Rejected!

Suppliers of shares were ready and waiting for the rally.

Ticker Sense asks: Vix Spike Callig A Bottom?

The folks at Ticker Sense part of the Birinyi organization posted this chart and asked is the

VIX Spike Calling a Bottom?

For my part I say no. This spike is not as definitively high as the others in the chart. Plus days like today when the market gets "good" news rallies sharply and then runs into selling and fails are not a good sign. Frankly, I don't expect the same kind of panic low market reversing bottom we have seen in the last decade. I hope we do see that but I believe we will see a more grinding bear market that is really demoralizing. So let's look on the bright side and remember Warren Buffett says any long term value investor in stocks should prefer falling markets because that is when you can buy things at low prices and buying low is where the money is made.

Fed Gives Wall Street What It Wants

Fed cuts by 50 basis points Bloomberg has these two articles:

Fed Lowers Rate to 3% as U.S. Expansion Falters

U.S. Stocks Gain After Fed Cuts Benchmark Rate By Half Point

All this as of 2:20 central time, let's see if it holds. Market will also be tested by employment numbers on friday.

Update: As of 2:59 the market is now down and gave up all the gains on the fed cut news.

All Eyes On The Fed

Everyone in the markets is waiting for the Fed tomorrow. The BCA says this:

Last week was clearly one to remember in terms of the efforts made by U.S. policymakers to support the economy and unfreeze the credit markets. Still, investors will be looking for follow-through this week.

Earlier this week BCA was quite critical of the ECB.

ECB Drops The Ball

Right now the bets are for a 50 basis point cut with a good chance of 75.

Citicorp Continues To Have Its Finger On The Pulse Of The Market

Citicorp who gave us 4, no 7, no 12, no 20 billion in losses in subprime mortgage trading continues to demonstrate a keen appraisal of market conditions. Ticker Sense pointed out the Citicorp analyst rating of Ambac:

The chart below (above here ) highlights Citigroup's recommendations for ABK since they began coverage of the stock in August of 2006. The blue line represents the price target, and the red dots highlight each reiteration of the rating and changes in the price target. As shown, the analyst maintained a "Buy" rating on the stock throughout the 90% decline. Throughout the decline the price target was reduced from $103 to $18 (-82.5%), and yet the "Buy" rating was maintained. The stock was downgraded to "Hold" on 1/18, at the low close.

Jeez. Ticker Sense goes on to say:

Our intent here is not to harp on Citigroup, or implicate them as bad analysts, this is only one example of a host of bad calls made by many firms. The point we make is that even professionals get it wrong.

Ticker Sense is not bashing Citicorp in particular, though I am. Ticker Sense is cautioning about Wall Street analysts in general. i would only change one thing in their post. I would amend that last sentence to read "The point we make is professionals get it wrong."

Bespoke: Sector PE Ratios

Bespoke has a very interesting though short post today showing charts of sector PE ratios in the S&P stocks. I have linked to a couple of the charts but you should click through to the Bespoke site to see them all. The two I have linked illustrate two ways pe ratios can make big changes. One is by having a huge earnings change, in this case lower, which drives the ratio higher even though the stocks are falling in price. The other way is to have relatively stable earnings but a big move in price of the stock. In the case of health care stock prices lower and pe ratio thus moves lower. If you go to their site you will notice the pe ratio of the full S&P has actually increased recently largely because the financial sector is such a large part of the index.

Buffett Buying Again

Warren Buffett is buying again, just when others are selling. Bloomberg has this article. My favorite bit of the article:

Imitating the 77-year-old Buffett, who built Omaha, Nebraska-based Berkshire over four decades into a $210 billion company, has been a profitable strategy in the past. Buying what he bought, even months after his purchases, delivered twice the return of the Standard & Poor's 500 Index during the last three decades, according to a study last year by the American University, Washington and University of Nevada, Las Vegas.

Twice the S&P for three decades - I cannot even think of a comparable sports record. That is really an astonishing record.

