Tuesday, December 27, 2005

Post Christmas Reversal

Since the market decided to have an interesting day, we decided we should put up a post tonight.  Tuesday’s market was an outside down day in all three indexes we follow except that the volume was not very heavy.  Since Friday was such a flat uneventful day, we decided to take a look at the trading for the last two days and all three indexes traded higher today than any of the trading of the last two days and closed below the lows of those two days as well.

The market popped hard at the beginning of trading such that the Dow was up 50 points in the first half hour only to lose 150 points from there into the close.  The price movement indicates a powerful reversal action while the volume was less than inspiring due to the holiday trading.  

The main news for the day was the inverted yield curve in the Treasury bond market, where the yield on the 10 year dipped below that of the 2 year.  This seems to be the definition of an inversion as it was presented in the media today.  The point is that the yield curve is at least flat and bound to invert.  The reason this is important is that investors don’t need to get paid for inflation for anything past 2 years.  An inverted yield curve has forecast a recession every time since WW II.  

At the close the yield on the two bonds were the same at 4.34% while the five year was 5 basis points less at 4.29% and the 30 year was 16 bps more at 4.50%--pretty flat by any standards, really.  When you consider that the Fed Funds are at 4.25% for overnight funds, this is really flat.

Another reason for the post is that the “True Contrarian” published his thoughts on several of the markets we follow.  We thought maybe you’d like to take a look at his forecast for 2006.  You’ll find the link on the left.

Hope you had a nice Christmas.

Dow Industrials:  10,777.77  -105.50
RYVNX:  18.85TLT:  92.55
BEGBX:  13.24

Thursday, December 22, 2005

Merry Christmas

The stock market basically chugged higher Thursday on fairly low volume.  With the Christmas holiday over the coming weekend (in case you might have forgotten), trading should be subdued on Friday, too.  The big beneficiaries of trading were Caterpillar and AIG, both of which are in the Dow Industrials.  They were both identified by separate firms as being among the top picks for the coming year.  Credit Suisse First Boston picked CAT and Merrill Lynch named AIG, both being up substantially on that news.  On the other hand, GM retreated again on Thursday and dropped over 2%.

In other markets, natural gas futures dropped almost 10%.  Gold was up almost $8 with the HUI trading up over 11, looking to make a new annual high in that index.  The news in the gold complex was Barrick Gold’s (ABX) hostile takeover bid for Placer Dome Inc.  This kind of merger news can have some speculators lathered up for other takeover targets and push possibles up accordingly.  

With all of the bullishness in the marketplace, it’s difficult to believe that the Dow hit a high for the move almost a month ago on November 25th at 10,931.  The Nasdaq Comp hit its high of 2273 on December 2nd.  The SP 500 is a bit more recent, December 14th.  You would think from all of the Santa Claus rally talk that we were well above all of these numbers.  But, You should understand that the three numbers just mentioned are our protection points.  As long as we are under those numbers, we are confident the next big move is down.  If all three of the indexes go above their respective highs from the last month, then we will reassess.  Until then, we remain bearish.

Tomorrow’s items are durable goods orders, expected to be up 0.8% and new home sales.  We don’t really expect market moving numbers, but only because most all the traders will not be present on Friday.

Next week is going to be a light week and our post schedule will not be definite.  If something happens in the prices that we need to report, we will post.  Otherwise, don’t expect an updated post until the New Year.

With that in mind, please have a Merry Christmas and a Happy New Year.  The Wednesday Update wishes you and your family the very best.

Dow Industrials:  10,889.44  +55.71
RYVNX:   18.85
TLT:  91.24
BEGBX:  13.27

Wednesday, December 21, 2005

Winter Begins

Now, wasn’t that interesting.  The market was perfectly set up today to show us an outside down day but managed to recover in the last hour to prevent that very bearish event.  I don’t think today could really be considered a bullish day anyway.  The Dow was up nearly 100 points this morning and bumped into 10,900 and that was the end of the up move.  Late in the day, the Dow was sporting about a 10 point gain and as mentioned was able to hold positive ground, ending up about 28 points.

Here the market is again, trying to get something going only to be pushed back.  This is happening in the face of all this bullishness about the year end rally.  One of the guys in my office came to me yesterday and asked if I’d take a bet on the Dow breaking through 11,000 by the end of the year.  I replied that I already had a big bet on that event, as short as I am.  So, of course, today when the Dow was up near that 10,900 area, he was back.  I almost took him up on the bet just to see what would happen.  But, the market made short order of that high and then proceeded back south most of the rest of the day.  

