I started this blog in January 2010, but I have been posting market comments on Covestor since March 2008. Below I post the market comments I have written previously on Covestor.com.
Recent Fed Action
March 21, 2009. I have mostly taken short positions in the market for the past year, but with the market down so far now I have been looking for some reasons to go long. But I couldn’t find many reasons this week. On Wednesday the Federal Reserve surprised everyone by saying that they would buy 300 billion dollars worth of US Treasury bonds- essentially expanding the money supply by monetizing government debt. The Fed also said it would buy an additional 750 billion dollars worth of mortgage backed securities expanding that program to about 1.35 trillion dollars. The stock and bond markets immediately rallied on this news, but the US dollar plummeted and the price of gold spiked. Monetizing government debt is after all, basically a mini devaluation of the dollar. Stock traders seemed to like the news initially. But my feeling is that if the Federal Reserve is making such big changes to their plans this late in the game, they must have a really negative outlook on the direction the economy is taking now.
Market Slides to New Bear Market Low
March 3, 2009. It has been a while since my last post. My last update was back on November 20, 2008, a day of panic selling where the market closed at its lowest level for 2008. I commented that there would probably be a reflex rally and then the market would slip back down. It took longer to unravel than I thought it would, but that is basically how things played out. Shortly after the November mini panic, well known investor Laszlo Birinyi issued a report where he labeled the level reached that day, around 750 on the S&P500, as the bottom for the market. This was detailed in an interview in Barron’s magazine on January 5, 2009. Laszlo Birinyi has some 30 years experience in the investment business and is well respected as a serious market analyst. He probably knows most of the things to look for. It seems like he was putting his reputation on the line by calling a bottom, so he must have felt quite strongly about it. In the Barron’s article he says, “we already know that this market is going to continue to be volatile, to be driven by that day’s news, and one in which trends are going to be difficult to discern. But at the end of the day, we don’t think the market is going down from here.” He wasn’t alone in that opinion and it did seem possible the market had bottomed, so I was reluctant to go short as the market rebounded in December.
But on February 23rd the S&P had fallen back below the 750 level, and the rebound off those levels was so feeble that I went short the market by buying the ProShares Short S&P500 exchange traded fund. (Ticker symbol SH.) It moves in the inverse of the S&P 500 and so it is not as volatile as DXD, which moves double the inverse of the Dow Jones. So it is a little safer in case the market moves against my bet. As recorded on Covestor I bought SH on Feb 26 at 84.27. I placed a limit sell for 90 and expected it may take a week to hit that level, but it hit 90 on March 2 as the market sold off and I am out already. Things are moving fast. On Tuesday the S&P 500 fell to 696.33, way below the November 20 low, and there is no question that Laszlo Birinyi and others were a bit early in calling a market bottom. As many have pointed out, now that 750 has been broken, there really aren’t any obvious points of price support for the market. The market will continue to be driven by the news, and General Motors is supposed to be running out of operating cash within a month. I think that is an obvious rock in the road, which has to be dealt with before the market will be able to put together a rally.
Market falls below levels of the dot com bust
Nov 20, 2008. Today was a historic day as far as stock market milestones go. The Standard and Poors 500 index fell below the low of 768.63 reached at the bottom of the dot com bust in October of 2002. In fact it closed today well below that level at 752.44. Many Technical Analysts thought there would be a bounce when it hit the 768 level but there was hardly any resistance at all. Not a good sign. So now, the S&P has fallen 52.25% from the high it reached in October 2007. It is at levels not seen since April of 1997. I decided to hold on to my gains for the year, and have been on the sidelines since early October watching these big swings up and down and thinking the risk level was too high to try to take a position long or short. In fact a story on Bloomberg today said “the S&P 500 rose or fell at least 1 percent in 86% of October’s trading days, making it the second most volatile month in its 80 year history… only November 1929 produced bigger swings.” With all three of the US automakers facing possible bankruptcy it looks like it will be quite a while before the market turns around. Any reflex rally from these levels would probably be short lived.
Getting Ready forAnother Short ETF
July 22, 2008. The Dow Jones hit a new yearly low last Tuesday amid concerns about the continued viability of Fannie Mae and Freddie Mac. The markets have rebounded since then based on statements that Fannie Mae and Freddie Mac will be bailed out by the federal government if necessary. The terms of this bailout are still being debated however. Fannie Mae basically sells bonds to raise money and then buys US home mortgages. With defaults on home loans increasing, Fannie Mae’s ability to continue to make payments on its bonds is being questioned. Investors apparently think the odds of default are high and have been selling their shares in Fannie Mae relentlessly for quite a while.
