Market Update

We had two positive news- good retail numbers and money flow into Citigroup. Think about the worst affected sectors that drove down the market, were they not Consumer Discretionary and Financials. If these negatives are eased, they allow for good ingredients for a rally. Keep this mind over the next few weeks, this can really help play the market.
Even though there was havoc on Tuesday, the volume was very low. So, probably the big money was not selling yesterday. That concluded to a nice rally today. But the overriding factor is ease of negative news and oversold levels.
Keep in mind the following chart posted here. Once that red line is crossed, we will setup for a meaningful rally. As far as my stocks are concerned, my predictions has turned true for DRYS short which I covered yesterday. Still holding my TSL short. It broke the earning day's low today at 33s and snapped up two points. Will see how it moves from here. Short was initiated it the 37-38 range. Other than that I still have a lot of longs on my list.

DRYS Weekly chart

On the weekly chart, DRYS confirmed a breakdown from the uptrend channel.If you see last week's candle it clearly indicates that it fully travelled outside the channel. This further confirms the breakdown from the daily channel as posted last week here.
If you are long-term short holder, keep your stop at 89. If you are a shorting on a short-term basis, your stop will be at 82. Target is at mid 60s.

Market Update- Bottoming out soon?

Observe the above chart carefully. This is the Nasdaq-High-Low index. Look at each of the BLUE arrows at the bottom of the chart. These indicate past lows in the market. Now if you check any of the market indices, you would see that these points roughly correspond to the market lows in the indices. Similarly the RED arrows on the top correspond to the tops in the market. To validate the reliability of this condition, I compared the last RED arrow which indicated a top in the market. As posted on the chart it seems that though this indicator pointed to a top in the first week of October, the market continued going up for another 3 weeks. But the action in October was very back and forth during this period as we all painfully remember and then the market took a big dive.

Now coming to the current market action and the bottom shown on the above chart for the week of Nov 12; are we in a bottoming out phase before the next uptrend begins ?
The BLUE arrow shown as market bottom in the first week of August proved that Aug 16 was the bottom for the market indices (about 15 days apart) and proved that buying the STRONGEST stocks during the bottoming out phase gave returns in excess of 50%. So where do we go from here- you be the judge as the market forces unravel their actions this week. Good Luck All !!

Solars- TSL missed earnings

TSL missed earnings today and is down 26% . This is now in a big corrective action. Baased on Elliott Wave theory analysis, it seems to be working on the C downwave. The C-wave will be very nasty and I believe this stock will move in the down direction. Very good short. If you again see 37-38 short another lot.
Target in 25-26 range.

Volatility continues unabated

We had some crazy volatility today. The markets first tricked the bears by doing a BO, moving above the red line and then in the afternoon failing the BO and going all the way down to the blue line. That blue line is the trendline formed when you connect the Aug 16 lows with last week's low. The market turned at exactly today on the touch of that trendline.
Now we have formed a massive doji on the chart. Atleast the better part of today's action is nowwe know the upper and lower supports.


For shorting, I have my former trend stock- DRYS. Today it conclusively broke the trendline that has been in place for several months. I believe this a good short with target in the 60s.

Market this week

My prediction for last week turned out to be true. I sold many long positions on Monday. Nasdaq and QQQQ with their huge large cap tech stocks were safe havens for this year. This week with CSCO earnings all that was shattered. Mr. Market is very good at shattering safe havens. Ok, now where do we go from here ? This is a very difficult question to answer. Would we turn around here and go back to new highs-possibly not. All I can say for sure is that Friday's low will be taken out. The QQQQ will make a trip to 49.70. That should (hopefully) provide a good support for a bounce rally. So, it is not wise to sell your long positions in panic on Monday. The likelihood of a bounce is very high. Good Luck !!

FSLR comes out with blowout earnings

One of my favorite stocks First Solar posted huge earnings. Check my earnings table that shows the comparisons with other company earnings.
A 900% year-over-growth and beating estimate by 200%. I think this is one of the best earnings for this season. I was long this stock from the 90s and sold all a few days before earnings in high 150s. I missed the huge next-day effect of 35%. I don't mind missing the earnings jump. My plan is to pick a good entry in the near future.

Dollar's fall affecting other economies

The fall of the dollar not only affects US economies but also other economies. One of the ways their economies are affected is that their products become more expensive in US and hence less attractive.
Excerpts from Bloomberg article follow:

Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar.

In Colombia, international investors buying stocks and bonds must leave a 40 percent deposit at Banco de la Republica for six months. The Reserve Bank of India created a bureaucratic thicket to curb speculation by foreign money managers. The Bank of Korea is investigating trading of currency forward contracts to limit gains in the won, now at a 10-year high.

