A fair day after yesterday's massive runnup

The tape is playing perfectly to what I wrote yesterday. In the first 30 minutes of trade, the market was up rapidly and tested 7000 on the DOW. It has since drifted lower all day after.

I sold off my longs in the first 30 minutes and have since added some longs back during this retreat. 

From my perch, the drift today is not bad at all. Volume is low and no major sell off after yesterday's massive gains.

The last hour will be crucial. If the indexes can finish solidly in the green it would be a great sign. If not, it might just drift around the unchanged line.

Either way, I think there will be a good chance there will be a 150-200pt down day on the DOW within the next two trading days. This would be a good time to reload on the long positions especially the financials.

The re-instatement of the uptick rule I believe is for real and the effect not to be underestimated.

Great quote from Tobin Smith's newsletter regarding investing in today's fearful markets

As Ambrose Hollingworth Redmoon (deceased manager of the legendary rock bank, Quicksilver Messenger Service) aptly wrote: 

"Courage is not the absence of fear, but rather the judgment that something else is more important than one's fear. The timid presume it is lack of fear that allows the brave to act when the timid do not. But to take action when one is not afraid is easy. To refrain when afraid is also easy. To take action regardless of fear is brave." 

Nice close above 6900 on the DOW

We were able to close above 6900, this is a great sign. I am now looking for a nice strong follow through day. Up day on strong volume. 

But as I've stated in my previous post. I took profits just before the close as we rose above 6900 on the DOW. I sold off my SPY longs. And took half my shorts on the SKF. There is still a very high chance we will continue to rise tomorrow, but I will play cautious for now and take some profits. 

If the markets rise again strong tomorrow morning, I plan to cover all my SKF shorts and sell a third of my FXI. This because I anticipate the DOW hitting resistance at 7000 and sell off. I will then rebuild my longs.

One very interesting piece of information I just heard on Bloomberg is that there is some strong talk about reinstating the uptick rule on shorts before the end of the month. This means one can no longer short a stock unless there has been an uptick. This will prevent the relentless pounding on stocks that has been so apparent with the bank stocks. This piece of information is crucial as it will carry the bank stocks up very rapidly. There will be a massive short covering should that happen.

I am looking to rebuild my SKF short near the $200 level. Hopefully if it gets there. I may also build a small TBT position as I believe money will flow out of treasuries to add to equity positions.

Games plan:

- Take profits on longs if we have a strong open within the first 30 minutes tomorrow

- DOW @ 6780 is where I will rebuild long positions.

- If we don't get a strong open, I will just build small long positions slowly as the markets retreat to each support level

Best of luck to all.

Take some profits

I am looking at the 6900 level on the DOW today to unload some shares and lock in some profit. I have been long the S&P and short the SKF with solid profits in only two days. If the markets finish strong today, I am expecting a mild sell off tomorrow and then resume on a less violent bear market rally until the DOW and S&P reaches the downtrend lines. 

My AET.un, VT and FXI are longer term holds so I may lighten a bit on them if the price continues to appreciate quickly. And then pick up some shares back when it falls back to support levels again.

Don't forget that this is a bear market rally we are going into now. Stay nimble, keep long positions small and manageable. And if you do go long, stick with solid themes such as Oil, Gas, China and agriculture.

Rebound or head fake?

Markets up today after days of sell off. I am not chasing this rally though. It feels like a lot of short covering to me. But I am holding on to most of my longs but sold off some of my SSO into the strength. The markets may rally tomorrow but there are too many headwinds. Further, the financials and GE did not rally today. The Chinese stimulus is good news but probably not enough the sustain the markets to rally for a few more days. The unemployment numbers coming out of the US was horrible today and the market wants to rally so bad it kept blinders to the numbers.

What I am thinking in the back of my head is that a few notable perma bear hedge fund managers are coming out and calling for a market bottom. 

Ultimately though, I stand firm in the belief that the market will bottom when the S&P 500 falls below 550. But this does not mean we head straight there. We could see a multi-day rally that takes us over 900 on the S&P first which no trader should miss out on.

I am holding tight to my FXI, agriculture and oils for now. Selling off a portion of my S&P longs (SSO).