Treasury Secretary Henry Paulson is proposing legislation to require the Federal Government to provide an unlimited guarantee on Fannie Mae’s bonds and operations. I don’t think its that simple. According to Bloomberg News, Fannie Mae and Freddie Mac own or guarantee about 6 trillion dollars worth of U.S. home loans. That makes the Federal Reserve bailout of Bear Stearns look like pocket change. It will be interesting to see if congress goes along with Treasury Secretary Paulson’s sales pitch for a complete bail out, financed by taxpayers. Bloomberg goes on to say that taking on that much debt would basically double the outstanding debt of the federal government. I imagine currency markets would react to that quite harshly. The value of the dollar would only continue to sink. Which means it would take even more dollars to buy a barrel of oil. Higher oil prices at this point would hit the overall economy really hard. Industrial companies are already having trouble in this environment.
Today NYU professor Edward Altman said that bankruptcy is a growing possibility for automakers Ford and General Motors. He says they have about a 46 percent chance of default within five years. GM posted a $38.7 billion loss in 2007, and hasn’t reported a profit since 2004. If it has trouble raising capital to meet short term liabilities it could default on its bond payments. This isn’t likely at the present time, but becomes more likely if business continues to deteriorate. Investors seem to think the outlook for GM is poor. The price of GM stock has fallen about 75% from its high in October 2007. I covered my short position on the Dow Jones average last week as the markets bounced, by selling my shares in DXD. But I am not sure why the markets have rallied so sharply on this Fannie Mae bail out proposal. It only seems to transfer the hit from the hedge funds that own Fannie Mae bonds to the taxpayers and the rest of the economy.
Jim Rogers, who is often interviewed on CNBC, has made that point repeatedly, and refers to Paulson’s bailout plan as an “unmitigated disaster.” So unless the price of oil drops sharply on an unanticipated increase in supply, I expect the decline in US stocks will resume after this consolidation period, which may be mostly a technical rebound. DXD, the UltraShort Dow30 Proshares, is a popular short etf. It is quite volatile however since it moves twice the change in the Dow Jones. So I may look at some of the other short etf’s that are out there.
Commodities Sell Off
March 24, 2008. Bloomberg news reports that traders were expecting the Federal Reserve to cut the fed funds rate by a full percentage point on March 18. When the Fed only cut the rate by .75% it was taken as a sign that the Fed was becoming more concerned about inflation and the value of the dollar. This lead to a sell off in the Euro and Gold as well as most commodities and the selling gathered further momentum later in the week.The size of the sell off makes it apparent that it was more than just a response to the recent Fed rate cut. The CRB index of Commodities posted the greatest weekly loss in decades. Gold fell about 100 dollars an ounce on the week. Some analysts say the commodites sell off reflects new concerns about a slowdown in global growth. But with the U.S. stock market trending sharply up the last couple of days it would seem that fears of an economic slowdown have not grown that much recently. The other explanation is that the bull market in commodities was simply overdone and when prices started to slip, traders all headed for the exit at once. The Fed rate cut was all it took to start the slide. Everyone was waiting for the number. In this case the underlying uptrend in commodities is probably still intact but it will be a while before a rally gets going again.
Federal Reserve Meeting Today
March 18, 2008. Today the Federal Reserve Open Market Comittee meets to decide further action on interest rates. Recent interest rate cuts and loan offers by the Fed seem to indicate that the Fed is focusing almost entirely on easing the credit problems in the banking and finance sector and that it is relatively unconcerned with how these actions affect the value of the U.S. currency. The value of the U.S. dollar has been falling like a stone against most major currencies and the longer term affects of this on the U.S. economy are probably quite negative.
Bloomberg.com recently reported that a trade weighted index of the U.S. dollar has fallen to its lowest level since the 1970′s. Just in the last 9 months the dollar has fallen about 17% against the Euro and 22% against the Japanese Yen. If the Fed is concerned about the fall in dollar it will probably only cut the Fed Funds rate by .25 or .50 percent today. Anything more than that would send a signal to the markets that the Fed is not concerned about the stability of the U.S. currency and it would set the stage for a further sharp sell off in the dollar. In this scenario, exchange traded funds like GLD and FXE will continue to advance. Today at 2:15 pm New York time the Fed will report its decision on interest rates. The markets will probably respond quickly.