How about a free 2009 outlook.
S&P will bottom around 500 (give or take 50) - estimate based on corporate earnings decline. This will be via breaking 1000 to the upside though with a target of 1150 (50% retracement) due to the inauguration of Obama. And that - my friends - will be the mother of all shorting opportunities.
Government will continue bailing out everyone via the Japanese style of spend, spend, spend, which, by the way, will only exacerbate any future inflation. But, the inflation will be the way of deflation for nearly all of 2009.
Government intervention will not prevent a quasi - depression. Unemployment will continue upwards of 600,000 weekly jobless claims and get to double digit unemployment rate from BLS non farm payrolls. All of us will know someone that is seriously affected by the economy.
Government debt will exceed GDP in 1st half 2009. This is pretty easy - we are already at 11 trillion and GDP is around 14 (which includes a couple trillion of cooked numbers, but that is beside the point). GDP will decrease substantially in the next 6 months.
The "2nd half of 09" recovery will not occur. Housing will continue to tank and will not return for several more years. Individuals will continue to save and this will affect corporate earnings by less spending on "stuff." Businesses will shrink operations or fail.
Depressed yet - don't be - the best opportunities arise from bad times. New inventions, new businesses, etc...
Saturday, December 20, 2008
Government Intervention
On CNBC, I keep hearing that stocks have bottomed and that bad news is discounted into the current price. While that may be true, I disagree. Let me explain. when the government used to be the "lender of last resort" - taking a loan was a deathknell for the bank holding company or primary dealer. Simply put, your company was in trouble and you needed to obtain a "punitive" loan. This is no different from our individual lives. If I need money and can't get it from a bank because I have no assets as collateral, I will go to an alternative financing company that charges a punitive rate.
Now, however, the government is the lender of first resort. Because all the banks no longer trust each other's books, the FED and Treasury have become the "only" lenders. Now, the automotive industry can no longer fund operations through commercial resources and have turned to the government. Ironically, at least their loan is somewhat punitive, albeit amounting to a slap of the wrist.
Ask yourself this, what happens if the government stopped funding all of this stuff. What happens when the government tries to exit their side of the equation. The answer - they can't. They can't and probably won't. This, my friends, is bad. Right now, the government is the "market" because normal buyers and sellers are not allowed to clear trades. Think of it this way, I have a rotten egg and you see I have a rotten egg. Because of my stupidity, I thought rotten eggs always appreciated in value and I bought that egg for 50 cents. I want to sell it to you for $1.00. You see the rotten egg and offer me 1 cent - because you know it is rotten, but wouldn't mind boiling it to decorate it.
We have a conundrum - at some price between 1 penny and 1.00, both of us will be happy. We argue back and forth and I decide that yeah, I should not have bought a rotten egg and asked 5 cents instead of a dollar. The buyer offers 3 and I take it. So, the prices cleared at 3 times the buyers initial offer and a 97% off what I "wanted." Overall, I lost because I was an idiot. So, let's say that I did this as a business. Well, a couple of rotten eggs later, and I am not making money anymore. In fact, I am most certainly on the verge of bankruptcy. Now, I can't let the eggs go for 3 cents, I need more to stay in business.
If I did declare bankruptcy, the other egg sellers will buy whatever of my business is left that is worth something. Perhaps my egg cartons - and - since I am liquidating, they will get it pretty cheap. However, I complain to the government and they decide to help. They figure that even though they know it is a rotten egg business, they will buy my rotten eggs for 25 cents until buyers return and decide to pay 25 cents. This prevents liquidation where the strong business gets to buy the weak business and the weak business no longer operates.
Folks - that is where we are - except, the rotten eggs are the large banking institutions. If they failed, there would be pieces to pick up - and have no doubt, there would be vultures of private equity to snag the remains. But, the government stepped in to "rescue" us from financial armageddon, thereby preventing the weak institutions from failing.
Initially, this looks good. Jobs are kept, businesses keep operating. However, something happens during failures - risky endeavors are punished, smart endeavors are rewarded. After the cleanup - the smart ones charge an appropriate rate for the implied risk. With the government stepping in however, everyone gets to compete at a very cheap rate. In fact, instead of taking loans from each other or getting private equity money, banks go straight to the government, since they have the best game in town - free money.
So that is where we are - the government is the market. They prevent failures. They essentially take money (taxes) from the strong individuals and businesses and give it to the weak companies that should be allowed to fail.
Now, however, the government is the lender of first resort. Because all the banks no longer trust each other's books, the FED and Treasury have become the "only" lenders. Now, the automotive industry can no longer fund operations through commercial resources and have turned to the government. Ironically, at least their loan is somewhat punitive, albeit amounting to a slap of the wrist.
Ask yourself this, what happens if the government stopped funding all of this stuff. What happens when the government tries to exit their side of the equation. The answer - they can't. They can't and probably won't. This, my friends, is bad. Right now, the government is the "market" because normal buyers and sellers are not allowed to clear trades. Think of it this way, I have a rotten egg and you see I have a rotten egg. Because of my stupidity, I thought rotten eggs always appreciated in value and I bought that egg for 50 cents. I want to sell it to you for $1.00. You see the rotten egg and offer me 1 cent - because you know it is rotten, but wouldn't mind boiling it to decorate it.
We have a conundrum - at some price between 1 penny and 1.00, both of us will be happy. We argue back and forth and I decide that yeah, I should not have bought a rotten egg and asked 5 cents instead of a dollar. The buyer offers 3 and I take it. So, the prices cleared at 3 times the buyers initial offer and a 97% off what I "wanted." Overall, I lost because I was an idiot. So, let's say that I did this as a business. Well, a couple of rotten eggs later, and I am not making money anymore. In fact, I am most certainly on the verge of bankruptcy. Now, I can't let the eggs go for 3 cents, I need more to stay in business.
If I did declare bankruptcy, the other egg sellers will buy whatever of my business is left that is worth something. Perhaps my egg cartons - and - since I am liquidating, they will get it pretty cheap. However, I complain to the government and they decide to help. They figure that even though they know it is a rotten egg business, they will buy my rotten eggs for 25 cents until buyers return and decide to pay 25 cents. This prevents liquidation where the strong business gets to buy the weak business and the weak business no longer operates.
