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March 23, 2008
Week in Review #12 (2008-03-23)
A few hours after I finished writing perhaps my most negative Week In Review yet, last week, the credit ring broke as Wall Street’s fifth largest investment bank could not meet its obligations to other bankers. A couple hours later, the Bull run for commodity prices snapped. I received many letters from all over the world thanking me for having pushed you into cash.
You may not be aware – I’ll publish the table later – but those 14 stocks of Cara 100 companies I recommended selling in December (with specific dates and prices) are down in 100 days by -15.7% on average (and hit a subsequent maximum low of -24.2% on average). At the same time the DJIA is down -1.0%.
Proof of concept in a simplistic little computer system.
Meanwhile the world’s great wealth management organizations are underwater, gasping for air, pleading to governments, central banks and sovereign wealth funds for their very existence. Can you imagine the trillions of dollars in losses to their clients since mid-December?
So, you can either trust your banker who says that Thurday’s trading turned everything around, where CNBC called the bottom, or you can re-read my warning from a week ago, which follows below.
But if you truly believe that “the economy is fundamentally strong” as President Bush stated clearly on Thursday, then you agree that the Financials (XLF) should have popped over +6.0% in a single day because their future is so bright now that the Fed is pouring liquidity onto the fire. You of course accept that on Thursday traders ought to have boosted JP Morgan, Bank of America, General Electric (big finance component), American Express, Citigroup and AIG by +8.3%, +5.9%, +5.4%, +9.5%, +10.3% and +6.7% respectively. And you agree that Countrywide, Fannie and Freddie should be up +13.1%, +11.7% and +9.7% on the day, and +21.1%, +49.3% and +54.0% on the four-day week. Of course, you were not surprised that those humungous Private Equity plays Home Depot and General Motors were up +4.6% and +2.5% on Thursday. But the kicker you say was that heavyweight DJIA components Exxon and Chevron deserved to be up +0.7% and +1.6% on Thursday when the whole peer group was getting rightfully smash from -5% to over -18% over the past four days, and of the goldminers on Thursday Barrick was plunging -7.2% (-20.8% W/W) and Newmont was down -5.6% that day and -14.5% W/W.
Now if you believe your banker, I think you’ll believe anybody including that Bear Stearns CEO who a couple days before his company instantly turned $10 billion into $250 million told the world “the company is fundamentally strong” -- to paraphrase what the President said on Thursday.
A week ago, I started my blog by saying that the week was one where:
all-time record high commodity prices and a fresh record low US Dollar has had the expected result in US equity markets: the stocks of the commodity producers and export manufacturing sectors have led the way to a week over week gain in the broad indexes, but traders are focused on the macro picture and remain nervous… Even the Commodity producers were flashing warning signs this week. The 800-pound gorillas among various nations like China (Petro-China PTR -5.0%), Canada (Imperial Oil IMO -3.3%) and Brazil (Petro-Brazil PBR -3.1%) were under pressure from rising production and refining costs and higher taxes.As the credit contraction cycle works itself through the economy, cash and unencumbered assets will continue to be king. Periodically, there are injections of liquidity by central bankers and by sovereign wealth funds, but these are mostly based on new debt, which is like pouring fuel onto the fire, stealing from the children and grandchildren of the future, and the elderly and others who are presently or soon to be in need of social assistance, all done with the intent that vested interests among bankers can be protected today.
…the big picture is looking bleak, and it is not one that can be fixed overnight or even in a month or a quarter. This problem (in the Financials) will probably take a few years to resolve.
Capital markets are operating in a stagflationary environment, similar to the 1970’s. The combined impact of slowing or receding economies and rising costs is that equity prices, which are based on inflation-adjusted corporate revenue, cash flow and earnings growth, are under pressure. Should inflation worsen, interest rates will rise, with further damage to economic growth and corporate earnings and net cash flow.
The problem has been caused by the massive increase in debt on the one hand without a counter-balance increase in economically-based sustainable asset prices.
Phony asset prices, which had been used to support the debt bubble, were discovered as banks tried to rein in credit that had been expanding at rates that were out of control. In the typical credit contraction cycle, the parties that suffer most are business corporations and real estate developers that are over-leveraged, which did not happen in this cycle. This time, it was the banks and brokers that were over-leveraged on the basis of these phony assets they carried on their books. A proper write-down of those assets to economic reality means that many of the financial institutions have capital reserves below the ratios permitted by regulators. In fact, there are concerns that should all banks write off these dubious assets, the result would be insolvency, which is to say a complete elimination of equity, and worse.