Time to unload

I am selling into today's strength. With the garbage stimulus plan and employment falling off a cliff. We are not at bottom yet. There is not much the Obama stimulus plan can do to turn the tide at the moment. Further, states are having budget problems, Eastern Europe is having credit problems (which will drag Western Europe down). Everyone needs money all of a sudden and only a few will be able to borrow. Some entities will be forced to raise bond rates to attract buyers (Spain) and this will further push and damage the already suffering economy.

I am selling into the strength BIDU, GOOG, RIMM, TBT. But keeping my FXI, VT and AET.un

Time to cover some shorts

I am covering a bunch of shorts today after this Tim Geithner speech. As bad as I think he is as the new Treasury secretary, the markets are showing signs of a temporary bottom. As a trader, we can never fight the market despite longer term beliefs. Large instirutions are starting to pick at stocks so its time to ride this wave for a bit. I covered most GBP and EUR shorts and long FXI, BIDU, CTRP, TBT, VT, AET.UN. I also feel oil is bottoming so this is time to start loading up on Canadian oil trusts that have great management and already reduced their dividends substantially such at Arc Energy.

We enjoyed the boom cycle, now deal with the bust cycle

Why are some things so simple, repeated again and again on TV. It is actually beginning to annoy me. Two of the most talked about topics on Bloomberg:

1) Banks are not lending even though they took in the TARP money from the government. And instead of lending, they are using the capital to shore up their balance sheets or make mergers and acquisitions.

The simple truth:
Of course they are! Banks are businesses out to make money, not provide social security. They lend you an umbrella when it is sunny. Not when it is raining. And certainly not when they need the umbrella themselves!

Business is bad and this economic tsunami is big. The bankers certainly know it. They are not going to lend if they know businesses are going to go 'out of' business 6 months from now. They know things are not going to get better no matter what the politicians say. TARP money or no TARP money. Get used to it. And all these portfolio managers and talking heads need to shut up about things getting better in the second half of 2009. This financial trouble we are in right now is so big that it is going to take at least 5 to 10 years to get through. They of course have an agenda to say it will get better soon because they want you to invest money into the markets not withdraw from it! 

As for the banks using the TARP money to shore up balance sheets and make acquisitions. Of course they are going to do it. They are here to make money. Lending it to soon-to-be-bankrupt small businesses will lose them money. But scooping up distressed competitors will make them money.

2) Bailouts, stimulus package and more bailouts!

The simple truth:
Out economies are contracting from a level that was simply an inflated bubble. We were living in a world fueled by debt. Money borrowed from the future. Make no mistake about it. Whatever comforts, increasing standards of living and entitlement one may feel especially was created from debt. This is especially true for most Western and developed economies. There has been little real value created with the ever expanding service industry.

Now is the time to pay the price as this bubble has popped and will continue to deflate. All this rubbish talk from politicians around the world talking about 'fixing' the problem with more debt is ludicrous. First of all, excessive debt is what got us here in the first place. Second of all, this bust cycle we are in now is so big, that nothing these politicians do now can stop the tide in the short term. The only way is to suffer the pain in this bust cycle the same way we all enjoyed the boom cycle. Let companies fail. Deal with the layoffs, high jobless rates and home foreclosures. Values will decrease and then money will come back into the markets naturally when the prices have reached the right level. Things have been overpriced, too high and for too long. Now prices must come down for our economies to truly be healthy again and resume on an upward trajectory. Home prices, wages, standards of living have all been inflated and overshot to the upside. Now they must come down as part of a natural cycle.

Unfortunately politicians need votes in the short term. So they want short term solutions and push the real solution away which is short term pain for long term gain.

And as people, we have become accustomed to expect only good times. We feel entitled to a good life and ever increasing standards of living.

And this is the world that we live. And this will continue to prevent us from accepting the reality of the situation required to take on real solutions. So let’s just continue to talk about it on Bloomberg and maybe a miracle will happen. We'll wake up and this was all just a bad dream.

Obama did not bounce

Obama bounce not happening. Indexes look like they are going to retest the lows and very possibly pierce them. Everyone needs to be exposed to the short side. Whether as a hedge to long term holds or to profit from the downside.

Obama rally coming?

