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MW - Good afternoon (except on the left coast)
Had a great time on vacation. Lost all my balls (golf that is) the first day on the links. So, I spent the balance of the trip enjoying various water sports. The only problem was the weather periodically. It was mostly Partly s-h-i-t-t-y with Scattered c-r-a-p. Since there were indoor water facilities, it worked out fine.
However, the weather held out long enough for me to get in one good picture of myself on the trip as a souvenier .
Regards,
Naz
Greetings designer - EVOL, MWAV.
How are you doing. Yes, I remember your emails regarding MWAV. I have a friend who is on the BOD of MWAV. However, I haven't spoken to him in long time. I last traded the stock back in January 2002.
Regarding EVOL, it made a new 52 week high on 8/6. They announced a strong quarter back on 7/31 and gave positive guidance. This weakness is likely profitaking, considering the strong run its had recently.
Here is today's technical take on EVOL:
TECHNICAL OPINION - EVOLVING SYSTEMS (EVOL) - 08/08/2003
Daily Opinion: HOLD
Friday's very Bearish (down) bar with low volume (69% of average) has no significant technical importance.
Short-Term Opinion: HOLD
On a short-term technical basis, the trend is Bullish (up) and the stock is above its 50-day moving average at 4.50 which also confirms its Bullish (up) trend. The stock is extremely overbought according to the Stochastic indicator (75.98), so look for a possible pullback.
Long Term Opinion: OUTPERFORM
On a long-term technical basis, the stock (EVOL) is trading above its 200-day moving average which implies it is in a positive trend.
The stock has support at 5.18 and 4.50. If the stock breaks down through support at 5.18 then it will probably continue lower to 4.50. The stock will meet resistance at 8.25 and 8.80. If the stock breaks up through resistance at 8.25 then it will probably continue higher to 8.80. The 200-day moving average is at 1.99. This will also act as support. The stock is extremely overbought according to the Stochastic Indicator (89.86).
From Briefing.com:
Jul 31 2003
7:30 AM In Play Evolving Systems tops consensus; updates rev guidance (EVOL) 7.12: Reports Q2 net of $0.08 a share, $0.04 better than the First Call consensus (1 analyst surveyed). Revenues increased 40% to $6.4 mln (consensus $6.2 mln). For Q3, co sees revs of $6-$7 mln (consensus $6.5 mln); raises full yr guidance to $27-$28 mln from previous forecast of $25.5-$26.5 mln (consensus $28 mln).
Good luck.
Regards,
Naz
GLG
GLAMIS GOLD: GLG - $13.55 Up $.63. Is this stock trying to tell us something? History shows us that August is typically a bad month for the stock market. As a matter of fact, August, September and October have not been months to write home about. IMO, the market's inability to break decisively through the 9,300 level is a sign of weakness and a sign this market will soon be heading south. Add the bad seasonality to the fact that we have some of our largest deficits in history with no job growth and the market is likely setting itself up for a tumble. There's no better way to protect yourself than by owning gold shares and Glamis Gold is one of the best, particularly on a technical basis.
GLG is currently breaking out of a "cup-with-handle" chart formation and is trading at a new 52-week high. Look for the mid- to high-teens in the near-term. Option speculators may want to take a look at the November 12.50 call options (GLGKV), currently priced at $1.95. With the stock $1.07 in-the-money, these options only have a premium of $.88 cents.
Good luck.
Regards,
Naz
NTES, SINA & SOHU
NTES continues on its path towards its 50 DMA @37.55, down another $1.50 on today's session.
SINA - September 30 Put Options (NOQUF's) currently trading at $5.30 bid for a one-day return of 47%. Sell signal given when it closed below 29 yesterday.
SOHU - the September 30 Puts (UZKUF) currently priced at $4.60 bid for a one day return of 67%. Of all the three Chinese portal charts, SOHU looks the worst and has the chance to fall to its 200-Day Moving Average at $15.82.
Good luck.
Regards,
Naz
Cycle Projections
SPX Current Analysis:
Last week the SPX dropped hard into mid-week, testing the 975 support region once again - which held for another strong push higher on Friday and a run back into first resistance, which is now near 998-1004 SPX CASH. As per last weekend, breaking the 983 area to the downside; Friday’s trading action looks to be a countertrend rally with the smallest daily cycle – the 15-day component Provided we do not see a close above the 1015.41 swing top, odds will favor a reversal back to the downside in the coming sessions, with a low expected with the larger 60 and 120 day cycles near August 12, 2003 - plus or minus 2 trading sessions.
With the above said, the next scheduled conjunction point for the 60 and 120 day bottoms has now been narrowed down to a window of August 7-12, 2003. In other words, the next ‘chart low’ with the larger daily cycles has the highest-odds of being seen in this date range. From there we will see another rally higher into the Fall before a stronger decline sets in into early 2004.
As per recent weeks, odds will not favor any larger decline (in other words, a drop of more than 12%) will be seen until this October-January 2004 period. As noted in recent weeks, better than 80% of recent 120 day cycles (going back several years) have shown percentage declines of 10% or greater - although I now have my doubts about the ability of the indexes to correct this much in the next 2-3 weeks, as time is quickly running out on the down-cycle phases of the and 120 day components.
I think the worst-case (or best-case) for the downside would now have to be the 40-week exponential moving average, which is now at 938 and rising, and should be near the 950 area in the next 2-3 weeks. Either way, even if we continue the recent sideways action in the coming weeks, whatever price low we are forming near August 7-12, 2003 should prove to be the next solid price low for the indexes.
Once an August low with the 60 and 120 day cycles is in place, then another 5-10% rally off that low will be seen going into the Fall (late-September/ October) - with odds tending to favor a run to or above the swing highs we have just seen. From there a stronger drop will be seen going into early 2004 – with the ideal date being January 14, 2004 - where the 180 and 360 day lows should come due.
From the cyclic table on page 1, we see that the 30-day cycle is now 17 days along and is labeled as bearish, and should bottom with the 60 and 120 day cycles in August. The 60-day cycle is now 46 days along and is labeled as bearish and is due for an August bottom along with the 120-day component. The 180-day cycle is seen as bullish but is soon due to top and turn lower about the same time the 60 and 120 day lows are coming due. The 360-day is seen as mild/bearish, with the four-year (1080 day) cycle viewed as higher and should ‘buoy’ this market into Spring/Summer 2004.
The bottom line is 4 out of the 6 cycles are labeled as bearish; this portends continued weakness into at least early-to-mid August with the 60 and 120 day cycles before another rally phase sets in, in the month of September. From the chart at left we still have the downside targets from the 30 and 60 day cycles to the 945-967 SPX CASH area, which the highest-probability for hitting these targets by mid-August. Note as well that last week’s 975 bottom came within just a few ticks of hitting the blue 54-day moving average, which it had 80% odds at doing before these down cycles were complete with the 60 and 120 day components.
Once the 60 and 120 day lows are in place in August, another 8-14% rally off the lows should be seen. In the same statistical analysis of the 120-day cycle, better than 77% of occurrences have seen rallies of 14% from trough to peak, while 88% of these cycles have seen rallies of at least 8%; in fact, the smallest rally with this cycle in recent years has been 7.6%. In other words, a 7.6% to 14% rally off this August bottom would target a run back to or above the current swing highs by late-September/ early-October - and possibly still a run into the 360-day projection to 1058 or higher, which is still valid into November 2003.
As per recent weeks - and as noted earlier - the one thing I do feel is that the largest decline phase will be held off until after the September/October cycle high. This Fall high is where the 60 and 120 day cycles will stall and then begin to turn lower with the 180 and 360 day lows that are due early 2004 (via the chart, page 2) - and is where I think the next major low will form (near January 14, 2004).
In other words, the action between now and the August low - and then the Sept/Oct. price high is likely to be more of a larger ‘trading range’ market. We will obviously know more once the current decline phase plays itself out and by mid-August should be able to calculate approximately how high the next rally phase will carry. From a January 14, 2004 price low with the larger cycles we will then mount another strong rally into Spring/Summer of 2004 (larger C wave correction?) - a rally that could take us right back up to or above whatever swing highs we are making with the current 360 day cycle, possibly for that run at the 1100-1160 region, as predicted by the normal bounces with the four-year cycle.
We have to continue to remember that the 9-year cycle is pointed up here - as well as the four year cycle, which favors this 768 swing low holding until early 2004 and then a secondary rally back to or above the recent swing highs by the next 360 day top that follows. In Elliott-wave terms, the entire rally from the October 2002 lows - to whatever high we end up seeing in 2004 - will be one large ABC bear-market corrective rally that will correct the entire decline from the 2000 price highs to the 2002 price lows.
Long-Term Picture:
Looking further out, the four and 8-9 year cycles likely printed bottoms in October 2002. Noted many times in the last few months, the average rally for a four-year cycle - even if that cycle ends up making new swing lows at the next bottom - is a 66% retracement from bottom to top, with 50% being on the low end. A 50% retracement would target 1160, while a 66% retracement would target a tag of 1274 - though I have my doubts we would see this upper target level of 1274 again.
Unless something wild happens and we enter into the 1100’s this year, odds will best favor a test of this 1100-1160 region by Spring/Summer 2004. From there everything turns down into the 4 and 18 year cycle lows into 2006-2010. Since we are in the final third of the 18-year cycle phase, this four-year cycle should see bearish left translation (in other words, a peak before half it’s phase), hold at or below the 1160 region by next Spring, and then make new lows at some point in 2005-2006 with the next four-year cycle bottom - and a test of the mid-600’s on the SPX being the normal expectation.
DOW Current Analysis:
The DJIA has actually been the strongest of the indexes in the last week or two, holding above the 9000 support region - and is actually within earshot of making new swing highs above 9352. How does this align cyclically? The DJIA should still be headed for an August low with the 60 and 120 day cycles, but looks now like the whole action will simply end up being a sideways correction – in other words, some test of the lower end of the range is all that we may see with the 60 and 120 day lows. Current resistance is still in a range between 9408 (weekly projected resistance high) and 9488 (monthly projected resistance) if the DJIA should break back above 9352 anytime soon. This would also be expected to contain any upside as we work our way lower into August 7-12, 2003.
