Can Financials be trusted?

Answer: No.  We had a nice bounce today in an oversold market.  Big whoop.  But trades can be made to net some coin.

XLF broke above resistance, but it's not convincing enough act as horizontal support.  The trendlines look ominous.

BBT is the best house in the 'hood.  Nice 14% run today up to resistance and then stopped.  I did take advantage of this from 15.15 to 16.79, but don't trust it enough further at this time.  This may run, tho.  After hours, it announced a dividend increase and is up another 3%.  Sweet.

WFC: no question this had the best bounce from extremely oversold conditions (as Eric will remind me again and again I'm sure; after all, his right brain is more developed, but Friday's VOLUME was the key in retrospect.)  The 17% run is impressive, but can the 12.45 act as support?

Longer term, however, if I had to own one bank, BBT would be it.  Six months from now, BBT does better than WFC: that I will guarantee.*

TROW is the dog of the financials.  I took some short at the close and it has not disappointed, giving up 8% so far after hours.  If the financials tank tomorrow, this one will lead the way down.

*with a CDS backed by Citigroup.

Why deflation is so terrible...

Eric has a good illustration of how deflation can be a big problem:

I am a bank. So, I have a loan, an ABS [asset backed security] on a home [worth] 300K at 4%;
it's a performer, made to a borrower paying back at full value.  is it toxic?

Well the value of the home is now 230K, but the borrower is still paying it back at 3%.
so that is $1432 coming in every month.

But... at best it has to be written down to .76 on the dollar.
Now it still is $1432 coming in every month..

but the thesis is, I need to get rid of it.... "Get the Toxic Asset off my books", ie Mark to market....

If I take 230K... the value of the bond, which pays 230K at 3% over 30 years.
Right now I can buy Corporate debt AA at 6.86% over 20 years

Which means that the Market rate for my Money the 230K is Twice what it is in my ABS, and the credit risk is much less.

so if the Market rate for my money is twice that of what I'm getting. Then my ABS at .76 cents on the dollar... Is solidly 10-20% below .76 So now the Fair value is .60cents on the dollar.

So if I sell it, I get...$180,000, but it is returning $1400 per month over 30 years. That is $515520 Yield to maturity.

I'm taking 30% of it's yield to maturity value.... Why would I do that??? to make the market happy.

this is very simple look. and there are Tranches, and some mortgages that are not performing, and some ABS that are not at full yield, and will probably only return half of the money. There are some Very bad assets...

but the real problem is that the Value of money has come up, and that instead of bonds at 3% yield, we now have better quality borrowers who will now borrow money at 6-9%. That is where this "Mark to market" thing isn't working.

It's one thing to let the vultures feed, and it's another to Kill someone to Let them feed.

My response:

Excellent illustration. One of the assumptions is that the mortgage holder will continue to pay the $1432 per month and thus the ABS is "secure."

The problem is that assumption may be faulty. The only way the guy can make the $1432 per month is if he remains employed, and his wife also remains employed full-time and her employer is cutting her hours and his employer is laying people off.

Furthermore, this is a non-recourse loan so if the mortgage holder defaults he does not need to file bankruptcy (unlike other loans)... little moral hazard. And he doesn't have any equity in the house anyway, so he'll just walk away.

Sure he needs a place to live, but heck there are tons of houses on the market and someone will surely rent him one for $800 per month after he forecloses.  Then asset prices like houses fall further in a vicious cycle.

So the "S" in the ABS illustration is not very "secure." The $1432 and $515,512 is a big, big assumption.

That is exactly why deflation is worse in some ways than inflation, and it shows why the president's three pronged plan to bolster the banks AND stimulate the economy to save jobs AND immediately help homeowners to prevent foreclosures is important.  If any one of those three legs of the stool fails, the whole stool falls. And once foreclosures start, the pace will quicken and be relentless.

Does it suck?  Sure it does, but that's life.   The Rick Santelli's of the world think that we can all live in isolation of the other actors in the economic system and that is a lethal assumption that could damage the system even more than it is already damaged.

Sentiment improving but not there yet

The TK sentiment meter just clicked to green. When he typed "O-BOMB-A" I saw the light go on.

