Death Spiral Stocks

I have long wondered just how the airlines stay in business. From fuel costs to security to the stupid need to overbook flights to the unbelievable infrastructure needed to keep things moving I really want to know how they do it.

The market wonders, too, by the way as these stocks are in the toilet.

But the public will travel by air and business needs to ship goods and people quickly to get things done. Someone will have to provide the service yet all the contenders are going out of business. Then supply and demand can finally right this wrong and send prices up to where they should be. Business already pays in the form of full fares and business class. Individuals will have to get used to higher fares and a budget squeeze that will force them to forgo that extra trip to Disney World or weekend jaunt to Vegas.

Do I sound like a cold b*st*rd for excluding the lower income brackets from air travel, or at least as much air travel? Yeah, I do. But that is the free market and it is coming. What stocks are going to benefit from that? Not resorts. Not casinos. But perhaps mass transit suppliers and restaurants.

A paradigm shift is coming.

And now lets talk about the automakers. More stocks getting flushed and why? Because they still cling to a world where energy was cheap and status came in the form of the stupidest car ever produced - the Hummer. I thought regular SUVs were dumb. Who needs an all terrain vehicle on the highways of the southern half of the country? Maybe we can make the argument that they are needed in New England, MinnieSota and the northern Rockies but soccer mom does not need a four wheel drive gas chugger to head out to Stop & Shop. Yeah, they hold a lot of kids but so do minivans and the dreaded wood paneled station wagon.

After Detroit finally wakes up and the unions start acting like partners and not parasites that kill their hosts the automakers will survive. Or at least some form will because we will always have the demand for motor travel. Again, moving people, goods and even travel for leisure are not going away. Well, not unless Mr. Scott can beam stuff around the planet.

So, my prediction is that a better motor vehicle mousetrap is being built somewhere (no not the Ginger) and that company will be a great investment. And so will the few airlines that figure out that charging the right amount of money to the right audience will make them profitable again. Let someone else figure out how to serve the low end - where there will be a better mousetrap made somewhere, too.

Sorry people who cannot afford the real price for flying. Perhaps a whole new industry of selling unsold seats the day they travel will arise - better than the online ticket brokers that I would not trust with my precious vacation time. Think of TKTS in New York selling seats to Broadway shows for half price the day of that show. Sell the seat or lose it forever. Same for airlines. Now those of us who cannot afford to travel with the whole family will be able to take that trip after all.

Journalists, oy!

Here they go again. The headline after the close today read:

Dow off nearly 20% from high, signaling bear market

That's what HAS happened. Calling something a bear market implies that more of it WILL happen. Can anybody give me a break? How about this headline?

The Dow is down 20% and you should have sold when the technicals turned sour oh, about a month ago.

Sorry, just a pet peeve of mine. This sort of stuff does absolutely no good to anyone's readers or clients.

Me-Ouch!

Put up your dukes! I am now in the unenviable position of having to defend my column looking for a market bounce despite all the warnings in it that this is still bear market and possibility that the runup to the Fed was buy the rumor, sell the news, which it apparently was.

Once again, journalist deadlines got the better of me. I wrote yesterday's Barron's Online piece in the morning and had it to my editor at 12:30 NYT - nearly two hours ahead of the Fed. The rally in the financials was hot and things were looking pretty good for that short-term trade. The UYG ETF was up well over 6% at one point, too.

But just like that, the market decided it did not like the whole Fed language thing and turned around. Toss in bad tech earnings and oil that is not falling anymore (not that it ever broke its trading range in the first place) and so much for the financials bounce. And so much for the market bounce, too.

This was not supposed to be a long-term trade. And it was no guarantee. It was just a pretty good bet given support, money flows and sector sentiment.

Am I getting defensive here? You bet! In a Barack Obama-esque way, I want to fend off the complaints before they begin. If you read the column closely, you will see it starts out and ends up with "this is a bear market."

Me-ouch! Dead cats bouncing. Hope springs eternal. Everyone is a contrarian.

Indian Quickie

Here is a quick excerpt from yesterdays' Quick Takes Pro, updated with overnight data. It is the Indian Sensex (stock market) index for the past three years.

My comment?

"Global growth engine my derriere. This is a weekly chart and the index is at a new 52-week low, below major support and long gone from a bullish trend."