Hussman: A Mixed Bag of Market Conditions

John Hussman is very good this week and remember he wrote this early monday before the tuesday and wednesday action.

A Mixed Bag of Market Conditions

t's instructive that the total return of the S&P 500 over the past 4 years has now averaged just 5.7% annually, despite the fact that the recent decline is still well short of a minimal bear market. The return on the S&P is close enough to the return on risk-free Treasury bills that our hedging over this entire period has cost us close to nothing. Equally instructive is that the S&P 500 has now lagged Treasury bills since April 1998. Valuations do indeed drive long-term market returns.

The recent bull market began at the highest valuations of any prior bull market in history. It has predictably achieved below-average overall returns, and the cycle isn't even over yet. Though every market cycle is different, an “average” bull market represents a span of about 3.75 years, with total returns averaging about 27% annually, followed by a bear market of about 1.25 years, with total returns averaging about -27% annually. That means that, on average, a typical bear market loss of just over 30% has shaved a typical bull market gain of 145% down to a cumulative return of about 65% (for a full cycle of about 5 years and overall annual total returns of about 10.6%).

i Think The Decoupling Argument May Have Been Overstated

Asian markets being routed last night rebound strongly tonight after Fed rate cut.
Bloomberg has it here:

Jan. 23 (Bloomberg) -- Asian stocks rebounded after the U.S. Federal Reserve's surprise interest-rate cut boosted banks and higher metals prices lifted miners.

Commonwealth Bank of Australia jumped the most in a decade and BHP Billiton Ltd., the world's largest mining company, soared the most in 20 years. Toyota Motor Corp. and LG.Philips LCD Co. led gains among companies that rely on U.S. sales. Asia's benchmark yesterday completed its worst two-day drop in almost 18 years on concern the global economy is slowing.

And the winner of the pissing up stream award is--

Serbian Central Bank May Sell Euros to Support Dinar

Stock Market Rout In Asia Continues Early Tuesday

As noted earlier the stock markets got pounded Monday in Asia and Europe and on the US futures exchanges while the US was celebrating the Martin Luther King holiday. So far in Japan this morning the selling continues. here is Bloomberg:

Jan. 22 (Bloomberg) -- Japan's stocks plunged, with the Nikkei 225 Stock Average set for its worst two-day drop in more than a decade. The yen strengthened while commodities prices and European shares plunged, adding to concern world economic growth is faltering.

The Emini S&P futures are trading 1267 right now (monday night 7:36 cst) after closing friday at 1325. That is down 4.3%.

Weak Markets And Rising Negativity On World Exchanges

Big drops on world markets Monday, Bloomberg reports:

Stocks Plummet in Germany, Hong Kong, India, Brazil in Rout

By Sarah Thompson

Europe's Dow Jones Stoxx 600 Index fell the most since the Sept. 11 terrorist attacks and sank into a bear market, as Allianz SE and BNP Paribas SA slid. Hong Kong's Hang Seng Index had its biggest drop in six years after BNP Paribas said Bank of China Ltd. may write down overseas securities by $4.8 billion because of losses from U.S. subprime mortgages. Citigroup Inc. retreated in Frankfurt.

The MSCI World Index slipped 2.4 percent to 1,402.75 at 2:44 p.m. in London, extending its decline from an Oct. 31 record to 17 percent. India's Sensitive Index lost the most since 2004, while Germany's DAX slid the most since March 2003. Futures on the Standard & Poor's 500 Index sank 3.4 percent.

Best comment in the article:

``The market is finally catching on to the fact that a recession will lead to a sharp contraction in earnings,'' said Jane Coffey, head of equities at Royal London Asset Management, where she helps oversee about $11 billion. ``We need to see more aggressive changes to forecasts before investors become more positive about looking through the downturn.''

This is the kind of rising crescendo of media fire alarms a trader wants to see as a signal of a trading low. (or a high in the case of the Euro currency)

Time For A Market Rebound?

