Short sellers

An interesting point raised on at least two business shows today.

We all know that the market tanked even though short selling on some 1000 stocks was not allowed. Aside from proving the idea that shorts kill the market to be a crock, here is something that was missed on the upside. There was little pressure on the market to rebound on short covering. Imagine what could have been this morning if there were hoards of short sellers scrambling to buy back shares!

Let the free market be free!

More Banks

Today's Barron's Online column was written before the bailout bill was rejected but the thesis remained intact. Some banks are not going to implode over the current conditions and some are. Check out this list of the PHLX bank index (BKX) as of about 2:50 this afternoon.

Of course, WaMu (WM) is no longer trading but the rest can tell us who is good and who is bad just by their percent changes on the day. The stock on top of the list are probably going to be fine and may make good investments if the market stops its free fall.

Tomorrow, I am going to publish another banks list in the newsletter (sorry, tire kickers) where each one passed a simple technical and fundamental screen. There are 14 names in the list (JPM, WFC and USB all mentioned in the column are included) and the day's losses, as of about 3pm range from 1.3% to 10.68%, the bad one happens to be BAC. That is a whole lot better than the average seen in the BKX index above.

Late flash - BBT cratered into the close and closing numbers all around were a little more in the red.

Sunday night funnies

If you're not laughin' you're not livin'
- Carlos Mencia

Just two items, one new and one from a few months ago. You'll get the dated-ness of the second post when you see the company name.

1) A credit crisis is never pleasant. It's kind of like having a national root canal.
- Matt Blackman in his current weekly newsletter

2) The SocGen risk management dept return to work

See, it's dated but you can change the name to any of the current name institutions. Another goodie from my favorite market comedian (and real trader) Alex Spiroglou.

My Bank has a First Name, It's M.U.D.

My bologna has a first name, it's O.S.C.A.R.
My bologna has a second name, it's M.A.Y.E.R.
Oh, I love to eat it every day
and if you ask me why I'll saaaaay......
- Oscar Mayer bologna commercial jingle

If ever you could apply food songs to the financial market it is now. My bank is Washington Mutual and it's first name is mud. And its management is clearly full of baloney.

Last week, I spoke to one of the tellers at my bank and she said the employees don't know a thing about what is going on. They know it is not good but it seems that all they got was a pep talk recently.

And last night before the news broke, I said to myself that I should probably talk a few hundred, not thousand, bucks out in cash - just in case. After all, just because my bank folds does not mean I won't have to buy food and heat. What will happen to my merchant account as all the money from my newsletter business goes into my WaMu business account?

Well, its not that bad as Super Bank JP Morgan Chase Manny Hanny Bear Stearns is swooping in to buy up the branches and deposits. They must gird up to do battle with Bank of America Countrywide Merrill Lynch!

Not to mention that I owe WaMu a lot more money (mortgage) than they owe me (bank accounts). Go ahead - fold the bank! Cancel my mortgage and give me the same relief that Fannie Freddie Chrysler Airlines is getting.

But let's get back to the point about taking money out - just in case. It is no secret that the FDIC is woefully unprepared for a financial meltdown. Rumor has it that China is not letting their banks lend to US banks and even stopped ATM withdrawals from US bank accounts. I don't know if that is true but it all plays to fear and fear is what sparks runs of banks.

Lehman's sponsored ETNs (exchange traded notes that everyone thinks are just like ETFs) went belly up. So, if I buy gold ETFs is that the same as gold bricks in my vault. Maybe not. Maybe Jim Sinclair has it right - get all your hard assets in physical form.

Well, I am not going to panic here. Just like driving a car despite the potential for accident, I am going to live my life and not be an ostrich with my head in the sand. But I sure as heck will buckle my seatbelt and keep my tank full.

Rally Time before the Next Plunge?

In January, I ran a chart from the Foundation for the Study of Cycles that predicted where the Dow would go in the first and second quarter. They were pretty much spot on. Here is their latest:

The Dow dropped right into the center trough, bottoming about two trading days early. Anyway, they call for a rally from here but only back to August high levels. That's not that much, is it.

The email this came in was entitled "Election Day Dow and Inaugural Day Crash?" suggesting that the market was not going to do well over the winter months - totally bucking the seasonal tendency.

If they nail it, I guess I am going to have to pick up their software at www.techsignal.com. (I have no connection to them, their product or anyone working there)

Click here for the January blog post.

Utility stocks - down and forgotten

This post is for those of you who appreciate charts and need little explanation.

With all the fuss over financials, here is a sector with a clear head-and-shoudlers top, including falling RSI (momentum) and a small bounce just before the breakdown. I wrote this one up August 25 for Barron's Online with the title, "Utility Stocks Face Possible Meltdown."