The DJIA has done two things last week, in terms of cyclic targets. At Thursday’s close the index confirmed a 30-day downside target to 8970 or lower, good through 8/22/03 - and valid whether or not new swing highs above 9352 are seen in the coming sessions. For the larger picture, the DJIA has also confirmed a new 360-da cycle upside projection to 9980 or higher, which is good through 11/19/03.
With the price-projection model running at a 90% accuracy on the DJIA in recent years, I would say odds are very high for both projections to be hit in the coming weeks/months. Stay tuned.
Jim Curry - Market Turns advisory
www.cycle-wave.com
Regards,
Naz
flimflammy7 - The monkeys thank you....as well as alert you to few other potential trades.
Yes, the monkeys have been on a roll, esp. ADL, which is up 70% since I posted about it last week.
Now for the new trades, it looks like the recent pump in Chinese portals has come to screeeeeeeeeeeeeeeeeeeching halt!
SOHU.COM: SOHU - $29.45 Down $2.82......Of the three Chinese Internet portals, so far Sohu.com is the only one of the group (SINA, NTES & SOHU) that's fallen below its 50 Day Moving Average. On the point & figure chart, SOHU gave a sell signal when it closed below the $34 level which was a triple bottom sell signal. We want to give these time to make sure we're on the right side. Option speculators may want to take a look at the September 30 Puts (UZKUF).
NETEASE.COM: NTES - $42.31 Down $2.03..... Netease.com has now generated a sell signal on its point & figure chart. The stock has yet to close below its 50 Day Moving Average at $37.55. However, in the monkeys opinion, a close below this critical support level is imminent. Option speculators should take a look at the Sept. 35 Put Options (NQGUG). These out-of-the money puts are extremely speculative, If they're right, they will be big winners. If they're wrong, be prepared to lose all your money.
SINA COP.: (SINA) $28.68 Down $3.30.... With Sina closing below $29, it too generated a sell signal on Thursday. The monkeys believe lower prices are imminent. Option speculators should take a look at the September 30 Put Options (NOQUF).
Good luck.
Regards,
Naz
Market Recap
By Jim Brown
The bulls were partying hard with a +160 point Dow gain and a new 52-week high when somebody tripped. Tripped a breaker, tripped over bags of money or tripped on a banana peel the results were the same. The lights went out and the party was quickly over. As if somebody yelled fire in a crowded theater the rush for the exits was fast and furious. When the smoke cleared the +160 point gain had turned into only +33 and the tone of the market was significantly different.
How we went from 100% bullish at the open to the crash at the close has probably got more than a few bulls scratching their heads tonight. The morning began with another drop in Jobless Claims to 388,000 and the second consecutive week under 400K. A trend, a trend, (visions of Tatu pointing to the plane on Fantasy Island) the bulls were shouting. Granted the first number started with a 3 instead of a 4 but not by much. Still the futures were spiking. The fact that the numbers were still adjusted for the cyclical auto layoffs was lost on everyone. Continuing claims increased to 3.65 million indicating that jobs are still hard to find regardless of the adjustments.
The slam-dunk came in the form of the GDP at +2.4% for the 2Q. This was a full +1.0% over the estimates and the crowd went wild. Personal consumption rose +3.3% and non residential investment rose +6.9%. Yee-Haw! Bulls began to party and shorts began running for cover. The buying was sharp and quick and futures were quickly +8 and climbing. Bulls pointed to this report as signs of a real recovery in progress. Let's not forget that this was for the 2Q which began with a war. Remember the expected post war bounce in the economy? For about six weeks we saw a light spurt in buying in anticipation of a quick recovery. That recovery never came and we ended the quarter with an unbroken string of Jobless Claims over 400K for the entire quarter. Corporate earnings have already told us there was a bounce in April that slowly died into June. This is the evidence of that bounce. Much of the jump was due to a +7.5% increase in government spending. One of the best components was a decrease in inventories by $17.9 billion which should indicate a bounce in manufacturing soon. This assumes of course the goods were made in America and not imported.
The Employment Cost Index came in slightly less than expected at +0.9% and provided yet another warm fuzzy feeling for traders. Costs are not rising and there is no inflation in wages. With nearly 9 million workers currently unemployed it would be tough to command a premium wage and signing bonuses are a thing of the past. Wage growth actually slowed in the 2Q which is detrimental to future consumer spending.
The Help Wanted Index rose to 38 in June from 35 in May and was possibly the most bullish sign of an economic upturn. Ads for workers rose in all regions except East South Central. This was the first real improvement in months. 73% of the 51 newspapers surveyed showed ad traffic rising. While this is a positive turn the headline number of 38 is still an indication of a declining job market.
The most bullish report of the day was the PMI report which came in at 55.9 compared to estimates of 53 and actual of 52.5 in June. While the GDP is seen as a lagging indicator the PMI is seen as a current trend and an acceleration of three consecutive positive months. May was the first positive month at 52.2 and June barely squeaked higher at 52.5. The huge jump in economic terms to nearly 56 was very positive. The market immediately rocketed to higher levels. New orders jumped to 61.7 from 54.8, backlog rose to 49.4 from 45.8 and employment rose to 46.0 from 43.8. Inventories showed a significant drop to 39.4 from 48.8 indicating a replenishment cycle in our future. The news orders at 61.7 was the highest reading since November 2002. This is the report for the Chicago region and traders hope the National ISM report on Friday follows suit.
That hope suffered a setback with the NY-NAPM, which came in at 224.9 and the sixth consecutive monthly decline. The manufacturing conditions component dropped to 64.8 from 92.8 in June. This whopping decrease took the excitement out of the previous reports and cast a shadow over the ISM for Friday. Traders were left wondering if the ISM would follow the Chicago PMI or the NY-NAPM. Since the ISM is actually the old NAPM on a national basis it was a credible concern.
Part of the strong selling at the close had to be due to the strong economic calendar for Friday. The previously mentioned ISM plus Nonfarm Payrolls, Construction Spending, Personal Income and Spending, Consumer Sentiment, Semiconductor Billings and July Auto sales. It will be a busy day. The ISM has been in negative territory since February and it is expected to jump +2 full points from 49.8 to 51.9. Plenty of opportunity for disappointment here. The Nonfarm Payrolls are expected to show a jump of +13,000 jobs with a whisper number of +25,000 jobs. Again, plenty of room for disappointment. Consumer Sentiment is expected to rise to 90.8. Worries are that it could follow the confidence earlier this week with a drop instead.
The market drop today on a full deck of strongly bullish economic reports could be due to many reasons. Worry over the reports on Friday may have helped but were not likely the total reason. The best guess is interest rates. The 10-year yield reached 4.56% today after being only 3.07% just six weeks ago. This is a disaster in the bond market the likes of which have not been seen since 1994. Back then the bounce was not as bad but it had dire repercussions. Several major investment houses folded and Orange County California went bankrupt due to over leverage in the bond market. The rumor making the rounds today is that there are one or more big investment companies, maybe even FNM or FRE, in serious trouble. Major insurers announced this week they were canceling bankruptcy insurance for Merrill, Schwab and dozens of other institutions. The insurance policies, which protect investors over the $500K federal protection limit, have become too risky according to Travelers, AIG and Radian Group. Sign of the future?
The rising rates, regardless of economic news, stock market movement or Fed commentary has everybody baffled. Bonds just keep going down and seldom pause for more than a few minutes during the day. Confounding the constant selling is a lack of money flowing into the stock market. Normally when bonds sell off a large portion of the money moves into stocks. It is not happening. Even given the large economic bounce at the open today the volume was still only average and the market breadth was terrible. On the NYSE decliners beat advancers by nearly +200 issues. New 52-week lows rose to levels not seen in months.
Not only are the interest rates a problem for the market the 30-year fixed mortgage hit 6.14% today. Refinance applications have dropped -50% in the last four weeks. This is a major blow to the consumer supported economy. Like financial junkies we have been living off our equity for years and that equity just dried up faster than a busted drug dealer. The shock to the system will be strong and the tax cut/credit may not be able to take up the slack. This shock to the economy has traders talking of asset allocation programs again ONLY from stocks to bonds. Boy, talk about full circle. There were several rumors on the floor today about major institutions, fearing for the future and dumping stocks. It was not hard to find believers if you look at the major hits to the averages on a blowout bullish day.
The Dow dropped -50 points on a sell program just after the open with bullish news floating all boats. It fell -60 points on another sell program right after the PMI was announced with a huge bullish jump. Clearly the programs were keyed in and waiting for the bullish news to break so they could sell into the heavy volume. The Dow dropped -70 points at 2:25 on a very strong sell program from the highs of the day. The last one came at 3:20 and knocked a full -100 points off the Dow in a very short period of time. Think about this a minute. On the most economically bullish day I can remember this year four monster sell programs knocked -280 points off the Dow for no apparent reason. There were plenty of buy programs as well but those were to be expected. Why are the big guys selling? What do they know that we don't? Did they find out Saddam has a dozen clones?
Another factor, which should be considered, is the August record. In the last 15 years August has been the worst performing month for the Dow and S&P, period. With the big gains in stocks and the sell off in bonds I could see where institutions may want to asset allocate. They did it constantly on the way down when bonds were growing to the sky and with them in the cellar and August in front of us it would only be prudent to revise the ratios again.
Personally I think the major reversal in the market today on the most bullish news in months is very negative. It could completely reverse again tomorrow and set another new high on good ISM and Jobs data but tonight I am skeptical. I was ready to join the bulls and party till January when the Dow hit a new high today but the breadth kept bothering me. The sell programs at the open bothered me. The rumors of a major fund collapse worry me the most. I remember losing money on the Russia default, the Brazil default, the Thailand default, Long Term Capital and a dozen smaller financial events over the last ten years. They all tend to appear just as the market is about to hit new highs. It must be a karma thing or the worlds biggest repeating coincidence. Either way Friday should be exciting and I am sure we can expect some serious volatility at the open. After that it is a coin toss on a summer Friday. Volume is likely to die by noon as traders head for the beach or the mountains to escape the heat. Look at the bright side. We have the three most volatile months of the year beginning tomorrow. If you can't make money trading over the next three months you should find another hobby. I get excited just thinking about it and I hope you do too.
