Monthly Archives: July 2008

Garmin, Lonmin and a lesson learned about the system

It is funny how the blindingly obvious can stare you in the face for a long time before you finally acknowledge it.

Garmin announced yesterday and, as I predicted at the start of the year, their results were pretty poor and their outlook even worse. The stock fell over 11% on the day. While there is a certain satisfaction in seeing such an event happen, I can’t crow too much about it as I didn’t actually trade it. In hindsight I should have done, but my main interest yesterday was the relevance of the fall in relation to the company’s value zone.

When I wrote a few months ago, Garmin was bouncing along its September 2001 Primary Value Zone at about $58/$59. Normally when a stock is at such a deep rooted value zone, this is a clear sign to start accumulating. However in the case of Garmin, as I rightly predicted, the prospects of the company looked fairly bleak in the macro economic context and was also starting to face fairly strong competitive pressures.

I said at the time not to buy this stock for these reasons.

Now I am not writing about this to boast, but rather to point out a flaw in one of my recent trades.

As you will be aware, I took a fairly nasty hit on Lonmin since getting back from America.

Similar to Garmin, Lonmin was at a long term Value Zone (April 2005). Crucially, though, I didn’t do enough research into this stock. Had I done a bit of deeper digging I would have found out about the problems the company was having with the power shutdowns in South Africa and how these were having an adverse affect on mining operations. This was against a backdrop of an already reduced production outlook from the company.

Had I done my work properly and researched this stock better, I would have avoided making a bad mistake in the first place and then compounding it by refusing to let go and chasing my losses.

The lesson is really quite simple. When buying individual stocks, using the System’s alerts, it is imperative to do the fundamental research. This might sound like invest 1-0-1, but it is a lesson I am taking to heart from here on in.

Update on my progress and why I am still Bullish!!!

I picked up a pretty nasty virus last week, which has left me feeling pretty knackered. This explains my lack of blog writing.

When I last wrote I had quite a few active positions in the market.

Starting with Washington Mutual, I got exceptionally lucky the day after they announced. If you followed it their news was pretty bad. At first the overnight market reacted reasonably well, but by the time of the open in the US it gapped down pretty significantly. I was sitting on a decent profit from the previous day, so I decided to wait to see what happened. Over the course of the first hour and a half of trading the price rallied pretty strongly to about $6.20 (from memory). I closed out near enough at the top. Almost as soon as I did, the price collapsed and has continued to fall since. It closed yesterday at $3.93.

I will be honest and admit I am still thinking about buying this again. I know this will be a hugely speculative trade, but this bank does have some pretty big support behind it. While Bear Stearns proved no-one is too big to fail, one thing I liked in WaMu’s announcement last week was the action the management team announced to strengthen the balance sheet over the next two years. Their cost-cutting programme didn’t strike me as being a panicky knee-jerk reaction, but looked well measured. I need to look more into this stock before committing to it in any significant way, but I am likely to take a small long term position today.

Moving onto Lonmin, I really allowed emotion to overrule logic on this trade. I cut my losses on this stock. I never should have gone back in on it as the chart clearly was screaming at me that this was going to keep falling. I am going to keep an eye on their announcement in early August, but this will be purely out of academic interest. South African power shortages are likely to hit the company quite hard, but whatever the case I am staying clear of this one for now.

After the Dow’s first big drop last week, I closed out my Nikkei position to lock in some profit and with the expectation of getting back in at a better level. It has dropped but I haven’t re-entered just yet.

Finally I am still long the Dow. I am taking some pretty serious punishment on this at the moment, but I am prepared to see it down to about 10,700. A lot of my reasons for remaining bullish are the same, but if we look at yesterday’s big drop it really was on tiny volume (less than 60% of the big up moves in the last two weeks). I am thinking about buying in at these levels, but the one note of caution I would sound is that it is the height of the summer. Volatility can be high because of the holidays.

Still Bullish; Washington Mutual

I am obviously following the Dow most closely at the moment and yesterday’s trading day helped reinforce by bullish sentiment. While the Index did fall, it was on roughly 60% the volume of last week’s big rise.OK so corporate results after the US market close, most notably American Express and Apple, hammered futures markets and set up a rough day for Europe, but I think we have witnessed something of an overreaction in both cases.

In Apple’s case earnings actually rose higher than expected, but apparently the reduced forecast led to that stock tumbling. American Express saw profits fall in the last quarter, as they set aside more money to cover any future potential losses.

Neither case can seriously have come as that much of a shock to any investor, who has picked up a newspaper or listened to the news in the last 12 months!

