Thursday April 7 2011
Falling behind on putting posts up, here are a few recent thoughts.
March 31
David Sokol, seen as the contender to succeed Warren Buffett, resigned unexpectedly amid surprising revelations about his personal stock trading.
Page A1 WSJ today
Bull Market Personalities Lose Luster in Bear Markets
Bear markets typically see a ‘fall from grace by former bull market figures. The front page article about Buffett’s heir apparent is a case in point. Tiger Woods was the lead ‘clay feet’ winner from the last market swoon.
Just below the Buffett revelation, one has to be amazed at how well socionomics can work. Nearly 30 years after the event, now Paul Allen writes a book suggesting or revealing depending on your POV, that Bill Gates (son of a lawyer as Allen observes) successfully made Allen the minority partner and then tried to leapfrog Allen with stock options and a low ball bid on Allen’s shares. This is no surprise to anyone who watched Pirates of Silicon Valley. In the movie, Gates tells IBM he has the software they need for the first PC; this is an outright lie, he later buys it from someone else.
Our point here however, is that we are transitioning to another phase of a potentially severe bear market. The signs are all here. People are seeing the clay feet of their bull market idols, commodity speculation pushing prices to new highs for no good reason, and what, a government program has not met its purpose, imagine!
Commodities
The news would have us all believe there is a massive shortage of copper, Dr. Copper it is called as an indication of industrial strength. Yet this report below from Alphaville suggests that not only is there some 600,000 metric tons in warehouses in China, its all time high value is being leveraged for more loans to build more presumably empty structures.
Page C12 of today’s journal reports that crude oil stored at Cushing OK hit a fresh record, a record high. There are 41.9 M barrels of oil in the delivery point for futures contracts.
We have made the point repeatedly that the end of a bull phase in stocks is marked by a spike in commodity prices. This was the case in the summer of 2008 with $145 oil. We have further pointed out that at all time high prices, there is no shortage of oil. No matter what happens in North Africa, everyone needs to sell oil to raise money, period.
How long until reality over comes the fear of a shortage? When it does as readers have e-mailed me, there will be a collapse as all try to sell at once.
TARP
Departing bailout official Neil Barofsky says that TARP failed to solve the to big to fail problem and it is worse than ever. Finally something useful from a Federal Official!
Bonds
Stock prices have not yet vaulted above the SAR PAR weekly requirement of 1339. This is amazing in that we know the FED and Goldman are doing all they can to boost stocks. 401K money will flow into stocks tomorrow, that may do the trick. Officially we acknowledge the stock market may go higher into our expected high June, We just think the better course of action is to leave the stock market now.
Has anyone noticed that despite stock prices creeping higher, TLT has not been below 91 again, despite a weak Treasury market, why is that? Again the bond market must be seeing something on the horizon that escapes the stock market.
I readily acknowledge that we need a final fling to the top in stocks, ignoring
Japan
Barry Minkow, Sokol, Barry Bonds and whoever else is on the witness stand this week
Commodity prices up for no good reason, no shortages
Overbuilding in China, speculation in Canadian housing market, problems in India
I believe that Wall Street can indeed do just that, ignore the obvious and bid prices higher.
April 2
Despite whatever bad news or signs of a top there may be, CNBC reports the markets just want to party and rise. This is typical of bull markets in topping mode. It completely ignores all the very real problems we have listed and that are evident in the news every day.
We mentioned this past week that bear markets often result in tarnished reputations. The Buffet saga continues on pages B1 and B7 of the Weekend WSJ. This got me to wondering, is there such a thing as insider trading anymore? Barry Minkow plead guilty to securities fraud for a false report on Lennar Homes; he shorted their stock before releasing his own report. How different is that, really , from Sokol suggesting Buffet buy Lubrizol, while owning the stock himself; Sokol came out $3 M ahead but left BRK. How different is that from FED Board Member Stephen Friedman who knew that the FED would rescue Goldman? And so he bought GS on the low in 2008 pocketing a cool million, using his inside information. He resigned from the FED but of course kept his seat at GS. Just wondering.
Now even Gandhi is coming in for criticism. As we mentioned, it was front page news when Paul Allen had unflattering things to say about Bill Gates. The interesting thing is that this is happening as we transition away from the bull phase of this market. The mood is souring.
All of this is extremely significant. Bull markets are fueled by positive emotion. This heap of negative emotion regarding various heroes of this and previous bull markets clearly signals a change in mood. Positive social mood causes people to buy. No kidding, the NASD has bid $11 Billion for the NYSE, even though stocks are not what drives NYSE profits, derivatives are. And the NASD is all about stocks not derivatives. But this is typical inclusionary action at a market top, that is when everyone wants to buy!
An alert Market Perspective Reader ( we like to think all of them are alert frankly) brought this to my attention.
