End to the Downward Trend

The Fed put an end to the downward trend, blowing a big raspberry at the dollar.


Here's an annotated chart of the S&P 500, showing all of the recent downward trends that have recently come to an end (click on the chart to make it large and legible):

It's generally a good idea to trade with the trend. Keeping that in mind, a Santa Claus rally could come to town.

However, the RSI(2) is getting overbought and the S&P failed to breach its recent high of 918. Are we really expecting St. Nick to usher in the January Effect this year?

Last year's Santa Claus and January Effects didn't fit the standard dictionary definition of "rally" (click on the chart to revisit 2008's craptastic start):

15 December 2008


Financial blogs have been discussing one of the core technical indicators I use everyday in evaluating stocks and ETFs: RSI(2).

VIX and More called attention to MarketSci Blog and his analysis of RSI(2) here, here, and here.

If you have no clue what RSI is, you can dig through some older Pig posts for an explanation, or just read the first MarketSci Blog post and follow his links.

After reading these posts and their comments, I found this analysis at Skill Analytics that shows the 2-period RSI tool is better than extending the RSI reading out to three, four, or the standard fourteen-day-period. Here's an excerpt:

On a recent post on Marketsci on the use of RSI2, Bill Luby of VIX and More posted the following comment:
Count me among the fans of RSI (2). I think you might get more interesting results — though with much more time out of the market — using 95/5 and 98/2 as break points.
Also, if everyone is jumping on the RSI (2) bandwagon, perhaps it is time to spend more time evaluating RSI (3) or RSI (4) strategies. Just a thought.
Nice work, as always, but why do I always feel like I am assigning homework when I comment here…?
Well, I agree Bill - you can't keep assigning homework to poor Michael. I mean, where is the rest of the collective quantitative testing blogosphere when you need it? Michael's doing all the heavy lifting! So to help Mike out, I've done some testing on different RSI days to see what would happen. I can't promise the snazy charts of Mike's blog, but I'll just break it down here quickly.
I created a basic system that buys the SP-500 when the RSI(N numbered day) goes below 10 and sells when it goes above 90. You could do a further optimization of the actual buy and sell levels - I haven't bothered to do that here. I next optimized the system by having it run through different N numbered days. So, RSI(1), RSI(2), RSI(3), etc. Here's the results:

So, as you can see, RSI(2) seems to do a lot better across a number of metrics. These include Expectancy, Sharpe and a few others.

I agree with Bill Luby's assertion that the more extreme RSI(2) readings of 95/5 or 98/2 provide better trading results. And then I remembered where I had learned this, on the Trade While Working blog.

In the November issue of Technical Analysis of Stocks and Commodities, an article by Larry Connors and Ashton Dorkins describes the results of testing more than eight million trades from January 1, 1995, to December 31, 2006. The average one week percentage gain or loss for all stocks during the period tested was +0.25%.

After quantifying overbought and oversold conditions (RSI above 98 is overbought; RSI below 2 is oversold), their research showed that stocks with a 2 period RSI below 2 averaged a gain of +0.88% one week later (beating the benchmark average by more than 3:1). Conversely, stocks that were overbought with a 2 day RSI greater than 98 lost money (-0.17%) one week later as well as underperforming the benchmark.

A Slack Monday with Superchunk

Superchunk - Slack Motherfucker

If you want to sing along, here are the lyrics:

You haven't moved from that spot all night since you asked for a light
you little smoke stack
You've wasted my time
I'd like to see you try and give it back

I'm working
But I'm not working for you!
Slack motherfucker!

Relax, sit down
I'll kick that stool right out from under you
Well, then, I see you sitting outside
Well, I can do the same thing too

I'm working
But I'm not working for you!
Slack motherfucker!

I'm working
But I'm not working for you!
Slack motherfucker
You motherfucker!!

12 December 2008

This Song Will Make Up for the Lack of Panic

Panic - The Smiths

Panic on the Streets? Nope.

Bill Luby from VIX and More noted the surprising lack of panic in the market today:

For all the talk about the auto bailout fiasco, a little more than two hours into the final trading session of the week finds the markets relatively unchanged since last Friday. As I type this the SPX is hovering around the 862 mark, down about 1.5% for the week.

Interestingly enough, the VIX has also fallen this week and is currently down about 4.4% from last week's close. In fact, the VIX is setting up for the sixth close in a row of under 60 – the first time this has happened in over two months.

