Tuesday, December 25, 2007

"Maharaja Of The Keyboards." 1925-2007

Oscar Peterson, whose speedy fingers, propulsive swing and melodic inventiveness made him one of the world's best known and influential jazz pianists, has died. He was 82.

During an illustrious career spanning seven decades, Peterson played with some of the biggest names in jazz, including Ella Fitzgerald, Count Basie, Duke Ellington, Charlie Parker and Dizzy Gillespie. He is also remembered for the trio he led with Ray Brown on bass and Herb Ellis on guitar in the 1950s.

"Oscar Peterson is a mother fucking piano player!" - Ray Charles, in Martin Scorsese Presents the Blues - Piano Blues (2003).

Sadly missed, You always have that swing !

C Jam Blues.mp3. http://www.raisethepraise.tv/songs/mp3/Oscar%20Peterson%20-%20C%20Jam%20Blues.mp3

Sunday, December 23, 2007

Watch that Jobless claims data.


The market is starting to suggest that we are going into – or may already be in – a recession, the Pavlovian response is that there can’t be a recession unless job creation falters. But the chart above is indicating that the jobless claims trend is starting to skew upwards despite going into the traditionally busy festive season.

If we are not yet in a primary bear market, the probabilities that one is developing are as high as they have been since the 2002 bottom. Taking it a step further, though it may not matter for the here and now, we must also consider that if we have a bear market in the offing, the possibility (rather than probability) that the S&P 500 (SPX) has put in a massive double top must be respected.

How far the market can rally and January Effect (likely to be short-lived) or not, we'll soon find out by mid-January and what's in the offing for the 1st Q.

Wednesday, December 19, 2007

Clear And Present Danger.



Richard Russell, an 83-year old author of the Dow Theory Letters, said: “In the stock market, hope gets in the way of reality. Hope gets in the way of common sense. If the stock market turns bearish and you're staying put with your whole position, and you're hoping that what you see is not really happening, then welcome to.. Poverty City.”

In order to gain some perspective on the outlook for equities it serves a useful purpose to study a long-term graph of the S&P 500 Index (above). This chart is based on monthly data, which tends to be more helpful than daily or weekly series when trying to identify the stock market’s primary trend.

There are a number of interesting observations that one can make from this graph:

* The MACD indicator (bottom section of graph) has just given a sell signal, as evidenced by the blue histogram bars falling below the zero line. These signals do not occur often – the last one, a buy signal, was given in May 2003 and the sell signal before that happened in September 1999.

* The more sensitive RSI (Relative Strength Index, which measures internal relative strength) oscillator (top section of graph) has fallen below 70, thereby giving its first sell signal since 1998. (A buy signal was registered four years later in 2002.)

* The 20- and 40-month moving averages (middle section of graph) are still intact, but these are lagging indicators and the turning down and crossing over of the two lines typically only serve as final confirmation of turning points in the index.

After the multiple Fed cuts, stocks had usually firstly experienced a bear market decline of 20% to 40% prior to recovering, and the average P/E on the S&P 500 Index was typically below 14 (compared with a multiple of 19.1 at the moment).

US profit margins, inflated by super-cheap credit in early 2007 (i.e. the lowest spreads ever seen), are clearly unsustainable. As a matter of fact, profits for the Standard & Poor’s 500 companies fell almost 25% on a per-share basis in the third quarter, the biggest year-on-year decline in almost five years.

“The earnings recession has already arrived,” adds David Rosenberg, North America economist for Merrill Lynch.

Tuesday, December 18, 2007

It's time to consider The January Effect.

If you already understand that supply and demand determine prices, then you'll quickly grasp how to trade the "January Effect".

We hear a lot this time of year about the "January Effect." The name suggests that it happens only once a year, so it is understandable why many investors don't bother to learn what it is. But there really isn't anything mystical going on, and its influences are quite normal.

The January Effect happens when it does because of the United States Tax Code. Wake up!! Sorry.., thought I saw you dozing off there when I mentioned the United States Tax... wake up! Seriously, you don't need to be a CPA for this exercise, you just need to understand that tax consequences on your portfolio are based on whatever happened during a single calendar year.

In other words, if you close out a position in your portfolio before the market closes on December 31, then its profit or loss should be considered in calculating your 2007 taxes. This is not an investment decision. To be sure, the decision to sell may be purely for investment reasons. But unlike any other time of year, that can be augmented and perhaps even overshadowed by tax considerations.

