29 September 2008

Mess



Ben Folds Five's "Mess." An apt choice for today.

And can you guess the relevance of the photo below?



The answer: A crash-landed Boeing 777, coinciding nicely with the Dow's 777-point faceplant.

I'd like to thank John McCain, the House Republicans, and even Nancy Pelosi and her pre-vote speech for today's mess. And W deserves some criticism, too, for having so little legitimacy left, that his own party saw no need to back the bailout bill. Before becoming President, Bush certainly knew how to fail upward, but he's made quite an art of failing over the last eight years, except when it's election time. Unfortunately for investors, Bush failed to buck the trend.

With that off my chest, I found plenty of good reading on the interweb that I'd like to share.

The Bespoke Boys quickly pointed out (by 2:30pm) that Congress' inaction already cost us more than the $700B bailout pricetag:

While Congress was busy debating and voting down the $700 billion financial rescue package, one of the key arguments against the bill was that our voted officials didn't feel right risking $700 billion in taxpayer money on a 'bailout' of the Financial sector. In voting the bill down, our elected officials may feel like they have done their constituents a service by protecting their money.

However, with a decline of 6% today, the S&P 1500 has now erased $746 billion in market cap alone. This doesn't even take into account the lost GDP that is likely to result from the continued deep freeze in the credit markets. Once again, Congress has done more harm than good for the 'good of the people.' What's worse -- that Congress couldn't put partisanship aside and come up with a solution, or that we put any faith in them in the first place? Nice job Washington!



David Callaway at Marketwatch revised that market cap loss figure upward, as the market continued on its path to the largest point loss evar:

But by making this about a bailout of fat cats and not what it clearly was -- an emergency rescue of the global financial system -- Congress imperils the investments, deposits, money markets and life savings of millions of Americans, to say nothing of people around the world.
...
Even the notoriously splintered government of Belgium was able to engineer a rescue of banking and insurance giant Fortis over 48 hours this weekend. But our own representatives, faced with the gravest economic threat in 70 years, took more than 10 days to hash up this rescue plan, and then rejected it anyway.

In total, more than $1 trillion was wiped off the value of the entire U.S. stock market Monday, as measured by the Dow Jones Wilshire 5000 Index.


Not to say the market was all cheery optimism this morning. I was mildly alarmed by this piece in the Times discussing the potential cash outflows from hedge funds:

First, the money rushed into hedge funds. Now, some fear, it could rush out.

Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

...

One little-known hedge fund barometer is pointing to trouble, however. The alphabet soup of complex investments that Wall Street created in recent years — R.M.B.S.'s, C.D.O.'s and the like — includes C.F.O.'s, short for collateralized fund obligations. Virtually unknown outside the industry, these investments are the hedge fund equivalent of mortgage-backed securities: securities backed by hedge funds.

But last week, credit ratings agencies warned that they might lower the ratings of several C.F.O.'s, in part because of the concern that investors would withdraw money from the funds backing the investments. Standard & Poor's downgraded parts of nine C.F.O. deals, Fitch placed five on a negative rating watch, and Moody's put one on a downgrade review.

"The concern is over the redemptions that are happening," said Jenny Story, an analyst with Fitch Ratings. "The gates are being closed."

With the bailout now in limbo, the threat from unwinding hedge funds is much greater this evening than it was this morning.

Otherwise, Dan Drezner is worth reading. Megan McCardle provided some good insight, but she was too quick to focus blame on Pelosi. And Barry Ritholtz was on top of the action, as always.

Here are a couple of charts worth perusing. First, the VIX is at appropriately extreme levels, which convinced me to plunk down some precious dollars on my long positions.

Click on the image for a large and legible view of the VIX:



The next chart shows the yield of a 1-month T-bill effectively going to zero:



Today's transaction:

Bought UYG at $18.80 in the morning, and at $16.47 in the pm, bringing down the cost basis down to $18.76.

