Saturday, February 23, 2008
Friday, February 22, 2008
Schizophrenic Psycho Market
Pull up a chart of the DJIA and you will see a classic wedge pattern of lower highs and higher lows that has been forming since January 10.
These wedge patterns form as a result of uncertainty by investors about the direction of the market. Upon further examination, you may notice that the successive lows have been rising in a shorter time frame than the highs have been falling. Although somewhat subjective, this is normally considered to be a bearish formation.
Today’s trading of the double reversal-schizophrenic market, supports the case for uncertainty and paranoia in the marketplace.
Does anybody really know what they’re doing right now?
This might be setting us up for a test of the January 22 lows. The probabilities are high that the market will breakout from this wedge, and in more cases than not, it will be in the direction of the prevailing trend.
Note that this current wedge pattern is a repeat of a wedge that formed from the end of October through the end of December of 2007….. And then there was January.
The bears may have lost the battle today, but the war is certainly far from over.
Disclaimer: Investing involves risk. You can lose money. A lot of money. In fact, if you’re careless, you could lose all of your money. If you do, don’t blame me or come cryin’ to me to make it all better. I’m not your adviser. I have better things to do with my time. Complaints should be directed to Bruno @ www.beatmewithanaxehandle.com. You must sign up as a member and file a complaint to receive reparations and a complimentary axe handle. All axe handles are imported and handcrafted from only the finest Romanian hickory. (Please allow 3 - 5 business days for arrival of henchman with axe handle.)
Update on Auction Rate Securities
The market for Auction Rate Securities remains frozen but has seen some progress as municipal borrowers like California and Florida schools converted their auction rate securities to fixed rate debt this week and the Port Authority of NY announced they would redeem $200MM next month.
Auctions for both single issuer Auction Rate Securities and the “muni preferreds” issued by Closed End Funds continue to fail to clear the available supply of sellers.
Mutual fund companies are making efforts to communicate with investors regarding the implications of failed auctions for preferred holders as well as common holders. While some of the Q&A sessions between the fund companies and investors provide little direction, I believe the fund companies are working on solutions for investors and are willing to work collaboratively to identify some options to resolve the current crisis.
Individual "retail" investors hold approximately $60 billion of muni preferreds, or about 20% of the ARS market.
Although the timing of a resolution is still uncertain, I do expect an announcement to occur very soon, as pressure is mounting on all fronts to get this issue resolved.
The fallout from all this has yet to be quantified. No doubt, adding more leverage used to boost yields on closed end funds is not an option at this point.
Auctions for both single issuer Auction Rate Securities and the “muni preferreds” issued by Closed End Funds continue to fail to clear the available supply of sellers.
Mutual fund companies are making efforts to communicate with investors regarding the implications of failed auctions for preferred holders as well as common holders. While some of the Q&A sessions between the fund companies and investors provide little direction, I believe the fund companies are working on solutions for investors and are willing to work collaboratively to identify some options to resolve the current crisis.
Individual "retail" investors hold approximately $60 billion of muni preferreds, or about 20% of the ARS market.
Although the timing of a resolution is still uncertain, I do expect an announcement to occur very soon, as pressure is mounting on all fronts to get this issue resolved.
The fallout from all this has yet to be quantified. No doubt, adding more leverage used to boost yields on closed end funds is not an option at this point.
Time to Go Bottom Fishing?
Here is what you avid fishermen are looking at:
It appears that the DJIA is in a descending triple bottom breakdown. As I wrote in a previous post, this is a continuation pattern of the major trend, and has been shown to have a 93% probability of a further decline over a period of months.
The Russell 2000 is showing a bearish triangle breakdown pattern, which also has a very high probability of further downside.
In the market, as in cards, I’d rather have the odds in my favor.
Rather than spend time on the computer this weekend looking at stocks to do some “bottom fishing”, you might try this kind of fishing, while waiting for the spring thaw:
Try your hand at this fishing game. Read the instructions (below the link) first.
http://www.peninsulaclarion.com/kenairiverrun/kenairiverrun.html
Instructions:
You will see the fish swimming in the lake. Click on the place in the lake you want the man to cast his line. Remember the fish are swimming and if you click on the fish by the time he casts his line the fish will have moved beyond that point. So click on a spot ahead of the fish where you think the fish will be after the line has been cast. WARNING: This can be addictive! Don’t blame me if you get your ass in a sling with the Mrs., because you sat around all weekend and didn’t get any projects done around the house. (Not that anyone has ever done that.)
——————————————————–
This is for all of you great outdoorsmen who love to fish, but don’t want to drive to the lake or go ice fishing right now…so, good luck, and no lies!!!…and turn up yer volume.Note: There is a tackle box nearby, want a different lure? Just click on it! Kenai River Run…..
—————————————————-
Or, you might do this if you live in a warmer climate….
It appears that the DJIA is in a descending triple bottom breakdown. As I wrote in a previous post, this is a continuation pattern of the major trend, and has been shown to have a 93% probability of a further decline over a period of months.
The Russell 2000 is showing a bearish triangle breakdown pattern, which also has a very high probability of further downside.
In the market, as in cards, I’d rather have the odds in my favor.
