Dec 29, 2004


The 10-yr yield managed to close back above its 200 day moving average today. It looks as if the move below November's yield low was a one-day shake out. The more muted buying in the 5-yr and complete lack of confirmation from stocks makes that case seem pretty strong.

The flipside is that it is a holiday week. I would guess we will retrace some of the move next week giving a short entry

Still Awake

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MMM looks like it will soon join the likes of GE and TYC in their uptrends. It is still below resistance but having cleared its 200 day moving average it appears to be carving out a near-term bottom.

SYNM also looks like it will soon be reaching for new highs. Has a nice tight risk-reward ratio while it holds above the recent gap.

Overall I expect the beginning of next week to be strong. Maybe some risk that we get a delayed negative reaction to the tsunami but seasonality and a well-rested uptrend should win the day. The semiconductors may be a good long in here as they are due for some rotating capital. I mentioned some head and shoulders patterns in AMAT and KLAC a couple weeks ago but the necklines have not been violated. The failure of that pattern might have left shorts squeezable.

Dec 28, 2004

Same Ukraine, Different Candidates

I ran into this old article on the Ukraine while looking to see how much debt the country has outstanding. But for the wrong candidate names I don't think I would have even noticed it was 5 years old.

The data I was looking for is available on the World Bank site.

Thoughts for the New Year

Some analysts are joining me in noticing the bullish pattern in Japan's Nikkei. Japan will probably be the story of the year in several ways next year. If their economy is indeed turned around they will no longer be motivated to sell Yen but will instead begin looking at raising interest rates. This in itself will shake up currency markets as Japanese intervention has kept the dollar artificially weak against floating currencies (the Euro in particular).

The biggest effect though will probably be in interest rate markets. Japanese O/N rates have been at zero for the better part of a decade and in my mind have been pulling global interest rates lower. The world has essentially struggled with the deflationary effects of negative growth in the second largest economy. That struggle may be over. This sort of shift in rates should cause some real pressure on peripheral borrowers and I would expect some spread widening in emerging market and high yield bonds. Many people looked at 1994 to see what might happen when the Fed began raising rates in early 2004 but this year's rate hikes were met with spread tightening. I don't think the same thing will be true when/if Japan begins moving rates up.

I would guess that all this and the development in emerging markets is setting up a pretty strong resurgence in macro trading.

Dec 22, 2004

Hand Sitting

While I tend to agree with the consensus that we will rally into mid January based on seasonal factors, I find this view a bit difficult to trade. I am almost exclusivlely long here but far from fully invested and plan to make partial sales and roll up stops as we go. August was a good time to be long and now seems like a good time to figure out what comes next.

This morning the GBP took a solid thumping. Below 190.13 it will complete a double top against the USD. I have been playing around short the AUD against Yen (stopped a couple days back) and am now playing a bit short GBP against Yen. Neither chart really shows trend lower yet so I am just getting involved a bit and hoping to put on some more substantial trades later.

I am watching the second upgrade of the precious metals stocks in two days and wondering what is going on. Are they upgrading them for technical reasons? Was I simply noticing some sort of pre-upgrade accumulation? Who knows I guess. It is a bit annoying as I prefer being active in a vacuum to buying into upgrades. The charts still look nice though.

Dec 21, 2004

Note to Self


Beneath the Hood

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Some of the individual charts in the HUI look like they are finding some footing. This chart has stochastics crossing at the bottom but I would prefer to see one more touch of the 200 day while the stochastics keep their buy signal. Might start to dabble on the long side in some of the smaller names soon.

This chart in OS (Oregon Steel) bodes well for the market. Particularly with CMC joining in the breakout today. As the market overall felt weak Friday and today I think it is a good sign that the steel stocks can resume their rally. Makes me more comfortable buying into this pullback. I am also watching FCX in here to see if copper can manage the same trick.

After not doing a whole lot and seeing little to even talk about today I was mildly surprised by going through the charts. I noticed short-term head and shoulders in AMAT and KLAC. I also noticed several stocks (RFMD, NVTL, RHAT...) I had flagged to watch for upside breaks instead broke down. Depending on what happens in other markets, this pullback could lead to a buying opportunity between Xmas and New Year.

Some other odds and ends here. F appears to be breaking out to the upside here even though GM is going through some tough news with this Fiat put. GM appears to be basing too so I am wondering if this is a case of the tape leading the market. I have not heard positive comments on any auto stock (except maybe TM) in a long time.

Lastly, the 5-yr is easily holding its uptrend while its stochastics have almost worked back to oversold. May not head higher immediately but it is hard to see that pattern heading lower from here. Like the steel sector, that seems quite bullish. Maybe just more flattening though.

Dec 18, 2004

Lost in the Social Security Shuffle

As the political wind of Social Security reform is beginning to blow everyone should rush out and find some non-political opinions on the current situation and its future sustainability. Paul McCulley's description is certainly worth a look. Here is a taste.
Social security is a welfare program, not a retirement program. Always has been and always will be. It is a social contract between generations, with the young funding on a pay-as-you-go basis an honorable duty to protect the old from a destitute journey into life's sunset. As a matter of financial architecture, Social Security is not anything like the ERISA-grounded retirement plans for which PIMCO manages huge portfolios.
A more detailed description can be found in Prof. Robert Shiller's book. Altering the Social Security system will have a lasting impact on our country no matter what happens and I find it unnerving just how far the public dialogue seems from reality.

Dec 17, 2004

Bitter Irony

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Watching HSY puke on the news that it will be hiking prices. I certainly had the right thought a couple of weeks ago about their costs being under pressure but I got stopped in a heartbeat. You'll notice in the link that PG had to raise the price of coffee so my SBUX thought (stopped there too) wasn't so far off either. That stock (SBUX) is in a flag pattern that may lead to an entry when it chooses a side. The "book" says it should resolve with the trend (up in this case) but maybe not.

On to today's business...

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HITK looks like a pretty standard momentum bet. I would put the stop at 17.80 and hope to take some profits at $22.

AIG looks like a classic short as it is finally back to where it got "Spitzered". Might take a bit to rollover so maybe play with a half position stop at $66 and a full stop at $68 (or the 200 day). Long term the insurance industry is probably going to look different than it did before the investigations and with Greenberg's son being forced to step down from MMC and investigations underway into AIG I just don't see the company returning to business as usual. Either way there is supply overhead here so it makes for an interesting risk-reward tradeoff.

Dec 16, 2004


One of the most interesting things yesterday was the excellent market breadth on a relatively flat day. Today we are experiencing the opposite with negative breadth on a flat day.

We have put in several strong positive days negative and flat breadth and I had been thinking the narrowing breadth may continue with the rally. This makes it really tough to trust the upside. Yesterday made me think maybe the breadth was going to catch up and give some real vigor to the upside but today is dashing that thought on the rocks pretty good.

Morning Take

The main event is outside of stocks this AM. It looks like the USD has successfully retested lows. The CAD and AUD continue to look very weak against the USD and did not really participate in the retest. Real confirmation would come with a further breakdown in the precious metals. Gold is sitting at its 50 day ($434) and silver is pinning its 200 day ($7.71). The breaks will be sharp if they occur. Next would be to watch copper and the other non-precious metals to see whether they are trading opposite the dollar or if international demand can keep prices high while the dollar rises.

Bonds in the U.S. are giving back some love from the last couple of days. Yields are really whipping around lately and I see it as mostly trader vs. fundamentally driven. I think that the steepening and yield increases are good for stocks to a point as it demonstrates that bond investors see economic growth. I would guess the 5-year can approach 4% before people need to be too concerned about leverage problems.

FNM is holding up well after last nights news but the real story is whether it can stay near $70 after options expiration on Friday. I am also trying to keep an eye on agency spreads as the nearness to year end could create knock on selling if traders are hit with a sudden loss.

Spice Up Your Expirey

So the SEC finally rules on Fannie Mae's (FNM:NYSE) accounting and it seems the company will restate earnings by $9B. The market cap is only $68B but I am not really sure this news will surprise people too much. I have had a hard time understanding why anyone would stay long that stock in the face of the SEC investigation so I don't really know what to expect tomorrow. The 50 day is just above $69 and there is a support line around $65. Will be something to watch I guess.