Our position is that the market has told us that the high is now just below that 11,000 mark.  The broader market is also in that same position—top is in for this move.  If that wasn’t the case, do you think the market would be having any trouble getting back to those levels over the past two days?  I will admit that the market is still well above the 10,500 range it was in for so many months but it also could go through that level in a heartbeat.  If this market is going to go down right here, the path might be fairly greased and ready to go.  

On Thursday we get the Leading Economic Indicators expected to come in around +0.5%.  Friday we get the Durable Goods Orders and November New Home Sales.  It doesn’t seem that the market is paying much attention to news these days but we wanted to let you know what was coming.  Sometimes it’s just better to know than not especially if the market decides to trade on the numbers and you don’t know what is going on.

That reminds me, we mentioned GM in last night’s post and thought we’d give you and update on it.  GM opened down Wednesday morning in a follow through from Tuesday’s after hours hit.  It immediately rebounded to a positive but spent the rest of the day leaking from the high around 20.30 to close at 19.05, another multi-decade low.  I think the last time it traded this low was back in 1983—again, so much for that theory of buying big name stocks and holding on to them forever.  And, don’t forget that as GM goes so goes the market, an old market adage.  

Dow Industrials:  10,833.73  +28.18
RYVNX:  19.14
TLT:  90.52
BEGBX:  13.23

Tuesday, December 20, 2005

GM Falls

The biggest story I could find on the market today was GM. A report suggested that Toyota may surpass GM as the No. 1 auto maker and the stock took a 5.7% drop during the trading day and dropped another 2.5% after hours. Connected to this story was the big investor that “saved” GM back in May with his announcement that he was taking a large stake in the company. Kirk Kerkorian indicated (actually his company, Tracinda) that they had sold part of their share in GM for about $20 a share after purchasing it in May for around $30, not a bad trade for six months. How would you feel if you lost a third of your portfolio in half a year? Not a good situation for anyone involved.

There was another item that we noticed only because we tend to watch it and wait for another opportunity and that was the price of gold. After trading near $540 last week, it closed under $500 today on a steep drop of about $10 and continues dropping in after hours markets around the world tonight to the tune of about $4 more. Silver followed suit by dropping 25 cents. The HUI did not move down nearly as much as gold but it has not followed gold on this run so it didn't have as far to fall. We are expecting another 15%-20% drop in the HUI as we wait for an opportunity. We are glad not to be on the wrong side of this move.

The other two news items we mentioned, housing starts and the PPI, were pretty much dismissed by the market. The bond market did drop initially on the news but managed to contain its losses over the course of the day. But, for the most part these items were not considered in trading today. No surprise there.

There was a bit of a surprise in that the market didn’t manage to make a good rebound from the losses it sustained yesterday. There’s a lot of week left but the reaction today was less then bullish from our perspective. We mentioned that the market would probably try to retrace some of its losses from yesterday and it still may but there is less strength in the market than most think.

As we approach the end of the year and this rally has run out of power, there is going to be a remarkable vacuum of buyers going into 2006. The market is Very dangerous right here and you should guard your principal. As bears, we look at a day like today and say that maybe tomorrow there will be a rally. Think of what the bulls must say after today. If they also say maybe tomorrow there will be a rally, and it doesn’t come what do they say tomorrow?

Be careful and BE SELLING any rallies.

Dow Industrials: 10,805.55 -30.98
RYVNX: 19.26
TLT: 90.68
BEGBX: 13.29

Monday, December 19, 2005

NASDAQ Takes a Hit

We have suggested that you sell into strength for the last couple of weeks but you didn’t get much chance to do that today as the stock market started off with a little gain but basically leaked all day and went out on the lows.  This is a Monday in front of a two week holiday period which many have thought would produce a nice rally going into year end.  Today’s action doesn’t help that argument at all.

Don’t be deceived by the 39 point loss in the Dow.  That was mitigated by the outsized gains of the two drug stocks in the Dow, Pfizer (PFE) and Merck (MRK), based on a patent victory (Lipitor) by Pfizer.  I guess Barron’s ran a story over the weekend about AIG saying the worst of the scandals and executive reshuffling are behind them and the price may come back and it did today to the tune of about one percent.  (Our position is that AIG has seen its highs for a while.)  Without those gains the Dow would have been down about 40 more points.  The losses today came even though oil dropped into the $57’s.

The big move was on the NASDAQ as that index fell almost 1.5%, showing surprising weakness for a Monday.  We are not unhappy about this move but we weren’t expecting such a big drop on a Monday.  The move was significant because it pulled the average down below lows set a week and a half ago and the lows set at the end of last month.  