Rather than spend time on the computer this weekend looking at stocks to do some “bottom fishing”, you might try this kind of fishing, while waiting for the spring thaw:
Try your hand at this fishing game. Read the instructions (below the link) first.
http://www.peninsulaclarion.com/kenairiverrun/kenairiverrun.html
Instructions:
You will see the fish swimming in the lake. Click on the place in the lake you want the man to cast his line. Remember the fish are swimming and if you click on the fish by the time he casts his line the fish will have moved beyond that point. So click on a spot ahead of the fish where you think the fish will be after the line has been cast. WARNING: This can be addictive! Don’t blame me if you get your ass in a sling with the Mrs., because you sat around all weekend and didn’t get any projects done around the house. (Not that anyone has ever done that.)
——————————————————–
This is for all of you great outdoorsmen who love to fish, but don’t want to drive to the lake or go ice fishing right now…so, good luck, and no lies!!!…and turn up yer volume.Note: There is a tackle box nearby, want a different lure? Just click on it! Kenai River Run…..
—————————————————-
Or, you might do this if you live in a warmer climate….
The Next Big Thing in Energy?
Bug doo-doo.
Yup. Derived from bugs that fart, shit and piss hydrogen and ethanol. Sound far fetched? Think again.
You’ve probably been hearing news about new developing technologies for large-scale fermentation processes that produce biofuels from organic waste. No? Well there are, 18th century-corn cobb-house dweller.
The “bugs” are actually patented microbes that are genetically engineered to process an oatmeal-like bio-slurry, which produces a byproduct, more commonly known as “biodiesel”. The slurry is nothing more than carbohydrates derived from plant matter that feed the microbes.
Just think of the microbes as tiny little employees that do nothing but eat and shit all day long, yet are very productive. Odd, no?
In light of the novelty of this idea, I find it somewhat hard to understand why heavy hitter VC firms like Vinod Khosla, Kleiner Perkins Caufield & Byers, and Texas Pacific Group have plowed big money into this technology. Cheap labor, 24/7?
After the microbes have done their “business”, the whole mixture is taken out, spun in a giant centrifuge, and density separates out the individual components. The most important of these components is a chemical compound that is nearly identical to diesel fuel…. “bacterial fuel”, or biodiesel, if you will.
There is a strong economic case for bacterial fuel because the fuel that the microbes produce is virtually ready for the gas pump, requiring only a simple cleaning step to filter out impurities. Making the bacterial fuel uses about 65% less energy than making ethanol. Also, keep in mind that ethanol requires extensive chemical processing that drives up its price and damages the “Green initiative”. Ask Green Writer about this…I have no idea what those people are about.
The fuel also has about 50% more energy content, which means a gallon of the stuff would last about 50% longer in your car, than a gallon of ethanol. Aside from making environmentalists jump for joy, this fuel has a number of advantages to it including, low cost, ease of production and low impact on the environment.
To me this bug doo-doo thing does make some sense. We are already dependent on petroleum, so an alternative will take years and years to develop and adopt. Solar is for asshats (and really smart, but diminutive Chinese professors).
Now, here we have a way to make petroleum, without having to wait a couple of billion years. It is simply through exploiting an existing biotechnology that God has established. For years (i.e., way before you or I were born), bacteria have been naturally turning sugar they consume into fatty acids. These fatty acids are later converted to lipids for storage. Serendipitously, fatty acids are only several molecular linkages away from diesel fuel. How do I know this, you axks [sic]? I read it in a chemistry book, aiight?
What companies like Amyris Biotechnology have done is to tweak the existing chemical process to yield diesel fuel, by creating strains of bacteria that excrete what your Lexus of the future will be storing in its tank and running off of: bug doo-doo. This may give a new twist to the phrase, “your car is a piece of shit”.
But, before you get all excited and start bagging up your lawn clippings to take down to the local bug doo-doo producer, be aware that this technology is early stage. It will be three to five years before the finished fuel is market ready. Then they will have the challenge of producing and distributing it in mass quantities. And, don’t forget there’s government regulation and red tape to wade through. So, don’t get your panties all in a bunch over this just yet.
There are other companies in this space that are developing this as well; LS9 and Synthethic Genomics to name two others. You can probably expect the farmer to get involved with this too, since he is closest to plant waste material, and has bags of gold coins to invest from his sales of grain. His new found wealth will start to manifest itself in greed and avarice to bank more and more coin. His mindset is that since farmers already control the food production, it only follows that they will eventually rule the world. Pure greed.
However, none of these companies are public…yet, so no coin for you right now. It will be interesting to watch how all this develops in the next few years. Perhaps, instead of hawking Chinese Solar Burrito stocks, we will be buying American Bug Doo Doo stocks?
Who knows?
Some may find it hard to believe that high brow VC firms are investing in this technology, with the likes of people like this…..Will this guy be the next Bill Gates of the energy sector?
Yup. Derived from bugs that fart, shit and piss hydrogen and ethanol. Sound far fetched? Think again.
You’ve probably been hearing news about new developing technologies for large-scale fermentation processes that produce biofuels from organic waste. No? Well there are, 18th century-corn cobb-house dweller.
The “bugs” are actually patented microbes that are genetically engineered to process an oatmeal-like bio-slurry, which produces a byproduct, more commonly known as “biodiesel”. The slurry is nothing more than carbohydrates derived from plant matter that feed the microbes.
Just think of the microbes as tiny little employees that do nothing but eat and shit all day long, yet are very productive. Odd, no?
In light of the novelty of this idea, I find it somewhat hard to understand why heavy hitter VC firms like Vinod Khosla, Kleiner Perkins Caufield & Byers, and Texas Pacific Group have plowed big money into this technology. Cheap labor, 24/7?
