Perspective on the deficit

Here is an FT story with excellent perspective on America's deficit.

Weekly Game plan

This week I expect some generic weakness on Monday and Tuesday and a bounce when the election reaches resolution. The DXY (Dollar Index) is near multiyear lows which should hold the first test and bounce 2 points from 85 to 87. This rally, if it materializes, will bring with it some metal weakness. I believe that oil has topped so next week we will see general commodity weakness. I would stay away from oil for a few months but there could be some good purchases in the metals.

For the stock market it feels like the semiconductors and NASDAQ are a bit overheated and may underperform. The cyclicals maybe a good place to look for the outperformance. Near the end the week it could be a good time to start putting out shorts in the financials. I think it makes sense to leg into a long term trade buying semis and cyclicals on weakness against finance sector shorts. FNM (Fannie Mae) in particular should begin a multimonth downtrend as it adjusts its business to new capital requirements and new legislation circulates in congress.

I see interest rates as a bit low in here but it I am not sure they are topping out yet. The commodity weakness could be perceived as a sign of the economy slowing or falling oil prices could be interpreted as stimulus.

Vols will probably take a sharp dip on Tuesday as the fears of terrorism pass.

More on Haliburton

There is now a U.K enquiry into Haliburton that is investigating bribery charges while V.P. Cheney was the CEO there.

I am very aware that all this news peppering the tape now is the result of Tuesday's election. It still seems to me though that all this attention is unwanted if you are an HAL holder. Very few large companies come out of these investigations without more bad news hitting. For CSFB and Arthur Anderson the investigation itself led to obstruction charges as employees sought to destroy evidence. And this U.K. investigation is certainly out of the control of whomever wins our Presidency.

With the other oil drillers being hit so hard by the move in oil while HAL hangs tough I will be avoiding HAL. Maybe there is a trade there and maybe not but for now it seems like dead money on the short side.

I will point out that the overall strength in yesterday's tape was similar to HAL's. October 31 is mutual fund year end so Friday was the last trading day. I am never quite sure how to gauge these events but it certainly could account for the inability of stocks to go down. The rollover in GOOG (Google) that caught a bid in the afternoon is another good example. That stock could easily have traded down another 5 or 10 points with no clear support until the top of its earnings gap at 175. Maybe on Monday.

Lastly, the dollar went out at the lows of the day, which also happens to be right near multiyear lows. It does look a bit scary but keep in mind that being short the dollar is the only trade in the world right now that everyone believes in. No lack of conviction there. With everyone on the same side there should be plenty of sharp rallies and these lows with the election as a news catalyst still seems like a good place to start one.

Synchronicity

I can almost here frat boys chanting "Frank the tank! Frank the tank" as I watch HAL (Haliburton) trade today. Clearly, my morning thoughts were a bit out of synch with the market.

The oddest thing here is that while the dollar has been willing to give up its gains from Tuesday, stocks have been well bid. Not sure I get it with the overhead resistance, sharp nature of the move, and of course looming election. Why buy vols but hold your stocks? Mine is not to question why I suppose.

I am still looking for a dollar rally and some metal weakness post election. Should stocks be down substantially on Monday I will make some selective purchases.

VIX

The volatility indices, VIX and VXO, are spiking up a bit. This is a familiar pattern where market participants get their heads together and decide that there could be a terrorist attack this weekend. It is true that if there is an attack 16 vol on the SPX will look very cheap. My problem with the behavior is that the election is widely publicized as something that might spur terrorist attacks and options that incorporate the election have not traded at a premium to the recently deceased October options. This makes the piling in today seem irrational and irrational trading is more likely to be a contrarian indicator.

This election also seems to be occupying a disproportionate amount of people's radar. Most pundits agree with my view that the U.S. deficit is the controlling economic factor no matter who gets elected. Because of this I am viewing the trading chatter as representative of traders' emotional commitment to a particular candidate.

Lastly, and I realize I am contradicting myself, I have been toying with the thought that if Bush wins we are more likely to see the deficit used against us. The deficit is funded by foreigners and foreigners do not like Bush. Perhaps foreigners are cutting us slack because they recognize that while our gov't represents us it is not always representative of us. Should Bush win, that perception may change and foreigners may collectively feel the need to take matters into their own hands and curb America's belief that it can act unilaterally. The obvious result of this is the dollar trading lower while interest rates move higher. I have a hard time betting on this because such a policy by foreigners could have been used preemptively (where have I heard that phrase before) to wake up the U.S. electorate with higher rates before the election.

SPX update

Wanted to get an update of the McClellan Oscillator posted just to highlight that we have now broken the near term high of 1110. By this indicator we are now in an uptrend. I put this year's channel on the chart and it is easy to see why we might struggle to move higher until next Wednesday.


Posted by Hello!

