Wednesday, May 30, 2007

China Down Again This Evening

[Editor’s note: This is the final daily market post. The blog will continue to be published on a weekly basis for now until either we get a market break, when the blog would go daily again, or we stop writing it all together. Thank you.]

Our report on China was somewhat inaccurate last night so we want to clear it up this evening. The change in the trading was an increase in the trading “tax”, they call it a stamp tax. Apparently, the government slaps each trade with a 0.1% charge and now that cost is rising to 0.3%.

The Chinese market was down over 6% last night and tonight is down another 3% so the change may have done something but will it last?

Market Action:
Before the US markets opened for trade there was some overhang from the Chinese market but right after the market opened, down about 0.5%, the buyers came in and struggled to move it higher. Once the averages went green, there was a concerted effort to buy ‘em and all of our three major indexes closed at either new record highs or new relative highs.

The minutes from the last Fed meeting were published today and they indicate that the Fed is still concerned about inflation and that the economy will pick up some steam later in the year. You would think that since the market has built some rate cuts into the prices, that a blow to the “lower interest rates now” theme would have taken a toll on the market. But, that didn’t happen, in fact after that news, the market bolted higher to put the Dow and the SP 500 at new record close.

This action puts our analysis in a particularly bad light and would seem to suggest that the market has not topped. The month of May has seen a good up move during which we have been short and this is something that we can no longer tolerate. There are two elements to this thinking, one, we don’t like to lose money and, two, we detest being wrong. You may not mind that we’re wrong as long as you haven’t followed our advice.

We do believe that the market is overbought and when it finally does turn there will be some very fast selling and prices will drop. But, we can not in good conscience continue to be short, and we are leveraged short so we are losing money at twice the speed the market is going up. The rally from last summer has been extremely difficult for us to call and we are not sure why that is.

Our guess is that there is so much money available for trading by the various large parties that there is no other way to go but up. We have maintained that the residential mortgage market would prevent retail customers from continuing to purchase stocks and we are probably somewhat correct in this assessment. However, there are still many automatic 401(k) purchases that could still be coming from the retail side. Ultimately, we still think the residential real estate will drive the economy and the stock market down. The WSJ had a front page article on the Subprime mess and we urge you to read it. Pay particular attention to the map that shows just how much money poured into these Detroit neighborhoods. No wonder people could afford to pretend they were doing ok. For a while...

Our favorite paragraph is: "This has stripped us of our whole pride," says April Williams, 47 years old, who has until August to pay off her mortgage or vacate the two-story Colonial at 5170, where she and her husband have lived for 11 years. "There's going to be no people left in Detroit if they keep doing this to them."

In any event, we have decided to abandon the shorts we are in and step back from this market and wait until something becomes clear to us. Along with this decision, we want to reduce our commitment to this blog, maybe all together, but at least limit the time we spend on it, until we feel that the market is going down. When that time arrives and we feel that we can be of the best service to you, then we may go back to daily posts.

Right now, the market is way too overpriced to be committing new funds to it but at the same time it is shredding those of us in leverage shorts. To that end, we are going to eliminate our short positions and reduce this blog to Wednesday evenings going forward. We would write a commentary on Wednesday evening like we used to in our email version. That way you would have something to read on Thursday mornings.

We want to thank those of you who have been faithfully reading the blog. We have an idea how many hits we get here (you can see the site meter) and decided that we would continue to write as long as we had 30 hits a week. That doesn’t sound like much but it was enough to keep us writing. And, we have had more than 30 hits a week almost every week, some of which are ours, but it has been enough for us to write.

Our goal has always been to provide some level of contrary thinking with opportunities for profits. We know that has not been happening for quite some time and for that we apology to all of you.

We have been writing a daily post for over two years and this decision has not been made in haste. We have enjoyed writing most every day and will miss it.

Dow Industrials: 13,633.08 +111.78 ( new record high)
VIX: 12.83
HUI: 322.52
QQQQ: 47.19
QQQRS: 0.12 bid
QQQRT: 0.24 bid
RYVNX: 14.87
RYAIX: 20.26
RYCWX: 30.33
TLT: 86.54
BEGBX: 13.72

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