As long as there was a conspiracy among bankers to price these real estate assets on fiction, backed by so-called insurance programs that work only as long as the credit ring remains intact, the beneficiaries of a strong US Dollar, and low interest rates, such as the bankers, telcos and regulated utilities were able to lead equity market indexes higher. But as the real estate market peaked and headed south, and higher inflation set in, the US Dollar started to plunge. Capital markets remained stable only as long as bankers could continue to sell their fiction-based assets, and the available excess capital went into bonds.
That process started to come to a conclusion in June 2007, and the big capital pools started to switch from equities to the most risk-free bonds, the US Treasuries.
Now, even that safety valve has come to the end as the yields have collapsed on short-dated US Treasuries to the point where in just four weeks, the yield on 2-year T-Notes has plunged from 1.90% to 1.48% and on the 3-month T-Bills from 2.17% to 1.06%. … These yields are massively under the inflation rate, so wealth is rapidly being destroyed. As soon as the commodity price bubble bursts (and it will since record high oil and precious metal prices are economically unsustainable and will crack, just like real estate prices cracked in the summer of 2005), there will be a huge deflationary wave engulf the world.
A week ago I asked rhetorically, “As a trader you have to ask yourself if conditions are likely to change in the next three to six months to where Mom & Pop start getting ahead financially, start spending again, and start saving and buying equities. You want to ask how the Telcos (and other financial income sources) are going to pay out high returns on capital without it being a return of capital. In addition, you want to know how the Banks can recapitalize their balance sheets without traders somewhere in the world taking on huge debt. Debt inspired by greed, after all, is the cause of the problems today.”
I am asked every day what my recommendation would be to defend against a financial Armageddon, and I will sum it up here:
(1) Go temporarily to a combination of cash, in the form of US Dollars held with the most secure financial institutions (preferably a Swiss bank outside UBS and Credit Suisse, which are international investment banks), and 3-month T-Bills, regardless of how low the yield is. (The minimum account size for private banking with Swiss banks is about $250,000 for those who are interested.) In the meantime, maintain small loans at various financial institutions -- if the interest rate is low -- because your continued payment of the principal and interest will put you into the most valued client category when the global financial crisis is ended and banks are seeking to issue new loans.
(2) Then wait for the crack in the precious metals market, which will come as most of these record high commodity prices are futures contracts based, which will fall apart when the credit ring snaps and counter-parties are unable to pay off. I’m now looking at $780-$800 gold, possibly lower, for example, in the months ahead. Yes, gold prices may go higher than Friday’s high of $1009 for $GOLD because the market is adrenalin driven at the moment, but if you are not a day-trader with your finger on the buy/sell button, it’s best you stay away.
(3) When precious metal prices, after the peak, spike down on the extreme sell-off days that I see upcoming, use that low price to buy physical bullion bars and coins for safekeeping, preferably in a private Swiss bank. For those who want the least exposure to the current financial crisis, I would not hesitate to put 90% of the cash into a variety of precious metals bullion holdings in safekeeping because even during the Depression era of the 1930’s, physical gold was the best performing asset class.
(4) After the global bankers appear to be resolving their crisis, and real estate prices and equity market prices have sunk to ultra long-term lows, which may take six months to two or three years to unfold, I would begin a program of selectively selling the precious metals and buying real property with rock-solid mortgages, probably in Emerging Markets, plus the stocks of Cara 100 companies that managed to survive the difficult economic period ahead. With that in mind, I would start to narrow the Cara Global 100 down to one in each sector, like: XOM, GG, ABB, TM, DEO, GSK, IBN, GOOG, NOK and EXC, as examples. That list would give a global balance of very strong companies, and I would probably weight the holdings on average with the S&P Global 1200 sector weightings at the point of entry.
There is really not much more I can add. I told you a week ago that if you try to swim upstream carrying gold bricks in each hand, you are going to drown. There are times when you have to protect yourself. Now is one of them.
You should reinvest in equities only when two things happen: (1) economic wealth is being created faster than fiat money, and (2) you feel comfortable that panicking traders are throwing babies out with the bathwater.
The market hasn’t reached either point yet, although the latter is starting to happen. You’ll see panic setting in if and when you observe the stochastics for the Daily and Weekly price data series tracking along the bottom for weeks on end, not being able to lift much above 30-40 without more selling. We're not there yet.