After the microbes have done their “business”, the whole mixture is taken out, spun in a giant centrifuge, and density separates out the individual components. The most important of these components is a chemical compound that is nearly identical to diesel fuel…. “bacterial fuel”, or biodiesel, if you will.
There is a strong economic case for bacterial fuel because the fuel that the microbes produce is virtually ready for the gas pump, requiring only a simple cleaning step to filter out impurities. Making the bacterial fuel uses about 65% less energy than making ethanol. Also, keep in mind that ethanol requires extensive chemical processing that drives up its price and damages the “Green initiative”. Ask Green Writer about this…I have no idea what those people are about.
The fuel also has about 50% more energy content, which means a gallon of the stuff would last about 50% longer in your car, than a gallon of ethanol. Aside from making environmentalists jump for joy, this fuel has a number of advantages to it including, low cost, ease of production and low impact on the environment.
To me this bug doo-doo thing does make some sense. We are already dependent on petroleum, so an alternative will take years and years to develop and adopt. Solar is for asshats (and really smart, but diminutive Chinese professors).
Now, here we have a way to make petroleum, without having to wait a couple of billion years. It is simply through exploiting an existing biotechnology that God has established. For years (i.e., way before you or I were born), bacteria have been naturally turning sugar they consume into fatty acids. These fatty acids are later converted to lipids for storage. Serendipitously, fatty acids are only several molecular linkages away from diesel fuel. How do I know this, you axks [sic]? I read it in a chemistry book, aiight?
What companies like Amyris Biotechnology have done is to tweak the existing chemical process to yield diesel fuel, by creating strains of bacteria that excrete what your Lexus of the future will be storing in its tank and running off of: bug doo-doo. This may give a new twist to the phrase, “your car is a piece of shit”.
But, before you get all excited and start bagging up your lawn clippings to take down to the local bug doo-doo producer, be aware that this technology is early stage. It will be three to five years before the finished fuel is market ready. Then they will have the challenge of producing and distributing it in mass quantities. And, don’t forget there’s government regulation and red tape to wade through. So, don’t get your panties all in a bunch over this just yet.
There are other companies in this space that are developing this as well; LS9 and Synthethic Genomics to name two others. You can probably expect the farmer to get involved with this too, since he is closest to plant waste material, and has bags of gold coins to invest from his sales of grain. His new found wealth will start to manifest itself in greed and avarice to bank more and more coin. His mindset is that since farmers already control the food production, it only follows that they will eventually rule the world. Pure greed.
However, none of these companies are public…yet, so no coin for you right now. It will be interesting to watch how all this develops in the next few years. Perhaps, instead of hawking Chinese Solar Burrito stocks, we will be buying American Bug Doo Doo stocks?
Who knows?
Some may find it hard to believe that high brow VC firms are investing in this technology, with the likes of people like this…..Will this guy be the next Bill Gates of the energy sector?
Wednesday, February 20, 2008
Farmers Are Living Large
While many are uneasy about the future, an increasing number of down home country bumpkins are banking excesss coinage. I’m talking about your garden variety friendly farmer.
According to the USDA, net farm income set a new record in 2007 and will likely surpass that in 2008. Inflation-adjusted farm income hasn’t looked this good since the early 1970’s, before many of you internets were born.
What gives?
First of all, consider that there is an important transfer taking place that is shifting income away from discretionary purchases and towards necessities, like food. As world food supplies are stressed and prices rise, there is unrest in various places around the world as economically dispersed and distanced as Mexico, Italy and India. For example, in January, world wheat stockpiles fell to their lowest levels in over 20 years, with supply levels sufficient for only about 2 months.
And several countries are starting to take action to stem the crisis. For instance, the EU has lowered or removed numerous cereal import duties for the first time since it came into existence. Similarly, pressure is mounting on governments in the U.S. and elsewhere to loosen the rules that impose constraints on land use. If the Western Hemisphere experiences a poor growing season, that would undoubtedly push grain supplies lower to critical levels. The demand for food coming out of the emerging markets, coupled with poor growing seasons in key producing regions like Russia and Australia have contributed to the growing supply-demand imbalance. Pain is on the horizon for emerging country markets.
The boom in Ag can also be partly explained by happenstance. For example, the energy bill recently passed by Congress that mandates the production of 15 billion gallons of corn-based ethanol annually by the year 2015 is creating new demand and upward pressure on corn prices. That is also affecting the supply-demand relationship in other grains as well.
Thomas Malthus’ dire predictions rested on an assumption that population growth is geometric, whereas food production only increases arithmetically. This further injects fear that recent price trends in food will end in a very scary economic and social conclusion. Shortfalls are the inevitable consequence this global view. It appears to be playing out today.
But, are things really that bleak?
What may offset the end result may be found in better irrigation (LNN: 70.26 +0.63%) and land management, introduction of better pest control systems, improved fertilization (POT: 156.00 +2.30%), (MOS: 114.04 +4.10%), (AGU: 70.42 +3.62%) and higher yielding grains (MON: 119.05 +1.00%). More technological innovations in Ag will continue, and may even accelerate, given the price levels of farm commodities. High returns seem to attract capital. Not odd, no?
The bottom line is that it is not too late to “milk the farmer”. There is still room to bank more coin is this space. The Ag sector stocks will still be volatile, no doubt. But, these are great stocks to trade as well as invest in for the longer term. However, in my opinion, you’ll make bigger money buying and holding on to these stocks, and adding to your position on normal pullbacks. The Ag sector is in the midst of a long term uptrend that could last for years. Many of the companies in this sector have highly visible and predictable revenues and earnings—a big factor when buying stocks during a period of negative index earnings growth. Of course, many of you will not heed my “buy and add to, long term” advice and will try to trade these stocks daily for nickels and dimes. That’s fine. Short term swing traders can make good money. Believe it. Ag stocks are in a big long term uptrend with more room to run.