Passing time

The market should stay range bound between yesterday's highs and Monday's lows through the election. I would guess we head lower into next Monday morning and trade higher on Wednesday. I believe the election will be settled in the wee hours Wednesday morning. I would expect these thoughts to hold for the dollar too.

This HAL (Haliburton) news should provide today's entertainment. HAL announced earnings 3 days ago and the stock gapped to a 2-year high. It was a difficult move to understand given the association between that stock and the Bush Presidency. Election is up in the air but if Kerry wins that stock will be under a microscope and forced through a lot of hoops for future contracts. Someone once said that the the toughest shorts are the best shorts and if that is true then HAL could break 30 today.

On an aside, I was paper trading HAL looking for a top in oil stocks and my loss on paper kept me from putting out many real shorts in the sector. The moves in the sector and this stock just highlight how willing market participants are to whip stocks around from day to day. Conviction and knowledge are trading at a premium in this market, trumping technicals. For me that means tight stops and a willingness to reenter the trade if my timing is off.

Fun with Citi

Watching C (Citigroup) trade has been fun today. It opened on a gap lower (the likely cause) and is now above yesterday's high. This is a good example of two things: 1) that moves in the illiquid pre- and after- market make good fades and 2) that oversold stocks will have trouble going down.

Citibank at 44 has retraced up near the trendline I pointed out last week and will struggle to get back above that bad boy but I would expect it to spend some time consolidating beneath it.

Still long some C calls but I have scaled out of 80% of the position.

Oil, bonds, the economy ... again

Last night I mentioned that the apparent relationship between oil and bonds would not hold and today you are seeing this with oil off 2% while bonds are unchanged. This is happening because of the Chinese rate hike. China is perceived as the marginal buyer of oil and so any slowing in their econ lowers oil prices. China also accounts for a large portion of current economic growth so any weakness reduces global growth estimates. So in today's action oil is weakening because of the slack economy while bonds are acting like they anticipated the weakness. Oil appears to have been mispriced rather than bonds in this case and it is probably going to see a large adjustment compared to the move in yields.

Expecting the Chinese to eventually hike rates was a no-brainer given their need to slow their economy. I will consider the mass selling of base metals that came out of China last week as insider selling and be on the look out for it as a future indicator.

On the front burner

So today's trends into the open look like bonds will continue to weaken, oil (and oil stocks) will continue south, the dollar consolidates yesterday's gains, and stocks look to pull back.

I would guess the stock market stays range bound through the election and for the most part it is time to be building inventory on the dips. The financials, however, seem like a good sector for shorting but need to work through an oversold condition first. Not so much urgent today unless something you want to buy falls out of bed. The DXY should make it back near 87 so buying the dollar on dips probably makes some sense too. Metals (and metal stocks) are continue to fall this AM and some of them might make good purchases shortly when they are sitting at the uptrend or on a moving average. Copper stocks are better positioned for accumulation over the next couple days as they are oversold and near support.

An angry bear from left field?

Just ran across someone else's analysis claiming that oil and bonds have a highly correlated relationship. My own analysis posted last week came to the opposite conclusion.

The "angry bear" has chosen to exclude the data from this Spring's massive bond sell off that occurred while oil prices continued trending higher. When searching for relationships like this it is important to have several up and down swings in both data series, otherwise you will find high correlations (or inverse correlations) for all series that are demonstrating trends.

There is something to the idea that oil prices are perceived by the markets as slowing the economy and causing interest rates to drop, but I think it is more a function of people trying to rationalize the low rates in a seemingly inflationary environment. Both trends appear to be breaking off now and I bet within a couple weeks the talk of their relationship will too.

British rates

Here is another story that chronicles the effectiveness of British rate hikes. I still think that currency is in for some rough sailing.

Hedge fund reducing volatility

I agree with many of the points in this article. With low interest rates and excess capacity in the financial industry (like the rest of the econ) the low VIX is probably a reasonable estimate of future vols.

Maybe in the coming years funds will finally fight it out trying to slash investor costs rather than chasing performance.

Focus on the Fed!

Just for the record, the next FOMC meeting is on Nov 10. Everyone is trading opinions about whether or not the election is a cause for a rally but a change in the Fed bias is probably a better place for people's attention. In Dec 2003 the policy statement contained this remark.

However, with inflation quite low and resource use slack, the Committee
believes that policy accommodation can be maintained for a considerable period.

And in Jan 2004 it was changed to this.

With inflation quite low and resource use slack, the Committee believes that it
can be patient in removing its policy accommodation.

This change marked the end of the great bull market of 2003. Most people believe that the Fed is done with its rate hikes in November and with equal speculation circling about inflation and deflation it probably makes sense to stop here.

Whatever people may say remember that the overnight interest rate topped in May of 2000, bottomed in June 03, and is generally expected to make either a top or near term plateau next month. People may agree or disagree with Fed policy but it certainly seems to be driving the stock market.

