Short Term Short BAC Revisited

On Nov 7, I posted "Short Term Short BAC". The close on the previous day, Friday was 15.14. Monday, opened higher and could have been shorted at 15.33, stop was hit the same day at 15.75 for a 0.42$ (2.7%) loss. Another excellent short opportunity is presenting itself for those so inclined. There is a short term gap at 15.90 to be filled, with resistance at the recent downtrend line which currently is at 16.40. Target is 13.70, so with an entry above 15.91, risk/reward is 0.217 or reward is almost 5 times the risk! It did not work out before, but it may pay to try again as eventually odds like this should pay out.

RIMM Collapse Imminent Revisited

The Oct 27 post proclaimed that "RIMM Collapse Imminent". Well, it has dropped, but has not collapsed, yet... It closed that day at 63.75, has traded as high as 65.16 and is currently at 57.89. Those who went short the following morning of the 28th, would have been able to enter the short position above 63 and suffered max drawdown of 2.16 intraday (3.4%) with a current profit of 5.11 (8.1%) less commissions. Best yet, another leg down is likely dead ahead with a target below 50. With the 34 day at 62.58, 63 can be used as a stop for zero risk. Risk/reward becomes roughly 5/8 which is not good enough to enter a position here but with the 21 day at 60.83 a 2 point bounce could provide an excellent entry point again. Notice also that Friday's gap down was filled today, yet the close was lower on a day the market was higher. Not a bullish divergence! Look for prices below 50 by year end.

Oh Nikkei You're So Fine...

...or not.

THAT'S WHAT A BEAR MARKET LOOKS LIKE !!!

And there is no sign that it is over yet. OK, maybe the daily chart suggests that it is a little oversold at the moment, but all of the longer time frames look like they are ready to plumb new lows. The 7,000 level will need to hold or else there will be NO support for this market. Whatever levels below 7,000 may have been support are so old (from the 80's or even the 70's) they are meaningless. If the Nikkei breaks below 7,000 and then rallies back above that level AND holds, that will be a BIG reversal. But that is conjecture. It hasn't happened yet. An equally likely scenario is that the market plunges to new depths if 7,000 does not hold. Hard to imagine that after already suffering an 82% decline there is the possibility that the market could drop 50% from HERE. But this is a distinct possibility that should not be dismissed.

More importantly for the US (and the world since the US economy is the center of global economic activity) this could be an important example. We are in a similar condition to Japan circa 1996. The stock market had dropped sharply (-65%) and rallied strongly (+50%) off those lows. Interest rates had been cut to exceptionally low levels, 0.50% in 1996 Japan. Government debt was at a similar level (80% of GDP) and would more than double in the next decade. By 1996 prices had already fallen more than 5% based on wholesale CPI index. The differences are the Japanese still had a savings rate above 10% in 1996 and they had a trade surplus. We have exactly the opposite condition. That will reverse. But it will be painful.

Finally, a long-term chart of the the Nikkei in log scale for those of that persuasion.

Black Friday

A couple of interesting posts on Black Friday, both from the same organization.

Black Friday Results Expected to be Promising

Black Friday Results are Dismal for Consumers

Now, I don't have any inside information here, but I find the juxtaposition of the two articles somewhat amusing and illustrative. I expect that they will both be proven correct ( I am guessing +1% yoy). But in the long run, such a situation is not sustainable. Specifically, a world in which the retailers win and their customers "lose" is not a recipe for long-term happiness.

Debt Levels

External debt levels ranked relative to GDP (from Wikipedia, collated using CIA World Factbook). Note that most of the data is from year end 2007.

