Keeping you on the right side of the market

Companies are reporting higher profits, supposedly more people are getting jobs and as a result those that stopped looking for jobs are now more optimistic about landing a new job, Consumer sentiment is improving, retail sales rising, unemployment insurance claims are down and the list goes on.

So why is the market falling; perhaps the market has already priced in all this, and it needs something more to power it. Perhaps it also senses that all this so called good news is just a short term development and that the potential for extremely bad news is rather high. Before the correction started to gather steam we warned that the lack of volume was a sign that all was not well. Precipitously low market volume a sign that a correction is imminent, May 5, 2010

Bottom line; tread carefully as this market is extremely overextended. The action of the past few days clearly illustrates that the market is falling down a cliff of Joy. Mass psychology dictates that the best time to buy is when there is blood in the streets and the best time to sell is when everyone is celebrating; its time to take a stand or risk falling down the lemmings.

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Continuous Strength in the precious metals sector signifies all is not well May 4,2010

The Engineering of a financial crisis April 8, 2010

Dow

The first wave of selling has completed and the markets are racing upwards on very light volume; this is a very bearish development. Worse yet the Dow mounted one of the largest one day point gains in years this Monday and yet the volume was at best mediocre. A very clear signal that the smart money is selling into strength and not buying the crap that the economy has entered into a new paradigm. The problems of Europe have not vanished and we have a bank and real estate bubble brewing in China. Thus the potential to get hit from all sides is rather strong.

Rising volume, lower prices and rising prices and lower volume are both very negative developments. At this point of the game it appears that we are still not out of the woods.

Gold

Has also moved up strongly but it’s extended its gains when it is already trading in the very overextended ranges. The current pattern could produce more price gains but it is also a very dangerous pattern for when it reverses it could lead to very strong pull back. Caution is warranted in the short term.

Copper

Is still trading below 330; the longer it takes to trade to this level, the more likely the market is to mount a stronger correction. A failure to trade hold above the 330 ranges if they are tested again will lead to a drop to the 280-290 ranges.

Canadian dollar

It mounted a Relief rally; there is a daily sell signal in effect and more downside is expected before it trades to new highs.

The first group of defaulters was individuals who were conned into buying houses at teaser rates and had a very hard time making payments when rates reset to market rates. The next group of individuals was individuals with decent to good credit; this group started to default because one or both members of the family lost their jobs and therefore, could no longer make payments on the mortgage. Now we have the next wave; the strategic defaulters. This group’s decision to default is based on cold logic. The value of the home of their homes has dropped so much that it no longer makes sense to make payments on a house that is trading well below market value. 

"Strategic" defaults accounted for at least 12 percent of all defaults in February, up from about 4 percent in mid-2007, according to a recent Morgan Stanley (NYSE:MS – News) report. Analysts led by Vishwanath Tirupattur classified a default as strategic when a homeowner who hadn’t previously been delinquent made an on-time mortgage payment one month; skipped payments for the next three months; and stayed current on other consumer debt of $10,000 or more. Full Story

In a way this it’s payback time for the banks; the banks swindled millions of innocent homeowners when they turned a blind eye and even encouraged the sale of fraudulent mortgages via the liar loan application process. Then when the S**T hit the fan, they came running to Washington and like faithful concubines, Washington bailed them out with taxpayer dollars. Thus they were handsomely rewarded for their illegal activities. Now it appears that the individual home owner is deciding to stick it to them and if this new trend picks up steam, a massive wave of new defaults could hit the market, further souring an already weak real estate market.

Conclusion

Housing analysts say strategic defaults mainly occur when a home’s value has dropped below the balance remaining on the mortgage. A homeowner in that position may decide that continuing to make payments is throwing money away, or may default to get the lender to modify the loan. All told, borrowers who aren’t making mortgage payments are probably skipping roughly $100 billion annually, an amount equal to 1 percent of consumer spending, according to Mark Zandi, chief economist at Moody’s Economy.com. Zandi likens the money to "a form of stimulus, a little tax cut."Full Story

Zillow.com states that one in five U.S. homes with a mortgage has “negative equity” so the number of potential strategic defaulters is rather huge; what we have on our hands is a ticking time bomb and purchasing real estate now is one of the dumbest moves an investor could make.

Long term the trend for housing is still down. Individual that are bearish can use strong rallies to short stocks in the housing sector such as LEN, BZH, etc. ETF players can open up positions in REK, SRS, and if you really want to take an aggressive position you can short via Direxion’s DRV. SKF is another option; it is an ETF that shorts the financial sector.