Fed quotes and interest rate info is of course here.

This year's trend

This quote ran on Minyanville yesterday and got me thinking.

"One of the most striking features of the present chapter in stock market
history is the failure of the trading community to take serious alarm at
portents which once threw Wall Street into a state of alarm... Traders who would
formerly have taken the precaution of reducing their commitments just in case a
reaction should set in, now feel confident that they can ride out any storm
which may develop. But more particularly, the repeated demonstrations which the
market has given of its ability to 'come back' with renewed strength after a
sharp reaction has engendered a spirit of indifference to all the old-time
warnings. As to whether this attitude may not sometime itself become a
danger-signal, Wall Street is not agreed."

-The New York Times Sept. 1, 1929

I disagree that this is the market we are in. To me it seems like participants overreact to each piece of news. Or perhaps more accurately that they have very tight stops and simply are unwilling to sit with a loss of any size. Both good news and bad news are reflected in the stock price immediately. If you are not long when the good news prints you can not expect to hop in and make money. Same thing on the short side.

Lots of people talk about bubble part 2 as if the current prices and PE's reflect the lesson that stocks always go up in the long run. I see the lesson of the bubble as one of momentum. The most money in the bubble years was made by holding stocks while they went up and then selling them only after they rolled over. People made money on both sides of the market by following large multiyear trends. Then as a kicker you had a very steady march higher in 2003 which really reinforced the theme that momentum is simply the best way to trade. So last year was momentum and this year is a wide downward sloped range. Last weeks new DJI low brought out the Armageddon hats and the NASDAQ highs two weeks prior were proof that the range bound year was coming to an early end.

I tend to think this market action is constructive and probably more reasonable than momentum trading over the long run. You certainly still have some momentum stocks working (TASR, GOOG, RIMM...) but not the indices and not stocks in general. The best trading style for this market seems to be range trading with smaller than normal positions and tight stops. With low interest rates and overcapacity keeping profits small throughout the economy is there any reason to expect the financial markets to be handing out windfall gains?

Nightly charts

Posted by Hello!

I wanted to point out the bullish wedge forming in Japanese stocks. The EWJ (Equity Webs Japan) is a closed end fund that tracks the Japanese stocks and it has a very similar wedge formation to the Nikkei. Owning EWJ lets you benefit from both rising Japanese stocks and a rising Japanese currency.


Posted by Hello!

The next chart is the homebuilder TOL (Toll Brothers). The homebuilders had a pretty sharp correction in the past month but are gaining some impressive volume on this bounce. TOL appears to be making a cup and handle. It still has a long ways to go to complete a breakout but it caught my eye because I thought I would highlight it. A breakout in homebuilders would shock many people at this point (myself included) and would probably do a lot to effect psychology. Almost certainly cause the bears to lose a lot of the conviction they have had since the FNM (Fannie Mae) news came out 3 weeks back.

Them bonds

Bonds being sold a bit today. Just evidence that the buying over the last few days was indeed related to the stress in the financials. As the market becomes comfortable with the insurance investigation the tight inverse relationship between bonds and stocks should loosen up.

Bounce

We are seeing a good bounce in the financials (Citigroup) mostly because they have been getting abused and to a lessor degree because of the news in Marsh and McLennan (no criminal charges and a new CEO). Not much else to notice. The dollar has stabilized near the DXY 85 level and bonds are a non-event. It could stay this way right through next Tuesday in case your wondering.

You will also notice the rash of news stories about the election that will never end. Maybe but it is probably over next Wednesday and the market will take that as good news.

Position in C calls.

Feeling bullish

Woke up this morning and caught a clip on CNBC about the IPO of shopping.com which apparently went very well. I then rode the train into work and basically got more bullish the longer I thought. Today will probably be up but that is not what I am talking about. My points are about a 6 month to 1 year move that is building.

While investors intelligence numbers are skewed bullish (Approximately 80% bulls and 20% bears) the overall news and IMHO most trades still seem bearish. More than bearish I would say they are quite skittish and unwilling to maintain conviction in the face of contrary price moves. Many people express concern that the VXO is still around 16% which it is historically low but I am not sure that anticipating 20% per annum moves in stocks makes sense here. Rates are low, there is over capacity and the economy is taking its time to work these things off. Maybe people are correctly anticipating that economic volatility (both up and down) is falling off.

Many people are balancing their views between two negatives: deflation and stagflation. I am not so convinced there is not a more positive middle road that allows theU.S. to work through its capacity overhang and eventually become less dependent on low interest rates. My thesis is mainly based on structural changes taking place in emerging economies represented in some part by what we have seen in China. If the developing world begins to shift away from being a source of cheap supply and towards a source of demand that is what will happen. That shift is really all it takes to counter the deflation argument and turn stagflation into simple inflation. Then all that remains is to see that G7 central banks stick to their guns and moderate growth.

