WSW Friday, May 22, 2009

Daily Notes

Wednesday, 27 May 2009

Yesterday I was an idiot, today a genius – so goes a traders lot.

OK, we had a rocket up yesterday, that I “missed” being cautious from last week. Now today we “rocket” back down giving most of it back. Again, we end up nowhere. Step aside. Just step aside. (From U.S. stocks).

(FWIW, under the ‘racing stocks‘ tab I’ve added two examples of ‘fast trader’ charts under the SPY broad market section. You can trade this market just buying and selling on the crossovers of the 16 hour moving average, but a couple of the other indicators can help… if you want to day trade…)

The U.S. Government had a bond auction today. Short duration (2 year, 5 year) bonds sold great, 10 year, not so much. 30 year yields spiked up. Nobody wants to hold long term bonds with the U.S. Government buggering the currency. (That “TBT short the bonds” suggestion is sure looking nice ;-) and it does look like China is walking away from long duration U.S. Bond purchases.)

So what does this mean? Things with income denominated in dollars are a ‘wasting asset’ – so a preferred stock with a 10% yield is not so interesting if it’s paid in $$$, much more interesting if paid in Euros or Aussie Dollars. That’s part of why I’ve been ramping down my holdings of preferred stocks. Things who’s payout depends on a commodity, like the oil trusts, are a mixed bag. Nice that the revenues willl go up over time as oil goes up from inflation, but revenue is measured in $$ so short term it takes a hit until prices adjust. OK, I can live with that.

Buy non-US$ preferred stocks and bonds. Buy foreign funds and foreign energy trusts for long term holdings with revenue. The OOTUS trade is still fine, thank you very much. Over the last 2 days (and weeks) EWZ has gone up more on up days, and down less on down days (nearly flat today after a real rocket ride yesterday). That’s why I’m holding my OOTUS trades like EWZ and EWA / IAF.

We are not yet in the position of the hyperinflation (or even high inflation) trade, but we are in a time where the “protection” play is starting. Own about 10% to 20% of gold, silver, metals miners, copper miners. The “stuff stocks” and related commodities. Similarly, the food and ag commodities will, being globally traded, move up in price in U.S. Dollars as the $ sinks in real value. Time to be a farmer and a miner.

Real Estate is harder to peg. Companies with a lot of long term debt to roll over will be hard pressed by the rocket ride up of the 30 year rates. Companies with low debt levels will benefit from the preservation of value that land represents. Companies with long term debt, that they do not need to roll over, at low rates; will win big (paying low mortgage rates on shrinking debt in real terms). So you must look at the balance sheets on REITS to see if they are good deal or not. Low debt is a good indicator.

Tomorrow? Who knows what tomorrow will bring… it’s a battle ground market. I’d guess down (that’s what the 10d hourly chart for SPY says) but at some point the ‘end of month’ new money will start coming in. Most likely I’ll toss in my 1/3 when the run starts to the upside, but focused into the things listed above. OOTUS, Stuff Stocks, commodities.

Tuesday, 26 May 2009

A surprisingly good consumer confidence report caused a market jump mid morning. Not what I’d expected. Based on that news, sectors like Tech and Consumer Discretionary are higher. No surprise there.

I’m sitting back with my morning coffee thinking about what this means. Not at all what I would have expected. A North Korean nuke test and nothing happens…

So I’m left with a “whale” on the sidelines somewhere (and wondering what the whale is wondering…) and the market moving up despite world events but with a surprisingly positive U.S. consumer. When I’ve seen the whale in the tea leaves before, they have often waited until 2 days of the settlement period has passed before moving, so that would be about late Wednesday / early Thursday. I’ll be worried about them until that date.

OK, well I’m 2/3 in, 1/3 cash (waiting to “settle”) and with a focus on OOTUS (Out Of The US) having trimmed my US consumer exposure. Not a bad place to be, but not optimal for this morning. I’m not going to make major changes until I have “settled cash” since that lets me have the most flexibility. (Buying with unsettled cash means I’m locked in until the cash settles 3 days later. Not good in news driven markets.)

So my actions today will likely just consist of a survey of what sectors are responding most to the news and a close inspection of my coffee cup ;-)

We are in the last week of the month, so the “new money rush” ought to begin this week. That implies I’ll be “all in” by end of Wednesday or early Thursday unless something dramatic and negative happens tomorrow.

