Posts Tagged 'stock market'

I’m back … and the Bear will be joining me shortly

OK, I know I’ve been a bad, bad, bad dagblogger for quite some time, but seeing as I’m getting married in less than four weeks, I’m giving myself a pass. (Today’s key word: ELOPE!!!)

I’ll be back more regularly by the end of the year, but for now, I just wanted to give you a ballsy prediction:

The market is nearing a significant short-term top. Nailing the exact timing is always difficult, but I expect we’ll be significantly lower by the end of the year, and certainly by the end of the first quarter of next year, I expect we will see market averages at least 15-20% lower than we have now.

Way back in March, on the day after the stock market bottomed, I wrote a piece predicting the rally could have legs. Now before I go patting myself on the back too hard, I must admit I’ve been surprised by how long the rally has lasted and how ferocious it’s been. But I suppose that’s the kind of combustible response you get when you combine a recovery from a near-death economic experience with trillions of dollars in government stimulus and bailouts and near-zero interest rates.

So why do I now believe the party is about to end? Well, for several reasons. First, my prediction is obviously influenced by my overall negative view of our economy. Employment is still ugly, consumer debt levels are still too high, the dollar is getting perilously weak while commodities like oil and gold are rising on an almost-daily basis. To stimulate the economy, we’ve pursued short-term measures like foreclosure relief, tax credits, and Cash for Clunkers, which have done little to resolve the structural imbalances in this country. The only thing we’ve really accomplished is burdening future generations of Americans with crushing levels of national debt. We may in fact see decent GDP growth for the next few quarters but that’s only because the comparisons will be so weak.

The overall bullish reaction to this better-than-expected – but still rather grim – drumbeat of news we’re getting is another reason I’m worried the good times are about to end. Take today’s action, for instance, with the market moving higher because of some new economic data. What are these promising green shoots of which I write??

Well, for one, tetail sales rose 0.1 percent for the month of September, according to a survey. This is the first sequential rise in sales in over a year, and apparently a cause for massive celebration according to the chief economist of the group that led the survey. “Let the retail recovery begin,” said Michael P. Niemira of the clearly unbiased International Council of Shopping Centers. “This is the start of a better performance and better fundamentals.”

Hogwash. With unofficial unemployment rates still in the teens and rising, I guarantee you this holiday season – and many holiday seasons to come – will be a big disappointment.

Speaking of unemployment, by the way, the market is also cheering the fact that the Labor Department reported that new claims for jobless benefits fell to 521,000 last week, the lowest level since January and, yes, ‘better-than-expected.’ Meanwhile, this still means that more than a half-million Americans lost their jobs, above the rate where overall unemployment would start falling.

i wouldn’t say the pundits and experts are universally bullish – which would be the ultimate contrarian indicator – as I do still see some skepticism out there, but I believe investor complacency is rising to dangerous levels while most of them try desperately to chase the market.

The final reason for my growing bearishness is more technical, but basically comes down to the fact that many of the stocks I look at are now approaching their 2008 highs. This is a little inside baseball, but basically it’s often the case that old highs for a stock end up being significant resistance points as investors who bought at those levels look to get out close to even. You see these ‘double tops’ often when looking at stock charts.

Since I believe that very little has been done to fix the economy structurally, I feel that 2008 levels will serve as a high watermark for the market for years to come.

Now don’t get me wrong. We’ve done a few good things to justify these higher prices. Inventories have been drastically reduced. Many companies have cut costs and yet kept efficiency and productivity levels high. The emerging markets like China and Brazil have shown a great deal of resiliency. And certainly the prospect for a total economic collapse – which seemed almost inevitable at the height of the panic – now appears very remote, at least for the foreseeable future.

But mostly what we’ve done is comparable to giving a sick, lethargic, malnourished patient a shitload of sugar and then celebrating the fact he seems more energetic. The sugar high crash is coming and it won’t be pretty.

Ok, Here’s the rally … Now what??

OK, so I was a day or two late with my short-term bottom and violent rally call, but it’s party time on Wall Street today with the markets almost up more than double digit percentages.

