This Week in Barrons – 4-25-10:
Our Thoughts – What is really going on inside those Black Trading Boxes?
A lot has changed in the last 12 years – making this a market controlled not by mass collective wisdom, but by computers, mathematical equations, dark pools, and black ‘trading’ boxes.
In the fourth quarter: total US corporate profits rose 30.6% year-over-year, a huge swing from the -25.1% trend a year ago. But almost the entire story was in the financial sector, where profits have soared an unprecedented 240%. Financial sector profits have accounted for 85% of the overall increase in corporate earnings. Total non-financial earnings are up a grand total of 5.2% year-over-year. Now is 5.2% overall growth, enough to justify where this market is? NO. And how are the banks doing it: (a) they’re keeping two sets of books – one real and one “mark to model”, and (b) the Fed allows them to borrow from the Fed at 0.50% and then loan back to the Government at 4% - and you’ve heard me go on about the rest of this list countless times.
But let’s look at yesterday’s action in the market for an example. The market opened weak – and we had a fairly sharp pull down loosing 105 DOW points quickly. As we got closer and closer to DOW 11K, you could feel the ‘defense’ – and then suddenly program trades / ‘black boxes’ kicked in and we were off to the races. Now, considering that black box trading now accounts for over 70% of all trades made, this is significant. What is Black Box Trading? It is very large computer algorithms - designed to buy up baskets of stocks when any of 10 to 500 parameters are met. The parameters vary from price levels, to interest rates, to volume levels, etc. When the computers sense these parameters, they automatically go out and buy up what ever has been programmed into them – normally very large baskets of stocks. Because many of these algorithms are based upon ‘other activity’ – you can potentially see where a couple dominos falling – could influence the entire group fairly easily. This is why a relatively small amount of cash tossed into the futures, can move stocks so extremely. The black boxes see the futures buying, figure out that they are going to go up, and correspondingly go out and buy their own baskets of stocks, pushing the market even higher. It's literally the tail wagging the dog. Before the widespread use of these incredibly powerful black boxes you could NOT have intra-day pops of 100 points on NO news – but today it controls 70% of the trading volume and therefore is the force behind our every day movement. This is why it doesn’t really matter what the underlying economy is doing – but rather where the major players wish to push the market.
For me, I’ll need to see a couple closes over DOW 11,200 to get me to toss in the towel and say "okay, we’re going to go even higher", or I’ll have to see two closes under DOW 11K, to tell me "okay, reality may have set in".
Factually: Employers took 1,628 mass layoff actions in March that resulted in the separation of 150,864 workers as measured by new filings for unemployment insurance benefits during the month. Each mass layoff action involved at least 50 people from a single employer. The interesting part here is that this number is an INCREASE of 58 (mass layoff actions) over the previous month. So ‘factually’ things are NOT improving in the job market.
Factually: What about GM paying back the TARP? Senator Charles Grassley of Iowa joins a chorus questioning GM's loan repayment, saying it's an "elaborate TARP money shuffle" rather than the sign of health in the company. In a letter to Treasury Secretary - Tim Geithner, Senator Grassley said that the source of the funds for the $4.7 billion repayment is not GM earnings, but rather a Treasury escrow account – and they literally borrowed from “Peter to pay Paul”. Sen. Grassley wrote that GM's early repayment of the federal loan is aimed at diverting attention from another uncomfortable issue – the big break the car company would get on a proposed tax to recoup TARP losses. GM is expected to generate some of the biggest losses in the TARP program, but it won't have to pay any money under the so-called TARP tax the Obama administration wants to impose on large financial institutions. Treasury and GM officials don't dispute these facts. But where was CNBC in telling us the entire story?
Factually: Food Stamp use has risen 22.4% in ONE year.
Factually: Just Friday night, 7 more banks were closed (bringing the total to 57 for the year). These seven banks will cost the FDIC $973.9M.
Factually: Call me old fashioned but I still can’t figure out how borrowing more money gets you out of debt?
Now onto the market:
Always remember: “the market can remain irrational longer than you can remain solvent!” Either I'm about to be made to look silly, or we are in that last hurrah.
On Friday, the market stumbled after the open and went red. Then the black boxes fired off and in a matter of minutes we went from 11,105 to 11,184 – and closed at 11,204 – breaking over their 200 day moving average. One of two things will happen here – either we just continue higher and higher in the face of all the ills and remain "irrational" or we roll over. I am still in the camp that says we're topping. We have seen the market advance for 8 weeks, seeing stocks fully priced and over-valued, and the market (by just about any metric) is overbought.