The loss taken on one stock can offset an equal gain from another stock. If I sold a stock earlier this year for $8000 that I bought previously at only $5000 (yes, I'm just that good) then I must declare a $3000 gain to pay taxes on. If I have another position worth $5000 that I originally bought for $8000 (yes, I'm just that good) then I can sell it and avoid paying taxes on the other stock's gain. At year-end, investors are more likely to sell their losing positions. So, under performing stocks tend to continue under performing into year-end.

Investors can sell a stock at a loss in January and still get the tax benefit, but they won't get that benefit until after year-end. So, this selling pressure suddenly disappears when the market closes at midnight December 31, when the time value of money meets human nature of not wanting to admit being wrong. Now add another reason to sell: the tax loss that can help to avoid paying some taxes a couple of months later. This increases supply, which makes price decline further.

Well, this sounds easy, right? Look for stocks that have been declining, find the ones that decline even further into December 31, buy them when the market re-opens on January 2, then choose between the red Ferrari or the black one. Too easy. Firstly, those bad-boys Ferraris are so.. last decade. To keep up with the times, think Lamborghinis instead!

In reality, everyone and their dogs have already figured out this strategy's timing. Buyers are already acquiring their positions well before year-end, anticipating the January Effect rally, even while some shareholders continue selling to realize their tax loss. We can take out some of the guesswork by limiting our choices to stocks that already stopped declining, or else those that are trying to bottom. I like to see price momentum indicators like MACD & RSI giving buy signals, and I also like to see Money Flow or On-Balance-Volume indicators under accumulation. Even if all systems say "go," the actual impact of the January Effect rally should subside by month-end.

By the way.., the season is changing, Winter Solstice is just round the corner - 21st Dec 07, and market will experience a directional change too.

Saturday, December 15, 2007




Merry X'mas..and hav'a profitable 08!

Gold Rush.


Gold is weak once again this morning on this silly idea that the Fed is going to be a tough guy because the inflation data is finally beginning to show some of the inflation that's been there all along. Sure, the Fed may be forced at some point by the market to stop feeding inflation with more rate cuts, but the Fed won't be tightening anytime soon with the economy and financial system in the mess it's in.

This is the stagflationary. It's finally beginning to show up in the government's data (which is a feat in and of itself), and stagflation is probably the most bullish environment for gold known to man.

The interesting thing that jumps out at me about gold this morning is that it's finally beginning to break free of its euro and dollar-related shackles. Gold has been rallying in all currencies, including the euro, but it has had a rather tight correlation to the euro over the past six months (and as a result, a negative correlation to the dollar index). This morning, however, that appears to be in the process of changing.

Note that while the dollar index has made a new one-month high and the euro has made a new one-month low, gold is resisting the decline in the euro (and the rally in the dollar) and not following the euro to a new one-month low of its own.

China Investment Corporation.

To see why a crash may be coming, it is worth examining the behavior of the China Investment Corporation- the $200 billion sovereign wealth fund set up by the Chinese government in September ... Six weeks ago, the power of sovereign wealth funds was celebrated and China Investment's moves into the market were awaited with bated breath.

A third of China Investment's portfolio is to be invested in Central Huijin Investment Company, a purchaser of bad loans from the Chinese banks, and another third will recapitalize China Agricultural Bank and China Development Bank, to shape them up for privatization. $3 billion of the fund was invested in the private equity manager Blackstone Group in May - that may have bought China useful political contacts, but it is now worth $2 billion. And the remainder is being invested very carefully, primarily in U.S. Treasury securities - which are also losing money steadily in yuan terms.
The lackluster investment strategy of China Investment exposes a central flaw in the Chinese economy, its lack of a rational system of capital allocation. For more than a decade, Chinese state-owned companies have made losses, and have been propped up by the banking system. Since 2004, loss-making state-owned companies have been joined by overbuilding municipalities, erecting white-elephant office blocks in attempts to turn themselves into the next Shanghai. None of these losses has resulted in bankruptcy; instead the cash flow deficits have been covered by the Chinese banks. As a result, the Chinese banks have an enormous volume of bad loans $911 billion at May 2006, according to a later-withdrawn estimate by Ernst and Young, which must surely have ballooned to $1.2 trillion-1.3 trillion now ...
A $1 trillion problem in subprime mortgages has caused even the U.S. money market to seize up and has required frequent applications of sal volatile by the Fed. Since China's economy is around one fifth the size of the United States' the Chinese banking system's bad debt problem is in real terms about five times that of the United States, about 40% of its gross domestic product.
We have seen this movie before; the Japanese banking system's bad debts after 1990 totaled around $1 trillion, about 30% of Japan's GDP. The result was the bursting of the 1980s bubble and a period of little or no economic growth that lasted well over a decade.
Since China also has much of the corruption that bedevils Latin America and its government lacks any genuine understanding of the free market and is increasingly dominated by special interests, it may indeed be fated to follow a Latin American growth path for the next few decades, with a tiny entrenched elite enriching itself at the expense of the disfranchised masses.

