The Nikkei had four 50%+ rallies since the top in 1990 and yet the index is down 74%

I am quoting David Rosenberg (even though I would like to avoid getting into the habit...) because it's amazing how much sense his making in just such a small number of sentences.

David Rosenberg wrote today:

Speaking of Japan, and we say this because the U.S. is following a very similar post-credit collapse pattern, we note that the Nikkei posted six 20%+ rallies since its bubble burst in 1990 and no fewer than four 50%+ rallies. Indeed, you can count 423,000 rally points from all the up-days since the secular bear market began in 1990 and yet the index is down 74% since that time. So actually there is nothing in this flashy move off the lows in the S&P 500 that is inconsistent with a pattern of a bear market rally — this is not the onset of a whole new sustainable bull market. These are rallies [...] purely technically-motivated and momentum-driven. They are not premised on improved fundamentals, despite data that are skewed to the upside by rampant government intervention. Just remember, nobody built more bridges or paved more river beds to skew the economic data than the LDP did in Japan for much of the 1990s. With U.S. T-bill yields close to zero, as they were in Japan, we have at least one market — the money market — that sees what we see, which is an economic outlook fraught with fragility, as is typically the case after a secular credit expansion moves shifts into reverse.

Now, the S&P 500 is all the way back to where it was in early October 2008. Back then, the consensus was looking for $26 for this quarter’s EPS. That number is now down by almost half, to just over $14. So again, the market has gone ahead and priced in some very good news for the future because there can be little doubt that the economy and earnings have a much deeper hole to climb out of than the consensus had been factoring in the last time equity prices were at current levels. Moreover, as it pertains to consumer credit quality, we just saw Citi and BoA reported their highest credit card default rates since the recession began (BoA’s charge-off rate rose to 14.54% from 13.81% in July; Citi’s rose to 12.14% from 10.03%; Discover’s rose to 9.16% from 8.43%).

Nearly everyone was proclaiming a new bull market

I am currently reading Robert Prechter's (and A.J. Frost's) Elliott Wave Principle and discovering the principle. While still considering like some sort of voodoo or art, it is making sense to me, as I understanding the foundations of it.

That said, I simply wanted to share this quote from Robert Rhea in The Story of the Averages (1934) which you can find at page 79 of the Elliott Wave Principle. I think it is summarizing very well the current market conditions.

Talking about the upward correction of 1930:

...many observers took it to be a bull market signal. I can remember having shorted stocks early in December 1929 after having completed a satisfactory short position in October. When the slow but steady advance of January and February carried above the previous high, I became panicky and covered at a considerable loss. [...] I forgot that the rally might normally be expected to retrace possibly 66 percent or more of the 1929 downstring. Nearly everyone was proclaiming a new bull market. Services were extremely bullish, and the upside volume was running than at the peak in 1929.

Relief rally and dead cat bounce in the markets

It's amazing to see such a powerful rally in this market, and again, the most amazing part is how much financials are rallying, most of them being up between 100% and 200%.

This is good for my portfolio, as I previously stated that I messed up my delta-hedging which resulted in a poor performance in Feb.

Oil is up as well, hitting a three-month high, and the USD and treasuries are a bit down.

But on thing I want to emphasis here is: do not get caught into believing this big fat liar and incompetent Bernanke who is talking up the markets. Mish has done a very good post about his interview.

These kinds of rally do not occur at bottoms and we are still seeing very high valuations in stocks and bonds. One simple way to know if we're facing a sucker rally is to see if it is lead by the financials. And it is...

The other thing to notice is that all the very bad news that are being reported every day for the past 10 days are simply just ignored by the market, which keeps on rallying. This is not a sign of complete capitulation of the markets, but testifies of greedy behavior, which is quite the opposite of what you'd be looking for at bottoms. I would expect good news to be ignored and market slowly declining in low volumes as a testimony of hitting the bottom.

I won't expect the bottom to be V-shaped anyway, but rather U-Shaped or actually even L-Shaped.

For those who want to read a very interesting study of bear markets, I would recommend getting a copy of Anatomy of the Bear by Russell Napier. It's a fantastic work, even if at many occasions, he seems to be supporting the idea that the Fed should be doing more, to help the markets, etc. The Fed should be banished.

The biggest (bear) rally in seven decades, seen through reality lenses

Oct. 13 (Bloomberg) -- U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars.

The Standard & Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance, its steepest since 1939, and the Dow Jones Industrial Average climbed more than 936 points. Morgan Stanley soared 87 percent after sealing a $9 billion investment from Japan's Mitsubishi UFJ Financial Group Inc. Alcoa Inc., General Motors Corp. and Chevron Corp. climbed more than 20 percent each as all 10 industries in the S&P 500 added more than 7 percent.

Let's try to contrast a little bit this news with a bit of reality:

• The Fed and the US government flood the world with valueless USD and the result is a drop of 3% of the price of Gold.
• A mega-market rally where even bankrupt companies like GM rise +36%. At the end of the day, what matters for GM is to sell cars, right? But to whom? Are the American citizen any more solvent than they were yesterday? It seems like all of the sudden, investors forgot about the real estate crash, foreclosures, tent cities, and woke up in Wonderland.
• Morgan Stanley, see below.

Morgan Stanley

Morgan Stanley's 12 month Ending 2007-11-30 income available to common shareholders was 2,495 million USD.

No UFJ-Mistubishi takes 21% of the shares (by diluting the current shareholders) and has a 10% guaranteed yield with their preferred shares for $9 billion USD. This makes a yearly income of 900 million USD that won't be available to the current shareholders.

This is 36% of their income, provided that it remains at the 2007 levels, which is more than unlikely. This is about 15% of the 2006 6,316 all-time-record of the Morgan Stanley.

On the news, Morgan Stanley's stock rose +87% and has now a market cap of $19 billion.

So basically, common shareholders just rewarded UFJ-Mistubishi with an instant gratification of +87% for diluting them, and they are now happy to hold these shares which are unlikely to perform well, and which are far more risky than they used to be because after bond holders, it's UFJ-M which will be served next.

The contrast is surprising when you notice that UFJ-M required to have:

• preferred shares
• 10% yield
• priced at 10$ each
  

And then that the market thinks that this is a fantastic deal:

• common shares
• very likely to get a 0% yield for the foreseeable future
• priced at 18$ each
  

My opinion is that Morgan Stanley is a nice short-sell. But I will hold for now, as I am sure that short selling will be banned again in a matter of days...

Other points of interest today:

- The (official) US dept, which hit $10 trillion on the 30th of September 2008 was at $10.266 trillion on the 9th of October 2008, that is a 2.66% increase in 10 calendar days. Annualize that and you will see how close we are from hyper-inflation.

- Mish - shares my opinion Big Robery Plan sorry, I ment, the the Rescue Plan:

To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

All this talk about Strategy, Implementation, Recruitment, Procurement, operations, compliance, and other details masks the essence of the plan.

Market wrap up in a few tables

Draw your own conclusions about rationality and buy/sell opportunities

Fannie Mae -89%:


Freddie Mac -87%:


Lehman Brothers -77%:


AIG -46%:


Washington Mutual -36%:


Merrill Lynch -36%:


S&P 500 +0.75%:


Ford +11%:


General Motors +21%:

To Crash or Not To Crash?

Paulson has revealed his plan about Fannie and Freddie. There are dozens of very interesting and important posts on the blogs so far. Here's a bullet point of what is happening:

• FHFA takes over Fannie and Freddie, replacing their CEO
• Dividends are eliminated
• Treasury can purchase up to $100 billion of a special class of stocks in each company: This means an approximate 15 times dilution on Fannie Mae based on friday afternoon market cap, and a 33 times dilution on Freddie Mac. Basically, these shares have no value anymore.
• Fannie and Freddie will have to reduce their holdings of MBS by approximately 50% as of 31/12/2009 (anyone interested in buying of MBS?)
• Bill Gross has had is ass saved by his friends in the government.
• Fannie and Freddie both intentionally cooked the books in order to inflate their capital
• William Poole, former president of the Federal Reserve Bank of St. Louis, said taxpayers may face a $300 billion bill to revive Fannie Mae and Freddie Mac. (I think this is the minimum bill, and wouldn't be surprised if the bill was as much as 2-3 times that amount).

In the light of all this, two opposing views can be made:

• Everything is going well and we keep on playing Alice in Wonderland since we are in good hands with Bernanke and Paulson.
  
• We get rational and have a readjustment of the various markets: US bonds sink, yields rise, stocks sink, USD sinks, Gold raises.

My view:

1. Fannie and Freddie have cooked the books and lied to the markets -> markets should lose confidence
2. Fannie and Freddie CEOs have openly lied on TV -> markets should lose confidence
3. Paulson has openly lied to the public -> markets should lose confidence
4. Financial stocks should get hammered with the loss of confidence and likelihood of book cooking
5. The debt of the US gov raising by at least $300 billion
6. It is obvious that the crisis is far from over and is getting worse and worse
   

The market seems to have chosen to get another line of coke as Futures soar after U.S. takes over GSEs (S&P 500 and DJ Industrial are up 2% in Futures market as I write this).

sources: Bloomberg

More market rally, it's getting interesting!

This is my favorite title for my posts, and I have used it quite often for the past few months. Basically, every time there are many bad news, markets rebound, on the assumption that we have reached the bottom and that things will get better from this point. That could be a fair assumption, if we were in a rational world. But markets are not rational, and make lots of false calls and dead-cat bounces, as one of my friends call them.

Look at the action today:
- 9% of all mortgages in the US are in delinquency or foreclosure. ALL MORTGAGES, not just subprime, alt-a, and other exotic and toxic ones:

More than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis worsened, the Mortgage Bankers Association said Friday.

- Unemployment figures were disastrous and the previous month data has been revised downwards:

Nonfarm payrolls fell 84,000 during August, bringing the unemployment rate to 6.1%, according to the latest government statistics. Payrolls were expected to decline 75,000 after shedding 60,000 jobs in July. The unemployment rate was expected to be unchanged at 5.7%. Manufacturing payrolls fell 61,000, which is more than the 35,000 decline widely expected by economists.(Briefing.com via Yahoo Finance)

- The USD dollar is still rallying, which is very bad for major US companies which have been making as much as 40 to 60% of their profits outside of the US, thanks to the falling value of the dollar.

Things have been getting worse and worse, and not sign of improvement has appeared yet, as a couple of Fed chairmen stated this week (Fisher and Yellen). So when will we hit the bottom? I can't know, but one thing is for sure, we will not hit it as long as any of these statement is still valid:

• The market's PER is at 26 (or negative EPS for the Dow).
• On every bad news, the market rallies. This means that lots of managers are still very bullish. The bottom will be hit once everybody thinks this is the end of the world, and that nothing can save us anymore. Not when the market rallies several percents on bad news.
• Volatility as mesured by the VIX or the VXO are at intermediary levels instead of near all time high (typically between 40 and 50).

My guess is that the market might have rallied on beliefs that the USD rising, commodity prices falling and US unemployment at very high levels will force the Fed to reduce the rates and that the US Government intervention will bail as much people as possible.

Just yesterday, Bill Gross, manager of the biggest bond fund in the world turn from free-market capitalist to socialism by begging the government to come and bail all the people on Wall Street:

Sept. 4 (Bloomberg) -- The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.

Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's today.

``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross said. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''

The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.

One other sure thing: Tresories holders and USD holders will be the big loosers while a handful of extremely wealthy people will be bail out. The irony resides in the fact that the poor lower and middle classes will be grateful and thank their "saviors" Paulson/Bernanke. I am wondering what the Chinese and Japonese (who are the major holders of to the US 'junk' treasuries) reaction will be, because they are going to be the big loosers. Japan has lent about $580 billion to the US while China a bit more than $500 billion (figures are as of June 2008).

Sucker rally in the USD

All of the sudden, it seems to appear to many that the US dollar was oversold and that the Euro was over-valued. Even Mish - who I highly respect - keeps on insisting that the $ was supposed to rally - even though I never read anything about this rally on his blog before it actually happened.

• Here, he dismisses Central Banks interventions and he says that Marc Faber weights in.
  
• Here, he says that a fundamental change has occurred to justify the rally.

First, I don't think that we can dismiss interventionism and obscurantism from the Fed. Obviously, I don't have any proof of interventionism but only the longer term view will show if the rally was a real one or if it was just interventionism. I have no real opinion about that, but just can't think of dismissing it neither.

Then, I can't believe that Marc Faber was able to push the USD up 5-7% just by being bullish on it. During the same interview where he said he is bullish on the USD, he also said he is bearish on the US stocks. Did that sink the US indices into the abyss? It didn't even prevent the US stocks from rallying about 10% since mid-July! So this is dismissed as well.

Finally, what kind of fundamental change can be so sudden and violent?

What happened during the past few days? As expected, all the bad news are still piling up, companies are still announcing weaker and weaker results, the US consumer is still broke and homeless, inflation is rising (I need to put a post on my point of view about inflation) and - surprise surprise - the Eurozone's growth has been announced as negative.

Did anyone expect the Eurozone's growth to be positive? Did anyone expect the UE's growth to be positive? One must be blind to believe the official figures about the US gov about growth, and even blinder to think that with Spain, Ireland, France, Portugal, Greece in the UE, the UE will keep on growing...

Finally, I had written that a few days ago that Trichet was abandonning the war against inflation but:

• If the Euro continues to collapse against the USD, inflation will rise further and Trichet will have to raise rates. The Eurozone is really lucky to have a real independent central bank, and not a for-profit, private, Central bank owned by the banking industry as in the US and UK. And the ECB only role is to keep a stable currency.
• According to the two charts below, the M3 growth is declining quickly in the Eurozone while it is growing a lot faster in the US and the growth is stable. I think it is obvious where we are going from here...

