The Four-Headed Beast

Some Quick Thoughts (and Links).

2009-10-07T11:12:00.000-04:00

Gold: Looks good, but likely to experience a pull-back. A pull-back which could be substantial. See this article for further analysis.

Rebalancing: It's a good time to do it. If you are a buy-and-hold style investor, and have not done any rebalancing, it's about time. See this article for further analysis.

The stock market plunders onward, although the short term (very short term) shows some weakness, despite the big rally two days ago. But don't despair, the rally is likely to continue. Beware the fallout when the underlying weakness of the economy, globally, comes to the fore again. The market has likely gotten well ahead of itself.

A Beastly Premonition

2009-09-24T09:02:00.001-04:00

The premonition is not mine, nor is it unique. As a matter of fact it is an annual ritual. That is of course the anticipation of the "October Bust". There is a veritable poupouri of reasons, logical and illogical, to expect a market pull-back. Most lean on history for the explanation of the possible depletion of what may ultimately be wasted anxiety medication. But might it be the nearly 7-month rally, the rally with nary a pause? Sure, why not. October is as good a month as any to finally have a significant pull-back. Could it be the potential winding down of the stimulus, meaning the sugar-based carbohydrates fed to stimulate our economic energy (gasoline on the fire) rather than strengthening protein (a fresh supply of long-burning wood). Might it be the Fed's recent proclamation that it will continue to hold interest rates at extremely low levels, hinting at their less than factual confidence in the "recovery". Is it the underpinnings of that "recovery". Maybe the real fear is that investors, read that to mean regular people, are smarter than some in Washington and on Wall Street want to admit. Can an economy that is 70% consumption, whose consumers have decided to borrow less at a recording setting pace, who are unemployed, whose home's have either been taken away, or their value, that is the "owners" wealth, is still 20% or more below levels of merely three years ago. Could these minions of corporate and government manipulation be led to the slaughter just one more time, time enough to let the economy look "recovered" till the next presidential election? I wrote recently in my client newsletter that if this is a recovery, then what was that period of time between 9/11 and the market peak in 10/2007? Is a recovery a fleeting thing, to be followed up by a worse recession, to be followed up by a weaker recovery? If so, then the long term trend is obvious. But if that is not to be, we must ask from where will the impetus come for a better recovery this time around. It can't come from the penniless pockets old Uncle Sam. Sammy is broke. And getting broker by the day. So don't fret the green-eyed beast of October. Fear the Reaper, for he lies in wait.

And away we go?

2009-09-08T14:35:00.000-04:00

Gold knuckle-busted it's way through the $1000.00 mark today for the first time since February, but also to the highest level since March, 2008. As I've written about in my newsletter, there are several common belief's regarding gold's persistent ebb and flow to and from $1,000.00 per ounce. There's inflation, currency devaluation, fear, stupidity and just plain silliness. But one rarely reads about foresight and pragmatism. On any given day, one, some or all of these are causes for gold's herky-jerky demeanor. But foresight and pragmatism, that's a novelty. How about maybe it's just time for people, real people, to begin to maybe understand the risk inherent in putting your faith and financial future in a piece of paper that the issuer of such paper can, and has, opted to devalue for the better part of three-quarters of a century, rendering its buying power to 1/10 of its past level (circa the 1930's) and impoverishing millions of Americans due to profligate and irresponsible monetary and fiscal policy. It is quite UN-surprising that the media at large ( the emissary for government propaganda) would lambaste and demean the decision of millions of Americans who are buyers of gold now but never had before. Be careful to be gold-less. A 10% allocation to gold and other precious metals (check out silver) is not terribly risky. If wrong, a 20% decline would mean a 2% decline to your overall portfolio value. But, if the gold uber-bulls are right, then a doubling or trebling of gold would have a significant impact and just might make the difference in your monetary future

Is buy and hold dead?

2009-05-18T13:28:00.001-04:00

Bye-Bye To Buy And Hold

INVESTOR SPRING CLEANING, MARKET OUTLOOK, VOLATILITY, STOCK MARKET, INVESTING, TRADING STRATEGIES, BUY AND HOLD

Posted By: Jeff Cox | CNBC.com

CNBC.com

| 18 May 2009 | 12:15 PM ET

The time-tested buy-and-hold investment mantra has become so unpopular that even those who advocate the strategy don’t refer to it by that name anymore.

Now terms like “buy and harvest” and “buy and trade” have replaced the old “buy and forget” philosophy once so popular among active stock market investors.

The change reflects a spreading attitude that in an age of 24/7 financial news and information, which can mean tremendous volatility, it no longer makes sense to buy a stock and then check back on its performance five, seven or ten years later.

