Apr

5

Home builders. Companies typified by Toll Brothers are up about 50% this year and the S&P home builders index is up 50% vis a vis its July 2007 levels. It is reasonable to think that just the way these stocks led the general market down, from 700 circa July 30 2006 to 200 on Nov 2007, that they will lead on the upside.

Evility. One of the evilest things in the world for a short is to see the a market go up 4% or 5% cumulatively up four days in a row, and then finally give them that one pull back down just one point or 1/10 of 1% the way the S&P did this week. It sets up to make all direction of change systems completely useless the next few days.

Ignorance. One of the greatest mistakes a businessman can make is to assume he is smarter than the market. An art dealer close to insolvency believed that if a Jeff Koons could sell for $30 million then old masters like Rembrandt were vastly underpriced and he bought them up on the principle that he would prove the market wrong. He ran out of capital and his Las Vegas partners took over the inventory. Has happened in many other fields.

Fed Model. The differential between 10 year yields and the earnings price ratio of 4.5% has to be the highest in history and that would predict the greatest market rise of the last 20 years, in the next year. And that's what Abbey Cohen based her predictions on. And it's a shame that she stopped making those forecasts just when they were so valid.

Employment. There is much talk about how when the market reacts well to bad news, it is good for the market, e.g the unchanged market on the 75,000 loss of jobs. By the way, I find the unemployment rate much more meaningful because at least both the numerator and the denominator have the same faulty seasonal adjustments and guesstimates of new jobs created by new businesses not yet seen. However, there is also the beaten favorite syndrome which comes up much too often in these cases, where what was supposed to happen the last race happens the next time out.

Stefan Jovanovich adds:

Regarding the home builders: the market's ability to forecast the unknown continues to amaze. Somehow it knew a month ago that the Senate Bill written this week would extend the tax loss carrybacks from two to four years for the home builders. If the bill is approved, the cash from the refunds may save the better companies from balance sheet collapse. Since the builders' inventories are actually shrinking (see Calculated Risk's March newsletter), an optimist could believe that the industry is about to pull out of its dive before it augers into the ground.

The household employment survey had far better numbers than the headline statistics. If you stripped out the American Axle strike and the construction sector, the decline in private employment was negligible. The one meme that is not being forecast is a mild recession. Therefore, as George C. Scott aka General Patton once said, the Germans will make a winter attack.


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11 Comments so far

  1. Lon Evans on April 5, 2008 2:25 pm

    In regards to 'Evility,'

    I'll counter that the 4% to 5% rise occurred on a single day, not an accumulation of days. The S&P has trended flat for the last three. Lehman's offering seems to have excited a particular market element. One more parasitic than speculative. My take is one suggesting the bottom fishers are pricing in that Bernake, Paulson, etc. continue to spoon feed those crippled by their own excesses. Billy's been a very bad boy, and as a result took a thumping. So let's give Billy a pat on the head and a lolly pop. Never mind that the treat more rightfully belongs to others.

    So great is the belief in the plutocrats propping up their own that UBS's taking an 18 billions write down, unemployment soaring higher than even W's faith in the 'surge,' and record bankruptcies across the country, all, fail to induce selling.

    But, neither do we see much buying. Are the bulls waiting for the next Viagra [to be given to the] market…? If so, they might consider that the Fed is running low of its little blue bullets. What then? Are we to put all our faith in helicopters?

    I'll postulate another test down at 1320.

    lon

  2. Anatoly Veltman on April 5, 2008 9:02 pm

    Great discussion; certainly some useful points. Arguments aside: focus on trading signals. It doesn’t make anyone a penny that Lon shorted 1460 last year (and that doesn’t make him tallest short in the world, either). Does anyone see a particular signal to long/short Monday? If not stocks - maybe another instrument?

  3. Lon Evans on April 6, 2008 2:51 am

    Anatoly,

    Ever the diplomat, thank you.

    Trading signals? O.K.

    Three doji’s, back to back, after an incomprehensible surge (and yes, I know that Vic hates candlesticks). Given a negative confirmation, and without senseless Viagra, Monday is necessary to determine what’s next. I, very well, may be stopped out in the next two trading days. If so, I’ll take it like a man, and appreciate the perfect adrenaline fueled rush that the last few months have been. Lord, I love this game.

    Should I find my analysis still holds (it has so far), Monday merely confirms my suspicions.

    As Anatoly mentioned, I’m not the most prescient bear. So, maybe the crabs (an original, if deplorable market participant) can find a way to mutate into something more resembling a mammal.

    If not, stick to your crevices, please.

    lon

  4. Lon Evans on April 6, 2008 4:22 am

    Vic,

    An interesting thought. Back in 04, I came across a bit of research done by some analysts over at Bear Stearns. It suggested that illegal immigrants (primarily originating from Central or South America) made up some 20 to 30 millions of the U.S. population.

    As most of these were were employed ‘off the books,’ this opinion, if correct, does much to negate Mr. Greenspan’s conjecture of post 2000 productivity gains. Possibly, it wasn’t technology responsible for experienced improvements, but, rather, good old fashioned, if covert realized, elbow grease.

    Fast forward to 2008, and a dismal unemployment reading. Is it fair to consider, given Bear’s numbers to be correct, that an estimate of some 250,000 over the last quarter or so just might be double, or even quadruple that.

