Sunday, October 26, 2008

S & P Crash Count.

Dive.., Dive.., Dive... !

This was an interestng read from Bloomberg:
GLG's Roman, NYU's Roubini Predict Hedge Fund Failures, Panic. -By Tom Cahill and Alexis Xydias. 23 Oct, 2008.
Hedge funds closures will eliminate about 30 percent of the industry, and policy makers may need to shut markets for a week or more to stem panic, according to presentations at an investor conference today in London.
"In a fairly Darwinian manner, many hedge funds will simply disappear,'' Emmanuel Roman, co-chief executive officer at GLG Partners Inc., told the Hedge 2008 conference in London. U.S. regulators will "find a way to force regulation,'' said Roman, 45, who runs New York-based GLG with Noam Gottesman, 47. The firm was founded 13 years ago as a unit of Lehman Brothers Holdings Inc. and now manages about $24 billion in assets.
Nouriel Roubini, the New York University Professor who spoke at the same conference, said hundreds of hedge funds will fail as the crisis forces investors to dump assets. "We've reached a situation of sheer panic,'' said Roubini, who predicted the financial crisis in 2006. "Don't be surprised if policy makers need to close down markets for a week or two in coming days.''
Many hedge funds have resisted oversight by the U.S.Securities and Exchange Commission, even as policy makers coordinated global interest-rate cuts and bailed out banks to try and stem the crisis. The hedge fund industry is stumbling through its worst year in two decades and posted its biggest monthly drop for a decade in September.
"There needs to be some scapegoats, and they are going to go hunt people,'' said Roman, who didn't indicate when new U.S.regulation may take effect. Regulation is "overdue,'' he said. In the U.S., "someone can graduate from college on a Friday and start a hedge fund on a Monday.''
Increased regulation and higher borrowing costs will make the hedge-fund business more difficult, Roman said. Still, financial markets have "overshot,'' he said.
In some areas of financial markets, including loans, there are "once-in-a-lifetime opportunities,'' he said. "At somepoint, people will say this isn't 1929 to the power of 10.''
Roubini, a former senior adviser to the U.S. TreasuryDepartment, forecast this Feburary a "catastrophic" financial meltdown that central bankers would fail to prevent and that would lead to the bankruptcy of large banks exposed to mortgages and a"sharp drop'' in equities.
The comments preceded the collapse of Bear Stearns & Cos.and Lehman Brothers Holdings Inc. as well as the government seizure of Freddie Mac and Fannie Mae. The Dow Jones Industrial Average, a benchmark for American equities, has lost 37 percent this year, including its biggest daily drop in more than twenty years on Oct. 15.
He predicted earlier this month that the world's biggest economy will suffer its worst recession in 40 years.
"This is the worst financial crisis in the U.S., Europe and now emerging markets that we've seen in a long time,'' Roubini said. "Things will get much worse before they get better. I fear the worst is ahead of us.''
Developing nations' borrowing costs jumped to the highest in six years today as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the International Monetary Fund to help weather frozen money markets and a slump in commodities. Argentina risks defaulting for the second time this decade.
"There are about a dozen emerging markets that are now insevere financial trouble,'' Roubini said. "Even a small country can have a systemic effect on the global economy,'' he added. "There is not going to be enough IMF money to support them.''
Italian Prime Minister Silvio Berlusconi roiled international markets on Oct. 10, first saying world leaders were discussing shutting down global financial exchanges, and then saying he didn't mean it.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

Wednesday, October 22, 2008

Trimming The Hedge Funds.