So where do we go from here? Well, my prediction that we could get back close to Dow 11K will likely prove far too aggressive, but it’s very likely this will have at least some legs. There’s just too many people bearish and short for it not to last a bit longer (People who are short are at least not in the market will worry that we’ve seen the bottom and will fear missing out if the rally continues).

But also remember that V-type bottoms (where we sink dramatically only to immediately recover all that ground and then some, such that the price charts resemble the letter V) are very rare beasts.

In the short term, I think this rally could last a while but that the downtrend will remain in place and that we will revisit the lows from last week sometime in the next few months, if not sooner.

In the medium-term, if this winds up being just a normal recession, we have seen the lows and will probably start to move higher as much of the bad news and lowered profits have been discounted by the market. Remember, during your garden-variety recession, the stock market tends to do well since it begins to anticipate the recovery period.

Unfortunately, I think we are in for something far worse and we will likely meander in a range near the 8-9K level on the Dow for a year or more, and we could even end up breaching those lows from last week.

The problem is unless you’re an active trader or will need a lot of your invested money sometime in the near future, you should probably mostly sit tight and ride out the storm. I’ve said it many times, this could end up being economic Armageddon but it’s not the likeliest scenario and panicking or changing your long-term investment strategy won’t do much to help you.

Add some gold (or gold ETFs or gold stocks) to your portfolio if you’re really worried.

For an insightful, more positive take on the long-term prospects on the market, this provides some great analysis.

Short post on short selling and a short-term bottom …

I think we’re about to get a much-needed reminder that stock markets don’t always go down.

Could happen today, could happen tomorrow, and it may or may not happen after one last big selloff, but we’re going to get a relief rally very soon. I don’t expect it to last long, but I do expect it to be rather violent and dramatic. Maybe we get back close to 11,000 on the Dow.

My short-term optimism (and change in opinion) stems from a conversation I had with a hedge fund guy at a conference on Tuesday. He said every hedge fund guy is desperately looking for new stocks to short. ‘You can’t have enough short ideas,” he told me.

It’s counter-intuitive, but it’s actually good when investors are all bearish because that means there’s a lot fewer people with stock they want to sell. (Remember, short selling is a bet against the market in which investors sell borrowed shares of stock in hopes of buying them back at a lower price and pocketing the difference).

It’s been especially difficult for hedge funds because the government unwisely banned short-selling in more than 1,000 different stocks (the list was at first 800 stocks, and was supposed to be limited to financial companies, but the list has expanded to the point of ridiculousness both in terms of size and scope).

At first, I thought the short-selling ban was keeping the market unnaturally high, but now I think it may have had the unintended consequences of making things worse. Hedge funds who may have covered their shorts haven’t done so because they know they can’t put them back on. Some sectors like technology may have been especially hurt as hedge funds looking for shorts have had to target companies outside the financial industry.

So I think the lifting of the short-selling ban Wednesday night could prove to be a catalyst to spark that rally. The Fed could come together with the European Central Bank to lower rates in a coordinated attempt to stimulate the markets.

Again, in the long term, I don’t think anything the government does will prevent an extended, deep slowdown, the likes of which we haven’t seen for decades, if not generations. The market will probably sink much lower than where it is today.

But at this point, even a short-term rally would be most welcome.

Some perspective on a Gray Monday …

So, the market is down 555 points, almost 5 percent. Yet so far this is no October Black Monday, like when the market dropped 13 percent on October 28th, 1929 or when it dropped 22% on October 19, 1987. (Note: Things are moving fast, market down more than another 100 points since I started writing).

This is, in many ways, even worse – just another Gray Monday, where we get the continued, orderly drip-drip-drip of a market with no confidence, and no idea of where we are headed.

Did you know in the Great Depression the market fell 89% from its 1929 peak? And that it took us three years to get there? I’m not saying that’s what is going to happen now. The world is very different. The genesis of this crisis is very different (whether that’s good or bad, who knows?). But it’s something to consider. I think we’re headed toward that panic sell-off … but we’re not there yet, and even if we have it, I don’t expect to get the immediate recovery we got in 1987.