The other interesting news I see is that GM spreads are widening because of the dispute with Fiat. The story contains this gem:

GM is already under pressure from weak vehicle sales in the US and large pension and healthcare liabilities. Following disappointing third-quarter earnings, Standard & Poor's downgraded the company to Triple B minus, the lowest investment-grade rating.

The rating agency said on Tuesday it was concerned about the potential ramifications of this situation for GM's credit quality, adding that a downgrade to junk status was unlikely - but could not be discounted. Its outlook is currently "stable.

GM's stock has been looking like it wants to bottom but it is still below the 50 day average and well within its downtrend for the year. A bit difficult to see why bank shares would have been so strong today in the face of these two stories which seem to go pretty straight to the risks in the banking sector.

Dec 15, 2004

Not much to add

Just wanted to add a thought on my earlier post. I have been thinking back about my own ideas from earlier this fall that low bond yields would lead to an economic boom and take up stocks and commodities. What has happened instead is that corporations are using liquidity to manage their stocks and to buy other companies. Instead of strong stocks, strong commodities and weak bonds, we are getting strong stocks, weak commodities and strong bonds.

Of these the commodity weakness seems like the best play. The CRB is still above its 200 day but a break below might open up the flood gates. It may also lead to shorts in some emerging market equity indices.

I don't trust bond strength here because of the currency exposure. I would rather play in German bunds for yield bets. Maybe the U.K. gilt market.

I don't trust the stock rally either as it feels like a house of cards. Maybe I will watch for a while and try to select some companies to buy stock and short bonds in. Ultimately it seems like the corporate bond market is the goat in this game.

Planning not to be very active in the short run.

A Short?

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With lots of chart showing positive momentum I thought I would buck the trend and show some negative momentum. ROP appears to be consolidating beneath its 50 day average and looks like it will head towards its 200 day. The recent narrow range makes for nice risk management.

Today my thoughts keep drifting back to a story on the newswire yesterday that the yield curve was now as flat as it was in 1998. That is the 2-yr to 10-yr spread is now at 1.16%. This shift in the yield curve is really difficult to relate to the strength in equities and especially the financials which are trying to lead the tape higher today. To reconcile these two views inflation will have to evaporate while economic growth continues. Maybe this will happen but it is difficult to understand why it would. This is even more difficult to reconcile with the banks as ebbing inflation would renew the risk of deflation which puts their loan portfolios at risk.

It makes a lot more sense to me to explain the moves as stocks flying up as corporations borrow at low yields to manage their stock prices via buybacks and mergers while banks benefit from fee generation. This increases the exposure of the stock market to even a slight bump in corporate yields and it is happening while the bond market looks like it is anticipating an economic slowdown.

A good trade here might be to pair an equity short(probaby in 6 month options to limit the risk) with a curve steepener.

In Case You Missed It

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With the Fed results being widely expected I think RIMM was really the show for the day. The chart we are left looking at on a daily basis is a disaster. It has just failed a cup and handle breakout with a massive bearish reversal on big volume. Look out below! I expect RIMM to test its uptrend line and probably 200 day on this trip lower.

More important for the market was the nature of the reversal. A story broke in the morning that an appellate court had remanded part of a lower courts decision back to the lower court but gave no more details than that. On this highly ambiguous news traders ramped the stock 10% to a new all time high. Then the stock was halted. Next the details of the court decision came out and the important portions of the lower court ruling were intact. Then the stock remained closed a couple more hours and opened on a 8 point intraday gap below its open. It is hard to view this reaction as healthy, particularly occuring on a Fed day.

This type of action was not restricted to RIMM as GE had a similar - though far smaller - run up and fall back on the release of slides prior to today's annual presentation. GE is not normally the vehicle of choice for hot trading but people were eager to get involved first and ask questions later.

I really preferred yesterdays grind higher to these whippy moves.

Dec 14, 2004

Double Double

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Just putting this up for perspective on how little this bounce means in the grand scheme of things.

Same story here. Both charts seem like they will need to test recent lows if they want to reverse the trend. Also if you look at the two of them you will see just how much of the gains commodities gave back relative to a shallow USD bounce. That is why I think commodities are reacting to some sort of deeper economic weakness. Maybe they are just more volatile and will quickly be setting the pace with new highs again but the charts in some (particularly silver) do not seem like charts that can move up without regaining their footing.

This commodity bounce matched nicely with today's equity rally but again, the S&P made a new 3-yr high while commodities are looking up out of a deep hole. The strength in stocks was concentrated in the cyclicals (GE and UTX) but by the end of the day it managed to pull the banks into it. C broke its 200 day moving average and is targeting its 3 month high at 47.09 and JPM looks well positioned to break its 200 day moving average shortly. The BTK is breaking out nicely from a near term inverse head and shoulders. Clearly all this is a sign that the equity market wants to go up no matter what the cross currents are in other markets.

Tomorrow is Fed day and with today's big move higher I would think we see profit taking at some point prior to the 2:15 announcement. Maybe we make a higher high in the morning but locking in some profits before 11 AM is probably a prudent move. I see no reason to initiate positions until after the meeting. The market views on the FOMC announcement seem pretty concentrated around a 25 bps hike and repetitive comments so I think with the equity run up in the face of the meeting there is extra risk associated with anything off script. Hard to imagine the market won't at least test lower hard (5 S&P points) in the 15 min. around the announcement no matter what is said.

Dec 13, 2004

And They're Off!

Probably makes sense to get long some stocks into this lift. I am looking at stocks like TYC that have a tight consolidation in an uptrend leading to today. People love these mergers with both buyers and buyees being taken up on news.

The Fed meeting may put a damper on things today or early tomorrow as people take risk off their books for the meeting but I would not count on it.

Seeing a bit of curve flattening in bonds as 5s anad 10s come off while 30s just don't care. Probably just the weaker dollar. Keep in mind this is how the last move higher in yields started.

Thoughts on Tomorrow

Friday was a good day to be a bit detached from the markets.

The market has remained quite buoyant in the face of a various negative stories and in particular the semiconductor news last week. The banks which underperformed in the November rally have not broken down and seem to be getting some of the money that is flowing away from tech. GM, a defacto financial, that also has not participated in the rally also appears to be putting in a near-term bottom. Churning while pulling up the laggards seems pretty positive. Also in this category is the biotech sector which has not made new highs with the NASDAQ but now appears to be attracting some positive attention. The action in the housing stocks is certainly bullish too. It is hard to see where the housing demand is coming from as retail and durable goods numbers are disappointing but TOL is sure selling to somebody.

That said the breakdown in commodity prices (silver) and their related stocks could be interpreted as anticipating slowing Chinese growth. There have also been several negative fundamental data points out of Japan since the November rally began. None of this has shaken the U.S. equity markets but if this rally isn't based on global growth being strong, what is it based on? A bullish scenario here would be if the metals stocks based near last weeks lows and then resumed uptrends. The rise was steep and this pullback has not done real damage yet but it can not go much deeper. The breadth has remained negative even through rallies.

I can really see the market going either way here but on the whole it is convincing me it wants to go higher. Maybe speculation on the Fed will make for some interesting moves tomorrow but it is probably best to wait until Tuesday to make any judgments. My best guess is the Fed issues exactly the same statement after this meeting as they did after the last.

Lastly, in the recent dollar rally the Canadian $ and Aussie $ topped early. With the pound not moving with them I am not quite certain it means anything but I can't help wondering if it is a sign that the market is beginning to figure out which countries will be lowering rates. If the dollar has found a bottom here perhaps those currencies will be the weakest. If the dollar has not found a bottom I would still watch to see what the do near highs to see if the dollar weakness will finally transfer to Asia rather than anything that floats freely.

Dec 10, 2004

Good Reading

"FORMER ENRON CORP. President and CEO Jeffrey Skilling is trying to pull dozens of ex-colleagues and business associates into the public glare of his criminal conspiracy case. The move sheds light on both the breadth of alleged fraud at the fallen energy giant and the legal strategy of Mr. Skilling.