25 September 2008

Time Bomb

The market ended up fairly flat, but my positions took quite a whuppin'. You gotta keep a sense of humor about macabre market days like yesterday, especially when the rest of the market is having a humdrum trading day. In that vein, today's tune is "Time Bomb", the first track off of the Old 97's "Too Far to Care" album.



Rhett, Murry and company played St. Louis every few weeks back in '97 when I lived out there. I picked up "Too Far to Care" at Vintage Vinyl based solely on the rave review hand-markered on the plastic placard separating the 97's from Olivia Tremor Control in the record rack.

"Time Bomb" was all it took for me to become a fan.

I'm not suggesting that the current market is in anyway a time bomb ready to go off, even if a couple of my positions are ticking.

Of course, if the market implodes tomorrow, I'll feel like a heel for posting this song.

So why did AIG plummet today? It accepted the $85B credit facility from the Fed over private investment.

An excerpt from the Gray Lady on the alternatives for shareholders:

If the shareholders are unable to redirect the Fed’s restructuring plans, they have shown interest in buying some of A.I.G.’s operating subsidiaries. The subsidiaries are mostly insurance companies with solid books of business, as well as other profitable businesses like aircraft leasing.

The shareholders are being represented by Michael Kantor, the former commerce secretary and United States trade representative during the Clinton administration.

...

Mr. Kantor said he believed that both the shareholders and the taxpayers would be better off if a new restructuring plan could be devised. The meeting ended without a clear plan of action, but Mr. Kantor said the discussions would continue.


And pressure to deal with Washington Mutual seems to be coming to a head:

Federal regulators are moving quickly to broker a deal for Washington Mutual as the savings-and-loan comes under mounting financial pressure, according to people briefed on the talks.

...

The government’s entrance suggests the sales process may be entering a new phase after the bank struggled to find an interested buyer. Washington Mutual had vowed that it could remain independent, but it quietly hired Goldman Sachs early last week to identify potential bidders.

Among the banks that have expressed interest in buying all or part of Washington Mutual are Citigroup, JPMorgan Chase, HSBC, Banco Santander, and Wells Fargo. It is unclear what form of assistance federal regulators will now offer.

Today's craptastic transaction:

Bought AIG at $4.17.

24 September 2008

Meyer, Thile, Buffett, Goldman, and Batali



No, I'm not writing about the merger of a white shoe law firm with a scrappy outer-borough slip-and-fall shop.

I happened to have the privilege of watching and listening to Edgar Meyer and Chris Thile this evening at the welcoming Jenkins' home. (Thanks Elvina for getting me on the invite list.) The clip above doesn't even get close to representing what it's like to watch these two men play from three feet away. Their performance made me downright incoherent, which explains the structure of this post.


Today's transaction:

Bought 3K shares of AIG at $4.98. New cost basis for my AIG position: $4.935.

So, Warren Buffett has made a move, getting in on Goldman. Of course he is:

Berkshire is buying $5 billion of perpetual preferred stock in the investment bank. The preferred stock has a dividend of 10% and is callable at any time at a 10% premium. Berkshire Hathaway will also get warrants to purchase $5 billion of Goldman common stock with a strike price of $115 each. Buffett can exercise these at any time over five years, Goldman said in a statement. Goldman also said it's raising at least $2.5 billion by selling common stock in a public offering.



After hours, Goldman traded up 7.75%. The other financials climbed after hours as well, so tomorrow (or is it later today?), I will consider lightening my UYG position and unloading the short-term-trading portion of my AIG holding into any significant show of market strength.

Onto a topic completely unrelated to finance or music: Mario effin' Batali. For me, he's right up there with Martin Picard and Tony Bourdain. Here are some choice quotes from the New York Magazine profile that you really should read instead of this blog:

"My worry is, how many times can you watch me eating something and saying, 'Boy, that's good,' before you say, 'Fuck you! I'm not tasting the shit!,' " he frets. "That there's no real payoff for the customer other than saying, 'Hey, they're having a great time, this is a great show.' The blogs that hate it are gonna be like, 'Who the fuck cares that he's eating with Gwyneth Paltrow, she's a vegan anyway,' or whatever."

