Monday, August 20, 2007

Have You Hugged Your T-Bills Lately ??

Have You Hugged Your T-Bills Lately ??SocialTwist Tell-a-Friend
Jason Goepfert

There are two defining moments from late last week - an incredible rush to safety, and a washout in terms of market breadth.

There are many ways to watch for extreme moments of risk-aversion. One sign of that came from Rydex mutual fund traders, as they were three times more likely to invest in a "safe" fund than a "risky" one. But in the bigger scheme of things, Rydex funds are small potatoes. The Treasury market is not.

And in that Treasury market, we saw a huge rush to one of the safest of all instruments - the three-month T-Bill. Over a two-day period, the yield on T-Bills dropped by more than 20% (near Thursday's nadir), which means that there was a big demand for those Bills. Like all credit, when demand is strong and supply is restricted, then prices rise and yields fall.





That two-day decline was one of the steepest in five decades. Using data from the Federal Reserve for secondary market rates on T-Bills, I could find only two other times since 1950 that yields dropped so much in such a short period. Those two times were February 24, 1958 and September 17, 2001. Both led to an imminent halt in selling pressure in equities (or very close to it in 2001), and the S&P 500 was about 8% higher a month later both times.






That rush to safety was accompanied by traders dumping shares at a record rate. NYSE volume set a record on Thursday, and the past two weeks have seen several days with volume nearly as high. Large share turnover in the midst of a decline is typically a mark of a bottoming market.

Going back to the 1960's, I looked for any time total NYSE volume was at least 50% above its one-year average for at least five out of the past ten sessions, AND the S&P 500 was at least 5% below it's highest point of the past year. Looking ahead three months, the S&P was positive 90% of the time (92 out of 102 days) with an average return of +7.6%.

Much of that volume was traders wanting to get out of their shares, and selling at any price. By Thursday, a phenomenal 1,132 stocks had hit new 52-week lows, the second-most in history.

Expressed in terms of total stocks traded, that comes out to 33%. There have only been three times in the past 20 years that more than 30% of stocks hit a new low on the same day - 10/19/87, 8/23/90 and 8/31/98. Those were exceptional times to initiate intermediate-term long positions.

Also near a couple of those dates, we saw extraordinary one-day reversals on heavy volume, and brokers exploding out of one-year lows…just like Thursday. Fundamentally, there are many reasons to expect more bad news and possible selling pressure to come. And technically, the markets look quite weak. But looking at some of the intangibles, a good argument can be made that despite some likely short-term testing of Thursday’s low, that testing should succeed and result in a one- to three-month recovery.

Financial Sector and this Fed

Financial Sector and this FedSocialTwist Tell-a-Friend
Sally Limantour

The biggest question over the weekend was whether the engineered discount rate cut by the Fed was enough to safely say the lows were put in last Thursday. There are reasons to be skeptical in looking at the market players and the Federal Reserve.

We have been witnessing the phenomenon of deleveraging and if history is any guide this rarely occurs smoothly, or without some effect on the wider economy. It is hard to imagine that what took years to create is over in a few weeks. The ability to slice and dice risk and spread it around has us questioning the vulnerability of the economy.

In addition, there are clear signs that the pain is spreading from hedge funds to banks. The total amount of rescue financing has placed tens of billions of dollars at risk for many of the biggest banks. Most charge nominal fees for the guarantee of liquidity and some banks did not properly reserve for the risk since the prospect of default seemed remote.

Citigroup (C) and JPMorgan Chase (JPM), for example, have guaranteed more than $90 billion of liquidity, or about 5 or 6 percent of their total assets, according to a recent Banc of America Securities report.






State Street(STT), a custody bank, guaranteed about $29 billion, or 23 percent of its total assets.


That has ignited fear that the subprime contagion has spread to the global banking system — and, some suggest, caused the Federal Reserve Board to take action yesterday.

“The Fed is concerned because of the banks’ exposure. The banks are on the hook for potentially tens of billions of dollars,” said Christian Stracke, an analyst at CreditSights, a fixed-income research firm. “That could tighten credit conditions significantly if all that paper is tied up in things that none of the banks want to hold."

