Cara's Commentary & Community Chat, Tuesday, Sept. 22, 2009

Good morning.

DELL - Downgraded to Neutral @ Credit Suisse

New Coverage:

BBBY - Thomas Weisel Initiates with a Market Weight
BBY - Thomas Weisel Initiates with a Market Weight
PAYX - Wells Fargo Initiates with an Outperform

We never know we're in the midst of an historic market event until it's over. This rally might be one of them.

My wife, who reads almost nothing about the financial markets, and is more a common-sensical observer of the markets, is up 12% over the past 3 months. I am down 2%.

Hmmmmm....maybe not at that price :(

Why Are Banks Paying Signing Bonus So Early?

Posted By Barry Ritholtz On September 22, 2009 @ 9:30 am In Bailouts, Corporate Management, Wages & Income | No Comments

I love the smell of napalm in the morning. You know, one time we had a hill bombed, for 12 hours. When it was all over, I walked up. We didn’t find one of ‘em, not one stinkin’ dink body. The smell, you know that gasoline smell, the whole hill. Smelled like [sniffing, pondering] victory.

Someday this war’s gonna end…

-Robert Duvall [1] (Lieutenant Colonel Bill Kilgore)

>

I’ve recently learned from several MBAs graduating in 2010 about firm signing bonuses. They are being paid out unusually early.

I have been wondering why.

The FOMC’s Zero Interest Rate Policy has been a license to print money — literally for the Fed, and figuratively for the major banks.

Being able to borrow at near zero costs means that making billions of dollars is a no brainer, even for some of the planet’s most mismanaged bankers.

Banks are so flush, they have been repaying TARP funds [2], buying out toxic debt guarantees [3], and repurchasing preferred shares [4] and warrants [5].

The most recent hint of their overflowing coffers are the class of 2010 hires. Traditionally, these new employees receive their sign on bonuses sometime in the spring. Some start work that summer; most (at least in my day) begin in September, following one last drunken promiscuous binge through Europe (Ahhh, youth).

I was surprised to learn that several firms, most prominently JPMorgan, are paying out their signing bonuses over the next few weeks.

Its not too hard to imagine why.

I doubt pending legislation has much to do with it, but who knows. Given how much cash they are throwing off, my best guess is they are trying to spend as much of it as possible in the current tax year.

The crisis, the bailouts, the obscene amount of taxpayer monies that have been usurped and wasted. One is reminded of Colonel Kilgore’s speech in Apocalypse Now [6]: While Duvall’s famous Napalm line gets quoted all the time, it is that last wistful sentiment that is really is the most poignant — and relevant — to the present license to steal.

Someday this war’s gonna end…

Bullish Today, Marc Faber Is "Highly Confident" the Future Will Be Very Bleak

"The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society," Marc Faber writes in the September issue of The Gloom, Boom & Doom Report.

A statement like that pretty much speaks for itself, but it's a bit more complicated than appears on first blush.

Faber has been bullish -- especially on commodities and emerging market stocks -- for some time now and believes the current global recovery trade will last another two-to-three years....... But he has major long-term concerns about the dollar's long-term viability given rising U.S. deficits, massive unfunded mandates and the fact "we have a money-printer at the Fed."

This combination will eventually lead to runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well, says Faber, who is "highly confident" in this grim prediction.

Shorted my favorite miners after their gap up this morning using ITM puts to cap my risk.

Nice chart and earnings.

Bought back into AHR at $1.07...the REITs are still on fire with the recovering economy.

Bought a few more Jan $16 Calls on BAC at $2.97.

I saw a huge buy come in on the Jan $16 Calls this morning for BAC. I believe it was one trade of 15,000 at $2.95.

Again, I'm buying into BAC because I believe their credit card and retail banking business are doing incredibly well due to the large spread between the rates they borrow at and lend at and with the revived credit and M&A markets, their Merrill arm should be doing well. I believe the street is too bearish on this name and I think they will crush earnings on Oct 16.

tof- I think they're going to ramp it up into end-of-quarter, and fund managers who have been asleep at the wheel are going to be doing the driving.

that's definitely possible, 2nd. being underinvested on a company that is benefitted so much by the yield curve could be a "duh, how did you miss that one" moment for fund managers.

the last time interest rates were so low (2001-3) the banks performed quite well despite being in a recession. sure, there was no real estate bubble, but there is no tech market bubble like there was back then. and we're currently coming out of a recession, which will buoy their assets' values.

i also think last night's news of them reaching a settlement with the govt so that they don't have to backstop their assets is a sentiment changer...

Kaimu will love this one.......
http://tinyurl.com/mrafdo

..................

were speculative options purchased in 2008 downside options?

