How I wounder what you are...?

Clearly, the various markets are currently grappling with how events will play out in the coming year.

There are four possible outcomes:-

Scenario 1: The Fed sticks to its assertion that the risks for inflation and growth are now in balance, does not cut rates any further, and the U.S. economy grows past its credit crunch. If this happens, it would be massively bullish for the U.S. dollar, massively bearish for gold and potentially bearish for Hong Kong and Chinese equities (which are now anticipating more rate cuts). It would also be very bearish for U.S. Treasuries and government bonds around the world. Additionally, we would also most likely see a rotation within the stock markets away from commodity producers and deep cyclicals (which have been leading the market higher for years) toward the more traditional "growth” sectors, such as technology, healthcare, consumer goods, and maybe even Japanese equities.

Scenario 2: The Fed sticks to its guns, does not cut rates, and the U.S. economy really tanks under the weight of the credit crunch. In essence, the U.S. would move into a Japanese-style “deflationary bust.” In this scenario, equities around the world, commodities, and the U.S.$ would collapse, while government bonds would go through the roof.

Scenario 3: The Fed ultimately cut rates, but this fails to rejuvenate the system and get growth going again. This would likely mean stagflation. As such, gold and other commodities would do well, while stocks and the U.S.$ would struggle. Excluding bonds, this is increasingly what the market is pricing in today.

Scenario 4: The Fed ultimately cuts rates, and succeeds in reigniting the economy. This would be good news for equity markets, commodity markets, and the U.S. dollar (as world trade and foreign buying of U.S. assets would again expand, increasing the need for U.S. dollars). Of course, this scenario would be terrible news for bonds.”

The bet is on Scenario 3 and thus one has to be concerned that the Fed’s hand could be forced by the market to cut rates. Cut rates indeed, yet history shows while the first rate cut has an impact, the second and third tend to not have so much of one. This is demonstrated once again by the fact that the S&P 500 is below where it was when the Fed cut interest rates for the third time on October 31.

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited." - George Soros.

Abu Dhabi to CITI rescue.

When I look at this deal it is quite interesting. First of all, it must be understood that this is effectively an equity deal because of the mandatory conversion provision. From the limited information I have been able to retrieve, it seems that Citigroup is selling just under 5% of the company for approximately $5.7 bln. Why is it not the $7.5 bln that it is getting from the investors? Because Citi will have to pay interest on the $7.5 bln for just over two years, which will come out to approximately $1.8 bln. $7.5 - $1.8 = $5.7.

By my estimate, Citigroup has basically issued restricted equity (to be officially issued in two-plus years) at a price per share around the mid 20's when you take into account the 11% interest it is paying on the $7.5 bln. Additionally, Citi does get the benefit of using $7.5 bln now instead of only getting $5.7 bln now (if it had just done a straightforward equity deal), while paying $1.8 bln over the next two-plus years in interest.

All in all, this deal is a tough deal for Citi in my opinion because it smells like desperation. But don't be confused about the 11%. It is clear since the deal has mandatory conversion prices that the 11% interest rate is basically a discounting mechanism for the conversion price, which is why I say the equity was effectively issued in the mid 20's. It also must be noted that doing a convertible may have certain tax advantages for Citi instead of doing a straight equity deal in the 20's.

Week ahead.

Tuesday November 27
10:00 Consumer Confidence: 91.5 cons

Wednesday, November 28
8:30 Durable Orders: 0.0% cons
10:00 Existing Home Sales: 5.00 mln
10:30 Crude Inventories: 1071 k prev.
2:00 Fed’s Beige Book

Thursday, November 29
8:30 GDP-Prel: 4.8% cons
8:30 Chain Deflator: 0.8% cons
8:30 Initial Claims: 330 k prev.
10:00 New Home Sales: 750 k cons

Friday, November 30
8:30 Personal Income: 0.4% cons
8:30 Personal Spending: 0.3% cons
8:30 Core PCE Inflation: 0.2% cons
9:45 Chicago PMI: 50.5 cons
10:00 Construction Spending: -0.2% cons

Will this bull kick save the market ?

A brilliant observer of things, W. D. Gann’s sheer genius led him to comment that : “God geometrizes!”

If the geometrical notion of "as above,.. so below" is true, then the key reversal at the 1576 S&P high on October 11 may be a mirror image of Tuesday’s, 20th Nov's, reversal at 1420 S&P. This is the level I have identified for weeks now as the pivot of the year.

Simply put, 1420-ish is 360 degrees down from the 1576 high on the Square of Nine calculator. The Square of Nine Calculator is simply a way of measuring price movements on a square root
basis as opposed to a simple linear basis.

Ha ha.., the straight line sometimes speaks with a forked tongue – otherwise everyone with a ruler would be executing trades from their yacht.

If intraday rapidity, accelerated volatility and ferocious price swings are the hallmark of turning points then Tuesday’s whipsaw and tag of 1420 S&P underscores the significance of the level in the same way that the outside day down from 1576 called the top. The problem is not all turns are created equal: it remains to be seen how much traction the 1420 level will have.

Despite more than a 10% S&P decline in five weeks, no matter how much religion you may have had about this rather quick slide to 1420 if you were trading individual stocks and taking positions home overnight, the zigs and zags would have stopped you out. And if your conviction was such that you didn’t adhere to protective stops or trailing stops then your gains are dirty money. Why? Because the bad habits learned from avoiding stops will dwarf any gains made in the long run.