Folks - that is where we are - except, the rotten eggs are the large banking institutions. If they failed, there would be pieces to pick up - and have no doubt, there would be vultures of private equity to snag the remains. But, the government stepped in to "rescue" us from financial armageddon, thereby preventing the weak institutions from failing.
Initially, this looks good. Jobs are kept, businesses keep operating. However, something happens during failures - risky endeavors are punished, smart endeavors are rewarded. After the cleanup - the smart ones charge an appropriate rate for the implied risk. With the government stepping in however, everyone gets to compete at a very cheap rate. In fact, instead of taking loans from each other or getting private equity money, banks go straight to the government, since they have the best game in town - free money.
So that is where we are - the government is the market. They prevent failures. They essentially take money (taxes) from the strong individuals and businesses and give it to the weak companies that should be allowed to fail.
Tuesday, December 9, 2008
Ho Ho Ho - Santa Claus Rally
Conventional wisdom dictates that the weeks from Thanksgiving to Christmas historically sees rises in indexes. This year looks to be no different - but from somewhat different circumstances. The S&P at current tape of 910 is down 41% for 2008. The intraday low was 741 - 52% off the top. We have rallied 22% from the intraday low - which technically constitutes a bull market. Ergo - your Santa Claus rally underway. Will it continue - more than likely to the end of the year.
The real test will be what happens next year. A case can be made for a rally to sustain up to 1150 area going into the inauguration. This is derived from a 50% retracement of the entire move down. If this happens, this would be an excellent time to revert to bonds because typically after a 50% retracement, the lows will be retested. Keep in mind that during the last bottom, the bottoming process took 8 months and retested the "low" 2 additional times. Guaranteed, this will happen again - so we will look for 752 closing low within the next 6 months.
Market and Economic outlook - the Fed / Treasury / Government will be "pushing on a string" for the next several years fighting deflationary forces and pimping "banks loaning money." As consumers continue to retrench and pay off bills - perhaps our outstanding debt to GDP ratio will lower from 350% of GDP (which was larger than the '20s). It seems the government desires a return to high borrowing and high spending. This became unsustainable and the credit explosion dissipated like a tornado ripping through a straw house. In absolute terms, no economy can spend their way to prosperity.
The government can't borrow the money, give it to taxpayers, and expect the ponzi scheme to continue. These are short sighted desired outcomes that just will not work in the long run. Apparently the answer for overborrowing and overspending - is to borrow and spend. Just silly.
The real test will be what happens next year. A case can be made for a rally to sustain up to 1150 area going into the inauguration. This is derived from a 50% retracement of the entire move down. If this happens, this would be an excellent time to revert to bonds because typically after a 50% retracement, the lows will be retested. Keep in mind that during the last bottom, the bottoming process took 8 months and retested the "low" 2 additional times. Guaranteed, this will happen again - so we will look for 752 closing low within the next 6 months.
Market and Economic outlook - the Fed / Treasury / Government will be "pushing on a string" for the next several years fighting deflationary forces and pimping "banks loaning money." As consumers continue to retrench and pay off bills - perhaps our outstanding debt to GDP ratio will lower from 350% of GDP (which was larger than the '20s). It seems the government desires a return to high borrowing and high spending. This became unsustainable and the credit explosion dissipated like a tornado ripping through a straw house. In absolute terms, no economy can spend their way to prosperity.
The government can't borrow the money, give it to taxpayers, and expect the ponzi scheme to continue. These are short sighted desired outcomes that just will not work in the long run. Apparently the answer for overborrowing and overspending - is to borrow and spend. Just silly.
Thursday, December 4, 2008
Volatility
Volatility may subside temporarily until new administration - resulting from higher index prices. But next year - when the new administration proves they are as clueless as the current administration - volatility will resume with a vengeance.
Just as FCX cut dividends - others will follow, earnings will continue to suffer, thereby index prices will succumb to more reasonable expectations. What is reasonable? 600 on S&P - could be by way of an overcorrection below that though.
The market pundits that argue stocks lift prior to end of recession are correct - the average recession has a 6% selloff prior to entering, a continued 22% decline to mark a 28% correction, then a rise around 2/3'rds the way through. But, coming out of the last recession - stocks ultimately drifted lower for years as earnings continued to disappoint. "Yeah, but the market is all knowing and has priced this into the equation." Vehemently disagree - arguably the largest credit creation in history will not go down in history as "average recession."
Immediate take - with all the short term rates nearing zero, 10 year lowest in 50 years, and 30 year at all time low - bonds are telling equities to get lost. I believe this is due to seeking safety prior to new year and will reverse. But until that trend reverses - equities and bonds will not rise together - one will give up the ghost.
Just as FCX cut dividends - others will follow, earnings will continue to suffer, thereby index prices will succumb to more reasonable expectations. What is reasonable? 600 on S&P - could be by way of an overcorrection below that though.
The market pundits that argue stocks lift prior to end of recession are correct - the average recession has a 6% selloff prior to entering, a continued 22% decline to mark a 28% correction, then a rise around 2/3'rds the way through. But, coming out of the last recession - stocks ultimately drifted lower for years as earnings continued to disappoint. "Yeah, but the market is all knowing and has priced this into the equation." Vehemently disagree - arguably the largest credit creation in history will not go down in history as "average recession."
Immediate take - with all the short term rates nearing zero, 10 year lowest in 50 years, and 30 year at all time low - bonds are telling equities to get lost. I believe this is due to seeking safety prior to new year and will reverse. But until that trend reverses - equities and bonds will not rise together - one will give up the ghost.
Wednesday, December 3, 2008
THIS IS THE BOTTOM
Just kidding of course. The question is whether or not the final bottom is in - and while that may be true for the next 20 or so trading days. The bottom for the S&P is yet to come. Don't know the number, but just about guarantee that the 740'ish is not "it."