Attorneys for Mr. Skilling have asked Houston federal judge Sim Lake to make public the names of 114 people who the government alleges in a sealed document were co-conspirators." - WSJ By John R. Emshwiller

I doubt Skilling will succeed in making the names public but if he did it would provide months of entertainment.

Vimpelcom - Learn It Love It

The news of Russia's tax claims against Vimpelcom tanked the Russian market today and like the CAO news last week could have potential ripple effects. The risk that the gov't will be randomly knocking down stock prices as they feel like it could be quite sweeping. It says a lot about the markets psychology that participants are willing to tolerate a gov't policy like this.

Something similar happened in the MinFin bond market back in 1996.
In the countdown to Russia's Eurobond placement, Potanin met with various government agencies Saturday and gave them just 10 days to solve the mounting problem of so-called "frozen" domestic Finance Ministry bonds.

The frozen MinFins emerged as an untimely threat to a successful Eurobond launch and have rattled international investors eager to snap up Russia's newest issue.

Russian police released figures last week showing that authorities have seized about $74 million of dollar-denominated MinFins this year as part of criminal investigations.

Prices of Finance Ministry bonds fell last month when news broke of $57 million in face value frozen MinFins seized by police.

Prosecutors had ordered the $57 million in MinFins frozen as part of a criminal investigation, a senior official with Vneshtorgbank confirmed soon after the seizure.

The later pool of frozen MinFin bonds, about two-thirds of which are held in custody by Vneshtorgbank, adds to the $24 million of suspected stolen bonds frozen in June.

At the center of the problem is a conflict in Russian law. The criminal code allows investigators to seize property until the rightful owner is determined.

But the civil code states that a bona fide holder of the securities should be free from any previous problems.

"If these bonds can be frozen anytime, every bond becomes a risk," said one London-based MinFin dealer last month, who did not wish to be identified.

At the time the markets became extremely upset with the governments seizures and ultimately forced a full about face by the gov't. Even so repo rates on the bonds in question never returned to normal as market players were too afraid that a new bond seizure would create a liability on borrowed bonds. Apparently the markets have a different view of the current actions or are better equipped to bear the risk.

Oil Output Cut

Apparently the Saudi's are being overruled and OPEC will indeed cut production. The meeting is tomorrow so we shall see.

Headlines of Interest

London put a stop to another terrorist attack.

Sprint and Nextel are reportly considering a merger as equals. The total value of the deal is estimated at $70 bln.

Today's 10-year auction did not go off as well as yesterday's 5-year. The foreign participation was around 3% compared to yesterday's 60% but some say this may be due to the auction being a reopening rather than a new issue.

There is a bit of a scandal developing about how the Coalition Provisional Authority in Iraq spent $20 bln dollars of Iraqi national savings in the last couple of weeks before control was transferred to the interim gov't. $20 bln is larger than the Iraqi GDP. Apparently the funds were sourced in the way they were because of strict controls on all of the money coming from the U.S.

Today's market action leaned to the bullish side in my view. The market did continue the trend of lower lows and the breadth was not great but the semi's managed to climb back above the 50 day after bad news and there were a fair number of stocks making new highs. The most bullish thing in my mind is really the emotional swing we went through and the fact that this mornings despair came while still within' spitting distance of new highs. We shall see. I have been expecting the breadth and bad economic data to bring stocks down and as this view seems wrong I will probably try to step back and collect my thoughts before taking any action.

Dec 9, 2004

Tennis Match

The bonds are going the other way with selling following today's auction. It is really a game being played on a very high level I think as the bond selling which started around noon has just transferred into the dollar knocking it down against the other majors.

Stocks are amazingly sanquine as this game in interest rates and currencies seems pretty evenly contested and the outcome will have sweeping implications for equities.

Three Things

The 5-yr auction yesterday saw a record level of central bank participation. While done to move the dollar higher this also had the effect of moving commodities lower with some gusto. With the Fed expected to move short rates to 3.0% it makes little sense to be picking up 5-yr notes at 3.50%.

Last night both Altera and Xilinx missed badly on their mid-quarter updates adding to the inventory problems already highlighted by Texas Instruments.

Oil is trading higher on a new weather forecast for the U.S. involving the word "arctic". I keep watching the stock market rationalize it ups and downs with the price of oil and wondering when it will stop. The bottom line is that the high price of oil was a drag on the economy which kept bond prices lower than they should have been. Even with that drag the Fed has been hiking rates. In a vacuum lower oil prices stimulate the economy but the Fed knew this when it hiked in Nov and it will know that when it hikes in Dec. As for the story at hand I don't think the Arctic blast will have a lasting effect on the price of oil.

Sending Our Love Down a Well

"The five-year notes were sold with a high yield of 3.55 per cent and attracted bids worth 2.6 times the paper on offer. Indirect bidders, often seen as a proxy for overseas central banks , took 65.8 per cent of the notes, easing fears the decline in the dollar would weaken demand." - FT

It is a tough call here whether fighting a bunch of central banks (or in my case picking sides in a fight against central banks) is the right thing to do or not. The only reason I would consider it is that other central banks (Russia, India, Indonesia...), some sizeable institutional investors, and those greedy bastards at OPEC are all taking my side. Also, the central banks doing the buying are already long and wrong. With gov't backing they may not need to stop out as quickly as some but they feel pain just like any investor and they have limits. The Fed meeting should really get interesting as I swear Fed officials have been doing their best to talk rates higher and getting no results.

Dec 8, 2004


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Throwing up the SMH chart after the bad news from XLNX and ALTR. I will be impressed if the SMH can stay above its 50 day tomorrow but we shall see. The inventory problems they talk about shouldn't surprise anyone but even so they are missing guidance by a fair bit.

Watching the QQQQ's trade down in the after-market and wondering who was brave enough to buy them during the day but afraid to hold them through these company reports. I thought this morning's open was pretty intimidating but maybe that was just me. Perhaps equities will make an effort to catch up with bonds tomorrow. Let's see the 10 year note has jumped back up near its Nov. 2 level over the last 4 days so...

Krugman on Social Security

This is an interesting and timely piece about Social Security before the reform talk really gets started. This was news to me but I am probably just too young to have noticed.

"Right now the revenues from the payroll tax exceed the amount paid out in benefits. This is deliberate, the result of a payroll tax increase - recommended by none other than Alan Greenspan - two decades ago. His justification at the time for raising a tax that falls mainly on lower- and middle-income families, even though Ronald Reagan had just cut the taxes that fall mainly on the very well-off, was that the extra revenue was needed to build up a trust fund. This could be drawn on to pay benefits once the baby boomers began to retire."

That's Funny!

Here is a bit from the Onion explaining the dollars current dilemna. Maybe they will replace the cover of Time magazine as the new contrarian indicator for financial events.

Levels for Watching

-- 1610.31in the NDX is a 50% retracement from this morning's low to Friday's high.

-- 105.13 is the level the yen broke down from 2 weeks ago.

-- 4.15 is where the UST 10-yr yield's 50 day moving average is and 4.2 is the uptrend line from from the october lows.

Figuring It Out

I am having a pretty difficult time reconciling the movements in various asset classes today. The strength in bonds coupled with strength in stocks makes the least sense of all. The stock market seems to be okay with that though and the breadth has improved since the open.

My best guess is that one of the Asian countries bought a healthy chunk of bonds last night. This moved the dollar but had a bigger impact on bonds because traders were still wrong footed from the jobs report Friday. Stocks are reacting with relief to the idea that the status quo is going to be maintained a bit longer. And commodities are in their own little world as Asian growth is disappointing and the dollar is not collapsing tomorrow.

There is some talk about deflation today with commodities off and bonds up but that view is tough to accept with stocks going higher. Deflation would be crushing for equity holders and maybe more importantly here, corporate bond holders. I would imagine the movements of a foriegn central bank would make it into the papers eventually if that is really what happened.