The street has had it with this guy O-BOMB-A. Wait till you see the pressure put on him.

He is in over his head. We are down almost 2000 pts since he was elected and he still doesn't get it. Very oversold short term and intermeiadte term so I expect a bounce but only a bounce. Unless he does something drastic which I don't think is in the cards.

As Eric has pointed out, the market is down 1000 points since Obama took office, but it was down 7,000 the previous 14 months.  The market would have been down no matter what the new president has said or done.  These companies, especially the banks have no earnings.  Is that President Obama's fault?  They are levereged 30:1 with worthless paper.  Did President Obama tell them to do that?

These same folks decry government intervention and then they decry the lack of government intervention.  I know I know, if only the governemnt would institute MY bailout plan, then it would all be okidokey.  TK is at #2 on the Kubler-Ross continuum of grieving the market*. (I've been at #5 for a while).  This is closer to a bullish sentiment indicator when grizzled street veterans lose their cool.  Discouragement on the chart below.

T.Lo's objective sentiment indicator (firewalled) is looking more bullish, too.

Unfortunately the fundies still suck and T.Lo's only technical winners are PCLN and MYL (other than gold and inverse funds.)

How do we play this scenario? I may take the day off tomorrow... but if the markets gap higher at the open, I'd suggest a little BGZ or FAZ.  If the market gaps lower at the open, I'd sit back with a cup of coffee and watch The View or Regis.  We still might need to print a 666 on the S&P, but we're getting closer folks.

*TK was buying Citigroup as recently as 4 weeks ago and has been looking for an inverse head and shoulders for over two months.  I'm worried about him.  Doesn't he know what is happening in the world?

Mutual fund rant

My job offers retirement funds through Fidelity.  Last Spring when I figured the market was due for a correction I re-jiggered my portfolio and included a new type fund called a 130/30 fund which is supposed to mitigate tumultuous markets by going both long and short.  Sounds like exactly what was needed in the market last year.  From Fidelity's site:

Strategy

  

Normally investing at least 80% of assets in common stocks of companies with large market capitalizations (companies with market capitalizations similar to companies in the Russell 1000 Index or the Standard & Poor's 500 Index. Normally establishing long and short positions in equity securities. Investing in either "growth" stocks or "value" stocks or both.

Objective

  

Seeks long-term growth of capital.

The graph is from Yahoo since the chart on Fidelity's site was conveniently "unavailable."

Here's the deal:  How the hell can a long/short fund underperform the market? Even if you had monkeys picking the stocks, the outcome should be at least less negative than the S&P 500.  And they charge 1.89% fee for this fund.  Unbelievable.

When this "economic crisis" resolves, do your think Joe Sixpack is coming back to this financial industry with his hard-earned capital? 

And you wonder why gold and Treasurys are up double digits last year.   

Update: CY, FCX and new pick: DELL

Long CY is not working as expected.  We were looking for the big break-out and it seems to be breaking down.  It's within earshot of the sell stop, so we'll stick to our discipline.  Same with MRVL, which hit the sell-stop and I got out with a 4% loss.

Long FCX still bouncing around below resistance and I'm still expecting an upside breakout, but my sell stop is currently at $26.

Long Dell is the new kid.  I know this chart looks ugly with a sell off last week on HPQ's lousy number.  I got some dirt cheap at $8.10 pre-market on Friday.  It had an "almost outside reversal day" on Friday and I may be able to pull 10% off on a swing trade.  Earnings come out Thursday after close and I'm very hesitant to hold it that long.  Low risk only here.

Real Estate is oversold

Last week we looked at AVB and VTR as short opportunities and entered AVB.  IYR is now showing signs of being oversold and due for a bear market bounce, or at least the risk of staying short is too high.

Short AVB was held for a few days and several percent was taken out.  I covered on Friday.

Short VTR for a quick swing trade.  This worked out okay but showed it was time to cover.   The capitulation on Thursaday with decent volume told me it was time to bail.  I could have turned around and gone long, but I missed it.