Shorts had an hour or two of fun yesterday, but the buy on the dip crowd appears to be back out in full force today, with technology, small caps, real estate and homebuilders catching a bid.

As long as the VIX keeps dropping, it is reasonable to assume that buyers will continue to step in aggressively to support the market when it pulls back.

At the very least, expect bears to start to lose their nerve if the current pattern continues.

Indeed, coming from the bearish p.o.v., I am feeling the same way: I'm getting impatient with my short positions.

You'd think the market would react quite negatively to the litany of bad news this week. But consider that the market recovered quite nicely today after the White House and Treasury stepped in with a vague offer of support for GM/Chrysler/Ford.

The market digested the Senate's inaction on the Detroit bailout surprisingly well. And where was the reaction to the $50B Madoff fraud revelation? And recall how the market rose after news of last Friday's terrible employment numbers.

So yes, I'm starting to get a bit frustrated with my short positions. The annotated chart of the S&P 500 below gives me some comfort.

We did see lower highs and lower lows this week, but the market held up far better than Harry Reid predicted last night:

"I dread looking at Wall Street tomorrow," Senate Majority Leader Harry Reid, D-Nev., said late Thursday after a vote to consider the plan failed. "It's not going to be a pleasant sight."

11 December 2008

Off Topic - Why Nigella is Awesome

Going off topic. Neither markets nor music. But I have the operator's license for this blog, so there.

I am an admitted fan of Nigella Lawson. She has her obvious charms, as noted above, as well as her not-so-obvious ones:

PETA is not pleased with television chef Nigella Lawson. When asked on BBC1's The One show if she thought the fashion industry should outlaw fur, Nigella replied that she would wear it if she could kill the animal herself. The host asked what she would think of fur-wearing celebrities who started wearing dog or cat fur, and Nigella blurted out, “I’d love a dog or a cat!’’ Then she made a stabbing motion and added, “Going into a shop and buying a fur coat would be an act of weakness. But if I could go into the woods and kill a bear myself, I would wear it proudly as a trophy.’’ Can everyone please leave Donna Karan alone now?

Jaw-droppingly awesome.

Eye-catching Excerpts from Other Blogs

Phil Davis is now 60/40 bearish in his portfolio. However, some of his thoughts today suggest that he should be significantly more bearish:

While the House stayed late and passed a $14Bn rescue package for the big 3 (less than 1/2 of what they admit they need), the Senate Republicans are threatening a filibuster to stop the bill dead there and that will give us the same kind of chaos the TARP vote did, which was not at all good for the markets.

Asia was up about half a point today as South Korea cut its rates a full point to 3%, the fourth cut in 2 months (have I mentioned I like gold lately?). India said they don't THINK attacking Pakistan is a good solution to terror attacks, but it is being debated. Europe is down about a point in morning trading ahead of the US open as riots in Greece underly the deteriorating jobs picture over there. Very unfortunately, in both Asia and Europe, the energy sector is leading the markets - a real fine example of fiddling while Rome, as well as Athens, Beijing, Moscow and Tokyo, burn…

Speaking of Moscow burning - The Ruble is on the rocks and much closer to collapse than you may think. If oil does persist below $50, the Russian economy may fall and that will imperil the Baltic states as well as the breakaway nations that have joined Europe but are still in Russia's economic sphere of influence. A breakdown in the 'stans will harm Asia as well, and this was one of my "worst case" possiblilities for the market along with GM failing (still on the table) and a major bank failing (not off the table) - any one of which can take us to 7,000.

That, my friends, is how we end up back to 60% bearish during yesterday's rally - let's hope I'm wrong and we have a reason to swing back to neutral after we get through tomorrow's Retail Sales report, but, with the international news flow such as it is, it's going to be hard not to be a little bearish into the weekend.

Bespoke shows that the share price of Goldman and Morgan Stanley have levelled out even as earnings estimates continue to plummet:

Expectations for anything positive to come out of Goldman's and Morgan Stanley's earnings reports next week have gone the way of the dodo bird. Earnings estimates have been lowered day in and day out since the start of September, and currently, Goldman's Q4 EPS estimate is at -$3.50, while the consensus EPS estimate for Morgan Stanley is at -$0.25.