I’m hearing more and more traders talk about one last hurrah – a ‘blow off top’ kind of day. If that’s the case – we should see them rush in on Monday, and take us up – and that may flow into Tuesday and Wednesday. And then potentially we see the unexpected pull down – a reversal and drop of 100+ points – and that could be the first stair step lower.
Don’t get me wrong – I’ve lived this movie before in 1999 - where the market simply "melted up" on nothing but hot air. It could do it here, especially with the amount of fraud, manipulation and Fed money they are playing with. Everyone knows the scam, everyone knows it's not sustainable. The question is only "when does the music stop?" Then again I could be all wet and next week we could be talking about what stocks to buy when the DOW is at 12,500 and rising.
Tips:
Let’s assess where we are:
- I am long ODP at $8.40 – and will sell it on Monday as they release earnings on Tuesday
- I’m also long NTRI at $18.47.
- I’m short the DIA’s at $110.94 and I'm going to sit with these underwater for a bit here. Yes that's suicide in a manipulated market, but I'm willing to take that gamble and risk a few bucks
- I’m into the VXX at $19.81 – which is a much longer term play.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com
Sunday, April 25, 2010
Sunday, April 18, 2010
This week in Barrons - April 18, 2010
This Week in Barrons – 4-18-10:
Our Thoughts
There just might be a way out…the Invisible Bail-Out!
"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest we become bankrupt. People must again learn to work, instead of living on public assistance." … Cicero, 55 BC
If small business isn't hiring, and houses are still foreclosing at record numbers, isn't this a time when people are being forced to "hunker down" and “tighten up”? For the large part, yes, but there's an interesting behavior happening. So many people have decided not to pay their mortgages and just wait until they get thrown out of their homes, that they are now flush with cash! Amazing stuff. People are spending more, because they've become squatters in their own homes.
Follow me here – because I don’t think that this has ever been tried before – and this may be the ‘Invisible Bail-Out’! Approximately 7.9 million homes are violently delinquent. With the first “help programs” – it turned out that over 50% of the re-worked mortgages failed anyway. So banks are beginning to get more aggressive with their “forgiveness” of principle programs – and this could be the making of the biggest bailout in history! A gentleman in Florida – recently bought a new vehicle because he stopped paying his mortgage over 12 months ago. The bank doesn't call him – no one has shown up to toss him out – he’s a squatter in a very nice home – WITH an extra $1,500 a month in his bank account. The FED has been secretly buying all those toxic loans from the banks – whether they are home mortgages, credit card debt, etc. It’s being called the: "Don't Pay, Don't Chase-Em" Plan. People are being encouraged to strategically default on their debt – that way they can still have shelter – but also have $10k to $20k more a year to spend on ‘stuff’. Of course it raises the question, "If people aren't paying, who is?" Well the answer of course is the FED at first, and then You and I in collective taxes and more inflation as they print more money to buy up the discarded debt.
I honestly don't know that this approach has ever been tried in the past, I cannot find evidence of it - urging people to strategically "walk away" and "start over", and the government will mop up the losses. It’s pretty common knowledge that at some point the U.S. was going to have to default on it's debt – it’s just getting mathematically impossible to pay it back. But what happens if we don't default on Government debt, and we just let everyone in the country default, then mop it all up, and then via use of a VAT tax, etc, on all the new consumer spending...try and spend down that debt? I don't know that this approach has ever been tried?
This is exactly why the Fed keeps telling us how they are going to keep monetary policy very cheap for an "extended period". This is why they left the door wide open to come back in and buy up more toxic assets. They’ve purchased a large portion of the already foreclosed mortgages, and as more and more people walk away, they'll re-institute the plan and start buying more toxic assets. I think the reason so many people are not being kicked out of their homes is because the banks get paid by the FED, and the FED knows if they force them out – and they have to go and buy another house, they won't have money to spend on goods and services – so temporarily they’re just being left alone.
Considering that just this week we found out foreclosures are up huge, breaking all the records again – 3 banks – Bank of America, J.P. Morgan and Wells Fargo could face up to $30B more in losses on home-equity loans - can you imagine the amount of money ALL of banking is losing over this? Now – expect better retail numbers because of this. But just "know" that this too is unsustainable – and unless the U.S. decides to give everyone a free home - squatters will have to get kicked out – and home inventories will continue to rise and come to market.