The Silver Surfer : "Surfing in a declining market, I am looking for high rates of attrition."
Before the market downdraft, there were about 10,000 hedge funds with an estimated value of $1 trillion.
Look for about half of them to disappear - but don't worry. It's healthy.
This is a cleansing process. There's a lot of leverage that's being unwound. A lot of funds are liquidating winners to finance sinners.
Investors pulled about $43 billion out of hedge funds in September. Money under management will continue to decline and funds will continue to take hits in a declining market.
Hedge funds appear to be an acceptable casualty in the eyes of government, as well as those of many small investors. But Main Street won't escape the fallout as the sector contracts.
Hedge funds are a mystery to many individual investors, and are often regarded as being volatile and leveraged to the hilt. The reality is more complex. A hedge fund can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and take a position in just about any opportunity in any market.
While strategies vary greatly, many funds hedge against market downturns. The goal: Use a range of techniques to reduce risk, boost returns and limit the correlation with equity and bond markets. In short, the means may be buccaneering but the goal is conservative.
Many fretted that risk-happy hedge funds someday would crash the world's financial markets. Instead, it was thumb-sucking mortgage lenders and established investment banks that gave the world a glimpse of Armageddon.
But that doesn't mean hedge funds are in the clear. In fact, hedge funds may be the next sector to fall.
So far, major funds have taken a hit, but haven't been shattered. One reason: The funds were conservatively managed, contrary to their gunslinging image in the general press. Paradoxically, it looks like most hedge funds took fewer risks than some investment banks.
Here's why: Hedge funds, unlike many mortgage lenders, were playing with their own money and were directly accountable to investors. Any misstep by a hedge-fund manager instantly set off howls, while his investment- and mortgage-bank brethren could make bad decisions until they built to tsunami proportions.
But that's changing. The value of publicly traded hedge funds has taken a hit. Man Group, the world's biggest publicly traded hedge fund, has lost about 41% of its value since July.
And things are likely to get worse. Look for hedge funds to take a hit, because the credit crunch means they can no longer leverage investments. The reason: Credit won't be widely available.
Hedge funds had little to do with the underlying conditions that led to the mortgage crash, but nevertheless will face increased restrictions as part of politicians' need to regulate the markets and do something -- anything -- to address the recent turmoil.
The immediate result of new regulation will be less wiggle room for fund managers. This will almost certainly erode returns, and make hedge funds less attractive to investors.
Big Ben and the central bankers will do their best to prevent future bubbles from building in various markets. This may be good news for the economy - but it will take a bite out of hedge funds, because deft managers were adept at chasing inflated asset classes and knowing when to get out, thereby pocketing a nifty profit.
Buyout funds routinely tapped the debt markets to finance the next acquisition. Such businesses can't thrive if debt markets seize up. What's next? Anyone interested in buying some used office furniture from a hedge fund?
The worldwide economic slowdown will hurt major industries, including those buyout funds routinely trolled, such as retailing and manufacturing. That means there will be few, if any, new deals ahead and existing deals may go bad.
The once saucy financial markets will become increasingly dowdy. That means innovative hedge-fund managers will have few chips to play in a game that has largely disappeared.
There will be rough times ahead, but the sun will continue to rise in the east.

Saturday, October 18, 2008

Tom Demarks's- Sequential. Tracking "The Red October".




Let's cut the chase.., skip to the end.., get to the nut of it: have we seen the low in the stock market for the year or not? Even if you are not a technician, using Tom Demark's TD-Sequential could help giving you an idea where we are at now.

First, let's go over very quickly the numbers you will see on the chart. These numbers are patterned expressions of selling (or, on the upside, buying) exhaustion that were identified by Tom DeMark more than 30 years ago.

This particular pattern we are discussing is an expression called TD-Sequential, and it consists of two components, a setup and a countdown period. Numerically, the setup is complete at 9, the countdown at 13. These patterns help identify potential selling or buying exhaustion points. They are probabilistic and dynamic, because markets themselves are probabilistic and dynamic.

Now, what do these 9s and 13s really mean? Because we are looking for a market low, let's focus on TD-Sequential Buy Setup and TD-Sequential Buy Countdown.

The TD-Sequential Buy Setup consists of 9 consecutive closes that are lower than the close four price bars earlier. The criteria for "perfecting" the sell setup is that the LOW of price bar 8 OR 9 be below the low of BOTH bars 6 AND 7.

Once a Buy Setup is in place, the TD-Sequential Buy Countdown can then begin. The difference between Buy Setup and Buy Countdown is that Buy Setup compares the current bar's close with the close of the bar four bars earlier, while Buy Countdown compares the current bar's close with the LOW two price bars earlier. Also, unlike Buy Setup, Buy Countdown need not occur on CONSECUTIVE bars.

That is the quick and dirty overview of TD-Sequential. 9s are completed Buy Setups and 13s are completed Buy Countdowns.

The question is, Have we seen the low for the year? I think there is a fairly significant probability that we have not.

Above is the weekly chart of the S&P 500 at its current juncture. Here is my concern. So far, we have not yet recorded a Buy Setup, and are currently on bar 7 of potentially 9. Moreover, in order to "perfect" this Buy Setup (remember, bar 8 OR 9 must have a low that EXCEEDS the low of both bars 6 AND 7), a new low must be made by one of the bars in the next two weeks (next week would potentially be bar 8 and the following potentially bar 9).

What If I'm Wrong?

This view is complicated by numerous buy signals on many of the daily charts of the major indices. But markets, the battles between buyer are seller, are about continually competing timeframes. I believe, looking at these significant market lows, longer-term timeframes tend to have the upper hand at significant market turns. Therefore, my conclusion is we have a high probability of making a new low within the next two weeks.