I have taken the pullback in prices to go long the US dollar versus Sterling and long the Dow. I also have gone long Lonmin, as it fell so much I saw an opportunity to recoup my earlier loss on this stock. Finally I have picked up Washington Mutual positions. This last trade is not based on a system prediction, but rather is a play on their earnings, which come out after the US market closes today.

What I like about WaMu the most is that 3 months ago the hedge fund, TPG, pumped $7billion in at $8.75. The stock closed at $5.48 yesterday. Last week they closed as low as $3.03. I was thinking about going in then (and really should have). My main reason for buying this stock is that when an institution like TPG puts that amount of money into a company, it has to be a fairly safe bet that they did a thorough job on the due diligence. They must have been satisfied that WaMu’s exposure to toxic debt was relatively low. Short of senior management deliberately concealing information from them, the prospects for this company should be reasonable. I am also betting that senior management are not likely to keep information from an aggressive, litigious hedge fund, with deep pockets. Judging by the performance of the stock in the last few days, it looks like others feel the same way. Wachovia has since come out with disappointing results, so there is likely to be a further pull back today, I could well take this as an opportunity to take up more stock.

The Dow needs to break through and hold 11400 today

Today is shaping up to be a big day for markets. I had started to write this blog this morning, when things weren’t looking too great. Disappointing results from Google last night hammered the futures markets. This, though, was after an extremely positive day which saw the Dow close above 11400.You will remember that I set two targets before going long. First I wanted to see JP Morgan’s results (which weren’t as bad as feared by the market) and second I wanted to see the Dow rally through 11400. The futures market did fall substantially overnight, but I have just come back to my desk and am pleased to see they have rallied strongly after Citi Group’s results also beat expectations.

I did end up trading yesterday on a daily contract. While it was a wild and uncomfortable ride I closed out towards the end of the day and made back most of my losses from earlier in the week. I still want to go long the Dow, as if the market holds its line today, I am fairly certain this will be the start of the next election-inspired bear rally (and I still think that is all it will be).

Overnight I went long the Nikkei. I haven’t written much about my thoughts on Japan, but it is fair to say I like the Nikkei at 13000 and can see a fair bit of upside from here on. I will write more on this in time.

Dangers of divergence

Divergence of groups of stocks in any given index can be deadly. The most obvious example at the moment is the performance of Financials, versus that of Commodities and Energies. In the FTSE 100 this is especially serious given the importance of these three sectors to the overall weight of the index.

In the last 12 months we have seen a rout in almost everything to do with the financial services sector from the banks to the mortgage lenders and insurance companies. At the same time we have also witnessed energy and commodity stocks rocket, especially anything to do with oil.

The risks associated with this kind of market behaviour are all too obvious. If the economy does grind to a halt and we see “demand destruction” in the demand of basic commodities then this is bound to lead to a collapse in their prices. In turn (though not necessarily this order) this will hamper the bottom lines of the companies which either mine or drill for them and all other associated with servicing the supply chain. Given the speculative characteristics of most commodity markets at the moment, such an outcome simply has to be one the cards.

Given that the FTSE 100 has been falling now for the last 9 months and has just officially passed into a bear market, if financials do not start to rally more strongly off their recent then just imagine what havoc will be wreaked if mining and oil stocks drop heavily. We really could end up in the worst of self feeding vicious cycles and I am afraid I think we are heading that way.

However, for my money I don’t think we are quite at that point yet and I am still looking for a rally into the second half of this year.

Getting back to the theme of divergence, the pattern I wrote about a few months ago between Cairn Energy and oil developed earlier this week and I missed it. Given Cairn’s sensitivity to the price of oil, the fact that it continued to fall (now >30% off its highs), whilst oil hit a plateau at about $146 – $147, was surely a clear sign that oil had peaked. While I did pick up on this, I should have paid closer attention to this pairing. The falls in oil in the last four days have been pretty extreme, but remember we are in the summer.

The charts indicate that the oil run has more steam left in it. It might pull back further from this point, but that will provide a point to go long. Given that we are in hurricane season and there is the ongoing threat of Israel/the US bombing Iran there are still plenty of factors that could cause the next surge. Possible entry points on oil are the May 2008 13195:13209 and April 2008 12723:12749 Value zones.

A broad rally led by financials — just what I have been looking for

There is a truism in the markets, that you cannot have a rally without the financials.

Today we finally saw financial stocks bounce off the lows on big volume. This was largely a result of a relatively upbeat (though still poor in real terms) set of results from Wells Fargo.

My Schroders position is going great guns as a result, so this makes up somewhat for recent disappointments.