What the day looked like for Bulls when the NDX tried to hit 1300:
Good luck all.
Regards,
Naz
Amazing Commercial Monkey Alerts....
Since I will be predisposed tomorrow and gone the following week, I'm going to combine all my current leads into this post.
CRYSTALLEX: KRY - $2.13. Another stock I gave up on MUCH too early, up 38.30% on Thursday after having NOT traded since July 8th because of a three year restatement of earnings. Intraday, the stock has traded to within $.16 cents of its 52-week high on 10 times its average daily volume. This one could be a fun ride!!
http://biz.yahoo.com/rc/030731/minerals_crystallex_stock_1.html
AMDL INC.: ADL - $.96. The company should soon submit to the FDA for approval of their cancer test kit. If they receive FDA approval, and the Amazing Commercial Monkey expects approval, this stock will be history. According to another source who runs a large gastro practice, he would use the test a lot because it monitors known cancer patients for $100 per test versus thousands for other tests. There's not that many shares outstanding and positive news could drive this one substantially higher.
CHORDIANT SOFTWARE: CHRD - $2.91. CHRD is currently trading 6 times its average daily volume at a new 52-week high on an upgrade from hold to buy by Needham & Co. Look for the $4.00 level in the near-term. The Monkey is also hearing positive developments brewing.
Good luck.
Regards,
Naz
OT: MG - Golf
Actually I'm leaving this Saturday morning to go vacation for a week. The resort I'll be staying at has a championship golf course which I play every year.
Two things I guarantee you will happen when I play next week. First, I will lose most, if not all the balls I bring with to play with. Using the driver is my favorite part of the game. My tee shots tend to be of the long, high, majestic nature with absolutely no sense of direction. I've broken windows in condos, hit a pick up truck which belonged to a carpenter on a construction site, hit shots through openings in new construction home sites, etc. Secondly, on my best day, I will never, ever shoot a 37 over nine holes, period. Bottom line, I don't take the game seriously so I suck. I play because I enjoy the outdoors, the babes in the drink carts, the beauty of the course and the interaction with my fellow players who drag me along for laughs.
Think Happy Gilmore when trying to picture my golf game. I'm a former hockey player as well.
Good luck.
Regards,
Naz
OT: MG - Golf
What's so great about that score? I shot a 30 after nine holes on a very challenging miniature golf course last weekend .
Seriously, 37 is an excellent score over nine holes. Congrats.
I've always wondered what its like to play nine holes of golf on a real course. I've usually lost all of my balls by the 4th or 5th hole ;-(.
Regards,
Naz
Good morning all - AMLN
Amylin Pharmaceuticals - AMLN: In today long @23.50. I hearing rumors of positive developments from one of my commercial trading monkeys. Technically speaking, the stock is about 10% off its 52-week high.
Amylin Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the discovery, development and commercialization of drug candidates for the treatment of diabetes and other metabolic diseases. The Company has two lead drug candidates in late-stage development for the treatment of diabetes, SYMLIN (pramlintide acetate) and exenatide, formerly referred to as AC2993 (synthetic exendin-4).
Amylin has received a letter from the United States Food and Drug Administration (FDA) indicating that SYMLIN is approvable for marketing in the United States as an adjunctive therapy with insulin, subject to satisfactory results from additional clinical trials. The Company's second candidate, exenatide, is in pivotal Phase III clinical trials.
Will post on any new developments on AMLN as well as on any other monkey alerts.
Good luck.
Regards,
Naz
Good morning....
Out of remaining longs: ASPT @7.70 from 6.57 & 6.72 11 days ago; GPRO @54.40 from 51.78, also 11 days ago; and IMCL @43.00 from 37.51 last week. Was also stopped out of FNSR for a loss of $0.31 and RFMI for a loss of $0.30.
Currently flat.
Well below concensus CC numbers caught traders with their pants down. This means Greenie had to ride to the rescue with a huge overnight repo of $9 billion, which represents a $3.75 billion net addition to liquidity over the expiring $5.25 billion today. May be helping to keep stocks from going into a freefall on the session.
The Conference Board's Consumer Confidence Index, which was virtually unchanged in June, declined in July. The Index now stands at 76.6 (1985=100), down from 83.5 in June. The Expectations Index fell to 86.4 from 96.4. The Present Situation Index declined to 61.9 from 64.2.
The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by NFO WorldGroup. The cutoff date for July's preliminary results was July 22nd.
"The rising level of unemployment and sentiment that a turnaround in labor market conditions is not around the corner have contributed to deflating consumers' spirits this month," says Lynn Franco, Director of The Conference Board's Consumer Research Center. "Expectations are likely to remain weak until the job market becomes more favorable."
Consumers' assessment of current conditions was less favorable than last month. Those rating present business conditions as "bad" increased to 30.4 percent from 28.1 percent. However, those holding the opposite view increased to 16.3 percent from 14.9 percent. Consumers claiming jobs are "hard to get" rose to 33.1 percent from 31.9 percent, while those claiming jobs are "plentiful" declined to 10.5 percent from 11.2 percent.
Consumers' expectations for the next six months were less optimistic than last month. Those anticipating an improvement in business conditions fell to 20.2 percent from 23.5 percent. Consumers anticipating conditions to worsen rose to 11.5 percent from 9.2 percent.
The employment outlook was also less favorable. Consumers anticipating more jobs to become available over the next six months declined to 16.8 percent from 18.9 percent, while those expecting fewer jobs increased to 19.8 percent from 16.9 percent. The proportion of consumers anticipating an increase in their incomes declined to 15.7 percent from 17.1 percent.
Source: July 2003 Consumer Confidence Index, The Conference Board
The put to call ratio was .58 for the past half hour. A moment of silence for all of those call buyers.
The Amazing Stock Picking Monkey wishes you all the best today.
Regards,
Naz
The Ord Oracle
Bottom Line On The Market
July 28, 2003
For 30 to 90 days horizon: Flat
Short term trades, one day to one-week horizon: Flat.
We have "800" phone update that cost $2.00 a min. and billed to a credit card. Call (1-970-224-3981) for sign up. We update Eastern time at 9:45; 11:30; 1:30; 3:30 and 4:00. Question? Call me (402) 486-0362.
What to expect now:
The McClellan Summation index on the S&P is now turning up and imply the short term down trend is ending. However, the S&P did trade above the previous high of July 24 and then closed below that high on lighter volume, which is a bearish short-term sign. However, with the Summation index starting to turn up the S&P may have limited downside. At some point the low of July 1 (960 level) should be tested. The July 1 low tested the previous low of June 9 on increased volume. We have found markets do not make lows on high volume, they are almost all re-tested. Since the July 1 low had high volume we expect at some point that low will be tested again. We like to have matching signals both from the S&P and the Nasdaq. The Nasdaq has failed to touch the previous high of July 24 and therefore has not generated a signal. However, both the S&P and the NDX summation index are starting to bend up and that implies more issues are finding support for the near term and that is bullish. No signal for the moment.
We are long today (7/28/03) SIRI at 1.74; we raised stop to 1.65.
A source to get put/call ratios and VIX readings on many index's including the QQQ is an excellent site called http://hamzeianalytics.com/.
Nasdaq Composite:
The Nasdaq Summation index is trending down but the NDX summation index is now bending up. We like to trade in the direction of the Summation Index and when it's bending up we will not trade the short side. However, a signal has not been generated yet as the Nasdaq failed to touch the July 24 at 1740.80. Today's high was 1740.40. Volume did shrink against the July 24 high; however, nothing is proven until the previous high is touched. "Window Dressing" is starting and runs into the first part of next month and can have a bullish bias. Staying flat for now.
GOLD Market:
We did a long-term study on the continuation contract on Gold today. The Pattern that has been going on since February highs is a consolidation and this consolidation appears to be forming a "B" wave of an "ABC" pattern up from the low of 2001 near the 255 level. If the current pattern is the "B" wave then the "C" wave should take the market to 450 level. The 450 level jumps the "Creek" at the 1996 high of 420 and would be another bullish sign. In a nutshell, the "Jumping of the Creek at the 420 level would have an upside target eventually to 505.
The XAU weekly chart last week closed above the week of January 24 and volume shrank by 21%. This condition implies a pull back may start near current levels. The bigger picture remains bullish.
We are holding BGO that was bought at 1.05 and 1.28. We added to BGO 6/18/03 at 1.17. The weekly chart looks good on BGO. An ABC daily pattern has an upside target near the 1.90 range, which is the June 2002, highs. If BGO can get through the 1.90 range with volume 8.8 million shares or more then next target will be 3.00 to 3.50 range.
The weekly charts on Drooy gave a buy on 3/21 and the Monthly charts gave a buy by closing above 2.23 on March 31. Therefore, Drooy is in a long-term buy signal both on the weekly charts and monthly charts. For the next impulse wave to begin to the upside, Drooy needs to close above the 3.00 range. Drooy has been building "cause" since mid March and could fuel a very big move up.
All the Best,
Tim Ord
http://www.marketweb.com/commentary/ord0729.htm
MajorLoopy, LOL, nice work. You passed with fly colors. Well done on your other positions today as well.
I still can't discuss NOVN yet, however, my non disclosure agreement expires soon. At that point I'm going to write a tell all book exposing the naked truth [your copy will have pictures and small words in big letters Lopy, so you'll be able to easily understand it ].
So majortoe just popped into your head? Wow, that scares me a little. I'd rather not know what other weird s-h-i-t pops in there .
I like IHub's format and service better than RB. I always have. And since many of the old MMClub traders have migrated here, I don't have any desire to go back at the present time. I don't even read RB's threads anymore with all of the constant service problems they have.
Good luck.
Regards,
Naz
Bill1109 - AtilaTheHung, LMAO!!
I might use that one, only I would have to modify it to say "AtilaTheHungLikeAFlea" .
OXGN sure took a dump today at the end of the trading session. Closed near is lows @12.35 and was trading in the 11.70's X 11.80's in AH.
Its one of those we should have jumped on when we were discussing it ;-(.
Good luck.
Regards,
Naz
skyfisherman, it works for me.
