Nothing Really Changed Or The Cockroach Theory.

It is said that there is never just one cockroach in the house. The JPM $ 2 Bil. speculative loss reminds us of that. How many various other kinds of loss are hidden in the cupboard of the Fed? JPM is supposed to be the strongest of the rotten lot. What about BAC or C or other European Banks? We know for sure that many of those are zombies walking around.

So what has changed after three years of the worst financial meltdown in the recent history and trillions of dollars/euro liquidity pumped in by the central bankers. Nothing really!  I know that a comparison of Bear Sterns with JPM may not be very appropriate, but let’s just review the time line of the collapse of Bear Sterns from an academic interest point of view: ( Source: Reuters)

1) December 14, 2006 - Bear Stearns posts record earnings, touting huge profit gains from then-booming businesses advising on mergers and arranging credit derivative, distressed debt and leveraged finance deals.

Bear stock closes at $159.96. The average price target from Wall Street research analysts covering the stock, according to Reuters Estimates, is $166.24.

2) January 12, 2007 - Bear shares close at a record $171.51 on momentum from its strong earnings report the previous month. The average price target: $174.

3) May 24, 2007 - Bear shares close at $147.55, a six-week low, after Goldman Sachs slashed its quarterly earnings target for the rival investment bank, citing concern about Bear's heavy exposure to the mortgage securitization business. The average price target: $181.73.

4) June 14, 15 & 16, 2007 - On June 14, Bear reports earnings declined for the first time in four quarters on weaker results from its mortgage securities business. On June 15, The Wall Street Journal reports a hedge fund run by Bear has suffered big losses on soured subprime mortgage investments. (A second fund with similar troubles would soon emerge.) The next day, the 16th, the Journal reports that Merrill Lynch, a creditor to the fund, seized some of its assets. The stock closes at $150.09 on Friday, June 15. The average target price: $181.

5) July 17, 2007 - As losses from subprime mortgages begin to threaten credit markets around the world, Bear Stearns informs investors in its two struggling hedge funds that the funds have "very little value" remaining. Bear shares end the day at $139.91. The average target price: $178.23.

6) August 5, 2007 - Warren Spector resigns under pressure as co-president and co-chief operating officer of Bear, having lost the confidence of long-time CEO James Cayne for his handling of the subprime mortgage crisis. The stock closes at $113.81 on Monday August 6. The average target price: $164.29.

7) October 5, 2007 - Prosecutors launch a criminal probe into the collapse of the two Bear Stearns hedge funds. The stock closes at $131.58. The average target price: $144.17.

8) December 20, 2007 - Bear reports its first-ever quarterly loss, driven by $1.9 billion of bad debt write-downs. It also says executives will not receive annual bonuses. Bear shares close at $91.42. The average target price: $121.67.

9) January 8, 2008 - James Cayne is replaced as CEO by investment banker Alan Schwartz. The stock closes at $71.01. The average target price: $111.36.

10) March 12, 2008 - Responding to market rumors of a cash crunch at the bank, Bear CEO Alan Schwartz goes on CNBC television and assures viewers that the firm has ample liquidity. The stock closes at $61.58. The average target price: $98.87.

11) March 14, 2008 - JPMorgan, backed by the Federal Reserve, provides an undisclosed amount of emergency financing to Bear Stearns. Bear says its liquidity position had deteriorated dramatically in the previous 24 hours. The stock plunges to close at $30.85. The average price target: $93.62.

12) March 16 & 17, 2008 - JPMorgan agrees on March 16 to buy Bear for $236 million, or $2 a share, representing just over 1 percent of the firm's value at its record high close just 14 months earlier. The deal essentially marks the end of Bear's 85-year run as an independent securities firm. On Monday, March 17, Bear shares close at $4.81 on optimism another buyer may emerge. The average target price: $2.

Yes, the same JPM.