Thursday, December 13, 2007

Uh...Global Coordinated Liquidity Injection ?

The perceived market's disappointment on Tuesday was the refusal by the Fed to make the Discount window more attractive. Now we know why they chose that course of action: Global Coordinated Liquidity Injection.

Uh, ok... but what does all that mumbo jumbo really mean? In order to understand it, let's step back for a moment go way back in economics history...far, far away.... .

Some are calling today's coordinated move by global central banks unprecedented? Is it? Not really! But that doesn't mean it's not extraordinary. In fact, the extraordinary nature of it is.., why we say it's "bullish" but not bullish. These types of things just don't happen when times are good! To understand the present credit market conditions in context, let's go back to... Shhhhh... don't say this too loudly... 1930!

What happened in 1930? The formation of the Bank for International Settlements (BIS). The BIS essentially laid the groundwork for global coordinated liquidity facilitation. After the end of World War I there was a deep distrust among countries, which magnified the global credit contraction conditions. Debt was massive at that time. Global markets seized up.

The BIS was initially a failure. Among the first loans the bank intermediated were packages to Austria and Germany, neither of which helped those countries avoid financial crises. What is important is not that the BIS failed to stop financial crises, but why. The answer is that markets eventually chew through fiscal and monetary intervention in spite of us. So frequently, in fact, almost always, the cure is far worse than the disease. Just something to think about.

Wednesday, December 12, 2007

Liquidity Unfrozened.

There is a stigma attached to borrowing funds from the Fed through the discount window: the banks have to disclose it and it illustrates severe financial weakness to their shareholders and depositors.

So the Fed is considering a “new auction system”. Essentially, what the Fed is doing is taking the stigma away from the discount window--the Fed will lend directly to banks and the banks don’t have to tell anybody. Theoretically, the Fed could make these quiet loans for indefinite periods, thus giving banks more permanent capital (it’s really credit, but banks call it capital).

I have a feeling the Fed moved less yesterday than expected because foreign investors (foreign central banks) were crying foul. A bigger move would further deteriorate the dollar and thus their investments in the dollar. It would also hurt their exports. They are getting pretty tired of this game and trade pressures are building.

The Fed knows that higher stock prices are important to reflate since 90% of global liquidity is dependent on high asset prices as collateral. Thus they are desperate to finance banks’ collateral values. How to do that? The only way is to lend directly to them.

The plan won’t work. Under the repo/fractional reserve system the debt can be hidden because it is spread out among many banks. The Fed lending $10 billion (and thus their balance sheet rising by $10 billion) will turn into $500 billion as other banks lend that money out and only keep a fraction of it for themselves. This is not working. Under the “new” plan the Fed will lend directly to each bank. If they want to create $500 billion of new credit the Fed’s balance sheet will increase $500 billion.

This will be obvious to foreigners just like a big cut in the discount rate last nite. This is why gold is up this morning in response to this “new” plan which is really just a hidden discount rate cut: if the Fed is willing to pervert its balance sheet to this extent the dollar will fall. And gold (in dollars) will go up.

Tuesday, December 11, 2007

Decoupling.