23 September 2008

Gotta Get Up



"Gotta Get Up" by the Bottle Rockets of Festus, Missouri. Note that they sing the verse five times representing each workday before hitting the chorus. That's about as subtle as the song gets.

Today's transactions:

Bought Washington Mutual (WM) at $3.45;
Bought AIG at $4.89;
Bought Ultra Long Financials ETF (UYG) at $20.36 for a new cost basis of $18.92.

It looks like I set up some long positions on a big down day. It'd be nice if the market heeded to the title of today's song.

22 September 2008

Scrapple

After posting Son Volt's "Windfall" videos last week, I poured through related records like Wilco's Being There and Uncle Tupelo's first two albums. And that excursion begat more musical rummaging through all sorts of alt-country, country, and bluegrass.

So many of the musical portions of upcoming posts will be of a twangy variety. You've been warned.

Now, if you have occasional misgivings about Southern cultural offerings, my country-ish music preferences seem to come from places like Illinois, Missouri, and Ontario.

To start things off, there's nothing more apropos for this porcine blog than Robbie Fulks playing the Scrapple Song:



On the financial side of things, here are some more scraps from the weekend.

Joe Nocera has a worthwhile column in Saturday's Times. Of his many solid points, he rightly feels blaming the shorts is misplaced:

KILL THE SHORT SELLERS It's understandable why people get upset at short sellers in tough times. As President Bush put it Friday, short sellers are "intentionally driving down particular stocks for their own personal gain." But that perception is more myth than fact, and in any case, it's not the dynamic here. Stocks are falling because companies made huge mistakes that have caused them a heap of trouble. Indeed, in July and August, short interest in financial stocks declined by 20 percent. Why did the stocks continue to go down? Because there were too many sellers and not enough buyers: it's that confidence thing again. Blaming the shorts is classic blame-the-messenger behavior.

The S.E.C. jihad against short sellers, which includes the banning of short selling on 799 stocks and forcing disclosure of large short positions, is nothing more than playing to the crowd. It is simply appalling that as one firm after another vaporizes — firms, let's remember, that the S.E.C. was supposed to be regulating — the only thing the agency can think to do is flog the shorts.

There were so many better moves it could have made. After Bear Stearns fell, it could have sent SWAT teams into all the other financial firms to assess their mortgage-backed paper. It could have then announced to the world the health of each firm, which would have helped the market regain some confidence. It could have forced firms to disclose their mortgage-backed holdings so that counterparties could evaluate them. It did none of these things.

Then again, maybe the S.E.C. is trying to cover up its own culpability in this crisis. Four years ago, the agency pushed through a rule that allowed the big investment banks to take on a great deal more debt. As a result, debt ratios rose from about 12 to 1 to more like 30 to 1. Guess what Lehman's debt ratio was when it went bust? Yep: 30 to 1.


Barry Ritholtz says the market's recovery is just another bear market rally. I agree with that assessment (click on charts to enlarge and read my comments):




Now, you may have noticed that I call my non-financial portion of my blogroll over on the left, "Scrapple". During the trading day, I read plenty of pertinent stuff from the Pig Pen, but often I need to read something else to clear the brain, whether it's about music, my neighborhood, real estate in my neighborhood, or whatever. I can recommend nearly every link to the left, if you happen to share exactly the same interests that I do.

After noshing on some nourishing pork detritus culled from the Pig Pen and Scrapple blogrolls, I'll be ready to tackle another week's worth of market mayhem. Or at least whatever Monday brings.

19 September 2008

The Genius I Was

This past week has been so engrossing that it's left me spent, with little but a modified cliche:

Even the sun shines on the Pig's ass some days.

The Trashcan Sinatras' song, "The Genius I Was" came to my mind repeatedly this afternoon. Here's the Trashcans' crap video of that lovely song from their brilliant but obscure 1996 record, A Happy Pocket:



So why am I thinking I'm either lucky, or a genius?