The supply-demand imbalances in the Ag sector, particularly the grains, is very serious and will be the top story and focus for international policy makers in 2008. Keep in mind that the global trend from rural living to city living in the emerging countries is pushing up demand for better food and more of it. Add to all this the cost of transportation and the unknown factor of the weather, and we could see continued price inflation in food. The near term beneficiaries of all this will continue to be the Ag biotech and fertilizer companies that are able to provide solutions that help the farmer increase crop yields, and thus, help them live large.
Friday, February 15, 2008
Hey Dumb ARSe! (Part II)
As a follow up to my post yesterday, this is an update on the situation in the ARS (auction rate securities) market.
Background:
On Thursday of last week, six Goldman ARS auctions failed, which means (GS: 178.41 +1.05%) did not provide a supporting bid to take up the slack for the lack of buyers to meet supply by the sellers. Those six issues that didn’t clear represented about $500 million.
Not surprisingly, a lot of institutional investors started asking questions about the structure of the auction market for the short term 7-day “floaters”. Then last Friday, JPM didn’t support its auction issues. The crack started to widen.
This past Monday, the student loan ARS auctions “failed”. This sector is currently in distress and many auctions are not clearing the available supply. This was followed by news on Tuesday that Citi didn’t clear student loan and muni issues as lead manager. Then yesterday, MER, LEH, UBS, et al, didn’t clear their CEF (closed end fund) issues, which are names like Nuveen, Blackrock, Calamos and Eaton Vance.
In most cases, the holders of these are largely institutional investors. They are paid high “max” rates of interest in many cases to hold the securities until they can sell them at the next weekly auction. [Can anyone say, “money market mutual funds”? and “corporate treasury accounts”?]
Onward. Let me define what the term “ did not clear” means.
This means that there are not enough buyers to match sellers. When this happens, the auction “fails” and the interest rate on the ARS goes to the “max” rate. This ends up being bad economics for the issuer and will likely lead to deals being collapsed (shares redeemed). But eventually, the market will “right size”. More on that later.
Let me digress and briefly explain, in laymans terms, how these instruments are structured.
Let’s say that I’m a fund manager of a CEF that invests in muni bonds. As you well know, a CEF is a mutual fund that is traded on an exchange like a stock, as opposed to an open end fund that issues shares to new investors as it takes in new money.
Since I don’t have sources of new money, other than the current interest on my muni portfolio, my local MER investment banker may then approach me, offering to underwrite an ARS bond issue for my fund. The securities issued are sold at auction where buyers bid an interest rate that they want to earn on their money. In the case of a muni ARS, the interest is tax free. Also the interest rate will reset, in most cases, on a weekly basis, on the same day of the week that they were originally auctioned off. This happens weekly until the securities are redeemed by the issuer (me, in this example). Also, because of the reset, the interest rate is variable. It is tied to an interest rate index, like BMA. Hence the term, “floaters”.
The reason why I would do this? ……. leverage. I can take the proceeds from the offering and go out and by longer term muni paper at a higher interest rate and make the spread between the interest rate I’ll get and the interest rate I’ll have to pay on the muni floaters. This is one way I can juice the the common dividend on the CEF shares.
MER, as the lead underwriter, has a moral obligation (not a contractual one) to provide supporting bids each time the issue comes up for the weekly auction. That means that they are the buyer of last resort. They step in and provide liquidity to the market, which allows for orderly transactions of the muni ARS auctions each week. This has been the protocol for the last 20 years. As we know now, the underwriters are refusing to do this.
Now, when an auction fails to clear, the investors holding the securities are now required to hold some or all of the securities until the next auction, but are paid a penalty rate of interest, the “max rate”. By the way, that interest penalty is to me, the issuer. The maximum reset rates for these deals have been reported in excess of 6% tax free, in some cases.
Yesterday, this situation spilled over from the student loan and taxable issues, to the “muni preferred” market. Again, these deals are sold as leverage to closed end bond funds (Nuveen, Blackrock, et al).
Most of the securities in these deals are held by individual “retail” investors, like mom and pop. These muni preferred auction securities, aka “tax free floaters” don’t normally offer the egregious maximum rates to the investors in taxable issues who experience a postponed auction. While each deal might vary, the max rate on tax free floaters in most cases, is based on 110% of the BMA index, which puts the yield currently at about 3.30%, tax free. (The taxable deals have a max rate that is typically 150% of LIBOR, or about 4.65%, currently.)
Queston #1: If I’m an investor in these things, and I want to get out, can I?
Maybe. Let me give you an example:
Let’s assume that there is $10 million worth of supply (sellers), but only $5 million worth of demand (buyers). We can’t match the buyers with sellers. Now, if the underwriter like MER doesn’t put any support bids to “backstop” the issue, that auction is not going to ”clear”. We go to the max interest rate. However, since there are some buyers, the sellers would be able to get out on a pro rata basis, in this example, 50% of their position could be sold. The other 50% would have to wait for the auction again next week. The transaction is pro rata across all the sellers, not on a FIFO basis. The buyers, obviously, would get 100% of what they wanted to buy.