But I may be wrong. If so, then I do not mind buying the stocks at levels higher than today because if I am wrong about the market's present state, then I will at least be entering the market at a point where risk is lower than I believe it is currently- just a wild idea!

If you would like to learn more about DeMark price exhaustion techniques, I recommend a new book that was recently published by Jason Perl, appropriately titled, "Demark Indicators."

Thursday, October 16, 2008

History Will Not Reflect Kindly On Recent Economic Decisions.



He who learns but does not think is lost. He who thinks but does not learn is in great danger.”--Confucius


A Chinese philosopher said that when it’s obvious goals cannot be reached, don’t adjust the goals—adjust the action steps. Global central banks have taken those lessons to heart.

The construct of capitalism has forever changed and investors are spinning from the insane volatility gripping financial markets. 20% moves in major market averages—session over session—are tough to stomach regardless of your directional bias.

One year ago, when the writing was on the wall as the Dow Jones Industrial Average probed all-time highs, pundits confidently proclaimed there was clear sailing ahead.

Last week, as perception caught up with the daunting reality of debt and derivatives that we’ve been warned of for years, depression was debated across mainstream America.

You can’t blame folks for being confused. We’re past the point where bulls and bears profit or lose. We’ve entered a new world order, a scary stretch where politicians rewrite history on a daily basis in an attempt to escape the devil of deflation.

There are certain things we know for sure. Universal truths, if you will, that can provide clarity amid the confusion. We’ll tackle five themes today with hopes that we’ll shed some light as we together find our way.

Two trading dynamics considered gospel for many years have effectively been debunked. The first was that lower crude would serve as a positive equity catalyst and the second was that a higher dollar would bode well for stocks.

We live in a Wishbone World with dollar-denominated assets on one side and the greenback on the other. One of two things must occur: either the world reserve currency will debase, paving the way towards hyperinflation, or the dollar will strengthen as debt destruction continues it’s natural course.

The U.S. government is attempting to buy the cancer and sell the car crash. The mere perception of “success”—a whiff, if you will—should be enough to shift psychology to the other side of the ride, damaging the dollar and propping stocks higher for a trade.

The hedge fund bubble popped this year and the carnage has been pervasive. On top of regulatory scrutiny and operational restrictions, the correlation of strategies has buried the best in breed well below their high water mark.

An obvious concern is the potential for continued redemptions and forced selling. Many macro portfolios are laced with derivatives and won’t be bailed out by the U.S. government umbrella, introducing the specter of further systemic risk.

Nobody is smarter than the market and I’ve long ago learned that if you don’t stay humble, the market will do it for you. What I’ll say with confidence is that the market tends to follow the path of maximum frustration and rarely rewards herds running aimlessly towards a cliff.

While the process of price discovery is fluid—dependent on a multitude of variables including credit, the dollar and geopolitical strife—it’s my opinion that we’ll look back at last week as the 2008 trading low (not to be confused with a market bottom) before a harsher downside comeuppance arrives next year.

There are two natural paths for financial markets—time and price—and an unenviable destination, that of debt destruction. The sooner we’re allowed to take our medicine rather than being given drugs to mask the disease, the quicker we’ll arrive at a stable foundation for legitimate economic expansion.

We will cycle through this period and arrive at better days and easier trades, although it will take some time. Just as the Internet prophecy proved true—albeit not before the tech crash—so too will the golden age of globalization once debt destruction fully manifests.

The recovery will be led by China, India and other emerging markets and profoundly reward those proactively positioned. Our goal—as investors and as a human race—is to get there in one piece while being kind to each other during the journey.

Wednesday, October 15, 2008

New Bull Market Defination.




Someone sent me this interesting defination:-


BULL MARKET– A random market movement causing an investor to mistake himself for a financial genius.

Sunday, October 12, 2008

New Gold Dream.



Spot gold rose $5.63 to $913.25 Thursday - a new closing high for the move since the September low.

For those keeping score at home, that means the gold price is now above the price of the SPX (909.92) for the first time since having fallen below it in the summer of 1990.

The last time we saw the dollar price of gold rise above the SPX after a long period of being below it was in summer of 1973, after which the price of gold more than tripled over the next year. The gold price would then remain above the SPX price for 17 years, ending in the summer of 1990.

Will we see something similar this time around? (i.e. Will gold tend to outperform stocks for the next decade or so, as it did after the summer of 1973?)

I suspect that’s going to be the case, given the long-term nature of the big secular bear market in stocks that began back in 2000 in “real” terms, and the big secular bull market in gold that began in 1999.