Below we provide historical charts of Q4 earnings estimates and stock prices for both GS and MS. As shown, even as the two stocks have begun to form a nice base in recent weeks, earnings estimates have continued to collapse. This suggests the market has already priced in doomsday reports from both companies.

I'm not sure I agree with Bespoke's assessment that the market has already priced in the upcoming disastrous earnings reports from Goldman and Morgan. Just looking at their charts, you can see the share prices basically track the lowering earnings expectations up until recently. Why haven't the share prices continued to track? Maybe they will shortly.

Trader Mike thinks the market is overbought:

Yesterday it felt like we were back in a market with normal volatility levels. But the VIX, which is still in the fifties, says otherwise. There were a lot of NR7s made yesterday, so perhaps that was just a slight pause before we get back to range expansion. Given the indices’ overbought stochastic readings and the looming 50-day moving average I think the odds of a downward move is more likely.

Finally, is it filibuster-time in the Senate?

The prospects of a $14 billion government rescue of the American auto industry seemed to vaporize Thursday morning as the Senate Republican leader, Mitch McConnell of Kentucky, spoke out forcefully against the bill, effectively dooming its chances despite the urgings of the White House.
But the more crucial test is in the Senate, as Thursday’s developments demonstrated. Senate Republicans on Wednesday rejected an appeal by the White House chief of staff, Joshua B. Bolten, who urged them to support the bill. Instead, some Republicans have called for the automakers to seek bankruptcy; while others said there should be steeper concessions by labor and creditors.

Will Currie and the Country French

Surprising Me - Live

These young Canadians also teamed up with Sloan on a catchy track called Push Pins. Here's the virtual cover to that single:

10 December 2008

Three Whiskeytown Songs Live in St. Louis

If you ever see a show in St. Louis, and I saw plenty in my time there, you'll eventually come across Beatle Bob, doing his herky-jerky dance moves. In this video, Ryan Adams expressed far more tolerance for Beatle Bob than his reputation would suggest.

Whiskeytown - Excuse Me If I Break My Own Heart - Live in St. Louis with Beatle Bob

16 Days

Drank Like a River

"We love Uncle Tupelo...That doesn't have anything to do with fuckin' why we're in a rock-n-roll band at all...Blues Traveler is the reason why [we're in a rock-n-roll band.] ... Fat fuckin' hippie."

Meredith Whitney on the Financials

Meredith Whitney is, surprise, still negative on the financials. From CNBC:

Influential bank analyst Meredith Whitney remains bearish about the economy, and her outlook for the banks that "lubricate the economy" is grim.

"The big banks are going to be on life support for at least 18 months, if not 36 months,"
Oppenheimer's executive director of equity research told CNBC Wednesday morning. "The big banks will not fail, but the big banks will not grow, in my opinion, for at least another two years."

She echoed other analysts who see the funds from the TARP program being used to fill holes, and do nothing to stimulate the economy.

"You've had massive asset deflation," she said. "There's more of this to come."

Below is a lightly-annotated chart of SKF, the ultra-short financials ETF. I'm using SKF as a proxy for my FAZ holding as SKF's longer trading history allows me to make the point that it looks to be a good time to be on the short side of the financials yet again.

09 December 2008

Theme to Super Mario Bros. 2 a la Django Reinhardt

Gotta give credit to Fark for leading me to this sweet video of Adrian Holovaty playing swing-y guitar.

And here's his take on the MacGyver theme song:

Camera Obscura

Here are a couple of videos from Camera Obscura, off of their last record. The first song, If Looks Could Kill, sounds like it's playing through a 60's mono radio with a speaker made of paper--and I mean it in a good way. The video is a visually interesting collection of images of the flyover country, interstates, and club marquees.

This is a humbler video for Let's Get Out of This Country, featuring Northern British visuals more appropriate to the band:

Sympathy from Bespoke

Bespoke Investment Group offers up some sympathy for holders of FXP:

After today's market action, FXI hit our target price of $30 on the trade. As shown in the chart below, FXI has now broken solidly above its 50-day moving average and looks great from a technical perspective.

But we thought we would also point out the action in FXP, which is the 2x inverse ETF of the same index that FXI tracks. As shown in the second chart below, FXP has taken investors on a wild ride in recent weeks. After peaking at just above $183 on an intraday basis in late October, FXP closed today at $36.23 -- down 80% from its high! It hasn't been hard to be right from the bearish side in this market, but those who bought FXP over the last month and a half have not made out very well.