Instead of using currency reserves or interest rates to influence foreign exchange markets, central banks and finance ministries are setting up obstacles to keep the falling dollar from threatening company profits and economic growth. The U.S. currency slumped 10 percent this year against its biggest trading partners, the steepest decline since 2003, while Treasury Secretary Henry Paulson has reiterated that the U.S. supports a ``strong'' dollar.

``Central banks are struggling to find new ways to intervene against their currencies and some of the proposals simply can't work,'' said Mirza Baig, an analyst in Singapore at Deutsche Bank AG, the world's biggest currency trader. Some plans are ``truly bizarre,'' he wrote in a report.

The U.S. hasn't attempted to stop the decline as the worst housing slump in 16 years forced the Federal Reserve to lower interest rates. The dollar has weakened 19 percent against the Canadian currency this year to a record 90.58 cents, and fell 18 percent versus Brazil's real.

The euro strengthened 1.2 percent last week and reached an all-time high of $1.4752 on Nov. 9. The yen rose 3.6 percent in its biggest weekly gain since December, and touched 110.51 per dollar on Nov. 9, the highest level since May 2006.

`More Violent Correction'

An index tracking the dollar against seven major trading partners dropped to 71.11 on Nov. 2, the lowest ever, a week after the Fed reduced its target rate for overnight loans between banks by a quarter-percentage point to an 18-month low of 4.5 percent.

Stephen Jen, head of currency research at Morgan Stanley in London, said on Nov. 2 that the dollar's slide threatens to turn into a ``more violent correction'' that may require joint intervention by the U.S., European Union and Japan. The dollar will trade at $1.51 per euro by year-end, Jen said on Nov. 8.

The extent of the dollar's slump reminds some traders of 1973, when former President Richard Nixon's Treasury Secretary John Connally abandoned the Gold standard while the U.S. was in recession and inflation exceeded 10 percent. The dollar lost 40 percent against the yen in the next five years.

Since 2002, the U.S. currency has fallen 40 percent against the Canadian dollar, 33 percent versus the euro and weakened 24 percent compared with the British pound.

Exports Increase

There's little evidence this year's decline is hurting the economy. Gross domestic product increased 3.9 percent in the third quarter, the highest since March 2006, the Commerce Department said on Oct. 31. The annual inflation rate was 2.8 percent in September, the Labor Department reported on Oct. 17.

The U.S. trade deficit unexpectedly narrowed 0.6 percent in September to $56.5 billion, as exports increased 1.1 percent, the Commerce Department said Nov. 9.

The pain is being felt elsewhere. U.S. sales for Hyundai Motor Co., South Korea's third-biggest exporter, may decline for the first time in nine years with the won the ``No. 1 obstacle,'' Vice Chairman Kim Dong Jin said in an interview last month. The won's 3 percent gain in the past year helped send Hyundai's shares down 9 percent.

Profit Squeeze

Infosys Technologies Ltd., India's second-largest software exporter, cut its full-year earnings forecast on Oct. 11, blaming the rupee's 13 percent rise. The shares fell 24 percent this year.

India may miss its $160 billion target for exports in the year through March 31 as local goods become more expensive abroad, Commerce Secretary G.K. Pillai said on Oct. 8.

Munich-based Bayerische Motoren Werke AG, the world's biggest manufacturer of luxury cars, and Paris-based Hermes SCA, the maker of Kelly and Birkin handbags, blamed the currency market for disappointing profits.

European Central Bank President Jean-Claude Trichet said Nov. 8 that the decline in the dollar has been ``brutal,'' while Canadian Finance Minister Jim Flaherty said he's ``concerned'' by the surge in his currency. French President Nicolas Sarkozy told a joint session of the U.S. Congress on Nov. 7 that the Bush administration must stem the dollar's plunge or risk a trade war.

`New Mechanisms'

``New mechanisms need to be considered because the exchange rate is affecting us a lot,'' Colombian President Alvaro Uribe said in a May 9 speech in Medellin.

Overseas investors have bought $18.8 billion of stocks and bonds in India this year, double the previous record in 2005. The increase ``is building bubbles'' in the country's stock market and real estate, Finance Minister Palaniappan Chidambaram said last month.

To curb speculative flows, regulators in Mumbai adopted measures in October to bar some funds from investing in Indian equities and imposed investment caps and deposit requirements.