Bernanke’s Fed

The perception that the Fed will bail us out is still in the background for many, but if Bernanke turns out to be more like Volcker than easy Al as I wrote on August 13th, then the current Fed will inject liquidity when needed but may quickly remove it when markets stabilize.
Mr. Bernanke may not follow in the footsteps of the former Fed chairman and provide what fondly became called the “Greenspan put.” Under that philosophy whenever a crisis brewed Greenspan would slash the fed funds rate and provide cheap money to those who needed it as well as those who used it to add on layers of derivative speculation.

The Greenspan put helped during crisis such as the 1987 stock market crash and the 1998 Long Term Capital Markets hedge fund fiasco, but it also built up a huge speculative fervor and added on layers of risk that would not be there if cheap money had not been available.

Friday’s move by the Fed to lower the discount rate – not the Fed Funds rate made liquidity available to banks and depository institutions. They could borrow against collateral, such as asset-backed securities but the important distinction is that this discount window is not available to the more speculative group such as hedge funds and in this sense is quite different from the insurance that Greenspan provided.

We are going forward confronted with decisions to make both with our portfolios and with daily trading. I am approaching the markets as if I am still walking in a minefield and highly alert as to where I step. Listening for further news from institutions holding subprime debt as well as the language and actions of the Fed will be paramount as to how we navigate this treacherous terrain.

During the day I am trading “light and tight” meaning small positions with tight stops. I still believe we are at the beginning - not the end of a volatile time in many asset classes and we should not get lulled into complacency if markets are calm for a week or two. That said, my other twin always reminds me I am too close to the game and I am reminded of the words from Julian Jessop of Capital Economics as he puts it rather directly: “People in financial markets always think they are more important than the real world.”

Ouch!

Sunday, August 19, 2007

Timer Digest Commentray

Timer Digest CommentraySocialTwist Tell-a-Friend
Fari Hamzei

What a tumultuous week we went thru.

Market Internals and chartpatterns of key indices this past week tell us that Fed's Discount Rate Reduction by 50 bp was immediately viewed as very constructive by our equity markets. While we do not view Thursday SPX low as the final bottom of this leg, DJIA low print on Thursday, for all practical proposes, came in at our first support level (12,500).

We expect this low to be tested as Fed's combat of the SubPrime Mortgage Debacle is still an ongoing event. Ideally this test (and its accompanying vol retest) should come, ceteris paribus, in about 2 to 4 weeks from now. That process will build the tradable bottom which we have been looking for. We plan to go long then and hold it into Xmas.

I have attached our updated Timer Chart.



HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Here are the nuts and bolts from this week's action. The sell off was caused by loose credit and poor lending decisions. Defaults had a cascading affect and they started a run on short-term debt instruments. That liquidity crunch culminated when T-bill rates dropped 1% this week. That type of move is almost unprecedented.

The squeeze spilled over to brokerage firms and they raised margin requirements to control risk. Instantly, hedge funds that utilize quantitative analysis were forced to liquidate their holdings. They employ a long/short portfolio strategy where they buy value and sell "fluff". Theoretically, they are market neutral. Many financial institutions view this as a conservative strategy and they allow these hedge funds to leverage up to an 8:1 ratio. When brokerage firms change the rules, the hedge funds have to pare their holdings. That is why we saw so many quality stocks get trashed this week. Companies that just announced earnings and raised guidance were pummeled even though they trade at low P/E's.

The sell off Thursday was exacerbated by option expiration sell programs. Regardless, the market staged an impressive intra day reversal without the help of the Fed. Friday morning before the open, the market was down 25 S&P 500 points in response to overseas declines. As the opening approached, the futures were only down 8 points. Clearly, we were near a short-term low. At 7:15 a.m. CST, the Fed lowered the window discount rate to avert a liquidity crunch and the rally was on.

The Fed’s action allowed financial institutions to pledge securities and borrow cash. This allows companies to meet their short-term obligations without having to dump their holdings at artificially depressed prices. The Fed has not had to use this tool for many years.