15th of January today. Obama's inauguration is only 5 days away. The markets are anticipating an Obama bounce. Much like the one when he won the election. Will this happen? I think it is very likely. For one thing, he's a great talker and has a way of instilling confidence in people. Seconly, the markets have sold off fairly hard the last 6 trading days so that sets up a perfect back drop for a few days of rally. If the markets don't pickup by Friday. It certaily will by Monday. Further, Citi is releasing their earnings early tomorrow and I believe the markets will rally because it has already priced in the worst in the short term. So I would cover any financial shorts. After Obama's inauguration, it is very hard to say. Will the markets continue to rally for a few more days or sell off on the news? I wish I knew the answer!

Currency Trends

So far in 2009, currency trends feel like they are on 'reset'. The trends that have worked in the second half of 2008 are no longer working. Then, currency strengths were JPY>USD>EUR>GBP. So far this year, the cross rates have been in flux and difficult to grasp. So far for the first few trading days of the year, the strengths are AUD>CAD>EUR>USD>GBP>JPY.

Happy trading

Investing Ideas for 2008

The Best investment ideas for 2008

1) Taiwan

The recent election of Ma Ying-jiu as the next president of Taiwan. An anti-corruption and pro-China candidate is set to reverse the deteriorated relations that his predecessor Chen Sui-bian had created. Ma Ying-jiu has already made it his agenda to improve relationships with Beijing and loosen and increase trade between Taiwan and China. As a gesture, Beijing plans to remove half of the missiles that are currently aimed at Taiwan.

The better relations will bring many benefits:

Currently laws in Taiwan has it that Taiwanese companies may only move up to 40% of manufacturing onto the mainland. Should these laws be loosened, the immediate benefactors will be Taiwanese export companies as their manufacturing costs will go down. This will be an immediate boost to their near term financial results.

As Jim Rogers has articulated. Taiwan may become an island paradise for Chinese tourists. Tourism is sure to increase as travel restrictions are loosened.

The Taiwanese Dollar is also on a rise. It has already risen 10% against the American dollar since January of this year but still lags behind the Euro which has risen 15%. The Euro has risen tremendously in the last few years not so much because it is the most attractive currency but more so because investors need a major currency to hide away from the depreciating American dollar. Until the Chinese Yuan becomes freely convertible and accessible for foreigners, The Taiwan dollar is a good alternative to place your chips on Chinese growth and to diversify away from the American dollar.

The easiest way to invest in Taiwan is through the Exchange traded fund listed on the NYSE as EWT. Buying EWT presents two advantages. One, is you are buying and believing in future growth of the Taiwan economy, no need to pick and risk in specific companies. Second, it is a hedge against the US dollar as the assets that EWT buys are Taiwanese stocks priced in Taiwanese dollars. Therefore, should the US dollar fall further against the Taiwanese dollar, the assets (and thus EWT) will increase in price since EWT is priced in US dollars.


2) Australian Dollar

Australia, just like Canada, Norway, Argentina, Saudi Arabia etc are mainly resource based economies. Meaning that the staple of their economies are on the natural resources that they sit on. Oil, timber, wheat, metals, soybeans, whatever they may be, these economies have seen a strong comeback in recent years due to the much increased demand and high commodity prices that have followed.

I have previously favored the Canadian dollar which has risen over 60% against the US dollar over the last 7 years. The Canadian dollar has also historically traded at a 10% premium to the Australian dollar. Meaning one Canadian dollar has historically fetched $1.10 Australian. This trend has recently been broken and as of this writing, one Canadian only fetched $1.05 Australian. I see two reasons for this sudden surge in the value of the Australian dollar:

Firstly, the Australian dollar is yielding 7% versus the Canadian dollar at 3.25%

Secondly, as increasing world trade and focus is shifting from the US to Asia and China. Australia is set to benefit. Canada is highly dependent on the US in her economy. Whereas Australia is more on her Asia and pacific rim partners. Australian prime minister Keven Rudd recently was on the Chinese island of Hainan to meet with Chinese leaders. There, he made a speech in mandarin! And fairly good mandarin at that. He is a prime minister that understands well that his countries economic well being is highly inter-dependent with Asia's. Australia is sure to benefit from these ties and future projects and business trade over similar economies such as Canada.

This is also a hedge against the falling US dollar.