The proof is in the pudding, otherwise known as this week's trades.

Ha! I knew I had another cliche in me.

Today's transactions:

- Sold half my remaining position in the ultra-long financials (UYG) at $22.095 from a cost basis of $17.4825 for a gain of 26.4%.

- Sold 2K shares of AIG too effin' early at $3.01 from a cost basis of $2.52 for a gain of 19.4%.

Now I'm mostly in cash, trying to figure out what's next. I'm keeping my eye on gold (GLD) and buttressed-by-the-government AIG on any pullbacks. Also looking to cash out of my ultra-long S&P500 ETF (SSO) soon and eventually return to the short side via the ultra-short S&P500 ETF (SDS). Finally, I look forward to unloading the remaining position in UYG with the idea of trading UYG and its ultra-short counterpart SKF back-and-forth if it continues to be rewardingly volatile.

Windfall

Today, I mostly watched the market whip around. Need a visual? Here's a simple chart from the Times that says it all:



I did get in one transaction that came full circle, buying 1K shares of UYG at $15.735 in the morning, and selling 1K shares in the afternoon at $18.23, scoring a 15.9% return in a matter of hours. Hence, the title of this post, and the two YouTube offerings of Son Volt playing one of their best songs:





So, why did the market surge over 500 points from the lunchtime bottom?

Perhaps the fear that the U.S. would follow the U.K.'s example in banning shorts from adding to their positions through 2008. This news certainly hammered the shorts today.

Perhaps the VIX passing 42 confirmed a short-term bottom. I'm wary of our government hindering the shorting of stocks, but I have to trade with the possibility that it may soon become tougher to trade on the short side.

Barry Ritholtz is really, really pissed
about this possibility. As much as I appreciate the flailing frustration in his verbiage, the anger is productive if you take note of points 2, 4, and 5, which I've conveniently put in bold:

This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.

This is the ultimate bailout attempt, which will have repercussions far far beyond our imaginations:

1) We suffer a loss of Market Integrity; The US is now a Banana Republic

2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;

3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections -- especially coming on top of the Fannie/Freddie bailout;

4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;

5) Expect a huge increase in volatility -- upwards first, then down;

We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction.



Take these factors into account, and you should see why I'm on the long side of the market right now.

And will soon be back on the short bus, riding this market down with my fellow morons, idiots, and a boy named Trig.

18 September 2008

VIX Suggests Going Long Because of, Not in Spite of, the Panicky Markets

Have we achieved a market bottom, at least in the short-term?

Bespoke has some thoughts on this:

Below we highlight a chart of the VIX index that measures volatility. As shown below, today's spike to 35 would mark the highest closing price since late 2002. People have been waiting for this spike to signal a short-term bottom, but while this is the highest level of the current bear market, it got well into the 40s back in '98 and the early 2000s.





Actually, by the end of the day, the VIX had crossed 36.

Anticipating the possibility that we may have hit bottom, albeit temporarily, I am slowly building up some long positions while everyone else seems to be panicking and selling.

Today, I added to my ultra-long financials position (UYG) in oh-so-a-contrarian manner at $17.39 and at $16.49, bringing the cost basis of that position down to $17.48. And re-logging into my trading account with minutes to spare in the trading day, I bought some shares of the ultra-long S&P500 ETF (SSO) at 3:59pm for $49.64.

Today's relevant tune is "Relative Surplus Value" by the Weakerthans. The particularly poignant lyrics are below. They work better with the music playing, with the pauses and rhythmic breaks stressing certain lyrics over others:
I touch my name-tag, should say, "HELLO I'M too tired to smile today," squeak the chair once, take a deep breath, straighten my tie and say, "What's the damage?" The pause feels like an extra year of high-school. The CEO takes me aside. I'm down 12 points, and they're selling. The graphs in the boardroom show by the time the market opens in Tokyo I'll be worthless.


