Thursday, February 07, 2008

It's Not Your Daddy's Olds

S&P comes over the wire with the quote, "history failed us". It's always impressive how corporate managers are able to blame others for their mistakes. History? Who's that? Is it really possible that the analysts at S&P had no idea how much the mortgage market had changed in the past five to ten years? I guess so. They're as lazy and greedy as the rest of 'em.

Didn't they notice that banks had been disintermediated by the originators, warehousers, I banks and so on? Owners of mortgages have never been more removed from the creditor. The Time Life telemarketers have taken over for the old timey, suspender-strapped, close cropped banker. Did they really base their ratings on the 1990's and prior history of sub prime mortgage behavior? I guess so, $200B plus plus plus later.

Just as I congratulate RR on the bear call, he starts hedging his ass off. Every pundit is pretty mistified. Do we pay attention to the Q3 GDP growth, increases in disposable income, BIG rate cuts and low unemployment rate? Or do we focus on the thousands of broken charts, high volitility, overlevered consumer, macabre housing market and stunned credit market?

Lowry's says selling pressure abates little during the rallies, Yamada says WW charts are in death spirals, oil drops daily. The oil charts look aweful and none of the names are bouncing in the rallies. The pyramid of absolute strength is dissapating into a shaky base of relative strength in the "early cyclicals" and defensive names.

The oldsters are looking for low PE's before they do anything crazy. The PE's have been cut in half since the '00 peak, but as Mr. Maudlin reminds us, in all past market cycles, "there has never been a time when valuations dropped to the mean and then went up without visiting much lower valuations. Never."

Is it possible to separate the consumer economy strength from the crash in housing and credit? The shortage of bank capital is a short term issue, but the change in lending standards is a longer term issue. It seems as though we have peaked on all measures of the credit cycle and can only grow through earnings strength. That leaves the US consumer on a very fine edge, supported somewhat by the lowering of rates. Recession or no, there is a big slowdown that will likely be around for a while.

So the market has a delayed but strong response to the rate cuts, and clearly expects a lot more. But it doesnt seem like the currency markets do. The dollar is in full rally mode as the UK bank drops rates but the Euro bank holds. Traders are saying it's because the focus in currency markets is shifting towards a premium on growth and not rates. I'm still trying to figure that one out. Maybe it's because the US is early on this move and will be the first one out.

There are clearly more cockroaches to come from the banks, and the consumer appears to be coming to a dead stop. What to do? At some point the SWF's will stop reaching for the falling knife. Byron Wein says oil is going way up, as is gold, and the US $ is still in drop mode. In other words, no changes in trends even with a US recession. In his world, the ags, solars, and all oil related stories continue to lead.

I played a couple bounce names - BAC, AGU - but I was on the road and couldn't focus. I'm now holding a ANF short, a HAL long and a few small odds and ends. I want to get short more financials, but I'm scared of a bond insurance bail out. And it really seems to a be no-mans land market - right in the middle of the trenches where you get mowed down by machine guns, the short and long ones.

A few things I am sure of: inflation in Asia is growing like a festering carbuncle; oil is suggesting at least a slowdown and a drop in prices (at least the stocks are saying it); metals are moving back into contango as the heat comes off of the spot markets and inventory projections build; the weather is freaking me out weekly which is good for ag prices; the credit crunch is still in force and banks have lots of overpriced assets on their books (Macquarie...); gold is holding like a rock as the US $ rallies - the decoupling no one is looking for - and the 10 year looks overbought.

I sold the MU for a good quick gain, got stopped out on IBKR for a small gain, AGU for two big gains, and ACM for a unstopped modest loss. My discipline is getting better. For the moment, Gold is holding up well as the correllation among assets seems to be changing around a bit. At the moment they all seem to be correlated, but I assume they will begin to diverge in new ways. I am looking for gold through any correction (ABX is the clear leader).

I'm staying long DBA and looking for re-entry in the ag stocks, which have clean charts (the pure play nitro's like TNH/MOS), and waiting for rallies to sell more financials. I'd like to short the 10 yr. Any retailer that's not been ravaged, I think I want to get short. The Baltic Dry is still a focus, and I missed the huge DRYS rally, shamefully.

I find it hard to believe that China would let the market do anything but go up through the olympics. There is no question they have a plunge protecion team inplace. I'm not concerned with whether this is a bull or bear, secular or cyclical. I'm just waiting for a trend or severe overeaction.


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