3) Solar, Wind and other alternative energy

A recent survey by Tobin Smith's Changewave Alliance research shows Solar power to be an overwhelming first choice for alternative energy source. The reasons are obvious. Solar power is plentiful and unlike ethanol, it doesn't take away from other needs such as corn for food. A quick search and filtering will show that eight out of every ten Solar companies are in China. Germany and US companies are also at the cutting edge. Many governments around the world are encouraging the use of Solar and providing tax incentives to do so.

I see solar as the next 'leadership industry group' a term used by the Investors Daily group. Some of the front runners in this space are FSLR, JASO, SOL and LDK all listed on NASDAQ and NYSE.

4) Agriculture

For those who follow the markets, the word 'Ag' should not be unfamiliar because Agriculture companies have seen a rise especially over the last two years. But this trend of growing demand for food is set to continue and some of the companies best set benefit from this bull market are POT, VT and MON. ETFs are also available, DBA and JJA listed on the NYSE

5) Water

World wide water shortages is becoming serious and many Water distillation companies and filtration companies are set to benefit. The best way to invest in this space is through ETFs such as PHO listed on NYSE

6) China

The Shanghai stock market has seen a 50% haircut since its peak in early November of 2007. The hit has mainly been due to a pull back from over extended levels and a pullback in the US which many still believe will have large effects on the Chinese economy. Where people stand varies on this but my understanding is that the two economies are not as correlated as people think. Sure, a slowdown in the US will affect the world, but it won't stop the rest of the world at its track. A slowdown in the US economy should cut 3% of GDP from China's 9%+ GDP growth at most. Internal demand is also strong. I therefore encourage all to begin investing in China if you have not so already. The best way is through FXI traded on NYSE which is a basket of Chinese H stocks listed on the Hong Kong stock exchange.

7) Supermarkets

Supermarkets are great investments during a recession. Some of the best supermarket chains around the world are Seven Eleven and Carrefour. Both very competitive and doing well in international markets outside of their home markets. Seven Eleven is wholly owned under Seven and I in Japan under the ticker symbol 3382. Carrefour is traded in France.

Middle East Tension

Almost immediately after I made the call that oil has made a temporary peak, trouble breaks out in the middle east between Israel and Lebanon. Oil almost immediately broke the old high and is currently settled at $77. I guess that's the risk of putting my neck out and making a call. I will continue to monitor the price action of crude prices to determine if it is wise to be long again in oil.

But one thing worth noticing is that the price of Crude stocks in service and exploration are still 10% or more below their peak when crude prices reached $75 previously in May. What this tells us is that investors do not believe that the current crude prices are sustainable long enough for oil companies to benefit. In other words, the current spike in crude prices is temporary due to uncertainty of war between Israel and Lebanon. There is at least a $15 war premium built in to the price of crude today.

Further, the liquidity problem today has dampened speculation capital. Another reason worth noting for the continuous decline in equity prices.

Apple computers has been a favorite short of mine recently. The volume and price action of this stock is not bad for trading. I've been shorting it on and off since it was about $60. It closed at $50.67 this Friday. The problems of Apple are many and beyond the scope of this entry but I'd thought I'd mention what I've been doing in the markets recently.

Middle East Tension

Almost immediately after I made the call that oil has made a temporary peak, trouble breaks out in the middle east between Israel and Lebanon. Oil almost immediately broke the old high and is currently settled at $77. I guess that's the risk of putting my neck out and making a call. I will continue to monitor the price action of crude prices to determine if it is wise to be long again in oil.

But one thing worth noticing is that the price of Crude stocks in service and exploration are still mostly over 10% off their May 10th peak. What this tells investors is that Buyers do not believe that the current crude prices are sustainable long enough for oil companies to benefit. In other words, the current spike in crude prices is temporary with a large war premium built in.

Further, the liquidity problem today has dampened speculation capital. Another reason worth noting for the continuous decline in equity prices.

Apple computers has been a favorite short of mine recently. The volume and price action of this stock is not bad for trading. I've been shorting it on and off since it was about $60. It closed at $50.67 this Friday. The problems of Apple are many and beyond the scope of this entry but I'd thought I'd mention what I've been doing in the markets recently.