Things will likely get worse before they get better. Good people will suffer. But to complain seems rather silly when so many people around the world have much bigger problems. As far as I know, I’m healthy. My family is healthy. i have so much love in my life. I know how I’m going to find my next meal. I live in a country where I can speak my mind, and vote my conscience.

Yes, even on Gray Mondays, life goes on.  I walked my dog in Central Park this afternoon and the sun was still shining. It was a beautiful early fall day, and I enjoyed every moment, watching my cocker spaniel search for any bits of food left by careless picnickers and chase squirrels he’ll never catch and wouldn’t know what to do with even if he did.

This election both presidential candidates have been tossing out words like Hope and Change as if they were cheap plastic political buttons, offering very few specifics about how we are going to get out of this mess. But Hope and Change are powerful concepts, and if applied correctly can help people get through tough times.

Today, I’d like to add one more:

Gratitude.

Holy *%$# … Bailout defeated, Market collapses

OK, I was wrong. Really wrong. I was sure politicians would approve this bailout bill, no matter how publicly unpopular it was. The short-term risks of not doing something seemed too enormous – a complete freeze of the credit markets and the subsequent collapse of the economic system that relies so heavily on that free flow of credit.

But apparently, there’s one other short-term risk I didn’t consider strongly enough: The fact that every last one of those 435 members of the House of Representatives are facing elections in a month and could be tossed out on their rear ends if they piss off their constituencies.

To put it mildly, the financial markets didn’t take too kindly to news of the plan’s defeat. Even with a pretty widespread short-selling ban in place, the Dow Jones average fell more than 700 points, while the Nasdaq plummeted more than 9 PERCENT!!!!!

So now what should you do? Well, here are my thoughts.

  • I obviously would never give specific investment advice here, but if you have money set aside and a long-term time horizon, putting some of that money to work doesn’t sound like a bad idea. I put an order in for a small amount of an S&P index mutual fund. But that’s been my strategy every year – put a little more money into the market during the bleakest time of the year. In general, you want to be buying when everyone is selling. As I’ve said in other posts, this situation could definitely end up being Armageddon and/or the next Great Depression (at some point, the American empire will collapse just like every other one in history), but that bleak forecast is probably not the most likely scenario. And even if it is, having a shoebox full of cash stashed under your bed won’t do you that much good. Eventually, at some point, I’d begin to look at the riskiest, hardest-hit sectors as possible places to invest – Homebuilders and real estate, financial institutions, etc. – but I’d wait awhile to see how things shake out.
  • While dipping a toe in these scary investment waters, I’d also hedge my bets a bit just in case things get appreciably worse. Personally, I’d spread out my money to separate institutions if I had to make sure my bank accounts were within the $100,000 FDIC insured level. Obviously, there are stronger banks and weaker banks, but in a crisis, it’s tough to be certain of the difference so there’s no harm in being prudent. Also, the government last week guaranteed against losses in money market funds for one year, but to be extra-safe, I’ve pulled money out of those accounts and into plain-Jane savings accounts.

It’s odd: I don’t agree with the free-market, deficit-hawk politicians who have opposed this bill and blocked its passage (I believe that we have no choice but to act), but on some level I actually admire them for sticking to their principles. The lessons of The Great Depression and subsequent crises suggest otherwise, but they could be right that we need to suffer the consequences of our actions and take the full extent of our medicine if we are truly going to cleanse the system. A bailout plan poorly executed will only make it worse down the road.

However, I still think the risk of inaction is too high, and that these politicians will look at the market and economic fallout of their No vote over the next couple of days and then pass a bailout plan that is very similar to the one they rejected.

After all, this decision wasn’t just about principles, but about politics. And the politics could change very quickly if the electorate realizes that The Powers That Be weren’t bullshitting when they warned that Wall Street blood would pour onto Main Street.

A Bill We’ll Be Paying Back For Generations …

Ok, so I’ve admitted that the government probably had to do something to stem the financial crisis.