To be honest I really should have bought the Dow at about 10850, but I still felt a bit burned after last Friday. I recognised this was a totally unhelpful mindset and this is certainly something I am going to be working on in future trading activity. Maintaining as emotion free an attitude as possible, surely has to be a key ingredient of a winning formula.

Given that I am short term bullish, prices yesterday and today were great entry points.

While the Dow is still hovering about its March 2003 Primary Value Zone I don’t want to enter just yet. I want to see two things happen, before I move.

First I want to see JP Morgan’s results on Friday. I think these are likely to be positive and they could well lead a rally.

Secondly I want to see the Dow break through the 11,400 level. This has provided resistance recently and the index needs to advance through it confidently if we are to see the rally I expect.

Of course today wasn’t universally positive. The news on inflation was truly bad and the falling oil price poses problems of its own, but I will write more about the dangers of divergence tomorrow…..

Why Fanny and Freddie can’t fail, but nor can they be saved.

As expected the Fed yesterday made its first announcement on its plans for bailing out Fannie May and Freddie Mac. However this was not received that well by the market. Yesterday’s charts reveal clear underlying nervous. Regional US banks came under particular pressure, with prices hitting levels not seen since the early 90’s and, in some cases, the 80’s. The Credit Crisis was always likely to see failures in US regional banks, as their balance sheets were not strong enough to weather the storm. Share prices in many of these are down +90% over the last eighteen months reflecting this.

In spite of these serious problems culminating, the Dow still closed above 11000.

Overnight there has been another Asian sell-off and US and UK futures are down ahead of the open. The Dow is now just below 11,000, but we really need to see where it closes tonight, before rushing to judgement.

Today Ben Bernanke reports to the Senate Banking Committee and is likely spell out further his plans for Fanny and Freddie. We also see the first of the Financial Sector reporting earnings, with JP Morgan announcing later this week.

Bernanke’s testimony should be especially interesting. The problem with Fanny and Freddie is that they are just too big. Between the two of them they account for just over half of the entire US mortgage market. Worse still overseas Asian investors (notably Central Banks) hold a great deal of exposure to them. If Freddy and Fanny were to fail, then the likelihood of a total failure of the global financial system seems highly likely.

However, just because they are too big it does not necessarily mean that the companies cannot fail.

Looking at the figures, it is extremely hard to see how the Fed is going to save the loan books of both companies, whilst also protecting shareholder value. In other words it is highly likely that the only choice the Fed will have will be to let both institutions fail (ala Indy Mac), whilst taking the mortgages onto the Government’s books.

I need to look more into the implications of this for the Federal deficit, but this is no Northern Rock!!!!

Judging by yesterday’s moves on the market I am fairly sure that this prospect is what has spooked the market. The fall in the Dollar and the rise in gold reflect this opinion.

I must admit I am starting to feel less confident of a short term bounce, but the fact that the Dow has doggedly stayed above 11,000 still gives me hope.

Watch closely today for moves in equity markets, the Dollar and Gold. Continued falls in the first two and a rise in the latter could well spell more short term pain.

Still looking for a bottom

After the mass panic of Friday’s trading in US markets, I spent a lot of the weekend worrying about my various positions.

I did get stopped out on my Dow and S&P trades, but this was mainly because I tightened my stops massively, in anticipation of the market getting hammered thanks to Freddie Mac and Fannie Mae. The sell-off did happen, but Ben Bernanke announced in the evening (US afternoon) that both companies would be able to use the Fed emergency lending facilities, which they had been barred from previously. The reaction to this saw a massive surge in equity prices.

This was followed in the last hour or so of trading with another big sell-off. Welcome back to summer 2007!!!!!

Then late on Friday, it was announced that Indy Mac had failed and was being taken into liquidation. This marked the US’s second largest federally insured financial failure ever.

Oil also surged to an intraday record, during the day.

Over the weekend there was ongoing talk of a Fed bailout of Fannie Mae and Freddie Mac.

As far as bad news days go, Friday is up there with anything else that has happened this year.

So what is there that is positive we can cling to?

To be honest, I still think a fair amount.

While volume was extremely heavy on Friday (unsurprisingly) and we saw a big fall in US markets (and even bigger intraday falls), the losses were well within the range of a “normal” bad day on the markets. Earlier in the year (possibly even in June), we could well have seen a +300 drop, if not far worse, on the Dow. The fact that we didn’t is a clear indication to me, that stocks do not have much further to fall for the time being.