Oil has peaked ....for now

Yes, you read that right. I have been an oil bull for over 2 years but it is my belief that oil has reached a temporary peak. The peak was reached on 7th July 2006 at $75.78 per barrel of light sweet crude. My only reservation to this prediction is if war breaks out somewhere, or there is escalation of troubles in the middle East. Based on fundamentals, oil prices have peaked.

What this means is that prices at the pump will ease.

My prediction is based on a number of indicators:

- Slowing of the US economy. This will affect even China. US spending has fueled much of the growth in the worlds economy in services and products. A large percentage of Chinese growth is in selling products to the US. When the customer reduces buying, the shop surely will feel the pain
- Demand destruction of high oil prices is becoming evident
- Tightening of worldwide monetary policy. Reduced liquidity worldwide will keep speculation money in check
- Technical analysis of crude prices over the last two months with action on Friday 7th July critical
- Marginal increase in Supply due to high prices motivating maximization of old oil wells, Canadian Oil Sand coming online and increased drilling worldwide

The peaking of prices is ofcourse only temporary. It is still my firm belief that we are in a long term commodity bull market for at least the next 10 years. We are only in the early stages but as in all bull markets they are never without temporary set backs.

Nardelli needs to go

I have never invested in Home Depot but having watched Nardellis' (CEO) interview with Maria on CNBC, my impression of him could not be worse.

His demeanor and avoidance to answering the questions asked was pathetic. What I found most annoying about him was his repeated use of the word 'Again' to precede ever answer as if he was asked to repeat himself.

For a guy from GE trained by Jack Welch, this guy is pathetic. Robbing the companies vaults and mistreating the shareholders.

Nardelli needs to go. The day Nardelli announces his resignation is the day to buy Home Depot.

The History of Wall Street

I am about to finish reading a fascinating book called 'The Plungers and the Peacocks' by Dada L. Thomas. The author through his research presents the history of Wall Street from its inception to the infamous Tech bust at the turn of the century. The stories are intriguing and grips the reader from page to page.

As a student of history, I am a big believer that history needs to be studied and remembered to avoid the same catastrophes from re-occurring. The chapters on the Crash of 1929 and the following Great Depression are must reads for any student of the markets. According to the author, the event that preceded the Crash was a liquidity problem. The US government at the time had just begun to implement measures to halt credit from being to easily loaned to brokers and stock traders. Further, interest rates were on a rise at the time. The liquidity problem eventually lead to the crash where fortunes were wiped out, many people unable to handle the shock committed suicide and there was panic everywhere. A ten year depression followed in which the economy suffered and the market continued to fall. Many a veteran trader who escaped the crash of 1929 unscathed returned to the market shortly after to buy 'at the low'. The way it has worked for them so many times in the past. Unfortunately, the unforgiving markets continued its slide and wiped them out also.

Could history repeat itself in today's sophisticated markets and watchful government regulations? Nobody knows for sure, but to completely ignore the possibility would be foolish. May 10th 2006 was the day the US markets begun to fall. Gold had hit a high of $740 and commodity futures and stocks were at all time highs. The big sell-off was followed by markets all around the world. Many blamed new Fed reserve chairman Ben Bernanke for his stance on further interest rate hikes. However, the real reason lay beneath the surface. The real reason was the reduction of liquidity by the Bank of Japan of 200 billion dollars. Some resemblance to 1929? As a result of the reduction of liquidity, investors especially large hedge funds have been liquidating their holdings, unleashing a big wave of selling.

The market hit what may be a temporary bottom a week ago and is currently showing a small rebound. The bigger question is whether markets will continue to fall. Interest rates are rising in the US and worldwide. Liquidity will continue to be a problem The housing boom in the US which has been driving most of the economic activity in the last 4 years is slowing. Oil prices are rising and consumers, already debt ridden are pushed harder than ever before. Experts argue that economic activity continues to look strong but I would argue that things look the best just before they turn south. Looking forward, investors need to be mindful of the lessons from the 1929 crash in our current investment climate.

Bill Gates to retire in 2 years

It has been exactly one year since I last updated. I apologize for the lack of updates. I have been busy and travelled for 9 months over the last year and in the process observed the economies and culture of many countries. I hope to share some of those thoughts on this blog in the future.

