Portfolio Changes

Added shares to the 3X Bear Financials (FAZ) position this morning at the price of $58.95, for a new cost basis of $61.38.

A.C. Newman Delivers Two New Tracks from D.U.M.B.O.

Here are a couple of tracks from A.C. Newman's new record, recorded in neighboring neighborhood D.U.M.B.O. of all places.

Annotated Charts for the Upcoming Week

Music Video Comparison

The ubiquitous video supra reminded me of the old-school video infra. Discuss.

Fozzie's Back in the Portfolio

Fozzie (FAZ) returned for another visit to the portfolio on Friday. I sold him out on the 20th for $82.87, but brought him back in from the cold for an average cost of $61.92.

Below is a chart for FAZ. You should note how popular this 3X-levered offering has become over the last eight trading days. It's also showing some intriguing volatility, enticing to the short-term trader. Its inverse ETF, the 3X Bull Financials (FAS) is also trading quite heavily as of late. I'll write here if I find the right opportunity to swing trade it, but for now, I'm still more comfortable putting money on the short side, even considering how low the financials have fallen.

Portfolio Changes

During yesterday's rally from deeply oversold levels, I picked up some additional shares of the 3X-levered short Russell 2K, TZA, at $60.055.

That brings the cost basis of my TZA holdings down to $71.48.

Portfolio Changes

Way back in late November, I picked up some shares of Fozzie Bear (FAZ), the 3X-levered short financials ETF. I had intended to keep it in the portfolio for a brief period:

I don't plan on keeping Fozzie Bear in the portfolio for long--I'll put him up for a few nights, let him clean up a bit, and then send him on his merry way into someone else's (presumably) short-term trading portfolio.

But then a bear market rally, as shown in the following chart, forced me to hunker down with Fozzie and his collection of groan-inducing Vaudevillian jokes.



And here's the chart of FAZ:



I closed out my position in FAZ based on several factors: 1. RSI(2) and Full Stochastics suggest FAZ is extremely overbought; 2. The news of Britain's bailout of RBS provided an opportunity to sell on the news; and 3. Re-balance a portfolio that was 100% short and looking greedy.

So how did holding shares a good month longer than I desired turn out?

Sold 170 shares of FAZ at $81.10 and 200 shares at $84.38 for an average sale price of $82.87. The cost basis was $51.26. That works out to a gain of $31.61 per share or 61.7%.

Bearing News from Thailand

Apparently, it's a Thai bear.

And here's some bearish news I've culled together while enjoying a jaunt around Thailand, fleeing a bit of NYC winter:

Corey Rosenbloom at Afraid to Trade believes the market is set to test or break the November lows. Here are some of Rosenbloom's arguments below. Click over to his excellent site for the entirety of his argument along with helpful annotated charts:

From a technical analysis standpoint, we’re officially on course today to test or break beneath the November 2008 lows in the US Equity Indexes - it’s now the highest probability play.
...
What could make this move quicker and more painful for the bulls is the Bull Trap that lured them in once price broke above EMA resistance for the first time in months and formed a ‘confluence buy’ trade… before reversing. The move down is likely to be even swifter as their stops are taken out one by one on the way down.

Also, we’ve now officially broken downwards out of either a rectangle pattern or an ascending triangle (also which trapped the bulls - we did have a breakout of an ascending triangle which lured more bulls in - they will be stopped out on the way down). Patterns with false breaks tend to have stronger moves in the *opposite* direction.
...
Finally, there just isn’t any logical technical support, like a Fibonacci retracement (they’re all *above* price) or key Moving Average. There’s not even a meaningful swing high or low to halt price until it touches the November lows, which is the whole point behind the notion of a “test” in the market.
...
In sum, nothing is guaranteed in the market, but it appears to me at least that the odds have now shifted solidly in favor of price making an expansion move that takes us down to ‘test’ the November lows of 750, and I would further assume that buyers would fail and that price would be taken out - but we’ll cross that bridge once we get there.