Around that same time other cockroaches came out of the closet. Lehman Brothers filed for bankruptcy protection on September 15, 2008.  Merrill Lynch got purchased by BAC on September 14, 2008. Then it took over 2 years to discover that too big to fail banks are in fact living dead walking the earth and yet today they are bigger than before. None other than a prominent Fed official is pounding his fist on the table to break them up but it will have no impact whatsoever. So many cockroaches got away in the height of 2008/9 crisis. They got fat with the taxpayers money and now they are coming out again. How many months you think we have now from sighting of the cockroach and final meltdown? I would say about eight months to a year.

But that is a very long time horizon. Let us review what is in front of us for the next week or two.

European Crisis: By now everyone knows everything about how shi**y things are in Euroland. And it is still a wonder that Euro has not collapsed yet. The reason being, the same TBTF banks believe that their Chairman will bring in more free money here in USA and ECB will start another LTRO in summer. Liquidity cannot save them forever but   may gain them some months.  Now that Euro has closed below 1.30, the immediate target is 1.285 after which there will be a short term bounce. I think we will see 1.26 challenged by end of June 2012.

This will give Bernanke enough ammunition to start the next liquidity pumping program.

Economic Situation: Those who believe in the de-coupling theory and shout that because US stock markets are going up, US economy is doing great, are in for a shock. The fact is the world economy is sputtering and US economy is no exception. The GDP count for the 1^st quarter will come around 1.5, Europe is in recession, Manufacturing index in India has nose dived, China, in spite of all manufactured data, clearly showing signs of landing ( I suppose hard) and have now reduced the bank reserve ratio. The real story of Chinese economy is told by Australian Dollar which is going down and will soon be below parity.  What does it all mean? It means that we will soon see a concerted effort by all the Central Banks of the world to reflate. Do not buy canned foods and that survival kit yet.

US Stock Markets:  While SPX and DOW gave sell signal, there is no sell signal from Nasdaq yet.  I keep repeating that we are following the script of 2011. An update of RFG ( SPX Mid cap 400 ETF) is here.

You can match the points to the T.

In the coming week, we might see a lower push but by month end we will re-test the Apple earning high of around 1400 again. I believe any rally should be sold.  You can follow daily response to the market movement in our model portfolio.  As of now, the model portfolio is short on commodities, financials and Russell 2000. I would like to close all short positions and re-enter later again.

Oil and Commodities:  I have said it before and will say it again; crude and commodities will go down unless we see more easing. These just reflect the world economy better than the algo driven bot controlled US stock markets. I think Crude will bounce along with the general markets only because it is much oversold.  It is gets past $ 93 in June, we would be looking for way down below.

Gold & Silver:  Just hanging by a thread. How far it can go? Let’s see if this chart by Chris Kimble gives any indication.

I still think Gold will go upto $ 2500 in next 12 to 18 months time but that will come in a different set of circumstances. For now, more downside is to come. Again, there will be a short term bounce along with other markets but I would stay away from going long gold for now.

It’s been a long post. So let me stop here by quoting Charles Dickens: It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

You see, nothing really changed even after 200 years.

Thanks for reading http://bbfinance.blogspot.com/ . Hope you are enjoying my blabbering and forwarding it on to someone who you think might benefit. I am looking forward to your comments and emails. 

Whale Of A Day.

It was whale of a day. Nothing much really happened in terms of end price but lots of things happened in between. It was only yesterday that I wrote: “I do not believe that the powers that be will allow any meaningful correction in the Indices”. And sure enough, the plunge protection team was out in full swing to buy the dip in the morning. They did stop the panic today morning but there were no believers or buyers. So the bots had to close their position by the end of the day and the market was back to where it started.  If you know how the house operates you can play your bets accordingly.

By the end of the day Euro was back to its lows of 1.2915, Crude at $ 95.575, Copper at $ 3.63, Gold at $ 1579.1, Silver at $28.89. Short term crude is reaching oversold level and any close near or below $93 may result in a dead cat bounce. Same is the situation with Gold and Silver.

While the trend is firmly down, I am expecting a short term bounce. If we see further sell off of all the asset classes on Monday, it may not be a bad idea to close the short positions, take some profit and wait for the bounce to complete. In any case my short term target for SPX is 1330 which is about 23 points away. Even if we come close to the target intraday Monday, I would take that as a sign of fulfillment of promise.

