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)

The market is still grinding along but surprisingly there are a few buyers.  Well they aren’t the buyers that we usually look.  Dow Chemical is finally buying Rohm Hasss.  Merek buys Schering-Plough.  Pfizer buys Wyeth.  Roche buys Genetech.  Healthcare consolidation.  Not only do private and institutional investors look for deals but corporate buyers are huge buyers as well.  Especially during these economic times, companies looking to gain market share and it looks like consolidation may rise at a much faster pace once credit eases a bit more.  It may not happen all too soon but it’s a foregone conclusion that it will eventually occur.  Consolidation will probably occur in many industries that are collapsing.  Auto suppliers.  Energy.  Metals.  Financials.  It’s pretty much endless at this point in which there is opportunity for the corporate buyer.  Again this is probably just the beginning but we’ll have a long way to go before the merger and acquisition wave comes back.  There is still a lot of money out there.  It’s either use it or lose it.

Disclosure: Long AAPL, MSFT, XTO, UNG, QLD, GS calls.

Yesterday was a bit sticky there but we’re just grinding along now.  Only 680 points before the S&P is done.  Now people are calling for it to go to 400.  Wow where were they when the S&P was 1000 or 900 or 800 or 700…wait…they waited for the S&P to go to 700.  What happened to this guy that was calling for gas to be at $25?  Well he isn’t talking anymore now that oil has stabilized.  What about all the analyst in 2008 saying that the market will recover?  Rhetoric, rhetoric, rhetoric.  Everyone can talk but no one walks.  Tired of listening to Roubini who is on television everyone hour talking about the collapse of our world while in fact, he has most of his retirement money in the stock market.  Or perhaps I should listen to those who point out the mistakes of demand side economics who blame the length of the Great Depression on it while they suggest that free markets are the absolute answer to all problems while at the same time they praise supply side economics which first started this fiscal irresponsibility that is now blamed on demand siders.  Well what really brought us out of the Great Depression?  Well supply siders say it wasn’t the New Deal, it was World War II.  Wait a minute, what did we do in World War II?  Answer, government spending!  Yes spending.  Demand side.  It’s all rhetoric.

While congressmen will always be a critique and blame the government for what they are doing?  But rather they criticize but have no answers?  What is there answer?  Let them fail?  Well what are the ramifications of letting Citibank, General Motors or AIG fail?  Will it cause Lehman II  or Lehman III?  Will this be the point that drives us to the Great Depression?  No one really knows but is it safer to tread a longer correction without the depth and despair or perhaps should be allow for the intense “creative destruction” of free markets?  Oh long will it take for someone to replace the influence of Citibank or General Motors or AIG?  Those are the questions that the critics will not answer.  They rather criticize without solutions.  Is it better to do something or just stand still?

Yet the argument goes on.  What caused this mess?  Was it government influence in the markets or was it the free markets?  Well let’s look at the government place in the market.  Well we have this antitrust thing they do.  Well that hasn’t really been in effect since forever.  Look at the reversion of the phone companies.  AT&T almost back together.  What about regulating financials?  Well let’s see, regulation was rather dismal?  Well it’s not quite government interference in free markets.  Let’s look at free markets.  Well people think free markets are nice and orderly where we get this nice simple equilibrium price where it utterly fair?  Well we need to define fair?  Well in free markets, it is a matter of survival of the fittest without regards to anything else.  Nothing.  Who cares about the disabled and elderly or even the young.  Who cares about our environment.  Who cares about deficits and leaving something for the children of the future.  Who cares about waste and uneven distribution of anything.   Who cares of equal footing for the discriminated and so on.  The free markets in historical terms has always been looked at as a “jungle” where only the strongest survive.

In this world, the strongest is the ones with access to the information.  It is now an information game.  Perfect competition can only be possible where there is low barriers of entry and perfect information.  Now information is the barrier because most things are not.  How does this information flow?  Well information only flows within a selected group of people while discrimination prevents the flow to other groups.  When is the last time, you heard a big shot executive give a tip to a single teenage mother in East Los Angeles?  Information is not free or is it a privilege.  Privilege is based on membership.  Don’t get me wrong, I’m a supporter of free markets, but only if it’s fair to a certain extent.  Free markets are inherently unfair because of biases and preferences of human beings.

