Chris Lau - Seeking Alpha

Wednesday, December 31, 2008

Are you being Fooled by the Numbers?

Fool me once, shame on you; fool me twice, shame on me

US Labour
The Department of Labour reported the following:
  • initial claims was 492,000, a decrease of 94,000 from the previous week's unrevised figure of 586,000
  • advance seasonally adjusted insured unemployment rate was 3.4 percent for the week ending Dec. 20, an increase of 0.1 percentage point
  • advance number for seasonally adjusted insured unemployment during the week ending Dec. 20 was 4,506,000, an increase of 140,000
The positive spinoff was that the rate of unemployment declined. Remember though that in December, people are in holiday mode.

GM Rescue Unwise
The Treasury Department said it would invest $6 billion to stabilize the troubled company. This would seem to be good because up to 25% of buyers were unable to make a purchase because loans were not available. GM is announced that it would offer financing as low as zero percent for up to five years on select new cars and trucks.

Lax lax financing in the banking sector for homes resulted in foreclosures. GM is now accumulating consumer debt, hoping to increase demand until the economy improves. The risk is that the economy does not improve in time for GM.

It seems to be smoke and mirrors. It is like giving vitamins to someone who has a flu. As I stated in a previous entry, GM should still be worth zero.

U.S. October Housing (Some real numbers)
  • Prices fell 18 percent in October from a year earlier, according to the Standard & Poor's/Case Shiller Housing Index
  • Prices fell 2.2% month-over-month
  • Only 2.5 percent of Americans say they plan to buy a home in the next six months
Although there has been Santa Claus Rally over the past few days, volume is light. On the plus side, volatility has declined substantially since mid-November when the Dow hit low numbers. Still, the economic numbers are very grim as the markets enter 2009.

Tuesday, December 30, 2008

Arguments for Deflation - From John Mauldin's Newsletter:

See below. I have high-lighted text most relevant for the investor with a long-term approach to money management:

Now, I argued above that the Fed is not really expanding the money supply, so far. But within a few quarters, we will be facing outright deflation. The Fed is going to monetize at least a portion of what will be a $1+ trillion dollar US deficit. They have announced they are going to purchase $800 billion in mortgage-backed and other types of consumer loan assets. That will be a direct infusion of dollars into the economy. That is serious monetization. But they may feel they have no choice if they want to keep the US economy from going Japanese.

When someone becomes a Fed governor, they take them into a back room and perform a DNA transplant on them. They come out of that room viscerally, almost genetically, focused on preventing deflation from happening on their watch.

How much monetization will be enough to halt deflation and overcome the slowdown in the velocity of money and the rise in personal savings? No one knows. There is no fancy equation or model which can encompass all the factors, or at least not one I know of.

We will also soon see which of the additional deflation-fighting policies that Bernanke outlined in his 2002 "helicopter" speech the Fed will adopt. It is highly likely that we will see more than a few of them. It is quite possible that we will see the Fed start to set rates on longer-term bills and even bonds in an effort to pull down longer-term rates for corporations and individuals.

We will explore all the deflation-fighting options and what the results might be in future letters, but remember that there will come a time when the Fed will have to "take back" some of the liquidity they are going to provide. That means we could be in for a multi-year period of slow growth after we pull out of this recession. And this recession could easily last through 2009.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

Counter-argument for the Small-Cap Sector

Don Vialoux mentioned in his newsletter today that there is seasonal strength for the small-cap sector:

Small Cap stocks on both sides of the border are recovering following the end of tax loss selling pressures. iShares on the TSX Small Cap Index popped yesterday and is close to breaking above a base building pattern. A trade above resistance at $8.78 will complete the pattern. ‘Tis the season for small cap stocks to outperform the market!

Norquay's book was also mentioned. Ken Norquay is Director and Chief Market Strategist of CastleMoore Inc. The key point made about 2008?

"Buy-and-hold no longer works in the sub-prime mortgage business or in the stock market."

In the 1970s, mutual fund manager John Templeton used to tell us: “We shop the world looking for unrecognized value [in the stock market]. We buy these stocks and hold them for three or four years until the value is recognized.” Perhaps modern investments should be managed the way Sir John once managed his mutual funds.

Now-a-days CastleMoore tells us: “Buy, Hold and Know When to Sell.” Perhaps modern investors should adopt the CastleMoore Way.

We have to learn from their mistakes. We have to learn from our mistakes too. There should be mass firings of the directors and senior managers of the financial big three and the auto big three. Should there be a few firings in your personal investment world? 2009 is a good year for you to find a better way, before you too need a bail out.

Monday, December 29, 2008

Investor Conference Calls

Absolute Software is a software Company in Canada. The company develops software for notebooks that will "call home" if it gets stolen. Absolute first caught my attention when it produce very solid earnings in 2007. Its big win was getting a contract from Dell and from Best Buy. But by mid-2008, when I listened to an investor conference call hosted by the company to discuss its quarterly results, but things sounded odd. The company did not sound very positive. Answers to analysts' questions were not as concise as I would have liked. By next quarter, Absolute announced that customers were scaling back purchase of its product. Smaller companies were watching its cash flow and were cutting back on purchases.

Moral of the story?

  • Investors who buy individual stocks need to go that extra mile to understand a company by doing such basic research as reading quarterly reports and listening to investor conference calls (leaving that work for professional money managers is another option)
  • Small-cap companies will continue to suffer more so than larger companies in the coming quarters due to the credit squeeze and to the weak economy
  • Small-cap software (IT) companies will become even more attractive investments as valuations continue to fall.
Below is a chart for Absolute Software. Notice the stock broke support at the Fibonacci 38.2% line in September. Selling was heavy with volumes well above average. Recent trading pattern has not been convincing. Look for the stock to re-test the $2.55 level.

Thursday, December 25, 2008

Psychology of Investing

Currently Reading:

One aspect of investing that requires attention for any trading is trading psychology. By that, I mean all of us would benefit from a trader coach of some sort to identify our strengths and our weaknesses. In 'Beyond the Bull,' Norquay touches upon inner trading psychology and the psychology of the markets as a whole.

Norquay employs the Eastern philosophy of Buddhism in his discussion of market trading. I could relate very well to this approach.

Two points I would like to highlight about the book are:
  • Achieving a state of objectivity (a multi-step process) sets stock traders apart to the next level
  • Like all things in life (including relationships, for example) being a good stock market trader requires work. Stock market trading is no different and requires constant work. It does not end.
Eyes on Christmas Shopping
  • Christmas accounts for 14% of annual sales
  • Top sellers: Nintendo Wii, Samsung's 52-inch LCD HDTV, the Apple iPod touch and the Blokus board game.
  • Mark Jan. 8 on your calendar, when retailers report same store sales,
Retailers slash prices to entice holiday shoppers
Friday December 26, 10:04 am ET
By Lauren Shepherd, AP Business Write

I still favor the software entertainment industry. In particular, I am monitoring Electronic Arts (ERTS) but favor Activision (ATVI).