“The buy-and-hold and passive investing approach works really well in certain environments and not so well in other environments. The ‘80s and the ‘90s were a good time for buy-and-hold,” says Matt Havens, partner with Global Vision Advisors in Hingham, Mass. “There’s benefit now to being more active in your management style.”

Investors who held tight during the contagion of the credit crisis saw their portfolios decimated by the market’s multiple gyrations that generated losses of more than 50 percent for the major indexes. Even the most bullish of investors acknowledge it will take years before the market returns to its record levels of October 2007.

At the same time, those who were nimble enough to get in and out of positions at least gave themselves a chance to mitigate losses.

Emily Sanders, president of Sanders Financial Management in Atlanta, uses General Electric(CNBC.com's parent company) as an example of how its “buy- and-trade” strategy has worked.

At its worst, GE shares had lost 82 percent of their value, before investors became convinced the company could regain its footing and overcome losses sustained primarily at its GE Capital financing arm. Since the March low the stock has more than doubled in price

“When something like GE presents trading opportunities due to severe gyrations, then it really calls into question the whole buy-and-hold-and-forget-about-it strategy,” Sanders says. “You can’t forget about anything. Nothing can be taken for granted, not even in the soundest companies.”

At the same time, though, trying to pin the tail on a stock that is in free fall may not be that feasible for a typical retail investor.

Most portfolio managers shudder at attempts to try to time the market as a whole and even particular stocks, choosing instead to find value levels or technical points – or sometimes a combination of both – to determine when to buy and sell.

Meanwhile, the individual investor has to decide whether to follow the strategy employed during the massive bull markets of the late 20th century and avoid even looking at daily stock quotes, or confront today’s reality of volatility sometimes four and five times higher than historical norms.

“The definition of buy-and-hold tends to be a little fuzzy,” says John Buckingham, chief investment officer at value-based Al Frank Asset Management in Laguna Beach, Calif. “A lot of people think that means you buy something and do nothing for years on end. That’s not a strategy we’ve ever implemented.”

Yet Buckingham would include himself in the buy-and-hold camp – sort of.

Buckingham describes his firm’s strategy as “buy and harvest,” a term that he says entails a long-term investment horizon but with the flexibility to be “following the money.”

“The strategy is sound--buying undervalued stocks and selling overvalued stocks,” he says. “Unfortunately, some people will confuse that with buy-and-forget as opposed to buy-and-continue-to-monitor.”

“In this volatile environment, you can have financial stocks that appreciate 100 percent in a week,” explains Buckingham. “To not try and take advantage of a move like that, you’re not doing your job as an active manager.”

But if “buy and harvest” with an active manager is still beyond one’s appetite for risk, there’s always the passive management strategy advocated by Charles Massimo of CJM Fiscal Management in Melville, N.J.

Even at CJM, though, “buy-and-hold is only part of the equation,” admits Massimo.

Portfolio rebalancing that reflects investor priorities is the key, so the thinking goes. Maintaining a balanced and diverse investment outlook takes precedence over following market gyrations, so that goals are met and risk is minimized.

That means if bonds should do especially well during a particular period, that asset class naturally would take on greater weight in the portfolio. Subsequent rebalancing would shift the portfolio more towards equities, allowing investors to take profits from the growth in bonds while positioning for a gain in stocks – “buy and hold and rebalance” as it were.

“What that accomplishes is the client never takes on more risk than they agreed upon,” Massimo says. “The second thing it forces us to do is to sell high and buy low, because we’re selling that asset class that performed best and rebalancing towards the asset class that performed worst.”

At the core of such a philosophy is a belief that what goes up eventually comes down and vice versa.

“Nobody was rethinking anything when the market was going up, and now that markets are doing what they often do – go down – all of a sudden everything is out the window, and I think that’s ridiculous,” says Matthew Kaufler, equity analyst and portfolio manager at Federated Clover Capital Advisors in Rochester, N.Y. “You don’t shoot your favorite dog just because he’s old.”

To the contrary, says Kaufler, who believes that a market pullback is time to add to positions of good companies that get beaten down – “buy and hold and buy the dips,” perhaps.

For some managers, though, what it all comes down to is finding the best way to make money without letting emotions interfere. So, if that is buy and hold or buy and harvest or buy and ask the computer, then so be it.

“Without a crystal ball, I think investors still need to have a more active approach, but with the caveat that it’s going to be an approach that’s systematic to the extent that your emotions do not factor into the decision of whether you buy and sell,” says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn.

Tuttle relies on computer software to tell him what to do. “We take all of our creativity and all of our discretion and we design computer programs, and the computer programs tell us when to buy and when to sell,” he says. “The queasier I am when the computer tells me to do something, that’s usually when we’re going to make the most money.”