Before the Open

The movement in bonds and weakness in commodities is interesting because it is the opposite of the Spring of '03. Could the next few weeks really smack people making that comparison as stocks actually sell off on economic weakness that drives rates lower?

The Fed meeting next weekcould be one of the most interesting we have had in a while. I am positioned for lower stock prices and higher rates and have been feeling that rates would go up even with a weak economy. Whether that is true or not will probably be resolved in the next couple of weeks.

The Passion

I get the feeling lately that market participants are becoming more passionate about their positions. The last few years one difficulty I have had is that a two day move in either direction seems to swing the entire market to the same side of the trade. That seems to be changing here. I don't think it means so much for the ultimate direction of the market but it probably leaves more money on the table for the middleman.

That said, I would be very wary of stepping into the oil or metals sector here. There seems to be a lot of rolling rationalization going on about 50 yr trends due to the printing of dollars and the general availability of commodities. Even if the dips are opportunities it is better to let the market base out and begin to feel strong again. Some of the industrial commodity companies may still be good shorts in here. Take a look at the chart of IST as it is not down nearly as much as the XAU or OSX. It also feels like the current commodity selloff will morph into real fears about Chinese growth.

The dollar is getting a long overdue bounce. I hope somebody was able to participate in it. Do you think it will bounce high enough that people will doubt that the U.S. deficit guarantees a weaker dollar?

Public Debt

I plucked this gem out of a very informative article about the current state of the Argentine economy and a thorough explanation of how it got there.

"In regard to public debt, governments do not pledge their own assets, but taxpayers' instead, with creditors cognizant that the principle and interest will be paid through the involuntary confiscation of private property - —taxation. In effect, both sides are complicit in the violation of property rights of a third party in the future, which scarcely deserves to be acknowledged as a contract."

The quote struck me because of all the recent talk about the U.S. deficit and how little willingness there is to fix the problem.

The article is also a good read because Argentina has a mountain of debt and from the looks of things there will be several months of erratic headlines about how the country resolves its obligations with creditors.

Deficit Management

"The growing external deficits of the world's "sole superpower" have put the global economy on a path that is not merely unsustainable but also dangerously so. This has been the theme of my last two columns. US and Asian policymakers seem determined to take no decisive action in response. This is understandable, but a big mistake."- The FT's Martin Wolf ($)

This ties in pretty well with the points I made last week.

Dec 7, 2004


Today's move lower on no news is further evidence that most of the traders in the market are reacting to prices rather than fundementals. This is the flipside of the momentum drift over the last couple of days and could lead to a nice swing trade by leaving some longs trapped.

Oil Top Off

The U.S. is about to finish filling its strategic petroleum reserve. In itself this is not actionable but hindsight could combine news like this with the CAO bankruptcy to make the move lower look like a very nice contrarian play.

Morning Story

Overnight the dollar weakness has reasserted itself with some vigor. The sharp rally yesterday (displayed nicely in the middle of this page) afternoon looked like the real deal but once again we wake up to find new lows. Treasuries were also weak overnight. The bond rally and dollar bounce were a gift to bond managers as they try to shift out of USD duration and into EURO and UK longs.

Equities continue trying to behave as though we are in the Spring of '03 but these shifts going on in the bond market seem very different. Except for China the world is growing more slowly than anyone would like and Europe, Japan and the U.S. are trying to boost activity with stimulative rates. Currently it looks as though the U.S. is going to be forced out of that game as markets take U.S. rates up. The upside is that the bond shifts are forcing the U.S. currency lower which will have a longer term stimulative effect. Maybe over the long run it is a zero sum game for the economy but in the short run the real currency losses in the markets will create sellers and weakness.

Lastly I wanted to point out the McClellan oscillator (chart) is behaving very oddly here, dripping off the right side of the chart while the indices float higher. This indicator tracks the market breadth and is reflecting a narrowing rally. In the few years I have been watching this indicator markets have always responded very quickly such deterioation but this time feels different. I was away from the market during 99 (which rallied for months with failing breadth) and will need to do some research but I point it out as a notable developement of the last couple days.

**added at 11:00 AM
The breadth is negative again despite this AM's strength. The relationship that has existed between the breadth and market really appears to be diverging here. It feels a lot like the trend is shifting and the breadth will no longer be the indicator it has been.

Dec 6, 2004

Question of the Day

If I didn't understand why we rallied, is it possible to understand why we rolled over?

The breadth has stayed solidly negative all day which is a bit hard to get used to considering how consistently that indicator has agreed with the close over the last year. Not sure it means anything and in general a nothing day which counts as trend continuation.

No Buyers?

I guess I should not be surprised no one has money left to shop at Wal-Mart or Circuit City.

Mulling It Over

I am a bit surprised today is not weaker given Intel's reversal and the poor breadth in the Nasdaq on Friday. No one seems to trust Friday's new high which also does not bode well for my shorts. There seems to be some rotation into the financials underway as well.

Of course the market is still lower after a new high on Friday and Circuit City is wrecking somebody's Christmas so a slow start to a deeper pullback could be just what the doctor ordered.

Watching the weakness in commodity stocks and comparing that to relatively better performance in their underlying commodities. Along the same lines the dollar bounce seems feeble compared to treasury strength. Lots of people are watching these variables to see whether or not the dollar will collapse now or later but it is tough to take anything away from today's action.

CAO was Short Oil

I found it interesting that CAO went bankrupt shorting the price of oil. It makes sense given they went bankrupt near the top but I had thought they just levered up too much and got burned by recent volatility or had a trader putting bad trades in the drawer. Apparently they did not receive the memo that commodities are in a multi-year bull market and bet the wrong way as a firm.

This news makes it more likely to me that oil has put in a 6 month top.

Quick post

Just thinking we will start the week lower. The momentum managed to keep the market up through the news on Friday but the unemployment report coupled with the bad retail numbers from last Monday should create some doubts about the soundness of the economy going forward. I would guess recent gains are at risk as people try to protect profits into year end.

Dec 4, 2004

What the Job report means

Here is a solid summary of November's unemployment report and this article summarizes the implications for the bond market.

I am still pretty sure the bond market has been getting hurt because investors are beginning to look at real returns rather than nominal returns. With the dollar making new lows on the jobs report I think that the trend towards higher yields will reassert itself shortly. The Fed may begin facing political pressures to stop hiking but they need to keep ahead of the currency market which means hiking until positive U.S. economic data gets reflected by dollar strength.

It was interesting that virtually everyone in the market seemed to be expecting a strong jobs report and my best guess for the reason is simply rationalizing the stock market's advance. As I said in my morning post yesterday, the stock market wanted to go up and whatever the numbers were it was going to do so. That sort of rationalization is a sign of euphoria. It is throwing your hands in the air, saying you don't understand the market's strength, and trusting other participants to be better informed about the future of the economy. That mindset will work just as well to justify lower prices.

Dec 3, 2004


The DXY just gave way and is making new lows. I would expect bonds to give back some gains on this.

Buying those puts back

I am buying back some of those puts I stopped out of on Weds. Just a small trade that should either work by next Weds. or not at all.

March Memories

For the memory impaired this equities up bonds up split on a payroll report is exactly what we had in the March cycle as well.

On March 5 the 30-yr opened at a yield of 4.88 which was the high, closed at 4.70, opened March 8th at 4.73 and closed at 4.71. While this went on stocks opened at 1154 hit a high of 1163 and closed at 1156 only to open monday at 1156 and close at 1147. That report marked the end of the great bull market / jobless recovery of 2003.

I don't think we have the same market psychology here as equities only began moving up a month ago but I am surprised the comparison to such a significant day in recent history is not being made.

The u-report on March 5th showed an addition of only 21,000 jobs while the market was looking for 125,000 jobs to be added.

A chart for your thoughts.

Posted by Hello

Click on the chart to see a larger image!!

Here is a graph representing what I said about housing stocks. Some appear to be buying the dollar selloff this AM so maybe my rational will not work out. I was just commenting off the cuff but the chart shows a stronger relationship between the two sectors than I would have imagined.