Now I’m going to talk about all the ways this bailout could – and probably will – go wrong (with the caveat that all the details still haven’t been worked out).

  • Everyone talks about how this plan will be reminiscent of the government’s ultimately successful strategy to create the Resolution Trust Corp. (RTC) in 1989 to help resolve the Savings & Loan banking crisis.  Numerous difficulties arose during that bailout as more than 2900 institutions and $900 billion in assets ultimately had to be rescued, and yet the cost and complexity of this current crisis will easily dwarf anything seen in the S&L crisis. The bad loans in question are larger in scope, broader in reach, and more intricate in design. Deciding which assets to buy, how much to pay for those assets, and how to get rid of them will be extremely delicate matters, and if we have learned anything about government, mistakes will be made in the process.
  • The plan will certainly cost U.S. taxpayers a lot of money. Some optimists are talking about how the government could end up making money from this deal if they’re able to pick up these assets at very distressed levels and then sell them back at higher prices once things settle down. Such a scenario is possible but highly doubtful. What is much more likely is that the U.S. balance sheet, already drowning in foreign debt and facing enormous future liabilities caused by a troubling demographic shift (e.g. Social Security), will continue to deteriorate. This will lead to higher inflation, a higher deficit, higher taxes, a weaker dollar and ultimately, a large transfer of wealth to other nations.
  • This bailout, even if successful and profitable, will once again institutionalize the concept of moral hazard into our economy. This is something I’ve talked about before in this blog, but economic moral hazard basically means that people will take on too many risks if they believe they will be bailed out if things go bad. There are folks, including me, who feel that the S&L bailout is one reason why the financial system got so quickly back into trouble. The Glass-Steagall deregulation of the industry didn’t help, either. I hear a lot of people say our current predicament is too critical and dire to spend time philosophizing about moral hazard, but that’s a circular argument which will never lead to addressing the issue.
  • That’s why it’s so critical the government makes sure all institutions that need help suffer some kind of repercussion as it designs and implements its plan. And when the dust settles, government should begin modest re-regulation of the financial industry to try and ensure this level of risk-taking doesn’t happen again. Finally, the government should go hard after people who committed crimes during this period, and take back some of the billions in ill-gotten gains from those bad apples. No need to play the blame game immediately, and you’re never going to get back all that money (thinking about the multimillion-dollar bonuses many of these guys got over the past several years is a bit sickening), but people as well as institutions need to realize that overly risky behavior could lead to punishment down the road.
  • The one thing we do know about the current plan is that the SEC has declared all-out war on short sellers (investors who sell borrowed shares in hopes of buying the stock back at lower prices and pocketing the difference). The agency has banned short selling on 800 financial-related stocks and forced large short sellers to disclose their positions. I hate this. It frankly disgusts me. It’s something a country like China would do (and has done). I’m a long-only investor, but short sellers are an easy scapegoat – they provide liquidity in the market and often correctly point out flaws in companies and business models. However, I do understand that confidence can make or break our financial system, and plummeting stock prices caused by unchecked short selling certainly threatened to exacerbate the crisis. So, while this ban sets a very bad precedent, I suppose I can live with it as long as it is a very temporary measure. In the end, the ban will only work if time and some breathing room was the only thing the market needed to stabilize. If this bailout isn’t sufficient and we have even more serious systemic issues, then this market rally will be only a temporary reprieve – stocks will fall again and the problems will begin anew as soon as the ban is lifted.

All Clear? Hardly …

The SEC has banned short-selling on financial stocks. The Treasury has guaranteed money market funds and is cooking up plans to spend hundreds of billions of dollars to buy distressed assets and save troubled banks. The market has rebounded huge, taking back all of this month’s losses.

So are we all clear??

Hardly.

I think in the short-term, the moves have bought the financial system time to gather its senses, to take a breath. That’s a good thing, and clearly the ban on short selling is doing a lot to move prices higher (I’m going to write about the numerous, potentially devastating long-term ramifications of all these decisions in a following post).