Activision will be releasing Diablo III (anyone every play Diablo I, back in the day? It is a classic). Its Guitar Hero franchise appears to still be strong, and has other very good titles such as Call of Duty (World at War) and Need for Speed. Still, technical charts suggest the stock will face further weakness.

To obtain a stock alert on when I enter positions in ATVI or any stocks discussed, sign up on kaChing and click "follow manager."

Tuesday, December 23, 2008

Prediction for Consumer Discretionary Performance in January 2009

Below is an introductory text taken from John Mauldin's Newsletter:

Have you done your Christmas shopping yet? Research shows that more of us are putting it off in expectations of better prices. In other words deflationary expectations! The prices I have seen while out shopping the past few weeks are simply amazing. I have to admit to have made a few purchases for some items that I was not planning to buy just yet because prices were off by 60% or more. A few days ago a friend came in sporting a new black cashmere sweater top with jeweled embroidery and quite fancy. She said she got it at Saks. But the real story is that when she walked into Saks looking for a present for her kids they handed her a coupon with a 30% off any one item from whatever price it was already marked down. That top? At one point it was almost $500. She bought it for $75. I have to confess that made me worry about retail sales and future unemployment. I like low prices, but I like profitable companies and employment. I went and talked to a Saks salesperson a few weeks ago who had been there 25 years and asked if they had ever discounted like that before Christmas and he said never. It was Saturday in New York and the place looked busy. I asked why? And he said, "The store is empty during the week." And I bought a few sweaters at 60% off. Tiffani just got some presents from J Crew at over 60% off. Before Christmas! How many readers have seen the same sales? And yet shopping is down?

As a side note, this year most of the kids and in-laws are all going to get a Visa gift cards so they can take advantage of what I think are going to be even better sales after Christmas. It is not that Dad put off his shopping to the last minute (which I did) but the kids are really looking forward to finding their special items on sale. I wonder how many more are doing that?


John Mauldin, Editor
Outside the Box

US Housing

For November 2008

  • existing home sales declined a record 8.6 percent.
  • median home price fell 13.2 percent (annualized figure) to $181,300.
  • The pace of sales fell to a 4.49-million-unit annual rate.

This does not mean that REITs and home builders are "sell" or a short sell in the medium term. The reason is that we do not know if these sales figures represent a housing slump bottom. The weakness in this sector is being exasperated by the difficulty in obtaining loans. LIBOR figures are suggesting that borrowing will become easier, but at a little at a time. Unfortunately, in the short-term, we are not there yet.

Monday, December 22, 2008

When Things get Complicated, Keep it Simple
I have stated numerous times in past entries that the stock market rules have changed, thanks to the Federal Reserve actions. That is not to say that these actions (in the form of bailouts for example) should not be carried out, but they do change the playing field. Stock market valuation analysis cannot be applied with absolute certainty, because forecasting such things as growth rates, margins, and revenue will be inaccurate. Take, for example, GM. Traditional fundamental analysis would result in recommending a giant sell call (in neon lights). With the government stepping in, the stock is not trading at its market worth of zero.

Remember another market rule: don't bet against the Fed. When the new administration in the U.S. is lead by Obama on January 20th, he will be spending at least US $700B. This will give the market a boost, but who's paying for all of this? Have the previous bailout bills been paid yet?

How does one keep things simple? Look at fewer indicators to get a gauge on the economy. Two things. Housing and borrowing costs. It is best not to look at just one housing market figures, but a variety of them, since one measure does not tell the whole story. I would closely monitor foreclosure rates, the Case-Shiller index, and new home sales figures.

On borrowing costs:
"But the undeniable reality remains. According to Merrill Lynch’s High Yield Master Index, the spread between high-yield bonds and comparable Treasuries has increased from roughly 600 basis-points to 2,072 bps since June according to Bespoke. This means that companies in the high yield bond category still face interest rates north of 22% to borrow – not a situation conducive to healthy balance sheets, especially in a deteriorating economy."

Thursday, December 18, 2008

What to do When Bad News Gets Worse?

I have a short story about cash being king. In November last year, I was in line at a bank to cash out matured savings bonds. The ticker prices were scrolling across the LED board. Citigroup had corrected to $14 (from $20) the last few weeks. In that month, the markets had only anticipated losses in the subprime arena. Business Week already speculated greater losses in other areas of lending, but that was not yet revealed. A thought had come to mind for me to use the cash proceeds to buy Citigroup.


Any experienced investor will know that cash is perceived as boring and unproductive in a portfolio. From an emotion standpoint, it is difficult to do nothing, to sit on cash, and to not invest in something in hopes of producing a higher return.

We all know the story now about Citi. Losses continued to mount, and housing prices continued to fall throughout 2008.

A year has passed since I passed this trade. The economic fundamentals are still terrible, and momentum is still building even faster now in what appears to be the worst economic storm for all eternity (well, at least as long as capitalism existed)! Does this mean that investors should be holding all cash? With the U.S. now at 0% interest rates, there is no more room for the government to lower the cost of borrowing. Its only option now is to buy up distressed debt and to spend a substantial amount next year.

Investors need to foresee the consequences of all of this:
  • Tax rates must rise (the city of New York is already seeing this happen)
  • The US dollar must collapse (it is already correcting) - see chart
  • Gold will rise speculatively - a new bubble might form here...why? Because the only thing more attractive than the US dollar is gold (and no other currency)
  • Various industries still need to fall, unfortunately (auto, housing, banking)
My investment strategy therefore remains the same:
  • Cash is more than king, especially when we are in a deflationary environment
  • Gold will still rally (but in a deflationary environment, money will eventually need to find a better place to be than this commodity)
  • At some small, almost random point in time, something new will emerge. Identify it, and invest in it.
It is only now that I am starting to value the idea of having a money manager. Pay for someone to identify a trend (seasonal analysis) or a company/sector (fundamental analysis), and to time it correctly via basic technical analysis.

Wednesday, December 17, 2008

Quantifying Human Spirit

Every day that goes brings another dose of bad news. Think of the bad news layered into a ball. At the core is the deflating home sector and consequently the falling banks. Factor in job losses there. Now on the next layer is manufacturing, namely the auto industry. More job losses. The negativity (and economic spread) inherently spreads over consumer spending. The month of December will be most indicative of the weakness in spending...yet I remain foolishly hopeful.

Two things keep me hopeful about an end to gloom for the economy. The first is economic policy. The U.S. is throwing what will amount to trillions of dollars at this layered negative ball. A trading rule is "don't bet against the fed." This time should be no different. Even if this "solution" is short-term, the markets will still move up for maybe even a few months.

The second thought that comes to mind is human spirit. Look at how the markets behaved during the Olympics. Maybe what the world needs are more festive events and celebrations that would bring people together. People get together, socialize, network, are a happier bunch who will not have their mind on the ailing economy. I for one would rather have a positive spirit, and I would certainly want to spread that around. Aren't smiles infectious? As a point of contrast, it should be recognized that one would not be smiling after losing a job.