17 September 2008

Sold the Gold




Sold my gold today. Closed out the position at $82.13, off of a cost basis of $78.13, for a gain of 5.1%. Today's $5+ spike convinced me to pocket the profits, and await a lower re-entry point.

Assorted Thoughts on Two Exhausting Days


First off, some associates (of Howard Stern, not Lehman Brothers) pulled some shenanigans that are worth your viewing.

This morning, I put off heading to the office to watch Governor Paterson give an impressive performance on CNBC, detailing his efforts to assist AIG in its attempts to stay liquid. And with the help of the federal government, it looks like AIG will survive.

Why did I buy AIG shares today? Unlike Lehman, I thought AIG was too big to fail. I also felt good about propping up the share price in my own very small way, as I know many people who work at AIG, or are AIG alumni.

I picked up shares at $2.30 and 2.74, for a cost basis of $2.52. Looking at the after-hours prices, this purchase looks like a wash for now. I'd be feeling warmer and fuzzier if I had dumped the shares at $4.50 a couple hours after purchasing them.

On a more uplifting note, I sold out the remaining ultra-short financials position in SKF right after the open at $141.49. Combined with Monday's sale of SKF at $125, I sold out the position at an average of $127.46 a share off of an original cost basis of $109.46. That $18 gain per share worked out to a percentage gain of 16.4%.

It's a good thing I sold out my SKF position. This volatile ETF traded in a $32 range today, closing at $118.66.

Now that I've introduced volatility into this meandering post, onto some volatility charts:





The extreme readings on the VIX and VXO volatility charts above suggest a near-term bottom, so I bought shares of UYG, the ultra-long financials ETF at $18.03

The last two days have been engrossing and exhausting. Reminded me of an excellent Wrens tune (This Boy is Exhausted) that you can hear in this fan-made video:



Some trite lessons learned during these last two days:

Stay calm, analytical, and centered as the market swings violently. I've tried to keep my eye on the horizon line, which is apparently suggested for those poor souls who suffer seasickness. Much like a rocking boat, I guess I enjoy the ride the market provides.

That old adage that inspired the name of this blog: "Bulls make money, bears make money, and pigs get slaughtered" has almost become a mantra. But not like that awfully tedious Chiodos song. (No link for that. Blog's gotta have standards.)

It's also a good idea to keep attuned to the bigger picture. And I mean looking at long-term trends on charts, not hugging loved ones or huffing the resplendent flora.

12 September 2008

Missed Opportunities

I didn't sell any of my SKF position at the open on the news of Lehman Brothers' fragility. Early in the day, SKF traded in the low-to-mid $120's.

(Damn.)

Bought a few shares near the close at $112.98, upping the cost basis of my position to $109.46.

(Woo hoo!)

Needless to say, I missed an opportunity to pocket a ~15% profit, and still buy back into my position at the end of the day.

I've posted a couple of charts down below that show how volatile SKF trades intra-day, and over time.

Over the past six weeks, SKF has traded in a $50 range.

In the past five days, SKF has traded in a nearly $30 range.

Granted, these are ultra-short financials, so the shares are leveraging a sector in turmoil. The price swings should be pretty fierce.




Douglas A. McIntyre
is despairing the financial sector:

In the next day or two, the financial markets could hit their tipping point. It is certainly not beyond the realm of the possible that Lehman (LEH) and Washington Mutual (WM) could fail. Merrill Lynch (MER) is also trading off sharply.

Looking into what is now a nearly bottomless well, a failure of several firms could cut the implied value of mortgage-back securities and other consumer debt instruments by 20% or 30% more than their nominal value a few weeks ago.This is not a measured failure of inherent value. It is an annihilation. Value of existing derivatives, which have not been valued by trading in the open market could face a catastrophic failure.

However, our government is apparently playing matchmaker, and is hoping to find a suitor to buy Lehman by the opening of Asian markets on Monday. This concerns me and my short financials position in the very short term. Could a Lehman deal trigger a relief rally in the financials, albeit for a brief period of time, a la the fleeting Monday Fannie/Freddie rally?