Country Iceland	Ext. Debt $116,053	Per Capita $362,942	Debt/GDP 998.64%
Ireland	$1,841,000	$448,032	960.86%
Switzerland	$1,340,000	$174,526	441.95%
UK	$12,670,000	$174,167	374.96%
Netherlands	$2,277,000	$136,795	352.75%
Belgium	$1,313,000	$126,202	348.74%
Denmark	$492,600	$89,853	242.30%
Austria	$752,500	$90,289	233.70%
Zimbabwe	$5,155	$454	220.11%
France	$4,396,000	$68,183	211.86%
Liberia	$3,200	$9,717	209.84%
Hong Kong	$588,000	$84,445	200.48%
Norway	$469,100	$98,530	190.23%
Portugal	$461,200	$43,196	188.63%
Sweden	$598,200	$65,048	176.72%
Germany	$4,489,000	$54,604	159.92%
Spain	$2,478,000	$49,619	150.65%
Finland	$271,200	$51,073	143.95%
Cyprus	$26,970	$30,550	126.03%
Sao Tome	$318	$10,258	124.22%
Guinea-Bissau	$942	$555	113.93%
Australia	$826,400	$38,798	106.91%
Iraq	$100,900	$2,878	98.54%
Netherlands	$2,680	$1,353	95.71%
USA	$13,773,000	$42,343	95%
Estonia	$24,820	$6,744	86.51%
Latvia	$33,530	$36,944	83.72%
Lebanon	$31,600	$7,680	78.14%
Cook Islands	$141	$2,462	76.97%
Seychelles	$1,059	$265	76.85%
Marshall Isl.	$87	$153	75.22%
Slovenia	$40,420	$9,477	71.93%
Croatia	$46,300	$10,300	66.53%
Hungary	$125,900	$12,200	65.68%
Canada	$781,100	$23,325	59.69%
Italy	$1,060,000	$18,235	58.21%

Dubai Dubai...

After the news of Dubai, I wonder how many other shoes there are out there that will drop? The UK's $13 Trillion, 375% of GDP of external debt is one of the largest. Germany and France seem relatively stable at 160% and 211% of GDP. Spain is only at 150% of GDP, but with unemployment at 18% and taxes slated to rise, this is an obvious candidate for disaster, maybe too obvious. Belguim and the Netherlands are tied around 350%, with a total of $3.5T between them. Switzerland is an awesome 441% with a sizable $1.3T. The "lands" of Ice and Ire are well known blow-ups with external debt levels of nearly 1,000%. Austria, Denmark, Hong Kong, Norway and Portugal are all around the 200% mark. Austria played a historical role in the final act of the financial meltdown of the early 1930's with the collapse of the Bank Creditanstalt. Will history repeat itself? Time will tell.

See also:

Monaco Debt Crisis
Pound in for a Pounding?
More Pounding Ahead


I still believe it likely that the British Pound is the most vulnerable of the major currencies, but we will not know from where the break will come until it arrives. But arrive it will.

SHLD Reversal?

Another potential reversal has presented itself and this time it is at a long-term time frame.
Sears is showing a potential reversal on the monthly and weekly charts as presented below. With only a few days left in the week and the month, it will be key to watch for signals that the stock is breaking down. But since the market has remained firm the last week or two, despite attacks on the bull story at periodic intervals, Sears has given back much of its gains and is perched at a key level around 70.

First, the monthly chart:


And then the weekly chart:

Bulloney!

From this, we know that John Mack does not believe in obeying traffic laws and that he was in collusion with Lloyd Blankfein.

Mack on Saving Morgan Stanley

Generally, it is a bunch of self-serving baloney. But one has to respect his fortitude.

Does Anyone Respect Warren Buffett Anymore?

If so, why? Here are his latest inane comments:

"I think it’s done a good job over the years. I think it’s had good leadership most of the time. I think it has terrific leadership now. And I think that curbing the independence of the Fed could lead to a lot of mischief."

Mexican Debt Crisis, Long Term Capital Management, Tech Bubble and the Real Estate Bubble. Followed by TARP, TALF, and the rest of the alphabetic nonsense that the Fed has created out of thin air in the last year. Who else really believes that these things are "terrific"? Sure, Lloyd Blankfein and Ken Lewis agree, but the rest of us who don't run over-leveraged hedge funds masquerading as banks think that we are being scammed and screwed. I put Warren Buffett in the same class with the rest of the banksters. And I am convinced that he will end up on the ash heap along with Goldman Sachs, B of A and Citigroup. Why? Because Berkshire Hathaway is dependent on cheap and easy credit. And one day it won't be possible or feasible to maintain the current credit system. It may be next month or it may be ten years from now (I doubt that it will take that long). But the path we are on is unsustainable. And when it falls apart, an organization which is dependent upon the leverage in the system that supports Wells Fargo, GEICO, General Re and Moody's.

Who really believes that if the financial Ponzi economy collapses and takes the above companies with it that the remaining businesses of Dairy Queen, Justin Boots and Clayton Homes will be able to survive without the access to cheap capital that the financial components of BRK provide? Is selling ice cream to boot wearers who live in manufactured housing a booming business plan? Take away the "aw-shucks" demeanor and what you have is another ruthless business exec who without government backstop would be severely impaired. One day we might wake up to a financial implosion or a killer storm or hurricane and the world that Warren Buffett knows may no longer exist. On that day, would Berkshire Hathaway?