Gold Backed Yuan?

2009-05-18T08:56:00.000-04:00

As readers of my newsletter and this blog know, I've been keeping an eye on the Chinese and others for indications of moves to gold-backing their currencies. Read below an article from the Dow Jones Newswire. China has been increasing their gold holdings for a while and some of our suspicions may prove to be accurate.

China Gold Reserves May Back Yuan Internationalization-Report

Mon, May 18 2009, 02:54 GMT
http://www.djnewswires.com/eu

China Gold Reserves May Back Yuan Internationalization-Report

SHANGHAI (Dow Jones)--China's gold reserves may serve as backing for the yuan as Beijing promotes its use overseas, said Zheng Lianghao, managing director of the World Gold Council's Far East division, the Shanghai Securities News reported Monday.

Zheng, who was speaking at a forum over the weekend, said increasing gold holdings would provide China with a useful hedge as the dollar faced the possibility of depreciation, according to the report.

In late April, the official Xinhua News Agency quoted Hu Xiaolian, the head of China's foreign exchange agency, as saying China's gold reserves had risen 454 metric tons since 2003 to 1,054 tons.

Newspaper Web site: http://www.cnstock.com

-By China Bureau, Dow Jones Newswires; 8621 6120-1200; djnews.shanghai@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=eRqsAYXy6dqsthoJAszoxA%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires

May 17, 2009 22:54 ET (02:54 GMT)

Long/Short Treasury ETF Strategy for Yield and Profit

2009-05-14T18:31:00.000-04:00

Try this on for size. With money market yields at most brokerage firms under 1% per annum, the search for yield and safety is difficult to say the least. Lest you lock up your money at your local savings institution in cd's with barely better yields, finding both takes a little creativity. What I've been doing is pairing up TLT, iShares Barclays 20+ Year Treas Bond ETF, which is currently yielding 4.01%, with TBT, the UltraShort 20+ Year Treasury ProShares ETF, which is currently yielding 1.34%. Depending on your propensity for risk, this pairing can be used in a couple of ways. For higher yield compared to money market and to neutralize market risk you could buy both as a hedge at a ratio of 4:3; for example 1000 shares of TBT and 750 shares of TLT. With this ratio the shares trade, on a profit and loss basis, at a virtual mirror image. You're up on one position as much as you're down on the other. The direction of treasuries is irrelevant. You'd be garnering significantly higher yield with little to no risk. At that ratio the yield is about 2.17% (the average yield on taxable money markets at the broker I use is about 0.75%) with the volatility nearly perfectly neutralized. For my more conservstive clients this is a great money market alternative. The other way to play it is as a source of higher yield while also looking for profit. Depending on your personal bias, you could alter the ratio and overweight one or the other ETF's. If you think yields will fall, overweight TLT. If you think yields will rise, overweight TBT. As long as you own both you are protecting yourself to some degree from being wrong, you could be creating a potential profitmaking opportunity, and at the very least, at the ratio of 4(TBT):3(TLT), providing yourself a liquid alternative to money markets or cash. Disclosure: I am long both TBT and TLT.

Beware the Bear Market Rally

2009-05-12T07:34:00.000-04:00

Beware the Bear Market Rally

Posted By: Ariel Nelson | Director of Market Data & Content Services

CNBC.com

| 11 May 2009 | 10:18 AM ET

With the Dow , S&P 500 and NASDAQ all up over 25% since their March lows, there has been a lot of talk about "green shoots" and the recovery. In fact, the lead story in today's Wall Street Journal is titled "World Regains Taste for Risk." But is this appetite for risk premature? In volatile times, markets swing up and then back down. Here is a look back at some of the biggest bear market rallies in history.

Sure there is money to be made during these rallies, but proceed with caution. If history is any lesson, it takes plenty of time to recover from big drops. Last fall, there were comparisons made to the Great Depression. Back then, the market gave its best trap in history.

Crash of 1929

Market peak -- the Dow hit 381.17 on 9/3/1929

Market crash -- 10/28-29/1929, the Dow fell 23.6% over the two days going from 301 to 230

Presumed low -- 11/13/1929, the Dow closed at 198.69, a fall of 47.9% from the September high

Rally -- the Dow rallies to 294.07 or up 48% by April 17, 1930

BEAR TRAP -- the Dow proceeds to plummet to 41.22 (yes, you read it correctly) by 7/8/1932, down 86% from the rally high of 1930 and down 89% from its 1929 high

Recovery -- it took until November 1954 for the Dow to get back to its 1929 highs