Phil Davis is bottom-fishing in the financials (bold added):

We like XLF as a bet against the long-term collapse of the US banking system and you can buy that ETF for $10.80 and sell the March $10 puts and calls for $2.90, which is a net entry of $7.70 if called away at $10 (up 29%) or an average entry of $8.85 if it is put to you on March 20th, an 18% discount off the current price. As more of a gamble, we also like the UYGs, a 2x ETF that tracks the XLF and is back below $5 at $4.71 (was $65 in October 2007). While we don't expect it to go back to its highs, it won't take much improvement in the financials to rally this one so we like scaling in at this price (it may go back to $3.50 on a spike down where we'd really like them) and holding it naked or selling the March $5 puts and calls for $2 to drop the net to $2.71 (called away with a near double) or a $3.85 average entry (an 18% discount).

Yes, Alcoa (AA) was terrible (but they already told us earnings would suck), but Infosys (INFY) came in with a beat this morning and we have CBSH tomorrow and JPM and BLK on Thursday and that should firm up our picture of the financials but it will be too late to buy XLF and UYG by then if I'm right!

Oddly enough, Phil seems willing to scale into a stock that could spike down 30%, when he'd find UYG even more attractive. Why not plough in at $3.50? We seem to be heading in that direction.

One caveat to the bearish market moves over the last six trading days--the 800+ point drop in the Dow has pushed the market into oversold territory according to RSI(2) and Full Stochastics. I fully agree with the bearish points of view I've been posting to the blog as of late, but I am keeping in mind that markets rarely go straight down.

Pessimistic Economic Analysis from David A. Rosenberg at Merrill Lynch

Barry Ritholtz pointed readers to a compellingly pessimistic economic analysis by David A. Rosenberg from Merrill Lynch. Another reason why Barry's blog is the second site I read in the a.m. (and throughout the day), right after the Times.

It looks like Merrill Lynch disappeared this report, but I got my (virtual) grubby mitts on the thing before it vaporized into the ether. Here are several lengthy excerpts:

Market not discounting that recovery will take more time We have enjoyed a big equity market rally in the past six weeks that seems to be discounting a very quick end to the economic contraction with the arrival of the new administration and all of its political capital. However, I'm left wondering what the market reaction will be when it becomes clear that the recovery will require a lot more time, because history shows that it is not at all unusual to see the entire period of extremely weak economic performance last between two and three years in the aftermath of a busted asset and credit bubble of the magnitude we have just seen.

When will our economy recover? David Callaway, in my prior post, thinks when oil prices percolate northward.

Rosenberg points to housing for signs of economic recovery, i.e. when the median value of a house reverts to the mean.

As I've said before, when bubbles burst and manias subside, prices don't usually stop at the long-term mean. Prices collapse, falling below the mean, before returning to a quieter historical path. We don't have to dig through the stacks, or even turn back the clock very far to find an obvious example.

When Rosenberg writes about the weak performance two-to-three years after an asset-class' bubble bursts, I believe Rosenberg has in mind the NASDAQ from the early aughts. After the NASDAQ bubble burst in early 2000, the market fell precipitously and spent much of 2002 and 2003 below the long-term trend/historical mean.

The following three charts show the performance of the NASDAQ from 1996 through the end of 2005. The blue line represents the 200-week moving average, a useful approximation of the mean trend for explanatory purposes. The first chart shows the bullish dot.com-driven market of the late 90's:



The next chart shows the bull market peak in March 2000, and the collapse through the 200-week moving average by year's end:



Through 2002, the NASDAQ didn't revert to the mean trend; it fell hard to the downside:

Without the context of the late 90's, 2003's NASDAQ performance is quite stunning, until you realize the index is merely heading back towards its long-term trend, the 200-week moving average. Look carefully and you'll see that the NASDAQ traded below its 200-week moving average for almost three years.