Question #2: If an auction fails to clear, and there are no buyers, what happens then?
The answer is….we don’t know. The auction could continue to fail week after week.
Fund managers do have the option to de-leverage their fund, and unwind the floaters, but will they do that? Again, we don’t know at this point. However, I’m almost certain there will be some arm twisting to get them to do just that.
In my case, as the hypothetical muni fund manager, I could sell assets in the muni portfolio and redeem the muni floater, thus taking the leverage off the common shares of the fund.
It is called a muni “preferred” because it is senior to the common shares of the fund. Usually, when a muni ARS issue is structured, there is normally 300% coverage by the assets in the fund to the ARS. In addition, the fund always structures the issue so that there will always be, at a minimum, 200% coverage, guaranteed at any time.
If the NAV of the overall fund falls below 200% coverage of the preferred, I would be forced to redeem the preferred to maintain the coverage ratio.
So the reason why an auction ”fails” is not a credit issue, but a liquidity issue and the added concern with the auction process overall.
Again, it is a liquidity issue, not a credit issue. Think about it. You have the coverage (collateral, if you will) of 200% at a minimum; you have the credit rating, usually A or better; and you have the diversification within the muni portfolio.
That all said, expect the situation to continue, if not worsen in the near term.
Eventually, the market will right size through de-leveraging by the fund managers or buyers coming in to seize the opportunities of higher max rates. We just don’t know when this will happen. In the meantime, the current holders of ARS will get a max rate each week, until an auction clears.
The ramifications of all this are better left as the subject of another post. I’m sure you can think of a few “shoes” that could drop as a result of all this.
Be well and have a great and worry-free President’s Day weekend.
Background:
On Thursday of last week, six Goldman ARS auctions failed, which means (GS: 178.41 +1.05%) did not provide a supporting bid to take up the slack for the lack of buyers to meet supply by the sellers. Those six issues that didn’t clear represented about $500 million.
Not surprisingly, a lot of institutional investors started asking questions about the structure of the auction market for the short term 7-day “floaters”. Then last Friday, JPM didn’t support its auction issues. The crack started to widen.
This past Monday, the student loan ARS auctions “failed”. This sector is currently in distress and many auctions are not clearing the available supply. This was followed by news on Tuesday that Citi didn’t clear student loan and muni issues as lead manager. Then yesterday, MER, LEH, UBS, et al, didn’t clear their CEF (closed end fund) issues, which are names like Nuveen, Blackrock, Calamos and Eaton Vance.
In most cases, the holders of these are largely institutional investors. They are paid high “max” rates of interest in many cases to hold the securities until they can sell them at the next weekly auction. [Can anyone say, “money market mutual funds”? and “corporate treasury accounts”?]
Onward. Let me define what the term “ did not clear” means.
This means that there are not enough buyers to match sellers. When this happens, the auction “fails” and the interest rate on the ARS goes to the “max” rate. This ends up being bad economics for the issuer and will likely lead to deals being collapsed (shares redeemed). But eventually, the market will “right size”. More on that later.
Let me digress and briefly explain, in laymans terms, how these instruments are structured.
Let’s say that I’m a fund manager of a CEF that invests in muni bonds. As you well know, a CEF is a mutual fund that is traded on an exchange like a stock, as opposed to an open end fund that issues shares to new investors as it takes in new money.
Since I don’t have sources of new money, other than the current interest on my muni portfolio, my local MER investment banker may then approach me, offering to underwrite an ARS bond issue for my fund. The securities issued are sold at auction where buyers bid an interest rate that they want to earn on their money. In the case of a muni ARS, the interest is tax free. Also the interest rate will reset, in most cases, on a weekly basis, on the same day of the week that they were originally auctioned off. This happens weekly until the securities are redeemed by the issuer (me, in this example). Also, because of the reset, the interest rate is variable. It is tied to an interest rate index, like BMA. Hence the term, “floaters”.
The reason why I would do this? ……. leverage. I can take the proceeds from the offering and go out and by longer term muni paper at a higher interest rate and make the spread between the interest rate I’ll get and the interest rate I’ll have to pay on the muni floaters. This is one way I can juice the the common dividend on the CEF shares.
MER, as the lead underwriter, has a moral obligation (not a contractual one) to provide supporting bids each time the issue comes up for the weekly auction. That means that they are the buyer of last resort. They step in and provide liquidity to the market, which allows for orderly transactions of the muni ARS auctions each week. This has been the protocol for the last 20 years. As we know now, the underwriters are refusing to do this.
Now, when an auction fails to clear, the investors holding the securities are now required to hold some or all of the securities until the next auction, but are paid a penalty rate of interest, the “max rate”. By the way, that interest penalty is to me, the issuer. The maximum reset rates for these deals have been reported in excess of 6% tax free, in some cases.
Yesterday, this situation spilled over from the student loan and taxable issues, to the “muni preferred” market. Again, these deals are sold as leverage to closed end bond funds (Nuveen, Blackrock, et al).
Most of the securities in these deals are held by individual “retail” investors, like mom and pop. These muni preferred auction securities, aka “tax free floaters” don’t normally offer the egregious maximum rates to the investors in taxable issues who experience a postponed auction. While each deal might vary, the max rate on tax free floaters in most cases, is based on 110% of the BMA index, which puts the yield currently at about 3.30%, tax free. (The taxable deals have a max rate that is typically 150% of LIBOR, or about 4.65%, currently.)
Queston #1: If I’m an investor in these things, and I want to get out, can I?