Bear Market of 1946: A series of ups and downs
Market peak -- 5/29/1946, Dow hit 212.5
Market trough -- 10/9/1946, Dow fell to 163.12, a 23% drop
BEAR TRAP -- Dow rallied to 184.06 by 2/11/1947, gaining 13%
Market trough -- 5/19/1947, Dow fell back to 163.55, an 11% drop
BEAR TRAP -- Dow rallied to 185.6 by 7/14/1947, gaining 13%
Market trough -- 6/11/1948, Dow fell back to 165.39, an 11% drop
BEAR TRAP -- Dow rallied to 192.96 by 6/11/1948, gaining 17%
Market trough -- 6/13/1949, Dow fell back to 161.6, a 16% drop
Recovery -- it took until April 1950 for the Dow to get back to its 1946 highs
Bear Market of 1961
Market peak -- 12/13/1961, Dow hit 734.91
Market trough -- 6/26/1962, Dow fell to 535.76, a 27% drop
BEAR TRAP -- Dow rallied to 615.54 by 8/22/1962, gaining 15%
Market trough -- 10/23/1962, Dow fell back to 558.06, a 9% drop
Recovery -- it took until September 1963 for the Dow to get back to its 1961 highs
Bear Market of 1966
Market peak -- 2/9/1966, Dow hit 995.15
Market trough -- 10/7/1966, Dow fell to 744.32, a 25% drop
BEAR TRAP -- Dow rallied to 983.34 by 12/2/1968, gaining 32%
Market trough -- 5/26/1970, Dow fell back to 631.16, a 36% drop
Recovery -- it took until November 1972 for the Dow to get back to its 1966 highs
Bear Market of 1973
Market peak -- 1/11/1973, Dow hit 1051.7
Market trough -- 12/6/1974, Dow fell to 577.6, a 45% drop
Rally -- Dow rallied to 1009.21 by 3/24/1976, gaining 75%
Market trough -- 2/28/1978, Dow fell back to 742.12, a 26% drop
Rally -- Dow rallied to 1024.05 by 4/27/1981, gaining 38%
Market trough -- 8/12/1982, Dow fell back to 776.92, a 24% drop
Recovery -- it took until November 1982 for the Dow to get back to its 1973 highs
Bear Market of 2000: Internet bubble followed by 9/11
Market peak -- 1/14/2000, Dow hit 11722.98
Market trough -- 3/7/2000, Dow fell to 9796.04, a 16% drop
Rally -- Dow rallied to 11310.64 by 9/6/2000, gaining 15%
Market trough -- 3/22/2001, Dow fell back to 9389.48, a 17% drop
Rally -- Dow rallied to 11337.92 by 5/21/2001, gaining 21%
Market trough -- 9/21/2001, Dow fell back to 8235.81, a 27% drop after the 9/11 attacks
Rally -- Dow rallied to 10635.25 by 3/19/2002, gaining 29%
Market trough -- 10/9/2002, Dow fell back to 7286.27, a 31% drop
Recovery -- it took until April 2006 for the Dow to get back to its 2000 highs
Comments? Send them to bythenumbers@cnbc.com
bythenumbers.cnbc.com
© 2009 CNBC.com

'Smart money' starts to bail on stocks' rally

2009-05-04T15:27:00.001-04:00

MARKET SNAPSHOT

'Smart money' starts to bail on stocks' rally

By Nick Godt, MarketWatch

Last update: 1:56 p.m. EDT May 4, 2009

Comments: 468

NEW YORK (MarketWatch) -- After more than eight weeks of a rally, stock market behavior is close to exuberance, say "smart-money" strategists who view factors such as rising participation and positive reactions to most news as tell-tale signs that it's time to take money off of the table.

"Just like when too many participants bet on the same horse the betting odds on that horse go down, the 'betting odds' of making money in the short-run have been greatly reduced after eight weeks into this upside skein," says Raymond James market strategist Jeffrey Saut in his latest research call.

"We have made a lot of money over the last eight weeks and continue to think the trick from here will be to keep that money," he said.

Saut has taken his trading account back in a cash position, and has taken defensive positions in case of a market correction.

On Monday, stocks received yet another upward jolt, after a realtor trade association reported a rise in pending home sales in March, fueling ongoing optimism about a housing and economic recovery.

The Dow Jones Industrial Average ($INDU:

8,382.77,+170.36, +2.1%) was up 188 points, or 2.3%, at 8,401. The S&P 500 index ($SPX:

900.33, +22.81,+2.6%) rose 21 points, or 2.5%, to 899, and the Nasdaq Composite (COMP:

1,749.67, +30.47,+1.8%) gained 32 points, or 1.9%, to 1,750.

After closing at a 12-year low on March 9, the market, as measured by the broad S&P 500 index, has now rallied more than 32%.