The market This Week

WSW – Friday, May 22, 2009

We were dramatically up Monday and Tuesday. Dramatically down Wednesday and Thursday. Flat Friday. Ending about where we were last Friday. “A tale, told by an idiot, full of sound and fury signifying nothing.”

Last week I said:

What’s next? I’d guess sideways for a week, then the next “new money rush” starting about 1/2 way through the last week of the month. We’ll see (and in all cases, let the charts be your guide, not what “you think” or what “I think”. It’s not about you, it’s about “them”. What the folks with a few billion dollars are doing with their money. You may be smarter than them and “righter” than them, but they will move the market, not what you know even if you are right… because it’s not about you and it’s not about what you know, and it’s not even about being right…

Well, that sure looks like what we had this week. More volatile than I’d expected, but basically a flat week. Thursday was odd, though…

Why? Them.

Because we had an unexpected big sell off, followed by a recovery late in the day. Then the Japanese Yen had a BIG move up, that then faded. So what does this mean? I’ve seen it before…

There is a “whale” (a large player in the market) that works in yen, who has moved the whole market from time to time. ( I don’t know if it a Japanese player or just someone who uses the yen due to the ‘carry trade’ advantage – borrow the cheapest currency {presently the yen and $ are fighting over who is closest to zero interest rate, but yen has been the ‘carry trade’ currency for the last several years…} and use it to buy stocks, bonds, whatever; in a currency with a higher interest rate)

What I’ve seen is that when the market and yen move together like this, the “whale” is changing positions. In this case from “long the market” to ??? I’d guess “short the market” but it could just as easily be OOTUS – Out Of The U.S.

So, I’ve sold out of 1/3 of all my positions and substantially all of my U.S. positions (the exceptions being some REITS and a bit of retail along with some companies that have a large part of their income from international sales, like TIF Tiffany and DIS Disney) and I’m positioned so that if Tuesday the market starts to “tank” I can toss my 1/3 at a leveraged short position and “hedge” myself to near neutral while I sell out of whatever is going down then close out the short.

I’m predominantly holding Brazil, Australia, BRKA and some Canadian Oils. The rest is fairly small dollar positions. So any shorting of the US market will not hit me much. I’m mostly OOTUS already. (Though traditionally Brazil and other emerging markets have moved with the US market. In this case, I think we will break that link. If not, I’ll sell out quick.)

OK, what am I going to do? Tuesday and Wednesday watch for a spike down in about a 1/2 hour interval about mid day. If I see it, I’m selling out. That is the signature of the ‘Crazy Ivan” that I’ve seen too many times. The “whale” coming back to the short side. If, by Thursday, we have a move to the upside, I’ll get back in to what is moving up.

Maybe it’s paranoia, but I’ve seen these particular tea leaves before. It is very hard to know what some random other person is going to do, but you can see them act; and react inside of one day. While I hope that they have simply sold out for the long weekend and will come back to the long side, “Hope is not a strategy”.

Why Thursday? Because if you are in Asia (or even Europe) our Thursday is your Friday. If you want to “wrap up ahead of the long week end” and are a middle eastern Arab or a Japanese mogul, you sell out on our Thursday. (Friday was slightly up as a rebound). Then in a couple of days near when the 3 day settlement period is over, you redeploy your money (often to the ‘short’ side, at least recently – we’ll see if that pattern still holds…) So I’ve gone to a high cash position and I’m on a ‘hair trigger’ to put in place a short hedge against my remaining long positions (i.e. buy something like SH, TWM or QID ) if we see a Crazy Ivan spike down on Tuesday or Wednesday. We’ll see.

Last week I also said: “So, for example, my Ford and Bank America got whacked on a trade basis. I’m holding them for a couple of year gain of 3 to 5 times over. If I sell now I not only become an involuntary day trader,”

Well, I’ve sold out of both now. I don’t need a socialist government as a partner (even if it is the U.S. Government) and I don’t need to hold a winning trade while it turns into a losing trade. So I’m out of them. I’ll trade back in if it looks right. Now, it’s time to “duck and cover” IMHO…

I also sold out of some of the retail in my wife’s account. (Keeping those with international exposure or those with particular interest.) Again, I’d ridden them down (probably a bit longer than I ought to have done) and it was time to step aside. I can buy back in if that’s the right thing to do later in the week.