How now brown cow you might ask? Especially since market strategists are touting that the S&P dividend is above the 10 year for the first time in 50 years. Doesn't this mean that the market is way undervalued? Nope, I don't buy that argument. Why, how about this - today, Freeport-McMoRan Copper & Gold (FCX) stopped paying their healthy dividend. Guess what - that stock tanked 18%. This will be the modus operandi for companies during the next year. In a year from now - who knows - maybe the 10 year will be above the S&P dividend.
What about those that say we need to "look through this" and look at companies' value now. Well, that depends on time horizon. I am sure back in 1997 when the S&P crossed 800 or so - some of these same companies looked really good. The problem now is that the government is undercutting competition by becoming part of the economy through bailing out of industries. I am having a more difficult time finding some part of a business that isn't partially or wholly complicit with the government.
Still looking for a downside target of 600 simply based on the easy math of $60 earnings X a 10 multiple. Now, if the trailing earnings multiple is let's say 13 and we are down at 600, then I would adjust to a lower number of around 460 (600/13=$46 earnings - then X 10 multiple).
Regardless - volatility may be scaling back a bit until the new year as traders begin to take time off. No problemo - we will be back in force once the new year hits looking to sell both sides for a February trade. Meanwhile, scalping a bit here and there by buying puts seems to be working.
Tuesday, December 2, 2008
NBER "A Recession"
Thank you NBER for calling this a recession finally - after it began Dec. 2007.
Here is a chronology of previous calls for recessions prior to it occurring. Which in retrospect - helped out the 401K move to bonds.
Oct 1, 2006
Overall – I think the housing market will end up sending us into a recession either later this year or early next year. I have been keeping an eye on houses for sale in Topeka and have watched the inventory grow in the last month or so. I think the cash out Refi’s and using the home for equity withdrawal days are over and now we have to pay the price for our lavish lifestyles. Once again, this past week we saw consumers spending more than they have which means savings decline and the credit card debt is increasing. The Current Account Deficit of the US has to be paid either by monetization (read inflation in the 7-10% regime from the fed printing $$) or by Americans saving more and paying down debt. Either way, that does not bode well for the stock market for the next several years.
Dec 4, 2006
The market continues to dismiss all the warning signs of an economy resting on the precipice of recession, manufacturing slowing, housing in a recession, auto sales in a recession, durable goods orders way down, dollar close to ALL TIME LOWS (78.18 on the index), yield curve inversion deepening, etc… I could go on, but the takeaway is that the market continues to rise and I continue to be wrong, until I am right that is. Once the market begins the descent however, I am sure the train wreck will unfold rather quickly as the peak to trough is a –28% or close to 1000 on the S&P. We should be there to make some profits on the downside. Meanwhile, I am a convert for now and will trade with the flow, up or down. Our positions are leveraged for a down move, but upside won’t hurt much and downside will be a welcome relief.
Dec 29, 2006
I guess overall – housing slowdown hasn’t impacted the economy as fast as I thought nor as much as I thought. Although the warning signs are everywhere – ISM below 50 showing contraction in manufacturing, durable goods orders down, etc… The list is long, but as of right now, unheeded by the market – or, as some have speculated, was anticipated in the selloff in May.
I don’t really buy that since the market rallied like this in 1999 – the similarities are uncanny. Both years started around the same – 1250 and ended around the same, 1425 (1480 in 1999). Remember what started in 2000 – yep, a huge sell off… The market didn’t “anticipate” being in a recession – so it is hard for me to believe the market is all knowing and has priced in all aspects.
Feb 27, 2007
I really think that the intermediate high for this bull cycle has been put in at 1460 and we are ending a cyclical bull in a secular bear market. Downside targets should drop below 1200 on the S&P over the next year or so with a serious amount of volatility. That is just the permabear in me right now though. I think we are headed straight into a recession. If so, we will drop around 6% from the high before entering, then another 22% once we are in the recession. Those numbers are the average drops for the history of recessions. Keep in mind that 22% of 1460 is 1128 on the S&P. The recession will be ¾ over and we will begin a big bounce. Looking at the chart below, 1100 isn’t that far down, and we may actually revisit the lows of 800.
March 5,2007
Big picture outlook - I think we are either in a recession or beginning of one. Typical drawdowns on the S&P are up to 22% throughout the recession... 6% down before entering by the way (which is exactly where we are right now). I think my housing call of last year is finally coming to fruition with inventories rocketing up and sales coming down... Jobs lag recession starts by around 4-6 months and I think by summer we will have 400-600,000 decrease in jobs. There are 28 confirmed sub-prime lenders that are in bankruptcy or stopped lending. Countrywide is admitting that their ALT -A and prime mortgages are late and may default soon. FDIC is giving cease and desist orders to mortgage companies and mandated tighter lending standards.
Guys - you may have thought the S&L bailout was big - but I seriously think this one will prove deeper and worse than that. I hope I am proved wrong, but hearing things like builders giving $50,000 kickbacks to buyers so they can carry the note until prices rise so they can sell at a higher price is just a living example of a market top.
If we get down 10% on the S&P (1314 area), I will reinvest a portion in equities, at 15% (1241) another portion, and down 20% - I will be full (1138) into equities... unless it really looks bad from there.
Keep in mind that in March of 2000 (when the last recession began), 95% of all economists stated there was no chance of recession. Keep also in mind the great Oracle of Omaha, Warrren Buffet, who stated in his latest letter to shareholders that "Goldilocks" is wishful thinking. Guys, the Fed has NEVER gotten it right when it comes to monetary policy and won't this time. If the FED lowers rates due to a bear market, dump cash into GOLD or other precious metals or oil, because they will be priming the pump with more $$ in circulation and the dollar itself will devaluate further aiding Mr. Gold's rise toward $1,000 or more.
March 13, 2007
Finally, the world is seeing the subprime mortgage market for what it is - a horrible mess in the making. I don't know how many of you (have to take a pause here because I am celebrating the sell-off today with a couple black russians - so pardon the mis-typing or grammatical errors up front here) follow all the big economy stuff like me or not... When the 2nd largest lender of subprimes - New Century - gets delisted and the big brokers such as UBS and Bear Sterns are accused by the SEC of the old famous pump and dump - something is askew in the market. Follow that with Mozilla from Countrywide saying this is a serious liquidity crisis and I think we have a big downside risk.