Based on my reading of the MACD/RSI data and the worsening economic and corporate data, and my understanding of the problems within banks and brokers, I expect the DJIA to grind down to 11200, where it will begin to form a base. That may take weeks or months of increasingly bad economic data and lower corporate profits due to economic recession. Then, at some point, I expect to see another round of bank and broker-dealer failures that will set off the final burst to the downside, which is the point we back up the truck of the stocks of Cara 100 companies in the Accumulation Zone.
Of course, the window of opportunity may be much briefer than I presently imagine. Did you see the number of Buy Alerts given by my “simplistic little system” in the past 10 days? So, we must stay alert. Values are starting to pop up; it’s just a matter of how much risk are we prepared to accept buying stocks of good quality companies that have already sunk some 25% to 35% or more. If you have a ten-year time horizon, now could be the right time.
Besides, at the week-ending session close, technical analysts would tell you there were several long lower shadows on the candlestick charts for the CRB, $WTIC, $GOLD, and +PLAT. According to StockCharts.com, candlesticks with long lower shadows “indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.”
This late buying action in the commodities may be confirmed or discounted on Monday morning. Following such an extreme sell-off as seen Thursday, there often is a bounce. As it could go either way, the smart play would have been to put on straddle trades prior to the close on Thursday.
Trading is not rocket science. Only the mere mortals pretending to be rocket scientists (ie, HB&B) would have you believe otherwise, asking you to reach out to them for help.
But, I’ll leave you with the final thought: Do you recognize who among us is pleading for help these days? Yes, it’s the banks and brokers.
I think this community can go a long way to helping one another.
Well, here is another (final) thought; forget the ego of the newsletter writers who tell you they called this week’s collapse of gold to the hour – the best call anybody made in 28 years yada yada. Nobody should be interested in that stuff. What is important is learning why markets move the way they do, and what you can do with that knowledge. The market’s not about the newsletter writers; it is about you.
Global Economics Review
I believe the US is now clearly in recession, which I have been saying for many weeks. The weight of the evidence, ie, the economic data, has been piling up and can no longer be denied.
Here are the key US economic reports and the Econoday analysis from last week.
New York Fed Empire State Manufacturing Survey for MarchUS Industrial Production for February
US Housing Starts for February
US Producer Price Index for February
FOMC decision to cut the Fed Funds Rate by possibly -75bp
So much for last week. Let’s look ahead.
US Existing Home Sales for FebruaryUS Conference Board Consumer Confidence Survey for March
US Durable Goods Orders for February
US New Home Sales for February
Final revision to 4Q US GDP and GDP Price Index
US weekly report of New Unemployment Claims
Yes, there are economic issues that Americans are struggling with. But, I have been saying for some time now that:
…the economies of Europe and Japan are almost as bad off as the US and are worsening week by week. I fully expect these economies to go into recession as well, which means that significantly more than 50 pct of the global economy will be in recession at the same time.The bad news gets worse because, as strong as the growth is in the emerging BRIC economies (Brazil, Russia, India and China), these markets cannot be unaffected by the others. I expect serious declines in the BRIC economic growth rates, and significant increases in inflation rates, this year.
Weekly International Economic Report dated March 20.
Weekly International Economic Report dated March 13.
As I say, positive economic news is now infrequent, and the same is happening around the world. The focus should not be on the negativity but on the data trends and the solutions that are being put forth by politicians. Traders need to be looking forward.
Of greatest concern is that the tools of the Fed being used reportedly to solve the inflation problem are the same ones that caused it, which is excessive credit spurred by interest rates that are too low. In fact, the Fed has not embarked on this course to solve inflation, as they say, but to try to save the US banking industry.But the problem is the carry trade; capital that is created in the US banking system no longer stays (for the most part) in the US, but flees to other countries in search of higher returns. Moreover, the Treasury Dept’s so-called “solution”, which is a cash giveaway to American families to encourage them to spend more is another failure because most of the cash will be used to pay off debts and to make deposits into bank accounts that ultimately be lent to wealthy customers of the banks who will invest a large part of it abroad.
Rather than just letting the economy cycle through a normal credit tightening period, with the usual Bear market damage to stock and bond prices, these interventionists (the Fed and Treasury) are trying to suck and blow simultaneously. They are making the situation worse. Moreover, they are appealing to Sovereign Wealth Funds, which also have objectives that too often are counter to the owners of private capital.