Foreign companies licensed to invest in India can only issue participatory notes, or offshore derivatives linked to local stocks, backed by 40 percent of the shares they hold. They were barred from selling notes backed by other derivatives, contracts whose values are derived from other assets.

Indian Restrictions

Trading on India's Sensitive Index was suspended and $120 billion of its market value was wiped out in a minute on Oct. 17, when the regulator proposed the measures.

The Bank of Korea and the Financial Supervisory Service said Oct. 23 that they will study forward currency transactions by exporters and financial companies. Companies use forward contracts to lock in exchange rates at a future date, helping fuel gains in the currency.

``We need to find out the cause of excessive forward sales,'' said Park Shin Young, an economist at the Bank of Korea. Interbank transactions jumped to $850 million a day in the third quarter, up 35 percent from the previous three months, central bank data show.

Policy makers told parliament in October that they will probably lose more than $1 billion for a third year because dollars purchased to stop the won's advance earn less interest than the bonds sold to control money supply.

``Central banks are trying noninterest rate methods to stabilize growth and capital flows,'' said Bank of Tokyo- Mitsubishi's Fullem. ``It's something extraordinary. They haven't used these venues for a long time. It's sort of the last resort the central banks would like to tap.''

This week will be critical

This week will be critical for the markets. As planned, I did not go overboard with any new long positions after the Fed cut. The main reason is the way QQQQ is hanging in the area between the upper trendline and lower dotted line. I am not sure how long it can stay in this area. On Friday it set an hammer and the close of the hammer was right at upper trendline. This is again resistance for the market. QQQQ is a good proxy for the market as seen by the fact that big-cap techs are leading the market.

A few hours back, Charles Prince announced his resignation from the helm at Citibank. There was a lot of angst among investors to oust Prince. So, this will be a welcome news to those investors. The critical point here is the massive writedowns of $ 8 billion to $11 billion. This is much more than the initially announced $2.2 billion during third quarter earnings. Citigroup earnings were already down 57% from last year. This tells you how bad the subprime mortgage mess is and we are still unearthing new dangers. Best is to stay away from any finanical banks that have sub-prime exposure. We lost two CEOs in a week....what is next ?

Why the Fed Will Cut and Cut Again

Interesting article on FXStreet.
Gives a different perspective to the already accepted notion that FED is done cutting rates. The author makes a strong case for future cuts. I am not sure how this can be possible in the wake of the declining dollar. I think FED will stay put for the next 1-2 sessions before cutting again.

Excerpts follow:
The economy added 166,000 new jobs last month, almost double the average estimate. GDP for the US came in at a blowout 3.9% growth, well above trend. The Fed cut its rate by another 25 basis points, but many observers see language in the accompanying statement which they think suggests the Fed is done with cutting, at least for now, as the economy appears stronger.

The Federal Reserve Open Market Committee cut both the Fed funds and discount rates by 25 basis points. Last month they said that "Readings on core inflation have improved modestly this year." On Wednesday they said, "Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation."

In the September meeting they wrote: "Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally."

And the last Wednesday: "Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."

It is clear they are concerned about inflation, irrespective of the Commerce Department saying it was only 0.8% last quarter. (How bogus!) Numerous commentators read into the statements on inflation and the credit crisis seeming to get better, that the Fed is signaling it will not cut rates at its December 11 meeting. Further, there was one vote on the committee to not cut rates, so there is some discussion in that direction.

However, I think the important sentence is the last one: "However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."

If the economy is slowing, then the Fed will cut and cut again. "But John," I hear you ask, "the economy is not doing that badly. There were 166,000 jobs created last month, over double the average estimate."

When a Positive 166,000 Jobs Number is Really a Negative 211,000

According to the household survey, there was no growth in jobs last month. "The labor force contracted by 211,000, total household employment fell by 250,000, and employment adjusted to match the payroll concept was off by 55,000. The year-to-year gain in adjusted household employment is 0.7%, compared to 1.2% for the establishment survey, a gap of 0.5 point; just six months ago, the household measure was 0.6 point ahead of the payroll number." (The Liscio Report)

Let's put aside the fact that 166,000 jobs is not enough to keep up with growth in the population, and certainly well below the average for the past four years. Let's look at how the establishment survey found 166,000 jobs when the household survey says we lost 211,000. To do that we need to go to the birth-death ratio. Below is the table from the BLS web site. (http://www.bls.gov/web/cesbd.htm)

In October, the BLS added 103,000 jobs as an estimate of the BD ratio. They added 14,000 jobs in the construction industry. Does anyone really think that we saw an increase in construction jobs last month? Supposedly we saw an increase of 25,000 jobs in the financial industry. The reality is that financial jobs, especially in the mortgage industry, are being shed left and right.