There are many other leveraged “conservative” strategies like this and when liquidation is forced, the market is thrown out of whack. The yen-carry trade is a widely-cited example. The most important thing to remember is that the macro business conditions remain intact. The adjustment process needs to run its course before everything can return to normal.




The Fed has conveyed that they are aware of current market forces and they are on alert. Next week the economic releases are very light. Retailers make up the majority of earnings announcements and dismal results are priced in. The market has staged back-to-back late day rallies and I believe it will follow through next week. If it can get above SPY 146, that would be a short-term bullish sign.


Editor's Note: Take Advantage of HOTS Special Offer

Wednesday, August 15, 2007

Timer Digest Commentary

Timer Digest CommentarySocialTwist Tell-a-Friend
Fari Hamzei

As you can see from the S&P-500 Cash Index (SPX) chart below, we are about to puncture thru Monthly Support Level One (MS1). On a relative basis, this level became Support in March and early June with much of run-up spent above Monthly Pivot (yellow line). And since mid-July, SPX and other major indices (not shown in this chart) are on left translation mode which is very BEARISH. Once we have a close below 13,000, we expect the redemptions to speed up and market upheaval as measured by vol indices will take over.


Bryon Wein, the legendary Market Strategist, formerly with Morgan Stanley & Co., was interviewed on CNBC yesterday and reiterated his downside target for SPX at 1380 which translates to our 12,000 on Dow (see March Lows).

Keep in mind, about half of what was lost in global market cap during the last four weeks has been pumped in last week by major central banks (Fed, ECB and BoJ). It is obvious now, with XLF in a rout, this is no more than a band-aid and this market will continue to bleed until it can find a tradable bottom -- where is it ?? -- we will find it after we have had our much dreaded vol retest !!

Stay SHORT and Sell the Rallies...............there are no bargains here !!

Monday, August 13, 2007

Water (H2O)

Water (H2O)SocialTwist Tell-a-Friend
Sally Limantour

There is a wacky Broadway play called UrineTown that deals with the concept of water – or the lack of. The premise is as original as it is unpleasant – in a city suffering from unending drought, private bathrooms are outlawed. Everyone must pay crippling fees to use public latrines run by a monopolistic corporation. Those who cannot pay get dragged off to "Urinetown," a mysterious place from which they never return. Finally, one latrine manager leads the people in rebellion. The catch is that the ingĂ©nue he loves is the daughter of the corporation's greedy president.
Watching this play a few years ago had me think how crazy the world will get as water becomes a scarce commodity. In many parts of the world this is already a problem and as populations grow and industrialized economies develop water becomes more precious everyday.

Water Stress and Water Scarcity

In the water industry the terms, “water stress” and “water scarcity” are often used. These terms have to do with a country’s annual supply of renewable fresh water. A severe form is when a country’s annual supply of renewable fresh water falls to less than 1,000 cubic metres per person. Such countries can expect to experience chronic and widespread shortages of water that hinder their development. Many countries fall in this category and do not have the technology to access clean water.

Water Shortages

One of the best books written on the topic of water is called, When The Rivers Run Dry, by Fred Pearce. He drives home the point that we do not realize how much water we actually use on a daily basis. Between drinking, washing and flushing we use approximately 40 gallons a day. In some areas where sprinklers and swimming pools and others uses are higher it can be double. When we add in water usage that is needed for what we drink and eat the numbers are astounding. It now takes 11,000 litres to grow the feed for enough cows for a quarter-pound hamburger, and 25 bathtubs of water to produce a single T-shirt. As a result, at the World Water Week in Stockholm, the International Water Management Institute claimed that a quarter of the world’s population now lives in areas of ‘physical water shortage’.

In a report from the Global Water Partnership of Stockholm, Sweden, it was stated that $4.5 trillion is needed to be invested between 2000 and 2025 to improve the global infrastructure.
The reality is that more than one third of the world’s population lives in countries where consumption of drinking water exceeds available supplies. In China alone it is estimated that their water supplies can support 650 million people which is only half of its 1.2 billion population. China has 617 cities of which 300 have serious water shortages.