Human spirit cannot be quantified by economic models or equations.

Now, back to some observations that we might be seeing some reasons for the market to stabilize and even trade up at least in the short-term:

1) Retailers have been discounting items so much that consumers are still spending (See Best Buy stock, for example)

2) Oil prices have popped considerably, which should make inflation a non-issue as more money floods the economy

3) The newly-elected US government will have massive spending plans in January 2009.

Monday, December 15, 2008

Will Mortgage Rates Reach 0% in the U.S.?

In short, no.

The Federal Reserve is poised to cut interest rates tomorrow, to almost 0% (0.5%). Why does that not mean consumers will get a mortgage of 0%, to have credit card rates cheap, or to borrow money in other ways like loans for free? The rate cut policy is for the most part a tool that will not be useful by any measure. The problems that we are all well aware of now won't simply go away by lowering interest rates. Banks are still de-leveraging (they need to raise cash by selling down assets), so lower rates will help them reduce borrowing costs.

There are a number of technical signals that need bearing note:
1) Gold is trading along a "channel" and is poised to break the upper channel

2) Oil has corrected substantially, and OPEC is planning to cut 2M bpd, a significant amount. Yet volumes don't support a call for higher oil prices. My call is $30 for a barrel of oil. This is due to the market being more likely to overshoot on the downside. In the meantime, enjoy lower prices at the pumps.

3) U.S. Markets have been trading up from lows, but on lower volume. Volatility has also declined, but it is still well above a more reasonable 35. Examples are DJIA and S&P500. The Toronto Stock Exchange has been trending, but does not have much upside.

Personal Notes:

Here is my virtual (for now) portfolio:

My participation in KaChing has been rewarding. By next year, the organization running the application will allow the community of real investors to choose from the participants. KaChing is effectively testing its participants, and the best traders might get a virtual office in California as a Portfolio Manager.

My standings are as follows. These are just statistical numbers. The more relevant performance measure will be known over time.
  • 6 month virtual return 26.7% vs -36.1% (S&P500)
  • Ranked 12 / 40 (Elite)
  • Ranked 377 / 32,200 (Premium, 3 month performance)
  • Ranked 1,331/323,240 (Basic)

Thursday, December 11, 2008

Expect Nothing in December and You Won't be Disappointed

What is there to expect for December? The rules have changed, economic news remains dire, and yet the market has rallied these past few weeks.

In Matt Blackman's weekly newsletter, Matt really summed up well the problems of trading profitably in today's markets:

Mass market manipulation changing the rules

James Grant was interviewed this week on the Business News Network about his new book – Mr. Market Miscalculates: The Bubble Years and Beyond. Grant didn’t mention the word manipulation but that is exactly what is going on if you really listened to what he is saying (see Video of Grant’s interview below). The Fed, which exhausted its $800 billion asset base months ago, had doled out or promised something in the order of $4.74 trillion as of November 24 according to Bloomberg. And that doesn’t include any commitments made since. According to Grant, that works out to an annualized growth rate in Fed assets of more than 2000%.

In his zeal to play Robin Hood to Wall Street banks and brokers, Bernanke has effectively changed the rules for doing business in markets. Stocks that should plummet are soaring and those that should outperform but are not privy to special TARP or bailout benefits are getting hammered. Treasuries and bond performances are equally perplexing for the same reason. That Bernanke and company have refused to be transparent about who gets Fed money and the terms of the loans makes the bailouts as well as the massive amounts involved all the more suspicious (see article "Bernanke..." below). Neither the Fed nor government will tell us where this money is coming from but it isn’t hard to figure out the answer.

Trading rules will have to be re-written as long as the government and Fed play buyer of last resort bailing out poorly run companies at taxpayer expense. But the unintended consequence is that it will keep those investors and traders who normally jump in during a market correction in the hunt for bargains on the sidelines, at least until they understand how to play the game now that the law of market gravity has been repealed. "

With that in mind, I am still not convinced that the market rally from its November lows will hold. For one thing, the indexes (DJIA for example) are approaching moving average resistance levels. Second, economic indicators are all still weak. The two figures that concern me are unemployment figures and falling home sales / prices.

It is possible that there will be a "Santa Claus" rally or that we have already seen the "market bottom," yet these are just short-term technical trading opportunities. They are, at best, hopeful events at a time when the markets will keep falling well into 2009. Fundamentals do not support the market from continuing to fall as we enter 2009.

Investors and the media are also fixated on the pending big bailout news for the US automotive industry, but will 14B do the trick? These companies have huge liabilities and inefficiencies. $14B will only be the start of more money needed to save these companies. I do not disagree that something must be done to keep these companies running. After all, there is an obligation for the government to do what is necessary to avoid massive unemployment in this sector.

I'd like to end this entry with a bright note. At some point in time, the morale of people will improve. They will eventually regain optimism and confidence in the markets. They will realize that oil is no longer over $100 a barrel. Consumer goods will be cheaper than ever. Lending will start to loosen. Money will be available again for borrowing. The demand for housing will start to pick up again, and prices will stop falling. It is just that this won't happen this month.

Thursday, December 04, 2008

The Part about Still Having Bad News

With each passing week, the economic news gets worse. For example, the Institute of Supply Management reported that the service sector reached an all-time low of 37.3% in November. Unemployment in the U.S. was 4.09M, its highest since December 1982. The numbers continue to be dire, but the three numbers investors need to keep an eye on are the following:
1) New Housing Sales and Average Home Prices
2) Volatility Index
3) LIBOR Spread

The first is obvious: the lower the average price of a home, the greater the mortgage paper loss is for US banks. The second, volatility, will give investors some indication on how convincing a rally or a sell-off is. It is very, very difficult right now to make a good investment decision if no trend exists. At best, there are wild fluctuations. This environment might benefit the day trader, but not buy and hold long term investors.

Finally, the LIBOR spread will indicate an investor's willingness to take on risk. It has been narrow, so that is at least a good sign.

This video is long but valuable. Shiller has some insightful ideas. They are good in theory, but can they be implemented in practice or accepted by government law makers?

Shiller says crisis may last for ‘years and years’

Hot Stock: Short EWC (iShares Canada)
Canada is only starting to feel the pain of woes in the U.S. The commodity bubble earlier this year has literally popped, the housing sector is starting to weaken, and the automobile sector is imploding. The only positive is that the US dollar has strengthened, perhaps making Canadian exports more attractive. These factors make Canada an unfavorable place to invest. Although I am long on gold, I believe that shorting EWC @$15.26 would be profitable. According to P&F charting, EWC may reach $10.50. Note also that HXD is a bear ETF for the TSX60.