Two of the smarter people I know made similar remarks today that the market was ready for a rally now. One is a private trader and a truly outstanding technician, he said: The S&P held important levels and was trading on volatility extremes in every time period so he suggested buying a trading psition. (note: he is not talking about optionvolatility but emotional volatilityfor which he has measures)
The second remark was in the GAVEKAL forum where Anatole Kaletsky respnded to a commenter who said "we have to be at a cry uncle point", by saying:

I agree.

1. Today's big shock was the Philly Fed survey. But contrary to bubble-vision comment, this "shocking" number was perfectly consistent with Mid-Cycle Slowdown and well above recession levels (see chart 1).

2. Sentiment on Wall Street is now second-lowest on record - and far below 1987 or 2000/01 (see chart 2). So US investors are more shell-shocked by sub-prime than by the 1987 crash or the TMT bubble!

3. John Thain calls Merrill Lynch write-downs "extremely consiervative"

and suggests they leave room for possible write-backs and rapid profit growth from now on

4. FDIC head tells Bear Sterans conference that "if market solutions fail to solve the sub-prime problem" the Federal government will "step in".

5. Bernanke endorses $150bn fiscal stimulus and House Dem leaders promise agreement with Repubicans on a specific package by State of the Union on Jan 28.

Can a bottom be far off

I agree as a trader, and I bought very small at the close Thursday and will add some Tuesday, but only for a small position and for a trading swing. I am not calling for a new bull market. Be careful out there.

BCA: Take P)rofits On Long Duration

This the third post in 2 days linkiing to someone suggesting the move up in bonds is overdone. I have been bullish bonds and getting nervous about the low yields of 5 year and 10 year treasuries but consensus top picking makes me uncomfortable.

BCA: Valuation and other yardsticks argue that investors should trim bond duration to benchmark.

Five year rates getting mighty low.

CrossWall Street posted this chart and made this comment:

The five-year T-note (^FVX) is under 3% today. Six months ago, it was going for 5%. Notice how you never hear the media talk about "irrational exuberance" or "runaway bubbles" in the bond market.

These rate levels make me nervous about bond prices too. Perhaps it is just anchoring to what have been much higher yields for most of my life.
The bond market may be in a bubble, but it may be sending a message that the recession is going to be very hard and very steep.

Kass: Sell Bonds Short

Doug Kass at the Street.Com today says to:

The bond market is in a bubble that is reminiscent of (and quite possibly as extreme as) other bubbles during previous eras.

From my perch, the only issue is the timing of this trade.

Surprisingly, today's 3.68% yield on the 10-year U.S. note is lower than the yield during the recession of 2001. This low yield appears to be artificially affected by a number of temporary and backward-looking factors.

Mr.Kass goes on to list his arguments but I let you click the link to get those. I would only add two brief comments. 1. This recession may be a lot worse than the one in 2001 as it has a much broader set of causes. 2. If you want to short bonds do it by buying puts that limit your risk. Interest rate markets are trending strongly higher and there is no reason to jump in front of a freight train. however, I agree that when the uptrend is over there will be a long ride down in the bonds.

Commodity Indices All Rising Steadily

INDEX NAME	VALUE	CHANGE	OPEN	HIGH	LOW	TIME
UBS BLOOMBERG CMCI	1316.58	-15.45	1316.52	1317.72	1316.38	07:24
S&P GSCI	597.01	-7.94	599.88	599.88	597.00	07:14
RJ/CRB Commodity	365.57	-4.65	370.22	370.30	364.52	01/15
Rogers Intl	4432.53	-54.20	4461.13	4461.13	4430.97	07:25
Brookshire Intl	492.42	-7.11	497.59	497.60	490.30	01/15

Bloomberg: provided chart above.
With apologies to Dennis Gartman: all commodity indices are moving from lower left to upper right- there are only three positions to hold, long, slightly long, or flat.

Elfenbein: On Bond Risk Premiums

Eddie Elfenbein at Crossing Wall Street has charts of AAA and BBB bonds illustrating the bond risk premium.

