Which Way Will We Go?

Posted by Ray on August 31, 2009 under Main | Be the First to Comment

I can say with 100% certainty that I am not sure which way the markets will trade. What I do know is that perfection has been priced into equities and they currently trade at 130x current earnings and 26x future earnings. I know that only 25% of the S&P 500 has beaten earnings expectations with even fewer beating on the bottom line and estimates have been substantially reduced.

I realize that my bearishness has not paid off, well not totally at least. I called a top on August 7^th and we basically have seen slightly higher prices over that close, but nothing to be jealous about. In fact, we are trading right in the area that I said was the top and we are on our way back down, kind of. Frankly, this is not the selloff I was looking for, but there are telling signs that I am correct. Treasuries had not sold off during this parabolic rally, which should make you nervous, and that is currently my largest positions, 2 year notes to be exact.

I expect treasuries will outperform in the near term as the dollar gains strength, although today we are seeing a weaker dollar along with weak stocks and weak commodities which is a bit odd. Perhaps we are seeing the decoupling of commodities from the dollar and stocks, but I do not think that is the case. What I do think is happening is people are taking profits from some commodities like gold and oil, both of which have done fairly well this year. However, industrial metals are fairing OK today with silver up 8 cents and palladium, one of my favorites, up over a dollar which is more than likely due to the weaker dollar, but it is possible people see these metals as the recovery play, which is what I am doing on a longer term basis.

Regardless, I do believe this is the beginning of the selloff which could be as little as 7-8% to as large as 20%, depending on who you listen to. I am in the camp of somewhere between the 8-20% range based on a severely overbought market and the underlying fundamentals. If we do not produce 4% GDP growth then there is simply no way equities can remain at these prices which mean there is a lot more pain for those who are not defensive at this stage. I do like corporate bonds which have only 2% GDP growth built into their prices which makes them much less risky than stocks.

I just finished reading an article on CNBC.com where they tell you that selling may happen in September, but you do not have to be the seller, which I found odd. Basically, it said that you should hold your stocks even though a correction could be coming (I thought we were over the buy and hold philosophy?). Frankly, I think that since we do not know how severe the selloff might, or might not, be one would be more inclined to reduce some risk now and be ready to buy when they think it bottomed.

Now, I sold all but about 7% of my equity holdings, which is my comfort zone, and am ready to buy when I think prices are right. I may or may not be right to do this, but so far I have done OK with this strategy and I do believe, based on what rising treasuries are telling me, that I am correct. I just do not see how one can be so completely bullish on the market right now, but that is what makes a market work. The only reason I can foresee strong equity prices is because the liquidity provided from the Fed is so great that there is no place to put assets, but even that philosophy is setting you up for disaster as the Fed could rein in that liquidity fairly quickly.

No matter what you may think I am sure you can agree with me on a few points. Nothing goes straight up and when AIG, Fannie and Freddie are the leaders in the market, up over 200% apiece, there is a problem. There is virtually no equity left in those firms and the government also indicated that they will replace Freddie and Fannie with something else in the future. As for AIG there is nothing there to really salvage as they owe the taxpayers some $130B, but for some reason the stock is parabolic. That type of leadership is not what you want to see in a market that is up some 50% from its lows.

For those reasons, plus slightly less bad fundamentals is why I do not want to risk capital at this stage on the long side. Being short is just plain dangerous as well mostly because of the massive liquidity, but the fact that you really cannot borrow shares to short is another major reason to not short anything, you can’t. The whole thing is just odd and anyone who thinks that it is not weird that the market never goes down is simply not thinking logical. Whether you agree with me or not you know that nothing, ever, goes straight up like what we have seen since July.

I suppose if I was a conspiracy theorist I would have a logical explanation like the Fed is buying stocks or some other government controlled entity. However, I am not that demented, I don’t think at least, but I do think something stinks to high heaven here. How long can we see stocks and bonds trade up in tandem? It just doesn’t make sense, period.

While I feel comfortable in my bearish position I am also willing to say that there is nothing stopping the market from going to the moon. Especially if you cannot short stocks or you make it so expensive that shorting the stock is not a realistic solution, which is not a conspiracy theory as we all know this is happening. Either way we will see what happens, but I cannot stress, based on the pure mathematics, not just my opinion, that there is just a ton of risk in stocks right now.

Abby Joseph Cohen’s Bull Market Call

Posted by Ray on August 6, 2009 under Markets | Be the First to Comment

I thought we had seen enough of Cohen after her disastrous calls in 1999-2000, but here we are again looking at her predictions. If there was ever a reason to short the market I think this is it. Cohen is one of those analysts who has a bad track record, but everyone forgets about it and praises her with being correct more often than she usually is. Now, forecasting the markets is tough and if your success rate is 55% then you are on top of the game, but I think her track record is worse than that.

I am not saying she is not smart or that I have a better track record, but I am saying she has a history, like Cramer, of cherry picking her previous picks. Not to mention, she gained notoriety in the 1990’s by always calling the market higher. Now, I am not sure if you remember the 1990’s, but it had a few really good years and, frankly, you could have put your money under the mattress and it would have doubled. Ah, those wonderful magical times when I trusted my government and we actually had a decent economy, kind of.

