Quiet Week

It's going to be another quiet week and I will be quiet this week as well. I hope everyone had a great Christmas, Hanukkah or whatever holiday you did or did not celebrate.

A Systemic Orgy

Bloomberg has a good article on (eulogy for?) the history of the Chicago School of Economics.

“When Friedman’s Platonic ideas of free-market virtues are put into practice, they have too often generated a systemic orgy of competitive greed -- whose remedies, ironically, entail countermeasures of nationalization,” Marshall Sahlins, an emeritus professor of anthropology, said during the debate, speaking in a room adorned with murals of female students parading through the campus in medieval gowns.

Drifting - Snow and Otherwise

It's a slow week. Little volume and price will probably drift around. It's a good week to take off and maybe next week as well.

Quote of the Year

This has to be the quote of the year, maybe the decade, from the New York Times yesterday:

“The Bush administration took a lot of pride that home ownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

Duh!

Madoff - The Good News

The good news about Madoff is that it was all fake. There were no counter-parties to take down unlike the now quaint failure of LTCM.

Market Comment: Happy Winter

It's winter in New York with a wind chill of -5F. The best news is that the days (amount of daylight) start getting longer which is enough reason to start feeling good.

Last Friday, I was technically correct in thinking the market would end down. However, the internals (A/D and volume) were positive. The averages are below their 50MA but in the climb from their lows of 11/20, lower lows have not been made. This is good. A lower low would be a close below 851 for the S&P (I like to use the intra-day lows - it's a more decisive statement) and 8347 for the Dow.

Today Will Be Interesting

All the major averages failed to close above their December high and closed below the 50MA. Short-term, this is not a good sign and normally I would say that the November lows look like a good target. However, over the past few months down days have been HUGH down days particularly when looking at the advance/decline line. Yesterday, the A/D was only modestly negative. It was not a blow out everyone-to-the-exits negative like we have been seeing. Also, as of right this moment, we are waiting to hear what Bush has to say about a possible auto bailout. I'm sure they will be doing something but I have no idea what. Yesterday he said something about a managed or prepackaged bankruptcy. All that said, I think the market will end down for the day.

Indecision

Yesterday was completely indecisive. The averages are still above the 50MA, did not break the December high and closed down a bit. The advance/decline lines were slightly positive but more neutral than anything. The biggest movement was the dollar which continued its fall which can be good for exports if anyone is buying. The economy may suck but there is a lot of money sitting in cash and historically low-yield treasuries. Someday that money will be looking for higher returns and head to the stock market.

Saved by Zero

I guess there is some irony in the Fed using a jingle from a Toyota commercial to save the economy. The market clearly liked it. See the above chart for the Dow. We closed above the 50MA but neither the Dow nor the S&P could eek out a close above the December highs (See B.) This is the next resistance level and after that, a good chance we go to the November highs (See A.)

A bit more about the Feds actions: The New York Times printed this sub-head today on the front page, "Agency Vows to Print as Much Money as Needed ..." Obviously, the long term risk here is runaway inflation. On the other hand, from a deficit point of view, the government is borrowing money at 0% and will pay back that debt with highly inflated dollars.

Waiting

Yesterday was rather indecisive. The Fed makes a move today and it should be a non-issue. Still waiting to see if the 50MA can be broken to the upside.

Southern Cars

Call it the revenge of the south. Eight foreign automakers have established major presences in the American south and have transformed the local economies. Daniel Gross writes about this in Slate. As you read this article it should come as no surprise to you that the Senators that lead the anti-bailout brigade were all from these same southern states. Were they making a stand on principal or self-interest?

Ponzi Schemes

Henry Blodget outlines why Bernie Madoff had just about the perfect Ponzi scheme. This raises questions: Does every Ponzi scheme eventually get discovered? Are some so successful that they keep going on and on? Has anyone successfully wound down a Ponzi scheme?

Market Up or Down?