This era of political intervention in capital markets is by far the worst I have seen in 40 years, and I’ll leave it at that.
Here is next week’s economic calendar:
Industry and Cara 100 “Impulse” Review
“Jock” is on sabbatical for a few weeks, visiting with his family the Renaissance city of Florence Italy.
I think it’s time for my own retreat. I need the break.
US Equity Markets Review
DJIA stockcharts.com chart
For this holiday shortened week, for the Dow 30 stocks: 20 were up, 10 down. Just like the previous Friday, with a week ending spike near the close, this Friday was a pre-holiday spike that was largely contained to a few groups, mostly tied to the banks and brokers and private equity deals.
By the end of the week, the DJIA closed higher by +410 points, or +3.4%, but +2.2% was the rally on Thursday. The Nasdaq and Russell small cap picture was even move skewed by Thursday’s move that started in the financials. I attribute those moves to be largely short-covering.
NASDAQ Composite ino.com chart
NASDAQ Composite stockcharts.com chart
The Nasdaq Composite gained +2.06% W/W but the gain on Thursday was +2.18%.
Several weeks ago I wrote in this space, “Here is the list of the ten highest-weighted non-financial stocks in the Nasdaq Composite. Put them in a watchlist (see Google Finance Portfolio) and watch them like a hawk:
AAPL MSFT GOOG QCOM RIMM CSCO INTC ORCL GILD EBAY” I said that the Techs would lead the market one way or the other.
Daily RSI-7 for the Nasdaq 100 Big-10
Weekly RSI-7 for the Nasdaq 100 Big-10
Monthly RSI-7 for the Nasdaq 100 Big-10
The US equity market Sector ETF Summary
Four weeks ago, I added charts for the S&P 500 ETF (SPY) as well as put SPY into the expanded sector performance tables so that you can see how each sector is doing relative to the industry benchmark. I also added XLK for Technology, while keeping SMH (Semi-conductors) in the list.
This week SPY futures gained +0.33% from 129.61 to 132.08. That’s nowhere near the move in Financials (XLF +6.19%). Besides, the gain on Thursday was +1.35%, so the rest of the week’s trading was unimpressive.
Here’s the SPY Monthly, Weekly and Daily data charts:
SPY Monthly data:
SPY Weekly data:
SPY Daily data:
The tables I now show are for eleven GICS Sector Index Funds (ETF’s), including two for Technology (XLK and SMH), for a total of ten GICS sectors. They cover the full spectrum of the US equity market.
Table 1: Cara ETF List is sorted by price performance Week over Week (W/W), i.e. 1W%N.
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
You can do this table yourself by entering the following string into the Summary window at Billcara2.com and then clicking on the link for Performance. SPY XLE XLB XLI XLY XLP IYH XLF XLK SMH IYZ XLU . You can also add more ETF’s – up to 30 in total.
For a list of components to any ETF, go to the AMEX.com web site, and click on ETF’s.
10 (energy: XLE)
15 (basic materials: XLB)
20 (industrial: XLI)
25 (consumer discretionary: XLY)
30 (consumer staples: XLP)
35 (healthcare: IYH)
40 (financial: XLF)
45 (technology, semiconductor: SMH)
50 (telecom: IYZ)
55 (utilities: XLU)
Individual Sector ETF Review
This week, there were 4 sectors (5 ETF’s) above SPY and 6 below. The worst performers were IYZ, IYH and XLF. The best were XLB, XLE and XLI.
Sector 10 (energy: XLE, IYE, VDE, OIH, PBW and IXC)
Here’s the XLE Monthly, Weekly and Daily data charts:
XLE Monthly data:
XLE Weekly data:
XLE Daily data:
The Energy sector ETF (XLE) was crushed -6.87% this week. Only the DJIA components showed any life at all, lifting a small amount in the HB&B led rally.
A week ago in this space, I made the following statement:
I am going out on a limb when I say that the $USD, which is extended on the downside, will weaken through this week’s FOMC decision (further large Fed Rate cut), but then start to strengthen as the month-end appears. March is the fiscal year-end of governments, and I think the Japanese govt will want to square the books, which may further strengthen the Yen only until month-end, following which we may see a weak Yen again and a stronger USD. Just a possibility to consider… I also continue to believe that traders are worried that recession will create demand issues that will soon pull the price of oil down. That situation will further depress the price of the oil stocks.