Equity markets have decoupled from debt markets, emerging markets have decoupled from developed markets and the U.S. dollar has decoupled from just about everything.
Short-term government securities have acted as a safe haven for money in transit. Interest rate traders have bet that the U.S. yield curve will steepen as the Fed cuts short terms rates and the long end reflect fears of inflation. European interest rate may follows as economies weaken responding to a U.S. slowdown and a stronger euro.
Debt is distinctly out of favor. Debt is also less attractive in an environment of increasing inflation. Fundamental price pressures are coming from higher energy costs, increasing food prices and rising inflation in emerging markets. The price pressures are exacerbated by seemingly deliberate policies from central banks to inflate their way out of the credit crunch.
Investments reliant upon abundant and cheap debt - highly leveraged hedge funds, private equity, infrastructure and property look less attractive.
Equity markets have benefited from lower interest rates, strong corporate balance sheets and profitability.
Fear of inflation underpins demand for real businesses with strong, preferably recession insulated cash flows. Fossil energy, hard commodities and food producers are key areas of focus. Alternative energy, water resources, essential infrastructure (especially in emerging markets) and environmental services are perceived as attractive.
Support for equity markets has an emerging markets angle. Emerging market growth is expected to be insulated from the turmoil of developed markets. Suppliers to emerging markets ( e.g. commodity producers) are seen to be protected from a US and European downturn.
Outward investment flows from China, India, Russia and the Middle East - the emerging market "bid" - are a key driver of equity market resilience.
A weak U.S. economy and concern that the Fed will continue to ease interest rates further in an attempt to prevent recession and support the banking system weighs heavily on the dollar.
Major dollar investors, especially Asian central banks who have invested a substantial portion of their reserves in U.S. dollar assets (estimated around 60-70%), have started to diversify their currency investments. Moves to replace the dollar with the Euro as the settlement currency for trade in key commodities such as oil, if it eventuates, also removes an underlying pillar of support.
This has supported currencies, especially emerging market currencies or currencies seen to be closely linked to these markets. Appreciating currency values reinforce asset values in these markets triggering positive feedback loops. This helps keep the emerging market asset price bubbles going.

Saturday, December 8, 2007

Rebound...

December has been up 75% of the time since 1929 in the S&P 500, with the second highest average monthly return and the smallest average drawdown. And whenever the S&P has lost more than 4% during November, December was higher five out of five times by an average of +5.6%.
Past results is no guarantor of future performance, as the saying goes, but while history rarely repeats, it often rhymes.
The autumn swoon stopped directly on the August lows, precisely ten percent from an all-time high. While this is admittedly a bit
cute for my liking, the technicians in our midst now have a level to lean against.
Keep in mind that the sharpest rallies occur in the context of a bear market and formidable resistance resides above at S&P 1490. The bulls seems to have chewed through that resistance, and the double-bottom ten percent blink-and-you-missed-it correction will be obvious with the benefit of hindsight.
I believe that “Don’t fight the Fed” is one of the most dangerous axioms in finance. Still, the perception that the FOMC is on call and at the ready could buoy markets through year-end, particularly if he they cut Fed Funds by fifty basis points and again adjust the discount rate lower on December 11th.
However, as traders, the path we take is entirely more important than the destination we arrive at. Interesting times indeed, fraught with risk and by extension opportunities. Stay alert and understand that a litany of agendas are littering our financial landscape. You don’t have to agree with them, you simply have to respect them. All the way to the bank.

Friday, December 7, 2007

Cutting rates any good ?


As the markets seem to want to be relieved that global central banks have the “liquidity” problem under control, let us remind ourselves of the magnitude of the problem.
Just how central banks inject “liquidity” into the markets when they need it? Essentially central banks encourage debt creation - for people to borrow money, so that they buy things (consumption) to spur the economy. But due to too much debt, financial engineering has had to create new and better places to stuff more and more debt.
You may have seen the chart above before. It shows the results of that financial engineering. Central banks can only affect the bottom two parts of the chart- ie high powered money and M3. The Federal Reserve is growing as fast as it can in order to indirectly support the much larger problem of scrutinized debt and derivatives.
These two phenomenal pockets of debt are supported by asset prices: when asset prices (which act as collateral) decline, liquidity gets sucked out of the system. So the purpose of pumping new debt into the system is to keep nominal asset prices up to protect collateral values of the real problem of leverage in the system that the Fed cannot directly control. It takes more and more debt to do this because people are having huge problems servicing the debt they already have.
So we have two huge forces fighting each other right now: the central banks desperately attempting to re-flate (create more debt) and the market grudgingly but purposefully attempting to deflate by paying back (which the bureaucrats are trying to help with) or more likely destroying (write-offs) that debt. We have extremely high volatility as these two forces fight it out.
Looking at the chart above, eerr... which do you think will win?

Thursday, December 6, 2007

Don't ignore the market.