Now that I've thoroughly documented my NASDAQ example, let's return to excerpts from Rosenberg's report re: housing:

Housing led us in and will likely lead us out

In the meantime, it's doubtful that anything is going to bottom in advance of the housing sector, which led the contraction in credit, the bear market in equities and the recession. Since housing led us in, I think it's going to have to be the area of the economy and the markets that leads us out, and I'm talking specifically about home prices, which peaked in the summer of 2006. I remain convinced that there is at least another 15% downside to nationwide home prices as the problems on the coasts migrate to the financial centers in the Northeast.

Still plenty of helium to take out of this balloon

The excess supply is acting as a deadweight drag on prices. Basically, at just over $180,000 the median value of an existing home is back to where it was when we published our inaugural "bubble" report back in 2004. To actually go back to the home price levels that prevailed when real estate was in the "mania" stage in 2001 would mean a retreat toward $150,000 or another 15-20% downside from here. The move all the way down to $180,000 today from the bubble peak of over $230,000 in the summer of 2006 sounds big at -22% – and it is for anyone who was buying at that time – but keep in mind that median prices are still 40% higher now than they were a decade ago. In other words, there's still plenty of helium to take out of this balloon.

Housing isn't the only problem for economic recovery--the consumer has stopped spending altogether. Or just about:

Sharpest retrenchment in consumption on record

For the here and now, the triple combination of declining employment, eroding wages and the conscious effort to raise the savings rate is triggering a near collapse in consumer spending, which peaked in nominal terms in June, has declined every month since and is down at a 5.2% annual rate. This goes down as the sharpest retrenchment in consumption on record.

During that time, discretionary spending has collapsed at nearly a 15% average annual rate: motor vehicles (-38.7%), movies (-36.6%), air travel (-32.7%), sporting goods (-12.7%), hotels (-12.5%), casinos (-11.7%), jewelry (-10.3%), furniture (-9.8%), home improvement (-8.2%), appliances (-7.3%), clothing (-6.6%), computers (-6.5%), electronics (-6.5%), toys (-3.3%) and books (-2.3%).

Even recession proof items are being cut back on

Even so-called recession-proof items like food (-3.6% SAAR) are being cut back on as households shift from veal marsala to pot roast, and from brand name to private label (in real or unit terms, food consumption has declined for six months in a row, so this is not just about lower prices, but also about shifting spending patterns even when it comes to grocery shopping). Utilities have also declined at a 4.9% annual rate, though some of this is clearly price related. There are also widespread anecdotal reports of households falling behind on the monthly gas and electricity bills.

The areas where consumers are spending their money

The only areas where consumers have allocated more of their budget toward since the spending peak in June are sundries/drugs (+6.3% SAAR), medical services (+4.4%), telecom services (+4.8%; the cell phone, we are finding out, is a staple in this cycle), cable (+7.3%; clearly a substitute for movies, as movie attendance during the holiday season was off 5% YoY) and education services (+4.7%).

Rosenberg is no gourmand, suggesting that Americans are downshifting culinarily ("as households shift from veal marsala to pot roast"). Veal marsala isn't much of a step up from pot roast. Giving up two-inch thick dry-aged porterhouse for pot roast, or potted meat for that matter, is a punchier comparison. Only in my house is porterhouse a recession-proof food. Still, for an economic report, it ain't a bad line.

Finally, Rosenberg contemplates the fear that rising protectionism will sustain recession and exacerbate economic hardship, just like what Hoover did in the early 30's:

If you read the papers over the holiday period, rampant fiscal stimulus, auto bailouts and other rescue packages are occurring all over the world. There is a growing risk of protectionism, which has a historical pattern of following periods of deep global recessions (ie, this is all about self-preservation). For example, since that ballyhooed G-20 meeting in Washington in November, five of those countries – Russia, India, Indonesia, Brazil and Argentina – have announced their intentions to raise import tariffs or otherwise restrict trade. Russia has announced plans to raise tariffs on autos. India has already lifted duties on iron, steel and soy. Brazil and Argentina are putting together a case within Mercosur for boosting external tariffs.