The main reason this IPO is bullish is that Wall Street has some overcapacity issues of its own. Hot IPO's like this feed retail interest and that will lead to more money flowing through Wall Street. Right now people on Wall Street seem to be the most bearish of all. The industry has done very little hiring in the last 5 years and any uptick could do a lot to change that morale. All of this will make the trading environment a lot easier.

Lastly, I keep thinking about the interest rate cycle. People were rabidly bullish in Jan 03, and now with markets very near the same levels 6 months later everyone sees us on the brink of a sell off. The rate hikes started in March and will end in November. If you had told me that the market would struggle to go up during the hiking cycle I would have agreed. It always does. I was bearish in Mar and essentially failed to make money because the sell off turned out to only be a side ways grind. This sideways grind made it difficult for everyone to make money and that lack of profitability is translating into a lack of hope. With the interest rate cycle changing I and the market apathetic it just seems that this sideways range will make a great base for a rally.

Where we started

While the action of the indices has been a bit dismal the breadth was not that bad. Many small cap stocks actually managed to rally.

The dollar is sitting solidly on support and many commodity sectors appear to be losing momentum while making higher prices. Most noticeably is the oil sector but the metal as well.

Interest rates are at a very important juncture retesting recent highs. Not much to predict which way they will move but perhaps a dollar rally will lead or be caused by a move in yields. I would much rather play that game via the currency than the interest rates at this point.

No positions in anything mentioned.

Planning ahead

The weakness in the financials last week felt like the real deal and is quite likely to be a drag on the rest of the tape in the next month or so. They are probably overextended a bit on the downside here but with a bounce over the coming days there will be some good shorts. GM, C, JPM, FNM, COF, and CBH all look like prime candidates.

Check out the chart for C from last week to see what I mean.

Heavy Betty

Market seems a bit heavy in here. We have had a nice bounce but given the clearout to the downside in the pre-market (not to mention the last couple of days) I would have expected a try on SPX 1100 by now.

Still sticking with a bounce in the dollar which should lead to some weakness in metals / metal stocks. Probably makes sense to lighten up a bit on some semi longs and try to get them back on a pullback.

The housing stocks could get interesting in the next couple of weeks. It appears they are bouncing and I would expect it to fail but with rates ratcheting lower I suppose they have a shot at some new highs.

No positions in anything mentioned.

Some thoughts to keep in mind

I was looking at the international charts this morning and both the FTSE and the CAC seem more like the S&P than the Dow. The FTSE actually appears to be retesting a breakout in here while the CAC is at the midpoint in a sideways range. No new lows but for the Dow.

Also, keep in mind that we are coming to the end of a hiking cycle by the U.S. Fed. The mantra don't fight the Fed was strong throughout the downtrend of 2000-01 and people got a bit tired of it. I have not really heard it once during the current cycle though the market has clearly been sailing into a headwind the last 9 months. It is still possible that we are at a point in the cycle similar to the 1994 cuts which also spooked markets quite severely. It may be that the marketing is waiting for a Fed bias change more than waiting to see who becomes the President.

Lastly the DXY is has made a straight line down to 85 and I would expect a bounce here.

Election arbitrage

I was just looking over the current prices from tradesport.com and figuring out exactly what the traders there thought about various aspects of the election. One interesting thing is that you can currently buy the "Presidential Election Ceritified by Dec 13,2004" contract for $85 and the price has been dropping. It is a hard to imagine any legal or counting challenges this year not ending at least as quickly as in the 2000 election, and that would be contingent on an election close enough for it to be worth challenging. That contract is probably a buy in here and certainly if it sees $75 or lower as the media hypes up the chances of a contested vote.

Another interesting prospect is that for $13 you can sell a contract that will be worth $0 if Pres. Bush fails to win 350 electoral votes. The odds of that seem a lot smaller than 13% at this point. That contract has been falling steadily and it seems like it will continue.

Lastly you can buy a contract that Kerry wins the Rustbelt (PA, OH, and MI) for $38 while you can hedge by betting that Bush wins OH for $55. If Bush actually wins OH this combo pays you $7 and can only loose money if Bush loses OH but wins in MI (trading at $26) or PA (trading at 31). Other combinations like Kerry winning New England are trading much closer to parity against their weakest link. This is to say that if you buy Kerry winning New England for $55 and also buy Bush winning NH for $49 you have become a net loser just with the bid offer let alone the 5 other states Bush could win with one of them being Maine which is trading similar to MI.

All of these contracts have relatively wide bid/offer spreads so it probably pays to be patient and to expect to hold throught the election rather than trade in and out.