It has been an exciting week. So far, we have played it nice and safe. We have not taken any undue risk, nor front- run. We should now take the money off the table and be cash and cushy. I think because of the JPM saga, the BOYZ will try to do something silly soon. But unless they feed the beast with more money, it will not sit quite. Let us see how it plays out.

It’s going to be a wonderful weekend. Sunny and nice. Let’s have a life and enjoy the weekend with our loved ones. Let’s forget Greece Spain and have some fun instead.  Thanks for reading http://bbfinance.blogspot.com/ . Hope you are enjoying my blabbering and passing it on to someone who you think might benefit. I am looking forward to your comments and emails. 

JPM Takes It On The Chin.

Although I am normally critical of the constant negative reporting of ZH, today I have to say kudos to them.  They do bring out the dark side of the Wall St like no other. Two of their reports stand out today.

·         The going on of JPM and

·         The impending bond default of Greece.

My only point is: do not get caught up in headlines or conspiracy theories while trading or investing- pay attention to risk management. Stock market is not economy. Wall St. is a giant casino and the house always wins.

After six days of red, today DOW managed a tiny green but that was compensated by red Nasdaq.  Even mighty Apple was marginally green. Markets are closed as I write it. Let us see how the world market reacts to the JPM news. The memory of Lehman may not have been forgotten yet.

Euro did show some bounce in the morning but gave back all of it by evening and there is serious risk that it will cross in the range of 1.28. AUD is nearing parity. US $ have crossed all important level of 80 and would likely do some serious damage in the next few days.

The carry trade favourite AUD is moving in sync with SPX and with AUD losing ground and demand for safe heaven $ shooting up based on headlines, things do not look so good for the “Risk On” trade. But again, please do not get carried away.

Readers know that the model portfolio is not much dependent on major indices. I have not touched anything remotely connected to DOW or S&P 500 or Nasdaq. The reason being I do not believe that the powers that be will allow any meaningful correction in the Indices. So I have targeted sectors where there is definite weakness. But I am glad that we have a short position in financials. Again, be ready to bail out of the short positions quickly. I am fairly confident about the short positions in commodities. If you remember my commentary few days back regarding Crude, I said that if it breaks below $97, the next stage is $ 93 and after then $ 70. Today, Jamie Saettele, an excellent currency analyst has this chart for us;

If we really get past $ 93, there is only air below that. Isn’t that something!

It is going to be exciting next few days. So far as SPX is concerned, unless we see a good close below 1330, we are playing out last year’s tape.

Thank you for reading http://bbfinance.blogspot.com/ . Hope you are benefiting from my two cents worth of blabbering and passing it on to someone you think might benefit. 

Quo Vadis Gold?

DOW is down six days in a row. For last two days SPX is opening huge gap down and recovering most of the losses by the end of the day. The fight has been going on hold the 1360 line but ultimately it failed today. An important Demark trend line was barely missed by a whisker.

SPX is down five of the last six trading days and Demark exhaustion signal can come by next Tuesday, which can also be a short term bottom. I still think we are playing the tape of last year and if so, we will see a bounce going into the end of the month. So lots of bounce points are converging at one place, 1330-40, Demark 9 up and we are reaching the oversold territory as well in addition to some short term bullish divergences.

However the trend is down and if the market fails to hold 1330, the next support is at 200DMA which is at 1280.But I do not think we will test 200 DMA yet. I feel that the market will take out some bears 1^st. On a weekly chart I think we are here:

But the important story of the day is that of precious metals. Gold broke the important $ 1600 level and as you can see from the weekly GLD chart “Mean Reversion” is in progress.  The weekly 50 periods MA is crossing over 20 periods MA.  Depending on how it plays out, gold may reach below $1400/oz soon. What a wonderful buying opportunity that would be for long term. I am glad that I have stayed away from gold after it reached $ 1900/oz. I wonder what those investors are doing now who invested at the top and were told to hold it for long term. Bad advice.