The larger question to me seems to be that with so many looking to buy the dips and thinking the absolute worst is over that, it smells like the perfect ingredient for a collapsing bear market for a minimum of six months counting from the October high.

Despite the turnaround on Tuesday, stocks remain in a liquidating and in dangerous mode. Remember how quickly the stampede from Monday a week ago turned tail. That low near the mid 1450’s on the S&P now carves out initial resistance. As far as strategy is concerned, I would look to trade with the shorts into Friday’s close prior to the next plunge to start next week. That will probably coincide with something big being uncovered and someone big owning up and going under.

Critical mass was reached at 1420 on Tuesday and a break of Tuesday’s low triggers a substantial number of technical dominoes laid out in this space.

"That's me in the corner,
that's me in the spotlight...
Losing my religion.
Trying to keep up with you.
And I don't know if I can do it...."
- R.E.M

Embrace The Volatility Or Ignore It..!

As I was going through charts last night, it dawned on me that unless you are intimately involved in the financial markets all throughout the day, you may not see the incredible volatility that is taking place.

Taking a step back, it is quite clear to see that we have corrected and now we are bouncing: it's as simple as that! For people with money on the sidelines, their thought process is probably something to the effect of "Looks like the markets are still OK. If a sell off happens again, I am going to buy."

It’s only when one drills down deep, one begins to truly understand just how chaotic and volatile things are, but as I was pondering this I couldn’t help but think just how beneficial it would be for people to either embrace the volatility, or ignore it altogether.

I know that sounds a bit silly, but let me explain. I often hear things throughout the day such as : just how challenging the environment is, or how wacky the action is underneath. These statements are arguably accurate, but there is no question they come across as negative to traders when in fact traders should look to find the positive opportunities that lie within and take advantage of them for their benefit. It sounds rather selfish, but that is what trading is all about.

There are many times when trading for a medium term time frame does quite well. Trades that last a few days can add healthy gains as markets follow basic technical patterns, however we are quickly learning this is not one of those times. This is a time period where I don’t believe there is any room for the middle ground.

One can do quite well as an extreme short term trader looking to take advantage of the intraday price swings that have been very extreme, either on the long or short side. If you recognize this and set your mind on such activity, you can do quite well. Just like today in the FKLI, untill it's suspended by the exchange on YET ANOTHER technical glitch!

At the same time, I do believe we are starting to see stocks become extremely attractive as long as your time frame is much longer than a few days and possibly even a few weeks. Taking a step back to see the bigger picture, you can see many stocks returning to their longer term support or retesting levels at which the stock previously broke out from. This, in my opinion provides excellent points of entry however one should be fully aware that micromanaging these positions will only frustrate you and have you succumbing to the emotional roller coaster that is brought on by the recent volatility.

As I look back over my trading sheets the last few days, these two styles make themselves very clear. I see quite a few intraday trades that have added some excellent gains, while I also see longer term positions I am building starting to creep into the decent gain area despite some significant gyrations along the way. The overnight or multi-day trades, however, aren’t so hot and I see red littered throughout on these attempts due to bad-boys morning-gappings.

Trading is all about flexibility and quite possibly by the time this is read, and digested, we may be facing another change. One of the biggest lessons I have learned is while being flexible is a must, it is the speed at which one realizes a flexible change is needed that sets one apart from others.

Week ahead.

Tuesday November 13

10:00 Pending Home Sales: -2.0% cons
2:00 Treasury Budget: -$53.0 bln cons



Wednesday, November 14

8:30 Retail Sales: 0.2%
8:30 Retail Sales ex-auto: 0.3%
8:30 PPI: 0.2% cons 8:30 Core PPI: 0.2%
10:00 Business Inventories: 0.3% cons
10:30 Crude Inventories: -821k prev.

Thursday, November 15

8:30 CPI: 0.3% cons
8:30 Core CPI: 0.2% cons
8:30 Initial Claims
8:30 NY Empire State Index: 21.0 cons
12:00 Philadelphia Fed: 6.0 cons

Friday, November 16

9:00 Net Foreign Purchases: -$69.3 bln prev.
9:15 Industrial Production: 0.1% cons
9:15 Capacity Utilization: 82.1% cons

Seasonal bias.

There are many statistics about the upside bias for November. I noticed the extremely positive historicals for November through December when the Dow was up 10% year to date by October month end. But the November carnage calls into question the seasonal bias for the remainder of the month.

Over the last 50 years, the S&P 500 finished November higher 70% of the time by an average +1.62%. Of those 50 years, however, the index managed a monthly drawdown of more than 5% (as we’ve already seen) just eight times before. And the index was never able to mount a comeback to close the month positive.

If we isolate the above occurrences to those years where the 5% decline occurred over the first 10 days of November, we’re left with just three occurrences: 1973, 1987, and 2000. Worse yet, it’s worth noting that of all the November returns for the last 50 years, those three years were the worst. Will 2007 reverse that trend?

Year/ Max Nov Drawdown/ Nov Close /Dec Close

1963/-5.95 /-1.05 /2.44

1973 /-11.63 /-11.39 /1.66

1974 /-8.12 /-5.32 /-2.02

1987 /-10.34 /-8.53 /7.29

1988 /-5.58 /-1.89 /1.47

1991 /-5.31 /-4.39 /11.16

1994 /-5.96 /-3.95 /1.23

2000 /-9.41 /-8.01 /0.41

AVG /-7.79 /-5.57 /2.95

% +ve /0 /0 /2.95

% -ve /100 /100 /12.50