Looking at the S&P’s chart during the day is even more encouraging. It barely registered a drop during the day and then surged into positive territory on Bernanke’s announcement. This really could give a clear indication of a bottom and given where the price is relative to its March 2003 Primary Value Zone it is still exceptionally tempting.

Also on Friday the FTSE 100 dropped below its March 2003 Primary Value Zone for the first time. In pre-market trading it is back up to this level.

Finally trading in Asia, while not great, wasn’t that bad. The major Australasian indices posted modest losses.

Given that fear is one of the critical drivers of markets one could well have expected to see a global ditching of stocks. However now that some of the worst news has happened (the likely bail out of the federally insured US mortgage lenders) market participants will start to look for what will happen next.

OK so earnings season is upon us, and is likely to be bad, but how much of the bad news has already been priced in? I would wager quite a lot.

We also still have summer’s light volume (and likely volatility) to come.

Getting stopped out on Friday of my Dow and S&P positions has put me in a slightly negative frame of mind about this, but to be honest, the current levels are still extremely tempting. To be honest I should trade again. While I am showing a modest loss, my worst fears on Friday failed to materialise.

I think I am going to sit on the sidelines today and take a view later tonight. I think this market still has some more selling in it and I think I will be able to get slightly better prices than are available now.

Markets forming a base or heading lower?

Yesterday’s big end of day sell off in the US has dragged markets down across the Globe, but I still think sticking with long positions at these levels is the right move to make. Once again Financials led the collapse. In particular there are serious concerns over Fannie and Freddie Mac, the US Government backed mortgage lenders.

Importantly the Dow halted its slide just below the March 2003 Primary Value Zone I wrote about on Monday. Since the end of June the Dow has been bound in a range between 11100 and 11400. This could be an indication of a base forming. Equally it could signal the next move down. Earnings season is going to be critical.

The more I look at markets and individual stocks, the more convinced I am that a lot of the likely bad news has already been priced in. If there are any positive surprises, then these could well have a higher proportional impact on markets, than more bad news.

There were some other bits of information, which filtered through yesterday, which increase my short-term bullish perspective.

First a survey was released, which put bullish sentiment at its lowest level since July 1994. Taking a contrarian view on this report, I take this as a positive signal. I often find that these types of survey tend to be trailing indicators. I realise that this is an upside down way of looking at these reports, as they are meant to provide an indication of likely future buying or selling decisions, but I think there is a compelling logic not to place too much value in their predicative value. In simplest terms the time to buy stocks is when others want to sell and you have pricing power. The reverse is equally true. Valuations at the moment are tempting across the board and with a Presidential Election in November there is a reasonable amount to be positive about in the short term.

Secondly Bank of America’s CEO put out a statement after hours, essentially re-affirming the message that their balance sheet was in order and there was no need to reduce their earnings outlook or dividend projection. During yesterday’s session BoA had been hammered, but the share price recovered a lot in after-hours trading, erasing most of the losses. Given that most of the current concerns are focused on the financial sector, this is a positive signal.

Finally I compared the volume of yesterday’s and Tuesday’s action on the Dow. While yesterday’s was higher than the 3-month moving average, it was also roughly 18% lower than Tuesday’s. If the current level of the Dow is a base, then significantly higher buying on up days than down days is also a good signal.

For the record I am still medium term bearish and don’t think we have seen the worst of this bear market, but I think that this will be more of a problem for 2009 than 2008.

I still have my March Dow and S&P 500 contracts, but I am now operating reasonably tight stops. While I think my arguments above for going long are reasonably strong, I could well be wrong. Simply looking at the charts clearly shows that once the current range is broken then there will be a significant move. If it is to the downside, there is little point chasing losses, as I will simply look for a better point to go long.

Trading the Dow and S&P 500

I had pretty much made up my mind I was going to go long on the Dow and S&P500, but I am glad I decided to wait until this morning before doing anything. Watching the action yesterday and the increasing concerns over the state of Financials, I had a feeling that Asian trading would be negative. This is a bit anecdotal but I have noticed that negative speculation in the US on one day concerning the ongoing impacts of the Credit Crisis, has tended to weigh heavily on the next Asian trading session.

Moving on from this horribly imprecise observation, markets fell overnight. I bought the Dow at 11161 and the S&P 500 at 1247.

There is a lot of negative expectation out there at the moment about earnings and earnings outlook, but I wonder how much of that has already been priced in. US markets did after all put in their worst June performance since the Great Depression, falling more than 10%.

Although there is the risk of summer volatility adding further pressure, I have decided that these levels in both indices are so critical that I have to trade them. I haven’t risked too much and have given myself quite decent margins.