I will publish a post about the inflation/deflation debate as well as I read many interesting things from both sides.

More market rally

This Bloomberg article tells it all:

• Fannie Mae and Freddie Mac, the largest sources of financing for U.S. home loans, each jumped more than 7 percent after the Securities Industry and Financial Markets Association said larger loans financed by the two companies will be allowed in the main market for mortgage bonds.
• PMI Group Inc., the second-biggest mortgage insurer, rallied 49 percent on plans to raise cash by selling businesses.
• General Motors Corp. climbed the most in a month on falling oil prices and the automaker's plan to accelerate a cost-cutting program.
• The S&P 500 Financials Index rallied 2.6 percent even after Morgan Stanley and JPMorgan Chase & Co. agreed to pay fines and buy back auction-rate securities that state regulators said were fraudulently sold to investors
• An index of 15 homebuilders in S&P indexes rallied 4.4 percent.
• GM had the steepest gain in the Dow, climbing 11 percent to $11.35.
• Ford, the world's third largest automaker, increased 4.5 percent to $5.10.
• Gannett Co. had the biggest gain in almost 21 years, climbing 11 percent to $21.31. The largest U.S. newspaper publisher plans to eliminate about 1,000 positions at its U.S. community newspapers as advertising sales continue to decline.
• the Labor Department said consumer prices increased 0.8 percent in July, double the forecast of economists in a Bloomberg survey. So-called core prices, which exclude food and energy, advanced 0.3 percent last month, also more than projected.
• First-time applications for jobless claims were 450,000 in the week ended Aug. 9 and the total number of people receiving benefits climbed to an almost five-year high.
• Earnings have slumped 23 percent on average for the 438 companies in the S&P 500 that released second-quarter results since July 8, according to data compiled by Bloomberg.
• Existing U.S. home sales fell 16 percent to a 10-year low in the second quarter and the median price for a single-family house dropped 7.6 percent

Basically, all the bankrupt companies soared, it seams like some people are trying to do some bottom fishing.

More on bottom fishing in another post.

UK Landlords and market reality [update2]

Until a year ago, the housing market bubble fallacy was: "House prices never go down in London".

The current fallacy I hear everywhere in London is: "As people cannot afford to buy home anymore (as if they could afford it during the past 3-4 years in London...) rents are going up and it's a good time to by a buy-to-letter.

Well, I think it's time to get real. You cannot say "Real estate prices are going up, so we'll increase your rent" and then, one year later say "Real estate prices are going down, so rents are going up". This simply doesn't work.

Now, the news are starting to show how things are getting worse or worse as buy-to-letters start understanding what leverage means, having been hit by a very bad experience and having lost 90% of the equity they had as their deposit:

There are about one million buy-to-let loans in the UK but, worryingly, around 200,000 were taken out last year at the height of the boom.
Many of those were amateur investors acquiring their first buy-to-let property with no professional property experience.
After a decade of booming house prices it must have looked like a one-way route to riches.

But hey, don't forget, when you leverage, you can lose more than your equity, so soon, we'll see people who have lost 200% or 300% of their initial deposit...

Interestingly, this page from the FT shows the UK subprime market as well as the BTLers. They actually consider that areas with high BTL exposure is a risky area, as much as subprime. And guess which area is the most exposed to BTL? The first 8 eareas in the lest in terms of pourcentage of BTL are the 8 areas of London!

So why would BTL be considered as a reason to see further decline in the house prices? The answer is easy to guess, but the FT gives us the answer here:

Property owners unable to sell their homes are being pushed into the lettings market, but many are finding rents insufficient to meet their mortgage repayments.

Lettings agents said these “accidental landlords” were not only having to top up rental income from their own pockets, but were being forced to pay for renovations and safety checks to meet requirements.

With mortgage approvals at a record low, estate agents said even those sellers who cut asking prices by 20 per cent were still often unable to find a buyer.
[...]
This has led to a significant increase in the number of homes with both “to let” and “for sale” signs outside.

Hamptons International, which has seen a 44 per cent year-on-year rise in the number of properties available to rent, said the increased competition in the lettings market meant owners were having to spend more money repainting and renovating their homes to attract tenants.

So here it is: a lot of properties are coming on the letting market as well as the sales market. What does economy 101 says about demand/offer/prices?