Economic Systems

SOCIALISM
You have 2 cows. You give one to your neighbour.

COMMUNISM
You have 2 cows. The State takes both and gives you some milk.

FASCISM
You have 2 cows. The State takes both and sells you some milk.

NAZISM
You have 2 cows. The State takes both and shoots you.

BUREAUCRATISM
You have 2 cows. The State takes both, shoots one, milks the other, and then throws the milk away.

TRADITIONAL CAPITALISM
You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

SURREALISM
You have two giraffes. The government requires you to take harmonica lessons.

AN AMERICAN CORPORATION
You have two cows. You sell one, and force the other to produce the milk of four cows. Later, you hire a consultant to analyse why the cow has dropped dead.

CitiGroup VENTURE CAPITALISM
You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow, leaving you with nine cows. No balance sheet provided with the release. The public then buys your bull.

A FRENCH CORPORATION
You have two cows. You go on strike, organise a riot, and block the roads, because you want three cows.

A JAPANESE CORPORATION
You have two cows. You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cowcartoon image called 'Cowkimon' and market it worldwide.

A GERMAN CORPORATION
You have two cows. You re-engineer them so they live for 100 years, eat once a month, and milk themselves.

AN ITALIAN CORPORATION
You have two cows, but you don't know where they are. You decide to have lunch.

A SWISS CORPORATION
You have 5000 cows. None of them belong to you. You charge the owners for storing them.

A CHINESE CORPORATION
You have two cows. You have 300 people milking them. You claim that you have full employment, and high bovine productivity. You arrest the newsman who reported the real situation.

AN INDIAN CORPORATION
You have two cows. You worship them.

A BRITISH CORPORATION
You have two cows. Both are mad.

AN IRAQI CORPORATION
Everyone thinks you have lots of cows. You tell them that you have none. No one believes you, so they bomb the shit out of you and invade your country. You still have no cows, but at least now you are part of a Democracy.

AN AUSTRALIAN CORPORATION
You have two cows.Business seems pretty good. You close the office and go for a few beers to celebrate.

A NEW ZEALAND CORPORATION
You have two cows. The one on the left looks very attractive.

5:1 Odds in Favor of the Bears

The SPX daily chart is showing multiple serious divergences. The band has been stretched quite a ways to the upside. There are 20 points upside risk with about 100 points to the downside. This appears to be an excellent shorting opportunity. At the very least, those with good profits on long positions should lighten up or hedge against downside risk.

Watch Out!

The market has rallied to a very critical point. This point is the confluence of a number of moving averages. Normally the market hold ABOVE the moving averages, but since last year the DJIA has been BELOW important moving averages. Earlier this year, the market was more than 30% below its long term moving average. Since March, it has rallied right back to its long term moving average near 10,500. This is make it or break it time, folks. The low-risk shorting opportunity is here! Now maybe it doesn't work out and the market breaks through to the upside. We will know in a few days whether that is true. But even if occurs, what is the risk? 150-200 Dow points? What is the potential gain? Close to 4,000 points, using the March low as a guide. That is a 200:1 risk/reward profile. Who doesn't want to take advantage of that? There is no guarantee that it will work, but the risk that it doesn't is so small and the potential profit so large, that it is the prudent, yes the prudent action.

Soybean Residue

You've got to love this one! Just like in the US, where the building boom of the 2000's has left many communities with cheap, poorly constructed housing, here is a report from ChinaHush about a "Soybean Residue" building. This is supposedly slang for shoddy construction. Check out the pics here at ChinaHush.

How much of China's current building boom will prove to be worthless and need to be torn down? My guess is a lot!

Unemployed in China

If you thought the USA was the only country where it is tough finding a job, think again. Here is a photo from China Daily about a job fair in China. They state that "Job seekers in China will face an uphill battle in the coming months and as many as 12 million may not find work this year even if the country hits its 8 percent growth target, the nation's top employment official warned in late August."

Consumer Discretion

I am perusing the excellent list of the best performing stocks by group from Bespoke Investment Group and am amazed at the classifications applied to individual stock groupings. For instance, Ford, Goodyear Tire, Amazon and Starbucks are all classified as "Consumer Discretionary". Ridiculous! In other words, if I am trying to get to work, I just may decide to stop by Starbucks and buy a doppio, low-fat, no-foam latte or I may not. While waiting at a stoplight, I may use my MePhone to buy a book at Amazon.com or not (depending on how observant I am of anti-texting laws). If I get a flat tire, I may just buy another one or maybe I will just continue to drive around town, picking up the kids and the wife with the 50 MPH spare spinning on the rear passenger side! And if that one blows, I will just blow some spray foam into it and drive back and forth to work never exceeding 15 MPH!