Alcoa and the Pepsi Bottling Company kick off earnings season today, so I will be keeping a close eye on today and tomorrow’s action

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Back from the States and lots to write about….: Critical Prices for US/UK indices: Long Lonmin: Positive Prospects for Japan

I spent much of the weekend catching up on things in the market. Today is my first day back at work and to be honest I am a little bewildered by all that seems to have happened while I was day.

Before getting into any of that I really should share my overriding impression of the state of the Union.

The country is in dire need of a change. Having suffered the worst Presidency in living memory (possibly ever) the country is in desperate need of strong leadership. We all know about the various problems the Americans face from the credit crisis to the housing crisis and from inflation to Iraq, but I was quite surprised at the determination of people there to move the country forward.

During the protracted Obama/Clinton Primary both candidates made a strong play as representing change. While Hilary Clinton was always going to be far too much of an establishment figure to carry this off, everything about Obama screams that this man is genuinely something different. I went away, highly suspicious of the kind of charismatic politics that Obama personifies and was even more suspect of the substance behind his message. I came home, however, with this opinion completely reversed.

– One little aside I heard while over there, was that over 50% of Obama’s campaign contributions came from individual Americans donating $200 or less. When a grass roots campaign is talked about, this will go down in history as one of the most powerful ever. –

Anyway while in America I covered about 2,000 miles across California, Oregon and Washington and spoke to a lot of people. I also saw quite a lot of CNN (although this is absolutely the last time I will ever admit that!). While I admit that any perception I might have from this trip is highly subjective and quite limited, the over-riding impression I got is that Obama is going to win by a landslide. I wouldn’t be at all surprised to see a massive turnout in November, which will give Obama the kind of mandate that America (and the World) really needs.

I don’t want to build up an unrealistically optimistic set of hopes in any politician, as Real Politik will always prevail, but I think an Obama victory is going to do short term wonders for stock markets…….

US/UK Index Prices

……. On that note, we are now at critical levels for many stocks, but more importantly the Dow, the S&P500 and the FTSE100. I will just list them now.

The Dow’s March 2003 Primary Value Zone is 11162:1178. As of writing we have just seen this market bounce off this level in intraday trading. As always I really cannot stress how important this level is. I am going long, but missed my entry point. I am going to wait for the end of today before trading and am also going to trade fairly light to start with. I am going to write more about why tomorrow, but for the time being it is still a little early in the summer for my liking and I am also worried about outlook downgrades during earnings season.

The S&P 500’s March 2003 Primary Value Zone is 1291:1297. It is now roughly 40 points below this level, which is worrying, but could in some ways be a better trading long than the Dow. Again more of this in the next few days….

The FTSE100’s March 2003 Primary Value Zone is 5324:5335. Last week it closed above this level. I am less keen about going long on the FTSE, but to be honest past experience has told me the importance of the strength of this Value Zone, so I will probably put my concerns to one side and go in light again.

Watching today’s US action I think tomorrow is going to be a good opportunity to write more about these levels, but make note of the prices, they are beauties!!!

Long Lonmin

This morning I went long Lonmin at 2901 on a March contract.

Lonmin’s May 2005 Secondary Value Zone is 2779:2791. When I bought the futures contract the daily price was at about 2830. I know I haven’t bought at an optimal level, but there are several reasons I really like the prospects of this stock.

Lonmin is primarily a Platinum miner. The price of Platinum has remained doggedly high and there was an announcement at the start of the year about a likely global shortage.

Looking at the charts Lonmin has been highly range bound in the last 12 months. It is now at the bottom of this range, in its value zone, 1 month before its next set of announcements. As timing goes this is an excellent combination.

I am looking for the daily price to top at least 3500 again, but it could go higher if earnings are strong in August. Lonmin announces on August 7th. Positive Prospects for Japan

Again this is a topic I am going to write more about in the coming weeks and is likely to become a bit of a theme of mine, but I am really encouraged by the prospects of Japan. I know I am not exactly ahead of the curve in this view and this has been at the forefront of quite a lot of commentary for a while now, but I finally came across some ideas that made perfect sense to me.

These aren’t my ideas, but are definitely worth repeating.

The first is that Japan’s banking system has been relatively unscathed in the credit crisis, thanks to their traditional management style and their unwillingness to participate in a lot of the speculative and predatory lending practices of most of their international competition.

The second argument is that inflation for Japan will be less bad (and possibly even positive) than for the rest of the World. Much of Japan’s economic torpor has been attributed to the deflationary cycle its economy found itself in. A burst of controlled inflation, could well break this pattern.

I have to go now, but will add more detail to all of the themes above in the next few weeks

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