As you can see, the risk premium seems to bounce between two points. It's either less than 10%, or more than 20%. That's a very rough generalization but there's not much in between.

When the premium rises above 20%, that means that investors are demanding more money to take on greater risk. The high premium signals fear with investors are generally coincides, and often causes, a recession.

As you can see in his chart risk premiums are still high. The TED spread (short term treasury compared to short term commercial bank paper) is another way to look at sentiment and fear. i posted this chart recently showing some improvement in the TED spread.

Bespoke: Recession Odds At 70%

Bespoke points out intrade has recession odds for 2008 at 70%.

Really Encouraging News on Biofuels.

Thanks to the Instapundit for linking to this article from Popular Mechanics:

DETROIT — General Motors announced a partnership today with bio-fuel developer Coskata that it hopes will result in the production of cost-effective E85 by 2011.

GM chief Rick Wagoner announced the partnership, saying that GM had taken an undisclosed equity stake in Coskata: “We are very excited about what this breakthrough will mean to the viability of biofuels and, more importantly, to our ability to reduce dependence on petroleum.”

Coskata’s process addresses many of the issues associated with grain-based ethanol production, including environmental, transportation and land use concerns (i.e., it takes a lot of energy input to get only a little output).

Using patented microorganisms and transformative bioreactor designs, Coskata ethanol is produced via a unique three-step conversion process that turns virtually any carbon-based feedstock—including biomass, municipal solid waste, and a variety of agricultural waste—into ethanol, making production a possibility in almost any geography. The technology is ethanol-specific and enzyme independent, requiring no additional chemicals or pre-treatments.

Simply put, the Coskata process can produce ethanol almost anywhere in the world, using practically any renewable source, including feedstock, garbage, old tires and plant waste. And it can do so for less than a dollar per gallon.

This is a big deal. Reducing our dependence on foreign oil and reducing the financial bonanza the foreign oil producers are reaping from that oil would go a long way to solving our balance of payments problems and reducing the funding of Islamic terrorism by by Middle Eastern governments. Ethanol produced from corn is an economically marginal idea. But using bio waste is to produce the ethanol would have very favorable economics. i will be keeping my fingers crossed this works out.

Dow Versus Gold Ratio

Strong trend in this chart which came from the Fullermoney site.

Some Positive Signs In The Credit Arena

The TED spread is falling back and today hit its lowest level since the middle of August, a strong sign that some of the freeze up in the short term credit markets is relaxing. Bespoke has the chart above posted today.

Bespoke: On Average Declines From 52 Week Highs

Bespoke has this chart showing the average decline from 52 week highs by stocks in different market cap groups. They also show average declines by stock sector in another chart. Here is one part of the commentary:

While the S&P 500 is less than 12% off of its intraday high from October, individual stocks are faring far worse. As the chart to the right indicates, the average stock in the S&P 1500 is now over 30% off of its 52-week high. Grouping stocks by their market cap shows that while large caps have been holding up better than average, small caps have been decimated.

BCA: on The Oil "Tax"

From the Bank Credit Analyst:

The surge in oil prices toward the US$100 threshold adds to growth risks for many of the world’s economies.

and

While strong oil demand--especially in China and the Middle East--is contributing to the surge in crude prices, the rising world oil bill is bearish for global growth. This “tax” on growth adds to pressure for major central banks to ease monetary policy.

this from The people Who Rated The CDO's AA

The Instapundit links to a Financial Times article I heard about earlier today titled:

Moody’s says spending threatens US rating

The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said on Thursday.

Now there is nothing wrong with the article when I heard about it this morning I was in the trading pits and I had 2 immediate reactions: 1. Why should we believe anything Moody's has to say after their disgraceful contribution to the subprime crisis where they continued to give high ratings to complete junk securities in order to continue receiving their fees from the underwiriters? I suppose the government isn't paying them any fees.
2. I then wondered why we only here about the problems the US is going to have meeting social security and medicare benefits in the future but we never here the same about Europe. European social programs are much more extensive in general and their demographics are much worse. All the piling on of negative news for the dollar reminds me of the 80's when Japan was going to buy up the US and our future was gradual decline. I am thining it is time for a pretty good bounce in the dollar soon., maybe when the new gold highs start appearing on the front page of local papers.