Now if you’re thinking of home bargains: Steve Forbes recommends these top cities – that could file for bankruptcy in the coming months:
- #10 Providence, RI (Year over Year - building permits down 83%, unemployment up 123%, median home prices down 17%)
- #9 Las Vegas, NV
- #8 Sacramento, CA
- #7 Orlando, FL
- #6 Los Angeles, CA
- #5 Phoenix, AZ
- #4 Jacksonville, FL
- #3 Riverside, CA
- #2 Tampa, St. Pete, FL
- #1 Miami, FL
The Markets
Friday – save the day – was the day that the SEC launched a civil suit against Goldman Sachs, saying they used fraud during the subprime mortgage disaster. In an instant Goldman fell $24 to $155 – but then the world rushed in – lead by Jim Cramer – to defend and lift Goldman back up. In my opinion was Goldman doing anything fraudulent - of course they were, along with the ratings agencies, and the people that were shorting more silver than what exists, and the SEC itself who passed on prosecuting Bernie Madoff – 4 times. Could this have anything to do with the fact that the CFTC is on the hot seat because of the Silver and Gold manipulations that have been exposed? Could it have to do with the current financial legislation on the hill? All Yes → but does it support the ‘topping theory?’ I'm pretty convinced that this week will see the top of the market, and we roll over. I think Monday we could see a circling of the wagons as they do their best to try and shrug off this GS mess, but by mid week we'll have gotten Apple's earnings and that could spell the "last hurrah". We said weeks ago that 11,150 would be the top – and when the GS news hit and we ended Friday at 11,018 - our estimate may (in fact) hold.
Tips:
The Goldman fraud news somewhat validates all the conspiracy theories that are out there – and immediately caused me to purchase the VXX at 19.81 and shorted the DIA’s at 110.94. This was a very low rish trade – considering the amount of air play this will get over the weekend.
Now we can’t over-react here – as they will spin this as positive as possible. They will make this look like it was just one or two people and NOT all of GS... so be careful here.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com
Our Thoughts
There just might be a way out…the Invisible Bail-Out!
"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest we become bankrupt. People must again learn to work, instead of living on public assistance." … Cicero, 55 BC
If small business isn't hiring, and houses are still foreclosing at record numbers, isn't this a time when people are being forced to "hunker down" and “tighten up”? For the large part, yes, but there's an interesting behavior happening. So many people have decided not to pay their mortgages and just wait until they get thrown out of their homes, that they are now flush with cash! Amazing stuff. People are spending more, because they've become squatters in their own homes.
Follow me here – because I don’t think that this has ever been tried before – and this may be the ‘Invisible Bail-Out’! Approximately 7.9 million homes are violently delinquent. With the first “help programs” – it turned out that over 50% of the re-worked mortgages failed anyway. So banks are beginning to get more aggressive with their “forgiveness” of principle programs – and this could be the making of the biggest bailout in history! A gentleman in Florida – recently bought a new vehicle because he stopped paying his mortgage over 12 months ago. The bank doesn't call him – no one has shown up to toss him out – he’s a squatter in a very nice home – WITH an extra $1,500 a month in his bank account. The FED has been secretly buying all those toxic loans from the banks – whether they are home mortgages, credit card debt, etc. It’s being called the: "Don't Pay, Don't Chase-Em" Plan. People are being encouraged to strategically default on their debt – that way they can still have shelter – but also have $10k to $20k more a year to spend on ‘stuff’. Of course it raises the question, "If people aren't paying, who is?" Well the answer of course is the FED at first, and then You and I in collective taxes and more inflation as they print more money to buy up the discarded debt.
I honestly don't know that this approach has ever been tried in the past, I cannot find evidence of it - urging people to strategically "walk away" and "start over", and the government will mop up the losses. It’s pretty common knowledge that at some point the U.S. was going to have to default on it's debt – it’s just getting mathematically impossible to pay it back. But what happens if we don't default on Government debt, and we just let everyone in the country default, then mop it all up, and then via use of a VAT tax, etc, on all the new consumer spending...try and spend down that debt? I don't know that this approach has ever been tried?
This is exactly why the Fed keeps telling us how they are going to keep monetary policy very cheap for an "extended period". This is why they left the door wide open to come back in and buy up more toxic assets. They’ve purchased a large portion of the already foreclosed mortgages, and as more and more people walk away, they'll re-institute the plan and start buying more toxic assets. I think the reason so many people are not being kicked out of their homes is because the banks get paid by the FED, and the FED knows if they force them out – and they have to go and buy another house, they won't have money to spend on goods and services – so temporarily they’re just being left alone.