Ten new exchange-traded funds briefly plunged early Thursday before the trades were cancelled, triggering memories of last year’s “flash crash.”
Nasdaq OMX Group Inc said it cancelled trades in 10 new ETFs sponsored by Scottrade affiliate FocusShares, some of which plummeted as much as 98% at one point.
Yes the trades got cancelled, something about a misplaced price. Will the Exchange be so generous on a day or a week of misplaced prices? This is why we maintain it is time to watch stocks from the sidelines. It is simply too dangerous with too little reward to be playing the stock game now. See our long-term chart on PTEN for a picture.
Several years, okay a couple of decades, Smith Barney used John Houseman (remember the law professor Kingsfield in The Paper Chase?) in a successful television ad. In his best Professor Kingsfield voice, Houseman intoned that
at Smith Barney we make money the old fashioned way, we earn it.
The vision of gray haired professorial Houseman was a nice touch. It conjured images of Buffet referring to his dog eared copy of Graham and Dodd on investing don’t you think? Nice sentiment but hardly realistic these days. These days however things are run by math wizards like David X. Li. Go ahead, click to read, you won’t be encountering any John Housemans scouring weighty finance books on the intrinsic value of Johnson and Johnson or some such. Now there are just unemotional machines clicking in and out of the market. How else would an ETF based on something of value drop 98 percent in a few minutes?
April 5
More Clay Feet
We mentioned that bear markets have a habit of turning the careers of former idols. We cited Warren Buffet among the latest. The list continues to grow beyond mere mortals to countries and theories no less
- We noted the top in the Bombay Stock Exchange this past November. Now a front page article in today’s WSJ 4,5,11 reveals an Indian Call Center unable to find 3,000 recruits in a country of 1.2 Billion. Cheating and lax standards abound, sound familiar?
- Wind Power, touted to produce 20% of US energy needs for ‘free, produced by 2% last year and despite subsidies has trouble showing a profit, and this with oil over $100
- Venerable SW Airlines has struck fear into every other air lane it has entered given its successful low cost model. But now, a crack in a 737 300 grounded flights. Hmm, new aircraft on order here?
- Fraudster turned investigator turned fraudster again Barry Minkow pleads guilty, and resigns as pastor of his Church
- The Galleon trial slogs on for Hedge Fund Manager Rajaratnam
But final fifth waves in markets ignore such things. At the same times these cracks in the ‘market fuselage’ appear, irrational exuberance pushes prices higher.
- ‘Big Deals Roar Back’ as Texas Instruments buys National Semiconductor, etc (front page article WSJ) Gee why didn’t’ TI think of this at DOW 6666? The answer is that upbeat mood spurs the desire for inclusionism. We see mergers at the top of markets, remember Fed Ex buying Kinkos? Fed Ex bought Kinkos in the first quarter of 2004 at Dow 10,500. A few year later Fed Ex took an impairment write down, dropping the Kinkos name.
- The battle over the NYSE rages on with Deutsche Bank on one side and NASD/ICE on the other, the latter bidding $11 billion.
Markets
We were proven wrong on gold and GDX as both soared today, gold up $22. We see headlines about the weak dollar but on our chart the USD only moved .03. Efforts by the Government to weaken the dollar to ‘boost’ exports have only really boosted gold and silver.
Gold typically leads stocks so this is kick off for the last big move up into June. Stocks will follow, this should equal the Nov 2007 type high with lots of optimism. But the events on page one are forecasting a top not the start of a new bull market.
Bonds retreated a bit, out 91.50 level on TLT looks like it will be tested.
Stocks went nowhere as the fourth wave from last summer meanders to a conclusion. We expect a final lift off into the expected high due in June.
While the NYSE and Dow have retraced most of their losses from year 2000, the NASD badly lags, why? The answer is the lack of stocks to drive the average higher! Don’t laugh, in 1999 the dot.coms created a tidal wave of IPOs, all on the NASD. The frenzy of stock buying drove the NASD to new highs. This of course collapsed back to its 1997 level by year 2003.
Now massive regulations post SARBOX have caused the new dot.coms, the social media network firms, to stay private. Every day another article speculates how much a Facebook or Youtube IPO would bring. Well, it would certainly bring higher prices for the COMPQ. As one of my students remarked, doesn’t Congress realize what it is doing? Chuck Schumer, have you looked in the mirror lately?
Note that we are back to the pre 2008 crash level which is a FIB 38% re- tracement. This is of course another reason to be cautious. And of course caution is cast to the wind, as deal makers work on, well, more deals.
More regulations are exactly what one would expect during an era of stagnation, and we are only half way through this one. IPOs move to Hong Kong. Gambling profits soar in Macau. The nest two months promise to be most interesting as we have box seats to another exuberant high.