The Good News

Congratulations to kaChing, formerly known as FSX Player. The facebook application completed its registration as an investment advisor with the SEC. Many of my readers have been skeptical about the merits of playing investment challenges. Some say they don't have the time, but in today's markets, sometimes inaction is the best action to take, with real money.
Here's a blurb from kaChing:

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* Your followers have an average account size of $10,000
* Assume 1% convenience fee (our term for mgmt fee)
* Assuming you make a few trades a month (you earn a percentage of commissions)
* Total = $350,000 revenue split between YOU and kaChing

Sunday, November 30, 2008

US Consumers Still Shopping

Black Friday in the U.S. still resulted in higher sales over last year. Sales were up by 3%. Online sales were up 1%.

Is there hope that the U.S. economy is still consumer-driven, despite all the housing debt problems?

The market already anticipated decent sales for Black Friday, between late October and November 18. However, the 25% appreciation is unconvincing. Volume has been shrinking on each day the consumer discretionary index rallied. There is still a 10% upside for XLY. After that, the sector may be vulnerable to a sell-off.

Friday, November 28, 2008

Christmas Rally?

I asked Don Vialoux if he thought the recent rally was convincing.

Don, the DJIA’s rally looks suspicious. The volume has declined each time the index has gone up. Does this mean the index is base building? Is it vulnerable to a correction back to support lines @ 7,449?

Answer: Hi, Chrispycrunch. I would love to confirm that the November 20th lows set by most major North American equity indices was the bottom, but insufficient time has lapsed to make that call. Lots of volatility in both directions.

Equity markets continue to respond irrationally. Meanwhile, glimmers of hope continue to surface. Sector rotation with positive breakouts above base building patterns have occurred during the past few trading days.

The first sector to break was gold. Utilities started to break earlier this week. Infrastructure started to break yesterday. U.S. energy surprisingly is close to breaking out (e.g. XLE). On the other hand, credit conditions remain frozen in the U.S. The yield on 10 year U.S. Treasuries touched an all time low yesterday.

Best guess is that the November 20th lows likely will be tested in early December(possibly a 50% retracement of recent gains as tax loss selling pressures take hold). Chances of a year end rally are above average this year. Favourable anticipation of the U.S. regime change on January 20th will help the bulls. The annual re-balancing of balanced funds and pension plans late in December and early January will help equity markets.

The big question is, ” Will this next intermediate upside move be a recovery rally in a bear market or the start of new secular uptrend?”. At this stage, Tech Talk is leaning toward the former scenario. The charts will let us know. I have a hunch that “Timing the market” by playing intermediate swings lasting 2-8 months will become more important during the next few years.

Tuesday, November 25, 2008

Bullish on Gold

The US Dollar is showing signs of fatigue and is beginning to roll over. This is a bullish signal for gold. Goldcorp, for example rallied by over 70% in the last 3 weeks.

Barrick Gold: reached the magic 38.2% Fibonacci line before retreating. If the stock is able to rally past this, it will act as a support @ $36.70.

The US Dollar may correct by up to 10%:

Don Vialoux Video on Gold @ ~ 7 min :

Friday, November 21, 2008

Is Citigroup Going Bankrupt?

Citigroup stock is trading very similarly to Bear Sterns. The market is rightfully concerned that the bank's asset/capital ratio is too high. It is running out of cash. Expect the stock to have a number of small but massive rallies. Longer term, the market is telling us that this bank will need to be rescued or merged with another.

What's the difference between C and GM?

Wednesday, November 19, 2008

I Aspire to Be Like Peter Schiff

I aspire to write on ideas and observations with conviction. It is easy for a blogger to do this, when naysayers do not challenge you. Watch this video. Notice how the others laughed and mocked Schiff. Note how he reacted: he stuck to his call. That is admirable. I have nothing but admiration for people who stick with a call and do not bend it because others express doubt. I aspire to keep making gutsy calls.

Monday, November 17, 2008

Book Review: Greater Fool (Part 1 of 2)
Subtext: Invest in Canada?

With the U.S. markets on the decline, every buyer out there is asking if the same will hold true in Canada. For my own interests, I will focus on Garth Turner's discussion about Toronto. His arguments that Canadian real estate is not immune to what is going on around the world use some of these points:

  • Majority of exports is to the U.S.
  • Majority of oil is exported to the U.S.
  • Canadian personal savings rate is similar to U.S. personal savings rate
  • 30% of condos in Toronto are investments (after 1989, owners rented condos at a loss)
  • mortgage payments account for a substantial amount of consumer expenditures

Turner discusses the role of the dotcom bubble and 9/11 in the U.S. housing bubble effectively. He also discusses the role of demographics over the next 10 years, and environmental issues as factors that will influence the real estate market in the future. I did not, however, find the latter two arguments to be very effective. Nevertheless, for $16 this book is worthwhile reading for anyone who wants to buy real estate. After all, $16 is far less for a buyer than a single percentage drop in the price of a home.

I previously visited the notion of a weaker real estate market back in June 2008. Since then, some things have changed for Canada:
  • Commodity prices collapsed (See TCK, AA, ABX)
  • Canadian dollar rallied
  • GM/F collapsed in share price - there are rumors that 10% of the workforce will be cut
  • Nortel cut jobs; its future is in doubt
From an international investor point of view, Canada represents 30% resources. This sector will rally about twice the rate of other sectors if the stock markets recover. It will also decline by twice the rate.

From a real estate perspective, the above factors are too great to ignore. The only positive is that the Canadian dollar is stronger. This should benefit the manufacturing sector.

So, let's simplify the investment strategy, because there are simply too many things to monitor (let alone the health of the U.S. markets).

Right now, trading is dominated by economics. Recession/"Depression", consumer spending, deflation, government debt, and government policy. If we roll up all of these factors, the gold sector comes to mind. It would appear to me that there will be numerous reasons to eventually buy into this sector. Note that gold producers will move more over the underlying commodity. My favorites are: Goldcorp, Barrick, and Kinross.

Stay tuned.

Another Long Idea
(Part 2 of 2)
Think poor. Think saving money.

What does the consumer NOT do? The consumer will avoid expensive ticket items (cars, LCD TV's, electronics, computers, items over $1,000).

What DOES a consumer do? Go thrift. Eat burgers, shop discount.

Yumm. Cheese-burgers (not the expensive big macs):

A dollar can go a long way:
Walmart might be everywhere, but so will shoppers looking for one-stop low-cost shopping:

Time to go to fewer yoga classes and to wear sweats at home with yoga videos (SELL):

Saturday, November 15, 2008

It is "The Great "De-leveraging" ... not "The Great Depression"

The media loves to compare current market conditions to the Great Depression that took place some 80 years ago. As I had written previously, it is the great deleveraging that is still going on that has created an immense level of uncertainty, taken money out of the stock market, and significantly lowered the valuation of homes globally.

Many unknowns still exist, which means I am unable to concisely provide a downside or upside target to the stock market based on fundamentals.