Bond Insurance

Last week, Moody's cut the ratings of the bond insurance companies MBIA and AMBAC by two and one notch, respectively. I am really not sure that Joe Investor comprehends the meaning of this. Sure, the financials dragged down the stock market the day the news came out and we can argue that everyone saw it coming but come on people. Your nice safe AAA rated municipal bonds and all those insured bond funds in your IRAs are not what they once were.

First of all, prices of these formerly top rated securities take a big hit when they get downgraded. Think of it as your house - I looks nice and it does you right but try to sell it for any reason and you get clobbered.

I like how the CEO of AMBAC bought 10,000 shares of his company today. Normally, that would be a great bit of insider info (the legal kind) but when your company is trading at a whopping $2 per share your big vote of confidence totals $20,000. Big whoop.

You can afford more, Mr. CEO. How about some real money - 50,000 shares? 100,000 shares? That would make a statement.

No, I don't think that this is an encouraging bit of news at all.

Oh, and check out the divdend yield of MBIA - 28.3%! Where do I sign up? Surely, I do not have to worry about that dividend being cut, do I? (Who has a bridge for sale? I'm in the market).

So back to the ramifications of the "expected" downgrade of the bond insurers. What yolu've got just lost money. But the good news is what you can get new just got cheaper.

I'd love to post a Bond Buyer Rev bond index vs. treasuries so if someone can point me to the data that would be great. Same for any muni housing bond index. I remember back in the 1980s when these puppies were being called left and right leaving investors with little to show for the risk.

Another win for the analysts - not

Having morning coffee and flipping through the cable business shows this caught my ear - Piper Jaffray downgraded the shares of Motorola to a sell. Let's check this out for a moment.

This stock was trading in the mid-20s for much of 2006 and started to crated in mid-2007. Where is it now? Last price as of this writing was 7.57. Where was Piper when the stock was in the 20s? Now they downgrade it? Thanks for looking out for my best interests.

I read a report that someone did a study buying stocks when they collect analyst sell recommendations. Motorola still looks like it is a dying stock but I certainly will start watching it now with the idea that it has a dead cat bounce, if not more, coming up soon.

Just for kicks, here are the last few analyst changes as recorded by MarketWatch.com.

3/26/08 Amer. Technology Research........ Neutral from Sell

9/24/07 RBC Capital Markets..................... Outperform from Sector Perform

9/20/07 Cowen & Co. .................................. Outperform from Neutral

7/30/07 JMP Securities ............................... Market Perform from Market Underperform

Each one of these is an upgrade!!!

Now check out the chart:

Do you think this might have helped here? Uh, yeah. You can see some support breaks. Not shown is a rather big trendline breakdown in Jan 2007.

Is it any wonder I don't look at balance sheets and income statements? The market tells me what I need to know and it said quite clearly several times last year that this stock should not be owned.

Ethanol

I have a question (what else is new?)

Why are we trying to turn food into ethanol, when there are other biofuels available, at least in theory? Here are some crazy, and I do mean crazy, ideas that may only work in cartoons:

• By the looks of the local catering hall, they are throwing out enough food to feed all the poor there are. Some work with food banks to get leftovers to people to eat. But dumpsters are overflowing with food that may not be edible but should be convertible into biofuel. The sugar in wedding cakes alone, which as we know taste like crap in most cases and are never eaten, can be turned into ethanol.
  
• Has anyone thought of tobacco? Smoking is bad and that means a lot of tobacco farmers are growing the fur coats of the plant world (think P.E.T.A.). Can tobacco be used here?
• How about hooking up power generators to stationary bikes at health clubs. Let the spinning classes benefit everyone and not just those wearing spandex and headbands. Where is Olivia Newton John when we need her? (let's get physical, physical...)
• or, if we want to be like Mr. Burns (ex-cellent) we can hire people to work at generators. They get a wage and we all get power. It may not be efficient but it's better than a puff of diesel smoke in your face when the truck at the red light hits the accelerator.
  

Oh, to be a grad student again and working on new energy sources, not just ways to extend the old ones.

Kill my Fun

It is very hard to be a bear on a day, despite a 131-Dow-Point drop and solidly bearish indicators, when you read this stuff:

• Fund managers took the most negative stance on equities for a decade in June amid worries about the potential impact of stagflation, Merrill Lynch's monthly fund manager survey showed.
• Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
• U.K. bank's (Royal Bank of Scotland) strategist warns of stock market crash

This on top of last week's AAII survey of investors at 54% (or so) bearish vs. norm in the 20's.