Disclosure: We have no position in the stated investments

VIP futures 5 year win ratio 75%

The ink has just dried and the cost of the package is already 115 billion more. I wander how much more it will rise a year from now, 500 billion more. Already the potential savings are starting to look like a myth. Providing health insurance for everyone while most don’t have jobs is simply brilliant; well only a lobotomized individual would think so and congress seems to be full of such individuals.

The signs for hyperinflation are all over the place; the name of the game now is inflate baby inflate, for this is the only way we can pay for all this crap.

President Barack Obama’s new health care law could potentially add at least $115 billion more to government health care spending over the next 10 years, congressional budget referees said Tuesday. If Congress approves all the additional spending called for in the legislation, it would push the ten-year cost of the overhaul above $1 trillion — an unofficial limit the Obama administration set early on.

The Congressional Budget Office said the added spending includes $10 billion to $20 billion in administrative costs to federal agencies carrying out the law, as well as $34 billion for community health centers and $39 billion for Indian health care. The costs were not reflected in earlier estimates by the budget office, although Republican lawmakers strenuously argued that they should have been. Part of the reason is technical: the additional spending is not mandatory, leaving Congress with discretion to provide the funds in follow-on legislation — or not.

"Congress does not always act on authorizations that are put into legislation by drafters," explained Kenneth Baer, a spokesman for the White House budget agency. "Authorizations for discretionary spending are not expenditures." Full Story

Let’s not forget that they are not giving anyone a choice. If you have no health insurance they are going to fine you. The land of the free has just changed; it should be called the land that was free. For now individuals have one foot out of the door, while the other is shackled to a prison cell.  Make sure you have a position in precious metals as this is the best way to hedge against the dangerous effect of inflation. If we move into a hyperinflationary cycle, precious metals could prove to a God sent.

   I am not ashamed to confess that I am ignorant of what I do not know.

Marcus Tullius Cicero

The first shock and awe failed miserably, victory was initially declared in Iraq, but a few weeks and months later, it looked more like defeat. Ironically the same term has been used to describe the new Euro rescue package. This parcel will only delay the inevitable, short term relief for even greater longer term pain.

This package does not address the main problem that many nations that are reeling from this economic slowdown are taking on debt as a means of generating new revenue. Now the leaders at the Euro zone have joined the party, taken on even more debt to address the short term debt issues, with no plans in place to deal with long term problems.

The next step would be for these idiots to follow the US and start monetizing their own debt; a silent but nefarious stepping stone to bankruptcy. This is one of the main reasons why Zimbabwe collapsed. No one would buy their paper, so they printed more to buy the crap they had printed before and with each run of the press the value of their currency dropped an ever increasing pace; now the Zimbabwe dollar is dead, millions are in the dog house and the unemployment rate is close to 80%.

The only way to fix this problem is to deal with the problem. It will be painful, maybe some nations will have to be thrown and drastic cuts will have to be implemented. Whenever you delay the inevitable the end result is always 10 times more painful.

The Euro is projecting a drop to the 115 ranges, so traders look to take advantage of a weak euro can, purchase shares in EUO.

It is against stupidity in every shape and form that we have to wage our eternal battle. But how can we wonder at the want of sense on the part of those who have had no advantages, when we see such plentiful absence of that commodity on the part of those who have had all the advantages?
William Booth,1829-1912, British Religious Leader, Salvation Army Founder

Disclosure; we have a position in EUO

Moody’s finally fesses up to the fact that they received a Well’s notice from the SEC; this time around things could be different as Moody’s might officially be put out of business. It could actually lose the right to be a rating agency, which in our opinion would be a magnificent move.

Moody’s Corp has disclosed that its credit rating unit could face enforcement action from the US Securities and Exchange Commission for allegedly misleading regulators in a 2007 application to remain a nationally recognized rating agency. Moody’s said in a filing late on Friday that the SEC is mulling starting an administrative case and "cease-and-desist" proceedings, and that a so-called "Wells Notice" was received from the SEC on March 18.

Regulators send Wells Notices to firms or people to alert them of the likelihood that the government will file an enforcement action against them. Companies or people being investigated have the right to argue why they should not be charged by filing a "Wells submission." According to Moody’s filing, the SEC claims the Moody’s description of its procedures for determining credit ratings was "false and misleading" because of Moody’s own finding that a policy had been violated internally.

In the filing, Moody’s said it disagrees with the SEC and said it had sent a response explaining why its application was accurate and why it believes enforcement is uncalled for. Full Story

Off course Moody’s is going to disagree with the SEC’s finding; those that make a living by sucking blood from others try to deny it until the very end. This same punishment should be levied against all the rating agencies that failed to do their job; rating agencies that mislead should be banned forever so that the message is clear, do your job or die. Of more importance though, is the fact that insiders appeared to have acted on this information in a manner that would enable them to get the best price before this knowledge became public.