The commodity sector in general is going to get flattened out in the next few months and in particular Crude. This has nothing to do with market force or speculation but more of a political necessity. “O” cannot hope to win with high gas prices. Therefore before the QE starts and all risk assets start going up again, they want to make sure that the base prices for crude is low enough. Anyone who is short crude, can hope to ride the short till end of June or even middle of July.

Till now the correction has been more of a teaser. Safest thing will be to go out around 1330-35 level, take profits and then go back again at good opportunities. I think June will be more kind to bears than May have been so far. 

Catching At Straws.

If anyone still believes that the stock market is economy or markets are rational and logical reflection of demand and supply or for that matter there is no market manipulation, s/he must be more naïve than me or bats**t crazy or both.

The last few hours of stick-save was just to goose the chart and make sure that SPX 1360 is not taken out, at least not today. But Euro is once again below 1.30. Gold is hanging on for dear life around $ 1600. Crude is on slippery slope.

Now the most popular game in town will be played out with gusto. Every now and then, we will hear deal from Greece and how Europe has been fixed. That will ramp up everything and the BOYZ will sell in the rip.  That will be the plan going forward. Any bounce is a sell for quite a while now, at least till next FOMC. In this game of chicken, who do you think will blink 1^st? I think it will be team Obama and Bernanke. By the way, there was an interesting article in Yahoo! Finance today as how Obama is not taking any tough line on the Wall St. Crooks. Only, now I cannot find the link.

Yesterday, we decided to add short position on Copper and Crude in our model portfolio. That turned out to be a good move although I was ready for some bounce in crude. Cushing crude inventories rose to 1.21 million barrels last week and they have no place to store any more. Crude closed at $97.25 and waiting to drop around $ 93 soon.

The question now is, Greece stays or goes. The arm twisting is on. http://www.bloomberg.com/news/2012-05-08/greek-leaders-given-bailout-ultimatum-as-syriza-begins-talks.html . I am sure that Greece will go but I am not sure when. The flip side is, if we get any headline of a deal, there will be a bounce. And irony is, If Greece leaves Euro, Euro will jump. Do you remember Mexico default? Possibly not, but after Mexico defaulted, a bull run started in the US Market.

Although I would like a small bounce tomorrow, I am not sure about it. And it does not matter really because the short and intermediate trend is down. We are positioned for the move down and are not really affected by the day to day noise.

I was one of the few who criticized the Groupon IPO and called it a scam. Today after 75% below the IPO price, that call has been vindicated. Another mother of all scam is brewing which is called Facebook. I give this IPO another 6 to 8 months, after which it will trade at less than half of its issue price. But we will save that for another day.

Thanks for reading http://bbfinance.blogspot.com . Hope you are profiting from it.

Bouncing Around.

Considering how bad last night’s future was, thank our lucky stars that the world did not end today. I suppose we will have to wait some more time for the apocalypses.

Technically speaking, markets were bit oversold on last Friday and since this measured drama is being choreographed by the BOYZ for more free money, we will see bounce for couple of days. But the trend is down. SPX is well below both the 13 DMA and 50 DMA and after a 2^nd attempt 13 DMA is crossing below 50DMA now. The initial downside target is between SPX 1330-1340. If we breach 1330, next target is 1275. But it is not going to be one straight line. There is every chance that when we reach 1330-40 level, we will see a good bounce before another downer.   I still think we are playing out the script of 2011 with some minor vibrations.

The pattern of S&P 400 (ETF: RFG) seems very similar which I have highlighted here. Commercials are net short in S&P futures whereas retail is net long. It happens like clockwork!

Commodities were weak as expected. Crude continued its downward spiral but it is also due for a bounce for few days. The commercials have built up a good sized short position in CAD$ which is a proxy for crude.

I think we will see Crude in the range of $ 70-$75 in the next few months.

Gold and Silver are not going anywhere and QE3 crowd who wants to ride gold to $ 10,000 / oz seems little disappointed. Still now, gold and US$ is moving in opposite direction but I think a time will come soon, ( By soon I still mean about a year) when they will move together in same direction. Right now a huge debate is going on between the gold bugs and the comments made by Buffet’s sidekick.