More on U.K. interest rates

This is another example of the world starting to shift its view about Britain's interest rates. The hiking cycle they just went through is not really so different than the U.S. cycle in 2000 and the current slack international growth rates could make a British economic slowdown come on faster than they would like.

Confirmation

I have mentioned a couple of times my belief that the U.K. and commonwealth currencies will underperform the dollar. This article demonstrates that the U.K's bond market (gilts) is beginning to anticipate rate cuts.

Election news

This is a good site for monitoring the upcoming election. There is a lot of press right now about Kerry taking the lead in the projected electoral vote. Currently the polls seem to be pointing to Florida deciding the election again.

Really the bottom? (DXY, SPX)

Posted by Hello

The DXY (Dollar Index) is oversold and coming into double support around 85 from the downtrend line and the '04 lows. Hard to see it bouncing past the 87-88 level and probably a good short when it arrives there. The longer-term downtrend has almost certainly resumed for the reasons given here and I continue to think the Euro and the Yen are better longs than the Pound and commonwealth currencies.


Posted by Hello

This is important because while the Dow appears in freefall toward the bottom of its channel the S&P does not look nearly as bad. This oscillator in particular shows that instead of gaining downside participants the market is losing momentum. A bounce above 1110 in the S&P without a new low for the oscillator would confirm a short-term bottom. Here is an explanation of the oscillator for those unfamiliar with it.

Definition from TC2000 - "The McClellan Oscillator is calculated by subtracting a 39 day moving average of (Advances – Declines) from a 19 day moving average of (Advances – Declines). It not only works as an overbought/oversold indicator, it works fairly well at making short-term trend changes when it crosses the zero line."

Into the close

I would add here that with everything down and the world apparently on notice that its days are numbered, Fannie Mae (FNM) has managed to stay green. I would have thought the bears would attack that thing as soon as the tape rolled over as I don't see anyone wanting to jump in front of that particular train when it gets rolling. They are being forced to go through some painful changes and the old valuation of the stock (where we are now) is going to become mostly irrelevant depending on the changes they implement.

Anyway as it swims against the tide today it is certainly a sign of some strength.

The Marshal Mathers plan?

The market and the financials are trying to find their footing with this MMC (Marsh Mclennan) news. I guess I was a bit premature in calling the market boring.


Today's action is quite a bit more cohesive than yesteradays. The seller's have been building momentum all day and are now managing to steamroll the buyers. Would expect a bounce into the close as there has not been much dat-today follow through and intraday shorts will look to get flat.

This resting makes me sleepy

Market is taking a break today. The most noticeable action is in GOOG (Google) but I think the run up there is unplayable. Perhaps better opportunity exists by noticing the bounce in cyclicals after CAT (caterpillar) took an old school beating yesterday. CAT probably needs some more consolidating to fix that damage but the bottom in DE (John Deere) looks more attractive.

That the news in MSFT (Microsoft) and AMZN (AMAZON) is being contained to only those names is impressive. It should have been easy for the market to give back a chunk of yesterday's gains. The good news in KLAC (KLA Tencor) is also being ignored as the semis retest 400. AMAT (Applied Materials) seems particularly heavy.

Today sideways wandering is nearly the opposite of yesterday's broad intraday swings.

Metal Madness - Silver, Gold

Posted by Hello

Lots of people watching silver here but probably needs to consolidate a bit. I would guess it goes below the most recently low back to 6.50-6.70. The long-term uptrend will be kept intact and I think it would take some major policy changes (fiscal or monetary), to challenge that.



Posted by Hello

Ah the mysticism of the channel. It also appears capped in the short run as these two sisters trade together. They also both trade with the dollar and I would guess the first test of the summer DXY (dollar index) lows will hold and we will get a dollar bounce during the next week.

No positions in anything mentioned.

Charts for thought.

This is a chart of the oil driller APA (Apache). It has had a great run but appears to be forming a short term double top. Time will tell but it should get some good support around 48. Be patient if you plan to buy as momentum seems to be failing particularity hard these days.



Posted by Hello

FDX (Fedex) looks ready to head higher.


Posted by Hello

The trendline from way back is pretty powerful stuff but there does not seem to be very much follow through on the break. It looks like C (Citigroup)will need to test the trendline from beneath. I will reevaluate it if it does.

So that was an oil stock ready to pull back, a transport leader set to continue its momentum and a bank that seems overdone on the downside. I probably need to own a few more longs here as these are all bullish implications.

No positions in any of the stocks mentioned.

This means war!

I don't remember the last time the market was so active. Either EBAY (Ebay) and KLAC (KLA Tencor) are going to keep their momentum going or the financials are going to drag the tape down. I don't think it is going to be resolved today but it feels like it will lead to a big move in one direction or the other. Either a lot of the momentum crowd will get left behind by these shake outs (3 in 3 days by my count) or the spread widening in insurance issues has finally put an end to the easy borrowing keeping the world afloat.