Looking to buy IF....

Not so fast, look at the end of 2006 action to compare. Or you would be better served to dust the 2003-2004 playbook.

I'm saying this all about dollar. Not doing so good today.

In response to the comments about the symbols that can be used with the RSI Tool I wrote a small tool which extracts the symbols of components of a given index, e.g. the ASX 200:

http://tinyurl.com/rsitool-asx200

If anyone is interested in certain index components please let me know (see the "Contact the author" link below). I will collect the symbol lists and provide the corresponding links to the RSI Tool and/or the symbol lists to korvus. Maybe he finds the time to integrate the lists as a drop down menu.

How do you feel about the stock and how it's looking/trading?

Is it a keeper or a seller right here?

Also I bought some ABK and I'm keeping it it looks really good as a swing trade.

The Kansas Supreme Court made a recent ruling pertaining to mortgage foreclosures which may have national
implications. Mortgages have been accounted for by MERS, an electronic registration system employed by banks to keep track of mortgages issued. When mortgages were pooled, sliced and diced and sold, the deed of trust and the mortgage notes have become separated in many cases which may come back to haunt those who think they have legal recourse for non payment of the mortgage loan. Whoops!

From the court:

“By statute, assignment of the mortgage carries with it the assignment of the debt. . . . Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” [Citations omitted; emphasis added.]

MERS as straw man lacks standing to foreclose, but so does original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a “security.” The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.

The Potential Impact of 60 Million Fatally Flawed Mortgages

The banks arranging these mortgage-backed securities have typically served as trustees for the investors. When the trustees could not present timely written proof of ownership entitling them to foreclose, they would in the past file “lost-note affidavits” with the court; and judges usually let these foreclosures proceed without objection. But in October 2007, an intrepid federal judge in Cleveland put a halt to the practice. U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not filed the proper paperwork to establish its right to foreclose on fourteen homes it was suing to repossess as trustee. Judges in many other states then came out with similar rulings.
Following the Boyko decision, in December 2007 attorney Sean Olender suggested in an article in The San Francisco Chronicle that the real reason for the bailout schemes being proposed by then-Treasury Secretary Henry Paulson was not to keep strapped borrowers in their homes so much as to stave off a spate of lawsuits against the banks. Olender wrote:
“The sole goal of the [bailout schemes] is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value – right now almost 10 times their market worth. The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
“. . . The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC . . . .
“What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back.”
Needless to say, however, the banks did not buy back their toxic waste, and no bank officials went to jail. As Olender predicted, in the fall of 2008, massive taxpayer-funded bailouts of Fannie and Freddie were pushed through by Henry Paulson, whose former firm Goldman Sachs was an active player in creating CDOs when he was at its helm as CEO. Paulson also hastily engineered the $85 billion bailout of insurer American International Group (AIG), a major counterparty to Goldmans' massive holdings of CDOs. The insolvency of AIG was a huge crisis for Goldman, a principal beneficiary of the AIG bailout.
In a December 2007 New York Times article titled “The Long and Short of It at Goldman Sachs,” Ben Stein wrote:
“For decades now, . . . I have been receiving letters [warning] me about the dangers of a secret government running the world . . . . [T]he closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.”
The pirates seem to have captured the ship, and until now there has been no one to stop them. But 60 million mortgages with fatal defects in title could give aggrieved homeowners and securities holders the crowbar they need to exert some serious leverage on Congress – serious enough perhaps even to pry the legislature loose from the powerful banking lobbies that now hold it in thrall.

http://tinyurl.com/kqz9mw

Bill, or others.

In terms of risk-reward there are many consumer discretionary stocks that are priced to almighty perfection. It also seems that right now it seems to me cheap to buy put options. Especially considering that some of these stocks are bankruptcy candidates.

I understand that much of what I have seen is trading through the Cara 100, and writing puts and calls at the appropriate times to increase profit.

What I am wondering is this? Are there any times where you look at valuations or short squeezes on stocks outside the Cara 100 and go out say - 6 months/1 year - on a fundamental basis and say to yourself, it looks very cheap to buy this put option on a risk/reward basis. Of course shorting the stock could be risky, but options might be far less so because you can't get bought in.

Or is it the case that you just don't stray far outside your sphere of companies because that is a lot already?

"Looking at the below graph, since gold has been considered a currency for thousands of years, if we price the behavior of the S&P 500 in terms of gold, the gain in the S&P 500 since the beginning of the year shrivels to a 3.92% rise."

http://seekingalpha.com/article/162467-a-market-ra...