It is very rare that sentiment this terrified results in a negative market. I remember back in July 2006 when the market appeared to be tumbling hard that sentiment was too bearish. The result was a huge multi-month rally. It was pretty bearish in January of this year, too.

Sentiment is a very tricky game. But is the market already too fearful?

I'm just sayin'

It's baaack!

Remember back to the good ole days of 2007 when the worlds coffers were overflowing with the sweet fruits of the ATM? You know - refinance your mortgage and take cash out. And for the big boyz and girlz, sell bonds in Japan and put the money to work anywhere else in the world. Ah, the yen carry trade (said looking skyward with longing eyes).

When the yen started to rally, the ATM closed for biz. The world lost its liquidity pump and wouldn't you know it, the mortgage crisis - kindling in the desert - ignited.

Well, check out this chart of the yen. Just when you thought the world was about to seize up we get this gift. No, I don't think that housing will come back because the yen dropped and Japan kept its short rates at a whopping one half percent. I'm just sayin'.

I don't think we're going to crash, at least not yet. Rather, I prefer to think of a regular ole bear market in stocks that grinds us down, makes fools out of the "stay the course, buy the dip" crowd and vindicates those of us who have been jumping up and down about it (yes, some prematurely).

Bonds falling, commodities rising until finally the global economic engine chokes. Can you say "inflation." I knew that you could (any Mister Rogers fans?) I just hope it chokes sooner rather than later - before a good chunk of the world starves.

Calloway said it - In-Thain!

Colleague Dave Calloway, Editor of MarketWatch.com, called it "In-Thain" that Merrill Lynch wanted to sell its stake in Bloomberg. That's right, John Thain, the CEO, wants to sell of the piece that is actually making money. Hey, isn't that how they created CDOs in the first place? Package the non-performing loans into a new security and sell them to the unwitting public! Genius!

Now we read that Mother Merrill's CEO is the highest paid US CEO with 2007 compensation over 83 MILLION DOLLARS!. Depreciated currency or not, that is a lot of cash.

Now, let's see if he deserved it.

Sorry, Charlie, I mean Johnny. This chart of your company as it heads into the toilet says you should be sued to give it back to shareholders and the employees you have and will lay off because of your greed and shortsightedness.

Is it any wonder I am advising clients to avoid stocks like these? Low priced does not mean cheap. But then again, there is absolute support on the charts at zero.

Brother can you spare an ad?

I was on a conference call today and picked up this little tidbit. The easier it is to buy advertising time in the media the worse the economy is and right now you can buy all the advertising you want.

Uh oh.

I really wonder how the NBA Finals are doing in this regard? It's too bad we don't have the Superbowl coming up because everyone knows how many millions it costs to by a 30 second TV spot there.

Check this out - its a chart of corn. Guess when the flooding in the Midwest started to affect the corn crop? Ethanol stocks are getting crushed and corn itself is making your breakfast flakes more expensive. Forget oil and gold inflation, this is inflation that hits everyone.


My point is that there are plenty of things that should be scaring us about the economy - including rising interest rates - and this is not exactly a good time to be looking to buy stocks.

Nickle and Dime Airlines

Just booked a flight on JetBlue. While they still let me check one suitcase for free (the second will cost 20 bucks) they charged me an extra 60 bucks per round trip to sit in one of the "expanded legroom seats. Most of know that the exit row seats have more room and compete to book them. JetBlue is charging extra for them and even added a few more non-exit rows with more legroom.

Guess what? I paid it. Think of it like a mini-business class seat on a coach flight. And since I am flying cross country, it seems worth it to me.

What will those zany airlines think up next? I'll be buying my own food, checking only one bag, bringing my own headphones and I booked it online without the help of any humans. What's next, a fee to use the head? How about a fee for a more experienced pilot?

Not a bad day

Every time I write my column there is always the possibility the market will change drastically between the time I file it and the time it goes up on the site. Today, when the stock market stalled at Dow down 140-150 I had that nagging feeling it would reverse higher and leave all sorts of hammer candles on the charts.

But it did not and now I am more confident in my bearishness. No, I will never call a day but I will call a trend. And that trend is down.

Transports broke. Tech broke. Small caps broke.

And the basic materials stock Alcoa crashed while consumer staples stock Lorillard (the former Carolina Group) rallied again. Does Anheuser Busch also count as a staples stock? It should as a bad stock market would make me want a few beers. Anyway, takeover time!

