Saturday, April 25, 2009

Hope Must Be Balanced With Hard Reality.

There's a case being made that there's a better-than-average likelihood that the more-than-30% rally in 6 weeks by the S&P through last Friday marks a first leg up as opposed to another bear leg. Why?


Well, relative to precedents established during the Great Depression, the last 2-month leg down in the S&P into March 6 is the second shallowest and briefest. At the same time, the current retrace has gained more in percentage terms than any of its 1930 predecessors.


However, if the secular bear runs 13 to 14 years counting from 2000, that means that even if a price low has been seen, there could be years of chronic underperformance and undervaluation - even if one were to assume that stocks represented "value" in April 2009.



Cyclically, there are 3 important technical benchmark periods that are at hand to influence the U.S market's turns :


- The mid-April rally high in 1930 post mid-November crash low in 1929.


- The early June anniversary of the great 60-year cycle, which in 1949, marked the beginning of the Great Bull Market into 1966.


-The anniversary of the birth of the NYSE on May 17 (note the pre-crash peak on May 19, 2008).

Sunday, April 12, 2009

S&P Drift.



The S&P is doing a fine job of holding 90 degrees down from the 845 high which is 817 (ladt Thursday) and suggests a possible Misdirection. A break of 817 and then 803 suggests the S&P could turn its Weekly Swing Chart down next week and test its 50 dma. The key level going into expiration IF any weakness shows up should be 360 degrees up from the low or our old friend 774.

Saturday, April 11, 2009

How You Turn A Mighty Tin-City Into Ngar-Choi-Kai-City..




Ipoh has changed so much over the years since the Tin bust, nobody seems to know that Ipoh used to be synonymous with tin.

The last time I met a friend who was born after the Tin-bust, I asked him in jest, “Do you know what Ipoh's famous for?”

He gave me a blank look. Anyway, not wasting any time, I told him, “Tin-lah.” “If there is no tin, Ipoh wouldn’t be here. It would be just another Orang Asli settlement. He squinted his eyes and responded, “Are you sure? I thought it was Ngar-Choy-Kai.”

Thanks to Barisan Nasional for single-handedly transforming Ipoh from a rich and bustling Tin-City to a Ngar-Choy-Kai (Bean-Sprout with Chicken) industry. Ipoh never recovered from this fatal stroke of incompetence and greed to corner the World Tin Market. As a result of this, the once vibrant Tin Industry was totally wiped out.

It all started with a shady Egyptian tin trader by the name of David Zaidner. He worked for the commodities firm Marc Rich & Co in Switzerland. ( I'll ask my children to remember their names!)

Actually, he first approached the Indonesian government thinking that they were stupid enough to buy his idea of cornering the tin market. But the Indonesians smelled a con job and had him kicked out of the country.

Next, he couldn't believe his lucky stars when his idea was accepted with enthusiasm by our then brand-new Prime Minister, Tun Dr Mahathir. A plan was quickly hatched to corner the World Tin market.
In December 1980, the state-owned Malaysian Mining Corp. Bhd(MMC). named Marc Rich as its trading agent in a move that would shock the world commodities industry.
Secret large tin purchases were made on the London Metal Exchange and went unabated throughout 1981, inducing a worldwide price increase. The strategy was cheap and simple. Malaysia had to only pay a 10 percent deposit against three-month's forward purchase contracts.
When the price of tin shot up in the world market, the Malaysian government thought it had scored a huge victory. But unexpectedly, the price increase attracted many world producers to increase tin production and even the United States began selling from its strategic stockpiles to take advantage of the Malaysian-induced price rises.
Subsequently, Malaysia amassed about 50,000 tons of tin and had no other choice but to keep buying just to keep prices up ( being "shot-squeezed" ). Production continued to soar and even unheard-of suppliers started to turn up to cash in on the high tin price. The world tin market went berserk and it crashed. (the Palm Oil market could face the same faith! - oh, maybe not, because FELDA/FELCRA are involved.)
Malaysia lost an estimated US$250 million on its failure to honour forward contracts, and another local bank lost another US$1 billion in separate losses on loans it had made covertly out of its Hong Kong subsidiary.

For five years Mahathir categorically denied that Malaysia had anything to do with the plan but as outside pressure mounted, Mahathir finally revealed the details in 1986.
Marc Rich was finally indicted and arrested then extradited to the United States and convicted of massive tax fraud.

Think of the billions of ringgit taken out of our economy in Perak when the tin price went bust. Had Mahathir not meddled with the tin price, we wouldn't have lost 30 years of Tin export income. Perak wouldn't have been relegated from one of the richest states to a poor one like today.
Another good example akin to the Perak demise is Terengganu. If all the oil royalties go to the people of Terengganu, Terengganu would be an advanced state at par with Selangor. But unfortunately, these royalties go to the pockets of BN politicians and cronies in the form of “Duit Esan”.
"To all our children,... you must all remember them by their names ! "

This material was lifted from:
A Billion Ringgit Tin Mining Industry to Nga-Choy-Kai Industry - By Choo Sing Chye .
Researched from Steven Schlossstein's book, Asia's New Little Dragons.