Let's see what Friday brings. I doubt it will be dull over on Broad and Wall Streets.

11 September 2008

Today's a day to remember and reflect on that deceptively beautiful day seven years ago.

Back then, I lived in Midtown. 47th Street in Hell's Kitchen. I was working at an entertainment law firm then known as Frankfurt Garbus on Madison Avenue, so I hopped aboard the M50 bus for the short commute. As I sat down, the bus driver was annoyingly and uncharacteristically yammering with a couple of my fellow passengers. Not the morning person, I like as much peace in the AM as can be mustered in Manhattan. But then I heard the fantastic topic of conversation, that a plane had struck the WTC.

The M50 crossed avenue after avenue like normal until I exited at Madison and peered to the south. In the distance, I could see some of the plume of smoke billowing from the tower. I then hurriedly got to the office. In a partner's office, one of the many with televisions, I saw a bawling secretary sitting at the desk, with partners, associates, and other staff sitting on the floor, standing, whatever, watching the broadcast.

Thankfully, it's not much of a story. I finally left the office at about noon, walking back crosstown while hordes of people poured north on the avenues. I remember trying to go to Mercury Bar on 9th Avenue to get a drink, perhaps a burger, and spend time with my neighbors (my wife was stuck in Greece at the time, so I was left to my own devices). The bar didn't open that day, so I stayed in, with televisions on in both the living room and upstairs in the loft.

A few weeks ago, I spent an afternoon at the Newseum in DC. The 9/11 exhibit was affecting--it doesn't take much to get me started. I was struck by the wall of newspaper front pages from 9/12, specifically the one below. I still feel the same, seven years on.

09 September 2008

It's Good To Be Short

Top Gear's Richard Hammond (bloke on the right) survived a horrific drag car crash thanks to his lack of stature. Like the Hamster, it's a good thing I'm short.

During Monday's ridiculous run-up, I sold my ultra-long Dow shares into the rally for $60.55, from a cost basis of $63.96, or a loss of 5.3%.

Yes, I know, ouch. That's quite a haircut on an ostensibly conservative holding. But I thought this rally was my best opportunity to unload my large long position. The bear market rally since July just wasn't going to surge towards profitability for my Dow shares. The taxpayer's/government's takeover of Fannie and Freddie may have taken a wee bit of uncertainty out of the market, but this isn't the kind of news that should nourish a bull rally of any significance.

So I went short. I took the proceeds from my long Dow position, and loaded up on shares of the ultra-short S&P500 ETF (SDS) at $67.99, and added to my ultra-short financials ETF (SKF), making the new cost basis for those shares of $108.84. The value of these positions is now more than the 5.3% loss I incurred on Monday.

I also added to my gold ETF (GLD) at $76.95, bringing its cost basis down to $78.13.

The market today acted like a properly hurled boomerang--it went up, and came right back down to Earth:



Here's one opinion from Douglas A. McIntyre that Monday's F-squared rally was for suckers:

In community college Economics 101 students learn that there can be dips in bull markets. Usually these are caused by a single event like a change in the party that runs Congress. The same holds true for bear markets. Suckers jump in on one piece of news or another. The market spikes up. A week later, it's gone.

The Fannie Mae (FNM) and Freddie Mac (FRE) rescue pushed the market higher and may do so for a few days. In Asia, they know better. The rally never made it beyond the first 24 hours. Markets turned down in Day Two.

The overwhelming evidence is that almost no one benefited from the government taking over the agencies. The rest of the economy is in the toilet. A lot of data has come out in the last day underscoring that point.

...

The market really did not rally. A few stocks did. GE (GE) sits at $29, still relatively near multi-year lows. Boeing (BA) faces a strike which could go on for months. That will hurt earnings and employment at scores of its suppliers. Boeing's shares could clearly drop. Ford (F) is barely off a 20-year low. The same could be said of Microsoft (MSFT).

