Sorry again for the lack of blogging.  Yes it’s been a rather crazy half year for me and there are a ton of things going on but I’m still trading and doing decently although my father’s IRA is doing much much better than mine which I happen to manage.  So the market is making new highs again and it’s something to cheer about but it seems a bit over bought in my opinion but of course the market doesn’t listen to my opinion.  However the point that I’m trying to make it that everything that is positive is being priced into the market at this time.  

• We are expecting real estate to bottom either this year or next. 
• We are expecting the stimulus to give the economy a pop
• We already have commodities rising like a bat out of hell (have you gone to the gas station lately?)
• We have gone through earnings and are making upgrades
• We have no more bailouts and fed programs to go through
• We have sucked up all the new equities issues already and there’s more on the way

So then the question is now what?  What will make the market move up anymore?  Is there anymore catalyst to push it any higher or we just buying because we don’t want to miss out?  Well let’s try not to be the greater fool because the market gapped higher on Monday and it should at least close that gap.  Bascially everyone is buying but only searching for the great fool.  Don’t be that fool.  

However I am finishing up another quarter for my masters so I will have another summer to blog and travel but before then here are some picks that would be interesting with the catalyst: 

Long Excelon because of Cap and Trade Legislation

Short Moodys because of rating agencies legislation

Long BGC and ABB on Smart Grid trade

Long EMC and TDC on the storage trade

But I’ll be posting more later but there is a lot of opportunity out there especiall with the dollar moving and the equities moving much faster.  So it’ll be one heck of a summer at least.

Everything seems to be running like clockwork in the market and it would be foolish to go against the tidalwave that is consuming everything in its way including bears.  The markets are pretty much a function of people’s expctations and emotions.  At this point, it’s optimism and cheer.  I would prefer not going long at this time while looking for a pull back.  Since I have been off from trading and working on a few projects which seem to be growing so far, the market has risen about 34% since I posted my Up Up and Away post.  Of course I am disappointed by missing out on much of the rise but I don’t fear missing out because the markets are very merciful if you are patient.  Right now I’m looking for a short term pull back as the markets are running more on emotion than fundamentals.  The earnings are gone and much of the good news are priced in but there may be some more upside because analyst will start raising price targets and the government will continue their economic puppetteering.  Free markets are no match for government intervention for now.  But everyone has to take note that yesterday, the rise in the markets made front page in most news sites so it is perhaps a sign that a pull back is near.  Of course that is not anything scientific but worth noting.  However it is also worth noting that the purchase of higher risk bonds and equities are a signal of a shift in momentum but again wait for a pull back and when it pulls back, don’t be afraid to pull the trigger.

The market’s been rising for about six weeks now.  I never imagined that it would rise this much but hey like they say “the market can stay irrational longer than you can stay insolvent.”  The economy is far from getting back to normal but there are signs.  But in all seriousness, it’s still far from where it will recover because the unemployment levels while hitting records in certain states like California, Oregon and North Carolina and also 30% of the states have unemployment over 9%.  Although I try to talk myself out of being a pessimist on the economy, it is rather difficult because when faced with the largest drop in personal wealth in real estate and equities markets, the consumer has changed forever.  I think it’s a long term behaviorial change not just something cyclical change where future profits will not grow as fast as the last ten years which much of the growth is due to technological changes and web adoption but there is no huge game changer in the future other than green technology.  Perhaps one dramatic change will be inflation that will push profits higher but perhaps that all that we need.

I wanted to let my readers know that I’m working on a couple business projects which may seem like a horrible idea at this time but in reality the best time is during recessionary periods where you can maximize capital since you can lock down fixed cost at a low rate such as rents and equipment while starting during a expansion period will cause a higher fixed cost.  Variable cost will be the same for all businesses during any period without factoring economies of scale.  It is during the recessionary period where you can develop a grow a business to the point where by the time, the economy starts expanding, it will be easier to obtain capital to grow because of a track record that was developed.  So there may be less blogging but I’ll keep it up because I still will be monitoring swing trades but at this time, it’s difficult to be long and slightly difficult to be short.  I’m siding toward the short side now but I think after a majority of earnings is done then we’ll see some weakness.  My S&P resistance is 870s or so while support is now about 750s.  So we’ll watch out for those points.