Considering that just this week we found out foreclosures are up huge, breaking all the records again – 3 banks – Bank of America, J.P. Morgan and Wells Fargo could face up to $30B more in losses on home-equity loans - can you imagine the amount of money ALL of banking is losing over this? Now – expect better retail numbers because of this. But just "know" that this too is unsustainable – and unless the U.S. decides to give everyone a free home - squatters will have to get kicked out – and home inventories will continue to rise and come to market.
Now if you’re thinking of home bargains: Steve Forbes recommends these top cities – that could file for bankruptcy in the coming months:
- #10 Providence, RI (Year over Year - building permits down 83%, unemployment up 123%, median home prices down 17%)
- #9 Las Vegas, NV
- #8 Sacramento, CA
- #7 Orlando, FL
- #6 Los Angeles, CA
- #5 Phoenix, AZ
- #4 Jacksonville, FL
- #3 Riverside, CA
- #2 Tampa, St. Pete, FL
- #1 Miami, FL
The Markets
Friday – save the day – was the day that the SEC launched a civil suit against Goldman Sachs, saying they used fraud during the subprime mortgage disaster. In an instant Goldman fell $24 to $155 – but then the world rushed in – lead by Jim Cramer – to defend and lift Goldman back up. In my opinion was Goldman doing anything fraudulent - of course they were, along with the ratings agencies, and the people that were shorting more silver than what exists, and the SEC itself who passed on prosecuting Bernie Madoff – 4 times. Could this have anything to do with the fact that the CFTC is on the hot seat because of the Silver and Gold manipulations that have been exposed? Could it have to do with the current financial legislation on the hill? All Yes → but does it support the ‘topping theory?’ I'm pretty convinced that this week will see the top of the market, and we roll over. I think Monday we could see a circling of the wagons as they do their best to try and shrug off this GS mess, but by mid week we'll have gotten Apple's earnings and that could spell the "last hurrah". We said weeks ago that 11,150 would be the top – and when the GS news hit and we ended Friday at 11,018 - our estimate may (in fact) hold.
Tips:
The Goldman fraud news somewhat validates all the conspiracy theories that are out there – and immediately caused me to purchase the VXX at 19.81 and shorted the DIA’s at 110.94. This was a very low rish trade – considering the amount of air play this will get over the weekend.
Now we can’t over-react here – as they will spin this as positive as possible. They will make this look like it was just one or two people and NOT all of GS... so be careful here.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com
Sunday, April 11, 2010
This week in Barrons - 4-11-10
This Week in Barrons – 4-11-10:
Our Thoughts:
I just Don't Trust This Market
Everyday I get asked the same question - "Why are you so glum, the numbers point to recovery". Everyone cites several recessions where in it took a long time before people bought into the idea of a recovery. What’s different this time – JOBS. On Friday the CEO Report told us that 22% of all polled companies plan to lay off more people. The general public may not know how this economy works but they see: foreclosures, inflation, gas approaching $3 bucks, taxes rising, houses on the market for 24 months, a lot of bad things. And what is different this time around – it’s the Internet!
In 1982 (a previous recession):
- The US was still the worlds largest exporter, and the largest creditor.
- People were looking forward to lower taxes.
- Our nation was fiscally sound.
Comparing that to what’s happening presently:
- Greece is doomed - and up to 18 countries could follow in lock step.
- The U.S. is running TRILLION dollar deficits with more to come.
- Wages have been stagnant for 10 years
- All the good paying, blue-collar jobs have gone off-shore.
- Household debt is enormous.
- 49% of all Americans pay NO taxes, leaving the ‘other’ half to pay the bills.
- Baby Boomers are retiring at the rate of 7,000 per day, yet 51% of them have "no visible means to retire". 70% of them have less than $50,000 in savings.
- We are scheduled to see 300+ regional banks go belly up.
- And we're waging wars in 2 locations, eating hundreds of billions per year.
- AND - we’re no longer dependant upon big newspapers for our news!
If that wasn’t enough:
- The U.S. office vacancy rate rose to 17.2 percent
- 149,268 consumer bankruptcies were filed in March – a 34% increase over February - the highest monthly consumer filing total since Congress overhauled the Bankruptcy Code
- California's three largest public-employee pension funds currently face a total shortfall of more than $500B
- The pension plans at General Motors and Chrysler are underfunded by $17 billion and could fail if the automakers do not return to profitability
- The Wall Street Journal reported major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky
- AND over 212,000 could lose unemployment benefits this week.