Mish: Money Supply Trends Are Deflationary

Mike Shedlock at Global Economic Trends titles a really good post:

Money Supply Trends Are Deflationary

Click through to the link because it has great charts and important content I cannot improve on. The charts were done by Now and Futures.

BCA: Economic Risks Favor More BoE Easing

The Bank Credit Analyst today says Economic Risks Favor More BoE Easing;

The growth outlook for the U.K. economy is rapidly deteriorating and will ensure further Bank of England (BoE) rate cuts in the coming months.

The Bank of England announces a rate decision tomorrow morning U.S. time. They are not expected to move but one never knows. Rumors of a an early Fed rate change as described in the previous post make it possible we will see some coordinated move by BOE, ECB(who also announce tomorrow) and the Fed.

Unsubstantiated Rumors of a Fed Ease

There have been rumors overnight of a coordinated Fed /BoE easing and now Doug Kass at The Street.com echos those rumors. As a result there has been a large rally in the Front Eurodollar, Short Sterling and Euribor contracts vs. the rest of the curve.

Will have to wait and see if there is any truth or if someone just needs to dump a position...

Help on the Way? From the STREET.COM Doug Kass
1/9/2008 9:29 AM EST

I have friends who are very close to members of the Fed, and they say that the Fed will ease momentarily.

I have friends.

I have friends in Washington D.C.

I have friends who are very close to the Administration.

I have friends who are very close to members of the Fed.

This morning, several of those friends gave me an indication of heightened concerns regarding the domestic economy -- far more than what has been expressed by the President, the Secretary of the Treasury, and the Federal Reserve in various platforms over the last week.

And they say that the Fed will ease momentarily.

_____________________

Expected Inflation

The market's expected inflation as derived from the 10 year TIPS (treasury inflation protected securities). Note the 4 consecutive quarters of rising expectations.
Chart is from the Cleveland Fed via The Economist's View. There is an interesting discussion in the comments to their post.

FT: Gold is the new global currency

The Financial Times editorial today claims :

Gold is the new global currency

The world’s major economies have experienced rapid money supply growth of 10 per cent plus per annum in recent years. The Fed remains the world’s biggest holder of gold, yet supplies of the metal are no longer growing annually. If gold is a finite currency, its value against not just the dollar, but sterling and the euro too, should rise.

I made a note of the gold price rise in several currencies in this post last week. I traded in gold during the big rise in the 70's and the climax in the early 1980's. The single most reliable sign of a short term top in gold was an article on the front page of the local newspaper ( The Dallas Morning News ) declaring gold makes new all time high. We are not there yet but, if you see mainstream non-financial news coverage of a new high in gold prepare for a sharp setback. The chart above is from Google Trends and does not indicate an explosion of interest in gold by the general searching public yet. I believe this trend has a good ways to go and would look for a lot of press attention when the market cracks $900, and enormous attention when it cracks $1000. Those will be times to expect a big correction. When the gold price crosses above the SP500 price will be another big news day.

Bespoke: Dow 15000?

A very interesting chart from Bespoke Investment, click through to read the very short post and explanation.

Jeff Saut: don't get too bearish.