I love the return of volatility and hope to capitalize on the market downturn to the max extent. My gut feeling is that we will soon break 1360 on the S&P index and continue southward in a bear market for the next couple years. The bulls are thinking we will hit our 10% sell off and go north to new highs, but, we are at historic valuations considering forward P/E multiples and the highest profit margins in many years. My gut is still telling me that bonds will produce more return over the next several years than stocks and precious metals / natural resources such as oil will be better than both.
May 12, 2007
Nonetheless - this has been once in a lifetime market run. I just hope ya'll weren't as dumb as me by getting out of equities at 1300 thinking we were heading for 1000. Not that I don't think we will end up around 1000 on the S&P in the next couple years - but focusing on selling both sides takes the judgment out of it.
Feb 2, 2008
Pretty much everything I traded on last year is coming to fruition...
Just about 6 months too late, but whatever. I still have my 401K in
preservation mode in the G fund (government securities) until some key
numbers are hit. At the first close on the S&P below 1250, I will feather
in 10% back into C fund (equities). At the first close below 1200, I will
feather in another 10%, then another 20% at around 1170, then pretty much
all in around 1100-1150.
Keep in mind the average recession takes the S&P down 28% which equates
roughly to 1150. I still think this is going to be a much longer and much
deeper recession than the foolhardy Federal Reserve believe. Summarily - 1
year ago, Bernanke testified that there would be no subprime spillover.
These policy wonks have never got it right in their history, and will never
get it right. Volcker was the only one with the cajones to do the right
thing and raise interest rates. So, at the end of the day tomorrow, the fed
will have cut the rates again, the discount window again and the dollar will
weaken and Toby's agriculture will rise along with Gold and all other hard
assets...
Yeah - I really enjoy watching Bear Stearns, Hedge funds, and the other
investment banks in trouble. Those same bastards ran the market up on
absolutely no fundamentals just to wipe out us small guys...
Apr 14, 2008
Quick outlook - the consensus is that the housing and credit crunch is over
and the market has bottomed. Not only do I disagree vehemently with this, I
think it is reprehensible by the big banks and brokers to give so much
positive spin to a dire situation simply to sell shares into strenth. But,
whatever, I still hold my position that the S&P will reach the 1150 mark
before all is said and done. Therefore, I will hold out on my switch from
Bonds to Stocks until that time.
The S&P is only down 15% and was only down 19% at its worst from the peak.
The "average" recessionary drawdown is 28% which brings the S&P to 1126. I
think this recession will be deeper and longer than the CNBC permabulls
believe. I can't quite figure out what will bring the US out of recession
and haven't talked to anyone who can answer that question.
July 01, 2008
S&P Target for Recession - 1 Jul 08
Yep - successfully made a third attempt at 1250 throughout the market action of today. Funny how psychotic the market can be - intraday low of 1261 and high of 1287. I personnally don't buy the market turn around with the news from GM. GM is just about a defunct company having to bleed money out to GMAC and RESCAP.
Expect 1150 later this year on S&P - then I will begin feathering back into 401K. Anticipate by the time the bear market is over - we might breach 1000 on S&P.
July 27, 2008
July closes the same way it opened
Yep, we made a lower low in the S&P at 1202'ish this month. Since we are in a bear market - we are destined to break the 1200 level in the next month or so. After the first several weeks of earnings and a proposed bailout of Fannie and Freddie, the market thought the "bottom" was in for sure. Nope, even when Chris Cox, SEC man, excludes all the financial companies from short sellers, the market rallies for a bit and begins to tank again. We will be in a whipsaw for the next several years and the target of 1150 looks like a given. Sadly, when the trailing earnings on the Dow are at 79 - the industrials will either tank readily to 9500 to get earnings into normalcy or we will continue to chop at this level for many many years.
Yes we will have bear market rallies that are violent, but as long as we keep our powder dry, we can sell calls into those rallies. Then during the lower lows, we can sell some puts into those sell offs.
Economically, still haven't figured out what sector of the US will bring us out of this non "recession." Won't be housing or financials... probably not agriculture either. Manufacturing at 15% of the US economy isn't enough unless the inflationary forces act upon our cheap labor countries and we bring jobs back here.
September 02, 2008
August Closes - September Opens
Yep - Good to be a seller of options in this environment. Closed a couple credit spreads and opened several more. Essentially trying to get 7-8% per month. The market simply whipsaws back and forth and does great things for our portfolio. Keep this in mind gents, there were 0 (zero) 300 point up days in the last bull market from 2003 to 2007. However, in the last bear market - 2000-2003, there were a total of 16. Oh, yeah, we have had 12 in the last year.
Boys, this market is overpriced. The conventional wisdom is that this is a stockpickers market since stocks typically turn up in the middle of a recession. Problem is - the average downfall for a recession is 28% or 1126... we haven't reached that yet on an intraday or close. We have only made it to around 23% down from peak of 1565. This contraction will be painful for those not protecting their investments. I have become somewhat dire in my thoughts because credit is contracting globally and without the credit - economies will tank.
Consider that Goldman Sachs (163.00) traded at 63.00 back before "securitization" took hold in secondary mortgage markets. This is a leader in the financial world and has hosted around 12 Bush appointees including the infamous Hank Paulson. Nevertheless - this great stock will have nothing but traditional investment banking and IPO introductions for the future. Where will profits originate? I can't answer that - I have asked my "Ed Jones" guy and he can't answer it either.
This contraction is called deflation - deflation in commodities due to lower demand, deflation in housing (duh - simply overpriced bubble), deflation in stocks (lower earnings and earnings expectations), and deflation in bonds (not yet, but coming - this will be indicated by rising yields which equals lower price). When credit contracts, fun stops.
Sep 9th, 2008
Guys,
You just can't make up history like this past week... Sold puts last thursday, Friday & Monday are relief rallies for Paulson and the bailout of Fannie and Freddie and I sold Calls yesterday. Market proceeds to tank today and we are out of the calls again for a 4% profit in a day... Which, btw, was the second time I sold calls on this same spread...