The CNBC folks may tell you that gold is rallying simply because of “panic,” but this would be far from the truth. The market isn’t that stupid. It doesn’t buy gold to hold it close and sleep with it at night because it’s “scared.” The market buys gold to hedge against debasement of fiat currencies and as a store of value.

In this case, we’re seeing gold sniff out what the result of all the Federal money-printing and backstopping in response to the current collapse will eventually result in: An “inflationary holocaust,” as Jim Rogers put it.

There are consequences for every action taken by governments and central banks when they meddle in the markets; in this case, the consequence will be massive inflation going forward.

It may sound a little counterintuitive, since the Fed is responding to “deflationary” forces resulting from the housing bust and the ensuing credit crunch. But at the end of the day, money printing always results in inflation, just as it did following Greenspan’s printathon in response to the stock bubble bursting back in 2000 (which was also “deflationary” at the time, but didn’t turn out that way due to the Fed’s printing).

Let’s not forget that crude oil was $20 back in 2000 and would rally fourfold (to $80) over the next 7 years, before Gentle Ben began running his presses back in 2007. That set crude on another run to $140 in under a year. If that sounds like a parabola, that’s because it is one.

It took the Fed from its inception in 1913 until 1997 to grow its balance sheet the first $500 billion. It then took another 10 years to grow it an additional $500 billion. In the past 3 weeks, the Fed has now grown its balance sheet another $700 billion in an attempt to force the credit markets to unfreeze by the brute force of massive inflation.

This is a classic description of a parabolic money printing, and it sets the stage for an inflationary tsunami going forward.

Buckle up. It’s going to be a wild ride. We always knew how the Fed would respond to this crisis, because it’s how the Fed always responds to financial problems: More money printing.

And it’s going to have a very predictable result too.

Wednesday, October 8, 2008

It's Not A Bargain, Yet.

It's a Bear Market. Understand It, Embrace It.

The first thing all investors must understand and accept is that the market is in a longer term downtrend. It will end at some point, and along the way there will be strong countertrend moves, but ultimately the wind is blowing south. Accepting it is half the battle.


Fire The Optimistic Advisor.

I have always considered myself to be an optimist, but, at the end of the day, I fall firmly into the realist camp when it comes to trading and investing. This is your future, not a lottery ticket. Maybe the tough decision is in taking action to can not just a few lagging stocks, but your lagging advisor as well.

This Will End In Hindsight.

Seasoned investors have no desire to catch bottoms; most will choose to miss the beginning of a new trend higher. They chose this path for its safety and certainty. It's much better to be late than wrong, and opportunity costs are made up much easier than losses. Stop being concerned with catching a turn, averaging in, or buying low. That's a fool's game, and should be avoided at all costs. Rather than trying to pick a bottom, take the time to study what bottoms look like. Formulate a game plan based on historical data, so that you know how to proceed when the rough times are over.

No, It's Not a Bargain.

Investors are learning, and will continue to learn, that trends can last much longer than seems reasonable and stocks can fall much farther than one would expect. Many may be tempted to pick up Maybank at lows or a Lion Diversified under 3xPE, but in reality, these stocks are trading at these levels for a reason. Rarely, if ever, will you outsmart the market. Just when you think a stock can't fall any further, you wake up to see a solid blue chip like Tenaga dropping another Ringgit. Avoid the siren call of bargain stocks. When the market regains its health, there will be ample opportunity.

Saturday, October 4, 2008

Panics Tend To Play Out Over A Certain Periodicity Of 49 To 55 Days.




The purpose of showing the charts of the 1929 and 1987 crashes is not to alarm you. I am quite certain you are already alarmed, as I am. It is one thing to be bearish and anticipate a crisis, it is another to see it spiral out of control.

There are a few important messages in the charts from those two fateful years: The economic outcome and fallout after each was worlds apart. The '29 and '87 template were similar in as much each saw a crash following a blow off top after a long run. That is not the current pattern in as much as the current waterfall decline the market is trapped in began from a much lower high.

Be that as it may the pivot for the break in 1987 was the end of August. The pivot for the 1929 break was September 3rd. Both panics played out over 7 squared days (49 to 55 days) of 7 plus weeks.

The last pivot high for this market occurred on September 2nd. An eerie analogue. I think it is wise to respect the message of history and the notion that panics tend to play out over a certain periodicity of 49 to 55 days before being tempted to jump in because stocksl ook like the are down too far, because stocks look cheap. There is no such thing as fair value when someone big is trapped and forced to sell and they cannot wait. There is no such thing as fair value when hysteria is running rampant. No one knew how high, high was on the fertilizer stocks. They burned many shorts who thought they were fundamentally a good short. They singed so many, that I suspect that many if not most of those same traders put them on their 'restricted list' as to shorting. They had just been burned one too many times. Such is the emotional nature of the beast.