But veteran investing advisors, such as Pimco strategist Bill Gross, believe the market's recent hopes over an economic recovery might be overdone.

"Do not be deceived by the euphoric sightings of 'green shoots' and the claims for new bull markets in a multitude of asset classes," Gross wrote in Pimco's May outlook. "Stable and secure income is still the order of the day."

Smart is as smart does

So-called "smart money" investors tend to rely on contrarian indicators: Just as a social trend often starts fading after it makes the covers of many magazines, too much euphoria by too many market players often leaves little room for further upside in stocks.

As the financial crisis and global recession drove stocks to 12-year lows, investor sentiment got so depressed that the slightest bit of better-than-expected news became potential fuel for stocks to rise.

But after a two-month run, investors are now becoming more demanding.

"Simply beating reduced earnings expectations is helping in the short term but in the long term, one must have earnings and revenue growth, not merely better-than-expected contraction," said Dan Greenhaus, market strategist at Miller Tabak.

"In light of the broader issues facing the global economy, muted earnings and revenue growth should be expected and with it, muted stock prices cannot be far behind," he said.

Optimism?

2009-04-29T19:34:00.000-04:00

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit.

Weak sales prospects and difficulties obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 0.25% and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.

In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

Sell in May, go away. Buy the rumor, sell the news.

2009-04-29T12:40:00.000-04:00

As the markets are up 2% or so today, it may make sense to consider the old adages in todays blog title. Sell in May and go away? Maybe. The rally which began in March seems to have been revitalized this week after two volatile but go nowhere weeks. Is a 6.1 GDP reading really an improvement over 6.3 in Q4 of 2008? Doesn't an economy that is dependent on consumers and a recession which reportedly began due to a housing crisis still have problems when unemployment is rising, charting a course for additional foreclosures just as foreclosures ARE rising and home prices ARE falling? As far as I know, unemployed homeless people do not buy stuff. Buy the rumor, sell the news? Frequently. And as May 4 approaches, we may see the financials rally through Friday. How they react Monday will depend on the details of the stress tests, and it is likely that the banks will sell-off. The wild card is that the tests were more stringent than anticipated, then the results could be deemed positive, and the financials could move higher. Neither adage is an absolute, but next week will certainly test both. Be alert.

Asset Allocation?

2009-04-28T12:13:00.000-04:00

Traditional asset allocation - as we know it today - is in large part the by-product of the great bull market from the early eighties to the stock market peak of 2000. The majority of financial advisors and portfolio managers still utilize the same methodology which relies on the belief that things will be as they were. That is, once we get through this rough patch, the markets, and therefore the "average" return of your portfolio, will come back to "normal", the assumed rate at which you based your retirement plan upon. This is unlikely. The unprecendented growth over the two decades from 1980 to 2000, which produced cumulative returns of over 1200% was created by a unique set of anomalous circumstances, ie the baby boomers, the lack of a gold standard backing our currency which translates into easy money policies, and a different attitude toward debt. The amount of domestic consumption needed to go back cannot occur with tighter lending standards, increased savings, and our still fiat currency which the government has no choice but to continue to devalue. Portfolio allocation and income planning strategies need to be modified in order to reasonably expect the future for our retirees to be as they originally planned.

Read between the lines

2009-04-09T08:20:00.000-04:00

From CNBC.com today, emphasis is mine:

"For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions (?), and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

The federal “stress tests” that the examiners are administering are the subject of fierce debate within the banking industry.

Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.

But the tests, which are expected to be completed by the end of this month, are being conducted out of public view. Federal law prohibits the unauthorized disclosure of the results of any bank examination, including the stress tests. Some investors wonder if the new tests are rigorous enough, given the potential problems lurking inside the banking industry.

Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

In some cases, however, the investments of existing shareholders could be severely diluted by large sales of new stock.

Some of the banks could also face more stringent restrictions on employee compensation or be ordered to change their boards or management. In extreme instances, the government could wind up taking larger, perhaps even controlling, stakes. (What's that called?)

In the last six weeks, financial shares have soared on hopes that the worst for the industry is over.

But some analysts say investors’ hopes are misplaced. With the recession, banks are likely to record further large losses on credit cards, corporate loans and real estate.

“Nothing has changed with the fundamentals,” said Meredith A. Whitney, a prominent banking analyst who has been bearish on most financial institutions.

The stress tests are playing a pivotal role in the Obama administration’s sweeping plan to shore up the financial industry. Forcing many banks to raise capital might undermine the still-fragile confidence in the industry. But if only a few banks raise more money, the test might lose credibility with investors.