Gotta love the goverment bailouts... Get ready though, we are busting 1200 on the S&P before the end of the month - bank on it...
Sep 20, 2008
Thursday morning - as credit markets froze up and Paulson and Bernanke panicked - the bottom started dropping. We were around 1137 intraday. Suddenly we started to launch. Rumors came out that there might be a bailout and sure enough by the end of Thursday, the government decided to step in and bailout the "bad stuff" from balance sheets.
Now, at that point - I wasn't paying much attention because we were pretty much out of the market. We had 1 Sep 1250 long call, 6 Sep 1410 long calls, 6 Oct 1410 long calls, and 2 Oct 1430 long calls. These were all insurance positions from our previous spreads that were essentially worthless, meaning, to exit the position might cost about as much as whatever was left.
That all changed because between Thursday morning and Friday morning at 8:15 am, the futures went from 1137 to 1268 - and yes, that meant our worthless Sep 1250 call that was due to expire had gone into the money...by about 18 points. As I watched gleefully - I decided to exit that before expiration. If I had not exited, that position would have turned into a futures position and I didn't want that. So, that 1250 we bought for 6.00 we sold for 12.00...
Sep 26th, 2008
Outlook - the bailout will pass (to my dismay) this weekend. If nothing
happens over the weekend - we may be setting up for a crash. Remember -
crashes do not occur from tops, they occur from bottoms. If the bailout bill
passes - we will launch - albeit temporarily
Oct 7th, 2008
Quick update -
Fears realized on Monday - Fed didn't come in and cut rates before Asia Market opened. No problem for us - our positions have increased dramatically. I did buy back 2 short Oct 1000 Puts because I was fearful of what happened yesterday. I did that last week.
Outlook - I am convinced that the S&P is heading down the road toward 975 and below. Again, this may take a year, but considering the earnings that will be occurring over the next few quarters - I think valuation might be fair around there. Jobs are being lost at an increasing rate - watch the first friday every month - that is jobs jamboree friday. We will be topping losing 2 - 300,000 jobs per month.
Bailout bill will fail, more money is needed, and the credit default swap market is 7 times larger than the mortgage market (45.5 trillion vs 7 trillion).
Oct 8th, 2008
Gee - the prediction of getting to 975 didn't take long. The overnight futures low of 963 has not been broken yet as of 10:30 am central time. I hadn't rolled any of my 401K into equities until today. I stuck in 35% toward the S&P 500. I think I had forecasted I would be 100% by 975, but, I haven't had time to actually roll any of it over until this morning. Any short term bounce could be violent - upwards of 10-20 percent, upon which I will exit that 35%. If we continue down, then I will simply add another 15% to get 50/50.
I have a fear about the FED cutting the fed funds rate - and the futures dropping. Unless we have a washout day - possibly down 10% or about 90 points followed by a move down on the next day with a violent reversal, we may have a crash next Monday. I think I have said it before - crashes occur at the lows. A crash in this case would be in the 20% category where we would hit some circuit breakers on the indexes - which means trading halts for a time period, then resumes. That would get us into the 800's or below on the S&P.
Nov 7, 2008
Outlook - we will see a 6 handle on the S&P 500 within the next year. This is calculated as trailing earnings are at 21 with S&P at 910. If earnings multiples retreat to historical mean of 15 that would be roughly 25% haircut on the S&P or around 680 on the S&P. I wholeheartedly believe that earnings will move below historical mean and be in the high single digits. At 10 though, that is roughly half and takes the S&P to around 450. Don't gasp - this is entirely possible. If I am right, my bond return will be roughly 5% and the market will tank another 50%. If I am wrong, I will earn 5% until the market turns up for a sustained period of time and I will return to equities and miss the bottom via the 50 dma crossover of the 200 dma.
The "smart guys" are calling for recession until 2nd half of next year - I think we are headed for 1) depression if automakers fail, or 2) deep recession lasting multi-year and not turning up until mid-2010 (well after the "smart guys" forecast recovery). Simply put, I have asked financial advisors and economists repeatedly what industry will turn our economy around. No answer... Fact - no economy has "spent" their way to prosperity. America has simply exported all of our widgets to overseas producers and in the interim spent the arbitrage.
Face it guys, Americans WAY overspent and need to save money. We don't need more McDonalds, strip malls, or nail salons. What we need is cash in the bank to prepare for retirement. As the aircraft carrier of consumer confidence has turned into the wind, it will take years of rebuilding (i.e. paying off debt) to turn the ship back downwind. The governmental solution of getting banks to lend - basically created the mess in the first place. Consumers are tapped and will not take the credit (or borrow) from the banks anyway. We reached Peak Credit (or max borrowing) when homeowners were taking nearly 800 billion out of their homes in 2006. That is OVER and won't return.
Even though all of this is my take on the outlook for the next several years - if I am wrong, I will have done no wrong to my forward retirement account by using my method. But, since I am off today - and all jacked up on coffee - seemed appropriate to rant a little.
Dec 1, 2008
Outlook no different going into new year. We are at depression levels for
housing, autos, financial sector. Seems to me that the government is
heading down the path of Japan by letting bad banks continue to operate.
This will sustain depression levels longer within these sectors. Our nation
"produces" less now than ever and an economy that requires consumption to
grow predicated on a service economy is clearly unsustainable. Americans
will eventually save and pay down debt. The question is how long will it
take for the government to do the same. All the indicators I look at - 10
year below 3.00, all short maturities near zero, corporate bond spreads as
wide as ever, all reflect money seeking safehavens. Equities still need to
fall to the 600's or below to become "cheap" like other deep bear markets.
The worst I could see - is 450'ish on the S&P. Just remember - 1565 to 850
is roughly 50% but 850 to 450 is another 50% schwacking from these levels.
Here is a chronology of previous calls for recessions prior to it occurring. Which in retrospect - helped out the 401K move to bonds.
Oct 1, 2006
Overall – I think the housing market will end up sending us into a recession either later this year or early next year. I have been keeping an eye on houses for sale in Topeka and have watched the inventory grow in the last month or so. I think the cash out Refi’s and using the home for equity withdrawal days are over and now we have to pay the price for our lavish lifestyles. Once again, this past week we saw consumers spending more than they have which means savings decline and the credit card debt is increasing. The Current Account Deficit of the US has to be paid either by monetization (read inflation in the 7-10% regime from the fed printing $$) or by Americans saving more and paying down debt. Either way, that does not bode well for the stock market for the next several years.