The lower line is the first downside target for the pattern breakdown.

Who Remembers Crazy Eddie?

Maybe you had to be in the NYC metro area in the 1970s to have seen the first in-your-face TV ads for a local electronics retailer (who later went to the pokey on fraud charges) but that is the vision that comes to me now.

Crazy Sam's - His bailout prices are in-saaaaaaaane!!

I'm not going to pontificate on the extreme nature of the current Federal intervention into the capitalist system. I won't call this country the USSA as one message board poster did (Get it? A play on USSR and the socialists). I won't blame Bernanke or Greenspan or Paulson or Cox or Bush or .......

I also won't extol the virtues of our current Treasury Secy for being the only one who understands the problem and takes action.

What I will rage against, besides the machine, is that current meddling - necessary or not - has rendered the free market obsolete. How am I supposed to measure supply and demand when a source of supply has been outlawed? When all of the sudden money market funds are on par with treasury bills in terms of safety? When someone has the power to pick and choose which companies he will save and which he will let slide into oblivion?

Where's the level playing field on which capitalism is based?

The environment is insane. None of us have the proper tools to tell us whether to buy or sell at this point.

Thanks a lot, Uncle Sam. Your efforts to calm things down just created a bigger mess. Mark your calendars to October 2 - the day the short sale rule expires.

Astounding!

As we know, 3-month Treasury bill rates went to practically zero this week as people panicked. Check out the gains in interest rates today. Absolutely amazing!

That is an 1100 percent gain in the short rate!

Crisis over! Yay!! :-)

Humor

My previous post left me feeling queasy so here is something lighter.

• From my new favorite market humorist - market technician Alex Spiriglou:

"I heard that a lot of the Lehman guys who got bonuses from the last several years

invested them back into Lehman stocks, and then borrowed against it - probably to buy real estate."

• From the "they are out to screw the little guy" department:

I tried to enter a trade to buy 100 shares of an ETF this morning with Fidelity. Trade entered at 9:34. Trade executed at 9:49 - and for 2 full points more.

Mind you this was a market order for one round lot of a very active ETF. It wasn't an order so big it had to be worked and it wasn't an odd amount. A market order for something that trades several million shares per day. I am seriously considering moving from Fidelity as it was not the first time.

• From the "wah?" department:

Kraft Foods to replace AIG in the Dow Jones Industrial Average. At least they did not replace an actual industrial stock this time.

• From a talking head on CNBC:

"Well, at least the USA now has a sovereign fund" - referring to the fact that the US government now owns tons of mortgage backs assets, guarantees money market funds and owns a giant insurance company.

Let's get this straight - EVERY politician and businessman and investor says that people are better at managing their own money than the government is yet all of the sudden the government is running the world's biggest hedge fund. Would you invest with them?

Lehman was bad, AIG would have been worse

This is a list of the biggest corporate bankruptcies according to the Associated Press. Is it any wonder that the market tanked this week?

For starters, Lehman was six times bigger than the second biggest filing and 10 times bigger than the third. AIG was 60% bigger than Lehman, according to the June 2008 balance sheet on MarketWatch.com.

The amounts are not adjusted for inflation.

1. AIG - $1.04 trillion (if the Feds had let it go)
   
2. Lehman Brothers Holdings Inc., Sept. 15, 2008, $639 billion
3. WorldCom Inc., July 21, 2002, $103.91 billion
4. Enron Corp., Dec. 2, 2001, $63.39 billion
5. Conseco Inc., Dec. 18, 2002, $61.39 billion
6. Texaco Inc., April 12, 1987, $35.89 billion
7. Financial Corp. of America, Sept. 9, 1988, $33.86 billion
8. Refco Inc., Oct. 17, 2005, $33.33 billion
9. Global Crossing Ltd., Jan. 28, 2002, $30.19 billion
10. Pacific Gas and Electric Co., April 6, 2001, $29.77 billion
11. UAL Corp., Dec. 9, 2002, $25.2 billion
12. Delta Air Lines Inc., Sept. 14, 2005, $21.8 billion
13. Adelphia Communications, June 25, 2002, $21.5 billion
14. Mcorp, March 31, 1989, $20.23 billion
15. Mirant Corp., July 14, 2003, $19.42 billion
16. Delphi Corp., Oct. 8, 2005, $16.59 billion

Too big too fail? Is the USA Treasury big enough to do anything about it? I hope to (insert deity) that it is.

Morgan Plays the blame game

Here is something I lifted from the Barron's site and later confirmed on Fox Business News.

In a memo to employees, Morgan Stanley CEO John Mack, asserting that the plunge in Morgan stock (down as much as 39% today) is “irrational” and driven by short-sellers.