That reminds me to finish up my latest reading on the Depression in the next week.

All in all, a report rich with compelling data, arguments, and insight.

Duck Season! Wabbit Season! Dirty Skunk Season! Fiddler Crab Season!

Naaah! It's earnings season!

And the EIC of Marketwatch, David Callaway, thinks earnings season means it's the end of bear season, as in the end of the bear market rally:

Everybody should have known the holidays would only delay it. The freight train of job cuts, plunging earnings and massive spending cutbacks set to hit the economy was, thankfully, pushed back a few weeks while stunned investors and workers across the globe caught their breath after the worst fourth quarter in decades.

But now the great dying has begun, and I'm not talking about German billionaires throwing themselves in front of trains or French aristocrats slitting their wrists, as alarming as these incidents have been. No, earnings season, the time for companies to 'fess up just how bad it's been for them in the last three months, is here.

Please tell us how you really feel.

I do appreciate how desperately Callaway wanted to call attention to the macabre suicides recently arising from the market turmoil. And I like his throwaway caveat, "alarming as these incidents have been." Reads like a last-minute add-on. Classy.

Callaway thinks we're in store for considerably more pain until investors show their confidence in the economy returning by bidding up oil prices?!?

So what will signal the turning point? Could it come during the worst of earnings season? Perhaps. But I expect it will come afterward, and that it will be tied to oil prices.

White Winter Hymnal - Fleet Foxes

Bank of America Eats a Bran Muffin, Finally Unloads Some Shares of China Construction Bank

Following up on my recent post on China's alleged interference with Bank of America's sale of some of its China Construction Bank holdings, Reuters reported today that BoA sold nearly $3B in shares (choice bits in bold):

The Bank of America raised $2.83 billion from selling part of its holding in China Construction Bank, and Hong Kong's richest tycoon followed by selling a $500 million stake in its rival, Bank of China.

Shares in China's big banks skidded on Wednesday after Bank of America's early-morning sale, with investors expecting further sell-downs in the face of slowing earnings growth at mainland lenders and the lapse of lock-up provisions on stake holdings.

China's three largest banks attracted big strategic investments from western financial giants at the time of their initial offerings. Some investors, including Royal Bank of Scotland, are under pressure to sell as the global financial crisis ravages the banking industry.

Bank of America sold more than 5.62 billion Construction Bank shares at 3.92 Hong Kong dollars each, according to a term sheet obtained by Reuters, in a deal that had been widely anticipated by the market.

Bank of America realizes a profit of about $1.13 billion on the stake sale, based on Construction Bank's initial offering price. It sold the stake at a 12 percent discount to the stock's Tuesday close.

On the 18th of December, the FT reported that shares of China Construction Bank were offered by Bank of America at a 15% discount to the then closing price of HK$4.63, or HK$3.92. Yesterday, China Construction Bank shares had returned to trading at mid-December levels before tumbling towards $4/share.

I guess BoA decided it was worth pissing off the Chinese to bolster its books. Or perhaps by delaying the sale for three weeks, the Chinese government broadcast its message loud and clear.

Western banks may continue unloading their Chinese bank holdings throughout the year to raise much-needed cash. We'll see if they heed China's warning, or follow BoA's lead and liquidate:

Citigroup said Bank of China might see further stake sales this year by Royal Bank of Scotland, which holds 8.3 percent, and Singapore's state investment agency, Temasek Holdings, which owns 4.1 percent. Lockups on those stakes lapsed last month, it said.

Industrial and Commercial Bank of China could also come under sale pressure this year.

Goldman Sachs, Allianz and American Express Company own a combined 7.3 percent in Industrial and Commercial Bank of China, with lockups that will lapse in April and October, Citigroup said in a note.

Bad news in China is good news for the portfolio. FXP popped more than 15% today from its recent doldrums.

Yacht Dance (Live)

Craptastic Projection for Today. Pooptastic Projection for the Year.