Of course I am over-reacting as usual, but I think that this is an indicator of the problems with our economic and financial statistics. The stocks of AMZN and SBUX are going to behave very differently from F and GT. Additionally, CSX is listed as an industrial. While the correlation may be higher in this case, it would seem to me that CSX is a transportation stock and should be more comparable to truckers like FWRD and shippers like FDX, than Stanley Toolworks and Illinois Toolworks.

Merry Christmas?

It is no secret that the US consumer is the key to the global economy. US consumer spending accounts for 70% of US GDP, so how is it possible that GDP has been increasing when credit in 70% of the economy has been shrinking? Well, obviously the other 30% has been expanding.

First off, if you look at the Federal Reserve's published figures on consumer credit , you will see that the consumer has been deleveraging at an annual rate of 4% (this number is interesting in itself since in all but Q1 in 2009 the FRB shows consumer credit declining at an annual rate of negative 6% or greater! Now who really believes that consumers were spending MORE in Q1 than Q3? If so, then the subsequent decline is ominous). The increase in Federal spending was 18%. So the 20% of the economy that is government spending added about 4% to GDP ($3,522 vs. $2,978). [We know that the Federal Government ran a budget deficit of $1.4 Trillion which is about 10% of GDP (I am being generous as this does not include $274 B from the "trust funds" which will need to be "repaid")].

During this period the official GDP numbers state that the economy declined about 2.5%, so the remaining 10% of the economy (business expenditures) must have dropped 25%. That is what happened according to Bureau of Economic Analysis. In FY 2010, Federal spending is estimated to increase 1%. The latest figures from the Fed indicate that consumer credit is declining at a 6% annual rate in the last half of 2009. This implies that business spending will need to climb 40% to keep ZERO GROWTH all else being equal. Now maybe consumers will open their wallets and spend this Christmas, but somehow I doubt with credit card companies hiking rates to 28% plus. More realistic assumptions are that consumers continue to shrink debt at a 6% rate, the government continues to increase spending 10-15% and business keeps a lid on costs with increased investment no greater than 10%. Such numbers provide a GDP growth rate of 0%, best case scenario. If governments actually holds spending to the stated 1% increase and business spending holds steady, look for 4% decline in GDP in 2010. Admittedly, these back of the envelope calculations would not hold up to close scrutiny, but I don't most official economists would either. Regardless, a double dip in 2010 is all but a certainty.

Truth About China

If you are interested in seeing the dark truth about China. But beware that some photos are somewhat graphic and not for the squeamish. Here is a sample:

Conservatives versus Liberals

What would happen to this country if the hard-line conservatives take over from the their more liberal counterparts? Would it pit the urban, coastal elites against the more conservative citizens of the heartland? Would the financial titans face a conflict with the industrial and agricultural Midwest? Would private enterprise face an attack from governments sponsored entities? Would the army get more resources? Would environmental remediation take a back seat or the drivers seat? Would import duties be raised or cut?

Well, "this country" is not the good, old US of A that I am talking about, the bad, new PR of C, otherwise known simply as China. Yes, THAT China! Rana Foroohar argues that China is not a monolith in a recent Newsweek article

Like all "one way" trades, they work until they don't. And then, BAM!, the bottom drops out. Could it happen in China? Sure, anything can. Especially, when the government is responsible for 88% of the growth, government debt is more than 70% of GDP and the government directly controls 50% of the economy. Surely, some of that $600 billion worth of stimulus injected since September 2008 has gone to unproductive projects. Say, about 100%? Roads to nowhere, high-rise apartment and office building which may never be occupied and financial assets which not be worth much more than the paper they are printed on? Does any of this sound familiar? Maybe we are not in such bad shape in the US after all? Of course, considering that the Chinese are buying at least one third of the government debt we are churning out this year and next, maybe we are actually in worse shape than we think. Dependent upon a creditor who, at least in the short run, may be even more irresponsible than we are, at least in the short run.

Short Term Short BAC

Shorting opportunity for BAC. Risk to 15.75. Nov 15 puts can be bought for $0.40 or less. Target $13. Potential risk/reward @ 15.15 is 0.60/2.15=0.28 or > 3.5 times the reward for the defined risk.