“What’s happening out there?” the memo runs. “It’s very clear to me - we’re in the midst of a market controlled by fear and rumors, (Quick Takes Pro adds - duh!) and short sellers are driving our stock down.”

I love when the good old boys talk about stock and market analysis they all pride themselves on the fundamentals. We look at earnings and sales and competition and market share. We don't look at that technical voodoo.

Oh really? Short sellers are as technical as they come. They hop on a trend and ride the heck out of it but let's assume that Wall Street fat cats really do operate on fundamentals. Why was there a declining trend in the first place? Could it be that the fundamentals were lousy and getting worse?

No, it's the short sellers.

Mack goes on to assure employees that he’s not only been personally reassuring Morgan shareholders, but has spoken with Treasury Secretary Henry Paulson and to the Securities & Exchange Commission about the stock’s decline.

Blah, blah, blahdy blah. That didn't work for Bear and Fannie and Freddie and Lehman and AIG and............

'You cannot jawbone up the price of a stock. Be a man and take the blame. Don;t worry about it because I am sure you'll get a severance package that would make a small country envious. Under your stewardship, the company fell apart. And now thousands of clerks, secretaries and other support staff are facing possible unemployment.

But it's the short sellers!

Reptilian Fear

First, let me start by apologizing. My website was partially down so the shopping cart was not working. It is working properly now.

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This morning in the newsletter I used that term "reptilian fear" to describe what many of us that had been around in 1987 were feeling Monday. In my head, sure, I knew that the Dow dropped 4.5% and while big it is not the end of the world. But say 500 points and I recall vividly watching the market fall on my Tradecenter tick chart. (If any of you were Tradecenter customers or employees, let me know).

As a wet-behind-the-ears product manager I was in awe of what was happening. Now, I just kick myself for not being short this market enough. Talk about a paradigm shift.

Here's where I am going with this. Back then, I left my office in lower New York City with my tie loosened and coat over my shoulder. After leaving the subway, I walked in to the local dry cleaner to pick up my suits and said something to the effect that the day was a disaster.

The dry cleaner, and I want to say his name was Morty but is was not, blasted me. Apparently, Wall Street was not Main Street and the world was just fine. It was just Wall Street that was fubar (not his word).

Me, being so green in the business, thought about it and he was right. The pizza shop sold pizza. The Chinese food delivery guys were all over the place bringing meals to yuppies and real people alike. Shirts got pressed and garbage was picked up from the side of the street. Although my industry was reeling, life picked itself up and marched on.

But can we truly say that today? The latest Wall Street debacle has left thousands upon thousands of people out of jobs, out of homes and just plain out of luck. And I am not just talking about high priced white collar buckets of greed who cooked up derivatives and subprime and CEO rewards for effing it all up. Yes, prices in the Hamptons have backed down so Muffy will have to eat her caviar at home.

Remember back to the late 1990s when everything was just wonderful? Then a little thing like the Russian Debt Crisis comes around to spank the markets a bit. Well, check out this pic of the Russian market (ETF) today, keeping in mind that they were raking in the rubles thanks to being a major oil exporter for a long, long time.

If you think the credit crisis is over or nearly over, Mr. Paulson and all you financial company CEOs, think again. Russia is in a free fall - again.

And don't think China is going to pull as all out of it.

This is a weekly chart of the Shanghai market (not the FXI ETF which is more like Hong Kong) and it shows more than a 2/3 loss of value over the past year. My view is that the symmetry of the rise and fall takes it down to 1800.

So, when I see a 500 point drop in the Dow I put it into real world terms. Sure, it was not a big percentage deal but it underscores the real problems we have out there. And for those of you who still think the economy is OK, the stock market has not turned up yet so any recovery in the economy is at least nine months away (the market anticipates the economy by that much)

What a feeling of helplessness for most of us who own a house knowing that if we had to sell we couldn't. I am fortunate not to have a single boss (I have many in the form of customers) so at least I don't fear that my company is going out of business or I'll get laid off.

Now, to do something about the heating bill, the electric bill, the phone bill, the tax bill, the mortgage bill, the auto lease bill, the cable bill, the gasoline bill, the tuition bill, the ..............

The week the was

The week that was? How about the week that is thankfully over?

Everything points to a bear market - except, of course, price action Thursday and Friday. Morning drops and afternoon rallies are good things. Then again 8% of the market hitting new 52-week lows on a day when the indices rallied big is not.

And how about oil stocks rallying Friday as oil itself dipped under par? Were oil stocks - and gold stocks - so disconnected from their respective commodities? We bought both sectors in Friday's newsletter, pretty much at the open and probably would have sold it at the close. Too bad we don't run a day trading service - one called "dead cats R us."