Financials: WFC vs. BBT

Anybody going long into financials must have gonads the size of Cleveland, but the case could be made that Friday was a wash-out day of sorts and the sector is oversold.  Keeping with the "irons in the fire" theme, maybe nibbling at a bank or two is in order.

XLF is an unmitigated disaster with unrelenting selling.  The anti-Democrats will say that it's because of the lack of a Geithner plan, or the liberal use of the 'N' word (nationalization), or the populist angst verbalized by the Derivitive Trader to the Stars, Rick Santelli.  Or, more sane people would postulate, it may be because these companies have NO EARNINGS and have LOADS OF WORTHLESS ASSETS, but I digress...  

XLF is oversold on a technical basis.  Spike lower on high volume. Full stop.  So if we want to take advantage of a counter-trend rally, how do we do it?

WFC shows a similar pattern on the daily chart.  Spike lower, high volume, wash-out/ capitulation pattern.  But this is a toxic bank with lots of bad stuff going on.  Can it be trusted on the long side??

BBT by some accounts has better fundamentals with less bad debt and more solid assets.  It may be the best house in a bad neighborhood... which could mean it's a safe place to live, or it could mean that the natives will torch it next.  The "outside"reversal pattern is statistically more bullish, but ONLY if it confirms with an up-move the day after.  Big decision.

WFC on the hourly shows some good upside volume at the end of Friday... and I even jumped onfor an hour and a buck.  But this still has a lot of bearish resistance to break through.  Eric likes this stock, but I don't trust it.

BBT on the hourly chart looks healthier.  It has already broken through it's bearish trendline and is poking it's nose at the horizontal resistance.  If it breaks through, we could ride it for a few bucks.  Sell stop 

would be Friday's intraday low of $13.20... if you're brave.  Strong futures and I may get in pre-market.

It takes some major league intestinal fortitude to think about going long banks, but maybe this falling knife can be caught.

Tuesday Recap and a look ahead

The bloodbath was impressive and gave me pause on entering any long positions at all.   But since I presented a few stocks I went ahead and got some CY at $5.09 and even went commando and went long FCX at 27.64 which was not a good price and one I may regret.  MS dropped so preciptously that it broke the support that I had mentioned, so I never opened that position.

The short side is working much better.  AVB continues it's descent into hell, and I did not short the other REIT, VTR, due to the gap down open.  I chased BBBY a little and sold it short at 21.34 for the next leg down.

Of course, GLD and SLV are the place to be and those are still being held.

The stink of blood still lingers and Asian markets are down as I write this.  No end is in sight for this free fall, but the futures point up at the moment and we should stay vigilant since we all know how violent bear market rallies can be.  Eric is predicting no bounce until Thursday at the earliest and more likely Monday.

Technicals, Fundamentals and Sentiment

Macroeconomic evaluation of the market is nothing short of voodoo.  Traders are constantly attempting to find objective indicators to tell them definitively to be long or short.  Fear and greed play hopscotch on our hippocampus while we feverishly punch the buy/sell buttons on Tradestation.  Let's look at a few indicators and try to come to some conclusion.

Technical analysis.  Here we have Upsidetrader taking out his big purple crayons to look at Elliot wave, Fibonacci and horizontal resistance all at once.... and voila!  The DJIA will hit 6363 very soon.  Love it!!  You can say what you want about Upside, but he is always sure, and I respect him for that.... and his day-trades go well an inordinate number of times.

Fundamental Analysis.  The Big Kahuna, John Maudlin*, implies that nearly every factory in the world has shut down as inventories have been built and no buyers can be found.  Fugly by definition.  It's called a deflationary depression, my friends.  

*This pdf is really worth reading in its entirety.

Sentiment.  With all this bad news, it might come as a surprise that mutual fund managers are still nearly fully invested.  Marc Faber  implies that money mangers have not not fully capitulated yet, which bodes ill for the stock market in the coming weeks.  

Take all this voodoo with a grain of salt.  The stock market will be a leading indicator out of this morass but who knows how long that will be?  Play the swing trades both ways: some long and some short.  Daytrade if you have the guts.... and keep your retirement in cash, gold and Treasurys/TIPS.