The quality and clarity of Bespoke's work speaks for itself.

08 December 2008

Recent Readings on China

Below are excerpts and explanations of some recent readings on China:

James Fallows recently interviewed Gao Xiqing, president of the China Investment Corporation, in the pages of The Atlantic. You should read the entire piece, of course, but here's a representative excerpt:

About the financial crisis of 2008, which eliminated hundreds of billions of dollars' worth of savings that the Chinese government had extracted from its people, through deliberately suppressed consumption levels:

We are not quite at the bottom yet. Because we don't really know what's going to happen next. Everyone is saying, "Oh, look, the dollar is getting stronger!" [As it was when we spoke.] I say, that's really temporary. It's simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors. But after a short while, the dollar may be going down again. I'd like to bet on that!

The overall financial situation in the U.S. is changing, and that's what we don't know about. It's going to be changed fundamentally in many ways.

Think about the way we've been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it's 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.

People, especially Americans, started believing that they can live on other people's money. And more and more so. First other people's money in your own country. And then the savings rate comes down, and you start living on other people's money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.

We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we'd love to support you guys—if it's sustainable. But if it's not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let's change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the "real economy," etc.]

Craig Stephen at Marketwatch offered up this report on troubles for the Danny Noonans of China:

Put deflating asset bubbles, steep interest-rate cuts and a 4-trillion-plus yuan stimulus package into the mix, and you can expect a lumpy economy at best.

In recent weeks, China has gone from optimism it could escape the global slowdown to a realization its export sector would take a direct hit -- November exports are expected to have shrunk in value for the first time in seven years -- and finally, to worries the whole economy is on the floor.

J.P. Morgan, in a new strategy note, pinpoints the "collapse of the domestic housing market" for spreading the feel-bad factor around.

Leaving aside the export sector, it seems intuitive that many of the industries that fed off the asset and property bubble on the way up will be spat out on the way down. One surprising new casualty of the economy is the jobless golf caddie.
Mission Hills, the self-proclaimed biggest golf club on Earth and recent host of the World Cup of Golf event, is sacking 2,000 employees, or 20% of its staff, according to a recent Bloomberg news report.

The ETF Expert skeptically cites a couple of fund managers buying Chinese stocks:

China's government recently cut its key lending rate by the most it had in more than a decade. It's also pledged a $580 billion stimulus package. Together, these efforts are supposed to stimulate the Chinese economy.

At least that's what a number of prominent international money managers think. Mullen, chief executive officer at Shanghai-based Emperor Investment Management, believes that prices haven't been this attractive since the Asian financial crisis of 1998. Mullen also maintain that Chinese businesses that serve the Chinese consumer and the mainland's infrastructure will post better earnings growth than anywhere else in the world.

Mark Mobius, executive chairman of Templeton Asset Management, agrees. He recently explained that he is aggressively purchasing consumer discretionary stocks due to a likely consumer "boom" in emerging standouts like China.
So call me skeptical if the talk about boundless opportunity isn't a bit self-serving. The reality is, the world is in this thing together. If developed countries worldwide are able to show signs of pulling out of a multi-year recession, the emerging countries will likely appreciate at a faster rate.
If it breaks out above the 50-day, one might wade into to Chinese waters. Yet one will need to be disciplined with a stop-loss percentage in place... to guard against the possibility of rapid deterioration.

Bill at VIX and More is more confident China is about to break out. Last Thursday, he wrote:

If FXI can close above its 50 day moving average again today, it will mark the first time in over six months that FXI has closed above that important technical level on consecutive days. Ten minutes into today's session, FXI is trading at 26.70, down 0.55. With the 50 day SMA at 26.94, any close at 27.00 or above should leave a fairly bullish signal on the chart and support the case for increasing upside momentum.

Today, FXI closed at $30.30.

Finally, here and here are a couple of Seeking Alpha contributors talking their books, one from the long side, and one from the short.

The long guy, Kelvin Schulle, approves of China's recently announced stimulus package before diving into recommending his portfolio of Chinese stocks.