What is more ominous is the drop in prices without any real news to cause it.  We would not be surprised to see the market continue to drop from here.  All it has needed in the last two weeks is a start to the downside and it will go down.  The participants are So bullish and are not prepared for a large drop, a pull back maybe but not a large drop.    

Tuesday we get to see the PPI and housing starts before the market opens.  We’ll see how those pieces of news affect the market.  We don’t think they will have much effect but there is always a chance the market will try to pay attention to them.  

Markets don’t tend to fall right out of bed and we understand that the market has every right to retrace some of Monday’s fall but we think that the market has now tipped its hand for the next move—down.  Be careful and be selling rallies.

Dow Industrials:  10,836.53  -39.06
RYVNX:  19.27
TLT:  90.79
BEGBX:  13.42

Sunday, December 18, 2005

Slow Weeks Ahead

For the week last week, the Dow Industrials managed to gain about 100 points or 1%.  The Dow was the best performer of the indexes we follow, with the SP500 up about a half of one percent and the NASDAQ Comp actually Down a little.  

Gold, from its highs on Monday morning near $540 a ounce, closed down nearly $40.  We are fairly confident that the recent price highs in HUI and Gold are solid tops with buying limited to retracing some of the losses since then.  

Meanwhile, the bond market keeps moving up in spite of the Fed’s recent interest rate move.  The ten year Treasury is at 4.44% while the overnight Fed funds rate has moved up to 4.25% as of last week’s Fed meeting.  That’s 19 bps of spread for ten years of inflation.  

The stock market has signaled a high for us to pay strict attention to, that being the highs set over the past two weeks in all indexes.  The main one the world watches is the Dow Industrials and its high for the last few weeks has been the 10,950 level, maybe more like the 11,000 for most observers.  We are extremely bearish against this high.  If the highs of the last few weeks get penetrated to the upside, we will need to reassess but for now, it looks like those will be tough ceilings.

There were two people in the news this weekend, one a bull, Tobias Levkovich, and the other a bear, Robert Shiller.  They both are looking at the same market and coming to very opposite conclusions.  We would, of course, have to side with Mr. Shiller and say that the market is still too exuberant.  He reminds us of the Dow 36,000 forecasts that were written in a book by that title in 1999: “…a sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier.”  As the CNN article says, “Or not.”  Maybe we should take a poll and ask when you think the Dow will hit 36,000…or not.

There are several noteworthy items coming out this week such as the ICSC Store Sales Index, the PPI, and November housing starts on Tuesday with durable goods orders and November new home sales on Friday.  Until tomorrow, we remind you to Be careful and Be selling into good rallies.

Dow Industrials:  10,875.59   -6.08
RYVNX:  18.72
TLT:  90.70
BGEIX:  14.49  (we are dropping this from our watch list)
BEGBX:  13.43

Thursday, December 15, 2005

CPI Falls?

Thursday morning we heard that the CPI was Down 0.6% in November.  That’s just the way the headline read.  We normally hear how the Core CPI moved and we did today but it was not the headliner.  These numbers are so silly anyway.  I don’t know how anyone can believe them.

An Illinois court overturned a $10 billion class action suit aimed at Philip Morris.  As you might imagine, MO was up about 4% on the news.  This stock closed today over 76 to an all time high.  Back in 2000 it had just gotten hammered by the tobacco decision and traded down under 20, a quadruple to today in about five years.  If it’s any interest to you, I was recommending MO at the time.  Of course, it wasn’t a popular choice when it was under 20, but today it is popular.  So, what do you think this contrarian thinks?  

Tonight, ORCL (Oracle) announced earnings and they disappointed.  Their net earnings dropped 2.1% on a revenue rise of 19%.  The stock dropped nearly 3% after the news.  The rest of the market seemed uninterested as the futures are up in overnight trading.    

Friday is what they call Quadruple Witching as four types of derivative in the stock market expire, stock options, index options, futures, and options on futures.  At any rate, this happens once a quarter as that is how the futures trade, March, June, September, and December.  Options on stocks and indexes expire once a month and those days tend to be a little volatile too but not quite like the Quadruple Witching.  Normally there is heavy volume traded as positions are unwound forced by the expirations.  Mostly, these contracts are not executed, just unwound so there can be a lot of volume.

Based on the Quad Witch, we don’t see much of anything real happening on Friday.  We will be back again on Sunday evening for another post.  See you then.

Dow Industrials: 10,881.67  -1.84  wow
RYVNX:  18.43
TLT:  90.40
BGEIX:  14.31
BEGBX:  13.36

Wednesday, December 14, 2005

What Happened to the NASDAQ Today?