I'd love to read more posts like yours everyday on these threads. A 35%, low risk return on a Bear Call Credit Spread (since both positions are NAKED), is very respectable as far as I am concerned. And all with a very small amount of capital required to execute.
However, if you have Jack Daniels running through your veins like Bill and I do, then a you may want to take a high risk, small position in merely selling the QYOIV naked @2.45 and bet they expire worthless based on the premise that OXGN has been pumped to these levels on a bubble that will relinquish some air in a couple of months, putting a stop loss near the next strike price of 15.
That was an excellent post skyfisherman. Well organized and formulated with stated parameters for the trade. I don't know where you came from, as I don't recall seeing you post on the old MMClub on RB, unless you did so under a different handle. Hope to see you post here more often.
Good luck.
Regards,
Naz
Majortoe (a.k.a. Lopy/Loopy), if you want me to take your posts seriously, you're going to need to change your handle.
And preferably not another body part [unless its something subtle like "Well Hung", "Hung Lo", "Spanking the Penguin", etc. I think you get the picture]. But majortoe??? What was your blood/alcohol content when you came up with that one ?
BTW, I have QYOHV closing @$1.15:
http://quotes.nasdaq.com/asp/option_multi.asp?symbol=QYOHV
Regarding your question about shorting the common [plain vanilla short using your terminology ] being riskier than selling naked calls, yes it is.
Naked call writing is not the same as a short sale of stocks. I only suggested this to Bill as an alternative if he was unable to locate shares of the common to short. Although both strategies have high risk factors, the short sale has a much higher reward potential versus the naked write, which has limited reward potential, as Skyfisherman correctly stated earlier. On the other hand, if the underlying stock remains relatively unchanged, the naked write will do better.
Using a your example (with the correct closing price of $1.15), this will clarify the basic profit and loss potential. OXGN is selling at $12.35 and the call option is selling for $1.15. If one were to sell the call option naked (without owning the stock), he could make at least $1.15 profit. This would happen if OXGN were below $12.50 at expiration. Should the stock climb to $15, the seller would have to buy the call for a price of $2.50 if he covered his position, and would have a loss of $1.35.
A little quiz for you majortoe (just because of your handle)
With OXGN closing today @12.35, what is the current intrinsic value of QYOHV?
Regards,
Naz
skyfisherman
Its actually more than a tad bit risky. It can potentially be disasterous if you end up on the wrong side of the trade.
--> unlimited loss (potentially)- Absolutely correct. The same risk exists with short selling the common as well.
--> limited profit potential - Correct. Again, the same profit potential that exists with short selling the common.
--> HIGH Margin requirements (if Broker would even allow it) - Correct. However, those margin requirments generally exist for trading the common as well.
--> little time value all but insures a loss if stock goes UP! This is correct if the trader merely concentrates their position in current period options. If you ladder your position amongst several option periods, you also stagger the time erosion risk associated with options. However, if the stock continues higher over an extented period of months without a significant pull back (YHOO, AMZN, EBAY, etc. are recent examples which come to mind), then even that strategy is doomed to failure.
As I said...seems a tad risky. As I stated above, more than a tad bit risky. I'm not in any way recommending anyone undertake such a trade without fully understanding the inherent risks associated with such a position. IMO, Bill1109 is an experienced trader and short seller, so I was merely expressing a short selling option to him in OXGN if he chooses to pursue such a transaction and is unable to obtain common shares to short. He has demonstrated the ability to cut his losses quickly if he is on the wrong side of a trade.
Am I missing something? - No, you are not missing anything. I suspect you somehow knew that already . However, I'm glad you brought this discussion up to the board about selling calls as a substitute for short selling. Executing such a trade is NOT a game and should not be done by those who do not fully understand the risks.
Welcome aboard.
Regards,
Naz
Bill1109 - OXGN
What an incredible run this stock has had. A little over four months ago, OXGN closed @1.17 (3/18/03), now @13+.
Float is 11.1 mln. Short interest last reported @2.6 mln shares or 23% of the float on 7/8/03. Obviously, this added a sizeable amount of fuel to its rally earlier, pushing it above 15 intraday.
Since OXGN is optionable, it won't matter if there are shares available to short. You can sell in the money calls all day if you want which technically gives you an unlimited number of shares to short.
I put it on my radar at the open this morning. Will be an observer for the balance of the day, looking to throw some harpoons at it near term.
Good luck.
Regards,
Naz
MW - Thank you. IMCL has been on my radar since its breakout in April. Guess we should name IMCL The Comeback Kid. The company has a wonder cancer drug that should soon be approved by the FDA and it's former CEO, Sam Waksal, started a 7+ year prison sentence recently for tax evasion and insider trading. Sam's brother Harlan resigned from ImClone and rumors are that with the resignation of Harlan the company is more likely to be taken over by Bristol-Myers Squibb.
Bristol-Myers has invested a chunk of money in ImClone ($1 BILLION). Even with all the negative news of the past concerning insider trading, most experts agree that ImClone's cancer drug will eventually be approved by the FDA. Recently, ImClone and Bristol-Myers announced the opening of a limited Access Program in the United States for cetuximab (also known as ERBITUX(TM)). The cetuximab Access Program will enroll and treat patients with epidermal growth factor receptor (EGFR) positive metastatic colorectal cancer who are not eligible for current clinical studies of the investigational monoclonal antibody, and who have exhausted all other available treatment options.
The cetuximab Access Program, which was developed in collaboration with members of the cancer advocacy community, will be administered by the National Organization for Rare Disorders (NORD), and will utilize an unbiased patient randomization system to select patients for entry into the program. Do you think this limited Access Program would have been started if the drug were not working on cancer patients???!!! Recently, the company announced it would be making available the its cancer drug Erbitux to terminally ill colon cancer patients. Under the U.S. Food and Drug Administration's compassionate use program, patients in life-threatening situations can be offered an experimental drug. Do you think the FDA would be allowing this if something very positive were not in the making?
Thomas Weisel analyst Patrick Mooney thinks success may be just around the corner for ImClone. Mooney, who covers biotech stocks for Thomas Weisel, recently raised his rating on ImClone to "buy" from "market perform." Why now? Among other things, the analyst cited "fading noise" surrounding the stock that has been at the center of the Martha Stewart insider-trading investigation. He also emphasized hopeful signs over the Erbitux development program, saying he expects positive findings from two pivotal trials of the drug, forming the basis for both U.S. and European regulatory filings. (And those expected positive findings have already been announced.) "We believe that the new position at the FDA is to be more user/industry friendly and approve drugs that are safe and moderately efficacious. We feel that Erbitux is both," Mooney wrote in his new report. Mooney's upgrade of ImClone focuses on his expectation of positive publicity for Erbitux. Mooney expects Merck KgaA, ImClone's European partner, will show positive data in a study testing Erbitux as a single agent and in combination chemotherapy with another agent at the American Society of Clinical Oncology meeting in May, forming the basis of a European filing.
Bernie Schaeffer seems to like IMCL recently saying the following...... "In addition to being the catalyst behind Martha Stewart's legal woes, ImClone Systems (Nasdaq: IMCL) is a biotechnology firm that specializes in cancer therapies. Today, an article in The Wall Street Journal asserted that IMCL and other cancer-treatment firms could benefit from the U.S. Food and Drug Administration's new decision to accelerate its application and approval processes for new drugs. Technically speaking, the shares have hurdled short- term resistance in the 12 region as well as topping their 10-week and 20-week moving averages. The stock's 10-day and 20-day moving averages have executed a bullish crossover, typically a positive short-term sign. Short sellers continue to favor the stock, even though the total number of shorted IMCL shares declined by 13 percent over the most recent reporting period. There are still more than 13 million IMCL shares sold short, a short-interest ratio of more than eight times. If the stock continues to climb higher, a "short squeeze" might come into effect, fueling the equity's rally as these bearish speculators scramble to exit their positions."
It's simply a matter of "when" the FDA will eventually approve this drug. Bottom line - it works. Recently, investors seemed to be encouraged by the fact that ImClone's European marketing partner for Erbitux said it is planning to build a $300 million euro ($324 million) facility dedicated to therapeutic oncology proteins. Investors see this as confidence behind the prospects for Erbitux. Merck KGaA, ImClone's marketing partner and the company running the additional European tests of the drug, said it will focus planning efforts for a new large-scale production plant that should create some 260 jobs as well as 20 trainee positions. The company didn't single out the yet-to-be approved Erbitux, but said the facility would be used to "manufacture the latest generation of biologic cancer treatments." On the negative side of news, ImClone certainly has had more than its share of negative news. As if the insider trading scandal wasn't enough, negative news has continued to flow..... But let me point out the fact had it not been for the insider trading scandal, investors would not have had the opportunity to buy this stock back in the $7 range! This company has seen it all..... 1.) Insider trading scandal; 2.) Company's past CEO, Sam Waksal, goes to prison to serve 7 years for insider trading and tax evasion; 3.) Martha Stewart may now be next to serv time for insider trading of ImClone; 4.) Sam Waksal's brother, Harlan, resigns as CSO from ImClone; 5.) Company's stock was delisted..... But through all the negativity surrounding the company, the stock has hung in there and is now within striking distance of its 52-week high.
Recent positive news events include... 1.) A $6 million milestone payment ImClone Systems received from Merck KGaA related to a license that allows Merck to import Erbitux made at the biopharmaceutical company's plants in Somerville, N.J., directly into Germany. In a press release Tuesday, ImClone said it sold 334,471 company shares to Merck at a 10% premium as part of the licensing deal signed in December 1998. Merck had agreed to develop Erbitux outside the U.S. and Canada and to co- develop the cancer drug in Japan. Merck said it still plans to file a marketing application for European approval of Erbitux this summer. The German drug maker expects to roll out the drug through most of Europe next year; 2.) The Wall Street Journal reported that a clinical trial in colon-cancer patients confirmed earlier studies that showed ImClone's Erbitux is a promising cancer therapy; 3.) On July 15, ImClone said it would receive two payments of $3 million following Merck KGaA's submission of applications to license ImClone's experimental cancer drug in Europe. As part of the deal, ImClone said it will issue 92,276 of its shares to Merck KGaA for the Swiss submission and 90,944 shares for the European Union submission. Merck KGaA of Germany applied for licenses to market Erbitux for the treatment of metastatic colorectal cancer in the European Union and Switzerland. The German drug maker holds the rights to develop Erbitux outside of the United States and Canada. ImClone acting Chief Executive Daniel Lynch said the company still plans to submit an application to U.S. regulators seeking approval of Erbitux in the United States in the second half of this year.