It is almost as if there is some mystical force (Fed Funds!! Fed Funds!!) driving tangible assets up together.

Something to watch

If I am right on interest rates and they don't resume this morning's fall then I would keep an eye on housing stocks. The lack of economic growth and higher interest rates is not really their cocktail of choice. The charts in that group will bear a striking similarity to the oil sector if they swan dive from here.

The next question is...

Can bonds keep their gains if the dollar keeps sliding? I doubt it very much. Domestic investors jumped on low bond prices into weak economic data but with the dollar weakening very soon the widely talked about macro forces will reassert themselves.

I would bet bonds have already seen their best levels of the day but it probably depends on the short base.

Jobs report

I keep thinking that when the numbers print it will be largely irrelvant for stocks. This market wants to rally and even a weak report will just cause people to justify values with future growth.

The biggest impact of a weak report would be to stem the slide in bonds.

But I don't really expect a weak report. I will say the strong side of expected with rates and stocks both going up.

Faber Speaks

The entire article is a great read but this section capture what I said about oil earlier:

"So the demand side is very strong, the incremental demand lead to rise in oil price as you can see. By the way, in your lifetime you won’t see oil at $12 a barrel again ever. That is finito, over.

Now we had some inventory accumulation this year, In the first nine months the Chinese imported 34% more oil than last year. I think they didn’t need 34% more oil so there has been some inventory accumulation. So oil prices could easily, in my opinion, go anywhere between $30- $40 in the months ahead when growth slows down, but the trend is definitely for oil demand in Asia to rise as people go from the bicycles to the motorcycles to the cars. Once they move from the countryside to the cities they need the refrigerators, they need transportation, heaters and so forth and so energy demands rises a lot. " - Mark Faber


The China post reports that the gov't will be continuing austerity measures to make sure their econnomy slows down. There is a more specific claim made here about raising interest rates and revaluing the Yuan but people outside of the gov't have been saying that forever.

I would expect commodity weakness will continue. Oil and the oil stock may need to wait a good 6-9 months before challenging recent highs. I would be very patient in that sector here.

The Promised Land

"Fourth, emerging economies can bridge to, but cannot substitute for, the containment and correction of financial imbalances in the US. The wellbeing of the global economy requires co-ordinated policy measures in several big industrial and emerging countries aimed at facilitating an orderly US current account adjustment concurrent with a pick-up in aggregate demand elsewhere." - Pimco's Mohammed El-Erian

He paints an excellent picture of the positive things going on around the world that can more than offset the problems with the core economies. The problem is really one of timing. The core economies of Japan, Europe, the U.S. and China seem more intent on bickering and finger pointing than on actually making positive changes within' their own countries.

With the dollar having begun its descent while interest rates in the U.S. float higher it is probably too late for changes to be made. Sometimes it takes a catastrophe or near catastrophe to spur real policy changes and that is what will ultimately unwind the U.S. debt problem.

Thunderbird 1.0

If you like Firefox and need a mail application / rss reader you can now download the prerelease of Mozilla Thunderbird 1.0.

Dec 2, 2004

Full Disclosure

"The state-owned parent of China Aviation Oil failed to disclose to investors that the sale of a 15 per cent stake in the company was intended to cover mounting derivatives losses at the Singapore-listed group, according to court documents."

"The revelation, made in an affidavit by Chen Jiulin, CAO's suspended chief executive, to Singapore's High Court, will heighten concerns over insider trading, lax corporate governance and poor disclosure at Chinese groups listed on international exchanges."

"The court document, submitted on Monday and obtained by the Financial Times, says that CAO has received payment demands totalling more than $247.5m from seven financial institutions including Goldman Sachs, Barclays Capital, Standard Bank and Mitsui & Co."

"On October 20, CAOHC reduced its stake from 75 to 60 per cent, raising S$196m ($120m) through a share placement to investors, believed to be mostly hedge funds. At the time, CAO issued an eight-line statement to the Singapore exchange reporting the placement without specifying the reason for the share sale. On the same day, a CAO spokesperson told Bloomberg the parent "had an investment they are making and they need to raise the cash"."

The issue was brought by Deutsche bank.

Read the full story.

Current interest rate trends

I keep looking at how interest rates are moving and thinking about bond managers swapping out of U.S. debt.

More China thoughts

More information is coming out about the China Aviation Oil collapse.

I want to reiterate my thoughts on the disconnect between what people know about China and what people think they know. That country is an anomaly in the world today with virtually zero transparency on any subject and least of all on its financial situation. People that live in China are not allowed to read the news unfiltered and if you remember SARS you remember that the official reaction was to lie, lie and lie some more. The Chinese government is living in a time machine and most of the world, for whatever reason, either does not know that China is different or chooses to ignore that fact.

The implications of this are absolutely huge if you are a company like GM and have bet a large portion of you companies growth on China. My first thought on reading about CAO was to the Bre-x gold scandal. The net effect in the short-run will be that risk managers will perform due diligence on every similar counter-party in the region and I doubt that process will lead to increased lines for anyone.

Right on Oil but...

Watching all commodity stocks enter a world of pain this AM. When the metal stocks went cliff jumping in January it was on selling out of Asia (supposedly margin calls). I think this oil news is having a similar effect as traders around the world really have no idea how much of China's commodity purchases represent consumption versus speculative accumulation. The data on China's economy is very suspect and so everyone tries to back out the real story based on commodity imports. This can create a circular effect where speculative buying creates the illusion of real growth and thus real commodity demand.

Taking stops in metal stocks today.

Notice that bonds continue weakening. U.S. equities are responding positively to the impact of lower oil but ignoring the drag of higher rates. Interest rates have been in a wide uptrend since April '03 and it will be interesting to see if the markets can tolerate rates making new highs.

The dollar is seeing its first real bounce in a while. I guess people are leaning towards a strong
unemployment report but that did not help the dollar last month.

Shake it up?

" The Singapore Exchange scrambled on Wednesday to limit damage from the biggest scandal to hit it since rogue British trader Nick Leeson felled Barings bank, ordering an inquiry into a $550m (€413m) derivatives loss by a Chinese company.

China Aviation Oil, one of Singapore's top China-related listings, sought court protection after running up the loss trading oil derivatives. The loss amounted to more than CAO's market value." - FT.

My guess is that this will really pummel oil tomorrow. It could have a broader effect on Asian shares or even banking shares here. My best guess though is that the market is too bulled up to get pulled down and any negative effect will be offset if oil does come off.

Dec 1, 2004

Dollar Woes

Both the Pound and the Euro are making higher highs against the dollar now. Not the most trustworthy of moves as it is happening after New York close and before Tokyo open but still probably not a good thing.

With the renewed strength in equities and the drop in oil it is probably a sign that we have finished a countertrend period for markets. While the dollar did not get a bounce, accelerating weakness would confirm that idea. Could lead to strength in metals tomorrow.

Banner Day

Taking stops on some oil and natural gas longs too.

This rally is impressive and feels well timed to avoid a pullback. I guess the market is willing to ignore higher interest rates and bad retail sales (auto sales too!) if we get stimulation via falling oil prices. While I like trading momentum patterns in individual stocks I am horrific at trading momentum in the market indices. Not sure if it is a short coming or a good defense mechanism but I find it very difficult to buy with higher prices as my only catalyst and a large crowd of people lined up the same way.

The metal equities seem pretty weak here compared to both the underlying metals and the dollar. I am guessing it is due to the arrival of the gold ETF (GLD) which essentially targets investors who don't trade metals or futures. Some people are pointing to the way metal equities led the metal declines earlier this year but I think this time will be different. We shall see.

Stopped out

Taking stops on some Dec puts here. I am feeling more bearish on the long term because of interest rates, the dollar, and more bad news out of Japan. My best guess is that there will be better short entries in January and for now it makes sense to try to play momentum where you find it.

Part of me feels like this top is just a bit difficult to time, like all the other tops this year, but with the breakout above the downtrend line in Nov. it is difficult to play that way.

Nov 30, 2004

Topping or Basing?