Friday was a resilient day for the market. It sank on news of the failed Congressional bailout of the auto industry and then managed to eek out a gain for the day. This chart is of the S&P for the past few months. The overall trend of the market is obviously down (green arrow). However, short term, the market is attempting a small rally (white arrow). The 50 MA is still resistance for the market. The Dow looks the same. If the 50 MA fails again then the down trend will likely continue. If not, them we could see a more sustained up trend, maybe to S&P 1000 or Dow 9600-9700.

Dimon and Rust

The market was hanging in yesterday until Jamie Dimon spoke in the afternoon and told us all that business was worse than he expected. (Was he talking his book?) This morning the futures are way down on news that the oxidizing US auto business is not getting a bailout - at least not yet.

The chart of the S&P shows how the 50 MA stopped the advancing action. Before hitting the 50MA, the market had advanced 20% off its recent low. The futures this morning are giving back less than 50% of that. For the S&P, a 50% give back is 830. The question going forward is how much pain and misery is priced into the market. Will bad news on the auto front drive the market to new lows.

A Force Field

Yesterday I wrote about the 50 day MA (moving average). I said it could act as a wall or a minor impediment. After yesterday it's looking like a force field. This chart is of the S&P and the red bold line is the 50 day MA.

This morning, more bad news on the employment front and Chinese exports fell like a rock. Will the market slough this news off or retreat? Retreat seems more likely.

Are You Happy?

Justin Wolfers debunks the Happiness is Contagious theory. He argues that there is a big difference between causation and correlation.

I made similar arguments awhile back concerning the market. Read here.

Two Views of the Market

Has the market bottomed - not according to the Q Ratio.

But, just maybe.

These two views, in reality, are not far apart. The Market is undervalued but not enough undervalued for it to be a real bottom.

That Moving Average

As I mentioned yesterday, the 50MA was overhead resistance for the market. This chart is of the Dow. The bold red line is the 50 day moving average. It can act as a wall or a minor impediment. Over the previous 11 days the market was up 20%. It doesn't feel like much but that's a big move. A lot of bad news came out during that time and the market sloughed it off. Yesterday we saw hordes of money going into short-term treasuries at 0%. I guess that is the definition of "flight to safety." We'll see today if traders are willing to bet on the market.

Strong Day

Yesterday was a strong day for the market. A big gap opening in the morning and the market held its gains all day - no late day sell off. The S&P closed above 900 but gave some back after hours. The Dow did not close above 9000. If the market moves up today, the numbers to watch are 930 for the S&P and 8941 for the Dow. These are the 50 day moving averages. The 50MA is often a point of support or resistance for the market.

Today's Market

See what I wrote last week. The pre-market is showing opening levels above 900 for the S&P and above 9000 for the Dow. If we close today above these levels then the Nov. and Oct. levels will be challenges (~1000 and ~9700). Two things look likely now, Obama spoke this past weekend about a major public spending program on infrastructure and it looks more likely that the automakers will get enough of a bailout to allow the Obama administration to make their decisions.

Order and Chaos in the Stock Market

It's time to pause and take a look at the past two months, give or take a few days. The top chart is a daily view of the Dow. On 9/29/08 the Dow opened at 11,140 and by 10/10 it cratered to 7882 before closing at 8451 - a 29% drop from top to bottom. A little short of two months later (12/05), the Dow closed at 8665. During this time we have been reading about the forced liquidations and deleveraging amongst hedge funds and massive withdrawals. TrimTabs reports that net outflows of all US equity funds starting 10/1 has been 134 billion dollars; post 10/10 the net outflow has been 69 billion. This number, obviously, does not include hedge funds, privately managed portfolios, individual selling and selling by overseas funds.

Here's my take on this action: the first week of liquidation was horrible and driven by unmitigated fear; that's when half the total liquidation took place. Since then, the liquidation has been controlled (do I dare say managed.) Fund managers, now more level headed, are using short term rallies in the market to liquidate positions. They have some limited patience and are willing to wait for better pricing to sell. Hence, when the market rallies to obvious resistance levels, we have big down days as the funds liquidate what they can.

The bottom chart is a weekly view of the Dow. It shows in even more graphically how the market has remained somewhat level since 10/10.

So now what? I will post my thoughts later.

WSJ Endorses Dope

An Op-Ed in the WSJ today supports the legalization of marijuana.