Now let’s look at the another problem.  The classic problem of the tragedy of the commons.  While every cattle farmer tries to optimize their profit by fattening up their cows, they ruin the pastures they all use.  Well some people say where are those pastures?  We have many pastures.  The pasture of our fiscal accounts which is being decimated by gives aways to the rich, pork for those lobbies, and wars that benefit nothing more than oil companies and no bid contractors.  Well that sounds like the government’s problems.  Let’s keep in mind that the people have not run the government for decades.  Lobbies and corporates have run the government for a rather long time and that can be easily argued.  What other pastures?  Well look at the environment.  We are slowly creating our doom while decimating the world in which we live.  For our children, we refuse to change to a clean fuel source and refuse to create financial incentives to prevent this.  At this time, we still argue that using cap and trade policies are very un-American and anti-business.  What about being anti-humanity?  Come on people.  There are many pastures that we destroy while pursuing the goal of optimizing profits.

Perhaps this may sound a bit socialist but the absolute choice of free markets is logical.  It is perhaps necessary to bring these arguments in the forefront.  It is merely an opinion based on years of economic study and analysis.  People should not bring one sided stories especially from academics who most of the time refuse to accept the truth until it is obvious.

Disclosure: Long: UNG, SRE, AAPL, MSFT, CHK (Yes, crazy as it sounds, I’ve uber long going into the weekend)

(got out of my WFC position this morning at breakeven – after studying a bit of bank trading history for the last year, it seems that once a bank hit single digits, it never got back above $10)

These days, I don’t have much time to watch television let alone movies.  But this video has been surging through the internet and since I’m a fan ot Jon Stewart and good old comedy because even when our portfolios are spiraling down in the toilet because we were told to hold forever because we all know that no companies ever go bankrupt and real estate prices never goes down in value.  But I’m a little bit tired of watching Roubini interviews and Jon Stewart is much more funny, I’m posting this.  By the way, I’m tippy toeing back into the market again and have been punished by the blacklash again my Wells Fargo position but I still have my calls.

This may sound rather insane or crazy.  But I picked up some calls on Wells Fargo after all the financials  have been smashed up and thrown in the trash.  It’s not really that I think Wells Fargo will survive or  not because I truly don’t know.  I wish I could say that I knew what was in the books or it would be nice to say that I could truly analyze it if I got my hands on it but I cannot at least at this time.  Seriously though, I would need an army of people much smarter than I to do it.  So I list to the best indicator of all.  Price.  All the information in the world boils down to a price.  If it goes up, it’s good.  If it goes down, it’s bad.  So I bought a decent amount of calls and see a price target within the next 3-4 days of $12-$13.  It’s at $9.20 right now. We’ll see.  Hold on tight, it’s gonna be a bumpy ride!

There was a rally this morning mostly based on commodities. I was fortune enough to have been long RIO and PBR. I’ve exited it all my positions since they were all up 9-11% so I’m calling it a morning but I’m watching out for a retracement back lower for the day. You all should keep your eyes peeled as there should be upside to about S&P 750 or so. That’s another 5% upside from here but in old day terms…that’s really 2.8% upside. I’m going to be looking for shorts again as the market approaches higher levels but for now, let the squeeze run a little bit.

Disclosure: No positions.

Wow, the infamous “perma bear” super short seller Doug Kass calls a bottom.  I still don’t think it’s in yet but it’ll sure be nice to rally since I’m net long now. Also I would like to add that our president suggested going long as well. Hmmm…..we’ll just have to remember the date March 3, 2009….is this the bottom?

Doug Kass’s call is at the very end of the video…so be patient…because I was thinking when the hell is it when I was watching. Patience is golden….it also goes for trading too.