Disclosure: Long UNG, Short ACC

My apologizes to all five of my loyal readers.  I’m been rather busy lately mainly because I’ve caught the entrepreneurial bug and working on a major business project.  I have been actually trading less and working more on the start up phases which is rather time sensitive since I’m working on a project for the awesome iPhone which will be coming out with their new OS 3.0 software which will be a “game changer” and I’m not even kidding about it.  I may post about Apple but for now, Apple has had a great run and I would wait for after earnings when people will take it out and shoot it.  On that day, at least one trader called Mister Bull will be buying.

But it looks like the market is on pretty solid footing and at worst may test it’s lows but it doesn’t seem likely to make new lows at least this year.  If the government plans don’t work, we’ll know by next year and we will definitely face worst problems than the market making new lows.  We’ll probably face something that most of us have never seen in our lives, a true depression.  I hope that’s not the case of course; I rather have us inflate ourselves out of this problem and deal with it later than face depression based deflationary economic fear and loathing.  As for the markets, it seems the rate of increase has been slowing and valuations are actually quite reasonable based on the uncertainty.  So at least a minimal correction is in order and earnings seems to be the catalyst for that now.  There isn’t much news that the government can provide except for the uptick rule and the results of the stress test.  Markets are merely looking for reasons to do something.  Right now, we’ll all looking for a reason to take some gains.

Meredith Whitney, the famous banking analyst who has called for the cutting of dividends and the problems of the banking industry for the last year or so has continue to suggest that the end is not close for the financials which has risen in the face of such criticism but now everyone is suggesting that banks are safe and that we are on the way back because it seems that the banks are now profitable again.  But let’s take a look at how profitable they can be.

Most banks are now saying that they expect to make a proft as long as the economy doesn’t fall off the face of this earth.  Ken Lewis suggested that Bank of America and even pay back the TARP this year.  CEO after CEO has been making promises only encouraging the gains in their stocks.  But to me, it seems that there are too many lurking problems to make these promises.  What Meredith was stressing on her appearance on Charlie Rose was not about more write downs or more subprime problems because those are almost behind us but the problems caused by the housing fall as only starting to materialize.  Here is probably the most important thing that Meredith said:

“Look, you have credit continuing being pulled from the system, and until it stabilizes, there is nowhere to go but down. And from an unemployment perspective, no one is pricing in low, mid teens unemployment in any of their assumptions. So it is just a question of not if the banks need to raise capital, it’s when, and, you know, let’s get some capital back in the system by looking at who can provide it, like the local banks”

While everyone is not questioning that unemployment will climb no one is factoring in that unemployment can reach double digits or even mid double digits.  There is a huge misconception that this cannot happen.  But if we look at the numbers, some states are close to hitting record highs for the last few decades while 9 of the 50 states have unemployed 9% or higher already and this is the very beginning as corporate and business bankruptcies are barely beginning with the credit crunch.  So while we are trying to fix the credit problem, housing prices goes lower and more businesses are closing their doors, pushing unemployment to be even higher.  It seems that the market believes that the stress test and the TALF programs will solve the problems but that seems to be still just a band aid because it is difficult to buy up housing when no one can qualify for the loans.  While I am glad that we are doing something, it doesn’t seem like we are attacking the problem that caused this mess in the first place which is housing.

There has been the suggestion of allowing immigrants to apply for citizenship in return for buying a house which seems sensible because it sucks up all the excess inventory, increases consumption from a new rich middle class, and provides a talented and able workforce to help retire the baby boomers.  But of course, America shouldn’t become a nation of immigrants…right?  Oh wait, that’s what America began as.

So on Thursday, we’ll see the real estate portfolio of GE Finance arm.  Supposedly real estate is a huge driver of earnings for GE finance but no longer.  According to GE, it has 34 billion in commercial real estate of which 16.6 billion was acquired in 2007!!!  Which was basically the top which included some Chicago buildings purchased from Blackstone who bought it from Equity Office Properties of Sam Zell who then sunk his gains into the failing Tribune.  Sam still came out on top though.  Anyways, GE says that 80% of the properties were bought cash and only 20% is mortgaged so that means they will not need to sell properties at a fire sale unlike other REITs may in the coming months and year or so.  