The Middle East imports 91% of its fresh water needs from other countries as Jordan, Israel and Saudi Arabia all suffer from water shortages and in Africa it is estimated that 2/3 of the population who live in rural areas lack an adequate water supply.

Here in the U.S. the 1,400 mile long Colorado River is at record low levels and a decade long drought is threatening drinking water supplies for major cities and irrigation for food production in the western part of the U.S.

Pollution

In addition to shortages pollution is a major problem in much of the developing world. In China you have a double whammy – both water scarcity and pollution. Not only are they threatening human health and development, but water problems also jeopardize China's economic plans. The impact of water pollution on human health and water shortages together has been valued at approximately U.S. $15.1 billion by Chinese sources.

The lack of resources and advanced technology are partially responsible for the slow progress in solving these problems.

Half of China's population (nearly 700 million people) consumes drinking water contaminated with animal and human waste that exceeds the applicable maximum permissible levels. Liver and stomach cancers in China are caused in part by water pollution. China has the highest liver and stomach cancer death rates in the world. Liver and stomach cancers are 3-7 times higher in polluted rural areas of China.

Increased Funding for Water Infrastructure

As water becomes more of a problem world wide you will see governments and the private sector increasing funds to fix the aging infrastructure as well as to develop technologies to clean and reuse water. As it stands now the global water market is estimated to be $365 billion while the U.S. market is $87 billion.

The investment demand for companies involved in water management and conservation will grow as the industry matures. The Environmental Protection Agency estimated that $140 billion will be needed in the next ten years just to meet the requirements of the Safe Drinking Water Act. Many in the industry feel this number is grossly underestimated.

The hot spots for growth in the water sector is in the replacement of aging water infrastructure in developed markets and the installation of basic water infrastructure in emerging markets. While the number of pure water plays has been reduced we are seeing large companies, like GE gobble up some of the water companies. GE has purchased Betz Dearborn a water treatment business and Zenon which makes advanced membranes for water purification, wastewater treatment and water reuse. The company pioneered the use of technology for water and wastewater treatment that is spreading rapidly throughout the world. GE is also building one of the largest desalinization plants in Algeria. The Danaher Corporation recently agreed to buy Centrist, a water treatment products and services provider and I foresee some of the large sovereign wealth funds (SWF) buying up water related companies in their need to provide their countries with clean water. As water becomes more scarce, tensions are likely to arise among different users within countries and also across borders. Companies operating in water-stressed regions will have to be aware that they are competing for an essential resource and will have to manage any potential flare ups.

So how can private investors tap into these markets? There are a number of ways and one play is to purchase the US Power Shares Water Resources or individual concentrated water funds, such as Aqua Terra Asset Fund, a relatively new water fund run by an environmental engineer. One can also go to the International Securities Exchange (ISE) where a water index is the basis for cash-settled index options (symbol, HHO), ETFs (symbol: FIW), and ETF options. Cash-settled futures on the index are coming soon.

There are also individual companies such as Aqua America or Calgon Carbon. Hyflux traded in Singapore is an interesting water company and recently bought into a business in Saudi Arabia which in addition to producing oil for export is also one of the world’s largest consumers of less expensive “used” oil. This is oil that has been collected from shipyards, power plants and other related industries. Hyflux owns a method that recycles the oil and they expect this aspect of their business to grow and equal their water technologies in terms of income.

The following are stocks and funds in the water sector that look attractive: American States Water (AWR), Aqua Terra Asset Fund (KWIAX), Aqua Water (WTR), Badger Meter (BMI), Calgon Carbon (CC), Clarcor Corporation (CLC), Hyflux (HYFXF), Insituform (INSU), Nalco (NLC), Pentair (PNR), Sinomem (SMMKF), Tetratech (TTEK), US PowerShares Water Resources (PHO) and Watts Water (WTS).

Saturday, August 11, 2007

Timer Digest Commentary

Timer Digest CommentarySocialTwist Tell-a-Friend
Fari Hamzei

As we have mentioned in the past, each time that the market has faced a major financial debacle, we have witnessed a ramp-up in major indices' volatilities followed by a Volatility Re-Test, as measured by intensity (sigma levels). This is a must prerequisite for markets before they can resume their normal operations.