The short guy, Rakesh Saxena, offers up a little more meat to his short-China call:

Firstly, following the announcement of the $585 billion stimulus package, farm-based factory workers see the opportunity to make quick profits from sales of agricultural land to hundreds of infrastructure-related projects. Secondly, in order to boost domestic demand (as opposed to exports to America and Europe), Beijing has taken the unprecedented step of departing from the fundamental notion of collectivisation to dramatically improve the negotiation capabilities of land-use rights. Taken together, the stimulus funds and the land reforms promise deep-rooted structural changes inside the Chinese economy.
[W]hat is clear is that Chinese corporations are being hit extremely hard on two fronts: shrinking domestic consumer demand and sharp reductions in export orders (which cooled by a whopping 15% in November). So until more reliable data on this stimulus-cum-land reforms experiment unravels, Chinese asset valuations must continue to deteriorate.

Portfolio Changes

Sold the lingering position in AIG for $2.05 for a wicked loss of 56.8%. However, AIG closed today at $1.93, and has barely traded above $2/share over the last three weeks, so at the very least I found a decent exit price.

Bought some more Fozzie Bear (FAZ) at $39.20, bringing down the cost basis of that position to $51.26.

The Ugly Truth

Matthew Sweet recently released Sunshine Lies. I'm grooving to it as I write this post. But for the blog, please enjoy The Ugly Truth from 1993's Altered Beast. This is a live version I found on YouTube from 2004.

Chanos Is Shorting China

I'm currently in the middle of reading New York Magazine's just-posted profile of Jim Chanos.

Chanos is shorting China:

Chanos was excited that afternoon. He had just read a report that China's electric consumption had dropped 4 percent, despite official government statistics that the Chinese economy was growing at 8 percent. He relished the implications. "I think they're making up the numbers!" he said. As Wall Street picks up the pieces of the broken financial system, Chanos is already one step ahead. He sees China as the next domino to fall in the global meltdown. In recent months, Chanos has loaded up short positions on the infrastructure companies that have rushed to build China's new highways, bridges, and tunnels. Now he is waiting for their share prices to tank.

07 December 2008

Basia Bulat - More Sweet Sounds from Canuckistan

In the Night - Live at Bowery Ballroom, with Basia rockin' the autoharp.

In the Night, but in the studio with guitar for any autoharp antagonistes out there.

I Was a Daughter - Live at Schuba's in Chicago

06 December 2008

Reader Question Regarding FXP

Reader Peter M complimented me on this post on FXP.

He then raised a question regarding the recent poor performance of FXP that has been taking its toll on both of our portfolios, asking if FXP is decoupled from the underlying FTSE/Xinhua China 25 Index.

I take very kindly to praise, and thought I'd tackle his question.

My quick answer is: FXP is doing a pretty good job returning 2X the inverse daily returns of FXI, the FTSE/Xinhua China Index Fund.

If FXP isn't tracking the FTSE/Xinhua China 25 Index, it's because FXI isn't fulfilling its aim to properly mirror its underlying index's returns.

I crunched some numbers on the spreadsheet below, starting on 20 November, when FXP closed at $93.00/share, and FXI closed at $21.16/share. Yesterday, FXP closed at $43.39/share, while FXI closed at $27.83/share.

Why the huge disparity? FXP tracks the 2X inverse daily returns of FXI. Over the past two weeks, FXI has had some wild swings, but where FXI has had one 5% loss and one 7.5% loss over that period, there have been single-day gains of 7%, 8%, 12%, and 16%.

Click to enlarge:

Barclays Global Investors operates iShares who manages the FXI ETF. ProShares, a competitor of iShares, manages the FXP ETF. ProShares has no control over the management of FXI. So should Barclehs receive some criticism?

The market volatility of the past few months has affected how well FXI correlates with the underlying FTSE/Xinhua China 25 Index, according to the following charts I created on Stockcharts.com.

This chart shows the daily correlation between the Index ($FXT) and FXI:

And this one shows the weekly correlation beetween $FXT and FXI:

The $FXT:FXI correlation levels have not returned to their pre-September levels, but they are getting closer to the long-term levels of ~440:1. It looks like iShares is trying to steady the ship in some very choppy waters. Still, at ~425:1, FXI is overvalued, compared to its underlying index.

FXI should eventually revert to the mean and fall in value, closer to the $FXT index.

Likewise, FXP should climb in value when that mean reversion occurs.

And that wouldn't suck for the portfolio.

Cattle and Cane

Above is a clip of the Go-Betweens from the That Striped Sunlight Sound DVD where Robert explains his first hearing Grant's composition, Cattle and Cane. And then they perform it.

