Daily Investment Interpretations

April 15, 2009

2009-4-15:  The market indices rose strongly in the last hour of trading today. The NASDAQ added a paltry 1.61 points (0.07%) to end the day at 1,627; the Dow tacked on a more robust 109.44 points (1.38%) to close above 8,000 at 8,030; and the S&P 500 gained 10.56 points (1.25%)  to 852. Oil and gold remained essentially unchanged at $49.76 and $893.50, respectively. The VIX fell 1.5 to 36.17.
    The U. S. economy is still contracting: U.S. economy still contracting. Industrial output fell the most since World War II: Industrial output falls most since WWII... down 13.3% since the recession began, and down 12.8% over the past year. 
    The core consumer price index, excluding groceries and energy, rose about 0.2% (1.8% a year).
The Bottom Line: 
(1)  It's clear that a lot of money is betting that the worst is behind us, and that the March 6th low represented the low for this multi-year market cycle. At the same time, there are reasons to think that they're as wrong as they were when they bid to stock market up to a new high in October, 2007, just before the market began its swan dive. 
(2)  The current U. S. market stampede is slowing, and short-term, is ripe for a significant pullback and retest.
(3)  By contrast, unlike the U. S. indices, the Chinese FXI ETF (see below), which bottomed at $19.42 on October 27, 2008, successfully retested, on November 29, 2008, its October 27th low and has now risen to close at $33.09 a share today. That represents a $33.09/$19.42 = 1.70... a 70% rise from its low! So it's time to buy China.
(4)  If FXI returned to its 2007 high of about $66 a share (after adjusting for dividends), it would double from tonight's close of $33.09 a share.
    Another, leveraged way to invest in FXI would be to buy the January 22, 2011, $15 call -VHFAO. It closed today at $18.10 bid, $18.60 asked. You could probably buy it for $18.10 bid or less the next time FXI has a bad hair day, although as the chart shows, FXI is rising rapidly. This would allow you to more than triple your present investment.
    If you buy this LEAP (Long-Term Equity Anticipation) call "at the market", you'll pay $18.60 for it, which isn't a bad deal for a $33.09 ETF. In a way, you'd be paying a 51 premium per share, or "rental fee" ($15 + $18.60 = $33.60) to "own" these $33.09 shares of FXI until January, 2009, for $18.60 a share. However, if you sell your call anytime soon, you can recoup your 51 premium. But this needs a better explanation and some examples for anyone who's not comfortably familiar with call options and how they work. 
    I'll try to write more about this tomorrow morning.
    Todd Harrison shared in January and reiterated in early March that we would see two 25% rallies this year. Today, he writes, "
The question, I suppose, is whether they're stacked back-to-back in the front half of the year or interrupted by a harsh downside comeuppance. Given the breakout in the banks (above BKX 32.5), we must respect the potential for the S&P to follow through to the upside, potentially driving the tape towards the 200-day moving average (currently S&P 990), sucking new found optimism into the market and paving a fresh path of maximum frustration." He continues,
    "
I'm humbly resolute in my my long-offered view, that this prolonged process will be a multi-year malaise and we're experiencing a cyclical bull within a secular bear. I could be wrong, of course, but we're not destroying debt, we're inducing it and that's running in the wrong direction. How these imbalances manifest--a currency 'release' (dollar debasement) or lower asset classes through further deflation--remains the trick of the trade."  
    "
For my part, I'm taking the journey one step at a time while understanding there will be frustrating junctures, opportunity costs and opportunistic holes to hit. Through it all, my modus operandi is "risk management over reward chasing, financial staying power and a steadfast desire to part of the solution rather than be part of the problem."
    He was responding to a fellow Minyanite who had written,
    "
I agree with your thesis that this powerful rally off the March low is most likely a cyclical bull within the contest of a secular bear. As the market moves higher, I hear many pundits 'calling the bottom'. Since the primary job of every bear market rally is to appear to be the start of a new secular bull, this appears to have followed suit.
    "
The only question in my mind is how far this rally will run. Using the six '29-'32 bear rallies as reference, it would appear the rally could run anywhere from 24-48 percent, with the greatest concentration in the mid- to upper-20% range. That would indicate a rally peak anywhere from current levels to SPX 985 (200-day moving average). Your thoughts?"

    Minyanite Jeff Sauk: Strategies for an Overbought Bear Market writes, "
I've learned the hard way that buying stampedes tend to exhaust themselves in 17 to 25 days. It's rare for one to last more than 30 sessions; the longest one lasted 41 days."
    "
If past is prologue, what should happen now is this: Some piece of bad news should com out of nowhere to startle the markets. Consequently, major indexes will decline for 3 to 5 sessions (sometimes it's as many as 7 sessions), then they re-rally. In the re-rally, if the indices make new reaction highs, the rally can extend. If however, they fail to better their recent reaction highs, then a more enduring correction should be in the offing."
    Let's attach some numbers to this. Today, April 15th, is the 27th session of the current buying stampede. Friday, April 17th, will mark the 29th session, and Monday, the 20th, will be the 30th buying stampede session. The 41st day, corresponding to the longest bull stampede Jeff Sauk recites, would be Wednesday, May 3rd. Adding 3 days to that would bring us to Monday, May 8th, and adding 7 days would take us to Friday, May 12th. ("Sell in May and go away"?) Of course, there's nothing that says this latest bull stampede can't set new records.
    It's clear that the "smart money" thinks that we've seen the lows for this multi-year market cycle, and that at least some of the "smarter money" thinks we haven't. In Minyanville today, Banks Rev Up Foreclosure Machine explains that major banks cooperated with President Obama's moratorium on foreclosures, but that has now expired, and "
the Wall Street Journal reports banks and mortgage-servicing companies are pushing through foreclosures at the fastest rate in more than a year. 
     "Foreclosures, however, are creeping into high-end markets, and coupled with high levels of inventory and weak demand, prices are tumbling.

    The author concludes,
    "
Meanwhile, back in reality, property values--actual homes rather than statistics--will keep sliding."
    In Goodbye to the Rally?, Minyanite Mike Mish Shedlock presents Kevin Depew's daily "Where We Stand". 

    The author explains,
"
Where We Stand (WWS) isn't a timing inidicator (nor is it intended to be). Yet every bear market rally has ended with all (or all but 1) of the above indicators in green. Likewise, every bear market rally started with every one of the above indicators solidly in the red. A nice turning point can be found simply by watching the shift from red to green, and vice versa, in the above table.

"
WWS is not foolproof (no indicator is), so don't bet your life on it. Nonetheless, history (so far) suggests that once a turn is made, the turn keeps going until it switches from nearly all one color to nearly all another color." 

    The author concludes,
"
I see pretty rampant optimism in equity options, general belief that we've turned the economic corner (I highly doubt we have), technically overbought indicators, euphoria on CNBC, and a sell-off for whatever reason on supposedly good news. While the market could continue to rally, this is certainly not a good mix."

    In another news item, banks have cut back again on lending over the past month or two.