BOTTOM LINE: Be long or be wrong.....this stock is headed to new 52-week highs IMO.
Regards,
Naz
IMCL - Sugar pill manufacturer running on some speculation that company might be takeover candidate by Bristol Myer Squibb (BMY) and extending Friday's gains again today. Still holding from 37.51 last week.
Autozone (AZO) - Strong move this morning back above 50-day SMA. Stock closed above 50-day SMA on Friday, but finds extended buying this morning. Stock continues to trade well after test of bullish support earlier this month. Bullish count is $90.
Fed OMO - $5.25 billion overnight repo announced, for a $2.75 billion net addition against the expiring weekend repo.
Put to call ratio drops to .69, VIX +.27 to 20.21. Keeping tight stops on longs still.
Good luck all.
Regards,
Naz
Wall Street great says the market is broken
Investing pioneer John Templeton believes there is still huge downside risk to the stock market -- and he's almost as bearish on house prices.
By Bill Fleckenstein
Wall Street has its statesmen and its noisemakers. Into the former camp fall the likes of Warren Buffett, the late Leon Levy and John Templeton, the founder of the Templeton funds group. Their wisdom is there for the taking, but when it's deemed to be "pessimistic," folks turn away.
That's where the noisemakers come in, ready to rev up any story that gets people buying stocks. Some technology chieftains have demonstrated remarkable skill in that arena. After all, the performance of their stock options depends on folks' willingness to believe. Imagine, then, the scene behind closed doors when Microsoft (MSFT, news, msgs) announced its decision to show options the door.
Templeton’s take: The stock market is broken
Last week, a friend was kind enough to e-mail a copy of an interview that Sir John Templeton gave recently to Robert J. Flaherty of Equities magazine. I, in turn, would like to share its wisdom with readers of the Contrarian Chronicles.
During previous interviews with the publication in 1999 and 2000, Sir John said investors should expect a 1929-style crash in stocks. Flaherty notes that those earlier interviews prompted two very different responses. Some folks expressed gratitude for the money they'd saved by reading Sir John's comments (both at the time and later), while others opined that Sir John was "old and out of touch," and what did he know about today's market, anyway?
In his current interview, Sir John, who is now 90, devotes most of his thoughts to the housing market. What he tells Flaherty comes as surprise to the downside, since the writer had been expecting to hear more encouraging words: "Because I was hoping for good news," Flaherty writes, "I was personally taken aback and depressed by Sir John's short-term pessimism."
In that vein, Sir John offers this observation about Wall Street at large: "The stock market is broken, and it will take some time, maybe years, to repair it. Mass media, especially TV (read: Bubblevision) today is so short-term that few in its audience grasp the lasting damage and corrective impact which will continue to linger from the greatest financial crash in world history."
He continues: "It would be unlikely that the bear market is over when the American stock market is only down about 30%, when in the biggest boom ever, it had been up 10 times over where it had been years earlier. . . . Following such a large increase, a 30% decrease is small." (I am assuming that here, he was obviously not talking about the Nasdaq ($COMPX).)
I guess I like that passage because it's a refrain that I've often pounded away at in my daily column.
Bear markets and housing markets
Moving on to housing prices, Sir John comments: "Every previous major bear market has been accompanied by a bear market in home prices. . . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak." Sir John adds, "A home price decline of as little as 20% would put a lot of people in bankruptcy."
Sir John also had a few words about debt -- a four-letter word that folks seem not to care about: "Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further." On that note, he has a word of advice: "After home prices go down to one-tenth of the highest price homeowners paid, then buy."
Well, that's a pretty extreme view, even for me. But I guess it shows you how bearish Sir John is. I'm sure his latest comments will elicit the same kind of response as when he shared his bearish views during the bubble -- that he just doesn't get it. (It's certainly the earful that I and others heard on the back of our bearish sentiments.) Folks who make that argument, protesting that this time it's different, are generally in the unfortunate position of having confused a bull market/rising prices with brains.
Of restricted stock and the Microsoft flock
Last week's big news was Microsoft's announcement that it would replace stock options with restricted stock and treat remaining options as an expense. Microsoft's move is an intellectually honest one, in my opinion, and a rather brilliant one at that. By awarding restricted shares to its employees, it's basically issuing a form of golden handcuffs: the shares vest over time, and the employees must remain with the company in order to sell them. Since Microsoft's stock amounts to a pretty stable form of currency (which is not to say it can't go down, but that a total collapse is unlikely), I believe this will give the company an added edge in attracting top talent. Other companies interested in aping Microsoft may not have as stable a stock, and, of course, most stocks in technology remain wildly, wildly overinflated. Microsoft may be expensive, but I don't consider it to be as egregiously valued as several others. (And, yes, I know, Microsoft is the publisher of MSN Money.)
Microsoft’s move should put pressure on other companies to start expensing options and go the same route, though lots of companies will resist the change. The wampum kings, as represented by Cisco Systems (CSCO, news, msgs) CEO John Chambers, will certainly resist it, as will Craig Barrett at Intel (INTC, news, msgs). But over time, I suspect that these other companies will also be forced to expense options, and probably will be forced to do something like Microsoft has done. In any case, I applaud the move, as it obviously aligns everyone's interests more closely.
Silver shows signs of a rebound
Turning to an arena that I refer to in my daily column as "away from stocks," my contacts close to the silver market note that it's "changing" (and they continue to be bullish). Finally, we are seeing the earliest signs of investment demand, something that's been missing from the silver market thus far. Folks have already decided they want to own gold as protection from the Fed's printing presses, and it now appears that a little of the same kind of money is trickling into silver. As a much smaller market than gold, it stands to benefit disproportionately. That said, silver remains very volatile, and the uptick in investment demand is in its infancy. But this glimmer of change strikes me as a big deal.
Fixed income, too, may be witnessing an interesting change, on the back of last Wednesday's news that Peter Fisher will step down as Treasury undersecretary. Fisher had been adamant that 30-year bonds wouldn't be issued on his watch. Now that he's going, and, in view of our government's exploding deficit, perhaps the Treasury may start issuing 30-year bonds again. So, for anyone who has an interest in the long bond, this may turn out to matter.
Of please-wait mail and hate mail
Finally, a closing word or two on my e-mail. I continue to try to answer your questions as best I can, but a backlog of nearly 600 has thrown a wrench into responding in a timely manner. Please bear with me and keep sending in your questions to my site, Fleckensteincapital.com, as I do grind through them. If I don't answer your e-mail specifically, it may be lodged in my in-box (most of them now are older e-mails), or perhaps I've already answered a similar question.
Also, for those of you keeping score at home, my hate-mail indicator predictably went 'tilt' last week, indicating this phase of the rally might be on borrowed time. I'm not sure when it will end, but all the signs of speculative activity and sentiment changes are in place, and it could happen at any moment. I only short a little and very, very judiciously, until I see signs of a failed rally. (Last week’s sell-off was more like exhaustion. But I have been stepping up my purchase of fall puts, as I think we will see a total collapse before the fall is out.)
Meantime, I continue to be struck by the number of bulls given to end-zone dancing. This reminds me of the apocryphal story concerning advice by a football coach to one of his players: If you happen to get in the end zone, don't act like it's the first time it's happened.
Regards,
Naz
John Mauldin Weekly Review
The View From Europe: Greenscam
The Easy Prediction?
Where's the Growth?
But Where is the Recession?
The Fed Must Become Transparent
Home Again, Off Again
By John Mauldin
July 26, 2003
This week we review what I learned on my trip to Geneva; we look at a way
to invest in the Chinese Renminbi; I offer some thoughts on master
strategist Paul McCulley latest essay; I ponder the implications of Bill
Bonner's soon to be released best-seller; and, I get more concerned (and
vocal) about Greenspan and Fed policy. It should make for a thought-
provoking and interesting letter.
Last Tuesday evening I spent one of the more stimulating (and enjoyable)
evenings I have had in a long time in the home of one Francis Stobart of
SODITIC in Geneva. He had assembled a small, but eclectic, group of Swiss
private bankers and asset managers for dinner to discuss whatever small
insights into finance and economics I might be able to dispense. I was
expected to sing for my exceptional supper and superb wines, but I believe
I walked away with far more insight than I was able to impart.
While the size of the firms represented ranged from huge to small and the
range of services was quite diverse, we all had one common connection: our
clients expect us to come up with investment strategies that make sense in
today's world. The problem is the future seems particularly risky as of
late, with the world of investment ideas a less and less friendly place.
Where does one safely put assets, whether it is billions for institutions
or smaller personal accounts for retirees? One very large and rather
bearish manager is now suggesting his rather substantial clients allocate
15% to physical gold. While not all participants were quite so bearish, the
outlook was more somber than I would have expected.
Reading an advance copy of Bill Bonner's new book, Financial Day of
Reckoning (on my computer - it will soon be out in print) on the ten hour
return flight did not relieve that note of concern. But it did give me some
food for thought as I reflected upon the conversation. A few of those
thoughts gleaned from that evening might be of interest:
Greenscam
As might be expected, there were more than a few questions for a Republican
from Texas. Not only at this dinner but throughout the week, I was posed
some hard, but polite, questions. The night before, I had dined in Paris
with a friend of Chirac's, who also had questions. Jean-Michelle noted that
it was not the strategy in Iraq that was the concern, but the execution.
I have been a staunch defender, and still am, of the President. But I will
tell you that it is disconcerting to talk with sophisticated men of
considerable experience in the world who so clearly did not understand the
President's view or America's concerns. It was not a case of these men not
listening (I did not have an opportunity to discuss events with any
ladies). It was not always a case of disagreement. We have clearly not
communicated well to the public at large, and that must be corrected or it
will come back to haunt us.