There was the interesting news this week that the UK was under evaluation for having the AAA rating on its debt downgraded (and maybe the USA too…). This resulted in a lot of market panic (part of the Thursday action?) along with the dollar dropping against other currencies. Given that I’ve been saying for a couple of months now that it was time to dump US bonds and move into instruments in other currencies, all I can say is “At Last!”. Oh, and China and Brazil announced that maybe they didn’t need the dollar to do mutual trade… What A Surprise…

OK, I’m continuing to hold the Australia, Brazil, Canada and OOTUS positions. I’m continuing to be focused on “the stuff trade” – that is Gold, Oil, Copper, Sugar, Real Estate, etc. That is, things with inherent value. That does not include the U.S. Dollar…

One other interesting bit of news: India. They had an election and voted in a more free market government. Monday, EPI (and most everything else Indian) went up 20% or so in one day! Nice. Tata Motors (TTM) also went up, and despite the expectation that things would “fade” from such a jump, ended the week roughly at the same high price.

What I said about General Trends last week still holds, but I’d watch out for a short (1 or 2 week?) down draft before they dominate. To repeate what I said last week about General Trends:

General Trends

Generaly trends hold for months to years at a time. At this point, we can make fairly good statements about what those trends are likely to be for the next year (and maybe longer…). Sure, there will be lots of day trade wobbles during tha time; and if you are willing to watch a 10 day 15 minute chart with live data (i.e. not the 20 minute delayed data you get for free from BigCharts) you can trade those ripples. I’d rather get “the wind at my back” and be in those dominant trends. Then if I “miss a trade”, I can recover by doing nothing but waiting.

So what are those trends? Same things I’ve talked about for the last couple of months:

1) The Emerging Markets are going to lead the recovery and have the best future gains. My favorite is Brazil, but Mexico is interesing and China will have lots of growth. EEM, the broader emerging market is also good (packaging a bit of Russia, Turkey, Eastern Europe and others too) as is India (via individual stocks or the various India funds: IIF, INP, IFN, EPI) .

2) Resource companies will continue to win. Miners, metals, etc. And with them the resource based economies (and markets) of Australia and Canada (and Brazil and…)

3) The U.S. Dollar is not a secure currency in the long run (given the number being printed) and the present demand for U.S. dollars will eventually fail. There is already evidence that the Chinese are cutting ownership of U.S. dollar assets. Yes, there will be tradable rallies (like the one started today by the Swiss central bank supporting the dollar due to excess demand for their currency…) but the long term trend is not stoppable until the government changes their behaviour, and I see no evidence for them changing.

4) When economies recover, and stock markets with them, Bonds tank. It is time to be getting out of your bond positions. Hold cash if you can’t bring yourself to buy stocks. (And cash does not have to be dollars… You can buy Yen, Swiss Francs, Euros, Reals… FXY, FXF, FXE, BZF respectively or even Aussy dollars FXA or Candian Loonies FXC).

5) Inside the U.S., it will be tech companies, resource companies, and cyclical recovery stocks that win. (Whether they win more than being in emerging markets will vary by company. Best answered by doing your own cusomized races for any particular company of interest. For example, you could race EWZ against RIMM and FCX to see what you like better… )

6) As an investor, this U.S. Government Is not your friend. They may be the friend of unions, voters, welfare queens, etc. but not of investors. Governments in general do not do a good job of running companies, this one will be worse. If they are heavily interested in an area, run away screeming. If they “help” (via owning?) GM and Chrysler, it is FORD who will win. If they are going to “fix” U.S. healthcare, look to TEVA or European drug companies for your defensive drug stocks. And if they are mucking around in the bank ownership and management, well, there are some really nice banks in Brazil and other emerging markets ( ITU, BBD ) in addition to Europe and Asia. Notice also that the “senior debt” i.e. bond holderes have had their rights crushed by the U.S. Government every time they have “helped” a company in this cycle; so the bonds of U.S. companies are not a particularly good deal either (if the Government is interested in an industry). So your money does not need to be there. It can go to other companies, other investments, and other countries.

These themes are likely to be with us for months at least, and perhaps for years and years to come.

Well, all I can say is that I need to listen to my self more! TEVA was up 2.5% on the week (mostly in a spike on Friday).

What does the 10 day hourly chart say is happening now?