And to today's topic:

Bill Gates announced last night that he will be retiring from Microsoft in a couple of years. The Microsoft empire has obviously changed the world and the way we live. But many question where Microsoft is heading. With Google leading the internet advertising space and leading the next generation of on demand software and web-based software. Can Microsoft remain King for much longer?

Bill Gates is a legend. He will be remembered as one in the tech world as well as the most generous philanthropist in history. He is a great visionary and a great man.

I think the bigger question for Microsoft is Steve Balmer and the rest of the top management and architects. If they can innovate and mobilize Microsoft to be nimble, they have a great chance to remain on top in the next change wave of software technology. If they cannot, the departure of Bill Gates may be remembered as the day Microsoft turns south

Gushing with oil? Oil reaches new highs

The price of light sweet crude reached new highs today at over $58 a barrel. For those of you who followed my advice in my March 23rd blog entry 'Oil Investments' will have made a nice 20% gain on XLE (Energy ETF). In that entry, I suggested accumulating shares of XLE when a barrel of oil corrects below $38. Oil retreated during the months of April and May and by mid-May, Oil was below $38. XLE fell below $37 on May 16th and today closed at $45.84.

My prediction is that oil will continue its streak and peak beyond $60 before retreating back to the low 50's. People have to understand that the days of cheap oil are days gone by. We have to get used to living in a world with high energy prices in a larger 10-15 year commodities boom cycle. We are in a demand driven oil boom with tight supplies. Add in the terrorism factor and natural oil disruption factor (such as hurricanes in the gulf of Mexico), we get the high prices of oil we have today.

In the past Saudi Arabia has had the ability to significantly increase their oil production overnight. This is no longer the case: at least not with sweet crude. They are able to increase the production of sour crude only. What is the difference? Sweet crude is more expensive than sour crude and the problem is that most refineries in the USA does not have the infrastructure to refine sour crude. The end result is that sour crude supply may increase but it will not affect increases of price at the pump.

This handicap at most refineries creates a huge opportunity for refineries that can refine sour crude as the gap between sweet and sour crude prices widen. They are able to sell the final petroleum products at the same high prices as others while purchasing their crude at a discount.

One of the biggest sour crude capable refiner in the US is Valero Energy (VLO). This stock has risen from as low as $56 from the sell off in May to the current $80. This company has a great balance sheet, good management and leveraged to the price of oil. I would recommend picking up shares when oil pulls back as anticipated in the near future.

Collusion in Real estate?

The information super highway has dramatically upended the way many businesses operate: particularly profit margins. Retailers now have to compete with online retailers and eBay. The competition drives prices down and the consumer wins. Stock brokers have to compete with online brokers with trading costs that are a fraction of what they used to be. Again, the consumer wins. Auto salesmen now have to compete with previously unavailable information to the public such as manufacturer rebates and dealer costs. They can no longer charge outrageous prices because consumers know when they are getting ripped off.

These are only three examples. But how about the real estate industry? In the US, real estate agents charge a 6% fee on the closing price. In Canada, agents charge 7% on the first $100,000 and 1.5% on the remaining balance. These fees have not dropped and those in the industry continue to enjoy such fat margins. The question I have in my mind is how this strong hold has resisted what so many other industries could not. I speculate some possible reasons:

- Selling and buying homes are very personal. The crew on Fox's 'Cavuto on Business' jumped on guest Tom (a real estate agent) this week about the non competitiveness of the industry. Tom argued that buyers and sellers get security because agents can screen the buyers. He also argued that commissions have dropped from 6% to 5% but that is despite the average home value rising from $200K to $800K

- Selling a home is unlike selling stocks. The buyer has to enter and view the home. This aspect cannot be done online.

- Listings online are limited

- The industry is doing whatever it can to maintain the status quo by minimizing the possibility of competition

The realestate market has been booming the last 4 years. When everyone is making money, they don't necessarily question the fees that they have to pay. However, as the market slows and less profit is made, people will begin to question the value that they got for the fees that they paid. This is especially true for homes that practically sold by themselves the day they were listed.

The boom has also encouraged many to become agents. This will increase the competition and lower prices. 1% flat agent fees have already begun to be popular and this should become the norm in the future. A slowing market should also result in slashing fees as more agents fight for reduced deals.