But the subject of the evening was primarily economics, so that is where we
will return. There was almost universal unease with the US economy. There
was a recognition that the US was the economic engine for the world, and a
concern the engine was running out of steam. There was an intense
discussion on Greenspan's latest policy statements, which none (including
me, of course) in the room could understand. It is best summed up in a
statement by Alex Bridport, of Bridport and Cie., in a client letter he
wrote the next morning. (Bridport is a major firm, consulting with large
European institutions on their bond portfolios, which in the aggregate
would be well in excess of $100,000,000,000. They have bought over
$20,000,000,000 in bonds for their clients just since the beginning of the
year. In short, they have their fingers on the pulse of European
institutional investors.) This caustic note from Sir Alex:
"When it comes to wealth destruction, the recent fall in bond values must
rival any thing that happened to the stock market when the bubble burst.
For this contribution to mankind, investors can thank Alan Greenspan for an
operation we might call the "Greenscam." It involved him allowing investors
to believe that the overwhelming risk was deflation and that all means
would be used, including the Fed buying long T-bonds, to keep long-term
yields low and support the "carry trade." Then Greenspan pulled the rug and
investors all fell down, taking off the carry trade.
"We admit to being as much a victim of the Greenscam as anyone else. At
least we all know whom never to trust again. Beyond the half-truths, the
inherent contradictions and unproven optimism about the rolling "recovery
in six months," our task is to weigh up the likely developments in the US
economy as the starting point to what will happen there and elsewhere.
Until last week we had "swallowed" the Greenscam line that the economy
could only recover or deflate. Since recovery with such a debt load looked
impossible, we went along with deflation being the more likely scenario,
although, in fairness to ourselves, we saw it as only a short-term
phenomenon, as a weakening dollar would offset deflationary pressures in
time (we overestimated the amount of time in making a "wild guess" of one
year).
"As of last week, because of a little publicized report that producer
prices were rising at a 4.8% annual rate, we began to think of the third
possibility: stagflation. Given our view that recovery is impossible until
the US imbalances have been corrected (a view we hold despite volatile
stock market rallies), we see the debate as deflation vs. stagflation. The
latter is understood to mean slow growth (only slightly above growth in
working population), increasing unemployment, and rising inflation and
interest rates.
"A major question for the outlook in this stagflation vs. deflation
competition is the future of the dollar. Bridgewater points out that, in
past periods of high twin deficits, the dollar fell but bonds did not. They
see the Fed producing "whatever liquidity is needed to shift some of the
downward pressure on bond and stock markets to the US dollar" - hoping to
attract foreign capital because the dollar is cheap (presumably with a view
to its appreciating again). Up to that point we agree with Bridgewater's
analysis, but we have to part company with them when they continue to see
the deflation model and falling yields as the most likely scenario.
"Our view is towards the stagflation model, because of the force of
argument from the indices and because the dollar looks likely to fall
again. Despite our now leaning towards the stagflation model (yes, we
changed our minds over the last few weeks - but the facts changed, too!),
it would be inappropriate to recommend maturities other than those close to
the bond index. Yields overshot on the way down and may well do on the way
up. Besides the Greenscam may not have run its course. New cash should wait
on the sidelines or be used to buy instruments to counter a further rise in
yields and inflation."
I am attracted to this view, as it is similar to mine, although I think the
time-line is somewhat longer and more stretched out. Reviewing quickly, I
think we are in a slow growth Muddle Through Economy. The Fed has virtually
guaranteed that short-term rates will remain low for some time, until
either inflation appears or the economy is soundly growing above trend.
Neither, as I explain below, is my most likely scenario. At some point,
there will come a recession (there is always another recession), without
the Fed having the "ammunition" of being able to lower short term rates. In
my opinion, if a significant rise in rates, either long term or short term,
were to happen in the current slow growth economy, it would indeed trigger
a recession.
Since recessions are by nature deflationary, the Fed will respond with the
rest of its arsenal, as they view deflation as the worst of all possible
worlds. I believe they will indeed stop deflation dead in its tracks.
However, I think that leads not to a comfortable reflation and a return to
the Roaring 90's, but to a slow growth inflationary period, similar to the
stagflation of the 70's. It will become the Muddle Through Decade.
I use the term Muddle Through to suggest that we are not facing an End of
The World As We Know It scenario. For a variety of reasons, I do not think
we will see a return of the Great (or even a Lesser) Depression, as do
some. However, there are significant imbalances that must be addressed, and
until they are, there will not be a return to continued above trend growth.
That means the investment opportunities will be different than those of the
80's and 90's.
The Easy Prediction?
And this is where we will momentarily digress and look at Paul McCulley's
latest essay. He is the managing director of Pimco, the world's largest
bond management company. McCulley makes me think as few other writers do,
offering insights and analysis in a flowing writing style. When I disagree
with him, as I sometimes do, I am forced to think through the reasons why.
Sometimes I change my views, as the facts change, and sometimes I can
become ore confident of my own. In either case, it is a valuable exercise.
(My real "complaint" with McCulley is that he only writes once a month and
I would like to read more of his thought.)
McCulley writes this week at www.pimco.com:
"I believe the Treasury market is in a "rational" bubble, because the
intermediate term global economic outlook is a bi-modal one, rather than a
"normal" bell curve. Put more bluntly, Keynesian reflationary policies will
work and inflation will go up, or they won't work and deflation will
unfold. A perpetual muddle-along scenario, the easiest one in the world to
predict, is also, I think, the least likely."
(By this, I assume he means suggesting that the current status quo will
continue "perpetually" is unlikely. I would agree that "perpetual" is most
unlikely. It is difficult to imagine a scenario of low inflation, slow
growth lasting for too long a period of time. I will outline the reasons
why below. But in the short-run of the next few months and quarters, it
seems to me the more likely case.)
So who is right? Bridport or McCulley? Both are sitting on monstrous piles
of bonds. Both are extremely smart and have the best and brightest working
with them. Let me weigh in, offering a few thoughts on the matter.
As I look around the room at my fellow "predictors," I notice a large
gathering at the end of the room labeled "strong recovery." They suggest a
powerhouse recovery, as predicted by the Fed for next year (between 3.75%
to 4.75%). Fed Governor McTeer suggests that such growth will not even be
inflationary. Fed Governor Bernanke's speech this week suggests the same.
Powerful growth and no inflation pressures? Ah, for such nirvana to
actually arrive. I will be surprised, but delighted.
Or consider the very robust numbers like those from the Blue Chip Economic
Survey. They estimated that the gross domestic product gains for the third
and fourth quarters would be 3.6% and 3.8%, respectively. (ABC News)
Over on the other end of the room is a smaller crowd of Austrian economists
and other assorted bearish predictors, who look at the huge imbalances in
trade, debt and government deficits, not to mention large (they think
excessive) money growth, and see a very unpleasant ending.
There are not many "stuck in the muddle" of the room with me, though my
company is swelling somewhat from the real loneliness of last year. Those
who actually have to eat their own cooking are not as optimistic as the
Fed. Today we read on Moneyscope: "U.S. businesses are less sanguine. The
National Association for Business Economics spoke with 123 corporate
planners and financial analysts and came up with a dimmer outlook.
According to the NABE survey, the forecasts were 3-to-1 for growth below 3
percent for the remainder of the year."
McCulley make the case for either deflation or a successful reflation.
Bridport (as I have) suggests a third alternative: stagflation.
Let's take the case for the deflation scenario. As noted above, this week
Fed Governor Ben Bernanke once again weighed into the topic, telling us the
deflation threat is real even if the economy enters into a period of robust
growth. (For the economically inquisitive, you can read the speech at
http://www.federalreserve.gov/boarddocs/speeches/2003/20030723/default.htm)
First, he tells us:
"This distinction between inflation that is positive yet too low and
deflation is worth exploring for a moment. Although the Federal Reserve
does not have an explicit numerical target range for measured inflation,
FOMC behavior and rhetoric have suggested to many observers that the
Committee does have an implicit preferred range for inflation. Most
relevant here, the bottom of that preferred range clearly seems to be a
value greater than zero measured inflation, at least 1 percent per year or
so."
He notes that Core CPI was only 1.5% for the year ending June 2003 and
trending down in a year over year basis. "Core personal consumption
expenditure (PCE) price index, a so-called chain-weight index that has the
advantage of allowing for shifting expenditure weights, also fell ...to 1.2
percent." Thus, we are in "shouting distance" of the lower end of the
preferred range.
What can happen from here? "..the factor most likely to exert downward
pressure on the future course of inflation in the United States is the
degree of economic slack that is currently prevailing and will likely
continue for some time yet. Although (according to the National Bureau of
Economic Research) the U.S. economy is technically in a recovery, job
losses have remained significant this year, and capacity utilization in the
industrial sector (the only sector for which estimates are available) is
still low, suggesting that resource utilization for the economy as a whole
is well below normal. By conventional analyses, therefore, even if the pace
of real activity picks up considerably this year and next, persistent slack
might result in continuing disinflation."
But what if "the pace of real activity" does not pick up considerably? What
if the "output gap" or economic slack to which he alludes to does not
close? It would seem to follow from Bernanke's thought (and I agree) that
deflation becomes an issue. This could come about as the economy continues
to slowly shed jobs, raising the level of unemployment, with the
accompanying effects of falling consumer confidence and spending. A
recession would follow at some point. This might take a long time (up to
several years), but without sustained above trend growth, it seems a very
possible scenario.
What if instead of a slower pace of growth we have an actual recession?
This scenario is real enough in the short term if long term interest rates
continue their recent steep rise. (I addressed the concern last week: a
substantial rise in mortgage rates, beyond the current levels. Thus
mortgage refinancing slows, thus consumer spending on the margin is
affected. This also means new housing construction slows as rates rise, and
thus the two areas of the economy which are keeping things afloat suffer.
The more rates rise, the greater the problem.)
Thus deflation could result from slow growth or a rapid rise in rates. One
is faster than the other, but either still gives us deflation.
As McCulley forcefully and logically points out, Greenspan is not likely to
raise rates for quite some time, and perhaps not again in his career. (I
really do urge readers to read this month's McCulley essay, if only for
this point.) As I wrote above, the Fed will act decisively, although as
Professor Robert Shiller wrote several weeks ago in the Wall Street
Journal, the fear is they will act to late. In either case, whether they
are reactive or proactive, they should be able to reinflate the economy.
But if we are in a recession, it will not be easy. The Fed will have to use
"unconventional means." They will re-ignite inflation.
The point for this phase of the argument is not how much inflation they re-
ignite, but to suggest that deflation of more than a short term nature
should not be in the future, barring an unforeseen "shock" or serious Fed
incompetence.
But Where's the Growth?
But what of the happier scenario: a successful reflation and a solid,
growing above trend economy? Let us make no mistake, a Fed forecast 4.75%
annual growth rate for several years, even given Bernanke's "output gap,"
will ease deflation worries, re-ignite employment and set the stage for a
healthy rise in interest rates. 4.75% growth will cure a lot of ills and
ease a lot of imbalance.
Try as I might, I cannot see such idyllic circumstances in the cards. Where
will the growth come from? A large boost in business spending does not seem
to be in the cards given the NABE survey of real businesses. As an example,
GM reports that 90% of its last quarter profits were from financing
activities, and half of that from mortgages. Morgan Stanley predicts GM
loses money on its actual car manufacturing in the third quarter. Neither
does the ISM survey of manufacturers support the case for a large growth in
business spending.
Can consumer spending grow at 4.75%? "In the late 1970s the rate of
consumption in the U.S. economy as a percentage of GDP was 62%. By the end
of the 1980s, that number rose by 4% to 66%; and it rose another 4% by the
end of the 1990s. But by the end of 2001, consumption as a share of current
GDP growth exceeded 90%." (Financial Day of Reckoning by Bill Bonner, due
out in October - see more below).
If what little growth there is comes from consumer spending, who are
already 70% of the economy, how much more of the heavy lifting of growth
can they do? Especially given that a large part of that growth comes from
debt and mortgage refinancing? If rates are backing up, is it likely that
this growth will continue? If lowering rates have been a stimulus, will not
rising rates be a drag?
Can the third leg of the economy, housing, be expected to grow from record
highs? Admittedly, the recent weeks have set records, but it is highly
plausible this was the result of homebuyers pushing their purchase up in
time in fear that rates have seen permanent lows and will not come back
down. Let's wait and look at what sales will be over the next few months as
rates climb back over 6%.
Is a lower dollar going to boost the economy? It will help, but a weakened
world economy does not seem ready to buy American with the same vigor with
which we buy foreign goods.
Louis Rukeyser suggests that the bond market is confirming what the stock
market is saying. They both suggest that a recovery is imminent. The
question is: how reliable are such market prophecies? The stock market has
given us four separate "predictions" in the past few years only to watch
them fail. The bond market could be said to be simply returning to the
level prior to the Fed's (evidently) misunderstood "promise" to lower long
term rates which Greenspan took off the table.
In short, I fail to see from what quarter the impetus for robust growth
comes.
But Where is the Recession?
All that being said, the current data does not suggest a recession.
Consumer spending is holding up and even rising slightly. Business spending
is positive. Capacity utilization is not falling. Productivity is rising.
There was a nice rise in durable goods spending today. Absent an increased
rise in mortgage rates, this does not appear to be an economy ready to roll
over.
The final scenario of stagflation? I posed the following question to my
dinner companions: What is the largest US export? My answer was that it is
the US dollar. We are currently exporting 5% of our GDP each year. While it
would take too long to go into the total argument, suffice it to say this
cannot continue for too long.
The world at some point simply starts to want something besides dollar
denominated debt. It will not be too many years at the current rate until
foreign central banks would hold all US government debt. It is simply not
credible to believe such a situation will occur. Long before that time
comes, foreign governments will begin to look for other ways to hold their
reserves. The market will simply force them to do so. Too much of a good
thing is still too much.
"What investments do you think have potential in the current environment?"
they asked as the evening drew to a close. One of my answers was the
Chinese renminbi versus the dollar. Given that the room was almost entirely
bearish on the dollar, there were nods all around. "How do you do that
trade?" they shot back.
I noted that a US bank offered cash equivalent renminbi accounts. How do
they do such a thing? Forward swaps on a rolling basis was the answer.
The bank is our old friend Everbank. You can indeed open an account which
will be denominated in renminbi. (fyi, renminbi is the official name of the
currency. The name the Chinese people call it is the yuan.) The account
pays 0.5% annually, but costs you that much to exchange the currency both
in and out. When the Chinese government allows the renminbi to revalue, if
it goes up against the dollar, you will benefit from that increase. While
many observers think it will revalue about 30% over time, the question is
how much time is "over time"? Is it 6 weeks or 6 months or 6 years?
The Chinese government shows no indication that it will respond to foreign
pressure to allow the currency to rise. They like the competitive edge it
gives them as they try to find jobs for their under-employed nation. Then
only reason they will do so is the market may force them to allow the
currency to slowly rise or they risk over-heating their economy, as
articles in both the Financial Times and Business Week point out this week.
Since the Chinese government forces their nation's businesses to sell any
dollars they receive to the government, the businesses are finding a home
for their Chinese currency in real estate, which is rising rapidly in
value. To prevent a bubble, the government may be forced to slowly float
or widen the bands (the upper and lower limits) under which the currency is
allowed to trade. Every time the government widens the bands, I expect the
currency will immediately trade to the upper limit of the band.
You can find out more about these accounts by calling Chuck Butler at
Everbank at 800-926-4922. In the interest of full disclosure, let me note
that my publisher (and through them therefore me) has a sponsorship
agreement with Everbank.
When the Chinese begin to find they have too many dollars, the end of what
Bonner calls the Dollar Standard Era will be nigh. The dollar will correct.
Rates will likely be forced back up. Rising interest rates, rising
inflation and slow growth will give us a period that will not be a repeat,
but it will be a rhyme, of the 70's and stagflation.
The Fed Must Become Transparent
Let me offer one final thought on a point that hedge fund manager Phillipe
Peress of Big Star Capital made at our dinner. He noted that the Swiss
central bank made it quite clear last year that the Swiss franc should no
longer be considered a "safe haven" currency. Too much money was flowing
into the country, causing relative prices to rise. (Indeed, I bought my
first $6 Diet Coke [a mere ten ounces] this week. A meal at McDonalds for a
family of four costs $30. Switzerland is a wonderful country, but the cost
of living is high.) To back up their words, they have drastically cut rates
and let it be known they intend to monitor the franc-euro levels. They were
quite clear about what they intended to do and then did what they said.
This is in contrast to the recent Fed actions. Paul McCulley noted:
"If there was ever any question about this dynamic dance between the Fed
and opportunistic buyers/sellers of duration, market action since last
November, when the Fed launched a rhetorical anti-deflation campaign,
should end it. Regrettably, Fed Chairman Greenspan started the campaign on
November 13 by declaring that the Fed could/might buy longer-duration
Treasuries outright:
"There is an implication in the notion (of fighting deflation risks) that
we are restricted solely to overnight funds. But our history as an
institution indicates that there have been innumerable occasions when we
have moved out from short-term assets and invested in long-term Treasuries.
We do have the capability, if required to do so, to go well beyond
activities related to short-term rates."
"I say that it was "regrettable" that Mr. Greenspan started the anti-
deflation campaign this way, because he needlessly changed the nature of
how Treasury markets participants must handicap prospective Fed policy.
Outright buying of long-term Treasuries was and is a "last resort" for the
Fed, and a step that is highly unlikely to ever be taken. The Fed
would/will do so if, and only if, market participants fail to appreciate
and discount what the Fed was planning to do, and is planning to do: hold
the Fed funds rate super low for a long, long time."
The market clearly thought the Fed was planning to move actively on long
term rates. They perceived this from Fed speeches and statements. The Fed
also clearly understood this was the perception, as more than one
commentator, in scores of circles (myself included) noted the apparent
change in policy direction. The market, without any real Fed action, drove
rates down, thinking they had a green light from the Fed.
Then Greenspan simply discounted the notion in his congressional testimony,
and rates have moved violently back up. Recent bond investors have lost
money. As Bridport noted, many feel they have been subjected to a
Greenscam. Once bitten, twice shy?
It is harder to redeem a reputation than build one. This is why I have been
so adamant about transparency at the Fed. Bond investors hate uncertainty.
They cannot plan in such an environment, and that is what we have today.
Bernanke's speech was made to help quiet such worries.
The last three paragraphs of his speech are the most important (emphasis in
bold is mine):
"What I have in mind here is not a formal inflation target but rather a
tool for aiding communication. The main purpose of this quantification of
price stability would be to provide some guidance to the public and to
financial markets as they try to forecast FOMC behavior. In a situation
like the current one, with inflation presumably near the bottom of the
acceptable range and trending down, and with considerable slack remaining
in the real economy, the Fed could make use of this quantitative guidepost
to signal its expectation that rates will be kept low for a protracted
period, and indeed that they would be reduced further if disinflation were
not contained. If private-sector forecasts also called for disinflation,
confirming the downward risk to price stability, then medium-term bond
yields should accordingly be low, supporting the Fed's reflationary
efforts.
"In principle, one could communicate a similar message, though perhaps less
precisely, without a quantitative measure of price stability. What is
missing from the purely qualitative communication approach, however, is an
exit strategy. At some point in the future, if all goes well, inflation
will stabilize, and interest rates will begin to rise. The task of
communicating the timing of that switch to markets with a minimum of
confusion and uncertainty is crucial and difficult. A quantitative measure
of price stability provides one objective basis that bond market
participants could use to help forecast the change in policy stance. For
example, they would know that as disinflation risk recedes and inflation
forecasts begin to cluster in the middle to upper portions of the price
stability range, the Fed is quite likely to react. And, indeed, the
forecasts of bond market participants and the resulting rise in private
yields will help to contain inflation, doing some of the Fed's work for it.
"In closing, for me the lesson of the May 6 statement was to underscore the
vital importance of central bank communication. In a world in which
inflation risks are no longer one-sided and short-term nominal interest
rates are at historical lows, the success of monetary policy depends more
on how well the central bank communicates its plans and objectives than on
any other single factor."