Can the POG rise even as the $USD rises? If the market is cratering, even as the dollar may or may not be rising, can we have such a lack of confidence in both the greenback and the market that gold doubles regardless of apparent strengthening of the dollar? (I know lack of confidence implies sell off of the dollar, but if there is coordinated activity by interventionists to prop up the greenback). Just thinking out loud in the context of Bill's TOG.

The S&P is a loser against the gains in silver.

TOF,
did you keep the BEE's you recommended on 9/18, its ripping with NCT, GKK and ABR...thanks
I hear 3 new IPO's on REIT;s coming out, maybe next week...I'll do some searching.
Joe

"...dollar longs - all two of us"

I am the other one, as of yesterday. Will be waiting for any positive vibes from the G-20 meeting.

Dave, FYI:

American International Group, Inc Hearing late afternoon weakness being attributed to secondary rumors circulating
- rumor appears to be have been generated by a Jim Cramer article this afternoon speculating that the "cash-strapped" firm could do a "gigantic secondary."

Careful... if the rumor is denied, it will explode just as furiously

Joe - I bought and sold BEE a few times. Made some good coin but not as much if I held to $3! To me, that was a bit of a parabolic move so I would tread lightly. I'm actually unloading some AHR I bought this morning...

Hey Vad thanks for the info. My position is small, but given the excitement and your info I think I'll hedge it a little bit now.

I still enjoyed that break through support quite a bit. I only saw it 15 minutes after it happened...my short is more of a swing trade, not a scalp or day trade.

forgot who brought this to my attention last week.....but thank you.

I owned it a long time ago. Called Investor relations & they no longer issue K1's for the div. think it is a qualified div @ 15% in US.

Put a GTC @ $9 on friday & was filled. dividend is 11-12% (.09) but it was paying 20-25 cents when Nat Gas was above $5-6.

http://ronsen.blogspot.com/2009/09/stupid-is-as-st...

You can't make this stuff up.

well, i say let's wait until we get really frothy before getting short...in the meantime, small hedges are the way to go...

How can that be? Zero Hedge gives us a clue, in an article entitled:
"Federal Reserve Accounts For 50% Of Q2 Treasury Purchases"

Now of course, ZH didn't mean total purchases - they meant net purchases. But still - the Fed did more than foreigners, households and primary dealers combined. What happens when the Fed QE program ends? They only have 15B left on that program...

http://www.zerohedge.com/article/federal-reserve-a...

The degree of intermediation by the Federal Reserve in the issuance of US Treasuries hit a record in Q2, accounting for just under 50% of all net UST issuance absorption. This is a startling number, as the Fed's $164 billion in Q2 Treasury purchases dwarfs the combined foreign/household UST purchases of $101 billion and $29 billion, respectively, over the same time period. In fact, the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers, which amounted to a $158 billion in net Q2 purchases.

Dave - one other thing - I bet if we polled the people on this blog the majority would be bearish and suspect of the rally...

Continues (STARTING WITH $10,000 INVESTED IN EACH STOCK ON 9/16/2009)

After 5 Days 9/22/09 (close)

AAPL - $10,517 STOCK UP +.25% ($26.00) NEW VALUE $10,543

SLW - $9,931 STOCK UP +2.96% ($294.00) NEW VALUE $10,225

AAPL STILL ON TOP

TOF, I think many of the folks here are suspicious of the rally - first of all, because none of the issues that caused the problems in the first place have been fixed, just papered over, and secondly (now) because the darned RSIs are in nosebleed territory, the technical indicators are saying "hey, don't buy here, the risks are quite high."

But my friends who are not involved in the markets agree with you. "Wait, isn't the recession over? I thought they fixed everything." So who is right? Well, Mr Market gives the award to you! So far.

But as for "things getting better" - tell me, if you were an auto dealer during the month of August, would you say things are getting better? Of course you would. Perhaps not so much in September, however.

Isn't our national economy just one big Clunker program right now? We have the highest deficit in the industrialized world, most of it going to our Clunker program. And what happens when that clunker program ends? Q3 is the period of highest stimulus impact, or so I'm told.

I missed out on a good chunk of the summer rally because I did not have a good understanding for how much impact all these government programs would really have on both the market, and the economy. Take QE - I had no idea it would result in bonds and stocks rising together. Same with the constant dollar drop since March: I didn't think the US equity market would rise given a falling dollar.

Bill's RSI system properly called the March lows - within a week or so anyway. So I'm going to rely on them to call what I think are going to be the September highs as well. They aren't quite here yet - the highs, I mean, but I think they're close.

Since trading done properly is taking a position when you feel the odds are in your favor, do you think the odds favor a sustained continued rise, given the current RSI levels?