1) It is unknown how much hedge funds need to unwind their positions to meet investor redemption
2) It is not known if housing prices have leveled off, thus stabilizing the paper mortgage losses inflicted on banks

Here are some scary facts about the Great Depression:
  • The stock market crashed in October 1929. By 1932 the stock market was at 20% of their value in 1929.
  • 11,000/25,000 banks were insolvent
  • Unemployment was 25-30% of workforce
  • The great depression was global (it included Europe)
  • No government intervention was made for the markets prior to this event
  • After the Great Depression, government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services, or deficit spending, came to assume a principal role in ensuring economic stability in most industrial nations with market economies.

Things are different because the wealth of nations is different:
  • Rich middle-east nations hold global wealth (due to wealth earned from high oil prices)
  • Asia (Japan and China) is cash rich
The U.S. accounted for a large percentage of world consumption. Now that it is shrinking, the other nations are suffering as well. The economic downturn is therefore still early part of the game.

The Solution

Government policy will be key to steering world economies out of the slump. This is unfortunate for investors, because policies take time to develop, implement and to work its way through the market.

Still Positive For Markets

Volatility has declined to 66.31 from its peak at 89.53 in October. Markets rallied this week even after touching the magic Oct 10, 2008 low. Expect markets to test this low again. We will revisit the indexes if this low is breached. On the positive side, the chances are just as good that resistance levels will also be tested.

Wednesday, November 12, 2008

North American Indexes Are Building A Base

According to Don Vialoux @ Tech Talk North American Indexes are showing signs of bottoming. This is indicated by indexes trading in a range, and volume declining. He draws a comparison to 1987 and present.

Full Article:



Monday, November 10, 2008

Job Losses a Concern

Personal Notes:
I briefly celebrating a top-5 position with an "elite" ranking on FSX Player, a stock trading game on Facebook, before falling to 8th for the week. I strongly recommend that even seasoned, experienced investors join the trading game. Investors may test trading strategies without real-world losses.

Now on to the Negativity:
The U.S. reported unemployment rose to 6.5%. The total job loss for 2008 is now 1.2 million. Both GM and Ford reported very poor results, and announced intentions to layoff staff. The theme for the economy remains unchanged. This ongoing theme might be hidden amongst all the headlines about bailouts and stimulus packages from other global nations.

The economic theme is as follows:
  • The automobile market is experiencing a "depression-era" economic downturn, precipitated by but suffering more than the housing sector
  • The financial sector will benefit from loosening liquidity in borrowing
  • Housing is severely weak in the U.S. and its problems are only slowly showing up in other nations (Canada, Europe, China)
The unemployment report needs to be assessed. Growing job losses is now only beginning to feed into the consumer sector. I had already noted that semi-conductor/IT companies warned on weaker revenue last month. This leading indicator makes it no surprise that consumers will spend far less in the months ahead. Christmas is only one month away, but consumers have already been cutting back.

At this time, day traders would benefit most from a market moving in no particular direction. I continue to monitor and search for longer-term plays, as I prefer to hold a few quality companies/ETFs that will make money over an extended period of time.

Investor interested in products/sites I promote, or for my research report should email me at chrispycrunch [at] gmail [dot] com.

A Long Idea: Activision

Activision is displaying a technical signal. A rally to $14US is possible. The stock is trading relatively stronger to the S&P500 (not shown). Fundamentally, the company has a very good basket of products that will appeal to the consumer. The product success and mix is important for the company, because weakness in consumer spending in the next few months is expected.

Tuesday, November 04, 2008

Is the Stock Market Going Nowhere for 10-15 Years?

I have copied an article from the most recent ChartWatchers newsletter. It suggests the market will go nowhere for 10-15 years. Despite the negative argument that will be presented to you, the last few trading days have been positive.

My Counter-argument:

Is this at least a short-term positive trend? The Volatility Index has dropped, suggesting October's wild swings will not be repeated in the near term. In addition, a rally to at least the 200 day moving average may take place. I asked Don Vialoux, technical analyst for about his thoughts on the matter. My concern was that stocks were rallying but the volume was not convincing. My argument was that the rally would not hold up. This was his response:

Technicals currently imply an intermediate recovery within a bear market. Reasonable technical targets are to 200 day moving averages. In most cases, a return to a 200 day moving average from current levels will provide an attractive return. Best guess based on current technical data on broadly based North American equity indices is that equity markets will continue to advance until near the end of January. The charts will help to fine tune the timing.

The Article:

ChartWatchers...The Newsletter

Carl Swenlin | DecisionPoint

To access/subscribe to the source of this article, click on this link:


When the market changes, we must change our tactics, strategies, and analysis techniques to accommodate the new market conditions. This is not a new idea, but it is one that is not very widely recognized, particularly when applied to the long-term. In recent writings I have emphasized that we are in a bear market, and that we must play by bear market rules. Overbought conditions will usually signal a price tops, and oversold conditions can often see prices slip lower to even more oversold conditions. When making these comments, my focus has been on the cyclical bull and bear markets. What I want to address in this article are the secular forces of which we must be aware.

On the chart below I have identified the five secular trends that have occurred in the last 80-plus years. First is the 1929-1932 Bear Market, which, although it was short, saw the market decline 90%. Next was a secular bull market that lasted from 1932 to 1966, which overlaps with the consolidation of the 1960s an 1970s. In the early 1980s another secular bull market began which peaked in 2000 (basis the S&P 500). Finally, we seem to have entered another consolidation phase that could last another 10 to 15 years.

I began my market studies in the early 1980s, before the big bull market took off, and I learned from the guys who learned all they knew from the market action of the 1960s and 1970s. Applying those rules to the new bull market was confusing, frustrating, and unprofitable. While I didn't participate in those markets, it is easy to imagine the bewilderment of those who, educated in the bull market of the 1920s, took the elevator all the way down to the basement starting in 1929.

The long bull market after the 1932 bottom was missed by most of those traumatized by the crash, but it trained a whole new group of analysts who learned that the market always goes up . . . until everything they knew was proven wrong by a 20-year consolidation. Finally, the battle cry of the 1980s and 1990s bull, "this time it's different," was learned well by those who ultimately ate the 50% decline of 2000-2002.

Unfortunately, it takes time to unlearn the lessons of the heady 1980s and 1990s, and we can still observe people using bogus valuation models that only work in bull markets. We still see people trying to pick bottoms, and we still see people who think that a stock is under valued because it is down 70%. By the time this current secular market phase is over, people will have learned all new rules, that will not apply to the next 20 years.

Whether or not I have correctly identified the current secular market phase as a consolidation remains to be seen, but I am certain that we are no longer operating on the rules of the last secular bull market.