Something needed to be done. We took out our previous lows and got that panicky sell-off I talked about in an earlier post. The potential for blood on the streets (Main Street as well as Wall Street) was very real. A functioning economy ultimately rests on people’s confidence in it, and widespread panic can cripple the health of such a system to the point where it takes years to recover.

But even if you stabilize the system with these moves, you’re still going to be faced with most of the same issues: A moribund housing market, a stretched-to-the-limit consumer, a weakening job market, a credit crunch, a global slowdown. It will take time and a lot of pain to resolve these issues. Anything we do will at best ease some of that pain, while there’s a very real risk we end up doing something to make the problems last longer than they otherwise would.

In sum, the government may have just put a floor in the market with these moves, and at least temporarily prevented a disastrous widespread panic that could have led to another Great Depression.

But I also think we’ve seen most of the short-term stock price gains we’re going to see (maybe we see another 5-10%).

And the medium-term future for the economy AND the market still doesn’t look particularly bright. We’re going to be stuck in this economic morass for some time to come, and the market will continue to reflect that reality.

A lot of Boo … not so much Yah!

Whoo-boy. Another fun day on Wall Street. I just got done watching another episode of Jim Cramer’s Mad Money and I gotta vent a little bit here.

I like Cramer. A lot of people think he’s a buffoon, but I think he’s incredibly smart, and he entertains and informs like few others in the business. And there is no denying his stellar record as a hedge fund manager in his former career (though I would venture that a lot of the practices he now rails against as a voice for the common man- like naked short selling – helped contribute to a lot of that performance).

But Cramer’s really beginning to annoy me. This year, i feel like he’s called the bottom at least a half-dozen times. Even from a short-term trading perspective, he’s been wrong on a lot of those calls, and obviously, from a longer-term perspective, he’s been painfully pollyannish.

Back in February, I wrote Cramer a long email saying he was being too cavalier and stating my concerns about the market. Among other things, I wrote:

  • Bubbles and market extremes that crash or turn the other way do not end softly or easily or without massive damage. The pendulum always swings to the other side and a buying opportunity (which will eventually arise) doesn’t appear until much of that damage has been felt and this gets way worse than people imagined. We are still in the early throes of this current crisis. We still haven’t seen any bankruptcies. Foreclosures and defaults have been at a minimum. The job market has only just begun to show signs of strain. The pain will of course spread to the rest of the world, which is wallowing in our debt and weak dollar, causing a global slowdown. Much more damage will be done, many more shoes will drop.
    I guarantee you this: we haven’t seen the lows yet. At best, we are probably a little more than halfway done with the selling.
    In six months we will be wondering how anyone ever thought that the January selloff marked the bottom of this market – a bottom that came less than three months and 20 percent off the market’s ALL-TIME HIGH?!?!?!?!? (doesn’t seem like a very good bottom to me)

Not surprisingly, Cramer never responded to me. One of the best things about Cramer used to be his ability to admit he was wrong (When he first created Thestreet.com financial website, his column was in fact even called Wrong!). He understood that Mister Market was a humbling beast, that one day you’d think you got it all down, and the next it’d have you whimpering in the corner like a scolded puppy.

But you don’t hear mea culpas much from Cramer anymore. Because he’s on every day, Cramer can and does change his mind about the market so often that he can claim he’s ‘right’ no matter what happens.

I don’t really want to castigate Cramer. He’s been right a lot in his career and obviously made a lot of money in his lifetime, while I’m a nobody who can’t even begin to count all the times I’ve been wrong in my short career. All I’m asking for is a little more humility and a recognition that maybe his show is better served as a vehicle for entertainment and education rather than making money.

Not enough bearishness …

I wrote earlier today how I was hopeful for a significant market rally in the short-term because there was too much bearishness.

I’m not so sure anymore.

This was a truly ugly day, the worst we’ve had since 9/11, and yet I see a lot of complacency. I know the number of bears in recent surveys has been very high, but I’ve been reading a bunch of stories on today’s action, and I see a lot of bottom-pickers or at least ‘What, me worry?’ guys out there – people who have been calling for the bottom for months and months now and feel this is an even better buying opportunity.