This week, the $USD rallied +1.51% to 72.75. The Yen rallied +0.28% to 101.06. Most other currencies sank. Crude Oil ($WTIC -$6.90/bbl) also plunged to 101.84.
A week ago I wrote here
Exxon Mobil (XOM) is the company and stock that Value Line has reported on this week. As you know, I didn’t like (Cara 100) XON at 94-95, and have profited on the slide to the low 80’s, which happens to be a massive loss of capitalization, meaning of course a hit to the customer accounts and also the marginability of customer accounts. So I’m not surprised to see a pop of +4.5% to the XOM share price this week following the massive Fed injection (over $200 billion). XOM is now up to 85.91, although it did drop -1.3% on Friday… My outlook is starting to change however, which I will disclose later in this report. After the next down-dip into the 70’s, I will be recommending that traders consider starting to accumulate XOM. Because of the inflation cycle, I doubt the 30-level for the Monthly or Weekly RSI-7 will be reached. I think there will be support found around the 40-level.
This week, XOM and CVX dropped -2.4% and -4.4% respectively, although both were up a bit on Thursday. The other oils were crushed: China’s CEO -18.5%, Brazil’s PBR -14.3% and Canada’s SU -13.5% were leaders on the downside as XLE dropped -6.87% W/W.
Table 2: Senior oil & gas equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Oil & Gas Exploration & Production -Canada
Sector 15 (basic materials: IYM, XLB, IGE and VAW)
Here’s the XLB Monthly, Weekly and Daily data charts:
XLB Monthly data:
XLB Weekly data:
XLB Daily data:
Basic Materials (XLB -7.33% W/W) was also crushed this week after the upward spike in commodity prices was hammered down, and the $USD strengthened.
Dow (DOW -2.5%) was the best of a bad lot. TCK -13.7%, RTP -13.2% and BHP -10.1% all got beaten down.
All the goldminers were blown up as $GOLD plunged -$79.50/oz. ABX -20.8% (I warned!), KGC -18.1% and GG -16.8% (I issued that SELL on Feb 28) were toast. There may be a mild bounce here, which would trap the weak hands, but the smart play is to run for cover on any rally. Clearly, the banks and the Administration need the commodity prices lower if there is any hope of saving some of the big banks and brokers and a big piece of American industry like the homebuilders and the retailers.
So I think the short-term play was to trade out of gold and goldstocks a week or more ago, and to get ready to step back in, especially some (but not all) of the juniors.
Table 3: Senior metals and steel equities:
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Sector 20 (industrial: IYJ, XLI, VIS, and IYT)
Here’s the XLI Monthly, Weekly and Daily data charts:
XLI Monthly data:
XLI Weekly data:
XLI Daily data:
Table 4: Senior capital goods makers and transportation:
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
XLI (Industrials) lost just -0.08% this week. Of course, the General (Electric) was up a monstrous +9.5%, but you ought to be aware by now that the GE Chairman/CEO sits on the Board of the New York Fed along with the heads of JP Morgan and Lehman Brothers. Well JPM just happened to rally +20.7% this week in what I see as a clear cut case of the boys trying to save a Brother.
The stocks of companies in much the same heavy industry stuff as GE, like FLR (-6.8%) and ABB (-7.3%), were crushed. No, I don’t think GE had any
Sector 25 (consumer discretionary: XLY, IYC and VCR)
Here’s the XLY Monthly, Weekly and Daily data charts:
XLY Monthly data:
XLY Weekly data:
XLY Daily data:
Consumer Discretionary (XLY) had a great week on Thursday, gaining +2.80% on Thursday to give a gain of +2.29% W/W.
A week ago the only Cara 100 winner was BBBY, which was up +6.65% W/W including a gain of +1.09 pct on Friday when the overall market was down sharply. This week BBBY lifted +9.1%. BC (+10.1%) and NKE (+10.2%) were the big winners of the Cara 100.
The price of Crude Oil collapsed -$6.90/bbbl this week, so the Consumer Discretionary sector was greatly helped.
Table 5: Senior consumer discretionary equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Sector 30 (consumer staples: XLP, VDC, RTH and IYK)
Here's the XLP Monthly, Weekly and Daily data charts:
XLP Monthly data:
XLP Weekly data:
XLP Daily data:
Table 6: Senior consumer staples equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |