Sell Your Energy Stocks

With the exception of uranium, I am not so hopeful on energy industry for this year. If you don’t sell them this round, there may be one more chance after some 1 or 2 weeks of the current short-term corrections. After that, energy stocks will probably drop along the general market, with bigger percentage of course.

The inventory picture for crude oil is simply terrible. Too many speculators have been playing the contango in the commodity futures market. What has been happening is that short-term price dropped too fast, while the longer term prices held up much better. A contango (higher future prices than current prices) in the futures market encourages traders to take current delivery, store it, and sell the futures at the same time. What resulted is basically additional (false) current demands that cushion the oil producers, at the expense of increase in future supplies from the release of inventory.

When inventory increases, it simply means that oil producers are not cutting production fast enough to match the fall in demand. That doesn’t bode well at all for the future prices.

I maintain my position that we will probably see something like a double-top formation in the general stock markets, with a second top forming at about June 15, plus or minus 1 week. After the second top falls off from the support trend line, the “sell in May, and go away” will reassert its power.

Hindenburg Omen: Sounded Again For Stock Markets 2

Hindenburg omen is one of the rare stock market crash signals. The fact that it is rare makes it even more significant. A rare signal or event in the Shannon’s information theories (the backbone of the modern day digital communications) is considered to contain higher amount of information. And this information from Hindenberg’s omen is obviously not a good news.

I have written about Hindenburg omen (H.O.) before on my site at 1stMillionAt33.com in 2006. Although in 2006 H.O. signal did generate a 7% declines out of the stock market, it was by no means a “stock market crash”. The current Hindenburg omen was triggered on June 6th 2008, and has been confirmed by subsequent repeated H.O. signals. The previous confirmed H.O. was in October of 2007, and stock markets definitely had a serious correction afterwards. The success rate for H.O. is only about 25%, or 1 crash in every 4 signals, and it will last for about 120 days during which it could crash. But if you could avoid those mini-crash period as a buy & hold investor, you obviously will do so much better.

If you study the details of H.O. signal, it indicates an unhealthy stock market advance, with both new 52-week highs and new 52-week lows among different companies going on simultaneously in the stock market. The resolution for an unhealthy stock market is often a substantial decline (if it happens). It’s obvious that in the current state of stock market, the financial companies are breaking new lows, while energy stocks are breaking new highs. Isn’t that a bit scary with the crude oil advance stopped at $140? What’s going to propel the general stock market indexes higher, when crude oil is knocked out by the fear of a slowdown in global growth?

With stock market technicians that I follow, Frank Barbera, Bill Cara, Jack Chen, Bob Hoye, and John Hussman all jumping into the bearish camp, I am fearful that a decline is just about anytime.

You’d better watch out, you’d better not cry …. Unfortunately, I am guessing that Bernanke Santa Claus will not be able to save this one.

Best luck.

Frugal at 1stMillionAt33.com

Warning! Markets Are Shifting Gear

In the short term, it appears that several markets may reverse directions.

I have been saying that I believe the general stock markets will go up since end of March. I’m changing my short-term stand now. I believe that there are too many clouds in front, and the forward picture is simply not clear at all. Most likely there will be a short pull-back if not already. But more importantly after that, the markets need to decide whether to resume upward or downward move. Right now, that is not clear at all. There are simply too much uncertainties.

While I believe that the more likely resolution is for markets to trade in a range between January/March low to probably with SPY less than 150, I must admit that both breaking new lows and breaking out above 150 are distinct non-zero possibilities. I am moving to the sideline cash again on my general stock market bets.

Definitely the shorts have been hurting, but I think the longs may have gotten too gleeful and ahead of themselves.

On the other hand for precious metals, if it pulls back, I would say buy. If it breaks new low, I would say double your bets. Why? HUI has shown significant correction, on daily, weekly, and monthly charts. That should be very sufficient. Again, it’s likely that precious metals will pull back from current level. But due to the its nature of extreme volatility, the probabilities for both breaking new lows and breaking out are even more significant non-zero. Certainly, I will not want to take a bet on that, but simply staying my current course on my asset allocation.

Nat Should Be Sold

http://www.1stmillionat33.com/2008/01/nat-should-be-sold/|http://www.1stmillionat33.com/2008/01/nat-should-be-sold/|

Sorry that I have been too busy to write about this. I have already sold all of my holdings in NAT. The coming correction will not be kind to NAT, I believe. This is the only stock that was specifically recommended by either ML or me, which I believe should be sold.

I also sold COP which was recommended by me, but I believe that it could be a mistake in selling it. The correction probably will be shallow on COP. But just in case, I’ve lightened up my energy holdings.

Most of the rest of the stocks you can probably hold. My money manager sold my holding in ADM, and it was definitely a big mistake. My recommendation in ADM still stands, even after it has risen from mid to low 30s to 45 right now.

Agriculural themes seem to be still with us, although it appears to be getting late.

I won’t be posting another message tomorrow. I hope it is still not too late to sell your NAT if you have them. Given the rich dividends in NAT, you can probably still break even.

Regards.

Markets Will Probably Challenge The Old High

Looks like the parties are not over yet. And that’s just great, because I haven’t started shorting yet. I did sell some 10% of my portfolio.

I didn’t think that Bernanke will abandon $US this fast, but I guess subprime problems are very serious, and 50 basis cut was necessary. And it’s an unanimous decision! So much for all those “tough” Fed talks. Today’s decision clearly shows that Bernanke is THE Helicopter Ben. I guess things are really playing out according to script. Higher inflation is to come for sure. $US is going to go down. And looks like a 1987-style correction may be in the process of turning into a 1998/99 prelude to another stock market bubble.

This incredible bubble blowing series may really crunch all bears to pieces, but ending up in hyper-inflation, then depression. So with the biggest high-tech bust, Greenspan created the biggest housing bubble. Now with the biggest housing bust, Bernanke appears to be in the process of blowing up the stock bubble to replace it. Money may be “funny” money again. Sometimes, I’m amazed at how these people lived in their lies, especially the Numero Uno Greenspan, a maestro of words, but crumbled in front of real truth. His recent lies and shunning of the housing blames truly make me repugnant. I don’t even want to talk about his greatest irresponsibility of this decade in human history. Not realizing that subprime is getting out of hand?? I thought it is YOUR JOB as the chairman of central bank, Greenspan?

So what should one do now? I believe one should get back to stock market at the opportune time. If there is not a good opportunity, one should temporarily park ones cash in gold or foreign currency. $USD is going down. According to Frank Barbera’s podcast this week, Chinese currency Yuan looks like it may have a revaluation soon. And Walmart’s prices are soon to go up.

Eventually one day 99 cents store will cease to selling $1 stuffs, but maybe $2 or $5 goods. I always wonder that whether they have ever thought about inflation. One day, $1 will be worthless as five cents, and what are you going to buy with that??

See the chart of $US below. There goes your 3.4% of purchasing power in 1 month (from 82 to 79.2). And you just thought that you are earning a decent 5% on a bank CD after a year?? The sad truth is that US government is going to rob you blind through inflation, and then tax you mightily too after you generate some good amount of “capital appreciation” through inflation. The middle class will continue to shrink at the expense of upper class and foreigners. The politics and social unrest will be increasing. And I only wish that Bernanke would have written his script differently. Unfortunately, one day far away in the future, we will be paying for someone (Greenspan’s + Bernanke’s) else’s sins. And we collectively speaking won’t even know how we get there, and recognize the real culprits of our economy.

Do me a favor, don’t let the government take away your hard-earned wealth. Invest in something tangible, and forget about paper money. That literally is just a number in some computer of your bank.

Chinese Market: In Making New Heights

I watched quite a bit of CNBC last week. Among other things, I caught the interview with Countrywide’s Angelo Mozilo who called for a recession in no uncertain terms. This of course, is the man who had steadfastly defended CFC’s business while cashing out some $250 million of options in the past year. Nonetheless, the CNBC anchors all went ga ga over this comment and actually put up several economists/strategists of the more pessimistic bend. Long time readers know that I have long held the same view; however, the very fact that the “R” word is mentioned on CNBC about once every 10 minutes may well mean that a short term bottom is in. Sure enough, Friday saw some nice upside action following a strong durable goods report.

While I remain suspicious American consumer’s continuing willingness/ability to pile on debt, I give more credence to the other leg the bulls stand on: strong global growth. Nowhere is this more evident than in China. The Shanghai stock market made consecutive new highs last week to end at 5108. Again recall that not too long ago the ubiquitous worry was for an implosion in the China to bring down global markets. The fact is, since the July 19th peak in US and the rest of world markets, SSEC has gained over 25%. On Friday, FXI, the FTSE/Xinhua 25 ETF, also made a new high, finally confirming the move in Shanghai.

Let me clarify my view on the Chinese market. Many have compared it to the Nasdaq bubble based on price trajectory alone. I will not debate that point. I will even grant that the Chinese market is in a bubble. But in my opinion, that misses the point entirely. Bubbles are grand money making opportunities, during both the expansion and implosion phases if you know which side of the market you’re on! So let’s put emotions aside and look at some relevant recent developments.

First of all, let’s look at some negative factors.

  • Chinese exporters enjoy a rebate of value added tax. On June 20, China announced that it will reduce tax rebates on exports of high energy-consuming, resource-intensive and environmentally-harmful products. The measure will take effect around September/October. Given that Chinese exports amounts to 30-40% of its GDP, lowering the rebate is a far more effective way to slow down its red-hot economy than raising interest rates.
  • Of course, they can do both at the same time! Chinese CPI was a blistering 5.6% for the month of July. The index was paced by food, especially pork , prices. In response, the PBoC (People’s Bank of China) raised deposit rates by 0.27% to 3.6%, and lending rates by 0.18% to 7.02%. It was the fourth raise this year.
  • I’ve always held the non-convertibility of the Yuan as a positive since the individual investor has few choices besides the domestic stocks. For example, some key state owned enterprises have listing in both Hong Kong (H shares, aka red chips) and Shanghai (A shares). But the A shares are far more expensive than H shares because there is too much money chasing the same shares. Two weeks ago I would have said that the day that the Yuan becomes fully convertible would be the top in the Chinese stock market as individual investors diversify out of the country en masse. In a surprise move last week, China declared it would allow individual investors investing abroad, starting with Hong Kong. The news sent the Hong Kong’s Hang Seng index up 10% last week with broader Asian markets following suite. Of course, some capital will be diverted away from the A shares market; on the other hand, this is gradual approach eliminates future shocks. It cools down the domestic market and relieves some exchange rate pressure at the same time – a stroke of genius really.
  • The Bank of China (BOC, not to be confused with PBoC, the central bank) and its Hong Kong arm disclosed that they hold $11.25 bn of CDO’s based on US subprime mortgages. The Industrial and Commercial Bank is on the hook for $1.23 bn.
  • Recalls of Chinese products, from tooth paste to sea food to toys with lead paints, are grabbing headlines everywhere.

The intriguing thing is that all these happened prior to last week where the Shanghai market had five consecutive up days. You can chalk it up to irrationality but the price action is to be respected nonetheless. In a way, it shows the power of liquidity since Chinese citizens are still pouring money stocks. Let’s now look a few positive factors.

  • One of the signs of excess that bears love to point to was the number of new stock trading accounts opened daily. It was somewhere around 100k before the last correction in May. Well, with the market at new highs, that number has increased to 150k or so – TDAmeritrade/eTrade, take that! Anyway, I never understood that logic behind that particular argument in the first place. Common sense says that the flow of money should peak well after the peak of number of accounts open. Besides, while 100k or 150k per day is a huge number, the number of potential investors in China is, well, huger!
  • If you’re wondering where all the juice in the Chinese market is from, just look at how fast Chinese wages are growing:

    Combined annual wages reached 2.34 trillion yuan ($308 billion) at the end of last year, up from 1.32 trillion ($173 billion) in 2002, representing an average annual rate of increase of 13.5% after inflation, according to a report from state-owned Chinanews.com.cn on official figures released at a meeting put on recently by the China Association for Labor Studies.

    Note this double digit increase is after inflation has been taken factored in. In coastal cities, annual wage increase in the high teens for the college-educated, 25-35 crowd is common. This increased wealth fuels the equity market both by fattening companies’ bottom line from increased consumption, and by channeling disposable income into the stock market.

  • Finally, while the health of the export sector may give investors doubts, recent advances in SSEC have been lead by RE developers/construction companies.

Despite new highs in SSEC as well as a clear non-correlation between Shanghai and the rest of global markets investor continue to shun Chinese stocks as indicated by the growing discount in the MS A shares closed-end fund (CAF) that now stands at 20%. For whatever it’s worth, my own view is that aside from the threat of a weak Christmas shopping season in the US, the prospects remain rosy until the Olympics next August.

Disclosure: I own FXI and CAF.

The Coast Is Clear!

Yeah, I’m still negative. This market I believe is going to be one of the most treacherous since 2000.

The credit crunch caused by homeowners’ default is real. There is going to be no way around the deflationary force. The only way to combat it is by even more inflation. However, both inflation and deflation takes time to generate or unfold. And my own guess is that right in the middle, market will sink like a rock.

Time-wise I believe, that middle point is still quite far from now. And therefore, I’m still negative.

I’m going to watch the market closely. But for now I will probably not going to add more. The intermediate picture is simply not pretty, although short term rally has the potential to break the previous high.

I cannot invest my money based on a short term picture, because under this volatile market, the money can be gone in a second. My lack of time to trade only allows me to invest for intermediate to longer term horizon.

Best luck.

Chinese Stock Bubble

Since the Chinese stock market has grabbed so many headlines recently, I thought I’d weigh in. First of all, recall that I wrote about $SSEC in early 2006 and was quite adamant that it had double bottomed at 1000 the year earlier. That was a time that no one wanted to touch Chinese stocks, particularly people in China. How much things have changed!

Today we have not shortage of people calling the bubble in China, while I don’t dispute the price rise has been nothing short of meteoric, and we may indeed have witnessed a 5th wave blow-off top. Nonetheless, it’s interesting to point out that we call other people’s bubbles far more readily than our own. According to Roubini, the P/E of the Chinese market has reached 50. I have been trying to find the P/E of the Nikkei at its peak, but that data has proved elusive. I have so far found one reference that the average bank stock P/E was 60 at the time! Triple digit P/Es were also common. This is not to say that the Chinese stock market has a lot further to go, but rather that it’s iffy to call a peak based on the P/E ratio, especially before it happens :-) The Chinese government is trying to curb excesses, most recently by increasing the stamp tax to 0.3% from 0.1%. The increase is insignificant but sends a clear message that it intends to curb speculation. In the end, the Chinese government always has the option to release official shares which was a big reason behind the market down turn in 2002-5 (see the first chart which was drawn in Jan 06). However, I believe it won’t be a step taken lightly. IMO, the issue with China is the non-convertibility of its currency and consequent lack of outlet for people’s vast savings.

Since few individual investors buy shares in Shanghai, the more pertinent question is how will a large drop in the Chinese stock market impact the rest of the world, given the size and open nature of the Chinese economy. I’m an optimist in that regard in that I believe a large drop tomorrow (say 30%) will not have much impact on even the domestic Chinese economy. It follows naturally that commodity should demand will remain robust.

Here’s my reasoning: Bubbles wreak havoc because it distorts price information which is the best feedback mechanism in a free economy for resource allocation. However, for mal-investments like the dot com’s of 1999-2000 and Miami condos in 2005 to take hold, new investment decisions must be made based on the elevated asset prices and the bubble must persist for some time. Neither of these elements is present in China. First of all, most listed companies are state owned enterprises and listing is very much a political process. Consequently, small to medium sized non-state own enterprises that are the most vital parts of the economy cannot raise capital in the stock market. On top of that China has only a nascent VC sector and they are not rushing to give money away. Secondly, if the bubble burst tomorrow, it would have lasted less than two years from deeply oversold levels. Not enough time to do lasting damage. There isn’t a mechanism in China to borrow against appreciated securities which is how many Japanese companies got into trouble. After all, without new issues, a stock market is merely a wealth transfer mechanism. Those few individuals who mortgaged their house to speculate on shares may be hurt and the reverse “wealth effect” may curtailed some spending, but I don’t see a lasting effect on the economy as a whole.

The corollary of the above is that there’s a good chance the Chinese stock bubble will continue and cause more problem when it finally bursts. There is a chance that the bursting will be a positive for gold as people look for the next speculation target. One should never underestimate Chinese people’s propensity to gamble.

As I finish this up Sunday evening, $SSEC is down over 7% to 3700 (roughly where the trend line is) at one point but has recovered to down only 4% or so. Recall that at the end of February, a 9+% drop there initiated a mini-crash in the rest of the world. Last Wednesday’s 6+% drop dragged down Asian and European markets across the board but US markets reversed higher nicely. Tonight, most Asian markets are up in the wake of the turmoil in Shanghai. It seems people are realizing the Chinese market for what it is: an isolated casino that matters little to its own economy, much less the rest of the world’s.

Last Week In Review

I’m still trying to make sense out of last the stock market decline last week and the bounce on Friday. Clearly global interest rates are on the rise; and the 10 year, in particular, took it on the chin. Its yield broke above a decade plus trend (link).

That China has announced its intention to not recycling its trade surplus into US treasuries as readily may be an indication of a long term shift in the treasury market (related link). Medium term, consumption in the US is on the wane due to declining mortgage equity withdrawal. The trade deficit is improving as a consequence. Paradoxically it also means our trading partners have less demand for treasuries. As a near term catalyst, Paul Kasriel of Northern Trust pointed to the most recent Fed custody holdings which showed a relatively large $12.5 billion reduction in the previous week.

Seeing that a rate cut may not arrive later this year in the best case (or the worst case depending on your point of view), and even if the Fed cuts, the yield curve can further steepen, only 20% is allocated to bonds in my re-worked asset allocation/passive portfolio. In addition to high quality, short term bond funds, I’m adding some floating rate, loan participation funds that I mentioned in passing in my article on closed end funds. Tim Middleton at MSN Money wrote about these types of mutual funds very recently. FFRHX (1 yr total return 7.16%) which was mentioned is actually the fund I own through my solo 401k account at Fidelity. I won’t go crazy with these funds since default risk goes hand in hand with high yields. So this is in effect a bet that higher rates now won’t plunge us into a severe recession.