Jeff Saut of Raymond James in his weekly piece:

the recent economic data clearly shows the economy is slowing and that the mortgage/housing situation is worsening. In our opinion, this leaves the Federal Reserve with little choice other than to reduce short-term interest rates until the yield curve steepens. A steepening yield curve should help financial institutions recapitalize and ameliorate some of the financial contagion. Recently, the markets seem to be telegraphing this outcome with the price of crude oil, gold, commodities, etc. all trading higher. The last time the Fed reliquidfied the system like this, equities were over valued, while bonds, commodities, and real estate were under valued. Today the opposite is true. Indeed, using the Fed Model, which compares equities “earnings yield” (earnings ÷ price) to the yield of the 10-year T’note, shows equities’ “earnings yield” is more than 4% greater than the benchmark T’note’s yield (according to a study of 29 various countries compiled by Lehman Brothers). The last time such a wide dispersion occurred was back in September 1974 right before the equity markets rallied strongly. While other valuation metrics (price-to-book, price-to-dividends, price-to-sales, etc.) are nowhere near as “cheap” as they were in 1974, it is worth noting the Fed Model’s current valuation in light of the probability of lower short-term interest rates. We mention the Fed Model this morning for while we are cautious, we think it’s a mistake to become too bearish.

There are some individual stocks mentioned in the article, but you have to follow the link for that.

Tim Price: In Flagrante Delicto

Tim Price of The Price Of Everything has written a good summary of current market conditions that reflects pretty closely what I think is a sound portfolio approach for the year that is shaping up. Here is the start:

In flagrante delicto

“A financier is a pawnbroker with imagination.” – Arthur Wing Pinero.

Warren Buffett once admitted that if a graduating MBA were to ask him how to get rich in a hurry,

“I would not respond with quotations from Ben Franklin or Horatio Alger but would, instead, hold my nose with one hand and point with the other toward Wall Street.”

That career advice comes from a more innocent, pre-subprime age. ‘Wall Street’ is, of course, no longer geographically distinct, but a global phenomenon, just as the infection triggered by the explosion of a giant credit (and housing) pustule has spread seemingly indiscriminately and certainly internationally, attacking mortgage lenders, investment banks, portfolio managers and money market funds alike. Norwegian townships, Australian hedge funds, Floridian public fund pools – all tainted by products originated by Wall Street.

Price's suggestions are similar to those of Donald Coxe in his December Basic Points

BCA: Recession Bound?

The Bank Credit Analyst Notes:

the Fed historically always eases significantly when the ISM manufacturing index is below 50%. Bottom line: The economic risks continue to mount on the downside, and further rate cuts are in store.

BusinessWeek: The Stealth Oil Giant

An excellent article in Business Week on Schlumberger (SLB), highly recommended.

While the majors typically want to own rights to oil reserves in the fields they operate—and take a share of the profits—Schlumberger has long been happy to work on a contract basis, getting paid a fixed fee for its services. "Schlumberger is the indispensable company," says J. Robinson West, chairman of PFC Energy, a Washington consulting firm. "They are involved in every major project in every important producing country."

The oil servicing stocks have been strong for a couple of years but so has thir business. i cannot see any big slowdown in the search for oil. Even a big correction in oil prices should still find countries and companies searching for new reserves. Weakness and volatility in stock prices in the face of a US recession may provide a chance to purchase some SLB at a favorable level which is what I am considering.

I am not an analyst and I am not recommending a stock purchase only the article about the stock.

Forget oil, the new global crisis is food

Ticker Sense Looks At Last Year

Chart from Ticker Sense

Gold Starts 2008 Strong

Gold which closed 2007 with its highest monthly closing price ever keeps going strong today. This is not just an anti dollar move as the charts from Fullermoney show. Fullermoney points out a good article by Prieur Du Plessis on the gold move and the potential for a lot more to come:

It is, of course, true that in inflation-adjusted terms the gold price is still a long way off its euphoric days of 1980. If adjusted for movements in the US consumer price index, the $850 record would today be around $2 250 and the average for January 1980 around $1 790.

The significance of gold moving in terms of all currencies is that this move is not just an anti dollar move. Gold is responding to a credit crisis and questions about whether the central banks have an answer to the crisis. also to fear that the only answer the banks hace is to inject very large sums of money into the world economy leading to inflation later. Donald Coxe wrote recently that he is watching the TED spread, gold, and the dollar index for signs the crisis is abating. No positive signals showing up yet.

Happy New Year

Happy New Year and let's all have a great 2008.