Consider the following info

Moody’s CEO Dumped 100,000 shares of stock the day the Well’s notice arrived. The well notice arrived on 18th of March; this once again clearly illustrates how corporate America is all about making money at the expense of its shareholders. However, sales by Buffets Company make CEO Raymond McDaniel sales seem very small; they unloaded a boat load of shares, the largest block was sold on the exact day that MCO received the notice. The timing of these transactions and the size leave one wondering if Berkshire Hathaway might have been privy to some inside info; take a look at the transactions. We are not stating that Buffet’s company did anything wrong, but the timing of these transactions does make one wonder.

18^th of March 678,962 shares at 29.98 a share

19^th of March 136,943 shares at 29.81 a share

23 march 148,054 shares at 30.22 a share

24^th march 54,574 shares at 30.37 a share

26^th march 3,000 shares at 30.56 a share

Disclosure; we have no position in the stated investments

Even when the experts all agree, they may well be mistaken.
Bertrand Russell,1872-1970, British Philosopher, Mathematician, Essayist

Everybody loves to use the word ‘expert’ all the time to claim they know something extra or have knowledge of the inner workings in a specific field or area. Repeat the word expert slowly and then spell it like it sounds and viola you get EX SPURT, which basically means that this expert is nothing but a spurt that never was, in other words, they are finished even before they have even begun. Isn’t it strange that most so called financial experts fall into the EX SPURT category? We use words to secretly define what we know to be true but refuse to believe or see with our open eyes. To live in an illusion is far easier than to step out and deal with reality. It’s said that reality bites, but then we could say illusions swallow. In reality, there is no such thing as an expert, because who are you measuring yourself against. Anyone can be expert if they measure themselves against the ignorant and blind. There are only advanced market students or advanced life students. We can never stop learning for when we do, senility is usually very close at hand.

The public do not know enough to be experts, but know enough to decide between them.
Samuel Butler, 1612-1680, British Poet, Satirist

Build a system that even a fool can use, and only a fool will want to use it.
George Bernard Shaw, 1856-1950, Irish-born British Dramatist

The initial trigger for drop in the Dow was probably due to fears that the Greek crisis was going to spread. One could credit this for 300 or maybe even a 400 point drop in the Dow; however, a 1000 point drop is quite another matter.

At 2.20Pm the Dow was at 10,460 and then suddenly in 7 minutes it shed another 600 points. Humans could never move that fast. There are rumours that a trader entered billion instead of million and this triggered the massive sell off. Whatever the cause the main wave of selling was initiated by computers.

A simplified look at quant model

A Quant (Quantitative) programme is a computer model which determines which investment strategy is going to yield a superior rate of return; to simplify matters let’s assume the programme decides when to go long or short.. It is assumed that because computers have no emotions, they should be better at trading as they can move in and out of the markets extremely rapidly. The scary part is that the computer renders the final decision. There is one problem, these computers are programmed by humans and one glitch in the programme can cause havoc. Let’s not forget the old saying junk in junk out. Today’s wild action is indicative of what can go wrong when computers take over.

These quant programs now make the vital function of market marker almost obsolete and this is a very dangerous situation if left unchecked. Today Treasuries, SP500 and other indices were moving so fast it was hard to manually follow them. Computers took over the markets for a few minutes and in that time they wrecked total havoc. What happens if the glitch is not spotted immediately, then a cascade of sell orders could be triggered pushing the Dow down until the circuit breakers kick in. However, if the glitch was not found then computers would resume selling after the markets opened again. Let’s not forget that big firms can still sell via Dark pools. They are basically electronic networks that allow big firms to sell stocks without tipping their hand; in other words, they can sell these stocks anonymously without the public ever knowing. This is a separate topic, and we will try to cover it another day. Two examples of firms offering such services are Liquid net Inc., Pipeline.

Quant strategies are becoming extremely popular. They are now accepted in the investment community and even mutual funds are now using these models. These models are also known as alpha generators, or alpha gens. These programs are often set up in advance so that the computer can react instantaneously to moves in the market. For example, if the Dow drops below a certain level, the programme can unleash a massive sum of sell orders and in doing so trigger other quant programs. This could potentially trigger a market meltdown as was experienced today. Indeed by some counts computers are responsible for as much as 70% of daily trading volume.