So GE marked down that commercial real estate portfolio 1.5%.  Yes one and one half percent.  Why do you ask they have only marked it down so little when commercial real estate has dropped at least 20% in value.  Well they say they aren’t planning to sell them.  That may come back to haunt them as they may need to raise money because if you book 20% losses on 34 billion, you get a loss of 6.8 billion dollars.  But they say that they don’t need to mark them down also because of their cash flow and income.  Suprise surprise.  Rents are going down and vacancies are going up and commercial real estate bottoms years after residential.  Residential hasn’t bottomed yet so commercial is still at least a couple years away.  So let’s see how Mr. AAA AA Plus, GE can figure how to get out of this mess.

So there was a release today that housing starts are up because of multifamily construction but single family construction was up only 1.1% so our residential construction is not moving very well.  What people need to look at is building permits because that is the leading economic indicator of activity and those are trailing starts.  The rise is starts could very well because of seasonal fluctuations because it’s much easier to build after the long winter is going away thus the 89% rise in the northeast.  But looking at a headline is more than meets the eye.  But housing starts don’t solve the problem that we have.  The problem is still prices are falling.  By adding more supply, we don’t solve the price problem.  More supply equals lower prices.  We are currently at a 13.3 month supply of homes as of January which is a record.  Normally we have less than six months.  So we need less housing starts not more.  In fact by placing more housing on the market, we deflate rent and house values which discourages buying even more when people want to wait for prices to drop.  But if you can even get a construction loan which is quite limited now, building more housing not bring out housing market to an equilibrium point especially since there will be more foreclosures.  

But now we have to focus on a huge problem that is slowly crippling our economy.  Why do we have the TALF program to help consumers and small businesses?  Well because 70% our economy is consumers and 60-80% of job creation is by small and middle sized businesses.  The banks who face billions and billions more in writedowns of jumbo loans, credit card loans, commercial real estate loans, lines of credit, and insured bonds cannot lend to consumers or small businesses, so the government will have to do it.  But by the time this program starts the end of this month, it may be too late.  I can’t help but notice that little restaurants have been closing down lately.  One by one.  Small businesses are struggling and it seems there is no help for them directly.  Although we are getting rather optimistic lately because of this 13% move in the markets and every bank saying that they are doing well, we are far from the bottom.  This can be the beginning of the end, perhaps the 7th inning but the last three innings may be really rough.  

Disclosure: Long UNG, SRS (perhaps too soon – might come back and haunt me)

It looks like a majority of the up move is out now.  I’m looking for shorts now but not taking a position quite yet.  At this point risk reward ratios are geared toward the downside but not quite.  We’ll have to see some sideways churn motion to keep it going.  Everyone is still skeptical mainly because the volume is rather weak yesterday although the price movement was “constructive” but it’s hitting resistance now at the gap down from last Monday.  I sound a little too technical now mainly because I’ve been training for my second mission into day trading.  Now that I’ve clearly thought about it, I realized that I have a long ways to go before so it seems it may not happen until summer as I’ll need to brush up on more studying and paper trading as well as move my account to a new broker which will be a hassle because every broker that I leave calls me to persuade me not to leave.  Not that I have a huge account but mainly because I overtade and generate lots of comission which is nothing to cheer at because the idea is that you trade less and make more.  Not the other way around.

But there is one thing that everyone needs to keep in mind while being short if you’re short.  There is a lot of money out there.  A lot that will go somewhere and some of it will definitely come back to the equities.  Here’s a nice chart that I found from the Value Plays blog:

I’m still smarting over the prices of WFC and GS which hit $12.73 and $92.40 respectively today mainly because I had some cheap calls that would have been up massively if I just held on a couple days longer.  That has always been my story though, always a bit early to the trade and then always a bit early to the exits.  So I lost on both sides.  Being too early is that additional stress factor then being too early to exit is that regret stress.  Both are emotional tolls for a guy who is rather unemotional.  But mainly because now that I’m trading for a living and for others, there is much more pressure.  Yet the journey goes on.

Just wanted to let all six of my readers that Mister Bull is now on Twitter and you can follow my trades more accurately there because I am not going to be posting my trades anymore unless I want to do a write up of why I’m in a trade and I realized most people can’t really follow the trades because the post doesn’t update nearly as regularily as people would like.  I’m planning to get back into day trading in a month or so but I realized that I need a lot more studying and practice but that will be the aim as swing trading is very profitable but does not satisfy my implusive ADD generation now needs.