Dec 4, 2006
The market continues to dismiss all the warning signs of an economy resting on the precipice of recession, manufacturing slowing, housing in a recession, auto sales in a recession, durable goods orders way down, dollar close to ALL TIME LOWS (78.18 on the index), yield curve inversion deepening, etc… I could go on, but the takeaway is that the market continues to rise and I continue to be wrong, until I am right that is. Once the market begins the descent however, I am sure the train wreck will unfold rather quickly as the peak to trough is a –28% or close to 1000 on the S&P. We should be there to make some profits on the downside. Meanwhile, I am a convert for now and will trade with the flow, up or down. Our positions are leveraged for a down move, but upside won’t hurt much and downside will be a welcome relief.
Dec 29, 2006
I guess overall – housing slowdown hasn’t impacted the economy as fast as I thought nor as much as I thought. Although the warning signs are everywhere – ISM below 50 showing contraction in manufacturing, durable goods orders down, etc… The list is long, but as of right now, unheeded by the market – or, as some have speculated, was anticipated in the selloff in May.
I don’t really buy that since the market rallied like this in 1999 – the similarities are uncanny. Both years started around the same – 1250 and ended around the same, 1425 (1480 in 1999). Remember what started in 2000 – yep, a huge sell off… The market didn’t “anticipate” being in a recession – so it is hard for me to believe the market is all knowing and has priced in all aspects.
Feb 27, 2007
I really think that the intermediate high for this bull cycle has been put in at 1460 and we are ending a cyclical bull in a secular bear market. Downside targets should drop below 1200 on the S&P over the next year or so with a serious amount of volatility. That is just the permabear in me right now though. I think we are headed straight into a recession. If so, we will drop around 6% from the high before entering, then another 22% once we are in the recession. Those numbers are the average drops for the history of recessions. Keep in mind that 22% of 1460 is 1128 on the S&P. The recession will be ¾ over and we will begin a big bounce. Looking at the chart below, 1100 isn’t that far down, and we may actually revisit the lows of 800.
March 5,2007
Big picture outlook - I think we are either in a recession or beginning of one. Typical drawdowns on the S&P are up to 22% throughout the recession... 6% down before entering by the way (which is exactly where we are right now). I think my housing call of last year is finally coming to fruition with inventories rocketing up and sales coming down... Jobs lag recession starts by around 4-6 months and I think by summer we will have 400-600,000 decrease in jobs. There are 28 confirmed sub-prime lenders that are in bankruptcy or stopped lending. Countrywide is admitting that their ALT -A and prime mortgages are late and may default soon. FDIC is giving cease and desist orders to mortgage companies and mandated tighter lending standards.
Guys - you may have thought the S&L bailout was big - but I seriously think this one will prove deeper and worse than that. I hope I am proved wrong, but hearing things like builders giving $50,000 kickbacks to buyers so they can carry the note until prices rise so they can sell at a higher price is just a living example of a market top.
If we get down 10% on the S&P (1314 area), I will reinvest a portion in equities, at 15% (1241) another portion, and down 20% - I will be full (1138) into equities... unless it really looks bad from there.
Keep in mind that in March of 2000 (when the last recession began), 95% of all economists stated there was no chance of recession. Keep also in mind the great Oracle of Omaha, Warrren Buffet, who stated in his latest letter to shareholders that "Goldilocks" is wishful thinking. Guys, the Fed has NEVER gotten it right when it comes to monetary policy and won't this time. If the FED lowers rates due to a bear market, dump cash into GOLD or other precious metals or oil, because they will be priming the pump with more $$ in circulation and the dollar itself will devaluate further aiding Mr. Gold's rise toward $1,000 or more.
March 13, 2007
Finally, the world is seeing the subprime mortgage market for what it is - a horrible mess in the making. I don't know how many of you (have to take a pause here because I am celebrating the sell-off today with a couple black russians - so pardon the mis-typing or grammatical errors up front here) follow all the big economy stuff like me or not... When the 2nd largest lender of subprimes - New Century - gets delisted and the big brokers such as UBS and Bear Sterns are accused by the SEC of the old famous pump and dump - something is askew in the market. Follow that with Mozilla from Countrywide saying this is a serious liquidity crisis and I think we have a big downside risk.
I love the return of volatility and hope to capitalize on the market downturn to the max extent. My gut feeling is that we will soon break 1360 on the S&P index and continue southward in a bear market for the next couple years. The bulls are thinking we will hit our 10% sell off and go north to new highs, but, we are at historic valuations considering forward P/E multiples and the highest profit margins in many years. My gut is still telling me that bonds will produce more return over the next several years than stocks and precious metals / natural resources such as oil will be better than both.
May 12, 2007
Nonetheless - this has been once in a lifetime market run. I just hope ya'll weren't as dumb as me by getting out of equities at 1300 thinking we were heading for 1000. Not that I don't think we will end up around 1000 on the S&P in the next couple years - but focusing on selling both sides takes the judgment out of it.
Feb 2, 2008
Pretty much everything I traded on last year is coming to fruition...
Just about 6 months too late, but whatever. I still have my 401K in
preservation mode in the G fund (government securities) until some key
numbers are hit. At the first close on the S&P below 1250, I will feather
in 10% back into C fund (equities). At the first close below 1200, I will
feather in another 10%, then another 20% at around 1170, then pretty much
all in around 1100-1150.
Keep in mind the average recession takes the S&P down 28% which equates
roughly to 1150. I still think this is going to be a much longer and much
deeper recession than the foolhardy Federal Reserve believe. Summarily - 1
year ago, Bernanke testified that there would be no subprime spillover.
These policy wonks have never got it right in their history, and will never
get it right. Volcker was the only one with the cajones to do the right
thing and raise interest rates. So, at the end of the day tomorrow, the fed
will have cut the rates again, the discount window again and the dollar will
weaken and Toby's agriculture will rise along with Gold and all other hard
assets...