Monday, November 03, 2008

Toronto Real Estate: Price Moderation in October

I have compiled some aggregate sales figures for Toronto Real Estate for the month of October. It is the same story. There is a flurry of active listings when comparing monthly and yearly figures. The total sold has fallen in most areas. Prices have mostly fallen

Central - activity (# listings) up 14%, but total number sold is down 16.8%. Average prices up 1.6% but median prices down 5%
East - activity (# listings) up 2%, but total number sold is down 22%. Average prices up 1% and median prices up 3.5%
West - activity (# listings) up 3.5%, but total number sold is down 19%. Average prices down 7% and median prices down 9%
North - activity (# listings) up 2.4%, but total number sold is down 22%. Average prices down 5.9% and median prices down 0.7%

Central - activity (# listings) up 65%, but total number sold is down 44%. Average prices down 9.2% but median prices down 17%
East - activity (# listings) up 21%, but total number sold is down 14%. Average prices down 3% but median prices up 0.5%
West - activity (# listings) up 28%, but total number sold is down 13.4%. Average prices down 7.8% and median prices up 1%
North - activity (# listings) up 48%, but total number sold is down 39%. Average prices down 7.2% and median prices down 4.5%

Why would prices be falling here? We see no major job losses and Toronto does not have direct exposure to the fallen commodities market. Supply is increasing because people are seeing the US housing bust storm headed our way. The Toronto stock market was also weak last month due to the falling commodities prices globally.

Just this past weekend I would stroll along various streets. There are literally 3-5 open houses on some blocks.
Summary Notes on TSG Stock Market Letter for the week ending Oct 31 2008
  • Emerging Markets ETF was the surprise star performer rising more than 28%. That being said, Zanger recommended that it is best to avoid the market until the wild swings slow down which “could take months.”
  • If the rally is to have any staying power we will need to see volume rise substantially in the next few days
  • Read full article for some good charts on the US Real estate @
  • It came as no surprise that GDP fell 0.3% in Q3-08 but the one standout in the numbers was the significant 3.1% drop in personal consumption expenditures or consumer spending. It was the biggest PCE drop since February 1991. It should also surprise no one that this number will get worse in the coming quarters
  • First American CoreLogic report recently revealed that nearly 20% of mortgage borrowers (on more than 7.5 million properties) owed more on their loans that their homes were worth. Another 2.1 million properties will enter negative equity territory if property prices decline another 5%, according to the report. As of the latest data, 266,000 mortgages are now defaulting every month in the U.S
  • To sum up, the underlying premise of these bailouts is to stimulate a rapid reversal and return to the days of high prices and bloated valuations. But this will come at a cost – a fiat currency that has no real relationship to true value and rapidly rising inflation. As a best-case scenario, we risk years of anemic economic performance, a rapidly declining dollar combined with stagflation and eventual spike in interest rates as foreigners avoid dollar-denominated assets like the plague in search of those assets that are realistically priced. If it fails, we can expect a continuation of extreme levels of volatility as markets swing between periods of euphoria as new stimulative plans are announced and then depression as prices plummet and the realization hits home that the latest plan has failed.

Saturday, November 01, 2008

October in Review

To summarize this past month, work stock markets sold off very sharply in October. This was the worst performance since October 1987. It is very important for investors to know what is most absolutely certain to occur next.

In the years ahead after 1987, a recession ensued in North America. In Canada, this was not fully felt until 1991 - 1995. Prior to the recession, the real estate market literally collapsed in 1989. World indexes did not perform well at that time either, most especially in Japan.

Today, it is eerie that the market is undergoing the same economic weaknesses, only it is a lot worse. News reports and analysts repeatedly describe the situation the market is in as "chartered territory." As an independent analyst who thrives on thinking otherwise, I have to agree.

The single word to describe the market problem is de-leveraging, but the problem is a two-step one. First, as we all know is the financial market de-leverage precipitated singularly by the collapse of the housing market in the U.S. and in Europe. Is Canada next? We'll see, but what has already happened (and what I have already written about) is that prices have fallen quite convincingly in Alberta and in Vancouver.

We are only now, today, facing the second problem: a recession. The word is an ugly one but simply describes two consecutive quarters of negative growth. That's just six months. So what's next?

Unfortunately, my analysis is no more positive from here. All leading indicators have suggested the recessionary forces are just beginning. Technology indexes have performed very poorly. See Semis.

The three horsemen of the economy who either led or dominated the economy over the past few years is sick. Housing, automobile, and financials. The cost two the economy will be job losses in this area. This will exasperate weakness in consumer spending.

Buy Stocks?

I am a consistent investor and I remain a value investor. The stock market has certainly become cheaper and the text book answer will be to buy stocks. The enemy, however, continues to be described by that one word: de-leveraging. Hedge funds will be selling into the rally, and only technical charts will indicate to investors when this "sell on the rally" phenomenon will end. A few stocks are becoming value plays, and I will provide an analysis in upcoming entries.

One stock I really like is Canon. I also foolishly like Sony because they have released a very nice digital SLR, but Canon is a more focused company in the photography and computer printing space. Both are consumer goods and might give a leading indicator as to the health of spending.

One more thing to note. I am/was featured as featured manager on the FSX Trader site this week. In addition, the two picks I made in the past two months performed very well. HED is a bear oil fund that I discussed when it was $13.19. It peaked at $45.46. HXD is a bear fund to the Toronto Stock Exchange. It was trending around $18.50 at the time of discussion and peaked at $38.25.

Thursday, October 09, 2008

Hope (for the U.S. Housing Market)

Dan, on the newly designed FSX Trader (Fantasy Stock Exchange for Facebook) posted the following link. I recommend you read it. Incidentally, I am ranked 48th / 18,419 ("premium" level) and 785th / 203,232 ("basic" level). If you are on facebook, my portfolio is here.

The financial crisis is worse today than in 1990, and there are many problems ahead (like less consumer spending and business investment), but I believe progress is being made.

Tuesday, October 07, 2008

Going Nowhere for 17 Years?

In the July-August edition of the Castlemoore newsletter, Robert “Hap” Sneddon suggested the Dow Jones Industrial Average may currently be in a secular bear market. It began in 2000 and could last 17 years. With the markets failing to recover from extended losses today, the scenario might have be considered. Here is the website if you want to subscribe:

There is growing evidence that the banking malaise is now spreading to the rest of the economy. Previously the problem was contained in housing, automotive, and the financial sector. But since banks are not lending to even healthy small businesses in the U.S., this will clearly impact growth in healthy sectors. In the end, the consumer will also cut back. Take Corning, for example. It warned of weak 3Q earnings, and weak 4Q also. Fewer people will be buying bigger LCD tv's this holiday season.

Monday, October 06, 2008

Banking Credit Illiquidity Now Global

The illiquidity problem taking place in the U.S. has now spread to Europe. Two things now must happen for liquidity to be restored in the banking system at a global level. One: the U.S.will need to take a secondary drastic but convincing step in restoring confidence. Two: European leaders must work together (not independently from one another) to come up with a concerted effort to restore liquidity.

The chances have increased that the EU will have to lower its interest rates. The US will likely do so on Oct 27th. 


Two things to monitor in today's markets: volatility (VIX) , and the US dollar. As mentioned in Tech Talk, capitulation has not yet been reached. The VIX spiked over 35, but volumes must be far higher than average over the next trading sessions whilst VIX settles to 35 and below.

Monitor the US Dollar, as the dollar's strength is now leading the price of commodities, namely weaker oil and gold.

