So we are about half way through the summer and it looks like the dog days of summer aren’t quite dog days.  The headlines state that it was the best July since 1987 so it’s something to celebate yet the market seriously seems to be at a point of fatigue but yet the valuation if we normalize earnings would still be between 980-1120 based on my analysis earlier this year.    Yet at this point the market’s move seems a bit irrational but at the same time it is a bit rational if it’s foreward looking.

But I heard a good argument about how it would be tough for the US to rebuild the lost consumption from an increase in the savings rate.  I will break it down a bit further into another post about the savings rate but this is a quick and dirty argument.  So let’s start with the 14 trillion dollar GDP which is about 70% driven by consumers so that amount to 9.8 trillion.  So let’s keep the math simple and say 10 trillion.  So the savings rate with peak earnings for 2007 and 2008 was 0.55% and 1.78% by my calculations.  Now let’s compare that to the average that I computed from the savings rate data from the St. Louis Fed was 6.84%.  Comparing just 2008 with the historical average of 6.84% (we just hit 6.9% recently on the last report in May 2009) then that would be about 5% decrease in spending.  Five percent of 10 trillion is 500 billion dollars in lost consumption for this year.  Imagine if savings rates increased more because of reduced credit and employment expectations and don’t forget the reduction in personal wealth.  The government spending is compensating at this point but there has to be another revenue engine for the economy in the future and as far as I can figure out.  Well there is the alternative energy economy that may help but further research in need to figure out what the contribution will be to offset the lose in the decline of the dirty energy economy. But yet the levels of the market at this point aren’t far fetched but in the short term, it just may be.

Well now on to business.  The week ahead we don’t have many major companies reporting but here is a summary is below.  But it seems that Kraft, Proctor & Gamble and Cisco will be the big earnings news to pay attention to as to news on the general economy in general.  I expect Kraft and P&G to be fine while Cisco should be fine as everyone is upgrading their networks 3G networks and working feverousily on their 4G networks.  I don’t expect Kraft or P&G to move the market but Cisco may have an affect on the Nasdaq.  But the biggest news will be initial jobless claims and the jobs report.  That will probably be the biggest mover of the market next week.  I noticed that the last two sessions as opposed to the last couple weeks, the marke thas been selling off so that may be not a good sign but we’ll see.  My portfolio has been suffering on trying to fade the market while my father’s IRA is up almost 30% for this year (his portfolio is holding McDonald’s only by the way).  Chalk another one up for buy and hold.

Monday, August 3:

Humana (HUM), Marathon Oil (MRO), MGM Mirage (MGM), Tyson Foods (TSN), Anadarko Petroleum (APC), Chesapeake Energy (CHK), Principal Financial Group (PFG)

Tuesday, August 4:

Archer Daniels Midland (ADM), CVS Caremark (CVS), Duke Energy (DUK), Emerson Electric (EMR), Entergy (ETR), Tenet Healthcare (THC), Kraft Foods (KFT), Whole Foods Market (WFMI)

*****Personal Income & Spending (June)… Pending Home Sales (June)

Wednesday, August 5:

Baker Hughes (BHI), Dean Foods (DF), Procter & Gamble (PG), Transocean (RIG), Allstate (ALL), Cisco Systems (CSCO), Prudential (PRU), Sunoco (SUN)

***ADP Employment Change (July)… Factory Orders (June)… ISM Services (July)

Thursday, August 6:

Comcast (CMCSA), DirecTV (DTV), Huntsman (HUN),  Thomson Reuters (TRI), CBS Corp (CBS), NVIDIA (NVDA)

***Initial Unemployment Claims (week ended Aug. 1)

Friday, August 7:

Edison International (EIX), Magna International (MGA)

Employment Report (July)… Consumer Credit (June)

Most car companies are hitting highs of recent along with the market but much of the move is based off the ideas that car sales will rebound.  If you look at Toyota, Honda, and Ford, they are making either new highs or close.  I wished I would have made this trade but unfortunately I did not.  But however I would like to look at whether the one billion dollar program will help the car companies.  One billion divided by $3,500 to $4,500 would provide the incentive for sales of about 250,000 cars so will this ultimately help them recover.  We’ll need to look at the large total US car sales number which is about 7.7 million for last year.  That 250,000 cars is about 3% of total sales which will help but will it ultimately save the industry.  The resounding answer is no.  It may make the numbers a little better and help adjust inventories for this year but the hype behind this is probably overly optimistic.  But ultimately this does help but does not exactly back the price to earnings of Toyota (TM $82.65) and Honda ($30.70) which are trading at respective PEs of about 26 and 24.  I do say that they are good investments if they pull back as the number of imports being bought are actually in an uptrend while domestics are in a downtrend. Toyotal faces major resistance at $88-90 while Honda faces resistance at about $32.  There is slight upside but not much.

I hope to be writing more as my business projects are keeping me busy but in the end, unless you’re a big time trader, you need to make a good living doing something else.

To save time on this post: I’m just going to paste my conversation from an email to a friend about market direction and trading.  But as of today, I went from being almost net way long on Monday to net way short as the end of today where I sold nearly everything except a few long positions plus some naked puts in YUM at 33.  I am looking into getting defensive in health care or utilities but perhaps after the market pulls back a little bit.  I don’t see much value in stocks right now or maybe I’m just not looking hard enough for some good positions but I stand with a pretty short book right now.
EMAILS:

On Wed, Jul 15, 2009 at 4:12 PM, MISTER BULL wrote:

All luck buddy.  But I have gotten really short after today so you might be able to get everything back so no worries but patience is kinda key in everything now.

Here’s a few things that I go by:

1. Always hedge – at least partially because hedging makes you think of the other scenario
2. Always buy or sell in lots because you can always average down or up on a trade – if it moves your way before you get your whole lot, it’s still profit.  Otherwise leg in.
3. Protect your profits.  I have a problem of letting my winners run still but I protect my profits first but if I had another source of income, I would probably let them run more but living on trading profits makes you a bit conservative.

But let’s hope of the reversion to the mean…I mean but my expectations are this: that for GOOG, BAC earnings that the market either doesn’t move or moves down.  Just profit taking especially on options Friday!!!

On Wed, Jul 15, 2009 at 3:16 PM, XXXX > wrote:
Good call man.

On Thu, Jul 9, 2009 at 5:12 PM, MISTER BULL > wrote:
Hhahaaha….not eating is hard but trading is just challenging.

Hello my loyal three readers…perhaps two now because of my hiatus.

I was a little bit early on my short call on the market but I remain bearish on the market for at least the next few weeks.  Consumers and businesses are still being squeeze by the lack of credit but also by the lack of opportunity.  There are few opportunities for businesses to generate money other than cut costs which many are already doing (with the exception of Goldman Sachs who makes golds out of dog crap – excuse my French).  My forecast, which I am reluctant to do, is that the S&P will find some support around 830-850 so there is about 5-7% downside at this time.  But in the end, we all know that people will have to find a place to put there money eventually.

But this blog will be updated a little more often but less about trading but more about education and analysis.  For those traders, I will still update my trades on twitter but please don’t depend on it for trades because I am not the best at keeping it updated.  However to keep everyone busy until my next post, here is a great article from Michael Lewis about AIG that was published in Vanity Fair.

Michael Lewis AIG

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.