Bullish 4th Quarter? Negative Scenario

Previous posts "Bullish 4th Quarter Part 1" "Part 2" and "Part 3" discussed the need for the final quarter of 2009 to reach a certain level on the SPX or else the highly leveraged system would not have sufficient equity to maintain itself. In this posting, I would like to introduce a bearish scenario based on the assumption that the financial system has been critically damaged and that due to the high level of global indebtedness, it is prone, if not bound, to fail. This failure could be imminent and unavoidable in spite of (or more accurately due to) interventions by governments around the globe to prop up a fatally flawed financial system. Events of the last 12 months have heightened the risks at the very time that most mainstream observers and participants believe that the "worst is past". But the imbalances in the global financial "system" are now even greater and more unwieldy. It is impossible to know what catalyst will cause another, more damaging crisis, whether it will be Eastern European debt default, a Chinese economic collapse, an Australian bust or some other event presently off the radar. But with the underlying problems of over-indebtedness and unsustainable capital flows remaining unaddressed and even exacerbated, world equity markets at levels 50-60% above lows reached earlier this very year have created even greater risk of calamity. So I have attempted to map out a possible scenario which could occur in case of a global accident, which I believe is very likely to occur. The attached quarterly chart of the Dow Industrials is entirely speculative and presented simply of an examination of what is possible. There are numerous variables, that could affect the outcome, but I believe that some version of the following is likely if the SPX is not able to maintain the 1075 level in Q4 2009-Q1 2010. As our problems match or exceed those of the early 1930's, the ultimate target near the bottom of the trendline shown on the chart below is what I believe to be a reasonable guess. And yes, it is a guess.


But the high level of debt in the financial system today will cause it very unlikely that we will see a ramp up in inflationary pressures until a significant portion of this debt is eliminated. So if the debt crisis deepens in the next 2-3 years, the Dow 3000 level is a likely level of support, although a short-term breach would be quite possible. If the authorities can hold the system together longer a higher level would be targeted, but with the dynamics currently in place, I am concerned that despite the appearance that the Fed and other Central Banks have the ability to control events, it is events, largely unstoppable, which will force a response from the Fed. Specifically, the rally into 2011 depicted on the above chart will be accompanied by a sharply declining dollar which will ultimately result in the US Federal Reserve being forced to defend the Dollar with higher rates which will kill the US stock and bond markets. With short term interest rates at zero and long rates around 3%, it would not take a drastic rise in rates to cause such a collapse. Any rise greater than 200 basis points would likely be enough. Due to the refunding the US Treasury is constantly performing at the short end of the yield curve, such a rate hike would likely make it impossible for the US to fund its massive budget deficits, resulting in a simultaneous tightening of monetary and fiscal policy. Such an occurrence would be a calamity in such a highly leveraged world.

Oracle or Tentacle?

Barry Ritholtz has a post on his Big Picture blog referencing Rolfe Winkler's "Buffett Betrayal" about the benefit to Berkshire Hathaway of recent government bailouts of financial firms. Personally, I don't think that this should be too surprising. Common wisdom is that Warren Buffett is a Graham and Dodd-style genius at value investing. Like most conventional wisdom, this is based on a kernel of truth surrounded by a number of complicating qualifications. My basic observation is that Berkshire Hathaway is largely dependent on expansionary credit dynamics. There is also a perception that Warren Buffett has achieved his above average results by diligent analysis focused on "the basics". Berkshire Hathaway derivative exposure revealed last year has given the lie to this fallacy. While it would be ignorant to deny that Warren Buffett is a savvy operator with excellent insight and management skills, it seems equally ignorant to ignore the facts that Berkshire Hathaway is dependent (however indirectly) on fractional reserve banking, a credit-based fiat monetary system, a financial regulatory landscape tilted in favor of the largest of institutions and implicit governments guarantees [this is not a new phenomenon as Buffett lobbied for a government backstop for re-insurers, a key component of Berkshire Hathaway's business structure, after major natural disasters such as Hurricane Andrew. This was an early version of privatize the gains (insurance premiums) and socialize the losses (large payouts due to disaster claims).] It is an interesting what-if scenario to speculate what would have happened if the US Fed and Treasury had not bailed out failed financial firms last year. But more importantly for investors may be what could happen if debt deflation returns in force in the years ahead as is quite possible. Just as the famous Delphi Oracle amassed enormous wealth which eventually vanished, Berkshire Hathaway could be destroyed when the fragile, and ultimately unsound, financial system which is dying, collapses.