Another Hidden Cost of the US Automakers

Yesterday, Rick Wagoner said that it was up to individual dealerships if they wanted to stay in business.

However, The Detroit Free Press reports that the dealerships costs the Big 3 $436 per car more than the dealerships of other automakers. Yet another area of expenses that the Big 3 have failed to do anything about over the years.

Jobs - What Jobs?

A really, really ugly jobs number this morning. Over 500,000 jobs lost in a month. At the close yesterday, I had not given up on an up move through 900 on the S&P. The tell today will be if the market rebounds after its initial drop on the jobs number.

Why It's Different

Over the past twenty some-odd years, there have been a number of shocks to the market - 1987, the Asian crisis, LTCM, the internet bubble burst. I liken these events to owning a house that suffers from a hurricane, maybe some flooding, a leaky roof - some problems/damage more serious than others, but all caused by outside or rare events that can be repaired. What we have now is a house that is infested with termites and the only thing left is a thin veneer of paint holding up the walls. It is rot from the inside out. The house needs to be torn down (deleveraged) and rebuilt (new investment and spending in line with real economics, proper regulation and less leverage.) This is a process that will take a long time. It can be helped or hindered by government intervention. Only in hindsight will we know for sure the right thing to do.

The big question for stock market investors and traders is how much of the downside - the tear down - has been priced into the market?

Something Could be Brewing

Just maybe the market is setting up for a nice move. If the S&P can close above 900 then I believe it will go to 1000. See the chart above. However, this market is very skittish and news driven - be careful.

Bad News is Good News

The ADP employment report stunk and the non-manufacturing ISM report was a new all time low and the market is up for the day. One hour does not make a trend but when the market treats bad news as good news, it's good news for the market.

The Stock Market View of Bill Gross

Bill Gross writes an interesting analysis of the market. By traditional measures and rules, the market is well undervalued. However, he claims that the world has changed.

My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.

Fear and Order in the Markets

Volume -wise the day started slowly but ended strong. It was a nice gain yesterday in the market. It was a nice orderly day. However, as I mentioned yesterday, when the market goes down. like it did on Monday it is with unmitigated fear. This market, in order to gain some footing, needs orderly down and up days.

Mid-Day Update

The market is up nicely today but it is on lower volume continuing the pattern of big volume on down days and low volume on up days. Also, the comparison of up volume to down volume is telling: yesterday the down volume beat the up volume by a whooping 70 to 1. Today, the up volume is ahead by 8 to 1.

Deflation and the Baltic Dry Index

The Baltic Dry Index is a measure of the cost to ship commodities. It's an index we don't hear much about but it can be a good leading economic indicator just like the Corrugated Box Index (I don't know if CBI is real or not but I had a friend in the box business and the number of cardboard boxes he shipped was a good indicator of economic activity.) In 2003, Daniel Gross wrote about the BDI when it was booming. Currently, the BDI is at 700, a level it has not seen since 1986! Earlier this year it was trading at around 12,000. See this chart from Bloomberg.

Today's Market

This is a chart of the Dow for the past two months. What was today's horrible action about? The government told us we have been in a recession since last fall- not much of surprise. Retail sales in dollars were okay last friday but so much was being given away, probably most sales with slim to no margins. Today's action gave up 50% of the past five trading days' move. I mentioned last week that I didn't trust that move because it was on declining volume.

Please Explain

Bernanke reaffirms that buying long Treasuries is an option the Fed has going forward. Can someone explain how it makes sense for the government to buy it's own debt?

Market at Fair Value

Henry Blodget makes the argument that stocks are back at fair value after being over valued for 15 years.

Where Are We?

This chart is a monthly view of the S&P from 1997 to the present. In 2007, the S&P tried to better its 2000 high and failed. Right now, the market is challenging the 2002-2003 lows. As I pointed out in previous posts, this level is a 50% giveback or retracement of the super-bull that began in 1982. I think the probability is that this level will hold. However, it is heavily dependent on other negative surprises and therefore, is not something to make big bets on. If this level fails I think the S&P will go to about 660 which would represent a 60% retracement.