These models are now a real threat to the health of the financial markets and should be eliminated or closely monitored and regulated. Exchanges should not cater to firms that are using these programs and openly allow computers to place orders for millions and or billions of dollars. Exchanges should place a dollar limit on trades that can be initiated by such programs. One can only imagine what would happen if the computer mistakenly places a trillion dollar sell order. Today’s action is a warning, next time things could be infinitely worse. At one point ACN fell from 42.30 to 4 cents, that is 4 cents; it ended the day at 41.08 down $1.08. PG shed $23 dollars in a heartbeat but closed the day down only $1.41. In between someone could have had a heart attack. Imagine you had 1 million dollars in ACN, and then suddenly watched your portfolio shrivel right in front of your eyes as ACN fell to 4 cents from 42 dollars.

One of our first warnings came from Long term capital (LTC). LTC founded in 1994 was one of the most famous Quant based funds and it was run by two noble prize winning economists: The Quant model did not foresee the Russian government defaulting on its own debt and this triggered a series of events that destroyed LTC. In less than 4 months in 1998 LTC lost 4.6 billion dollars. If the Feds had not stepped in, things could have really turned ugly.

These quant trading programs need to be regulated and not allowed to freely take over the markets; they are destroying the vital role market makers play to maintain financial stability in the markets. Today’s action should serve as a wake up call for those who have turned a blind eye to risks these programs pose to the markets. Next time round we might not be so lucky.

On a separate note we warned individuals about the dangers poised by the extremely low volume in an article that was just published one day ago and at that time suggested opening up positions in DOG and or  QID. Precipitously Low Market Volume a Sign That Correction Is Imminent 7 comments

The key to the age may be this, or that, or the other, as the young orators describe; the key to all ages is — Imbecility; imbecility in the vast majority of men, at all times, and, even in heroes, in all but certain eminent moments; victims of gravity, custom, and fear.
Ralph Waldo Emerson, 1803-1882, American Poet, Essayist

No positions in the mentioned investments

Since the 16th of April, the Dow has pulled back several times however on 3 occasions the volume swelled to over 7 billion shares. April 16, volume swelled to 9.1 billion, April 27, volume surged to 8.31 billion and on May 4th volume surged to 7.4 billion. What do all these dates have in common? The markets sold off on each one of these dates. What is even more important is that not once during the 37 new highs the Dow put in did the volume ever make it even to the 7 billion mark. This is an astounding development, for it clearly indicates that long term players are not participating in this rally. Low volume indicates low market participation and vice versa. Thus a market that trades to new highs on low volume is setting itself up for a very big fall as there are fewer and fewer players to support it.  The current pattern is projecting a pullback of 10%, but things could spiral out of control at the drop of a hat.  Extreme caution is now warranted for the masses are simply too bullish.

VIX appears to have put in a bottom and is ready to trend much higher. An upward trending VIX means markets will trend in the opposite direction.

Copper a leading economic indicator has already topped and the Baltic Dry index put in top last November. Put call ratios are indicating that the masses are also extremely bullish.

Individuals willing to take on a bit of risk can short the market via the following ETF’s DOG and QID.

Disclosure: we have no positions in the stated investments

The dollar has just rallied to a new 11 month high and will soon put in a new 52 week high; in contrast Gold has refused to trade below its Feb 5 low of 1045. In Feb 2010 the Dollar was trading much lower and so by logic Gold should have easily dipped below its Feb 2010 lows, instead we find that Gold is just a hop and skip away from testing its old highs. Gold has now put in new highs in all major currencies. The strongest out of the bunch has been Palladium, which went on to put in a series of new highs in the face of a rising dollar. These extreme divergences indicate that the precious metal’s market is sensing another crisis in the not too distant future; our guess would be another currency crisis.  Watch the 83 level on the Dollar index; a close above this level on a monthly basis will indicate that the dollar is ready to test the 90 ranges and the euro will most likely trade down to the 120 ranges.

Gold has rallied to new highs in the Euro, and it continues to defy the dollar; instead of pulling back it continues to put in higher lows, a very long term bullish pattern. It has also just closed above $1175 on a weekly basis and has thus set the base for a test of its old highs. The entire precious metal’s sector appears to be sensing some sort of future disaster for it simply refuses to correct strongly even in the face of a very strong dollar. If you have no position in the precious metal’s sector, use pull backs to open up a position. If you already have positions, then use strong pull backs to add to them. A major currency crisis is going to strike, it’s just a matter of time and precious metals thrive in such conditions

Obviously, the best hedge against a currency crisis and an inflationary environment is to own physical bullion. ETF players can purchase SLV, GLD, CUT, GDX, PALL, etc.

Disclosure: We have positions in Gold, Silver and Palladium bullion.