These people suck. We need them to go away, to admit they were wrong and didn’t realize how bad things had gotten, before we get a true bottom. We may just need to destroy those old lows of the summer before real panic sets in.

If we don’t get that panic, any rally we do get will be EXTREMELY short-term. The problems that we have created weren’t built in a day, a month, or even a year, and they won’t go away that easily either. Expect a sluggish, choppy market at best over the next couple of years.

BTW, can you believe the price of oil? $94?!? A couple of months ago, I made a call that oil was a bubble market nearing a top (I ended up posting the prediction on the very day the price of oil topped out, but that was just sheer luck). I said oil would hit double digits by the summer of ’09, and it turns out I was, oh, a wee bit early. I just hope politicians don’t take any credit for this – oil’s 35% fall is due to one reason and one reason only: A weak worldwide economy growing weaker by the day.

Merrill saw the light … now, maybe we can to

I just wanted to offer my immediate, quick, bullet-point take on the flurry of GIGANTIC market-related news today, which i briefly referenced last night.

  • Lehman Brothers’ brankruptcy obviously sucks for the company’s employees and shareholders, but this HAD TO HAPPEN. Over the past year, starting with Bear Stearns, the U.S. government has spent hundreds of billions of dollars, and will likely spend hundreds of billions more, bailing out numerous large financial institutions. The process had to stop as there will likely continue to be a stream of companies, in the financial sector (hello AIG) and then elsewhere (hello GM), that ask for bailouts or other financial assistance from a federal government which just doesn’t have the balance sheet to support any more albatrosses. The obligations it has already taken on will bring the U.S. economy to the brink of disaster, and the government had to make a stand that most companies from here on out would be on their own.
  • Merrill Lynch CEO John Thain is no dummy. He saw the government playing tough in the Lehman negotiations, and decided now was the time to pursue an exit strategy – while he still had the time. Without a doubt, Merrill would have been in the bears’ crosshairs next. The deal he signed with Bank of America was an extremely savvy one.
  • Can’t say the same for Bank of America and its CEO Ken Lewis. He is already dealing with the repercussions of unwisely taking on Countrywide Financial, a large home lending organization that was among the worst of the worst in terms of bad apples. Now, he’s paying a healthy premium for Merrill when there is little doubt the stock would have fallen much, much lower in the coming weeks. Fifty billion dollars is nothing to sneeze at. Perhaps the only explanation for the timing of the transaction was that the U.S. government placed some pressure on Lewis and Thain to make a deal – though that was denied in a press conference.  Or perhaps Lewis is just a patriot who feels a company named Bank of America should do its part to bolster the confidence of the economy (and knows deep-down his own institution will be threatened if things don’t turn around soon).
  • All this news is obviously causing turmoil on Wall Street. The markets are down big as I write this, yet I think there is a possibility that a short-term rally occurs in the near future. I’m encouraged that the financial stock index as well as the other major market indices are still holding above their all-time lows. The market is already hugely bearish, which is a good contrarian indicator (when everyone’s already bearish, that can mean that there aren’t many people left who want to sell)
  • This is not the end of the story. There will be more fallout. The long orgy of easy credit days are over, the U.S. consumer is on life support and will remain there for years, and the world economy will continue to feel the pain of our exuberance for some time.  I still worry about a significant, deep, prolonged recession or even mild depression. I worry that the global markets are now so complex, so intertwined, that even one failure like Lehman could cause a systemic collapse. I worry that a geopolitical event pushes us over the edge. I worry that the aging demographics of the U.S. and the country’s enormous and growing budget deficit will make it tough for us to pull out of our current malaise. But I now also have at least a glimmer of hope that I haven’t had for a long time. The government and the Fed can’t bailout, or rate cut its way out of this mess. We have to feel some pain, maybe a lot of it.  But it’s true that things look darkest before the dawn.  We’re not there yet, I don’t think, but we’re certainly closer.

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