This Fed, led by the very able Dr. Ben Bernanke, has pumped in near $85 Bils in 3-day repos this week, buying MBS and Treasuries, in an effort to provide short term liquidity. We are still holding our Short SPX position from June 7th (1490.72). We do not think all the bad news is out yet. This week market actions reminds us of August '98 before the LTCM debacle with same pattern of massive volume on alternating large range days (positive and negative bars).

We have included two charts here. Timer Chart shows a short-term oversold condition with no immediate stabilization in sight as we enter August Options X week. The McClellan Oscillators for Advance/Decline and Up/Down Volume closed in negative territory on Friday even though indices closed mix.





The next chart shows the popular Vol Indices overlaid with sigma channels. This is the set-up part of the vol retest and we suspect the next 3 to 4 weeks will be very challenging trading environment till we go thru the vol retest. Our down-side target on the Dow is 12,500 and then 12,000.



We suspect the next shoe to drop won't be another sub-prime woe, rather it will be an exogenous news and if we had to pick it, it could be Perviz Musharraf getting booted out of Pakistan. That would give this market the badly needed wash out via a massive volatility retest and create for us a tradable low.

Do not buy dips -- rather SELL THE RALLIES..........

Wednesday, August 8, 2007

Rydex S&P

Rydex S&PSocialTwist Tell-a-Friend
Tim Ord

The following chart is the Cash flow ratio for the Rydex S&P. Since early 2003 bottoms have formed on the SPX when this ratio reached 1.10. Yesterday’s close came in at 1.11 and in bullish territory.



The next chart is the Trin 5 dating back for three years. The Trin or sometimes called ARMS index is the ratio of advancing issues divided by advancing volume then this ratio is divided by declining issues divided by declining volume. The Trin 5 is the closing Trin added up for five days. When the Trin 5 reaches past 7.5 the market is near an intermediate term low. We have marked on the chart with red arrows going back for three years when the Trin 5 reached 7.5 or higher. You can see the Trin 5 has a good history of picking out intermediate term lows. The Trin 5 closed yesterday at 8.18 and implies the NYSE is near or at a bottom now.





The next chart is the NYSE going back for three years with its McClellan Oscillator and Summation index. When McClellan Summation index reaches below -500 it implies the NYSE is very oversold and near an intermediate term low. We have marked on the Summation index with a red arrow when the Summation index reached the bullish -500 range. Once the Summation index turns up from below -500, it implies the NYSE has seen its low. The Summation index has not turned up yet but is in an area where bottom form.





The market is at an important junction and is about ready to start an intermediate term advance. We are long the SPX on 8/2/07 at 1472.20.

Editor's Note: watch for Tim Ord's upcoming book, "The Secret Science of Price and Volume", to be published by John Wiley & Sons, in February 2008.

Monday, August 6, 2007

Sovereign Wealth Funds, Volatility and Markets

Sovereign Wealth Funds, Volatility and MarketsSocialTwist Tell-a-Friend
Sally Limantour

The recent correction in the stock market has many worried that liquidity will dry up as private equity deals diminish from their torrid pace. While this may be true the new darlings of investment – the “sovereign wealth funds” may pick up the slack. Sovereign wealth funds (SWF) are basically pools of money derived from a country's reserves and set aside for investment purposes that will benefit the country's economy and citizens. The funding for SWF comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources.

Government investment funds have been rising and China’s recent investment of $3 billion into Blackstone and the purchase of Barclay’s by the CDB (which also came with a board seat) shows how they want to develop their economies and will give China access to operations in emerging markets.

The numbers are staggering. For perspective it was only five years ago governments were sitting on $1.9 trillion in foreign currency reserves. This has grown to $5.4 trillion which is more than triple the amount in the world’s hedge funds. This excess cash is being moved into sovereign wealth funds and will change the landscape going forward.

A number of ramifications will emerge from SWF and currently concerns from protectionist measures to financial stability are being discussed. The US government has stated that the spread of sovereign wealth funds could create new risks for the international financial system.