The difference this time around – is that we all have access to multiple channels of information – and we can separate reality from fantasy. For example: the American Farm Bureau Federation said that Supermarket prices for 16 basic foods were up 6.2% in the first quarter, led by gains in cheese, vegetable oil and eggs. But the Government said that food prices went up just 0.2% in January and 0.1% in February. Now - Who do you believe?
Yes, right now there is a disconnect between what the economy is really doing, and what the stock market is doing. This disconnect is one of the largest we've seen in many years. Despite the trillions in stimulus, despite the rah-rah of the market, we are economically cooked, and until this recess/depression runs it's course, nothing's going to stop it. The Government can slow it – but they can’t stop it.
The Market:
The Market has wanted DOW 11K for months – but it’s tough when the bulk of the American population doesn't have the means to invest, and most of the foreigners are trying to get money OUT of the US(S) Titanic not put money in. So, for the past 3 weeks we’ve been running in place. Consider this: 8 million people are out of work and 3 times that are "under-employed" – with the remainder being very scared of touching the stove – AGAIN. So, Friday (after an incredibly boring session) they circled the wagons and late in the afternoon, pushed and pushed and broke through DOW 11K - to end the day at 10,997.
Okay - now what? This week is the official start to "earnings season" and yes we're going to hear some tremendous earnings. Uncle Sam has spent trillions to keep things moving and companies have cut employees and expenses to the bone. But my guess however is that we are still in a topping phase. It takes a long time to roll over after a year of the biggest financial stimulus and Wall Street push in our history, but roll over we will.
Was Friday the top? I don't think so. I think we still have a climactic "blow off top" coming. I could easily see us gain 150 - 200 points, and then start a long process of stair stepping downward - lose 300, bounce for 200, lose 400, bounce for 300 and so on. After all, history shows us that "stocks" often rise up into their earnings, but interestingly the "market" doesn't have to follow along.
So we will lean long into the stocks that are going to release earnings - usually taking a position 3 to 5 days before the report will reward you - but we never hold over through a report, we always sell out the day ahead.
Tips:
I would be a lot more optimistic if:
- Uncle Sam wasn't spending the upwards of $24 trillion in stimulus,
- Banks were marking assets to market, instead of to "model" which the FASB has allowed them to do,
- Taxes were about to go down instead of up,
- There were NOT 7 million homes in a "shadow inventory",
- Good paying jobs were abundant, and
- Companies reported GAAP earnings instead of proforma.
Therefore, I’ve traded very little this past week and have only two positions open:
- MS purchased at 30.27 – with a stop in at 30.30
- LTD purchased at 26.02 – with a stop in at 25.99
I’ll be trading stocks (approximately) 5 days prior to their earnings reports – and then selling the day before their earnings release – as these next several weeks unfold.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com
Our Thoughts:
I just Don't Trust This Market
Everyday I get asked the same question - "Why are you so glum, the numbers point to recovery". Everyone cites several recessions where in it took a long time before people bought into the idea of a recovery. What’s different this time – JOBS. On Friday the CEO Report told us that 22% of all polled companies plan to lay off more people. The general public may not know how this economy works but they see: foreclosures, inflation, gas approaching $3 bucks, taxes rising, houses on the market for 24 months, a lot of bad things. And what is different this time around – it’s the Internet!
In 1982 (a previous recession):
- The US was still the worlds largest exporter, and the largest creditor.
- People were looking forward to lower taxes.
- Our nation was fiscally sound.
Comparing that to what’s happening presently:
- Greece is doomed - and up to 18 countries could follow in lock step.
- The U.S. is running TRILLION dollar deficits with more to come.
- Wages have been stagnant for 10 years
- All the good paying, blue-collar jobs have gone off-shore.
- Household debt is enormous.
- 49% of all Americans pay NO taxes, leaving the ‘other’ half to pay the bills.
- Baby Boomers are retiring at the rate of 7,000 per day, yet 51% of them have "no visible means to retire". 70% of them have less than $50,000 in savings.
- We are scheduled to see 300+ regional banks go belly up.
- And we're waging wars in 2 locations, eating hundreds of billions per year.
- AND - we’re no longer dependant upon big newspapers for our news!
If that wasn’t enough:
- The U.S. office vacancy rate rose to 17.2 percent
- 149,268 consumer bankruptcies were filed in March – a 34% increase over February - the highest monthly consumer filing total since Congress overhauled the Bankruptcy Code
- California's three largest public-employee pension funds currently face a total shortfall of more than $500B
- The pension plans at General Motors and Chrysler are underfunded by $17 billion and could fail if the automakers do not return to profitability
- The Wall Street Journal reported major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky
- AND over 212,000 could lose unemployment benefits this week.