Several factors have changed over the last month that make me a better seller here than buyer. The first and foremost is prices. We have had a nice rally so it makes sense to be less aggressive. The second is psychology. Most people have turned into dip buyers and while it creates some nice charts buyers would have been better served by that strategy in Oct. when the dips were deeper. Also under psychology, the number of references to a "wall of worry" is through the roof which is creating an atmosphere of no worries.

The third is the news flow itself. The news for stocks has really knocked a lot of legs out from under my bullish arguments from a few weeks ago. There was news that Freddy Mac has been increasing activity to fill the gap left by Fannie's forced conservatism. Japan's GDP growth was revised down showing that not only can they not lead a recovery, they can not even keep up with the world. The congress that everyone thought would ram through tax reform, social security reform, and tax cuts is currently split and holding up a widely popular intelligence reform package. Wal-Mart's miss is the icing on the cake. It comes on the heels of a weak durable goods number overlooked during the holiday festivities. As everyone knows the consumer is the heart of the economy and such a poor showing while loan rates are still low just makes higher rates seem all the more dangerous. And of course Fed officials have continued talking up rates past market expectations. I see many hopes that have been proven false here but other than the charts themselves I have a hard time finding reasons to buy stocks.

Nov 29, 2004

Strange Days

I was shocked to find the Nasdaq futes higher when I woke up in the morning and am even more shocked that they managed to recover after the morning rollover. The news out of WMT is a fundemental bad but even worse here is the destruction in the bond market. With names like TASR (TASER), GOOG (Google) and the semis leading the strength I worry that this buying is retail interest setting itself up for some punishment by macro forces.

In case you missed it there was a run on the banks in the Ukraine as the result of their election turmoil. When really bad things are happening people tend to lump events together so the phrase "run on the banks" outside of historical reference should never go unnoticed. Are those Ohio vote counts done yet?

More Retail

Here is another article summarizing the retailing weekend. Unlike the FT article of my previous post this needs no subscription but has a lot of the same info.

The World's Biggest retailer

Posted by Hello

Click on the chart to see a larger image!

WMT (Wal-Mart) is already out saying that sales were not so hot on Friday. They are also lowering their ytd growth to 0.7% from the 2-4% range they guided to 10 days ago. I have been watching WMT pretty close as it pulled back to support. It will be interesting to see how it trades tomorrow. My best guess is down to 54 in the first hour of trading and then a bounce. Where the bounce goes will say a lot about this market. WMT's problems were the result of competition so it will also be interesting to see if the market rewards or punishes the other retailers.

I expect the market to be down as a whole tomorrow but whatever happens I think tomorrow will set the tone for the week. Maybe I am being too simple but I think a strong Monday will mean a strong week and a weak Monday will lead to weakness. The market has to make up its mind whether momentum has taken hold or if we need to retest some breakout levels.

Nov 28, 2004

Inflation, the Yield Curve, and the Dollar

From Between the Hedges on November 20.

Originally posted with a chart of CPI and PPI.

Bottom Line: While some measures of inflation have spiked recently, due mainly to the effects of the hurricanes, they are not even to levels seen in 2000. As well, it is highly unlikely the CRB index, the broadest measure of commodity prices, will continue to rise near recent rates. The rise in commodity prices has been the main source of inflation thus far. Unit labor costs, which account for more than 70% of inflation, have remained well-contained.

My Comment to Between the Hedges

Difficult to understand the comparison you make between inflation in 2000 and now. The front end of the U.S. interest rate curve was never below 5.50% in 2000 and now we are at 2%.

Inflation is not a problem but without much higher rates I am not sure why it would peak here like it did in 2000.

His reply.

I am not comparing. I am just stating a fact. Inflation was more of a "problem" then, yet we didn't harp on it incessantly. Modest inflation has historically been good for stocks and that is what we have now. Low interest rates now are telling me disinflation is more of a problem than inflation. The CRB is likely to decline over the next 12 months. Commodity price increases have been the main source of inflation worries.

My follow up thoughts.

I disagree entirely with the idea that people here are worried about inflation. Central banks around the world have learned to tame inflation and there was a risk of deflation last year so I think most people view 2% inflation as a relief. What people are worried about is higher interest rates. That is the only mechanism central banks can use to control inflation. The U.S. economy is more highly levered than at any other point in history and if interest rates move up significantly, from these "accommodative" levels, then it is difficult to see consumer spending and corporate investment being maintained at current levels.

Expecting the trend in inflation to change of its own accord is silly and I trust the Fed's ability and desire to control it. The only issue is where interest rates will be a year from now and if our economy (and the world economy) are prepared for that level of rates.

Gary also raise the point that the yield curve is flattening indicating disinflation. Personally I see the flattening as an anticipation of immediate dollar weakness. During currency events bonds will trade on a price rather than yield basis as the loss to principal overwhelms the gains from interest payments. The currency adjustment punishes all principal equally but a 30 year bond gets to discount the loss over 30 years. A flat curve indicates the currency adjustment is going to come all at once and chop an equal amount off principal at all maturities rather than a steady erosion that inflicts a larger loss on principal payments further in the future.

Page 9 of this paper has a good chart showing the spread inversion of the Brazil IDU bond (2001 maturity) against the spread of the C bond (2014 maturity) back in 1998 (after Russia devalued and the market began to anticipate a Brazilian dollar default and real devaluation). There was also a nice article on Friday which came to a similar conclusion about the message coming from interest rate markets.

Nov 27, 2004

A New World Order

Posted by Hello

Click on the chart to see a larger image!

This chart of U.S. 5-yr yields against the dollar index shows a definite change of character since the U.S. election. Except for a brief separation in March yields and the dollar moved up and down together. Now they are flying apart. The relationship could revert in the short term but it does not really seem very hopeful. So far the dollar has performed much worse than bonds but I would expect that bonds will catch up (fall that is) in the weeks ahead.

In my first entry on Oct 16 I wrote, "Obviously I am looking ahead here and am still very open to changing my mind (say if the yen trades below 103/$ in the next month) but to me the global imbalances are showing signs of correcting in an orderly fashion." When I mentioned "changing my mind" I was referring to my generally bullish stance on the stock market and economy. The yen traded below 103 on Nov 18. The equity markets still seem alright and the sideways range of last week lends strength to the idea that we are entering a momentum market on the upside but the dollar and yield movements are giving me the willies.

Though the market momentum may last a bit longer I am getting the feeling this will end badly. Higher prices in the face of bad news can be a sign of strength but they can also be shorting opportunities. I entered some shorts in December equity puts the week before last and have been accumulating Dec and Jan UST puts over the last month. While my views are shifting here, rather than change them wholesale I will stick to my original strategy with each trade. The equity puts are all short term and whether we rally or fall I will be out of them next week. The bond positions are fundamental and longer term but I am hopeful that I will get to book some profits there shortly and roll out the trade maturity.

I will begin looking for some positions in long dated out of the money puts now and may enter into them over the next month. Nothing big just something to put my mind at ease and that I can add to over time and if my conviction increases. I don't have much conviction in my short term views here (probably the poorest feel since I began this blog a month ago) so I am focusing a bit more on longer term trades. I would still like to accumulate some cyclical stocks on a pullback and some precious metal stocks seem to have underperformed the dollar move.

BBC Firefox story

The BBC ran a story on the 24th with similar a sentiment to my post from a few days ago. As I say the real story here is that I have not heard any traders mention the new competition from Mozilla products.

Nov 24, 2004

Put GE on the list

With WMT and GE both pressing the lows of the day I don't think the market is going to hold up. I would guess people are caught long and if the statistics fail today wont people expect them to fail on Friday? And the OIH just ticked a new high to boot.

I would put the resilience in the face of a weak dollar in the plus column but that is not going to help much into the close.

Took a stop

Just stopped QTWW. It is not even making an effort to get off the lows and I don't want to waste any more time watching it.