One theme running through the SWF story is the idea that countries are diversifying from US dollars and placing their funds in other more tangible higher yielding investments. They want to diversify their holdings and this is not bullish for the US dollar. This adds to the move by other countries that are beginning to accept other currencies for purchases of oil and other products.

I have long held the view that we will see increased volatility in many asset classes going forward. The growth of SWF could be a factor in this as Mr. Lowery of the US Treasury has warned that SWF could fuel financial protectionism and has said “little is known about their investment policies, so that minor comment or rumors will increasingly cause volatility in markets.”

We all know markets do not like uncertainty and we are entering a period where “deep opaque pockets” will be making bigger and more ambitious purchases through state owned companies such as Gazprom and the China Development Bank (CDB).

My focus with regards to SWF is the natural resource sector. It is well known that China is basically resource poor and needs to import many of commodities to feed, house and mobilize their 1.2 billion people. With China set to move up the food chain it is only natural that they would use the SWF to secure their commodity needs by directly buying into companies that produce natural resources.

In a recent interview Marc Faber was stating that China will have to import most of their commodities and he looks at the price of coffee as an example and says, “If the Chinese just go to the per capita consumption level of say the Taiwanese or South Korean, they will take up the entire coffee crop of the world.”

As both China and India grow the demand for commodities will increase. The voracious appetite for commodities should continue and I would expect the next 5-10 years will see continued advances in many of the natural resource prices and the related stocks.

Water stocks, food, timber, mining and oil should continue their bull market and look for these SWF to move in this direction as well to secure their commodity needs for the future. Remember, 1 billion people currently use 2/3 of the world’s natural resources.
5.6 billion people use the other third. Meanwhile 3 billion are discovering capitalism and want “stuff.”

During this time while the stock market is taking some heat I am gathering my list of names in each sector and will share these with you going forward each week.

Water, oil and energy, food and metals are still in bull markets and I expect another leg higher in many of these will occur sooner than later.

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Two weeks ago I was talking about how the market might stage and expiration related rally that would fuel it to new all-time highs. The basis for that prediction was strong earnings and a large open interest of in the money calls. When that rally failed to materialize, a warning shot was fired.

A warning shot was also fired last February when the S&P 500 dropped 50 points in one day. Liquidity and credit risk were perceived problems and traders headed for the exits at the first sign of trouble. The difference between then and now is reality. This week hard numbers were attached to the losses stemming from loose lending practices. Technically, this decline has caused serious damage. The SPY penetrated the 146 support level. That represents the breakout from last April and it also represents the 200-day moving average. This juncture is a pivot point. If the market continues to trade below this level, lower prices lie ahead. If the market can recover and rally above this level a bounce and recovery could materialize.







There is new information that needs to be digested by the market and that process will take a couple of months. In the meantime, there will be bullish and bearish opportunities. It will be critical to find relative strength and weakness within the market.
I still believe that a year-end rally is in the cards. The earnings growth rate is in the high single digits at this stage of the earnings season. That is considerably ahead of expectations. Interest rates have declined and that is also bullish for the market. Oil prices backed off from their highs when forecasters lowered their expectations for hurricane season. Foreign markets are holding up relatively well and global expansion should carry us through this soft patch.
Next week the economic releases are very light and I don't feel they will drive the market. These are some of next week’s earnings announcements: NILE,HET, DRQ, TXU, TYC, ATW, CSCO, FLR, MDR, WYNN, AUY, AGU, BIG, FWLT, FLS, GES, LVS, CRM, ZUMZ, GME, SHLD, BRCD, DELL, FMD, ANN


I am expecting another volatile week. As the market tries to determine its next direction, it makes sense to lay low. Many traders are taking time off and thin trading is adding to the intraday volatility. I will follow their lead and I will be taking the week off as well. I will not be producing a new report next week, but I will update the current positions.
I’ll be clearing my head and preparing for the opportunities that lie ahead the rest of the year. If you decided to trade next week, keep your size small, stay balanced and take advantage of the high implied volatilities by selling out of the money credit spreads.

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