Goldman must be short the markets, here is some of the absurdities she said:

“We do think that the new bull market has begun—it may prove that it started in March of this year,” Cohen said in a live interview. “We’ve talked about the staircase pattern of recovery in an equity market. Even if this is a new bull market, don’t expect it to look like a V—expect it to look like a series of upward steps.”

She went on to say:

“Over the last year or two with all the difficult problems in the financial services sector, many of us have lost track of the fact that most of these stocks do follow economic growth. So when GDP is doing well, financial services tend to do well at the same time,” she said.

The third quarter is looking stable for companies, said Cohen as most firms have held profit margins up well even during the difficult portion of the recession. She said the cost containment and improvement in margin would be beneficial for companies in the second half of the year.

Additionally, because companies and investors tend to look at profits on a year-over-year basis, “the third and fourth quarters of last year were dreadful so the third and fourth quarters of 2009 will not only good, but fabulous by comparison,” she said.

This really blew my mind:

In terms of the unemployment situation, Cohen said there are slow, but steady signs of improvement in the labor market.

“Whether the [employment] number comes in light or unpleasant tomorrow, we’re seeing improvement even in the labor market—it appears the job losses are slowing and there is some job creation going on,” she said.

I am not sure what data she is looking at, but man I need to get some of what she is smoking.

So, she said that even though things stink, they stink less than last year and we should just get over the whole top line revenue growth thing.  Either way her bullish call makes me cringe, on top of all the data I am currently looking at. Anyone else remember her bullish call on technology in 2000? Yup, enough said.

This is What We Were looking For

Posted by Ray on October 28, 2008 under Main | Be the First to Comment

It looked as though the market was going to have yet another day of a downward spiral, but our prediction of a rally came to fruition after all. Yes, we were thinking the rally would not hold unless we had significant buying power enter the market, but the buying did come in after all.

The Dow broke through the 8,500 mark and it needs to close above this mark. It is physiologically important, but also technically important. While the long awaited rally is here we still have an hour and a half before the closing and anything can happen.

This would be an opportunity to sell some loosing positions, but wait before you start to buy randomly. This rally is just a short reprieve from further declines and may not even hold through the close of the day.

We do expect to see a nice close today, for a change.

Asian Markets Are Down, Again

Posted by Ray on October 22, 2008 under Main | Be the First to Comment

We did not test the lows of Friday, October 10th, but based on the selloff yesterday and the decline in the Asian markets it looks like the testing of the lows will be tomorrow. Currently the Asian-Pacific markets are down 2 to 6% with the Nikkei leading the selloff.

This thing is not over, but we need to hit the lows before the recovery starts. Even after the lows are reached the 1% or higher daily swings will not stop. Volatility will remain high for months as the market reacts to new lows and economic data. We avoided a complete meltdown in the banking sector, but that risk is mitigated now.

That is good news for us, but the market needs to capitulate to stop the constant 5% daily drops. Unfortunately, this means a one day 10 – 20% or more declines in equities, on top of the 38% loss we have already. Yes, this is a tough pill to swallow, but it needs to happen. Buy on extreme weakness, greater than negative 3% daily drops, and be cautious on strength and unload loosing positions or weaker holdings.

Continue dollar cost averaging, carefully. We are not out of the woods yet, but some companies are trading at great prices with high yields. Buy strong balance sheet firms and consumer cyclical as they should hold up under selling pressure and a recession which could last 2 years.

Oil traded down big time which is in part due to a stronger dollar, but also because world demand is declining rapidly. Gold has lost its luster at the moment, but it looks somewhat attractive at the moment. The good news is treasuries, the longer term maturities, are seeing some strength which was not there a week ago, while this is a sign of flight to quality it does represent confidence in the government and should help keep foreign dollars in the dollar, which we need right now.

Be careful and cautious. We have been calling this market pretty well, but if we are right this will turn very bad in the short-term.

A Decent Relief Rally, but It May Fail

Posted by Ray on October 9, 2008 under Main | Be the First to Comment

Yesterday we saw 4 reversals in trading on somewhat decent volume, but the market still closed down after being up nearly 200 points. This is an indication that there is more selling pressure to come, especially since the Fed has made such strong moves to quell market concerns.

Even good news, such as unemployment and the fact that the government may buy into banks have not lifted the markets in a noticeable fashion. We hate to be the doom and gloom people and do like to see the market go up, but we feel a sense of duty to tell you what we see happening. The data still says the markets go lower.

We like 40% + cash positions still and would be selling into strength. Friday and next week will prove interesting and we believe you can buy into the markets at a much lower level. We did get some of our day-to-day predictions wrong, but cumulatively we were correct in what we predicted.

We are not rooting for a crash, but it needs to happen. We need the markets to have a swing down and close on its lows with heavy volume. That will represent a bottom and then begin to dollar cost average in as volatility will remain high for sometime to come. This, of course, is barring unforeseen problems such as further bank failures or worse.

I cannot believe we are going to even say this, because he is oh so wrong so often, but Cramer is correct on his predictions of the market. Where we do not think he is correct is in his long-term money. We think you should move some of this to cash as well, the 40% mark is a good place to start. It makes no sense to say that short-term money needs to be moved, which it does, but long-term money should suffer.

At 40% cash you have enough in equities to catch the recovery, whenever that occurs, and enough to dollar cost average back into the market to mitigate potential losses. Right now, it just make sense…unless you think that the Fed typically puts in money to bailout banks, money market funds, bonds, commercial paper and arbitrarily cuts rates overnight.