Apart from the well informed and intelligent people in the blogosphere, investors by and large shrugged off Europe. It seems nobody in US of A really care about the happenings in Europe. Sometimes ignorance is really bliss. US $ lost some of its mojo during the day as a result of non-caring attitude of the US investors but have now formed a base around 79.60. It will be interesting to see where it goes from here.

We added shot position on Copper and Crude today in our model portfolio and now we wait for the summer correction to play through. However, be ready to dump the short position in a short notice though.

Thank you for reading  http://bbfinance.blogspot.com/

What A Day!

Before we discuss the market action and what is next, let me quote from some of my earlier posts. It seems that many readers do not really apprehend what is being said on a regular basis.

On 23^rd April, I wrote: “What I find interesting is that we can consider it as test of previous lows which it did not break.  Now it should have a test of the previous highs, at least which is the theory. Only when that test fails and it reverses, we can short with confidence.”

On 24^th April the heading of my post was “Last Bounce Coming?”

On 30th April I said: “It may not be a bad idea to start laying the defensive bets now onward….When the correction comes, it will be fast and furious and will not give us much time to take advantage. But at the same time, it is risky to front run, as I keep saying. So we will have to pick up sectors where there are definite weaknesses.”

On May 1, I wrote: “Question is, have we seen the test of top today?  I am getting a funny feeling that we have. … Despite new high in DOW, NYMO did not go up much and is in that zone from where it can go up 25 handles but can come down 135 handles.”

On the same day we added defensive positions in our model portfolio which is absolutely free for the readers.

The purpose of quoting my own post is not to gloat but to demonstrate that the road map has been before us all along if we cared to read it with little love and attention.  Our defensive positions taken on May 1^st  are doing fine and we plan to add some more on a bounce.

S&P futures were down some more after the cash market closed. But the biggest loser of the day was crude, down over 4%. Again, it was only yesterday that I wrote that Crude goes on sale in summer and I would like to short it.  We will see a bounce by Wednesday next week and maybe we will get a chance to add some short position on crude. I expect crude to reach around $ 101 by then.

Dr. Copper is another short candidate and we will assess the situation next week.

Now before we get carried away with the sell-off and start talking about the coming end of the world / Europe etc, let us pinch ourselves hard and remember that this is part of the plan. Stocks did not fall because NFP numbers were bad. It fell because the numbers were not bad enough for Bernanke to act on his own. If you remember me saying it again and again, Chairman is ready to catch us but we have to fall first. Buying stocks on a dip will not get us free money. The sell-off has got nothing to do with Spanish yields spike or Portugal going the way of Greece. It has got everything to do with more free money.

We have seen this tape played last summer but most of us do not remember it.  Only difference this year is how Bernanke will implement the lessons he learned last year. Because this is an election year, the powers that be are very concerned about the rising gas prices. And as we all know, the unintended consequences of last QEs have been rising commodity prices. So this year, they will try to keep oil prices under check while letting stocks rise. It should not be that difficult given the fact that $30-$40 of the crude price is speculative premium built by TBTF banks that run huge commodity trading desks. These guys will be under strict instruction to stay away from channeling the free money to crude trading.  That is another reason I think shorting crude would be a safe trade in summer.

Coming back to markets next week, I expect we will see a lower low on Monday but will see some bounce by mid-week. Such a bounce will still be a sell. I hope you have already got out of your long positions and are either in cash or little bit short. You have not missed much yet because more action will come in June. Stay tuned, stay nimble and trade safe.

Have a great weekend folks. Thanks for reading http://bbfinance.blogspot.ca/

Good News is Bad News.

So what bubble Bernanke has created or creating to replace the housing bubble? I don't think we will get any prize for guessing that correctly.

Anyway, yesterday’s main picture was quite appropriate!

The unemployment claim numbers were better than anticipated. Then it dawned on the good folks on the St. that if the numbers are not bad, Chairman cannot give free money anymore.  Therefore the selling. It was not very severe and it stalled after 1PM eastern, after the Europe markets closed. They are waiting for NFP day tomorrow.  Not that Wall St cares whether we have a job or not. They want more free money and if more people have lost their jobs it is probably good for them. Isn’t that sweet!