Fibonacci @ 38.2% represents the support level for VIX:

USD support is @ 78.87 (not far from the 81.73 close).

Charts from:$USD

Important note: support prices as outlined on the charts are very speculative. Fundamentals are poor for the global financial markets. For now, price support levels should only be used as a guide.

Saturday, October 04, 2008

Toronto Real Estate Prices Finally Fall

National Post announced the housing boom in Toronto is finally over, because average prices have fallen for the first time in 12 years. Here are the figures from TREB (The Toronto Real Estate Board):
  • Average prices fell to $393,647 year-over-year in September 2008
  • Sales were down 6% from a year ago, and down 11% in Toronto
  • Housing "supply" increased 19% year-over-year to 16,236
  • Days on the Market increased to 36 days, from 31 (year-over-year)
  • 905 sales declined 3% (to 3,878) but average price increased to $352,071 from $351,641
  • 2007 was a strong year, so the figures illustrating the decline are exaggerated
  • A month-over-month comparison is required to get a truer picture of the health of Toronto real estate
  • Using averages is too broad: median home sale prices and an analysis
Some counter-figures:
  • For Central "C" area month-over-month average prices increased 6.2% from August to September, and median prices increased 12.2%
  • For Central "C" area year-over-year (Sep 08 vs Sep 07) average prices declined 7.5%, and median prices declined 2.4%
One thing is for certain: the days for bidding wars is long over. I find it hard to perceive buyers over-bidding for homes when the supply has increased.

Risks are increasing that the Toronto housing market will falter further, the longer the U.S. economy struggles. Ontario (and global countries, already facing substantial housing bursts) is not special and therefore not immune to the weak US economy. In short, the U.S. is an important trading partner for this province.

Lower home prices is simply good news for the buyer who is not willing to devote a large pay cheque to paying down monthly mortgage payments.

Raw Material and Commodity Prices Falling. Buy These Stocks

There is a stealth bull market brewing. FSX Players take note. Companies that benefit from lower grain prices, like General Mills, is performing well. In Canada, George Weston rallied back. It's quietly clear that the market is betting the bailout will result in dis-inflation and slower growth. Again, watch the US Dollar, gold and oil prices, and stocks like Potash.

Thursday, October 02, 2008

Assessing the U.S. Economy After Any "Bailout"

The $700B bailout is hogging the news headlines and is, quite frankly, a distraction. This plan will not save the housing market nor prevent the likelihood of the U.S. entering a recession. Still, some plan is required to restore confidence in the banking system. The free market cannot function without a frozen banking sector.

Here are some recent figures illustrating economic health in September:
  • ISM Manufacturing Index was 43.5 (down from 49.9 in August) - a figure below 50 represents a contraction
  • Unemployment benefits +1,000 last week to a seasonally adjusted 497,000, above expectations for a 475,000 increase (highest seen since Sept. 11, 2001)
The wild trading swings over the past week will make any technical analysis less than useful. Volatility reached significant highs, meaning the direction of the stock market is neither in an up- nor down-trend.

On a more positive note, the US dollar is holding previous rallies. This suggests that foreigners are still willing to place their money in US treasuries. Commodity prices (gold and oil) fell significantly, which may have helped propped the USD.

The USD traded above the $78.08 level. This level now represents a support price.

GE represents the health of the US economy. If it is reaching multi-year lows, that cannot be a good sign of strength:

No sector has been safe in the last few massive sell-offs. It is disturbing that the commodities sector did not hold up, nor did gold.

Cash is king, but a rescue plan that causes inflation will cause its value to deteriorate. What does the investor do next? It's best to first monitor the details of rescue plan before making assumptions.

Wednesday, October 01, 2008

The 3 Views of Analysis

Don Vialoux assesses the market using three things: technical, fundamental, and seasonal analysis. Using seasonality, it is possible to trade based on the time of the year.

In his most recent post here, he wrote the following:

Seasonality in the month of October

During the past 10 Octobers, equity markets around the world have recorded strong gains:

  • The S&P 500 Index gained in 8 of the past 10 Octobers for an average return per period of 3.02%. October was the strongest month of the year.
  • The TSX Composite Index also gained in 8 of the past 10 Octobers. Average gain per period was 1.47%. October was the third best performing month.
  • The Dow Jones Transportation Average gained in 10 of the past 10 Octobers. Average gain per period was 5.12%. October was the strongest month.
  • The Russell 2000 Index gained in 7 of the past 10 Octobers. Average gain per period was 2.26%. October was the second strongest month.
  • The NASDAQ Composite Index advanced in 8 of the past 10 Octobers. Average gain per period was 6.06%. October was the strongest month of the year.
  • The Paris CAC Index advanced in 9 of the past 10 Octobers. Average gain per period was 3.84%. October was the best performing month of the year.
  • The Frankfurt DAX Index advanced in 9 of the past 10 periods. Average gain per October was 4.56%. October was the best performing month of the year.
  • The London FT Index rose in 7 of the past 10 Octobers. Average gain per period was 3.25%. October was the best performing month of the year.
  • The Dow Jones Industrial Average rose in 8 of the past 10 Octobers. Average gain per period was 2.89%. October was the best performing month of the year.

Tuesday, September 30, 2008

What the 700B Bailout Delay Could Mean for Canada

Many are asking if or when the frozen credit system and slower growth in the U.S. will impact the Canadian economy. The answer is broken down to a number of points:
  • The energy index fell greater than the TSX Index
  • The materials index fell greater than the TSX Index
  • 5-year first time mortgages reached almost 8% (signaling a flight to safety)*
  • The auto industry remains in a decline
  • Gold rose
* as reported by Diane Francis in Financial Post for Sep 30. Rate could not be verified

Impact on Toronto Real Estate

I have been assessing the Toronto real estate activities for 2008. The theme remains the same: listings are increasing (supply), days on the market is increasing (activity is slowing slightly), housing prices have increased. With mortgage rates rising significantly due to the events in the U.S., the purchasing power for consumers will weaken.

As we have already seen, provinces most exposed to the commodity market will see declining profit (and a need to hire more workers). Again, there will be pressure on the demand side of the housing market.

At some point, perhaps in a month's time, the prices for homes in Toronto will need to adjust to the pressures of the global economy. After all, other countries have been proven to be impacted by the weak U.S. economy. This includes China, London, India, and Europe. Canada will be no different.

Chart below: U.S. Energy Sector reflects economic health for Canada:


Monday, September 29, 2008

Excerpt from TSG Weekly Market Watch
September 26, 2008

Written by Matt Blackman

About the $700B Bailout plan
  • They are highly inflationary and even if they do temporarily work, result in rapidly eroding buying power as government deficits soar and the value of the dollar plummets
  • Recessions are a necessary part of maintaining healthy capital markets longer-term. They remove excesses that have been built up over years of easy money and rapidly appreciating asset prices as the inevitable bubbles build. To try to interrupt this cycle makes about as much sense as trying to suspend the law of gravity

  • August new home sales fell 11.54% from July and are now down 34.4% year-over-year. All the bailouts and money pumped into markets have yet to have any impact on sales according to the latest Census Bureau data.
  • July marked the first time since the bubble began to pop that the excess of homes being build (red area) exceeded sales and as we see from the chart, this situation continues to plague builders.
Stock Market:
  • Every sector remains in a technical downtrend demonstrated by a series of lower highs and lower lows.