Maybe. Let me give you an example:
Let’s assume that there is $10 million worth of supply (sellers), but only $5 million worth of demand (buyers). We can’t match the buyers with sellers. Now, if the underwriter like MER doesn’t put any support bids to “backstop” the issue, that auction is not going to ”clear”. We go to the max interest rate. However, since there are some buyers, the sellers would be able to get out on a pro rata basis, in this example, 50% of their position could be sold. The other 50% would have to wait for the auction again next week. The transaction is pro rata across all the sellers, not on a FIFO basis. The buyers, obviously, would get 100% of what they wanted to buy.
Question #2: If an auction fails to clear, and there are no buyers, what happens then?
The answer is….we don’t know. The auction could continue to fail week after week.
Fund managers do have the option to de-leverage their fund, and unwind the floaters, but will they do that? Again, we don’t know at this point. However, I’m almost certain there will be some arm twisting to get them to do just that.
In my case, as the hypothetical muni fund manager, I could sell assets in the muni portfolio and redeem the muni floater, thus taking the leverage off the common shares of the fund.
It is called a muni “preferred” because it is senior to the common shares of the fund. Usually, when a muni ARS issue is structured, there is normally 300% coverage by the assets in the fund to the ARS. In addition, the fund always structures the issue so that there will always be, at a minimum, 200% coverage, guaranteed at any time.
If the NAV of the overall fund falls below 200% coverage of the preferred, I would be forced to redeem the preferred to maintain the coverage ratio.
So the reason why an auction ”fails” is not a credit issue, but a liquidity issue and the added concern with the auction process overall.
Again, it is a liquidity issue, not a credit issue. Think about it. You have the coverage (collateral, if you will) of 200% at a minimum; you have the credit rating, usually A or better; and you have the diversification within the muni portfolio.
That all said, expect the situation to continue, if not worsen in the near term.
Eventually, the market will right size through de-leveraging by the fund managers or buyers coming in to seize the opportunities of higher max rates. We just don’t know when this will happen. In the meantime, the current holders of ARS will get a max rate each week, until an auction clears.
The ramifications of all this are better left as the subject of another post. I’m sure you can think of a few “shoes” that could drop as a result of all this.
Be well and have a great and worry-free President’s Day weekend.
Hey Dumb ARSe!
Auction Rate Securities (ARS) have recently joined the list of fixed income sectors experiencing dislocations due to the fallout created by the problems in the subprime mortgage market. Borrowers ranging from student-loan authorities to municipalities to large bond funds depend upon this market to raise money for making loans and funding projects. They do this by selling securities whose rates reset weekly in auctions held by various dealers.
The Student Loan ARS sector has been largely an institutional market whereas the securities in the Closed-End Fund (CEF) sector, featuring names such as Nuveen, Blackrock, RMR, First Trust, and Calamos, is more of a retail market. Regardless, in recent days the investors who typically buy auction-rate securities have been balking. This has created a mismatch between buyers and investors who try to sell their securities at the weekly auction, and as a result the auction(s) haven’t “cleared”.
Auctions for some Nuveen and Calamos issues haven’t cleared in the last few days when the lead underwriters failed to support the auctions.
The number of daily auctions, particularly in Student Loans sector, not clearing has increased in the past few days and will likely continue to do so in the near-term until market conditions settle down. When an auction doesn’t clear, an investor looking to sell must continue to hold some or all of their securities until the next auction and receives a “maximum” rate from the issuer. This rate is set forth in the security offering agreement and will depend upon the type of ARS.
The rate on the CEF products reset at a spread to an underlying index. Taxable CEFs such as RMR, First Trust, and Calamos are indexed to LIBOR.
The tax exempt CEFs (Nuveen and Blackrock, etc.) are indexed to the BMA (Bond Market Association) index.
Both short-term indexes will follow the direction of short-term interest rates as Central Banks change monetary policy.
Dealers in ARS (C, UBS, JPM, GS, etc.) have no contractual obligation to take the securities in. In the event an auction doesn’t clear, this has created liquidity concerns on the part of current holders. Because of these different reset agreements, there is a wide disparity in reset rates and the “maximum” rates may vary widely between the CEFs, the muni ARS, and the student loan ARS.
Auctions will continue on a weekly basis. When an auction doesn’t clear, the investor will receive the “maximum” rate until the next auction opportunity. You probably heard that the Port Authority of NY and NJ interest rate on Tuesday jumped to 20% from 4.2%. Investors will continue to receive that rate until the auction clears upon which time the rate reverts to a market rate. This “maximum” rate will act as a penalty to the issuer and should be an incentive for them to move to reduce supply by refinancing into other vehicles (collapsing deals and redeeming shares) which will help to “right-size” the market and clear the auctions.
The inability of an auction to clear has created a near-term liquidity issue in the ARS market and as a result an investor in those deals will find themselves owning securities subject to the next auction opportunity. The underlying credit quality of the issuers generally remains very high, investment grade at the least and/or some issues are involved in the government-guaranteed student loan market. As far as I have heard from my sources, the sector does not have a credit issue. The dislocations in the sector have caught the attention of the media and the rush to sell has overwhelmed the market, increasing the likelihood auctions will not clear creating a liquidity issue.
Lost in the media discussions is the fact that these instruments carry investment grade underlying credit ratings or are involved in the government-guaranteed student loan market, hence this is not a credit issue.
This period of volatility is likely to persist for the near-term, but for investors comfortable with a potential lack of liquidity that can ride this out, it may be an opportunity to benefit from attractive short-term yields.