The stock market seemed undecided today with the Dow up and the NASDAQ down.  The SP 500 managed a new high for the move which means the SP 500 is to another 4 year high.  We only bring this up because of Where the market Has been, not to provide insight into where it is going.  So many people think that the market Is going up when really it Has already gone up.  Now, it’s just a matter of picking an exit point.

Today’s trading leaves a question in our mind:  What happened an hour and a half into the session that caused the NASDAQ to drop so fast? Looking at some of the big names doesn’t reveal any big drops for them but still the index shows a rather large drop for about ten minutes before recovering nicely during the day only to fall into the close.  The Dow and the SP500 both dropped at the same time but didn’t fall nearly as hard and both were positive on the close.  There were a couple of downgrades on Apple Computer (AAPL) but that happened before the market opened.  Oh well.

I guess the big news for the past couple of days is in the currencies and the precious metals.  On Monday evening we mentioned that the dollar had dropped out of a trading range that it had been in for about a month.  The Fed raised short term rates on Tuesday partly to prop up the dollar and the dollar has now fallen a bit more, not really a lot but it dropped below 90.  (With this noticeable trend change in the dollar we have added to our watch list below the mutual fund BEGBX, a fund that hedges against the dollar.  It is at a nice price here after rising a bit from the lows set when the dollar was trading in its trading range.)

The Japanese yen on the other hand exploded yesterday.  The yen has been in a decline for a year starting back in December of last year when it traded near 101, closing this week under 83.  On Wednesday the yen closed about 85.25 for a significant jump of nearly 3% in one trading session.  

As for gold, it took another beating today dropping about $15 to close around $505, this after trading at $540 just a couple of days ago.  Silver has followed suit by trading down from 9.20 a couple of days ago to 8.35 today.  These are large moves for both metals and indicate that more is probably coming.  We will continue to stand aside waiting for a good opportunity.  

Important notes about today’s rally in the Dow:  The Dow was up with the NASDAQ down and the Dow stayed below its suggested ceiling of 10,950.  We continue to watch that level to balance our bearish stance.  Yes, the SP 500 made a new high but that doesn’t mean it’s a buy.  We still think that the market is desperately trying to hold on to its recent gains but it will Fail.

Probably the most interesting of all markets on Wednesday was the bond market which jumped a day after the Fed’s rate increase announcement.  I’m sure the Fed was hoping the bond market would follow along and push longer term rates up but that wasn’t the case today.  The bond market pushed rates down today trying to get the yield curve as flat as possible.  Right now, the fed funds rate is at 4.25% and the ten year bond is at 4.45%, meaning that ten year money is only worth 20bps more than overnight funds, amazing.  For comparison purposes the 30 year T-bond is yielding 4.66% for another 20bps for 20 years.  

Dow Industrials:  10,883.51  +59.79
RYVNX:  18.49
TLT:   90.62  (nice move up in bonds today)
BGEIX:  14.20  (going down)
BEGBX:  13.39  (New to our watch list tonight--dollar hedge mutual fund)

Tuesday, December 13, 2005

Say Goodbye to "Accommodative"

Today the Fed surprised the market with a…no, no, no, there was no surprise.  The Fed raised rates 25 bps to 4.25% bringing the number of increases to 13, a very long baseball game indeed.  The Fed’s announcement was greeted with the predictable buying frenzy for a few minutes that took the Dow up about 100 points.  Most of the rest of the day was spent trading in a fairly narrow range but drifting a little lower in the final hour to only close up about 55 points.

Bonds were modestly up at the opening but faded into the announcement but generally recovered to close on the highs of the day.  This is not what the Fed has been hoping for.  They want the long Rates to go up but instead the Prices are going up and rates are going down or nowhere, you remember the conundrum.  

But, wait, the Fed not only is managing the short end of the interest curve, they are managing Adjectives too.  They removed the word “accommodative” from the monetary policy statement.  Maybe next time they can remove the adjective “measured”, then we can really have a good rally.  (yes, sarcasm)  I am truly amazed that the Fed has the market mesmerized into thinking that if only they change one word in the policy statement, that is bullish for stocks.  Aren’t there other things the market should be paying attention to?

Well, we think so and here are some of them.  Today:  1.) natural gas closed at a new high near 15.50 about double where prices were a year ago (about 7 to 7.50); 2.) retail sales, without autos, were down for the month of November.  Didn’t we hear that Thanksgiving sales were 20% higher than a year ago???; 3.)  Best Buy (BBY) announced it was lowering guidance for the quarter and the year and said desktop computer sales were a bit of a problem.  BBY lost 12% today;  4.)  Don’t forget that the Fed actually Did raise interest rates, they didn’t just lower the number of adjectives.

We continue our bearish stance.  There is very little reason to be long this market in any way shape or form.  BE CAREFUL and be selling.