Wednesday, April 8, 2009

Let's Talk About The VIX Again.

Lately it seems like I'm the only one who's not talking about the VIX. I find it particularly ironic that many of the same people who were pounding the table, saying that the market couldn't bottom unless there was another dramatic VIX spike and high-volume capitulation, are now insisting that the markets cannot rally from current levels until the VIX continues down. I suspect these pundits will end up going 0 for 2 in their predictions.

So what's driving the VIX right now? I opined that a simplistic conceptual model of the VIX is one which “incorporates incremental changes in uncertainty on top of recent historical volatility.” Many of the common measures of historical volatility (10-, 20-, 30- and 50-day) show that historical volatility in the SPX topped in the middle to latter portion of March.

Since the 7.08% jump in the SPX on March 23, trading has been relatively subdued from a volatility perspective. As that 7.08% jump, as well as the 6.37% and 4.07% jumps from March 10 and March 12, begin to scroll off the lookback window, historical volatility numbers should begin to lead the VIX back down.

As far as fear and uncertainty are concerned, the fear of a global systemic bank failure seems to be receding, while concerns about a deepening global recession are lingering and still rising in some quarters. The G20 meeting underscored the willingness of leaders of the world’s largest economies to coordinate their activities, even if they cannot agree on the details of those coordinated efforts.

Finally, we're in a news-cycle lull this week, with earnings season officially kicking off.

The bottom line is that current levels of the VIX are in line with historical volatility readings and changes in the macroeconomic landscape. The fear component of the VIX is clearly on the wane, which should mute any VIX spikes. On the other hand, historical volatility needs to continue to decline, and the VIX term structure (which is based on SPX options) and VIX futures need to soften somewhat before the VIX can reasonably be expected to start trading in the 30s on a regular basis.

Many analysts have a tendency to rely too heavily on charts when looking at the future of the VIX. While charts can provide some useful information -- and it's nice to know that the VIX has recently moved below its 200-day moving average -- sometimes putting the VIX in the proper geopolitical and macroeconomic context is a more valuable approach.

So, I think the VIX is about where it should be right now, and stocks can resume their move up without the VIX being required to plummet. In fact, if the bulls continue to keep the upper hand, expect the VIX to decline in a decidedly gradual fashion.

Tuesday, April 7, 2009

Friday, April 3, 2009

Stocks Can't Reach Higher Levels Unless Foundation is Built.

Here's an article I found in Forbes today by “Dr. Doom” himself - Nouriel Roubini. In the article, Mr. Roubini raises several excellent points, including his bear-market rally conclusion. It could be argued, as Mr. Roubini and others have, that stocks -- which have been on the upswing since early March -- are doing little more than producing a counter rally to the firmly entrenched bear. This argument has merit, provided stocks fail to complete their 3-part process of building a bottom from which higher levels can be achieved.

Headline indicators making new lows weren't being confirmed by more than a few other important indices, and what set the stage for the catalyst was the fact that the markets were primed for any good news - with the catalyst being the positive Citigroup news that their business over the first 2 months was doing just fine. With the setup in place, the stocks reacted to the catalyst quite well with the requisite power move when both the advance/decline on the NYSE and its advance/decline volume met or exceeded a 10 to 1 ratio. To help seal the deal, stocks then met yet another bottoming process requirement, in which “sustainability,” which must be met with “(1) no big retrenchment” and “(2) another big up-day.”

So far, so good. But is that a market bottom? Or is Roubini right when he says “…we've had 6 bear-market rallies, and at the beginning of each one of these suckers' rallies the delusional perma-bulls repeated that this was the beginning of a bull-market rally. And for 6 times these perma-bulls were totally wrong as the rally fizzled and new lows were reached. And for 6 times I correctly pointed out that these were bear market rallies”?

At this moment, the answer lies in whether stocks take that final step and produce what's needed to complete the market bottoming process: the upside breakout.

For a market bottom to have been built, the final part must fall into place: the upside breakout from the trading range that's been established over the past several weeks. Frankly, the odds are against that occurring right now, and that it will likely take more time and work before it does occur. This can be seen from a valuation perspective.

Two days ago, “investors stared into the abyss of the Great Depression II, and came to the conclusion that a couple trillion dollars thrown at the world economy -- along with an era of better regulatory management and a most appropriate change/modification to mark-to-market -- will generate 2008 operating earnings for the S&P 500 at something north of $50."

Moreover, “…the perception that the end of world may not occur this year has led many investors to conclude that an appropriate P/E between 12.5 (bad times) and 15 (average times) applied to a $60 operating earnings number is where equities belong. And that gets to almost exactly where the market is today: P/E of 13.75 (average of 12.5 and 15) times $60 = 825.”

That’s the good news.

Investment Strategy Implications :

The bottoming process is well underway. However, only when it's been completed by producing an upside breakout above its previous rally high can the rally be perceived as something more than yet another false dawn.