The Student Loan ARS sector has been largely an institutional market whereas the securities in the Closed-End Fund (CEF) sector, featuring names such as Nuveen, Blackrock, RMR, First Trust, and Calamos, is more of a retail market. Regardless, in recent days the investors who typically buy auction-rate securities have been balking. This has created a mismatch between buyers and investors who try to sell their securities at the weekly auction, and as a result the auction(s) haven’t “cleared”.
Auctions for some Nuveen and Calamos issues haven’t cleared in the last few days when the lead underwriters failed to support the auctions.
The number of daily auctions, particularly in Student Loans sector, not clearing has increased in the past few days and will likely continue to do so in the near-term until market conditions settle down. When an auction doesn’t clear, an investor looking to sell must continue to hold some or all of their securities until the next auction and receives a “maximum” rate from the issuer. This rate is set forth in the security offering agreement and will depend upon the type of ARS.
The rate on the CEF products reset at a spread to an underlying index. Taxable CEFs such as RMR, First Trust, and Calamos are indexed to LIBOR.
The tax exempt CEFs (Nuveen and Blackrock, etc.) are indexed to the BMA (Bond Market Association) index.
Both short-term indexes will follow the direction of short-term interest rates as Central Banks change monetary policy.
Dealers in ARS (C, UBS, JPM, GS, etc.) have no contractual obligation to take the securities in. In the event an auction doesn’t clear, this has created liquidity concerns on the part of current holders. Because of these different reset agreements, there is a wide disparity in reset rates and the “maximum” rates may vary widely between the CEFs, the muni ARS, and the student loan ARS.
Auctions will continue on a weekly basis. When an auction doesn’t clear, the investor will receive the “maximum” rate until the next auction opportunity. You probably heard that the Port Authority of NY and NJ interest rate on Tuesday jumped to 20% from 4.2%. Investors will continue to receive that rate until the auction clears upon which time the rate reverts to a market rate. This “maximum” rate will act as a penalty to the issuer and should be an incentive for them to move to reduce supply by refinancing into other vehicles (collapsing deals and redeeming shares) which will help to “right-size” the market and clear the auctions.
The inability of an auction to clear has created a near-term liquidity issue in the ARS market and as a result an investor in those deals will find themselves owning securities subject to the next auction opportunity. The underlying credit quality of the issuers generally remains very high, investment grade at the least and/or some issues are involved in the government-guaranteed student loan market. As far as I have heard from my sources, the sector does not have a credit issue. The dislocations in the sector have caught the attention of the media and the rush to sell has overwhelmed the market, increasing the likelihood auctions will not clear creating a liquidity issue.
Lost in the media discussions is the fact that these instruments carry investment grade underlying credit ratings or are involved in the government-guaranteed student loan market, hence this is not a credit issue.
This period of volatility is likely to persist for the near-term, but for investors comfortable with a potential lack of liquidity that can ride this out, it may be an opportunity to benefit from attractive short-term yields.
Monday, February 11, 2008
Pattern Probabilities
A basketball player is fouled and goes to the line for two free throws. He is a 70% free throw shooter. What is the probability that he makes both shots?
Answer: 49% (0.70 x 0.70 = 0.49)
That means, on average, he will make both shots about half of the time.
We have a similar situation in trading. If we buy a stock right and sell it right, accomplishing both correctly 70% of the time, we have an even chance of making money.
An interesting study was done a number of years ago by Earle Davis at Purdue University on PnF signals (Point and Figure charts are simply a logical, organized way of recording supply and demand).
He found certain price patterns exhibited very high statistical probabilities. For example, a stock in a bull market that broke a triple top had an 87.9% chance of being profitable for an average gain of 28.7% in about 6.8 months.
He also found that in a bear market, a stock that broke a triple bottom had a 93.5% chance of moving lower for an average “gain” (short) of 23% over only 3.4 months on average.
I don’t know about you, but if I had a stock that had a 93.5% chance of going against me for a loss of 23%, I’d want to short it, or at a minimum, at least know about it.
Be careful that you don’t short UBS based on this post, or a yodeler in lederhosen might crash your next party, and you might lose some money.
Answer: 49% (0.70 x 0.70 = 0.49)
That means, on average, he will make both shots about half of the time.
We have a similar situation in trading. If we buy a stock right and sell it right, accomplishing both correctly 70% of the time, we have an even chance of making money.
An interesting study was done a number of years ago by Earle Davis at Purdue University on PnF signals (Point and Figure charts are simply a logical, organized way of recording supply and demand).
He found certain price patterns exhibited very high statistical probabilities. For example, a stock in a bull market that broke a triple top had an 87.9% chance of being profitable for an average gain of 28.7% in about 6.8 months.
He also found that in a bear market, a stock that broke a triple bottom had a 93.5% chance of moving lower for an average “gain” (short) of 23% over only 3.4 months on average.
I don’t know about you, but if I had a stock that had a 93.5% chance of going against me for a loss of 23%, I’d want to short it, or at a minimum, at least know about it.
Be careful that you don’t short UBS based on this post, or a yodeler in lederhosen might crash your next party, and you might lose some money.
Thursday, February 7, 2008
"Are We There Yet?"
I have fond memories of family vacations when I was a kid. We took practically the whole summer off, pulling a 32′ trailer around the country, visiting many of the National Parks. My dad was a college professor, so he had nothing better to do in the summers than haul me and my sister and my mom all over creation.