    Sonora, Mexico, recently complained that it was being overwhelmed by in influx of returning ex patriots. Interested to know if such information in any way skews your numbers.

    lon

  5. Anatoly Veltman on April 6, 2008 5:01 am

    I’m not surprised no one is sticking their neck out. Quietly, all markets lost their sponsorship of late. No wonder, Commitments of Traders (C.O.T.) for the week were as neutral across all futures, as I’ve ever seen. Even the solitary signal of last week (short EUR) got covered by Commercials. So here is my balance of evidence:

    1. Elliott Wave labels bounce off of 3/17 low not impulsive, but rather corrective. Correction is likely to terminate in 1390’s, the area of wave4 of lesser degree.
    2. Trend-following indicators turned up. Enough to cause early-week gain. Many (even Lon - wow) would brand such development “confirmation” of further advance. Why?
    3. VIX is trending strongly lower. But it may turn out to be low in the range, instead. 50-70% spike wouldn’t shock me.
    4. All related markets look confusing to most people as well. On balance: I favor commodities, treasuries and currencies. I expect spec EUR push toward the golden 1.6180 number before reversal. Crude has long-standing $115 target.

  6. Anatoly Veltman on April 6, 2008 2:55 pm

    Not sure if anyone ventures to post signals before Monday… I like reading Nigel: never to forget “drift”, do you have particular trading approach? You’ve posted on stops dilemma… You are buyer at 1372: what’s your upside scenario; would something particular make you exit above or below? Any interesting idea in any market?

  7. John on April 6, 2008 3:39 pm

    Ken Fisher uses Goldman’s demotion of Abby Joseph Cohen as a bullish contrarian signal: “…On Mar. 13 Goldman Sachs demoted market strategist Abby Cohen for having been bullish too long. That day marked the bottom of the back half of what I think is a double-bottom whose first bottom was in January. I see Goldman’s move as bullish. That once famous market timer Joe Granville materialized out of nowhere saying that we are beginning a bad bear market. I’d bet against Joe any time. Gloomy people are saying that we are in the midst of the worst financial crisis since the 1930s. They said the same thing in 1998. Bullish!…An old saw says, “You should be fearful when others are greedy and greedy when others are fearful.” Clearly folks are fearful now. So you should be greedy. Another saw: “Buy when there is blood on the streets.” There’s plenty of blood, or at least depression, on Wall Street. So keep buying…”

    http://www.forbes.com/forbes/2008/0421/242.html

  8. Nigel Davies on April 6, 2008 4:46 pm

    Anatoly,

    I’ve not been trading (short term) of late - too much on my plate with other things. I was topping up some stock investments a little lower, right now I’m holding. Probably things will sort themselves out in time with stocks producing typical long-term returns. It’s rare for them to be down after 5-10 years and in a couple of decades this might have been seen as a great buying opportunity.

    Monday? That’s kind of short term for my current perspective, but I certainly wouldn’t be buying a new local high.

    Best wishes, Nigel

  9. steve leslie on April 7, 2008 10:17 am

    Anatoly you say nobody is sticking his neck out, yet Richard Bove, banking analyst, has been pounding the table very hard about bank stocks esp C. In fact I have quoted him right here over the last month.

    I worked at Dean Witter in 1992 When Dick was the banking analyst and made the statement that the money centers in particular and banks in general offered the buy of a generation. He was early in his call and was summarily fired. He surfaced at Raymond James later on and was deemed as making one of the very great calls of the decade. I have met him and have found him to be a very candid man an excellent analyst and a true expert in banks.

    He is on record as predicting that this is a buy of a generation with respect to banks. From its low C is up a third.

    take it for what it is worth.

    To John: The demotion of Abby is unfortunate but as they say in sports you can't fire the team and the owner and the general manager are not going to fire themselves so somebody has to go. That leaves the coach.

    Look no further than the Boston Celtics I guess Doc Rivers will probably get coach of the year awards and possibly a championship ring. They have already won 61 games this year although last year they won 26 games. I wonder if the addition of Kevin Garnett had anything to do with it.

    Is Bernanke the Kevin Garnett to the banking industry? Interesting query.

    sl.

  10. Anatoly Veltman on April 7, 2008 11:21 am

    I haven't missed too many of D. Bove's on CNBC/Bloomberg. He makes sense value-wise. Not the same as trading signal.

    I posted my first ever signal on C on this website, the day before UAE's $5.5b purchase; I also bid $18.00 2 days after Dick's $21.00 "buy of gen" rec. I'm sure Dick likes $25.00; I don't have a current signal.

  11. Lon Evans on April 7, 2008 4:48 pm

    Anatoly, As you've probably realized, I play nothing other than the S&P. I'd rather play one thing well than a number of games with mediocrity. All of which speaks to my own mediocrity. That said. I'm calling today's action (4/7) a reversal. How far down will we trend? I've no opinion, but trust that 1350 is doable. As to my methods, well, the hoots and hollers emanating from this site would most likely cause neighboring sites some annoyance. So I'll leave the neighbors their peace. Is 1320 in the cards? I would hazard an affirmative. In short, I'm feeling a lot more secure with my short. Peace, lon

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