If the stock prices of Washington Mutual (WM) and Lehman (LEH) tell any tale it is that they will have to be rescued or cease to exist as independent companies.

Most of the seminal stocks in key industries are still well down and have little prospect of recovery.

If a recession is defined by the breadth of its damage, this is already a powerful one.

Trader Mike provides pithy agreement with the above notion of a sucker's rally:
Two things stood out to me as I looked through the charts though. First was the S&P 500 stopping right at its 50-day moving average. So I'm watching the action there closely. Second was the striking weakness in technology. The QQQQ actually closed lower thanks to weakness in GOOG and AAPL. That technology weakness really makes me think that this relief rally will be short lived.
Beyond the current calamities affecting the stock market, there are also broader negative seasonal trends, i.e. as summer turns to fall, the markets also fall.

You want some proof of this assertion? I have several sources for your enjoyment.

First, Bespoke says September consistently stumbles:

As the unofficial end of Summer draws near, market activity is likely to pick up in the coming weeks as traders set themselves up for the end of the year. If history is any indication, the last four months should provide some improvement to this year's double-digit percentage losses. History shows, however, that September could present some rough sledding before any rally occurs.

In the chart below, we show the average historical trading pattern of the S&P 500 during the last four months of the year. The blue line shows the S&P 500's trading pattern from 1960 - 2007, while the red line shows the average of the last ten years. As shown, over both time frames, the S&P 500 typically declines during most of September before staging a year-end rally beginning in late September/early October.





Jim Kingsland wrote a year ago
that September is the cruelest month:

Stock investors are bracing for a bad September -- knowing it has a well-deserved reputation for being the worst month of the year.

Since 1929, stocks have declined an average 1.2% in September, compared with an average gain of 0.59% during all months of the year.

"There's been a frequency of negative numbers," says Sam Stovall, chief investment strategist at Standard & Poor's. "September is the only month in which it falls more than it rises."

Why is September so bad? Part of the reason is a seasonal slowdown of money flowing into the market, so there's less new money to push up prices. In addition, Stovall says some mutual funds "have October as fiscal year-end, and may be selling losing positions from mid-September until mid-October."
And Mark Hulbert at Marketwatch agrees that September sucks, but he thinks the phenomenon is an example of correlation without causation, a.k.a. data mining:
My favorite illustration of this phenomenon, which long-term readers of my column will recognize, comes from David Leinweber, founding director of the Center for Innovative Financial Technology at the University of California at Berkeley. Several years ago he searched through all the data on a United Nations CD-ROM to find the indicator with the most statistically significant correlation with the S&P 500. His discovery: butter production in Bangladesh.
Hulbert debunks some unconvincing arguments for September's malaise, e.g., parents sell stocks to pay for tuition, but he didn't dig deep enough in the interweb to find Kingland's explanations.

All things said, I'm inclined to follow the seasonal trend, as well as the broader market trend, which means I'm long gold and otherwise short.

05 September 2008

Some Proper (and Improper) Justifications for Buying Gold


If only there were a vine, then I could swing across this pit and grab that tempting gold, shining and taunting from so close, yet so far. At least according to the primitive game physics of an Atari 2600 title.

Today, I picked up more shares of GLD at $78.49, for a new cost basis of $78.72. I know, you're thrilled. Absolutely ecstatic for me.

Well, here's why I bought some soft yellow metal.

Previously, I didn't find any justification for the seasonal rise in the price of gold. Apparently, Indians (of the South Asian persuasion) have something to do with this phenomenon, as well as slacker European jewelers returning to work after spending August pastying up the Greek isles and the Gold Coast of Spain.

This piece suggests a justification for the seasonal rise in the price of gold:
70% of all gold manufactured each year goes into jewelry, and is one of the major reasons for the seasonal pattern in gold.

Consumption causes prices to be low in August when European jewelry fabricators are on vacation but then to rise immediately thereafter. The fourth quarter is the peak season for gift-giving, with gold jewelry most highly prized.