Update:
Evening Standard is carrying this article: Buy-to-let landlords hit as rents fall by 20%

Update2:
Time Online is carrying this article: Repossessions rise 40% as mortgage arrears worsen

Housing repossessions rose by more than 40 per cent in the first three months of the year as the number of people in arrears on their mortgage payment soared to over 300,000.

Bear Market Rallies in 2000-2003

I was wondering if it was normal so see so many stupid rallies during the current market correction (krach yet to come?), so I dug just a few minutes on Yahoo Finance to see what happened during the krach of the Internet Bubble.

It is quite clear from these graphs that the long term trend was broken many times by rallies that drove the market up as high as 20% (or more on the Nasdaq Composite). So it looks like bottom fishing is a dangerous sport, specially when the market is only down about 15-20% for the all times high, and that many people are considering that this is biggest and most dangerous recession since the Great Depression.

Speaking of the great depression, I also dug a little bit that Krach, and one year after the Black Monday, the markets where down only by about 20-30%, while the correction unraveled, it took about 3 more years to hit the bottom which was 75-80% lower that the heights of 1929...

Russell 2000 P/E of 2470 is correct

Alright, I just got from a long week-end and upon arriving home, what do I do? I just launch my home-made spreadsheets to get the PER of the US indices, since the quarterly are almost finished now.

This is a little bit scary, because the indices PERs are still very high:

• Dow Jones 30: 77 (no kidding, thanks to GM and its huge losses)
• S&P 500 : 23 (still very very high, compared to historical averages)
• Nasdaq Composite: 27 (according to WSJ).

Regarding the Dow, even if there's a huge miracle, and that GM makes even (EPS of 0$) we still get an PER of 17 for the DJ INDU, which is not small, given that the financial stocks may sink in the DJ as well as many other components that are at historical high values. Notably:

1. JNJ -1%
   
2. IBM -3%
   
3. WMT -6%
   
4. MCD -9%

And they all have PERs of more than 15...

UPDATE: I just found this on the WSJ. No wonder my shorts on the Russell 2000 are not bringing any money!! The companies are collapsing, but the index is still holding!

NOTICE TO READERS: The Russell 2000 P/E of 2470 is correct. The EPS are very small because of write offs and such in the current quarter.

Rally Confirmed!

Wachovia: mega loss of almost 9 billions USD, +28% today, +1% on top of that after market
UAL (united airlines): mega loss of 3 billion, +68%
US Airways: +59%
Washing Mutual: mega loss of 3 billion USD, plus many bad news, +6% today, +2% on top of that after market.

Conclusion: idiots are in command

More reasons for equity markets to rally - 2

Bank of America: loss of almost $6 billion and many bad news.
Bank of America: many more billions at risk.
Bank of America: won't guarantee the debt of Countrywide.
American Express: Shares of credit-card giant American Express shed as much as 12% on Tuesday after the company warned that a deteriorating economy is choking off earnings growth.
Wachovia: an almost $9 billion loss.
United Airlines: reports 2Q loss of $2.73 billion
Merck stocks get hammered.
Texas Instruments: Shares slid more than 15% Tuesday

The company said demand "slowed unexpectedly" in June [...] a trend exacerbated by a weaker U.S. economy. [...] we are cautious given the demand environment we just experienced," TI Chief Executive Rich Templeton said in a statement. "If demand strengthens as quickly as it slowed, we are well-positioned to meet it."

Dow Jones 30 - S&P 500 - USD: rise on these news.

[Update] The Fed is talking the $ up by announcing they will raise rates (when???). They have been talking the $ up for a while, but talk is cheap.

More reasons for equity markets to rally

Today, in the news - as usual, bad news causes rallies, everybody should know that:

• Unemployment in the US rises more than expected. Official unemployment rate hits 5.5% while the unofficial ones from ShadowStats should reach around 13-14%
• ISM Services contracted, and were way lower than the market expections
• Gazprom announced that they will increase their prices by 22% (Bloomberg link)
• They also forecast oil at $250/b soon

Let the rally begin!!!

• Oh, did I forget to mention that oil hit $147 in London and $146 in the US? It's stabilised at $144 which is another good reason to rally!!
  

"Suckers" Rally - the sequel

So, yesterday, the market rallied because the auto-sales were worst than possibly imaginable:
Chrysler -36%
Ford -28%
Toyota -21%
GM -18%
Honda +1.1% (is this figure true???)

These figure are scary, but they are a good reason to buy the bad news right?

And today, the market is ready to rally, even if the employment figures came way below what the market was expecting:
ADP Employment report as per Yahoo Finance:
June: -79k where the market was expecting -20k
May has be revised to +25k where previously reported as +40k

And then we hear that markets are supposed to be efficient :-)