The charts on this posting are very large. On a Mac with Safari, “CTRL” and a mouse click lets you open them in another window for better viewing. Other browsers, YMMV…

Here’s a 10 day houly chart of the Dow 30 Industrials (DIA), the S&P 500 (SPY), the Nasdaq tech companies (QQQQ), the Russel 2000 (RUT), and both a Brazil fund (EWZ) and an Australia fund (EWA). It also has a ‘short fund’ (SH) on the chart so you can see what being short this market is doing right now. We also have EWO, an emerging Europe Austria fund and EWW for Mexico.

10 Day Hourly Interval Broad Market

10 Day Hourly Interval Broad Market

This is a live chart, so my comments will describe how it is now, but in a week it will be showing new data and a new week. Since I think it’s more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonble choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now!

We see that the U.S. market is in a flat wobble. No need to be there. The emerging markets are continuing to out perform. No real surprise. If it were not for the odd behaviour of stocks / yen on thursday, I’d just sit pat; but that particular “odd action” reminds me of too many Crazy Ivans from the past. So I’m stepping sideways a bit to indulge my paranoid moments and enjoy a holiday weekend with “no worries”.

Other Asset Classes

The 10 day hourly asset class race:

10 Day Hourly Interval Asset Class Race

10 Day Hourly Interval Asset Class Race

Wood, based on a bad economic and home building report, dropped. So did the U.S. Stock market. Every other asset class was up. Metals, oil, foreign markets. It’s time to be OOTUS.

Gold, Silver, Oil, and Ag Commodities won. The “stuff” trade is on. The U.S. Dollar is dropping like a rock.


SPY  S & P 500 US stocks
GLD  Gold
EEM  Emerging Markets
FXY  Japanese Yen
JJC  Copper
SHY  Short term bonds 1-3 year
USO  U.S. Oil
DBA  Agricultural basket
SLV  Silver
WOOD  Wood / Timber

So what happened in the Tech Market relative to world markets?

Recent months - A Tale of Two Markets

Recent months - A Tale of Two Markets


QQQQ  Nasdaq 100 mostly Tech companies
DIA  Dow Jones 30 Industrials
SPY  S & P 500 largest companies in the U.S.A.
MDY  Midcap  (Middle sized in terms of market capitalization)
RUT  Russel 2000 - a collection of 2000 companies from small to large.
EWZ  Brazil fund
EWA  Australia fund
EWO  Austria fund
EWW  Mexico fund

Up, down, flat. OK, wait and see time. But it is clear that Brazil EWZ, Austria EWO, and to a lesser extent Australia EWA have held up while U.S. Stocks of all sorts, even including tech, took a hit. There’s your clue. Tech can out perform the rest of the US market, but not enough right now to beat the currency drop. Easier to buy valuable goods held by companies in other countries, for now at least. South African gold miners, Canadian oils, Australian miners, Brazilian sugar and oils, etc.

Were Bonds a good idea?

OK, lets take a peak at the Bonds Race.

Well, at last my sentiment that you ought to be out of bonds was justified. Long term bonds tanked, TBT – the bond short, rose nicely. Very short term bonds didn’t do much of anything in dollar terms (though they lost a couple of percent in terms of most other currencies of the world… and more in terms of gold…)

What sectors won this week?


9.72%  DJ US Paper Index	  
9.72%  DJ US Forestry & Paper Index	  
7.54%  DJ US Platinum & Precious Metals Index
7.14%  DJ US Gold Mining Index	  
5.46%  DJ US Nonferrous Metals Index	  
4.73%  DJ US Electronic Office Equipment Index
4.72%  DJ US Basic Resources Index	  
4.68%  DJ US Industrial Metals & Mining Index
4.30%  DJ US Iron & Steel Index	  
4.11%  DJ US Mining Index	  

Substantially “The Stuff Trade”. Papers, metals, gold, platinum, resources, iminers (metals in the ground), iron & steel.

A Broad View

Finally, my “Rorschach Race” (under the “Racing Stocks” tab up top).

EWJ  Japan fund
SHY  Short term bond fund
SPY  S & P 500
EWZ  Brazil fund
FXI  China fund
SH  Short S & P 500
RWM  Short Russel 2000
EPI  India fund
EWQ  France fund
EWP  Spain fund
EWG  Germany fund

Shows the shorts made a tiny bit, but India was the big win with Brazil and China also doing OK.