Well, its the weekend and I've got kids to shuttle and chores to do so I'll leave it there. This stock market scares me and while I won't forecast it or even write about it, a black swan is always lurking out there to poop on our heads. The market is severely fractured and AIG was the latest company in the confessional booth.

Where there's smoke there is fire and there is a lot of smoke out there now.

More Fun on the Sovereign Nation Level

Some quotes lifted from a chat room - Thanks again, William.

The price of credit default swaps on five-year US government debt rose to a record 17.5 basis points in early trading, according to CMA Datavision.

Although the market for such insurance is relatively illiquid, the price suggests the market believes the US government is more likely to default on its obligations than some other industrialized countries. “The USA is now ‘riskier' than Norway, Germany, Netherlands, Sweden, Finland, Austria, France, Denmark, Quebec and Japan,” said Tim Backshall, chief strategist at Credit Derivatives Research.

How about this one?

From the Financial Times: "Bankers say Russia is facing its worst crisis since the August 1998 default. "

or this one, also from the FT?

Indonesia failed to sell bonds in an auction on Tuesday in a sign of growing worries over emerging markets as concerns heightened over the health of the world economy.

Kind of makes you want to own gold, doesn't it? Too bad the gold market is not reading this - YET.

Smack my Fannie, Freddie

This is old news already but the bailout caused the federal debt to double. Would you lend money to a company like that? Would foreigners lend money (buy bonds) from Uncle Sam? And if they don't, who needs to buy dollars?

Just a happy thought for all you struggling homeowners watching departing Fannie and Freddie CEOs rake in millions in severance for destroying their companies.

Oil Vey!

Yeah, like nobody thought of that title before. I do live in New York Post country.

Crude oil is killing me here but as I always point out the trend is not the same as it once was. Now it is time to listen to my own sage advice and stop trying to catch a falling knife - even though in my gut I think oil is not done rallying in the long-term.

Have I capitulated? Yeah, sure. But have I been pounding the table saying it was cheap all these months? Nope. I just made a few bad trades. That is hardly a raging bull throwing in the towel. More like a bottom fisher choking on sand.

I do believe that the dollar is partly to blame for my foibles. (Have to blame something for being wrong, don't I?)

But what has been the case all year it seems is that technical analysis is not working the way we expect. Prices hit support and they are supposed to stop going down if not start going up. Lately, the way it has worked is prices penetrate support, get the newbies excited to short and then the market turns around. Fooled you! Now stop confusing brains with a bull market.

Anyway, oil broke support at the 2008 rally 50% retracement mark so down it goes, right? Oil stocks were down 4% this morning so it all looks terrible.

And that's just when things don't work the way we expect them to work.

Barron's Online follow ups

Solar Power - This week's sector column liked a select group of them and they are holding up so far.

Utilities - Last week's column warned about utilities - The DJUA has broken majors support.

Gold - Two weeks ago I pointed out support below. It's getting closer but not quite there.

Consumer Staples - Three weeks ago they were beating the market and they still are today. The column focused on household products and they still look good.

This is why they get the big bucks

Here is something from this morning's Quick Takes Pro with some elaboration:

Goldman Sachs just downgraded Merrill Lynch to a sell. It is no wonder these guys are so highly regarded! They are right on top of the situation, guiding their clients through the rough seas of the investment world, protecting their assets and making them money.

Oh wait, the stock is already down two thirds of its value in the past year and a half. Hey, where were you when there was an investment to save? Just who's interests are in play here?

I read a study somewhere that said when brokers issue sell ratings it is time to buy.

You can read this chart and see a possible selling climax this past summer. It may not be a buy right now but I am not rushing out to buy puts, either. It may go a bit lower, sure, but there are other fish to fry out there.

Teenage Angst

Having just hosted a birthday party for my teenage son in my house and backyard, teenage angst certainly comes to mind. The place sure smelled like teen spirit.

But angst is not limited to teens and I present a quote from market technician and financial astrologer Arch Crawford from his latest tome:

"Meanwhile, our “ivory tower” economists declare there is no Recession, yet. We can openly declare not EVER having witnessed this degree of angst amongst both blue and white collar acquaintances, and even upon the faces of strangers in public places!"

Other than the insanely rich, everyone I know is feeling economic pressure.

A friend of mine who works in real estate (lawyering and investing, not brokering) was at the house recently and said that nobody has yet picked up on the coming disaster in commercial loans. He said they had the same garbage-y terms and were ripe for bank killing.

So now that the initial "we survived a hurricane" rally has retreated and the market has shown its true colors, and as I wrote last week in Barron's Online, I'd rather hold cash than stocks this year.

Now, who wants some bearish picks?