Also I have added a resource section with some awesome links.  Best Stock Charts is pretty nice and it’s free.  Real time charting for those who just want to look.  Value Cruncher is interesting but I don’t do the fundamentals things.

I’m somewhat licking my wounds as I sold out a little early this morning and the rally makes me sad that I didn’t hold on for a little longer for the maximum profit but c’est la vie.  Good trading folks.

Let’s play a game where we figure out what the S&P is really worth. Just much like technical analysis these days, it seems like more art than science. Just like a chart you can always tell when the bottom is only when long after it turns, you can only figure out what is a reasonable PE only after the true earnings are presented. However all these numbers and charts suggest things in hindsight. But to help everyone with their awesome predictions of the bottom of the market, I present my S&P Valuation and Earnings chart:

So I’ve highlighted the most recent range on the chart and have also made a box around what the predicted earnings for this year will be which is about $45 by those great analyst out there.  So under that earnings scenario which suggest a 30% drop in earnings from 2008 (which dropped 25% from 2007), there is a possible range of 915 with a PE of 20 and 450 with a PE of 10.  Right now, we’re trading at a PE of about 14 which seems high to those crazy people calling for a PE of under 10 which I think is insane.  Then you ask, well there were times that the PE were lower but if you studied your history, you will realize during those times, the risk free return was well above 6% which discouraged capital into the equities market.  I would assume that most investors would like a return of at least 7% because if you add inflation (3%) plus risk (3% -4% risk free return), you’ll have anything above 7%.  So if any risk free return like treasuries will provide this, it will drove capital toward this assets class thus competiting with other investment classes.

But the main question is not quite the earnings however it does need to be discussed.  Earnings of last year was somewhat depressed because of write downs and this year’s earnings will be depressed not only because of a contraction (which won’t be permanent contrary to popular belief from the world) so we have to take those two things into consideration because by using this year’s earnings as the basis will leave you thinking that we’re living in the early 90s with those kinds of earnings specially considering that the CPI went from from about 150 in 1995 to 210 today.  So with 40% increase in prices or inflation, we cannot expect earnings to be $45 for the S&P.  But we’ll first work with the $45 earnings target which can change either up because of write ups if there are mark to market changes or go down simply because we all stay in our homes and never go to the mall again.  But looking the chart, we are trading at a PE of about 13-14 based on the low expectations of 1994-1995 earnings. But the next question is what is a fair PE when people are calling for a PE of under 10 now?  Or even 12 which puts the S&P at 588?

Well let’s look at PEs.  The average PE from 1960 (mainly because we are looking at the S&P 500 and it was created only in 1957 – didn’t know that did you?) is about 16.8 including even the 70s and 80s when interest rates were sky high.  We are not going to look at the Dow although it has a longer history because the Dow in the 1930s was a bad representation of history because there weren’t many companies in that index and it didn’t represent the diversity of the economy of today.  It’s just comparing apples to oranges.  When people make the comparison of the market drop in the 1930s to today, there are too many variables to make a good comparison.  Anyways I decided to separate the years from years where the risk free rates were above 6% and years where risk free was below 6%.  In a high rate environment, the PE was 12.5 and low rate environment was 19.75.  So during this environment which is pretty much deflationary and low rate, we should expect something at least around 19 or so because the markets are forward looking.  So if we did apply a PE of 19 to $45 in earnings, we have S&P at 870.  But those are depressed earnings and the market knows that or does it.

Let’s just apply the 40% inflation from 1995 to 2009 to the earnings of $45 from that year.  We have  earnings of $63 for 2010 if we recover or probably closer to $70 since inflation will pick up a pick more by then.  Normalizing the earnings will also get you about $70 so at a 12 PE, we have 820 but that is probably the bare minimum that we expect in 2010 when the economy recovers.  But since the market looks about a year ahead, we should see 820 this year again.  But if we apply a more normal PE of 14-16, we really have S&P at 980 – 1120.  But those are just numbers just like the charts predict that we’ll go to 400 right?

(By the way, I was a bit wrong with WFC, it did get back over $10 which is the first time for any bank stock and if it hits my target of $12, boy I’m gonna be mad)