We will have to wait to see if the bailout has a positive impact on this but as we have said in the past, this is not a liquidity problem, its is a solvency crisis that no amount of liquidity will cure.

Full Article here:

Thursday, September 25, 2008

Seeing Beyond the $700B Smoke of Distraction

I found a great counter-argument to the market's assumption that the stock market is still healthy. I, personally, am having difficulty assuming the markets will rally between November and April (on seasonal strength). The current smoke screen investors are facing is the 700B bailout making its way through congress.

Let's look at the figures to see beyond today's headlines.

In the U.S. for August, 2008:
  • Durable goods orders declined 4.5% .. Source: @
  • Fresh claims for unemployment benefits jumped sharply to 493,000 (it last reached the 500,000 mark in September 2001)
  • Even after adjusting 50,000 jobless claims (hurricane Ike), the 4-week average of 443,000 claims was last reached November, 2001
  • new home sales plunged by 11.5 percent in August, (1 percent dip that had been expected). Annual seasonally adjusted annual sales rate of 460,000 is the slowest pace since January 1991
  • The average price of a new home fell in August by 11.8 percent to $263,900, the biggest one-month drop on record
  • The median home price was down 5.5 percent to $221,900.

It remains clear that although I believe by sentiment that the markets will stabilize or even rally, the fundamentals are not there yet for a sustained rally.

I am really torn as an investor and as an analyst: the market is more ripe for short-term trading than for value investors who like to buy and hold. It is for this reason that one might find my notes contradictory from one entry to the next.

The market simply needs to hope that the government bailout action will at the very least restore liquidity in the debt markets in the face of declining employment, lower home prices, and higher commodity prices.

Tuesday, September 23, 2008

Notes on Matt Blackman's Trade System Guru Newsletter:

Week of September 22 2008

  • “As a group, 17 or the 19 stocks for which naked shorting was banned jumped nearly 20% in the three-day period (July 15-18)!” Unfortunately, this rally was short-lived.

    In other words, the last SEC action generated nothing more than a short squeeze where prices were temporarily driven higher by short covering. Prices then continued to fall putting in lower lows.
  • There was a net loss of more than $70 billion (net sale of Treasuries) during the July low in stock markets. More concerning, the orange linear regression trend line remains strongly negative and the sales remain below the yellow dashed line that shows the approximate amount that the US Treasury must raise each month just to pay off last year's budget deficit – a deficit that has skyrocketed with all the bailouts announced so far this year! Falling purchases of Treasuries has the potential to put strong upward pressure on interest rates if it continues.

Furthermore, Matt's summary view on the market is the same as mine:

  • Until there is a significant turnaround in earnings, the housing market firms and economies start growing again, any recovery will be short-lived.
Comments and Analysis:
The trading on Monday was disappointing: there was no upward follow-through, which means the market is not confident the $700B bailout will succeed. The US Government has a monumental yet simple task it needs to accomplish: convince the world that it can restore credit liquidity and be able to back it.

The huge (historic) drop in the US Dollar led to a rise in gold and oil prices. The latter will undermine consumer confidence and therefore my call to take a long on the consumer goods sector.

Monday, September 22, 2008

Thoughts on the Rescue Plan...Outside View

Sunday Links: The Splurge

Capitalism will survive
, but not for lack of trying to commit suicide.

Links shared by Daniel Carroll, FSX Team on FSX Fantasy Stock Exchange.

Saturday, September 20, 2008

What Credit Crisis?

Business reports around the world are reporting last week's trading activity was net neutral. For example, the Toronto Stock Exchange was up 1% for the week. The Bush Administration is creating another bailout package that will cost US $700 Billion. This is a massive amount. Worse is that this is on top of the cost of saving AIG ($80B) and Fannie And Freddie Mac ($200B combined). The total deficit excluding these items will be $482 Billion.

It has taken me months to really comprehend why the credit market is seizing. Mortgages were given out to many homeowners who should not have qualified in the first place. Why? There were "workarounds" against the checks and balances associated with calculating the risk these homeowners would default. The repackaged debts, CDOs, and other instruments that were created still actually have value, but there is no market for them. What do you assign investments that have no buyers? Zero. Yet these debt obligations have property backing them, so its book value should not be zero.

The government is effectively buying all of the above illiquid debt obligations and creating a market for them. This should solve the problem of the credit market seizing up. In fact, this was so severe that several money market funds had a redemption value of $0.99 for every $1.00 deposited. Investors were even buying US 30 day T-bills were paying almost 0% interest.

The action taken by the Government was necessary. Now, as stock investors, we must review the consequences of this drastic bailout, and make a few assumptions.
Let's start with the logical assumptions:
  1. Credit markets open up again, making it easy for consumers to borrow again
  2. Consumers re-gain confidence and boost spending
  3. Companies boost revenue because consumers are happy again and buying their things
  4. Companies do not lay off employees because their sales are steady
  5. Companies import raw materials, developed products thus aiding in economic growth for China, India and Europe
  6. US Consumers take out mortgages and buy homes, and assume that housing prices will not fall the next month
  7. US Consumers take on more credit card debt, and don't mind paying the high credit borrowing rates
Assumption #2, Consumer Confidence, will be a key factor in ensuring the latest banking sector bailout succeeds.

Consequences to stabilizing the Financial Sector:

  1. The US will buy debt and increase Money supply, fueling inflation
  2. Higher consumption = Higher supply of products = Greater demand for oil, metals, and other commodities
  3. Interest rates will need to increase, creating higher borrowing costs
  4. The US dollar will weaken
  5. The US is spending $400B a year just to pay for the interest on the debt. This will severely limit the ability for the next President to fulfill spending promises.
It's clear that the cost of this massive government action will be severe inflation. Therefore investors need to do the following:

  • Buy gold (trades inversely to the price of the US Dollar)
  • Buy commodities, especially oil
  • Sell US Government Bonds (I can no longer recommend TLT)
  • Begin to take a position on the consumer discretionary sector and semiconductor sector
The VIX (Volatility Index) peaked on Thursday @ 42.16 and is headed down. Stock markets will probably trade in a range but may risk re-testing lows reached early last week.

...and On Toronto Real Estate?

The renewed bank sector stability in the US will have a positive impact on Ontario's economy. Home buyers will be less fearful that the weakness in housing in the U.S. will spread here. As always, I would recommend home buyers monitor the health of the commodities market and the job market. These two factors are good indicators for the health of home buyers.

I recommended TLT on September 4th. It is now a SELL.