Here's more on the song from Wikipedia:

In May 2001 "Cattle and Cane", written by McLennan and Forster,[1] was selected by Australasian Performing Right Association (APRA) as one of the Top 30 Australian songs of all time.[2] McLennan described writing the song:

I wrote (the song) to please my mother. She hasn't heard it yet because my mother and stepfather live (on a cattle station) and they can't get 240 volts electricity there, so I have to sing it over the phone to her [...] I don't like the word nostalgic; to me, it's a sloppy yearning for the past, and I'm not trying to do that in that song. I'm just trying to put three vignettes of a person, who's a lot like myself, growing up in Queensland, and just juxtaposing that against how I am now.[3]

—Grant McLennan, 1983

And here is the original video from 1983:

05 December 2008

04 December 2008

The Trend Is Your Friend

(Not so) ancient Wall Street proverb: The trend is your friend.

Check out the following charts of the S&P 500, the Dow, and the Russell 2000. As per usual, click on the image to make it large and legible.

I added the current trend line in Grimace purple. Notice that every time the bulls have tried to rally, the downward trend prevails.

S&P 500:

Dow 30:

Russell 2K:

Much like fashions, trends don't last in perpetuity. However, the current downward trend doesn't seem to be going away anytime soon. This bear market ain't a Members Only jacket or a pair of Crocs.

I Make the Dough, You Get the Glory

I prefer country music from the north. You should, too. Case in point, Kathleen Edwards.

03 December 2008

A Trio of Ben Folds Five Songs from Sessions at West 54th

Enjoy a trio of Ben Folds Five performances from Sessions at West 54th, circa 1997.


Theme from Dr. Pyser

Battle of Who Could Care Less

Portfolio Changes

Fozzie Bear (FAZ) is hanging out in the Pig's portfolio for a bit longer, as I added shares at $54.98, bringing the cost basis of my Fozzie position down to $55.72.

FAZ has traded in nearly a 30-point range over the last three days, but that's what 3X leverage can do in a volatile market.

02 December 2008

Portfolio Changes

Picked up some shares of TZA, the small-cap 3X bear ETF at $84.84 and at $80.98 for a cost basis of $82.91.

Shoegaze Primer

Posted below are four musical exemplars of early 90's shoegaze. The videos themselves give away how much time has passed since these bands and songs entered the music scene, but I think the songs hold up quite well.

My Bloody Valentine - Only Shallow

Chapterhouse - Pearl

Slowdive - Allison

Ride - Vapour Trail

Retailer Death Watch Returns

Last month, I shared my retailer deathwatch picks: Pier 1, Restoration Hardware, and Design Within Reach.

JVL offered up West Elm, a division of Williams-Sonoma.

Fark linked to this story at 24/7 Wall St. with their ten picks. I've excerpted the shared picks:

4. Pier 1's (PIR) shares are on sale for $.50. A little less than a year ago they would have cost $8.25, making this a remarkable write-down. PIR said its Q3 same-store sales would be down as much as 18%. The firm says it has a $325 million credit facility, but the stock market clearly thinks that is inadequate. The company's guidance for the quarter sent shareholders running for the exits. In the last quarter, revenue fell 7% and the company lost $30 million. Pier 1 pulled its guidance because it believes it cannot predict how much the retail market will deteriorate. With $183 million in debt, it won't take much to tip Pier 1 into insolvency. UBS recently cut its price target on the shares.

6. Williams-Sonoma (WSM) operates 600 stores. The company is doing badly enough that Barclays Capital recently said that it may violate financial covenants on its $300 million credit facility. The retailer made a sharp downward revision in its forecasts. It said it would lose as much as $.12 a share in the third quarter against its previous projection of as much as a $.04 profit. It took its revenue forecast down as low as $732 million. The earlier projection had sales as high as $820 million. WSM also made extremely sharp cuts in its projections for the fourth quarter. Lenders take loan covenants more seriously in a recession than during other periods. WSM has to beat its numbers or face a chance of its lenders pushing for remedies. The CEO recently forced to sell over 60% of shares due to financial obligations.

What are the others on 24/7 Wall St.'s death watch? Bon-Ton Stores, Dillard's, Talbots, Cost Plus, Chico's FAS, Saks, Eddie Bauer, and Rite Aid.

I make no argument with any of these picks.