Dow Industrials:  10,823.72   +55.95  (well below 10,950)
RYVNX:  18.34  (if you want to buy something, buy this)
TLT:  89.70
BGEIX:  14.50    

Monday, December 12, 2005

Slow Trading Ahead of Fed

The stock market seemed to be treading water on Monday and rightly so as the Fed is set to meet on Tuesday and decide on the important course of short term interest rates.  Actually, the stock market is hoping that the Fed removes the measured language it has used for the last year or so.  That way, the stock market figures the Fed is done raising rates and they can party on and get this market moving up again.

We are of the opinion that any change in the Fed policy statement will be viewed as positive by the market even though that enthusiasm will probably wane quickly.  The way the market reacts on Tuesday will only be another clue in how the market will trade in the next year.  Bullish sentiment persists even as the market has shown a fairly strong ceiling near Dow 10,950.  Volume continues at a “measured” pace since Thanksgiving and there are many reasons that this rally is on its last legs.  

We are in a waiting pattern until the Fed announces but we are firmly bearish this market at these levels.  Even gold looks like it hit a top today falling sharply in the afternoon trading.  The dollar seems to have fallen out of bed today too after trading in a nice 91 to 92.5 range for about a month, it fell to just over 90 today.  The two markets should be trading opposite each other but both look like they want to go down right now, and go down together.  We will see.

We’ll have more to say tomorrow evening after the news.  Until then be careful and be selling any strength after the Fed’s announcement.

Dow Industrials:  10,767.77  -10.81
RYVNX:  18.50
TLT:  89.37
BGEIX:  14.66

Sunday, December 11, 2005

Fed Decision Due on Tuesday

The market has another Monday to trade and as I write this (Sunday evening), the overnight futures are fairly strong trying to make a good start in the morning.  We tend to see strong Monday’s and this one looks like it wants to at least start the day on the up side.  

We think the news from the Fed will be another quarter point hike on Tuesday so why’s the market so firm tonight?  The traders think the Fed might just eliminate the measured language it has used in its policy statements over the past many meetings.  That news would signal to the market that the rate increases might be over.  We don’t necessarily agree with the logic even though we might actually agree with the outcome.  With a yield curve that is virtually flat, a higher short rate would cause them to be higher than the longer dated securities causing what is called an inverted yield curve.  

A “normal” yield curve is people charging more to borrow money for a longer period of time.  An inverted curve means the short end is higher than the long end, which is not normal, why would You be willing to long money for twenty years at a rate that is less than a one year loan?  It just doesn’t make sense to the normal person.

Inverted curves have been associated with an economy leading to a recession which is another reason the Fed doesn’t want to see it happen and may stop raising the short end just because of that.  You may have heard about the “conundrum” that Greenspan talked about recently.  The Fed has pushed up the short end of the curve and has tried to force the longer end of the curve up by doing that.  Well, since it hasn’t really worked, Greenspan calls it a conundrum.  Maybe the market knows something the Fed doesn’t.

We are looking forward to the Fed’s announcement on Tuesday afternoon and are anxious to see that way the market trades into and out of their decision and statement.  

Dow Industrials:  10,778.58   +23.46
RYVNX:  18.62
TLT:  89.54
BGEIX:  14.62

Thursday, December 08, 2005

INTC Disappoints Market

Here we are after four days of trading this week and we see the Dow Industrials dropping to the 10,755 level, remembering that the Dow closed 2004 at 10,783.  The Dow has been exhibiting signs of a top after trying several times in the last two weeks to overcome the 10,950 level but failing.  Yes, we know that the 200 points separating tonight’s close and 10,950 is a very small number.  The strength in the market place seems to have been used up on this very strong 2005 rally that has taken the Dow to 30 points less than last year’s closing price.  (yes, sarcasm rules)

The market had no idea what direction it wanted to go today starting modestly higher, and then dropping to the morning lows and then spurting up almost a percent about an hour into the session.  The market traded at that level for about another hour and then dropped back to the morning lows for another hour before trading up into the close.  This makes for a truly unpredictable trading situation, especially have the various sectors traded today.

After the close, INTC graced the scene with its mid-quarter update and tightened up its revenue guidance for the fourth quarter.  The market didn’t really think the news was too impressive and hit the stock for about 3%.  I don’t really know how it will trade in the morning due to the overnight futures having recovered a bit from the INTC news.  INTC has had quite a round trip these last few weeks having been right at 24.5 and moving up to 27.5 and tonight trading down to just under 25, the close I saw in two different places was 24.93 and 24.90.  