Such words are refreshing, but are not enough. They must be backed up with
actions. It is simply inappropriate that a small group of men operate in
such secrecy on matters of vital public interest. Given that their recent
actions are clearly promoting instability and putting the entire world
economy at risk, it is more than inappropriate.
Home Again, Off Again
It is late and the letter is long enough. I will have to comment on Bill
Bonner's book Financial Reckoning Day (Wiley) in a later letter. I have
almost finished reading an advance (electronic) copy, and I can tell you I
think you should read it as soon as it comes out. Do I agree with every
word? No, but like McCulley, Bonner makes me think, and he will make you
think, too. If you only read people who think like you, you will soon find
you do not do much thinking. It is in the arena of ideas that the blade of
the mind gets sharpened. It also helps that he is a writer's writer, one of
the best crafter of words I know, and simply a pleasure to read, even if
his words are sobering. You can get a copy shipped as soon as it is ready
by going to Amazon.com
(http://www.amazon.com/exec/obidos/ASIN/0471449733/frontlinethou-20).
I leave on Monday for Nova Scotia. I have promised my bride a week of
actual vacation. Just to insure my resolve and from looking at the
itinerary, I think she has found a few places where the internet does not
conveniently reach. Withdrawal will be hard, but she promises I will
survive. At the end of the week, we come back to Halifax and civilization,
and there I find if I can work away from the Texas heat and my office for
the next two weeks. Clients should note that these latter few weeks will be
a working "vacation," and I will be available. I will also contact those
who have asked for a meeting in San Francisco from August 14-17.
Your looking forward to cool evenings analyst,
John Mauldin
Weekly Market Indicators
The DJIA remained locked in a 186 point trading range last week as closing values fluctuated between 9096 and 9284. On Thursday, the DJIA flirted with the June high (DJIA - 9323.02), as it topped 9280 early on before it reversed course giving up 81.73 points to close at 9106.42. For the period, the DJIA gained 96 points (+1.0%) and closed at 9284. It was the same story over at the NASDAQ, which gained 22 points (+1.3%) for the week and settled at 1730. For the year the NASDAQ is up over 29% while the DJIA has gained more than 11%.
Momentum Index: The Momentum Index, +4, lost two points from last week's +6 reading. Breadth was mixed as the NYSE Advance/Decline line lost 24 units while the number of NYSE stocks making new 52-week highs outpaced the new lows on all five trading days. The percentage of NYSE stocks above their 200-day moving average eased to 84.4% vs. 85.2% while those above their 50-day fell to 66.6% vs 68.2%.
Sentiment Index: The Sentiment Index is neutral at +1, unchanged from last week's neutral +1 reading. This is the lowest reading in over two years and reflects a large degree of complacency that has permeated the market. The percentage of bullish advisors is in bearish ground at 55.2%, down slightly from 57.4%. Readings over 55% are considered bearish. The put/call ratio was steady at 1.20 down from last week's 1.23 reading while VIX slid to 20.46 down from last weeks 22.82. Readings under 20 are regarded as bearish. For the week ending 07/23/03, U.S. equity mutual fund inflows was $3.2 billion compared to inflows of $852 million the previous week.
Strength Indexes: All three of the Strength Indexes remain in negative ground suggesting a continuation of a trading range market over the next several weeks. The percentage of Dow stocks under accumulation improved to 30.0 up from 26.7 last week. The percentage of NASDAQ-100 stocks considered to be under accumulation slipped to 31.3 from 33.3 while those in the S&P-100 increased to 29.6 vs 24.5. Readings under 50.0 indicate that the majority of the stocks in the index are under distribution, a short-term bearish condition.
Support for the DJIA is at 8870 followed by 8461 while resistance remains at 9413. Support for the NASDAQ is 1598 and then 1478 while resistance remains around 1760.
Regards,
Naz
MW - Fed OMO
Nice picture of our pals . Unlike myself, the monkeys are very photogenic.
Mail's interest in posting likely would increase once our project comes to fruition. Until that happens, I feel he's under a very tight time constraint that simply won't allow him to participate on a stock thread. You have to remember he has a wife, five young children, a partnership in a public accounting firm and a developing new venture. There simply are not enough hours in the day to do anything else.
Regarding the Fed, here is an old post of mine describing the open market operations:
The staff of the New York Fed's Trading Desk continuously monitors global financial conditions and the state of banking reserves each day. After extensive deliberation beginning early each morning and a conference call with all of the regional feds, it determines whether or not it will add to, drain from, or leave unchanged the level of banking reserves. This is carried out on a daily basis. A plan of action is established for the day, and the Fed executes it by moving huge amounts of money through its network of 22 primary dealers, which are banks and securities brokerages that deal in US government securities. To give you an idea of the money flows being executed, these 22 dealers averaged $375 billion per day in trading volume of U.S government securities in March, 2002, according to the New York Fed website.
The most frequent transactions are called "repurchase agreements" or repos (RP) for short, which are described as short term transactions whereby the Fed purchases securities from the dealers, who agree to repurchase them from the Fed by a specified date at the specified price. When the repos mature, the added reserves are automatically drained. The Fed pays for the securities and takes delivery thereof simultaneously. When they mature, often the next day, (known as "overnight repos"), the securities are returned and the funds reimbursed by the dealers to the Fed.
The reverse of a repo is called a matched sale-purchase transactions (MSP's), whereby securities are sold to the dealers for cash, and then repurchased from the dealers upon maturity. Both Repos (RP's) and matched sale-purchase transactions (MSP's) are temporary open market operations. Sometimes the Fed will sell securities to or purchase securities from the dealers outright, which affects the dealers' reserves on a permanent basis.
The effect of these OMO's on the 22 dealers' reserves has a direct influence on the level of liquidity in the markets. When the dealers have excess reserves, they are free to play with those funds until such time as the funds must be refunded. This liquidity finds its way into the markets, purchasing securities. On days when reserves are drained, the liquidity finds its way out of the market. During the past months, there has been a tendency to see market strength on days when large repos of $5-10 billion have been announced. When these repos expire, if they are not replaced with new repos, we often see market weakness.
The trouble for traders is in knowing which markets will be affected by each Open Market Operation, and within each market, which securities. Repo money can go into equities or fixed income securities, currencies, or whatever else the dealers wish on that day. I have read arguments to the effect that companies such as MSFT are prime targets for Fed money because they are listed on multiple indices, and so buying or selling in MSFT gives the Fed's dealers the greatest bang for their buck. Remember that the Fed's goal is to encourage the stability of financial markets. When these markets are in jeopardy, smart traders watch for the Fed's morning announcement and consider which markets need it most.
Tracking the Fed's Open Market Operations gives the trader a window on how much money will be available to the markets that day relative to past days. Experience will permit you to assess the impact of different sums- is a $1B drain substantial? Might the markets tank or just drift? Generally, all that one can know is how the Fed's daily activity will bias the markets, and so it is far from a magic indicator. Many traders I know and respect will not put on bearish positions on a day in which the Fed has announced a repo for more than a few billion dollars. Like most other indicators, it will eventually help to fill in your overall market picture in its own particular way.
the Fed's daily Open Market Operations in the Market Monitor and will continue to do so. To follow the Fed's daily Open Market Operations, bookmark the following link:
http://app.ny.frb.org/dmm/mkt.cfm
Good luck.
Regards,
Naz
Husky - re: Mailman
I used to talk to Mailman several times a week. We have been working on a project together since last August. However, I ran into a roadblock on the project at the beginning of April and hadn't talked to him in over three months. I made a small breakthrough yesterday morning at a meeting so I called him. Needless to say, we had some catching up to do. From my dealings with him, Mailman is a pure joy to work with from a business standpoint. He does everything he says he is going to do and then some. It really facilitates my end of the project. Its outsiders beyond our control that are the cause of the headaches and problems.
Unfortunately, I can't divulge any of the contents of our project and discussions pertaining to them. What I can say is that he is doing very well and is enjoying the challenge of this new venture. However, coupled with his public accounting work, his time is consumed completely every day. He no longer trades nor follows the markets on a regular basis, therefore reading/posting on a forum such as this would be a complete waste of his time.
I don't have an opinion on ALT, as I haven't followed the stock. I'll put it into the Amazing Stock Picking Monkey's mail slot and have him do some follow up research .
Good to see you here Husky. Take care and good luck.
Regards,
Naz
Tightening stops on long positions based on Fed OMO.
Again, thanks to MW for setting up this board. IHub is a much better setup than RB and Yahoo IMO, and 18 free posts per day should be more than enough. By the way, I spoke to Mailman yesterday. He is doing well, busier than ever with his new venture.
Another drain from the Fed today, with $2.5 billion in weekend repos announced against $8 billion expiring, equating to net $5.5 billion drain.
Yesterday, the big Fed repo drain didn't hit the markets until around 2:15PM EST. There's another big load of funds coming out of the market today, but we don't know if it will be from bonds or from equities. Either way, let's watch from 2PM onward and see if there isn't a pattern to be had. Either way, be careful on the long side. If you're going to initiate a position and hold it for awhile, better to be short than long given the repo drain announced today.
Short cycle oscillators now on sell signals, long intraday cyle oscillators rolling, ADX trendless.
That buyout call on IGEN by tracker144 on RB a few days ago has to be the call of the year so far. Congrats to all those who got in on that action.
Still holding ASPT, GPRO, CHRD, & RFMI. Stopped out of FNSR for a $0.20 loss.
On an unrelated topic, truth is stranger than fiction:
http://story.news.yahoo.com/news?tmpl=story&cid=573&ncid=757&e=3&u=/nm/20030725/od_n...
Good luck.
Regards,
Naz
Trades.......
CHRD - Chordiant Software: The Amazing Commercial Trading Monkey is hearing positive developments are brewing. Stock trading twice its average daily volume hit a new 52-week high intraday. In on Wednesday @2.30.
IMCL - Imclone Systems: This chart is once again shaping up very bullishly. Picked up September 40 call options (QCIIH), at $3.00 with spec capital.
RFMI - RF Monolithics: Another new 52-week high. Look for double digits in the near-term. In @8.18 on Wednesday.
FNSR - Finisar Corp.: Technical play here. Stock has recently made a technical breakout and looks headed to the $3.00 level. In @2.14 on Wednesday.
Regards,
Naz