“Clearly there is a desire to put a seal of good bookkeeping on these banks,” said Lou Crandall, the chief economist at Wrightson ICAP. “Whether they will use this to select a couple of sacrificial lambs is unclear. It’s a big uncertainty hanging over the system right now.”

The tests, led by the Federal Reserve, rely on a series of computer-generated “what-if” projections in the event the economy deteriorates. Those include unemployment rising to 10.3 percent by next year, home prices falling an additional 22 percent this year, and the economy contracting by 3.3 percent this year and staying flat in 2010.

Top regulators say the effort could signal a new approach to supervising the risks that banks take. While federal regulators routinely monitor the financial condition of banks, one goal of the tests is to devise a common set of standards for judging losses across all 19 institutions. Examiners are also considering instruments that are not carried on banks’ balance sheets. They long escaped tough scrutiny.

As part of the tests, the banks analyzed each category of loans they held and compared their results with the “high” and “low” range of government loss estimates. If a bank expected fewer losses than the government, the regulators asked the institution to explain why.

The banks were also asked to project their earnings over the next two years to give the regulators a better sense of how much capital they would have to absorb the coming losses.

Several people involved in the process say there is a wide range of results among the institutions. Those that fall short will have six months to raise capital from private investors; if they are unable to do so, the Treasury Department has said taxpayer money will be available.

Some federal and industry officials say regulators may use the results to prod reluctant banks to sell assets under that program.

Michael Poulos, a director at Oliver Wyman, the consulting firm, said many big investors were burned after investing in financial companies last year and are averse to doing so again. The stress test findings, he said, could “make private capital more eager to come in because they will get a view of the bottom.”

At a recent breakfast with a dozen or so corporate and banking executives in New York, Treasury Secretary Timothy F. Geithner warned he would take a tough stance. Many banks, he suggested, believe the investments and loans on their books are worth far more than they really are, according to a person who attended the meeting.

Mr. Geithner said that was unacceptable. The banks, he said, will have to sell these assets at prices investors are willing to pay, and so must be prepared to take further write-downs."

Existing Home Sales Fell 5.3% in January to the Lowest Level in 12 Years

2009-02-25T10:03:00.000-05:00

Weaker than expected existing home sales numbers bring us back 12 years, coincidently to the same year that the major indexes last traded at their current levels. Housing numbers will not improve until prices fall to levels supported by income and rental ratios. If we only go back to the year 2000, the year when the housing bubble started to rapidly inflate, the ratio of house prices to rents was approximately 100, it now stands at approximately 122. From this perspective, either rents go up by 22% or home prices come down 18%. The ratio of median home prices to median family incomes stands today at approximately 3.2 and was approximately 2.8 in 2000. So either incomes rise by 14% or prices fall by 12.5%. With rising unemployment, incomes are unlikely to rise any time soon. And, with rising foreclosures and a glut of rental homes available, many of these homes are owned by people who anticipated flipping them but couldn't and are trying to rent them before foreclosure consumes them, homes sales are not likely to improve and rents won't rise with so much competition. Assuming the two ratios meet in the middle, housing prices could reasonably fall another 15.25%. But that's only to 2000 levels. 1997 is a better harbinger because that was when home prices first began to rise following the S&L crisis. That would make my back-of-a-napkin calculation of 15.25% optimistic.

As a follow up to my post "Ridiculous" yesterday, I repeat, RIDICULOUS! It is 10:20 as I write and the S&P is down 2.10%. Ridiculous. Or maybe just scary.

Ridiculous

2009-02-24T15:38:00.000-05:00

I haven't commented in a week as I've been busy protecting my clients assets. The selloff last Tuesday put us in dangerous territory as I noted in my most recent post. Here it is a week later and we have a rally 4% rally following the 3.5% selloff yesterday. This amount of volatility is ridiculous. As I write this the S&P is up 4% at 773 a few minutes before the close. This puts us a little lower than the close last Thursday. Almost as if nothing happened in between. This is where we are all greatly challenged. I listed to all of Bernanke's testimony today and didn't hear anything new. He seemed confident, but then his testimony was littered with enough "if's" and "when's" to cast doubt on anyone within earshot. It seems his pronouncement that the banks will not be nationalized is the catalyst for the rally, even though 40% government ownership of Citigroup seems quite like nationalization to me. I think the lesson learned from the last week is that the "market" is hypersensitive to anything that resembles news. On the technical side the higher close today will only be relevant if we can string a few together and break through resistance at 800.00. Then of course we'll need to stay above that area for a while before we can call this a double bottom. Play it cautious and beware the volatility.