The difference this time around – is that we all have access to multiple channels of information – and we can separate reality from fantasy. For example: the American Farm Bureau Federation said that Supermarket prices for 16 basic foods were up 6.2% in the first quarter, led by gains in cheese, vegetable oil and eggs. But the Government said that food prices went up just 0.2% in January and 0.1% in February. Now - Who do you believe?
Yes, right now there is a disconnect between what the economy is really doing, and what the stock market is doing. This disconnect is one of the largest we've seen in many years. Despite the trillions in stimulus, despite the rah-rah of the market, we are economically cooked, and until this recess/depression runs it's course, nothing's going to stop it. The Government can slow it – but they can’t stop it.
The Market:
The Market has wanted DOW 11K for months – but it’s tough when the bulk of the American population doesn't have the means to invest, and most of the foreigners are trying to get money OUT of the US(S) Titanic not put money in. So, for the past 3 weeks we’ve been running in place. Consider this: 8 million people are out of work and 3 times that are "under-employed" – with the remainder being very scared of touching the stove – AGAIN. So, Friday (after an incredibly boring session) they circled the wagons and late in the afternoon, pushed and pushed and broke through DOW 11K - to end the day at 10,997.
Okay - now what? This week is the official start to "earnings season" and yes we're going to hear some tremendous earnings. Uncle Sam has spent trillions to keep things moving and companies have cut employees and expenses to the bone. But my guess however is that we are still in a topping phase. It takes a long time to roll over after a year of the biggest financial stimulus and Wall Street push in our history, but roll over we will.
Was Friday the top? I don't think so. I think we still have a climactic "blow off top" coming. I could easily see us gain 150 - 200 points, and then start a long process of stair stepping downward - lose 300, bounce for 200, lose 400, bounce for 300 and so on. After all, history shows us that "stocks" often rise up into their earnings, but interestingly the "market" doesn't have to follow along.
So we will lean long into the stocks that are going to release earnings - usually taking a position 3 to 5 days before the report will reward you - but we never hold over through a report, we always sell out the day ahead.
Tips:
I would be a lot more optimistic if:
- Uncle Sam wasn't spending the upwards of $24 trillion in stimulus,
- Banks were marking assets to market, instead of to "model" which the FASB has allowed them to do,
- Taxes were about to go down instead of up,
- There were NOT 7 million homes in a "shadow inventory",
- Good paying jobs were abundant, and
- Companies reported GAAP earnings instead of proforma.
Therefore, I’ve traded very little this past week and have only two positions open:
- MS purchased at 30.27 – with a stop in at 30.30
- LTD purchased at 26.02 – with a stop in at 25.99
I’ll be trading stocks (approximately) 5 days prior to their earnings reports – and then selling the day before their earnings release – as these next several weeks unfold.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com
Saturday, April 3, 2010
This week in Barrons - 4-4-10
This Week in Barrons – 4-4-10:
Our Thoughts:
Forming a Market Top - Understanding the “Put” Option
I have the prestigious honor (of being selected) to give a TED talk at CMU on Easter Sunday. The theme is ‘FearLess’ and my topic is: “Fearless Investing.” The event is being streamed – and for those of you wishing to watch (and I would be indeed honored) – you can turn to: www.TEDxCMU.com/watch … around 1:30 EDT on Sunday – April 4th.
If you believe (as I do) that we’re in the final stages of forming a ‘market top’ – then let’s explore ways to take advantage of a market decline – one of those ways is buying the “PUT” option. An ‘Option’ is the ‘Right’ to do something. Think of it this way: suppose you are driving home and you see a car for sale parked in a yard. It's a real beauty and you know from experience that it should sell for about $25,000. You walk over and the sign reads "One owner, 1,000 miles, perfect condition - $10,000." Thinking this must be a mistake you run up to the house to inquire. The owner says the deal is for real – he just wants it gone. So you say to the owner: "I would love this car, but I'm not sure my wife would approve of me spending $10K without her, so I would like to give you $100 dollars to hold this deal until tomorrow. If my wife says ‘yes’, then I will take the car for the $10K, but if she says no, you can keep my $100 dollars for all the trouble."
That is an option! You have the right, but not the obligation to purchase something within a specific period of time. But why use an option instead of just buying the stock itself – you ask? The answer is that a small amount of money can control a much higher priced issue. In our example, $100 controls a $25,000 car. In stocks - $2 to $10 options will control $10 to $100 stocks – but more importantly ... if you trade that option you can make some incredible profits.