Get the picture? As I have been saying in Quick Takes Pro, the sector rotation is here. Tech was a flash in the pan.

We had a pretty good day Wednesday (Dow down 205) with plenty of shorts and two of three longs moving higher (we are in Lorillard, Potash Corp and General Mills, the latter of which went down only a tad). I won't show you my shorts (oh, the imagery!).

What do you want for nothing? Rubber Biscuit? (name that tune)

Where have all the gas stations gone?

Readers, I want to take a a poll and here is why:

In my neighborhood and surrounding towns, over the decades, the number of gasoline filling stations has declined but not at any rate that would raise an eyebrow. A new store comes in and needs real estate or a housing development needs more room. I get it. Progress and change.

But over the past year, not only have the numbers of the departed gone way up as the price of energy skyrocketed but now there are exactly zero stations in my town with the nearest one to my house a mile away. Not a big deal? It is when you consider it is in the next county. The nearest one in my county is three miles, no that one is shut down, so make that four miles away.

Again, not a big deal? Some of you I am sure, have to drive dozens of miles to fill up but I live on Long Island where three million of my closest friends live within a few dozen miles. This is not a rural area and it is not a mass transit friendly area, either. We need our cars and not just for luxury or convenience.

With so many people needing so much gasoline (demand) then why are the sellers of that product closing up shop? I don't get it.

So, here is the poll question. Have your noticed an unusual reduction in the number of gasoline stations where you live? Let us know where that is, too.

Bonus question - what is replacing those gas stations? Here, banks are sprouting up like weeds, like everyone is so flush with cash. And lately, drug stores are replacing the gas stations.

Given the times, drugs I can understand a little bit more.

History Repeats

The old saw says that history does not repeat but it rhymes. Here is a tidbit I dug up from a chat room posted by colleague Dave Steckler:

The last time the Giants won the Super Bowl (1990), oil prices were spiking, the banking system was falling apart, and the economy was heading into a recession. Sound familiar? But after bottoming in October of that year, the markets had one of the most robust growth periods in U.S. history.

Now, I am not quite ready to think that India, China and Brazil are Giants fans and therefore decided to ramp up their economies - and oil demand - following the Superbowl. But the confluence of the rest of these circumstances does make for one nasty conclusion.

Robert Prechter's socionomics theory says that markets create social mood, not the other way around. A falling stock market puts people worldwide in a lousy mood and the worse the trend the worse they feel. It gets implemented in dark culture (war movies do well while comedies do poorly). Let's skip to the end - if it gets bad enough then wars start.

While the parallels between now and 1990 really end with the above, the fact that rising oil and food markets also can create social mood makes the final parallel to 1990 a possibility. War of some kind can break out somewhere.

It may mark the bottom as it did in 1990 as the market sees through to war's end. Or it may not if the market cannot see the end, creating a poor investment environment for a long long time. I won't predict either.

So was it so crazy for "news" (said with serious sarcasm) came out last week that an attack on Iran is coming? The idea of war is crazy but the idea that some people are thinking that way fits right in with the markets.

Let's hope stability comes to all markets soon.

Nobody Knows

Everyone thinks that they know where the stock, bond, commodity and currency markets are going yet everyone wants to know what everyone else thinks. It's herd behavior, of course, and it drives the markets.

I was at a family function over the weekend and chatting with some friends about stocks and real estate (the group included a mortgage specialist and a developer). The bottom line was that with all that experience in our little chat circle nobody really knows what the future will bring. We can read the signs and hopefully interpret them correctly (that's technical analysis, folks) but nodoby really knows.

After oil's crazy week, the pundits were out in force with their predictions. $150 oil (duh). gas prices will keep going up (duh). How about this one from two months ago - gold has topped? I bought more for myself in late April.

And the dollar? Look at vs. the euro and it looks sick. But vs. the yen and it's not so terrible (substitute Brighton Beach old world accent and a shrug of the shoulders for dramatic effect). The pundits say the dollar is still weak thanks to the economy. Didn't they all say the economic news last week - pre-jobs - was much better than anyone thought?

Will the Fed cut rates or raise them? Who cares? The ball is out of their court. Wait for the Europeans to do something and react to that.

Nobody knows.

But when nobody knows it is even more important to find different analyses from experienced professionals. Note how I did not say to listen to their conclusions - not even mine. Rather, see what they are looking at and let that trigger some ideas in your own head.

I'll tell you what I am looking at now. In the stock market, its a bear and surprises happen in the direction of the trend. Hello Lehman. Who's next?