What Is Our Context

Let’s look at the S&P 500 largest stocks in America compared with some other kinds of assets; a couple of month maturity bond fund, oil, gold, Yen. We are in a bear stock market, having a bull run on the edge of a formal swap to the bull side, that’s getting old, but is defining a fairly healthy market recovery but where that run has stopped, and is threatening to roll over. OK, I’m doing the “duck and cover drill”… The SPY is approaching the moving average stack from the top side, though, so we need to be ready to buy back in if we jump away to the top side. I don’t expect that (largely due to the “odd” Thursday action), but it’s not about me… Notice that Gold and the Yen were the winners for the week. During this bear market, that has been the “tell” for a Crazy Ivan…

(Crazy Ivan is a bit of an homage to Clancy from The Hunt For Red October. It was what he called a Soviet sub making a sudden stop and turn 180 degrees.)

Asset Class Races

Asset Class Recent Race

What is this chart? It shows a comparison of a few different assets over a period of several months.

SPY       The S&P 500 ETF
GLD       Gold ETF
USO       Oil ETF
FXY       Japanese Yen currency fund
SHY       1 to 3 year U.S. Treasury Bond fund
FXE       Euro currency ETF
SLV       Silver fund
BZF       Brazilian currency ETF
EWA       Austria ETF
WOOD      A wood and paper products fund

Stock Indicators – what and how

What about Brazil?

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

The biggest point I’d make here is the Real. It continued strong, even as the stock took a tiny dip. You want to be in Real denominated assets. Any dip in the stock will be washed out by the currency. So U.S. players sold some EWZ in the selloff, fine. The underlaying stocks are going up and the currency is going up. These will be reflected in the EWZ basket soon enough. Certainly a far better place to be than the SPY in U.S. Dollars.

What About Oils?


XOM  Exxon Mobil - Largest, U.S. / Global
COP  Conoco Philips - U.S.  with Russian exposure
CVX  Chevron Texaco - U.S.
PBR  Petrobras - Brazil
PCZ  Petro Canada
BP  British Petroleum
STO  Norway
E  Eni Italy
TOT  Total - France
RDSA  Royal Dutch Shell
IMO  Imperial Oil - Canada Oil and Oil Sands
SU  Suncor - Canadian Oil Sands
SSL  Sasol - South African Synthetic Oil Company

U.S. oils continue to have the “Obama Put” pushing them down. Canadian and Brazilian oils continue to show strength. Oil itself was up on the week. Clearly there is an expectation that U.S. Oils will have a confiscatory tax or some other similar pronouncement from The Ministry of Stupidity at some point. That oils can go up, and other nations oil companies can go up, while U.S. oil companies go down; well, the chart doesn’t lie…

(The Ministry of Stupidity is my term for stupid governments, anywhere in the world, that make stupid statements – often, but not exclusively, from the socialist point of view, but sometimes from the merchantilist point of view, and occasionally just bizzarely off the wall)

Oil is once again running up. My advice from last week was fairly good:

So oils took a bath (after a long run up) along with the rest of the sell off. OK, but in the long run the economy will recover and with it oil demand. So make your shopping list now, and put oil on it.

Hope you bought some. If not, it’s not too late. Just avoid any oil company subject to the U.S. Congress as long as it is dominated by the socialist democrats.

The REITS race – Real Estate Investment Trusts

Shows REITS whacked for the week too. I still hold to the notion stated last week:

I held my other REITS through this drop (mostly because I’m lazy but partly for the large dividends) and I’m happy to buy some more real estate in preparation for the inflation play in the future.

I only have a few percent in REITS at this point. My largest position had been in PCL, a timber REIT, but I sold it when WOOD rolled over on a weak housing report. So a small “marker position” is fine. But it’s not yet time for a major position.

Conclusions and Likely Actions

I’m holding my OOTUS positions in Australia, Brazil, metals, miners, and ‘stuff stocks’. I’m lightening my positions in “recovery plays” like retail. I’m generally positioning out of the U.S. Dollar. I’m holding a fair amount of cash for 3 days as the stock sales settle, and watching to see if I short the US market as a hedge or if I go long more Brazil, China, etc. It’s a nervous watching, waiting, and whale watching. I hate holidays… they are often like this…

I’m particularly watching ag and food related, given the cool weather and likely crop failures that are shaping up for the year (including drought in places like Argentina).

Click for Disclaimers, Disclosures, and Where To Get Charts

Advertisements

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Wall Street Week... and tagged , . Bookmark the permalink.