While on the surface there may be differences between the '29, '87 experiences and the current crash if one looks at the daily charts. The notion occurs to me that looking at the monthly or weekly chart of the S&P or DJIA that it may be a fractal of the daily charts from the prior two instances. The monthly chart shows the persistent run up and just as persistent a tumble off the top. The message of that notion is two fold: we need to carefully watch the period of 49 to 55 weeks from the October 2007 high. Of course 49 weeks from the October 2007 high was mid September when this snowball from hell accelerated. The 55th week will be the end of October early November. An interesting time to focus on indeed as it obviously coincides with the daily 49 to 55 day panic zone on the daily counting from the September 2nd pivot.


It is important to remember that the largest gainer in the market to that time occurred in the fist week of October 1987 prior to the crash. It is important to observe that in he middle of the 1929 experience that there was an hellacious rally of a few days.

Conclusion: I suspect that after the House approves a bailout bill that there may be a coordinated effort by central banks to inject rocket fuel (as one trading bro calls it) into the market. It's the last exit to Brooklyn---can they afford to let the market sag on the passage? I may be wrong of course but the point is if it happens I warn against buying into any carrot that they try to stick into this snowball and pass off a a friendly Frosty the Snowman. It is not. The daisy chain of systemic issues are vast. I for one don't believe that the markets are always a great forecaster of the economy. What did the markets know in October 2007 or was that that years version of a 'rescue plan' to prop up the market so that insiders could take capital gains right into the beginning of the new year, not to mention bonuses? What did the market know in August of 1929 as opposed to August 1987? It is entirely possible that the Great Depression was an effect of the way the aftermath of the crash was handled---the snowball was bobbled.

The dollar was not the whipping boy in the 1920's it has been this decade. Real estate was not crashing prior to 1929. There was leverage in stocks, but there were not the derivative dominoes that are plaguing us now. The global counter-party and systemic complexities that exist today dwarf those of the prior two experiences. There are many land mines to tiptoe around today and unfortunately the dog and pony pork show put on by Congress is not the kind of deft action that inspires confidence in leadership. We can only hope they get it before we get it.

Strategy: 1080 S&P is .618 of the 2002 to 2007 range. A tag of that level will carve out a three point trendline from the 2002 lows. Of course we may have already come close enough for government work, pun intended. We are NEAR the ideal place for a bounce. The US markets may gap up Monday--next week being the anniversary of many historical turns such as the Oct. 2002 low, the Oct. 1990 low, the Oct 2007 high and the Oct 4th 1987 fake out blastoff.

Friday, October 3, 2008

Damn Right, We ARE FUCKED!



As the equity markets set up for what I believe will be a short-term non-confirmation, it's advisable not to lose sight of the fact that the longer-term technical picture is decidedly less positive. To help understand how to view the longer-term market picture, a technical analysis tool that I have found to be most helpful is the Mega-Trend.

The Mega-Trend (as I define it) is a multi-year stock price trend analysis where price and two moving averages (50 day and 200 day) are measured. In well-established Mega-Trends, three conditions exist:

1) Price is above (or below) its moving averages.
2) The shorter term (50 day) Moving Average is above (or below) the longer term 200 day.
3) Both moving averages are pointing in the same direction, either up or down.Using the S&P 500 (SPX) as an example, for most of the past 5 years price has been above both of its moving averages and the 50 day was above the 200 day and both moving averages have been headed in the same direction (which is this case is up).

Then, around the end of last year, the circumstances changed and a Mega-Trend reversal occurred. Price went below its moving averages, the 50 day crossed the 200 day and both moving averages turned down.

What is important to remember is that all three conditions must exist for the tool to work effectively. A closer examination will reveal frequent crossovers by price, to its moving averages: As an example, investors often hear comments regarding price in relation to its 200 day moving average. In my experience, I have found no consistent predictive value in this frequently occurring fact.

But such events have no longer-term significance and little predictive value.

Another point to keep in mind is that this tool is less effective when applied to individual stocks. Perhaps it's due to the fact that they are subject to more frequent violent moves whereas whole markets and sectors and styles are less so.

Investment Strategy Implications

The Mega-Trend tool is a simple, elegant, yet highly effective tool for investors (and traders) as it keeps the longer-term picture firmly into view and helps place in context the shorter term wiggles and squiggles.

That said, the expected rally that my shorter-term technical tools (momentum, MACD, and Slow Stochastics – all part of the Divergences group) are forecasting will take place within an overall bear market trend.

Only when the Mega-Trend reverses itself will rallies and corrections be treated differently.