Following up on this post, and this post, how about some more turbulent market outlooks?

Todd Harrison from Minyanville via Marketwatch is wary of what is to come in '09:

When asked about my year-end price target on the S&P, my answer is constant. Tell me what the dollar will do and I'll offer an educated guess on stocks. Indeed, since the beginning of 2002, our financial machination has operated through the lens of "dollar devaluation vs. asset class deflation."

My sense for 2009 is that -- all else being equal -- we'll see wild movements and a wide range, perhaps with the S&P 600 as a nadir and one (if not two) 20% bear market rallies filled with false hope and empty promises.

The Jan. 20 transfer of power is an important inflection point, for if we can collectively navigate past that date without geopolitical conflict, stocks have room to run into March or April, when the bloom begins to fade on the new administration's rose.

...

This is no garden-variety one-and-done recession; it will be a prolonged process as we attempt to regain respectability on a global stage after eight years of mismanaged affairs. It would be myopic to expect a V-shaped recovery despite the historic stimuli being injected into the marketplace. Keep it in perspective, no matter what comes our way.

Joe Weisenthal at Clusterstock posted today's craptastic outlook before the market opened this morning (key bits in bold):

Earnings seasons gets going in earnest soon, but right now we're in the heart of pre-announcement season. Alcoa (AA0 announced layoffs and a production rollback, Time Warner (TWX) just announced a massive writedown as well as a worsening ad market, and now Intel (INTC) says its Q4 revenue will be down 23% from last year, or 20% sequentially. That's what you call falling off a cliff.

Now the rally will be tested.

Back To Me

More Than 80% of the S&P 500 Is Now Trading above its 50-day Moving Average. Whoopee?

406 stocks in the S&P 500 are trading above their 50-day moving average. Before today, over the past two years, there have been four episodes when so much of the S&P 500 (more than 80%) has traded above its short-term averages.

Click on the informative annotated chart to make it large and legible:



That's great, you say. The market has recovered quite a bit of ground, percentage-wise, since late November. And the market has done so well in spite of the continued onslaught of bad news (Madoff, GM/Chrysler, housing, unemployment; your pick).

The next chart shows what happened to the S&P 500 after reaching this milestone. You'll see that lately, nothing good has come after such overperformance:



Of the four times that more than 400 of the S&P 500 traded above their 50-DMA, the market broke down three times, and churned sideways one time.

If you're bullish, be careful.

One Permabear's Predictions for '09

You think I'm bearish right now? Check out the Tech Ticker interview below with permabear Gary Shilling:



Schilling projects 5-6% growth in China whereas the Economist's World in 2009 projects 8%.

Schilling projects that the S&P 500 falls to 600, about 35% below today's close, among other choice bits of negativism:

Gary Shilling's 2009 Predictions: We're Still Screwed

1. Sell homebuilder stocks and bonds.
2. If you plan to sell your house, second home or investment houses anytime soon, do so yesterday.
3. Sell some housing-related stocks.
4. Sell some consumer discretionary spending companies.
5. Sell most commercial real estate.
6. Sell some commodities.
7. Sell emerging market equities.
8. Sell emerging market debt.
9. Buy the dollar.
10. Sell stocks in general. (S&P 500 to 600)
11. Sell consumer lenders' equities.
12. Buy, carefully, high-grade bonds.

One thing to remember: the best economic forecasters from one year rarely retain their prowess through the next.

Short-Term Market Outlook with Three Annotated Charts

Below are three annotated charts offering up my short-term outlook for the broader market. As per usual, click on 'em to make 'em large and legible.

First up, the S&P 500 is in an up-trend achieved on low volume. It's now looking overbought and primed for a possible pullback:



Second, a chart of the number of S&P components trading above their 50-day moving averages. Another sign that a pullback is likely:



Third, a chart of the CBOE put/call ratio. Another indicator showing a too-optimistic market:

Dance with Me

Annotated Dow Chart

Click on the chart to make the annotations large and legible.

The New Year