Today's Close

2009-02-17T16:02:00.000-05:00

I should probably let this settle a little before I comment, but here it goes. The S&P 500 closed today at 789.17, the LOW of the session. This is the first close below 800.00 since 11/20/2008, which was the day that marked the purported crescendo of the panic selling which began in September. That day can be considered an anomoly, alebit a very important one. The S&P, from 11/19 - 11/24 (the 22nd and 23rd was the weekend), had a gain of 5.6%. Nevertheless, 11/20 must be considered. More importantly however, is the fact that the S&P 500 has not closed any lower than this, except for 11/20/2008, since 04/28/1997. So, as I've been writing about in my blog and more extensively in my newsletter, this is a vastly important event. From a technical perspective, if we do not hold this level (we've closed below 800.00, which is a bad sign, but we could vacillate around 800.00 for a while), the next stop on the S&P 500 is between 650.00 and 750.00. There looks to be weak support at 750 and strong support at 650.

Is this really a bottom?

2009-02-12T09:52:00.000-05:00

As my clients and readers of my newsletter are aware, I've been suspicious of the supposed bottom that was set last fall. The past few days action has my suspicion growing exponentially. I've noted previously the precarious support threshhold on the S&P 500 between 800 and 825. As I write this we're at 815, having bounced off the days low (it's 10:12 EST) of 811.35. In light of Treasury Secretary Geithner's annoucement Tuesday and the reported agreement in the Senate on the stimulus plan, it is quite disturbing to see the market react this way. The six month chart of the S&P 500 shows a pennant or flag formation, what I generally refer to as price consolidation. Interpretations vary, especially if one has particularly bullish versus bearish orientation. Either way, the conclusion of the formation is usually a breakout, either up or down. Given fundamental conditions right now, if I were a betting man, I'd say down. My advice, keep yourself protected and aware.

Buy and Hold (and Pray)

2009-02-05T14:27:00.000-05:00

The Post-Postmodern Asset Allocator: Why the title? Here's the concept: Asset Allocation as we've known it is probably dead. Why probably? Because there will be pockets of time where we'll be deceived into thinking things have returned to "normal", and your cookie-cutter run of the mill 70/30 portfolio (or any other iteration) will seem to be performing as it once had, but that will likely prove to be fleeting. The traditional "diversify and rebalance" method promoted by brokerage firms and mutual fund companies works pretty well in bull markets. Hence the popularity of the method during the 80's and 90's. What the last decade has shown us is that buy and hold can leave one with flat to negative returns over a decade. Where the S&P 500 lost 10.3% from November 1998 through November 2008, a standard growth allocation, 70% stock and 30% bonds, using the Fidelity Total Stock Market Index Fund and the Fidelity US Bond Index Fund, returned a cumulative 20.23%. Wow! That's, uh, 2.023% per year. Double wow! Need we discuss inflation? Fidelity Cash Reserves Money Market averaged 3.4% over the same period with no volatility(Oh to be able to see the future). I don't believe any of us can afford to buy and hold (and pray) any longer. How much better of we'd all have been had we simply protected our investments with trailing sell-stop orders. Of course, you can't do that with traditional mutual funds and your friendly neighborhood mutual fund representative would not want you to. They make more money on you in their traditional open-ended mutual funds (higher fees). Exchange Traded Funds (ETF's) allow you to build portfolios with as much if not greater diversification, lower expenses, the invaluable ability to buy and sell positions intraday, AND, place stop-loss and trailing stop-loss orders to protect your capital. Naturally you need to be more proactive with this method, but you'd likely have been sold out before the declines got horrific. You probably would have been paralyzed with indecision (as with most investors), but at least you would have been in cash, not fully invested, and listening to your representatives advice to "Remember, you're invested for the long haul. The market always comes back. You're allocation is still appropriate for age and risk tolerance." Blah, blah, blah. You should have been told, but never will be told, to sell. It was quite clear to me since 2007 that something was wrong and that a recession was coming and the stock market was going down. I got out then. Did you?

2009-02-02T10:25:00.001-05:00

FDIC shuts down three banks in one day.

2009-02-01T22:36:00.000-05:00

What a week it was, again. As I begin to write this, at 10:30 am, Friday January 30, the S&P 500 has just broken to the downside at 835.14, down 1.18%, taking us below Tuesdays close and within four points of last Fridays close. This is significant. As I’ve pointed out recently, the dominant trend for the major stock indexes is still down, punctuated by a sequence of lower highs on 12/19/08, 11/04/08, 01/06/09 and possibly this past Wednesday, 01/29/09. The bull argument that we had established a bottom on 11/20/08 was supported temporarily by a series of higher lows and modestly higher highs which peaked on the pivotal date of 01/06/09, which marked the resumption of the downtrend. Support stands at 800.0 on the S&P. If and when we retest that low and fail to break below it convincingly, then the bull argument for a bottom will have some support. If we breach that support level, meaning we need to close below and for more than one day, then we’ll hear screams of look out below. A look at any chart six months or longer indicates a much poorer outlook than the optimists would admit. The 3 month chart could easily be used to argue a bottom, but again, the series of lower highs dating back to October 2007 and the weak and failed mini-rallies since November keeps me on the defensive. I see more downside risk than upside. Any long positions should be carefully selected and strategically protected.