Harvest and wedding festivals begin in September in India --- the world's largest consumer of gold. Then come year-end holidays in the United States and finally Chinese New Year. By late December, gold demand can be exhausted.

You can find this same reasoning on other sites throughout the interweb, too, like here:

Seasonality also exists in gold. There are times of the calendar year when gold tends to do well and other times when it does not. Although there are many varying reasons for this phenomenon around the world, the most famous example of gold seasonality has to be the Indian wedding season.

Indians have a deep cultural affinity for gold, so in the autumn India 's farmers tend to invest their profits from harvest in gold. But even more gold is bought for the Indian weddings that happen late in the year during festivals, mainly in October and November. Something like 40% of India 's annual gold demand occurs in this short period of time. Wedding gold is often in the form of intricate 22-karat jewelry that the bride's parents give her to secure her financial future and financial independence within her husband's family.

This same piece produced this very busy chart below that somehow shows that it's a good time to buy some gold. Or you could just look at my much-clearer annotated charts here, here, and here.



For some belabored writing in favor of a position in gold, check out this piece at Marketwatch. Or if you want some technical justification full of Elliott Wave and Fibonacci goodness, check out this piece. If you think someone who refers to gold as the "Ancient Metal of Kings" is worth reading, well good luck with this post.

04 September 2008

Portfolio Changes



Today brought some changes to the portfolio. Before I get to those, I'm starting to change my tune about this bear market rally. I think it may stall out before the Dow breaches 12K after reading this market outlook, found via Daily Options Report:

* Liquidity Drying Up - I see that Rennie Yang, author of the excellent Market Tells service, observes that 20-day volume in the stock market has made a seven-year low. "Once in 2004 and a couple of times in the 70's NYSE volume hit a three-year low," he observes, "but this is the first time in the last fifty years we've seen it hit a 5-year+ low. Volume is not just low, it's really low." Of course, it's not just that volume is low; it's that we are seeing reduced volume following a bounce from the mid-July lows. If you think in Market Profile terms, this means that higher prices are failing to attract participation--not something you'd expect to see if this were a fresh bull market leg.
* Checking Readership - I've mentioned on a number of occasions that the readership of this blog tends to spike during bear market swings and pull back during bullish moves. Since the summer of 2007, this has formed a rather accurate timing tool with respect to intermediate-term market tops and bottoms. The pattern of readership of late has been consistent with tops, not bottoms, in the market.

* Hmmm... - Yes, the market looks weak right now, and I wouldn't be surprised to see us test the July lows before too long. That having been said, I notice that we're knocking at the door of multi-month highs in retail stocks (RTH) and that we're posting multi-week highs in housing stocks ($HGX). Not exactly what you'd expect if all were going to hell in a handbasket...a lot of issues might be setting up for non-confirmations of any test of lows.
Trader's Narrative also recently lamented the limp market by pointing out the recent rallies off of oversold levels have been getting smaller and smaller.

So the nattering nabobs of negativism convinced me to make some changes to the portfolio.

On the selling front, I unloaded the entire UYG position at $22.64, for a gain of 6%. Click on the chart below for some technical justification for today's sale.


Conversely, I initiated a swing trade by buying shares of the ultra-short financials ETF (SKF) at the bargain price of $109.99. The SKF position is approximately one-fourth the size of the closed UYG position. The short-term trading thesis for the SKF position is to sell if SKF moves into $130-$140 range, and swing back into UYG below $19.

Of course, there's a clickable annotated chart of SKF, if you're interested:




I also put my money where my mouth (pen, keyboard, whatever) is and purchased some gold ETF shares (GLD) at $78.95. Below are two informative GLD charts, the first a daily chart, the second a weekly chart:




If you need some hearty fundamentals after all this technical chartastic mumbo-jumbo, The Big Picture offers up a Bloomberg piece pointing out that Wall Street analysts are far too optimistic about corporate earnings, further cementing my bearish outlook.