Stock Market
I have iterated numerous times that I anticipate a housing-led slow down, but how the market will react is altogether another question. The daily chart on the S&P shows another short term trend line broken but the index took a stand at the 50 dma on Friday. In the weekly chart, the trend line is very much intact. The CBOE put/call ratio showed a big spike last Thursday, but we are still ways from the capitulatory levels seen in Feburary/March, so a little more down side is to be expected.



On the other hand, this market has shown too much resilience at the most critical junctures, so I’m not ready to go short yet. My current plan is to wait for the next leg down and see what kind of divergences, if any, reveal themselves.

PMs
I was far from the only one noticing the recent break out in PMs and PM stocks. Alas, money is not so easily made! The one characteristic of a bull market is to throw off as many people along the way as possible! After a couple days of reasonable relative strength, PM stocks went back to their old way of doubling to tripling losses in the general indices. As seen in the chart below, HUI briefly wend below the down trend line that it broke out from not too long ago. GDX, the ETF that tries to replicate HUI, has more clearly broken below its trend line.
I’m not letting these developments affect my core PM holdings which I still believe is in a secular bull market. But many johny-came-lately’s apparently has abandoned ship as GDX temporarily dipped below its recent low of $37.50 on Friday. Just to add another mildly useful indicator, the put/call ratio on XAU also spiked above 3 on Thursday which points to higher PM equity prices ahead.


I have consistently said that I’ll let the market tell me when it pays attention to evidence of a slowing economy. My ears perked up last Thursday, but as the rebound on Friday showed, we are not going anywhere in a straight line. Even if we go into a meaning correction/bear market from here, it’ll be a lengthy topping process. And if we do go to new highs, I intend to milk the last drop.

DOW Near Record High But Japanese Nikkei Plunged

Just when I’m going to write for Friday’s post, reflecting on the market actions, international markets threw another curve ball. Nikkei plunged by 2.3%, down by almost 400 points, while other major Asian markets followed with some 1 to 3% loss.

Will US markets open tomorrow with a loss?

Will the Euro and UK Sterling keep beating up on $US, which just broke $1.36 (Euro) and $2 (UK) levels?

Will gold ascent continue, or be hammered again (for the fifth time on HUI) by the invisible (Fed) hands?

Will uranium spot price continue its parabolic ascent after breaking $100 barrier? Yup, my U.TO (tied directly to the spot price of uranium) has returned 70% in less than a year.

Where was the subprime panic after all? Countrywide (CFC) now is back up to $38. I really wonder who is that stupid to buy those billions of subprime TOXIC loans from Fremont (FMT) and Accredited Home Lenders (LEND)? The only news is that they were sold at a discount (without a doubt). How can there be not a single trace of the loan buyer at all?

In the meantime, my short positions are definitely hurting. I just closed more with a small loss. I still have outstanding 5 short positions in QQQQ, XHB, GM, etc. I was approved for naked short-selling calls, which is allowing me to short stocks that are already on the FTD (Failed-to-Deliver) list via option markets. The advantage of selling calls versus buying puts is obviously that you benefit from time premium. The disadvantage on the other hand is obviously that your profit is limited, while your loss is unlimited.

Despite my short-selling, my net worth on 4/18/07 is just 0.18% below the “all-time” high since I kept a record on this blog (the all-time high was the very first date 5/9/06 quite ironically). My own saving and investing have made up almost 11% shortfall from my company holdings.

Despite all the complacency in the stock market, I’m spending 3+ hours everyday watching the market now (and therefore less time for blogging). This is one of the most dangerous time and my eyes and ears are paying full attention. I fully expect the housing slowdown to hit stock market this calendar year, and I have no time nor mood to cheer the market advances.

I feel almost like I’m back in 1999, when I’m totally shocked by the P/E ratios of the stock markets, while everyone else keeps hooraying all the way into March 2000. NASDAQ however doubled in a single year from 1999 to 2000 during which I was totally abhorrent of the stocks.

From my own investing experiences, I tend to be right, but early (if not way too early). I will delay my own actions, but will make sure that my delayed action won’t turn into inaction.

If you have not gone partially into cash yet, I would say, watch out below. NASDAQ is under-performing SPY, and that is a sign of weakness in this market.

I am prepared to take some amount of haircut even with my shorts which cannot hedge all of my long exposure. What about you?