Back to our example – if we purchase the car for $10,000 and let’s assume we can sell the car for $20,000 – that gives us 100% profit on the transaction. But on the other hand, suppose you sold your option? Let's say you went to a car dealer known for selling that brand of car and said ... "I have the option of buying this car which you sell on the lot for $25,000, for $10,000. I don’t want all the hassles associated with buying and re-selling a car - will you give me $1,000 for my option to buy that car?” If he agrees to buy your option – you purchased the option for $100, and sold the option for $1,000 – that’s a 1,000% return on your money – and you never had to take possession of the asset. So for the most part we don't buy options to actually "execute" them (or go through with the underlying purchase) - we buy them to trade them as their value increases.
The above is called a “CALL” option – the ability to purchase something at a pre-determined price. On the other side of the coin is the "PUT" option – the ability to SELL something at a pre-determined price. We buy a PUT if we think the asset is going to fall. So let's say you think the XYZ company is going to sink because their sales are slipping. XYZ is currently trading at $50 dollars per share. You could buy the August $50 dollar PUT option (for $5) and if you are correct and XYZ falls to $44 dollars per share, your PUT option will probably have almost doubled. You would then sell the PUT option and pocket the profit. (Naturally if the stock rises instead of falls, the option you paid $5 for is going to be worth less in a hurry). So with a PUT option – you have the ‘right’ to sell a stock at a pre-determined price – which means the PUT option increases in value if the stock actually falls.
So – if you thought that this market was just way out of whack and should lose a lot of it’s value - you could buy the January 2011 DIA PUTS. That would give you 8 full months for your option to work. In fact, during 90% of the calendar year 2008, we were holding long term PUTS against the market. Some of those PUTS gained almost 500% as the DOW fell from 14K to under 9K. Next week we’ll talk about inverse ETFs.
The Market:
This market action is very indicative of two things. One, by every measurable metric the market is well overdone to the upside. So, there's two ways to work off an overbought situation. The market can fall (a sin according to Bernanke) or tread water "sideways" – which is basically what it’s doing. Secondly, after months of moving higher, the market often gets into a pattern of "sucking in late comers". Many people have watched the market move higher without them, so they finally decide to get in. They send in market orders before they go to work, the market makers open the market higher and fill those orders, then later in the day they let it fall, effectively taking the late comers money. This is also happening.
Now this week we had Friday’s Jobs Report – and in it we found out: Economy adds 162,000 nonfarm payroll jobs - biggest U.S. employment rise since March 2007. Now before we get too excited about the report, thanks to Steve Forbes for writing:
- ADP, a payroll services firm, said the private sector shed 23,000 jobs in March.
- The number of long-term unemployed workers (those out of work for 6 months or longer) - increased by 414,000 during March to 6.5 million.
- 44.1% of unemployed workers have been jobless for 6 months or more.
- A Gallup Daily survey found that the underemployment rate - edged up to 20.3% in March, from 19.8% in February.
- Construction spending in February tumbled 1.3% to a seasonally adjusted rate of $846.2 billion, down from $857.8 billion in January.
- AVERAGE HOURLY WAGES fell – which is further indication that good jobs are leaving but we’re still hiring: “Do you want fries with that?”
We think we are in a market topping action – and give us this week to potentially see the turn.
Tips:
Jacob Hawkinson wrote this week concerning Copper: “With copper at a 2 year high – currently good traders are playing copper from the short side, however the length of their holding periods and success of their trades are inversely correlated’ – excellent comment – don’t marry it – date it!
James Taylor writes about AGI – Alamos Gold – Encouraging Reserve Increase Highlights Exploration Potential. He rates it a ‘Strong Buy’ with a price target of $19 vs the closing price of $13.57 – You know me and GOLD - I’m looking at it for sure.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com
Our Thoughts:
Forming a Market Top - Understanding the “Put” Option
I have the prestigious honor (of being selected) to give a TED talk at CMU on Easter Sunday. The theme is ‘FearLess’ and my topic is: “Fearless Investing.” The event is being streamed – and for those of you wishing to watch (and I would be indeed honored) – you can turn to: www.TEDxCMU.com/watch
If you believe (as I do) that we’re in the final stages of forming a ‘market top’ – then let’s explore ways to take advantage of a market decline – one of those ways is buying the “PUT” option. An ‘Option’ is the ‘Right’ to do something. Think of it this way: suppose you are driving home and you see a car for sale parked in a yard. It's a real beauty and you know from experience that it should sell for about $25,000. You walk over and the sign reads "One owner, 1,000 miles, perfect condition - $10,000." Thinking this must be a mistake you run up to the house to inquire. The owner says the deal is for real – he just wants it gone. So you say to the owner: "I would love this car, but I'm not sure my wife would approve of me spending $10K without her, so I would like to give you $100 dollars to hold this deal until tomorrow. If my wife says ‘yes’, then I will take the car for the $10K, but if she says no, you can keep my $100 dollars for all the trouble."