As I noted above, when the economy is slowing the BD ratio will overestimate the number of jobs being created. And I think the household survey is suggesting just that.

Look at the chart from Lombard Street Research below. It shows the employment surveys on a 3-month moving average. You can see that the two surveys tend to move together, except at times when the economy changes direction.

Quoting Charles Dumas (and emphasis mine): "The payroll jobs number of 1% growth [for three months] is 1% or more below its long-run average, ... If the implied GDP variance - 2-2 1/2% below trend - Lombard Street Research proves to match the past average, the GDP is growing at or slightly below 1%. The same analysis applied to the household number gives GDP growth close to zero. If either is true, these numbers are inconsistent with the results for Q2 and Q3, which ought - given that labor market data are usually lagging indicators - to have produced payroll jobs growth at well over 2%."

Employment is a lagging indicator. Typically, employment does not turn down until after a recession has already started. However, the unemployment level has already risen from 4.4% to a current 4.7%. And the household survey suggests that the rate is rising faster than in the payroll survey. As unemployment rises, consumer spending will also soften. And the Slow Motion Recession will become evident.

Round Two of the Credit Crunch

The credit crisis this summer ended up with the Fed and central banks worldwide adding massive amounts of liquidity into the system. This last two weeks have seen one bank after another make large write-downs of subprime debt on their books. Merrill found a few billion dollars more in losses than they had only a few weeks ago. My bet is that Citi will find a lot more as well.

The problem is that more and more CDOs and other forms of mortgage debts are being downgraded. It is highly doubtful that banks have written down assets in anticipation of future downgrades. As Dennis Gartman says, there is never just one cockroach. The Fed injected $42 billion into the system in the last few days. I believe that is the largest injection that has ever been made.

Take this to the bank: There are going to be more write-downs as more and more mortgages go into foreclosure, forcing more downgrades of mortgage asset-backed paper. Foreclosures are up over 200% in a number of states, and 800-900-1000% in some. Scary. Look at this list of the rise in foreclosures over the last year, from Greg Weldon (www.weldononline.com).

Arizona up + 201.7%, Arkansas up + 254.2%, Connecticut up + 920.7%, Delaware up + 389.4%, Florida up + 130.6%, Iowa up + 180.5%, Maryland up + 491.0%, Massachusetts up + 1,127.7%, Minnesota up + 124.9%, Nevada up + 212.2%, Ohio up + 136.0%, Vermont up + 400.0%, Virginia up + 516.4%, Wisconsin up +155.6%, Georgia up +84.5%, Michigan up + 78.6%, New Jersey up + 56.7%, New York up + 66.7%, North Carolina up + 99.0%, North Dakota up + 85.7%, Tennessee up + 57.3%. And on and on.

A Congressional report suggests that over 2,000,000 homes financed by subprime loans will go into foreclosure in the next 18 months. This means that more and more of the mortgage-backed assets on the books of banks, CDOs, and SIVs are going to become losses.

I think we should be getting ready for a second round of the credit crisis. And I would certainly be uncomfortable with owning any financial stock with exposure to the mortgage markets. We may not know the full exposure of many banks until the middle of next year.

The SIV Superfund is just one signal that this is serious. Last week I gave you charts that showed even AAA assets associated with recent-vintage subprime mortgages securities losing 20% of their value. That is going to bleed over into Alt-A mortgage assets, as home values drop 10 and then 15 and then 20 percent.

The asset-backed commercial paper market declined another $9 billion last week, down for the 12th straight week. It has dropped 26% since August 8, and there is no reason to think that trend will not continue for several months, as commercial paper linked to mortgage assets is simply not being rolled over. The Financial Times talks of one banker who is bartering his mortgage assets to avoid setting a price.

Bottom line? With rising unemployment, a credit crisis, and a housing bubble imploding, this is not a market or an economy where the Fed will be able to sit tight. We are going to see a Fed funds rate below 4% in two more meetings, at a minimum.

And yes, I did notice that gold went over $800 and oil almost hit $96 today. Neither are good signals. With oil jumping $2-3 up and down almost every day, the chiropractors must be doing good business with oil traders suffering from the whiplash they get almost every day.

And the dollar? It hit $1.45 on the Euro. I actually have a regulated financial entity in Canada for which I have to pay fees about this time each year, and they are of course denominated in Canadian dollars. This year the fee was 40% higher in US dollar terms than it was a few years ago. But then, my income from European-based funds is rising as well. My belief is that markets of all types are going to get ever more volatile. Stay tuned.