Bad trade

Watching the action in QTWW which is down sharply on merger news. It is basing on lows and I am considering a stop. I think I will let it make one more low and see how it does from there. Typically stocks that show up on my momentum scans show up for a lot of others too causing stops to exaggerate the action in the early going quite a bit. If it can get back into the morning gap, I would set a stop at the open price. Otherwise I will probably just dump it around 11:00 AM.

Action is positive but a bit hesitant in the market over all. Lots of people looking at the positive calendar bias around Thanksgiving. WMT (Walmart) is breaking down a bit after a strong open. The retail stocks are probably on pins and needles with the holiday season upon us so that name demands some attention.


Is it just me or is Mozilla Firefox really taking off as a browser? It is now accounting for about 1/2 of the hits on this site even though on Nov 1 it apparently only had a 6% share of the browser market.

I downloaded it myself last week and am generally impressed. I really like the FoxyTunes extension, tabbed windows and general clean feel of it. I guess Firefox is mainly popular with developers and bloggers now but I would say being popular with that group could lead to bigger things.

I have not heard anyone in the markets mention this product. Lots of focus on Google's desktop search and whether Google was going to launch a browser but Firefox has apparently slid under the radar. Given the short time it takes to download a new browser, this could potentially create quite a surprise.

Wandering around

Today's action again was not that bad. I would call it great except that we are still languishing near the highs while overbought and with weakening momentum. And of course the possibility is growing that a weakening dollar is becoming a negative for stocks and bonds. All in all I am making an effort not to read too much into the action and to trying to view the market from the ground up and by sectors.

One thing that stands out a bit is the failing in the SMH (semiconductor holders ETF) and I would point to KLAC (KLA-Tencor) as the main culprit there. INTC (Intel) broke down today and AMAT (Applied Materials) had some earnings problems last week but neither of them seems to show the same problems as KLAC. AMAT even seems to be putting in a very strong pattern in the face of some pretty bad news. Maybe a pairs trade make sense for those two.

Nov 23, 2004

Dollar Drip

The continued weakness in the dollar this morning, makes me think we are in for a repeat of Friday's action. Interest rates will move higher and stocks lower. Good for the precious metals and other commodities too. This has the potential to get very ugly.

I would add that the holiday week will make any damage that much worse. This is an American holiday and foreign traders will not care that U.S. markets are not open to react.

Dollar bounce

The dollar is getting a good bounce in Asia. The yen has recovered the 103.42 level and the Euro is leaning on 1.30. I would say the recent lows make a nice stop loss.

If the dollar and the stock market continue their link this will weigh on stock tomorrow. Of course the dollar has to keep its gains. We shall see.

Slap shot

Posted by Hello

Click on the chart to see a larger image!

Not much stood out in the action today but this driller looks like it is about to join its brethren on the march.

Whether or not today was really a stop hunt was hard to say in the end. The action certainly felt like it was being managed on the way up but in the end they closed them well and the action also felt like shorts being squeezed. I find it hard to believe the upside is the more painful direction for the market to trade now but perhaps I am wrong.

The bond market got a good bounce today reversing some of Friday's losses and that is a solid reason for a rally in equities. Higher rates are on the way for all yields it seems but I guess until they arrive the market does not need to react.

Nov 22, 2004

Stop hunt

This rally smacks of a stop hunt. Hard to believe that many shorts got in on the one day selloff everyone was looking to buy but that appears to be the case.

NEOL which I mentioned in a post last week is getting a crazy pop on a brokerage upgrade today. Usually worth it to book some profits on a move like this. Keep something for the long run but at least guarantee a positive trade.

More on the dollar

This article gives more detail to the points I made in my morning post on the dollar.

Nov 21, 2004

Charts for shorting

Charts posted by Hello

Click on the chart to see a larger image!

HSY (Hershey) looks like an excellent short with a very clean double top. I selected it for purely technical reasons and then smacked my forehead a bit as I recalled what has been going on in the Ivory Coast for a couple of weeks. A good target for this move down might be the 50 day. I almost included a chart of SBUX (Starbucks) here, also for technical reasons, and checked the news a bit on that one too. While coffee is important to the Ivory Coast it is still only 3% of the world market. Doesn't mean it can't work for a trade but the news gives better support to a HSY short. Both companies' bottom lines are driven by many factors besides input prices but often that does not matter to the market in the short-run. Relevant or not markets are drawn to stories.

LM (Legg Mason) made a big contribution to the breakout in the broker complex but since the initial move it appears to be running on fumes. Because yesterday's selloff also lacked volume, shorting here is a bit dicey and I would wait for an inside day (between yesterday's high and low) to initiate a position.

S&P 500 relationship to the dollar

Posted by Hello

Click on the chart to see a larger image!

This is the relationship between the stock market and the dollar that I mentioned on Friday. While I see the logic that a falling dollar helps exports and profits at multinationals I am not convinced these factors can offset the interest rate effects. During the late 90's the strong dollar was good for the markets because it was evidence of foreign investment. This made sense because the strong dollar and low interest went together and led to an investment boom.

The dollar is still the world's reserve currency so maybe U.S. interest rates can stay low indefinitely but my guess is that in the very near future U.S. interest rates will head higher. Whether it is because the falling dollar causes inflation or capital flight, I can not say but both pose very real risks. The optimism being exhibited by corporate bond buyers here makes me question whether the capital markets are really prepared for the change.

Nov 20, 2004

The Money Illusion

Chart posted by Hello

Click on the chart to see a larger image!

A skunk at the party? A dead canary in the coal mine? You bet! If I had to make a list of individual companies that could collapse the confidence-based, global financial system, this bank would be near the top. As I here the story, JPM is the single largest derivatives counterparty in the world (no one but JPM knows this for sure). FNM hedging, hedge fund levering, mortgage lending, emerging markets lending, swaps, currency hedges,... Etc., they do it all. The fact that it is showing such a horrible pattern in what is a great market should make headlines shortly. It could be benign evidence of traders shying away from a stock with a lot of bad exposures and little to gain from a commodity driven rally in a rising interest rate environment but it could also be a sign that something very rotten is happening with a particular trade or counterparty. Maybe it is just FNM but so far JPM trades much weaker than that stock does. Whatever the reason this stock absolutely needs to be watched here.

This is a good step-off point to distill what I see as the core bullish and bearish arguments in the market. Bulls believe that counter-cyclical interest rate policy has worked. It has created some near-term distortions in borrowing and asset prices but in due time these problems will work themselves out as global growth comes in above expectations and perpetuates a virtuous cycle. Bears, however, believe that central banks can not possibly do better than the market at setting interest rates and that any such counter-cyclical policy is creating greater pressure somewhere in the system. Ultimately that pressure will blow up a major money center bank causing the faith that supports our capital markets to disappear. When it does all asset prices will tumble as there is not enough liquidity to support current prices.

While I see both sides of the argument and truly see both of them as correct in the big picture, I absolutely lean towards the bulls case here. This is based solely on my own view of the prevailing psychology. More and more bearish investors that I know and talk to are focusing less and less on individual problems and situations and are obsessed with the idea that the euphoria of 2000 has not met its mirror image yet. True or not it just makes for bad trading and a weak hand. Money is made trade by trade and hanging on to a vague idea that the market needs to head a particular direction is a recipe for losses. Yes, the trading does feel more and more like 99 but it also feels a lot like 95 and 96. To be looking for a disaster here you have to expect the market to be blindsided by a liquidity crunch and so far there is just no evidence that it will ever arrive (see definition for blindsided). I don't think we are in a position to launch the next great bull market but I definitely think we could see renewed involvement from retail investors which can create a very profitable trading market.

If the JPM chart turns out to be a lead indicator of a deeper problem, I will need to reevaluate my stand. That is why I posted it.

Nov 19, 2004


No leg lower in bonds and no (or very little) hope for a currency reversal today. Not sure what to make of it as the weak dollar and strong stock market have walked a long road together. Maybe that all changed at 8:30 this AM but only time will tell.


"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability."

These famous remarks led to a 3.2% drop in the Nikkei, a 4% fall in the DAX, and a 2.3% drop in the Dow. All of which were reversed within' a week. I am not really sure Greenspan is telling markets anything more revolutionary in his remarks today. The markets certainly were due to pullback and it is important here to realize that even with the dollar weakness we are not really entering uncharted waters.