And in the oil market, while I do think we are in a short-term bubbly move, for the long-term, the trend is up. Hello rumored attack on Iran (last week's news"). Who's next?

And one of my readers at the family party called me a permabear. I call it like I see it.

The Dreaded "C" Wave

I am no Elliotician but I am now looking for that most scary of waves - the "C." Thursday was a killer for the bears but perhaps that was its function. As I wrote in my column Wednesday, there were just too many bears out in retail-land and the market does not like consensus.

Here's the way I see it on the chart and believe me it is open for discussion as I am sure I violated some rules.

The rally ended in October and the decline into January was a nice "A" wave and first leg of the correction (a.k.a. - bear market).

Whatever we saw from January through May was the "B" wave higher, which essentially corrected the first correction.

How do I know this? [Warning - Jargon Alert!!!] Like I said, I am not Elliott Wave expert but the decline from October unfolded in five wave and the rally through May was arguably three waves - just like a nice zig-zag correction should be. I say arguably because it was far from a textbook look but as colleague and wave expert Steve Poser said, if you can't figure out how to label it then it's not an impulse wave.

That leaves us with the current decline now just getting underway. Oh, and "C" waves are usually not very gentle.


Here's is how I justify this week's action: The only conclusion is that the bearish sentiment we’ve seen (very high percentage of bears in the AAII survey) was kindling for the rally and once the public says that things are not so bad anymore (as they did yesterday when the media was full of reports that the economic data is a lot better than anyone expected) the market will continue with its unfinished business of revisiting its March lows. Of that I am confident.

Now with the economic data worse then expected, all of the sudden, high oil and low jobs matter. They always matter. It's just a matter of time.

In the coming week, we'll have some better if-then forecasts for subscribers with an eye on what to do if and when the March lows are reached.

We know its a bear, Michael

There are only so many ways I can write about the stock market being bearish before even I get tired of it. I know my editor is pushing me every week to come up with a new angle but frankly now is just the time to watch all the groundwork come to fruition.

We are mostly short in the newsletter. We hate financials and think energy is done (for now). Materials are finally getting hit (except for those lovable fertilizer stocks).

That's all I have to say, post column today. Blogger extraordinaire Barry Ritholz ran a black swan toon the other day and I'm going to start looking into that concept for real.

Sleep well, kids.

ChinaBubblecious? Nope

Remember the good old days - OK, it was last year - when all things China were just great? Everything on the red planet was going up. Well, since we've all been so preoccupied with the Uncle Ben's Kredit Krunch and soaring oil guess what has been happening over there?

What goes up, must come down. And since these parabolic moves like to come down in a mirror image we can presume that there is more to go.

And for you technical analysis propeller-heads, check out weekly stochastics. A 50-line is drawn instead of traditional overbought/oversold lines and we can see that in bull markets the indicator stays above it. In bears, it stays below. It's below now.

You know, India is kind of similar on the charts. Weren't these two supposed to be driving the global economy and demand for commodities? Me smells a fishy theory.

Change your paradigm

I heard on morning drive radio this morning that Rolling Stones drummer Charlie Watts turned 67 years old today. And worse, Jerry "Beaver" Mathers turned 60. Talk about a kick in the reality! When did all this happen?

Ask yourself the same question about the financial markets. When oil was 80 did you see the trend? When the dollar was at 80, did you see that, albeit very different, trend?

The point is that unless you see relationships changing, one day you turn around and your portfolio is not where you thought it would be. Maybe your were heavy into energy a year ago and now your portfolio - as of last month - was say 50% energy. No wonder it hurt over the past week when oil fell sharply. Looking back, you should have been paring back energy every so often to keep your eggs in the appropriate baskets. Did you really think energy would go straight to the moon?

What is everyone's paradigm now? $200 oil? $800 gold? Dow 13,000?

How about the latest that the tech sector is leading the stock market higher? That was today's Barron's Online topic and the conclusion was that it was last month's place to be. Tech and things from the ground (energy and basic materials) usually do not lead together. They are on opposite ends of the business cycle and there is no denying which one has really been the leader (hint - its not tech).

Don't let the talking heads tell you how now is the time corporations are ramping up their tech buying as we head out of recession. According to many, it has not even started yet (the recession).

The relationship I am watching now is the one where various sector rotate their way around that business cycle. Next up is consumer staples, not tech, and even that may not be a good investment as this bear market rally ends.