We find ourselves at an inflection point where just about every piece of news imaginable indicates that our financial markets should be falling lower. The mortgage mess is just starting to heat up while the credit crunch is in full swing. Despite some improved retail numbers the general consensus is that the consumer is strapped, gas prices are high and inflation for everything except what the government counts in their basket of goods is ramping. Yet despite all this the market is actually starting to rise.

Most traders will clearly be scratching their head over this dislocation while others skip the scratching and move straight to pounding, choosing to fight the market and its ascent. While it is always fun to debate and form one's own opinion regarding the macro outlook, the simple fact is that the market is acting well in the extreme short term and while it doesn't mean we're out of the woods we must stand up and take notice or at least give it the respect it deserves.

Every market that goes higher starts from some point and while there is great danger in being overly anticipatory, it is he who identifies the move first that will typically reap the most rewards. It is during this early time when the crowd has not yet embraced the move, rather they are fighting the trend and standing stubbornly aside. Ironically, as the ascent continues, these individuals become more and more optimistic and the crowd mentality slowly shifts. Ultimately the pendulum shifts in completely the opposite direction and ironically is about the time when positive news flow starts to creep in and actually supports higher stock prices. Of course, we all know that it is also around this time when you have to start becoming more and more cautious and slowly creep out of the optimistic mentality, moving towards the exit.

The problem most traders face, however, is not just how to identify an early move but how to play it. In my opinion, it is during these early stages that time frames become incredibly important. Most would believe that during the early possibility of a turn, the short term time frame dominates as hyperactive speculators jump in and out in a matter of minutes not risking any more than they have to and capturing as much gain as possible. This activity breeds volatility, which is why short-term market moves acts so erratic at key junctions such as the where we are now. In one sense that opinion is correct but I believe this early playground is wide open and actually may present more opportunity for those with a longer time frame.

Despite this volatile short-term activity, it is also around this time when the new winners start to make themselves known and present perfect opportunities for the longer term trader who can start to slowly wade back in with a much longer leash and a smaller investment size. They are typically stocks that are just starting to show improved relative strength despite after having weathered the recent storm relatively well. They are typically also those that are the most fundamentally sounds as traders seek to move back into their favorites that they sold only weeks before during periods of high emotion and fear.

The individual seeking a longer time frame can easily start to move slowly back into these areas with a long leash, giving themselves the most opportunity for reward while keeping their risk in-line by holding a less than normal position size. Should the market not be turning and falter again, stops will be taken, but if the market does move steadily higher, the longer term trader will be well on his way to building back solid inventory in order to fully participate with the next move.

At this very moment the market has been showing signs of resiliency and is improving. The technical conditions remain extremely precarious but there are also subtle signs of improvement and early speculators are starting to step back in and scoop up inventory. It may simply be another push towards the new longer term trend line resistance, or it may be a move back towards new highs. There isn't a soul out there who knows for sure but if you find yourself already having formed an opinion on what will happen, whether you believe it or not, you are actually predicting the future.

At this juncture especially, we must remain flexible, open-minded, and with both ears listen to the charts.

Tuesday, December 4, 2007

Dances with energy.


Yesterday I saw a bunch of Bloomberg headlines regarding a new U.S. National Intelligence Estimate (NIE). I parsed through them quickly and made little of it; until, that is, I read an eye-opening piece last night. The bottom line is that the Dec. 3 NIE concluded that Iran halted its nuclear weapon program in 2003, and that since 2005 the U.S. has been overestimating Iran’s plans to develop nuclear weapons.

And with that, the oft discussed “geopolitical premium” presumed to be built into energy prices was pretty much eviscerated. What does it mean for energy stocks? What does it mean for the broader market? Based on recent (and not so recent) history, lower energy prices are not correlated with broad gains in equities, regardless of what the broad media feed us on a daily basis. You can search the archives for many statistical takes on this point, but merely eye-balling this 4-yr chart of crude and the S&P500 (SPX) it is rather obvious that the two have been dancing together quite nicely.

Does it mean then that equity markets will fall together with energy prices? All things being equal, I suspect that lower energy prices would indeed be a drag on equities; but things won’t be equal. The only thing keeping the Fed from mainlining the system with every dollar it can print is the risk of inflation. The mere thought that inflation might be restrained by lower energy prices should be excuse for Bennie to continue his compulsive monetary promiscuity. It matters not that, in my humble opinion, these actions will only prolong and exacerbate the current credit mess; if the Fed keeps printing, nominal asset prices will likely continue their delusional exuberance.