My best guess is that markets with real issues do not lend themselves well to momentum trading. Just pull up the chart of AOC (Aon Corp) to see what it means to be on the wrong side when a problem hits. Momentum can keep the shorts at bay but that does not keep bringing in more buyers which are the necessary ingredient of an advance.

Mostly I think today is a good opportunity to pare risk both ways. The action wants to move fast in both directions and if it continues like this the VIX (CBOE Volitility Index) is completely mispriced. It is good to finally see some tradable moves occurring within a day but I am not sure the banks that are already under pressure are in a a position to deal with rising risks.

As the dollar weakens

Watching the dollar sit near lows and thinking it is truly amazing that while the U.S. rate hikes were widely expected and telegraphed the dollar basically sat and waited until the cycle ended to continue its slide. On that note, doesn't it seem likely that the U.K. and commonwealth countries are going to be cutting rates in a few months? It may make sense to start building positions long the yen and euro against them rather than the dollar.

And does the cyclical sell off really make sense given dollar weakness?

What a difference a day makes.

Today's action in the internets will probably negate the trade setup in YHOO (Yahoo!). It could be an interesting stock to watch though as Yahoo Japan was off 4% and helped move the Nikkei lower. And of course their should be some posturing in the net names in front of the GOOG (Google) earnings tonight.

Hard not to see today getting good follow through on the strong opening. Should continue for weeks as we probably saw a washout yesterday.

Position in YHOO.

A new world order

It appears election fears are hitting the dollar (among other things). Here is a good summary quote:

``Who'll win the (U.S.) presidential race is important but whether the election ends smoothly is also crucial, and any disorder can become another market-unfriendly factor,'' said Daiwa Securities strategist Tsuyoshi Nomaguchi.

The quote was from here if you like reading about Japan.

And wasn't it just 2 weeks ago the Japanese FinMin was telling us that oil prices caused the yen to weaken????

Inflationary signs

Raises in India are probably good for the U.S. and global growth in the long run. Maybe not as good for interest rates.

Google

Google makes its first earnings announcement since its IPO Thursday night and the stock is getting whacked a bit in front of it. I am not sure what restrictions the company is under from the IPO, but it tonight may be a good opportunity to announce a secondary offering. You'll remember that the company cut its share issue back a bit because of a lack of demand. The stock has now traded above the original high end of the suggested range ($135), so I think they would get the show on the road and issue more shares. The management in its prospectus stated intentions to make the issue size large so that it would be liquid and the price would more likely represent the companies true value.

If they do announce a secondary, I would expect the stock to dip quickly on the news. I would view such a dip as a buying opportunity. Off the top of my head I would guess the dip would carry to around 120-125.

I have no position in google, no relationship to the company and this is just a hunch based on the statements made around their IPO.

Analyzing Oil and Bonds

I have a short position in TLT (via put options) and this morning's action made me a bit nervous. It is one thing to see the anxiety in the market and believe it is overdone and another to ignore the possibility that the flight to quality can drive bond yields to unreasonable levels. What struck me as I thought about it this AM is that the Oil, energy and all commodities were the only thing up and that should help offset the pressure on yields. I checked into it by comparing the OIH and TLT for simplicity. Below is a chart of the % rolling monthly change in each graphed against time.



This looks like there really might be some correlation between Oil and Tsy bonds but a regression analysis makes it unlikely.




The r2 of this analysis came in at 0.05 and the scatterplot visually confirms that their is very little shape to cluster. The slope does seem to have a slight positive bias so maybe you could say that the bond market focuses equally on oils impact on inflation as well as the slowing effects on the economy of rising oil prices. Many times economic variables will show a better correlation of long periods (30 years) but for the horizon of my trade that is a bit useless.

I am posting this just to share what I found. Even though there is no relationship, knowing that is worth something too.

As for my trade I put it on as a long term position for economic reasons and kept it small so I could add to it if the market got carried away. This insurance investigation was not out then but I am still seeing it as contained to the issuers securities and not something that can effect the broader market over the medium term. Since this is my belief, I will stick with the original plan and continue to watch the financials (particularily their bond spreads) for evidence that I am interpreting the situation incorrectly.

The charts and analysis were done in Excel with the data coming from yahoo.

mike

In a tizzy

The dollar continues its gradual weakening, financial stocks are getting thumped, and there appears to be a flight to quality trade taking treasuries higher. The world sure seems to expect this insurance investigation to create greater problems for the banks. And as far as market impact goes, could C have picked a better night to can some managers?

I am still in the show me camp about this issue but will be probably try to hedge my views by shorting the banks on a bounce. The semis still need to base out a bit in my view but they may be a good place for shopping. And I am getting a bit worried that gold and gold stocks will not pull back this week as i had hoped.