In the morning the other Italian passed the ball to the European Govts. and refused to offer more free money to bail out the Banks there. We have two elections coming up next week which will possibly upset the apple cart of the Banksters. Was it last summer that we had the same drama about Greece and Europe? Only this time, Spain and Portugal are on lines which are many time bigger than last year’s mess. But so are the money printings by the Central Bankers.  Do you think we will follow last year’s script and spice it up with Presidential election in the US of A? In that case, it would be a good idea to review last year’s price chart once in a while.

Talking of price charts, here is one from S&P mid-cap 400. This one has been top performer for years in a row.

I see a double top clearly formed in the chart and price action very similar like last year.  I have marked and highlighted the areas. Another 15 points drop would definitely confirm that we have seen the high for some time to come. As of now while the bias is down, the trend is still up.  If you are confused, just play it safe.

Both crude and gold lost some weight today. The loss was more in crude. As I have said before, Crude normally goes on sale during summer. I would like to short crude on its next bounce. Another one in my short list would be copper once the bounce is over. From Mid-January copper is moving in a range and it looks more likely that the range will break and the next move will be sharply down.  I would not short Nasdaq or other indexes for now because I think there are other better opportunities. I expect TLT to also go up steadily but I am not sure how much it can go higher. 

There is one chart I would like to share with you before I hit the send button. It is from Jeffrey Gundlach of Doubleline and he has made a comparison between Apple and Google.

Pretty amazing, huh?

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Risk On or Off?

One thing we can be sure of is the short life span of our collective memory. Does anyone remember May of 2011?  It took over 60 days for the top to be formed and a drop of 19% ensued. However 2012 is little different in the sense that it is an election year and all the central banks in the world have joined the Fed.

It is still little early to say whether yesterday’s intraday high was in fact the test of the high of April 2. While the upside momentum is definitely weak, the downside pressure is not strong either. In a sense a battle is going on between the bulls and bears.  SPX 1450 is still possible but everyday it is becoming more difficult. The markets are struggling. I would be watching with interest what the next few days bring. If indeed we have seen the test of the high, we will see more selling from as soon as from tomorrow.

An up-side would most likely be an opportunity to sell in to the strength, if you have not done so already. For the more adventurous out there, may be to add some more defensive bets. For the cautious sorts, stay in cash and wait for the trend to develop and confirm.

Liquidity is still plentiful in the market. But Apple is not looking too good either. The heavyweights in DOW are rounding off the slope.  Most of them have not been able to take out their earlier highs of March and yet somehow DOW has reached a high of the year yesterday. Interesting indeed. PM has not been able to break through the range. Most likely we will see both the dollar and gold go up together on the worry of Europe.

Unlike the other days, I do not have much of an idea about tomorrow. We will wait and watch without taking too much risk. Thank you for reading http://bbfinance.blogspot.ca/

Are We There Yet?

Bull’s-eye! We did go up huge today as anticipated. Question is, have we seen the test of top today?  I am getting a funny feeling that we have. While DOW made a new intraday high at 13340, SPX touched 1415 and reversed from there.  Tomorrow will tell us if indeed we had a test of the high. Again, I want to emphasize the point that the markets are not going to roll over tomorrow and in fact a push is still possible but the energy seems to be diminishing. The upside now seems rather limited. Despite new high in DOW, NYMO did not go up much and is in that zone from where it can go up 25 handles but can come down 135 handles.

Today most of the European markets were closed.  Overnight RBA reduced the rates by 50 basis points and that caused a drop of almost 100 pips in AUD.  Even Euro dropped almost 50 pips. US Dollar is stronger across the board except CAD. It seems US $ has made a double bottom at 78.60 may now stage a recovery.

US treasury bonds are on a buy signal. All in all it may be time to be cautious. Some of the defensive positions in our model portfolio have been updated.  We will add positions as we go along and deem fit.

Thank you for reading  http://bbfinance.blogspot.ca/ .