That is an option! You have the right, but not the obligation to purchase something within a specific period of time. But why use an option instead of just buying the stock itself – you ask? The answer is that a small amount of money can control a much higher priced issue. In our example, $100 controls a $25,000 car. In stocks - $2 to $10 options will control $10 to $100 stocks – but more importantly ... if you trade that option you can make some incredible profits.
Back to our example – if we purchase the car for $10,000 and let’s assume we can sell the car for $20,000 – that gives us 100% profit on the transaction. But on the other hand, suppose you sold your option? Let's say you went to a car dealer known for selling that brand of car and said ... "I have the option of buying this car which you sell on the lot for $25,000, for $10,000. I don’t want all the hassles associated with buying and re-selling a car - will you give me $1,000 for my option to buy that car?” If he agrees to buy your option – you purchased the option for $100, and sold the option for $1,000 – that’s a 1,000% return on your money – and you never had to take possession of the asset. So for the most part we don't buy options to actually "execute" them (or go through with the underlying purchase) - we buy them to trade them as their value increases.
The above is called a “CALL” option – the ability to purchase something at a pre-determined price. On the other side of the coin is the "PUT" option – the ability to SELL something at a pre-determined price. We buy a PUT if we think the asset is going to fall. So let's say you think the XYZ company is going to sink because their sales are slipping. XYZ is currently trading at $50 dollars per share. You could buy the August $50 dollar PUT option (for $5) and if you are correct and XYZ falls to $44 dollars per share, your PUT option will probably have almost doubled. You would then sell the PUT option and pocket the profit. (Naturally if the stock rises instead of falls, the option you paid $5 for is going to be worth less in a hurry). So with a PUT option – you have the ‘right’ to sell a stock at a pre-determined price – which means the PUT option increases in value if the stock actually falls.
So – if you thought that this market was just way out of whack and should lose a lot of it’s value - you could buy the January 2011 DIA PUTS. That would give you 8 full months for your option to work. In fact, during 90% of the calendar year 2008, we were holding long term PUTS against the market. Some of those PUTS gained almost 500% as the DOW fell from 14K to under 9K. Next week we’ll talk about inverse ETFs.
The Market:
This market action is very indicative of two things. One, by every measurable metric the market is well overdone to the upside. So, there's two ways to work off an overbought situation. The market can fall (a sin according to Bernanke) or tread water "sideways" – which is basically what it’s doing. Secondly, after months of moving higher, the market often gets into a pattern of "sucking in late comers". Many people have watched the market move higher without them, so they finally decide to get in. They send in market orders before they go to work, the market makers open the market higher and fill those orders, then later in the day they let it fall, effectively taking the late comers money. This is also happening.
Now this week we had Friday’s Jobs Report – and in it we found out: Economy adds 162,000 nonfarm payroll jobs - biggest U.S. employment rise since March 2007. Now before we get too excited about the report, thanks to Steve Forbes for writing:
- ADP, a payroll services firm, said the private sector shed 23,000 jobs in March.
- The number of long-term unemployed workers (those out of work for 6 months or longer) - increased by 414,000 during March to 6.5 million.
- 44.1% of unemployed workers have been jobless for 6 months or more.
- A Gallup Daily survey found that the underemployment rate - edged up to 20.3% in March, from 19.8% in February.
- Construction spending in February tumbled 1.3% to a seasonally adjusted rate of $846.2 billion, down from $857.8 billion in January.
- AVERAGE HOURLY WAGES fell – which is further indication that good jobs are leaving but we’re still hiring: “Do you want fries with that?”
We think we are in a market topping action – and give us this week to potentially see the turn.
Tips:
Jacob Hawkinson wrote this week concerning Copper: “With copper at a 2 year high – currently good traders are playing copper from the short side, however the length of their holding periods and success of their trades are inversely correlated’ – excellent comment – don’t marry it – date it!
James Taylor writes about AGI – Alamos Gold – Encouraging Reserve Increase Highlights Exploration Potential. He rates it a ‘Strong Buy’ with a price target of $19 vs the closing price of $13.57 – You know me and GOLD - I’m looking at it for sure.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com
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