Next week we have much news for the market to trade on and there could be some volatile trading.  At the end of next week is the options expiration which can cause some extra volume with the volatility.  During the week we get to here from the Fed on their next interest rate hike, which would be on Tuesday December 13th.  Other news next week includes the CPI and reports on the twin deficits as well as several other fun and games.  We’ll be back on Sunday evening, see you then.

Dow Industrials:  10,755.12  -55.79
RYVNX:   18.75
TLT:  90.25
BGEIX:  14.72

Wednesday, December 07, 2005


The stock market seems to be set on declining all of a sudden.  When the Dow had trouble last week near that 10,950 level and then fell away, it seemed like a good opportunity to get out.  Then this week, the Dow tried to rally back to that level but didn’t quite make it.  These don’t seem like mighty signals to most but we see them as powerful.  The trading day on Wednesday was much more negative than the numbers showed at the end of the day.  There was a bit of a rally going into the close to eliminate the worst numbers of the day.  

All in all, Wednesday was not a very good day.  There was a story during the day, confirmed by the news later on in the day that someone had been shot by an air marshal, a story which most of you have probably heard by now.  We only bring this up due to the market seeming to trade down on that news a little today.  You just don’t know what news the market will trade on until it comes.  

During the day the Dow dropped into the 10,700’s but managed to rally back over 10,800.  Remember that the Dow closed 2004 at 10,783 and today traded at that level.  Pretty strong year for the Dow, it may close breakeven.  Cash would have done a little better, without the headaches.  Yes, our other two indexes are up about 3% on the year but the year isn’t over.  There is plenty of time for a drop off in those.

After the close, Texas Instruments (TXN) announced good guidance for the fourth quarter and the after hours market was happy about it and drove the price of TXN up a couple percent.  Since then, there has been some deterioration in the futures as we are now seeing negatives replacing the happiness after the close.  We report this due to the nature of the trading.  Recently, it hasn’t mattered what happened during the day, the futures seem to have been up and above fair value every night for the past month.  So, tonight’s action after the TXN news is something to report.

Gold continues to outperform and we are not too pleased by being out of the sector.  We remind ourselves that we had a nice trade this summer with BGEIX but somehow this up move has gone further than we expected.  We remind you that we still think that it is a temporary situation but the world is definitely paying attention.  We do watch it every day and look for opportunities, so far, no safe plays seem available.

One last item:  We received an email from one of our readers that contained an article from yahoo finance that made some claims about the housing sector that of course align with our thinking process.  The title of the article said that the housing slowdown may claim 800,000 jobs, 500,000 in construction and 300,000 in finance.  The article sited several reasons like new home sales have declined, applications for home mortgages have trended down since September, homes are remaining unsold longer and home construction is outstripping population growth.  They must have been reading the blog for the last six months.  Thanks for the email.  

Be careful and be selling, “Cash is King”.

Dow Industrials:  10,810.91  -45.95
RYVNX:  18.50
TLT:  89.67
BGEIX:  14.50

Tuesday, December 06, 2005

A Small Reversal in Stocks

After yesterday’s DOWner, the market decided it was time to have a rally from those severely depressed prices (yes, there it is again, sarcasm, I’ll try to do better).  Out of the chute stocks appeared to be headed for the moon, rising steadily until around noon (do you like rhyming better than sarcasm?).  The bulk of the afternoon was spent treading water around the 10,910 level in the Dow, curiously below the highs of last week around 10,950.  That level seems to be impervious so far.  

A strange thing happened on the way to the close however, the market decided to fall the last hour of the day.  The last hour saw the Dow drop from that 10,910 level to close near 10,850, a significant reversal since it opened higher than that.  On the surface, people can see that the market was up on the day.  What they don’t know is that it closed near the lows of the day and below the open.  All of the major indexes exhibited this pattern of trading.  This is Not bullish.

Reading the online WSJ this evening, there is an article of note relating to the housing market.  It should be in the Wednesday paper version so you can look at it yourself under the title “Investors Retreat From Housing Market”.  The article suggests that investors, maybe we should call them real estate speculators, have slowed their purchases of homes for investment purposes.  It says that in Phoenix, about 30% of properties for sale are owned by investors while six months ago, most investors were buying rather than selling.  The article continues by saying that in April, there were about 8,600 homes for sale in the Phoenix area and in October that number climbed to 22,340.  

You have likely heard of the practice called flipping, which means that people buy homes and immediately put them on the market for sales at higher prices.  Some of these homes are pre-construction homes and have been popular with “investors”.  The article quotes a broker who had set up a web site last year specifically for “investors” that were looking for these pre-construction properties.  With the market softening, he reports that “I haven’t sold an investor a property to flip since June.”  