Position in TLT

mike

A few ideas

It might make sense here given the weakness in the dollar and the base metals to buy precious metals and short base metals. This trade implies a weakening economy, or at the very least a weakening of Chinese demand for commodities.

It may make sense to short the bank sector or buy bank puts against other positions because if this insurance stuff pulls us down it will be short, sharp, and focused on the banks. Maybe short some GM for good measure as it makes most of its money of GMAC and has got some definite issues in the pipe with this pension investigation.

The put/call ratio is a bit low given the position of the indices. It sure feels like everyone is worried in here but I would like it better if that number were 1.3 rather than 0.9.

Despite the angst we stayed above 1100 which will look very bullish if we manage to bounce.

No good news overnight apparently.

The Nikkei appears to be following suit on todays action with some extra fuel from the Citibank firing. Should come into strong support at 10600. We will probably get a chance to see how it holds up shortly.

On the ball

I swear I did not read this before my last post! :)

Bark or bite?

It feels like there is a lot of angst out there today. It is really just more of the same as the market marches sideways. The dip this AM in the banks (caused by insurance fears) really has a lot of bulls reconsidering. I think we continue to edge sideways in equities and that these mini-panics (or euphorias) are opportunities for short-term trades. Still have some bigger trends like the advance and collapse in steel stocks but as a whole too many traders and not enought idea's. Everyone has tight stops and very little patience with the market.

Lots of people talking about election risk but I think the risk is more in the process than in the outcome. Seeing stories daily now about various start dates for absentee ballots. That combined with law suits being fought about computer voting and new laws make me think the media is going to recreate "Indecision 2000" before the voting even starts. Probably more hype than anything until election day actually arrives.

The cat ate my homework!

I had a much better post prepared earlied today but the blogspot server was apparently down when I tried to post it. In the event this should ever happen to you perhaps it is better to compose in word.

The market is getting tanked by the financials here. This probably has legs to keep the market weak for a couple of days because of the widening credit spreads on insurers. The best article I have seen on the implication is at this pay site.

Alan Greenspan spoke on the consumer debt levels and the housing bubble and basically said not to worry. His arguements are plausible but these problems are probably a headwind for the U.S. economy. A more bearish prognostication was made in August by Stephen Roach.

Keep watching that USD/JPY!!

Wrap up

After going over todays action I am struck that the volume was weak everywhere. This happens a lot on Monday's and generally it means you can't trust the move. Not a bad day but still feels like both sides should be nervous.

The charts I posted today are all shorts but they are all in sectors that have been market leaders. Maybe just more volatility (better to trade) on both sides while other sectors are caught in doldrums.

Maybe the whole market is in the headlights as we head toward the election or maybe just testing everyones patience. Their seems to be a lot of that this year.

Have a great night.

mike

Is Google eating their lunch??

Perhaps a short looming here. This is a volatile stock so a smaller position and wider stop may be necessary to participate.

A vote for Kerry?

Could this be an election trade? It looks like it is heading for 200.

I am only relating this to the election by the old axiom that Republicans are tougher (and spend more) on defense. The election is still up in the air and both candidates are talking strong on defense but given the run up it has had it seems like a good candidate to have an adverse reaction to a Kerry victory.

Momentum is fading in Oil stocks.

For the near term the uptrend looks done but support coming in at 75.

Is this tape is wishy or washy?

Lets see...
-early weaknes in semi's got bought
-early strength in metals got sold
-weakness in bonds got taken up by Olson's negative comments
-LXK mentioned earlier is digging out of this morning's hole

On the whole the action could have gotten much worse considering how the day started so I would call today a minor victory (so far) for the bulls. Mostly we appear to be waiting on tonight's earnings which makes initiating positions seem a bit pointless.

no positions in any security mentioned

mike

Trifecta!!

Notice today's trifecta; USD down, bonds down, and U.S. equity indices too. Not a big deal yet but it has not been happening too often. In particular the USD has been rallying on most days when bond yields rise.

Catching the knife

My Dad sent me an email on Friday mentioning buying MRK in here because they have a strong drug pipeline. That may be the case but when a stock takes an instantaneous drop, like MRK did a week and a half ago, it leaves a big supply overhang. Lots of trapped longs that want to sell on a bounce back near flat. Even if this is the bottom, it is better to wait about 3 months (1 mo minimum) to let the stock put in a base and weed out the more nervous holders. My thinking is that even assuming we have seen the bottom the stock will struggle. Take away that assumption and the risk reward becomes wholly unattractive.

Some stocks with better patterns are ALTI and RANGY. Both in materials but ALTI probably will be treated like a tech stock from time to time. Both are penny stocks and subject to big percentage moves but the charts by themselves are nice.

no positions in anything mentioned.

mike

Morning Notes

Lexmark's guidance reduction is probably the story of the day. Probably makes some good sense to short HPQ on the news.