Longs for Tuesday 2-17

Let's just say, for argument's sake, that the four horsemen take a detour and the world somehow pulls out of this descent into chaos.  Which stocks will do well?  These are all lottery tickets... looking for four baggers in the next few months, or they could all go bankrupt.

FCX mines for a lot of stuff: copper, platinum and gold.  The chart looks great.  Loose stops are okay on this one.  It could double with any rebound in the markets.  NG is also an adrenaline junkie's dream.

CY is in the semiconductor space but also is involved with design and manufacture of solar panels.   Could double, or could go to zero.  Careful.  Still holding MRVL and still like LLTC.

MS along with GS may be the last soldiers standing... and post-Mad Max investors will have to go somewhere once Citi's "mall" gets shuttered.  MS was trading at $50 six months ago, and while it may not double we could see a 20% pop very soon.

Shorts for Tuesday 2-17

Update: AVB was covered last week as a short opportunity and it has not disappointed... with a 6% decline so far.  Tight stop would be about 50 and loose stop is closer to 54.  Ride it on down.  

VTR is a healthcare REIT which is hovering above support.  Any drop below 22.70 could be met with a precipitous decline.  

BBBY has fallen below horizontal support and has formed a bearish inverse cup-and-handle.  Who really is going to buy scented candles on the eve of Armageddon?    Die!

Ritholtz' book gets douched

Few blogs have actually made me money, but Barry Ritholtz' Big Picture is one.  This site has helped me to navigate my way through the financial markets these past 3 years and I can honestly say that his spot on analysis has directly influenced my investment choices that have saved me from severe losses in my retirement portfolio.

So, it comes as no surprise that the owner of S&P, one of the ratings agencies that is clearly implicated in the current economic meltdown, put the kibosh on publication of Ritholtz' book which is critical of S&P.  In fact, reading Ritholtz' account convinces me that S&P is likely ground zero in the mis-rating of financial products that has led to levered losses throughout the world's markets.

No doubt someone will publish Barry Ritholtz' Bailout Nation, and one could only imagine that this controversy will help propel the book to iconic status.

Finding the "tell" in the graph

Eric has pointed out that yesterday's graph showed the SPY peeking above the short-term pennant and more importantly moving away from the lower trendline.  This was the "tell" to today's rally and resolution of the longer term pennant.  The red line is the "tell."

The interesting thing is that I saw this "tell" in the GPS graph I put up last night when I issued the warning about holding GPS short.  It turned out that was a necessary warning as GPS broke out above resistance of 11.50 (which was my buy stop) and kept going for to 11.85 today.

Stock charts for Friday

Big big BIG NFP number at 0830 hrs may move the market (I'm on tenter hooks.)  Geithner has "the plan" for banks on Monday and that may actually be a bigger item.  I can't trade the financials with all the chatter going on, so I'll just stick to meat and potatoes TA for now.

Short idea:  GPS (2 graphs)  The first is the daily chart showing it drop below horizontal support (now resistance), but it's not dying easily and rallied over 5% today.

Short idea: GPS on the 30-minute graph shows it violating the downward trendline but still below horizontal resistance.  Be careful, the closing stop is 12.12.

Long idea: MRVL still looking marvelous.  Semis are leading tech and tech is leading the market (for now.)  LLTC looks good, too.

Short idea: AVB owns rental residential properties.  Is it sustainable?  Stimulus legislation may give incentives for renters to buy homes.

FLIR falls out of bed

FLIR was covered last night and the night before as a potential short hovering at support.

Take some profits if you were fortunate to be short.

Stocks for Thursday

GDX is the gold miners ETF anbd has been trudging upward along its trade channel for several weeks.  The trend is your friend, but buy when it pulls backs into the lower channel.

PM has been breaking down and is threatening the November lows.  Good short candidate.

Update on FLIR, which was covered yesterday.  Will this hold support or fall off the table?

MRVL is one of the better performing semis.  Also, LLTC looks pretty good.

Charts for Wednesday

Mistakenly posted at KaPo, so go here for the charts:

http://kalamazoopost.blogspot.com/2009/02/good-bad-and-ugly.html

I was very busy at work last week, so I didn't get a chance to post as often as I would like.