As I write yields look like they are going to put in another leg higher, and at the risk of embarassment I still believe this yield move is going to drive a currency reversal.


I interpret Greenspan as tying together the recent comments of Fed officials regarding higher rates with his own views on the deficit. He has always been very outspoken about his desire to see the Gov't cut spending and even when he advocated tax cuts he did it because he did not trust the Gov't to keep spending under control in the face of a surplus.

I don't think many people were looking for a conflict between monetary policy and fiscal policy where the Fed attempts to reign in the debt but that seems where we are heading. This should shake things up in all markets but mostly thru interest rates. Corporate bonds seem particularly vulnerable in here with historically tight spreads and historically low yields.

Morning reversals

U.S. 10-yr yields, the Euro and GBP have all reversed in the early morning while the Yen continues making new lows (stronger) below 103.42. Call me crazy but I say the Yen will reverse today too. Not a good trade because it does not have a floor but taking profits here makes good sense.

Dollar positions

Keep in mind if you are short the dollar here that:

  1. It is extremely oversold.
  2. The DXY came very close to a key reversal day yesterday. It traded a lower low and reversed to a higher high but closed inside Wednesday's range.
  3. The APEC meetings will provide an opportunity for everyone and their mom to weigh in on how horrible the dollar sell off has been for their country.
  4. The March low in the the JPY is 103.42
  5. Other trends of the last couple weeks appear to be hitting a turning point. The OSX put in a strong day Thusday while momentum seems to be failing in the SPX.

Nov 18, 2004

More recession thoughts

Tonight's FT has Richard Davidson of MSAM echoing the PIMCO comments last night. He is looking at a 50% chance of a recession in '05 predicated on the recent oil spike and reduced tax stimulus.

"Davidson is particularly enthusiastic about Europe, where dividends are growing at a double digit rate and where cash deals now top 80 per cent of all mergers and acquisitions activity, normally a bullish sign. He is also keen in Japan, where he believes good progress has been made on banking reform, corporate balance sheets have been restructured, manufacturing capacity has been reduced and the return on equity is rising.

Within the bond market, Davidson is underweight US Treasuries, saying yields are too low in the light of rising producer prices and the falling dollar. He has a holding in gold (which reached its highest level since 1988 on Thursday) as a hedge against the US currency. He also owns no corporate debt, arguing that spreads are too low to reflect risk."

He also expects U.S. rates to continue rising while U.K. rates have topped. As for his Japanese comments, today's downward revision in GDP estimates there may provide a buying opportunity. It is not clear if that news was out during the interview but typically GDP data is backward looking and is not a good reason to change an outlook.

Morning Glory

Just a few opening thoughts.

Israel can not be pleased about the thought of Iran with Nuclear missles.

Gross' firm is weighing in on the current state of the bond market.

Heard stories that an Asian central bank bought $12 bn in US treasuries yesterday.
Add that to the $2 bn the FT said Korea bought last week. Whoever is buying, I can not see
why they are investing anywhere but the short-end. If it is Korea or Japan the duration risk just gives them more to lose if their currency intervention fails.

Nov 17, 2004

Momentum market??

Perhaps the hour is upon us for some opportunistic shorts (financials) and to roll up trailing stops to keep profits from slipping away. Tuesday marked a short-term trend change in my book and I will be suspending buying for a while to hunt shorts and defend profits. Posted by Hello

Understanding inflation

This is a must see for anyone trying to understand yesterday's inflation data. With the dollar continuing its decent, it is difficult to imagine how inflation stays dormant.

That may be just what the Fed is looking at as it tries to talk up interest rate expectations.

Nov 16, 2004

Swing trader's market?

I keep thinking about how strong the bearish case was for a sharp drop in the Spring of '04. Interest rates were coming off 50 year lows while mortgage portfolios had grown to an unprecedented size. The stock market was up 30%+ in a year with hardly a pullback. We were at war and it appeared the situation in Iraq would get worse before it had a chance to get better. Despite the stock market's rise and economic growth, U.S. consumers were faced with a growing debt problem and a slack job market. And by the way the only thing keeping long-term interest rates down was the investment of foreigners who were being forced to sit through currency losses to keep their own export markets afloat. And I almost forgot oil prices...

Now with FNM finally getting addressed, jobs trickling in, marginally improved exports, most rate hikes behind us, and strong momentum off the election doesn't the bull case seem equally compelling? Maybe not equally compelling but certainly a good bet.

If the tape did not respond to price breakdowns while the environment was ripe, I am just not sure you need to chase it here. I see no compelling reason to buy until SPX 1140 and even then I would trade a half position looking for a shakeout lower. There will certainly be sectors and stocks that can run for the next 6 months but there will be time to be selective. Too many people here are trying to turn a one day move into a multimonth trend and I just don't think the market is going to be cooperative.

Beware the flattening

The U.S. yield curve is definitely trending flatter here. One month ago 5-yr rates were at 3.31% and 30-yr rates were at 4.85%. Now they are at 3.56% and 4.91%, respectively. A 19 basis point (bp) flattening. Most of the shift came on the day of the FOMC meeting and the rest is happening this morning. The markets are changing their expectations for the Fed Fund's rate while keeping their long-term expectations for both the economy and interest rates relatively fixed.

Yesterday Fed Gov. Olson Spoke and the most striking part of his speech to me was the comments he made on real interest rates. After noting that the overnight rate remains accommodative he went on to say, "The nominal federal funds rate is currently 2 percent, a level that, using standard measures of core consumer price inflation, implies a real funds rate that is just above zero--considerably lower than the long-run average of about 2-3/4 percent." Nobody is expecting a Fed Funds rate of 3.75% anytime soon, not the Fed and certainly not the markets but that is the rate his comment implies. I was surprised his remarks did not have more of an impact on bonds yesterday and we may end up with a when-are-they-going-to-stop-hiking-panic in the short-end eventually. Not even close yet but the short-end is definitely reacting.

Even without a panic I think the treasury market will at some point steepen back out as people begin to find a 4% 5-yr rate attractive. Could take a while to play out as the market's belief in a low overnight rate is based in the belief in a weak economy. These Fed comments should be telling markets that they don't perceive the same need for stimulation.

This last point is also the only way to reconcile the strength in stocks with a curve flattening. Flattening is a sign of slowing growth and by keeping the long end low the bond market is not showing the same respect for the economy's strength (or even fear of inflation / stagflation) that the equity market is. In March of '03 the bond market was proven wrong and I think they will be here as well. I have absolutely no doubt that the Fed will avoid deflation and I have a growing faith in the U.S.' ability to export its way back to balance.

Until the Fed starts to give signals that rates are no longer accommodative I think it makes sense to be short bonds. The flattening is making me see the long end as vulnerable to a sharp move higher (yields) like the moves in the Spring of both '03 and '04.

position in TLT options.

Train thoughts

Today's thoughts center around the arrival of a pullback. On Friday, Nov. 5th I opined to a colleague that the S&P would continue its wandering ways, and that although we had clearly broken out I thought we would need a shakeout below 1140, probably to 1125 (or the 200 day), before it became urgent to buy stocks.

Today with the Fannie Mae's (FNM) failure to file and the broader news interest in the vote recounts we may see just such a shakeout. It is hard to see the election outcome being overturned and I don't believe we will learn it was rigged but if you were a buyer on clarity, it will get harder and harder to justify ownership as the tape heads lower. FNM is a similar story. The bad news has been out for a while in my opinion and the only thing keeping that stock up is that it has been dead money on the short side. If it starts to work lower and breaks below 62 it could trade with a 20 handle in a hurry.

If you want to read up on the vote recount I recommend this as a summary, and this to get an idea for how old the news is.

It is still way before the open and the downdraft may not materialize but I am thinking we get a brief scare today, sideways trading into expiry on Friday, and then we shall see if the pullback will be deep as I expect. Plenty of time to square up long positions or if you like to spin positions every couple of days you can even get short.