Yeah - I really enjoy watching Bear Stearns, Hedge funds, and the other
investment banks in trouble. Those same bastards ran the market up on
absolutely no fundamentals just to wipe out us small guys...
Apr 14, 2008
Quick outlook - the consensus is that the housing and credit crunch is over
and the market has bottomed. Not only do I disagree vehemently with this, I
think it is reprehensible by the big banks and brokers to give so much
positive spin to a dire situation simply to sell shares into strenth. But,
whatever, I still hold my position that the S&P will reach the 1150 mark
before all is said and done. Therefore, I will hold out on my switch from
Bonds to Stocks until that time.
The S&P is only down 15% and was only down 19% at its worst from the peak.
The "average" recessionary drawdown is 28% which brings the S&P to 1126. I
think this recession will be deeper and longer than the CNBC permabulls
believe. I can't quite figure out what will bring the US out of recession
and haven't talked to anyone who can answer that question.
July 01, 2008
S&P Target for Recession - 1 Jul 08
Yep - successfully made a third attempt at 1250 throughout the market action of today. Funny how psychotic the market can be - intraday low of 1261 and high of 1287. I personnally don't buy the market turn around with the news from GM. GM is just about a defunct company having to bleed money out to GMAC and RESCAP.
Expect 1150 later this year on S&P - then I will begin feathering back into 401K. Anticipate by the time the bear market is over - we might breach 1000 on S&P.
July 27, 2008
July closes the same way it opened
Yep, we made a lower low in the S&P at 1202'ish this month. Since we are in a bear market - we are destined to break the 1200 level in the next month or so. After the first several weeks of earnings and a proposed bailout of Fannie and Freddie, the market thought the "bottom" was in for sure. Nope, even when Chris Cox, SEC man, excludes all the financial companies from short sellers, the market rallies for a bit and begins to tank again. We will be in a whipsaw for the next several years and the target of 1150 looks like a given. Sadly, when the trailing earnings on the Dow are at 79 - the industrials will either tank readily to 9500 to get earnings into normalcy or we will continue to chop at this level for many many years.
Yes we will have bear market rallies that are violent, but as long as we keep our powder dry, we can sell calls into those rallies. Then during the lower lows, we can sell some puts into those sell offs.
Economically, still haven't figured out what sector of the US will bring us out of this non "recession." Won't be housing or financials... probably not agriculture either. Manufacturing at 15% of the US economy isn't enough unless the inflationary forces act upon our cheap labor countries and we bring jobs back here.
September 02, 2008
August Closes - September Opens
Yep - Good to be a seller of options in this environment. Closed a couple credit spreads and opened several more. Essentially trying to get 7-8% per month. The market simply whipsaws back and forth and does great things for our portfolio. Keep this in mind gents, there were 0 (zero) 300 point up days in the last bull market from 2003 to 2007. However, in the last bear market - 2000-2003, there were a total of 16. Oh, yeah, we have had 12 in the last year.
Boys, this market is overpriced. The conventional wisdom is that this is a stockpickers market since stocks typically turn up in the middle of a recession. Problem is - the average downfall for a recession is 28% or 1126... we haven't reached that yet on an intraday or close. We have only made it to around 23% down from peak of 1565. This contraction will be painful for those not protecting their investments. I have become somewhat dire in my thoughts because credit is contracting globally and without the credit - economies will tank.
Consider that Goldman Sachs (163.00) traded at 63.00 back before "securitization" took hold in secondary mortgage markets. This is a leader in the financial world and has hosted around 12 Bush appointees including the infamous Hank Paulson. Nevertheless - this great stock will have nothing but traditional investment banking and IPO introductions for the future. Where will profits originate? I can't answer that - I have asked my "Ed Jones" guy and he can't answer it either.
This contraction is called deflation - deflation in commodities due to lower demand, deflation in housing (duh - simply overpriced bubble), deflation in stocks (lower earnings and earnings expectations), and deflation in bonds (not yet, but coming - this will be indicated by rising yields which equals lower price). When credit contracts, fun stops.
Sep 9th, 2008
Guys,
You just can't make up history like this past week... Sold puts last thursday, Friday & Monday are relief rallies for Paulson and the bailout of Fannie and Freddie and I sold Calls yesterday. Market proceeds to tank today and we are out of the calls again for a 4% profit in a day... Which, btw, was the second time I sold calls on this same spread...
Gotta love the goverment bailouts... Get ready though, we are busting 1200 on the S&P before the end of the month - bank on it...
Sep 20, 2008
Thursday morning - as credit markets froze up and Paulson and Bernanke panicked - the bottom started dropping. We were around 1137 intraday. Suddenly we started to launch. Rumors came out that there might be a bailout and sure enough by the end of Thursday, the government decided to step in and bailout the "bad stuff" from balance sheets.
Now, at that point - I wasn't paying much attention because we were pretty much out of the market. We had 1 Sep 1250 long call, 6 Sep 1410 long calls, 6 Oct 1410 long calls, and 2 Oct 1430 long calls. These were all insurance positions from our previous spreads that were essentially worthless, meaning, to exit the position might cost about as much as whatever was left.
That all changed because between Thursday morning and Friday morning at 8:15 am, the futures went from 1137 to 1268 - and yes, that meant our worthless Sep 1250 call that was due to expire had gone into the money...by about 18 points. As I watched gleefully - I decided to exit that before expiration. If I had not exited, that position would have turned into a futures position and I didn't want that. So, that 1250 we bought for 6.00 we sold for 12.00...
Sep 26th, 2008
Outlook - the bailout will pass (to my dismay) this weekend. If nothing
happens over the weekend - we may be setting up for a crash. Remember -
crashes do not occur from tops, they occur from bottoms. If the bailout bill
passes - we will launch - albeit temporarily
Oct 7th, 2008
Quick update -
Fears realized on Monday - Fed didn't come in and cut rates before Asia Market opened. No problem for us - our positions have increased dramatically. I did buy back 2 short Oct 1000 Puts because I was fearful of what happened yesterday. I did that last week.