Let’s talk about what is working. Let’s look at gold, as represented by the gold ETF, GLD. What appears to be a true bottom was formed on October 23, when GLD closed at 70.65 and November 12, when GLD tested that low and closed lower, at 70.00. The following day GLD closed at 72.15 and has not looked back. Volatile, yes, but a very strong and obvious series of higher lows and higher highs has sustained the rally. The next higher low was 74.52 on 12/15/09, 80.39 on 01/15/2009 and possibly yesterday, 01/30/09 at 89.50. The ETF has surged again today, currently intraday at 90.71. The trend was also defined by the higher highs as follows: 80.91 on 11/24/09, 85.43 on 12/17/08, 88.95 on 01/26/09 and possibly today, especially if we close above 90. Up until this week, GLD was still in a primary downtrend which was started in March 2008 with the intraday high of 100.44 on 03/17/2008. The significance of this week is that we have reached the resistance level at 90.00 established between September 18 and October 10 with a series of intraday activity and closes around the 90.00 level which the ETF failed to successfully breach and surge ahead, instead failing miserably and sliding to the absolute low of 66.00 intraday 10/22/08. Here again, the rise in GLD and other precious metals ETF’s from late October to today has been exciting and profitable, but this is a critical point. Failure to convincingly breach this level, and I would love a close above 91.00, would allow for a short term pullback immediately to the 82.00 – 87.00 range.

Next up, another favorite of discussion, oil as measured by the ETF USO. Technically speaking, I think oil has bottomed. From July 12 and a high close of 117.48, USO and it’s counterparts had been in an unmitigated slide, culminating on 12/24/08 and a close of USO at 29.024, a loss of 75% for that 5 ½ month period. Dare I call a bottom? Yes, with reservations. Technically, USO has bottomed. Following the rally from 12/26/08 to 01/06/09 where we saw USO jump from the 12/24/08 low by 28%, it subsequently sold off, bottoming on 01/20/09 at 28.66, then a small rally, followed by a close this week, 01/29/09, at 29.22. Our three closes, 29.024, 28.66 and 29.22 form a support level at 29.00. Continued support will affirm my conviction that oil is oversold, has accounted for the global recession, and will soon rise to a level most oil experts expect to be between $50.00 and $70.00 a barrel. BUT, should that support level fail, as some believe it will, the bottom could anywhere, even, some speculate, a return to sub-twenty dollar oil. THAT translates into 50-75% losses from here which is hard to fathom. So any exposure to oil must be accompanied by sufficient protective measures and vigilance.

On the bond side, my recent old friend TBT has done a spectacular job for me since December, rallying from a two week bottoming process between 12/17/08 and 12/30/08 with the low close of 35.85 on 12/30/08 to a high close 01/30/09 of 47.79, supported by a series of higher lows and higher highs. TBT, the ProShares UltraShort Lehman 20+ Yr ETF, has prospered while the mass inflows to the treasury market, caused by the “flight to safety”, turned the other way and, quite predictably, saw a “flight FROM safety” and back into other stuff. Last months treasury 35 billion dollar treasury auction, which had bonds sold with NEGATIVE yields, should have been a hint to investors that treasuries of all stripes were overbought, and prices had to come down, thereby bringing yields up (remember, bond prices and yields are inversely correlated). So, from that bottom of 35.85 to the recent peak of 47.79, assuming of course you bought at the aabsolute low, TBT returned 33%. Is the run over? I think not. The ETF as recently as mid-November traded in the low to mid-sixties, which means a possible profit from here of 30-35%. I do not expect a straight line, and do expect a pullback soon, so as with all investments, protect your capital.

On the long side, especially in corporates, both investment and high-yield, safety continues to be the focus. The investment grade market, as measured by the Vanguard Total Bond Market ETF, has traded recently at 77.00, almost right back where it was one year ago, when it closed at 78.35 on 01/31/09. But remember, it traded as low as 67 in October, a full fifteen percent lower. High-yield, as measured by the iShares iBoxx High Yield Corporate Fund, HYG, has recovered from it’s recent lows in the 65 range but is still a far cry from it’s year-ago close of 98.88. The message being that even bonds, treasuries, investment grade corporates, and high-yield, can provide losses, sometimes significant, and require vigilance and risk management.