One of the headlines that we failed to report yesterday tells of another key data point on the housing market, that being the National Association of Realtors’ index of pending home sales dropping 3.2% in October.  As these pending sales drop, so do actual sales and this index is a leading indicator to tell us just that.  We may be reading too much into this one piece of data but we have seen more and more evidence of a slowing in the housing market over the past six months.  

To us, the real estate articles represent critical information that the stock market is currently ignoring, as this current rally has been maintained for almost two months now.  We continue to see deterioration in the housing market from all signs and we have to say that we are keenly interested in how the stock market will cope with the likes of a housing pullback.  So far, there has been enough smoke to confuse the market, but soon enough it will figure it out.  Until then we remain short.

The gold mining stocks managed to get to a new high for the year today which seems a little delayed based on where gold has been trading recently.  We feel this is a must avoid market at this level.  We would tell you to short it but we feel the stock market in general offers as good or better shorts.  Be careful and be selling any rallies.

Dow Industrials:  10,856.86  +21.85
RYVNX:  18.40
TLT:  90.01
BGEIX:  14.22  (new high)

Monday, December 05, 2005

Monday's Market Pointed Down

Unusual trading for a Monday, with the major indexes all being down, at least a little.  Normally, we see a fairly strong start to the week but not Monday.  The NASDAQ just dropped into the first hour of trading but then stabilized the rest of the day.  The question is “Can the market start its descent now?”

The stock market has been overbought for several weeks now and is certainly due for a correction.  This correction could take a couple of different paths, one which would basically trade flat for a few weeks or two which would mean a good drop in prices.  With the Dow Industrials meeting some significant resistance in the 10,950 area and now rolling over about a hundred points, there hasn’t been much in the way of relieving the overbought condition.  I vote for a decline in prices just because Monday’s trading showed some weakness in the market without much in the way of buying to bring prices back higher.  

The stock market is currently a dangerous place to store your funds.  We continue to advise selling any strength.  The market looks tired and in need of some price declines to alleviate this unusually bullish period of time.  We remind you to take a look at your portfolio to see if it is giving you a good run along side this “rally” or is it lagging?  

Gold keeps pushing higher without much in the way of support from the mining stocks.  This should be a warning signal to most traders and is to us.  We don’t like missing out on a good run but we really haven’t been impressed by the mining stocks’ move.  The HUI was up about a buck on a five dollar move in gold, not a good ratio.

Not much else to report this evening and our posts have been fairly long the last few days so we will keep this one short.

Dow Industrials:  10,835.01  -42.50 (Time to head back to 10,500?)
RYVNX:  18.54
TLT:  89.10
BGEIX:  13.90

Sunday, December 04, 2005

Time to Evaluate Your Portfolio

The Stock market continues overbought, giving all ample opportunities to raise some cash.  The best thing to do is to consider moving out of some of your highly appreciated mutual funds and especially if you are in an aggressive growth fund in your 401(k), there you don’t even have to worry about the tax consequences.  Normally, traders talk about tax loss selling at this time of year but with the market up so much right now you should be evaluating your exit points.

The gold market has shown us a lot of strength lately but not so much in the HUI.  The gold itself is up as we write this (Sunday evening) about $3 in overnight trading.  If you take a close look at the charts of gold (use GLD as a proxy) and HUI over the past month, you will see the spike in gold itself to what are new 23 year highs. The HUI has been able to break above its late September but not by much.  This lack of resolve on the part of the HUI to break out with gold is ominous as the mining stocks generally move ahead of the metal, the other way around.  We don’t have the courage to short gold but we don’t think this is a very good opportunity to get into it.  

Our involvement in gold was for about four months from the lows of May to the highs of September.  We have recently watched the BGEIX go above our highs of September but not by very much, maybe about 5% after our run of over 30%.  We don’t mind leaving a little on the table for the current speculators.  We think there will be a good pullback into the spring and we will consider getting back into gold then.  

As for the stock market, we are concerned by the lack of fear and would not sleep very well at this point if we were exposed to long stocks almost of any sector.  Yes, there have been sectors that Have moved up but here we are.  What do you do now but sell this strength.  The rally has carried these stocks up to unsustainable levels.  And, our test for stocks is how they stack up against the new highs in the market.  In general you would think that as the NASDAQ is making new highs, your stock should be making new highs, too.  So, if that is true, then you may consider keeping it, but if it’s not true, you should take a serious look at selling.  

We stand ready to look at your stocks on a technical basis only.  All you have to do is leave a question in the comment section of the blog.  You can even leave it anonymously if you want to.  This will be one of the best selling opportunities of the next two years so we want to encourage you to act.  