CSFB is downgrading the Steel sector saying that the demand imbalance in the U.S. is being corrected and that China's economy looks to be slowing. There will probably be some good shorts in the sector soon if they can bounce a bit.

The dollar is moving a bit to the downside mostly against the Euro. The story of India's reserves does not seem to be getting much chatter but I think it will probably come to the fore as people look to figure out why the dollar is breaking down now.

For the record, I have no positions in anything mentioned here.

mike

Caterpillar (CAT) is big enough to lead the market.

Since I spoke about CAT I thought I would show it. It is getting a nice lift here but it will probably need some stronger volume to break through 85!!

Dollar Index (DXY) in the Hotseat!!

DXY staying below the downtrend and breaking below nearterm support.

Election Crunch

Today's News
Since the debates ended pundits have been spending a great deal of time analyzing Kerry's "outing" of Cheney's daughter. It is a bit amusing that it is taking air time away from the investigation into the administration's "outing" of a CIA spy. While the spy case will not reach the President or V.P., the leak was in response to Bush being called out for talking about Nigerian "yellow cake" in his State of the Union address. I recognize the need for the media to give equal time and their desire to make the election a horse race but at some point it stops making sense to weigh each candidate phrase by phrase and action by action without taking into account the ramifications of those actions. The two political maneuvers are not even in the same league and yet the air time is all going to Kerry's insensitivity.

On to the Bigger Question.
For the markets it is difficult to see either candidate making much of a difference. The deficit is too large and the global forces of my previous post are too strong for the US to do anything but struggle. Kerry's plan to move "catastrophic" insurance costs to the public sector seems promising because if he does manage to curtail healthcare costs that will improve U.S. competitiveness tremendously. Kerry needs to spend his entire tax hike though (and maybe more) which ensures that the risk of capital flight from U.S. markets remains high. Deficit, deficit, deficit.

The flipside, to me, is Bush's overwhelmingly bad track record. It was going to be a bad 4 years no matter what but he has spent too much on projects (Iraq war) which that have no monetary payoff. The short-sighted nature of his decisions means he could probably still make things worse. While the deficit growth has produced a lot of hand wringing by market watchers it has not had an impact yet and interest rates remain low. A Bush re-election alone would not alter the markets perceptions.

Getting Started

I am starting this blog, to record my thoughts on the global financial markets and to see if the world has any interest in them and to receive feedback on my thoughts from readers.

Today's news
This morning the news is about India's possible change in foreign reserve policy. India has $120 bn in foreign reserves, most of which is invested in US Treasury bills, and is considering investing them in domestic infrastructure projects instead. This makes good sense in theory because definite need in India for infrastructure improvements (roads!) and the dramatically lower return on investing in the US compared to India. Whether this is good or bad for India will be determined by the specifics of the spending but it is significant to the markets because of the similarities between India, China, and Japan. Since the start of 2002 China and Japan have purchased a combined $240 bn of USD assets while Chinese and Japanese foreign currency reserves total $450 bn and $650 bn respectively.

Will it matter?
If China were to change its reserve policy financial markets would certainly react but right now all we have is India considering changes. My opinion is that it will probably make the dollar trade down against the Yen and the Euro. Not an earth shattering call in here but it is really more an issue of timing than direction. The dollar was already down a bit yesterday and Monday should continue the move. This should also benefit gold and other precious metals but personally I would wait a few days to see if last week's weakness reappears. I also plan to watch Caterpillar (CAT:NYSE) closely in here as it has a bullish chart, a CEO who has "never seen such a strong economy", and the possibility of a ramp up in Asian infrastructure building. China probably has more need of roads than India if they were to follow suit.

Not the end of the world.
Contrary to popular opinion I am not so sure that the repatriation of Chinese or Japanese funds will cause any sort of financial collapse. A strong argument could be made that this repatriation is what the Federal Reserve and US gov't were hoping for by letting the dollar depreciate. Such a policy change would mean that the US consumer is no longer the growth engine of the world and that the US could then be pulled out of its jobless recovery by exporting goods to Asia. Probably some short-term adjusting to be done but I don't think it leads to an inflationary spiral for the US or the world.

Bullish or bearish?
As the above comments reveal, I am leaning a bit bullish on US equities in here. A change in Indian reserve policy would be the second major "bearish" occurrence in two weeks (the first is the FNM restructuring). I believe this Indian policy change (if it actually occurs) will pass relatively quietly and if China should follow suit in 6 months that will be accepted too. The passing of these events without massive US inflation or deflation can only be interpreted as bullish. 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.

Thanks!
Thanks to Google for hosting this and to anyone who takes the time to read my first post.

BTW, I have no positions in any assets mentioned in this post.

mike