I don't read a ton into RSIs when determining my long term investment strategy. They are just too volatile for me. For the short term I look at it as a buy/sell point but again it is too volatile and I really don't put that much stock in it. And in past recoveries, stocks have tended to stay "overbought" for a lot longer than people thought possible. The same is happening here.

To me, the single most important long term buy/sell indicator is the stupid little indicator I found a couple of years ago when determining when to go to cash or buy stocks. Again, when the S&P 500 moves from underneath the 200 DMA to 3% above it, it's time to buy stocks. When it moves from above it to 3% beneath it then it's time to move into cash. This signal told me to move my LT trading account to cash in December 2007 and then it told me to buy in July 2009. It has worked wonderfully for me. It would have told you to sell in 1974, buy in 1975, sell before the crash in 1987, buy shortly after, sell in 2000, buy in 2003, sell in late 2007, buy in July 2009....can't beat that. It has worked over 90% of the time since 1928. For less risk, you could just move to SPY when it goes above and then to a money market fund when it goes below. Thinking that the move down in 2008 was a once in a lifetime type crash, I figured I'd make more money buying individual stocks than SPY. However, the beauty of this signal is that you don't even have to have an opinion about the market and if you want to keep it simple you could just buy the SPY whenever the trend changes up and buy a money market fund when it goes down. You could play it completely stupid and not even know what is going on in the world around you and still make money and save yourself the agony of huge declines.

On a side note, I have friends/family in the retail and semiconductor businesses and they are all saying that business is much stronger over the past couple of months. That's good anecdotal evidence to me...

I received a K-1 from PGH in 2008. As far as I know they are still a partnership for US tax purposes and sending out K-1's.

To answer this question we might have to go back a bit in our Econ 101 class.
Is the economic growth sustainablle, well what makes the economy...Personal consumtion (71%), Government spending (21% and increasing), business investments (10%) and net export (-2%).
So where will the growth is coming from to keep the market rallying...we know its not from personal consumption, because we read about the layoffs, savings etc., in fact its stagnant and it might go to .2%; its not from business, because if you study their balance sheets, they are hoarding cash and don't know how to spend it (BHP wants to buy POT?).
So all we have left is our friendly customer (the feds), we don't like them, because when they come in the store, they make a mess of it, but they are spending money and keeping me and my family (the economy) alive...for how long?, I don't know, but rest assured they do know, is it a bill they want to pass, an election coming up, in fact they know what I am writing, because its in their playbook.
So what do we do in the meantime ... buy the dips, scalp as much as we can and share with each other what we are getting into and out of (much like TOF), of course do your homework.
So lets enjoy the ride (like a rollercoaster), up, down or sideways...I get a kick of it and want to get on the ride over and over again.
Joe

If it drops below 76, I think we will see another leg up in DOW commods and PMs. Right now a breakdown in the $ looks very possible

http://tinyurl.com/lfxq8p

TOF, your buy and sell indicator is neat, but I have a question. Currently the SPY closed at 107.07 and the 200 DMA is at 89.60. So my question is if someone had committed $1 million at today's close, should they be willing to hold till the sell rule?

If they do they will have to endure a loss of -19.31% or $193,164 of their capital. Comments anyone?

My second question is (using Tradestation MA's), your rule would have gave a buy signal on 7/14/09 (200 dma equals 87.96, buy price equals 90.59)again assuming a $1 million portfolio, I would have to watch my gain go to a loss of 1% (89.60)before my sell signal. Is this prudent to watch my gains slip away into a loss? Comments anyone.

Telestar - a person trading with TOF's indicators has to have the patience of Job. Seriously. A trading signal once every few years is about all you get. However, over time, I suspect it would have kept you out of trouble most of the time.

I am really curious to backtest it to the 1920s and see how it did during the market crash, when volatility was very high, since that's the period I think we're in now.

Now if only QTrade expanded its services to include (hint, Bill):

1) A trading platform in addition to the web-based interface.
2) Trading fees at least comparable to Questrade. Preferrably cheaper for heavy users.
3) A trading application programming interface (API).

The ultimate would be an programming API similar to what Interactive Brokers offers, so that various trading software can be written against QTrade services. Even better would be if the QTrade API was compatible with the Interactive Brokers one, so that many existing trading software packages which already work with IB also worked with QTrade.

I looked long, hard and rather hopefully at QTrade as an alternative to HB&B's platform choices, but I hate to say it, QTrade fees are comparable to HB&B and without a trading platform QTrade is better suited for swing traders or buy&hold mom & pop types than active daily traders.

And what's with the trailing stop being hard wired only in integers from 5% to 99%(!)? A 99% trailing stop but no way to set, say a 6.5% trailing stop? Or have they fixed that since I last looked?

2009 will not have a K1