As far as AIG is concerned, I remember hearing a lot about the run it had back in late 2003 into early 2004 from about 57 to about 77, a very good move indeed for about four months.  I said in January of 2004 that it would probably go to about 78, which it did and that would be the ceiling.  AIG dropped hard on news to a low of around 50 earlier this year.  Now, AIG has moved back up to near 70, admittedly a good move for the period, but look at where it is in regard to the market and its near term history.  It was 77 two years ago and now it can’t even get over 70.  This is a big sell right now.  

Just as a reminder, when I owned this stock in my 401(k), we were given the opportunity to sell it in early 2002, I sold mine near 80 the first day I could.  AIG is down about 15% since January of 2002 even with this rally from 50 to 70.  This is pure hard technical analysis and, no matter what the fundamentals are, this stock has done nothing for over 3 years.  The fundamentals are probably not all that good with AIG having had a tough hurricane season this year.  

Be careful and be selling, “Cash is king” again.

Dow Industrials:  10,877.51  -35.06
RYVNX:  18.23  (This is an excellent price for you)
TLT:  89.50
BGEIX:  13.87

Thursday, December 01, 2005

First of the Month Rally

Before the US markets opened on Thursday morning, there was news out of the European Central Bank (ECB) that they were raising rates a quarter of a point to 2.25%.  Initially, that drove up the Euro against the dollar but the ECB made comments that it wasn’t sure that it would raise rates again for a while.  After that the currencies went the other way with the dollar again strong.  

The very interesting thing going on in this time is the price of gold and the dollar are rising together.  Of all of the markets, this seems to conflict the most.  Metals, not just precious metals, were very strong today as copper rose to $2.  We don’t typically follow copper but we can look at a chart and see that about a year ago, copper was trading around $1.  (That double in a year is part of the reason we think that inflation is not being reported properly, but that’s another story.)  

Gold and silver were strong performers today with the HUI following suit but lagging.  Gold and silver made new highs for the move but the HUI didn’t.  They were all strong reports and of course we sold out a little too early.  We are still happy with our BGEIX trade earlier this year and we were hoping to get back into it around now.  Unfortunately, we haven’t ever gotten a good pullback in the precious metals so we have stayed out.  We will get another chance but right now, the prices are too high to get involved.

Tomorrow we get to find out about November jobs.  We don’t really think it will set off anything unusual in the market but it’s always good to know what you are facing as you start off the trading day.  Certainly today’s read on manufacturing from the ISM was not really considered at all as the market was well up before the opening bell sounded.  

We would like to thank Chicken Lit… I mean Erick for his comments about inflation after Wednesday’s post.  With the price of the 12 days of Christmas going up only 6.1% I don’t think the world feels too badly about that.  

We did want to make a comment on Erick’s earlier points on the debt situation here in this country.  If you look at the stock market, or the gold market or the dollar, since the middle of October, you see almost a relentless move up in the price of all.  We believe that this is the magic that the Fed delivers.  After the big Hurricanes, the Fed must have done what it always does in the face of trouble, add money to the system.  The economy is said to have grown by 4.3% in the third quarter, we don’t really know how that is possible given the state of the world watching the hurricane coverage.  

The strong move in the stock market suggests that there is plenty of liquidity around and of course the most visible place you will see liquidity of this magnitude will be in the US stock markets.  Our thought on the debt situation is this:  There will come a point, and we think it will be sooner than later, that no matter how much money is available, there will be no one that wants to borrow, maybe more to the point would be that there will be no one that Can borrow due to servicing debt they have already put on.  

We have said this would occur as the housing market slowed and precluded more extraction of equity from people’s houses.  We don’t think that the consumer will survive Christmas in a very good way.  At some point, there will be a sudden drop in liquidity, not because the Fed will tighten the purse strings, but because the consumer will stop spending so much.  We think that has already started.  

We read with interest that the Congress is introducing bills that will force employers to automatically enroll employees in their 401(k)’s.  They would have to match a certain amount but the initial savings rate would be set at 3% and raised a percent a year after that for a few years.  I realize this is a proposal that may not get passed but this seems a little beyond the government’s authority.  Take a look at the articles and give me your thoughts.

Have a great weekend and we’ll try to do better in the coming weeks.  We feel badly that we missed this tradable October low.  We really felt it would hold off until November but we missed it.  Right now, we think the move is near an end, at least near a flattening if not a drop.  Good luck, be careful and be selling these rallies.

Dow Industrials:   10,912.57  +106.70  (after yesterday’s down 82, net about 25)
RYVNX:  18.32
TLT:  89.47
BGEIX:  14.05
(not a good day for us)