Outlook - I am convinced that the S&P is heading down the road toward 975 and below. Again, this may take a year, but considering the earnings that will be occurring over the next few quarters - I think valuation might be fair around there. Jobs are being lost at an increasing rate - watch the first friday every month - that is jobs jamboree friday. We will be topping losing 2 - 300,000 jobs per month.
Bailout bill will fail, more money is needed, and the credit default swap market is 7 times larger than the mortgage market (45.5 trillion vs 7 trillion).
Oct 8th, 2008
Gee - the prediction of getting to 975 didn't take long. The overnight futures low of 963 has not been broken yet as of 10:30 am central time. I hadn't rolled any of my 401K into equities until today. I stuck in 35% toward the S&P 500. I think I had forecasted I would be 100% by 975, but, I haven't had time to actually roll any of it over until this morning. Any short term bounce could be violent - upwards of 10-20 percent, upon which I will exit that 35%. If we continue down, then I will simply add another 15% to get 50/50.
I have a fear about the FED cutting the fed funds rate - and the futures dropping. Unless we have a washout day - possibly down 10% or about 90 points followed by a move down on the next day with a violent reversal, we may have a crash next Monday. I think I have said it before - crashes occur at the lows. A crash in this case would be in the 20% category where we would hit some circuit breakers on the indexes - which means trading halts for a time period, then resumes. That would get us into the 800's or below on the S&P.
Nov 7, 2008
Outlook - we will see a 6 handle on the S&P 500 within the next year. This is calculated as trailing earnings are at 21 with S&P at 910. If earnings multiples retreat to historical mean of 15 that would be roughly 25% haircut on the S&P or around 680 on the S&P. I wholeheartedly believe that earnings will move below historical mean and be in the high single digits. At 10 though, that is roughly half and takes the S&P to around 450. Don't gasp - this is entirely possible. If I am right, my bond return will be roughly 5% and the market will tank another 50%. If I am wrong, I will earn 5% until the market turns up for a sustained period of time and I will return to equities and miss the bottom via the 50 dma crossover of the 200 dma.
The "smart guys" are calling for recession until 2nd half of next year - I think we are headed for 1) depression if automakers fail, or 2) deep recession lasting multi-year and not turning up until mid-2010 (well after the "smart guys" forecast recovery). Simply put, I have asked financial advisors and economists repeatedly what industry will turn our economy around. No answer... Fact - no economy has "spent" their way to prosperity. America has simply exported all of our widgets to overseas producers and in the interim spent the arbitrage.
Face it guys, Americans WAY overspent and need to save money. We don't need more McDonalds, strip malls, or nail salons. What we need is cash in the bank to prepare for retirement. As the aircraft carrier of consumer confidence has turned into the wind, it will take years of rebuilding (i.e. paying off debt) to turn the ship back downwind. The governmental solution of getting banks to lend - basically created the mess in the first place. Consumers are tapped and will not take the credit (or borrow) from the banks anyway. We reached Peak Credit (or max borrowing) when homeowners were taking nearly 800 billion out of their homes in 2006. That is OVER and won't return.
Even though all of this is my take on the outlook for the next several years - if I am wrong, I will have done no wrong to my forward retirement account by using my method. But, since I am off today - and all jacked up on coffee - seemed appropriate to rant a little.
Dec 1, 2008
Outlook no different going into new year. We are at depression levels for
housing, autos, financial sector. Seems to me that the government is
heading down the path of Japan by letting bad banks continue to operate.
This will sustain depression levels longer within these sectors. Our nation
"produces" less now than ever and an economy that requires consumption to
grow predicated on a service economy is clearly unsustainable. Americans
will eventually save and pay down debt. The question is how long will it
take for the government to do the same. All the indicators I look at - 10
year below 3.00, all short maturities near zero, corporate bond spreads as
wide as ever, all reflect money seeking safehavens. Equities still need to
fall to the 600's or below to become "cheap" like other deep bear markets.
The worst I could see - is 450'ish on the S&P. Just remember - 1565 to 850
is roughly 50% but 850 to 450 is another 50% schwacking from these levels.
24 More Days Til XMAS
Note the declining volume and rise in index during T Giving Week. I did the right thing and bought some puts on Friday. Monday, note the circle that shows volume returning to the market.
Could be another leg down - again, calling for 600 or below on the S&P when all is said and done. With average moves interday of 3.8%, which is higher than the depression, scalping trades is easier than setting up long term trades. Truthfully - I would be scared to be in the market 100% of the time right now. Getting in and out is working fine.
Friday, November 28, 2008
Black Friday
S&P is onwards and upwards. Bought some more puts today. The S&P is still within a channel and in the upper part of the range. Volume has fallen dramatically - could see a fall to the low 700's in short order. Any break higher than the fib of 910 area could signal a short term bear market rally.
Thursday, November 27, 2008
Year Ending Trades
Thoughts about market direction between T-Giving and end of year. Historically, the week of Thanksgiving is bullish, this year was no different. However, the 10 year went below 3.00 - if this continues down in yield, up in price, the recent gains in the S&P will be shortlived. The bond market has been right on the entire time.
Harken back to a year ago when the curve went inverted and stocks continued upwards. Looks like equities had it wrong, again. This time is no different. The tell is in the short maturities and 10 year. If the 3 mos. remains around zero and the ten year is below 3.00 - equities will fall.
So the question is what to do about it. Those familiar with my trading will know that I remain fully in bonds in my 401K. In the trading account - sticking with short term trades, under 30 days to expiration. The volatility is so high, the market could be down or up 30% within 60 days. Just simple credit spreads collecting anywhere from 5-15% per month.
Harken back to a year ago when the curve went inverted and stocks continued upwards. Looks like equities had it wrong, again. This time is no different. The tell is in the short maturities and 10 year. If the 3 mos. remains around zero and the ten year is below 3.00 - equities will fall.
So the question is what to do about it. Those familiar with my trading will know that I remain fully in bonds in my 401K. In the trading account - sticking with short term trades, under 30 days to expiration. The volatility is so high, the market could be down or up 30% within 60 days. Just simple credit spreads collecting anywhere from 5-15% per month.
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