However, what used to drive him nuts was the inevitable question from the backseat.
“Are we there yet?”, my sister would whine in her 9 year old voice. This was nothing short of impertinent impatience in wanting to get “there” ASAP, even though we traveled only 50 miles enroute to a 400 mile destination.
Sort of reminds me of the hopeful and impatient bulls in this current market.
Most stocks are now in a bear market and we are approaching something that is a full blown bear market—globally. Check these out:
The Russell 2000 is down -19% from its’ peak on 07/13/07.
Naz……..down -20.30% from the peak on 10/31/07.
The Naz 100…….down -22.24% from the peak on 10/31/07.
S&P 500……down -15.25% from the peak on 10/09/07.
DJIA………..down -13.87% from the peak on 10/09/07.
Globally:
MSCI EAFE……..down -17.34% from the peak on 10/31/07.
MSCI Emerging Markets…….down -21.06% from the peak on 10/31/07.
More than 3/4 of the stocks on the NYSE are trading below their 200-day MA. If we take the traditional definition of a “bear market” as a drop of 20% from the prior high, I calculate the current bear market levels as follows:
NAZ …….2287.30
S&P 500…1249.44
Russell 2000….684.35
So, the Russell 2000 is almost “official”. The Naz, Naz 100 and the MSCI Emerging Markets Index are already there.
Hope for the Bulls is that we are approaching a level of internal market damage that suggests we could be closing in on a low for most stocks. In the last two major sell-offs of 1998 and 2002, we saw 85%-90% of NYSE stocks below their 200-day MA., a point where the indexes began to rally.
Outside of technical considerations, we need to see fundamental confirmation to gain conviction about a sustainable market low. This would include a bottom in global leading indicators and a better picture of corporate guidance.
Both are not to be seen at the moment.
Ominous.
Lady Bulls croon for new highs in Mr. Market....
However, what used to drive him nuts was the inevitable question from the backseat.
“Are we there yet?”, my sister would whine in her 9 year old voice. This was nothing short of impertinent impatience in wanting to get “there” ASAP, even though we traveled only 50 miles enroute to a 400 mile destination.
Sort of reminds me of the hopeful and impatient bulls in this current market.
Most stocks are now in a bear market and we are approaching something that is a full blown bear market—globally. Check these out:
The Russell 2000 is down -19% from its’ peak on 07/13/07.
Naz……..down -20.30% from the peak on 10/31/07.
The Naz 100…….down -22.24% from the peak on 10/31/07.
S&P 500……down -15.25% from the peak on 10/09/07.
DJIA………..down -13.87% from the peak on 10/09/07.
Globally:
MSCI EAFE……..down -17.34% from the peak on 10/31/07.
MSCI Emerging Markets…….down -21.06% from the peak on 10/31/07.
More than 3/4 of the stocks on the NYSE are trading below their 200-day MA. If we take the traditional definition of a “bear market” as a drop of 20% from the prior high, I calculate the current bear market levels as follows:
NAZ …….2287.30
S&P 500…1249.44
Russell 2000….684.35
So, the Russell 2000 is almost “official”. The Naz, Naz 100 and the MSCI Emerging Markets Index are already there.
Hope for the Bulls is that we are approaching a level of internal market damage that suggests we could be closing in on a low for most stocks. In the last two major sell-offs of 1998 and 2002, we saw 85%-90% of NYSE stocks below their 200-day MA., a point where the indexes began to rally.
Outside of technical considerations, we need to see fundamental confirmation to gain conviction about a sustainable market low. This would include a bottom in global leading indicators and a better picture of corporate guidance.
Both are not to be seen at the moment.
Ominous.
Lady Bulls croon for new highs in Mr. Market....
Monday, February 4, 2008
The Trend is Your Friend....
This is almost a universal mantra for traders everywhere. I agree with this, because it is what you might call, a trading truism.
Being a trend follower makes a lot of sense.
But realize that with any methodology or system, there are always trade offs. In the case of trend followers, by definition, they are always going to be late to buy and late to sell. ALWAYS.
If you wait for a trend to develop, you give up gains at the front end and the back end of a move. Nothing wrong with that if your goal is to capture the middle 2/3 of a trend.
What trend following fails to recognize is the initial early shift in the market between supply and demand. I have said it before, and I’ll say it again: markets move based on supply and demand. That is the bottom line.
Trend following, using graphs and technical analysis is only a way of measuring the results of supply and demand by looking at price movements on a chart. It is not supply and demand itself. It is a derivative.
Markets do not move according to charts. The Fly’s (www.ibankcoin.com) humorous statement about technical analysis being “the lazy man’s way” has some ring of truth to it.
Sometimes you have to force yourself to change the angle of your perspective and view things in a different way.
That said, I am not against technical analysis. I am for making money, using all kinds of ways to look at the market. At certain times, some ways to look at the markets are better than others.
Lately the bad news has been overblown, in my opinion. People start talking about how terrible things are, and before you know it, the herd mentality develops. This is basic human nature. It is true on the other extreme, as well, where people develop “irrational exuberance”.
I think we work our way back up from here. The demand factors, right now, seem to indicate that. I know that is not the opinion of the majority, and I take some comfort in that. If you wait to put cash back to work in this market until you feel good about it, you’re missing the move.
Parting thought: Where else are institutional investors going to put their money? In cash? With interest rates going down, the return on cash or bonds won’t even beat inflation. There are some very good names that are bargains right now. Mutual funds not only have a fiduciary duty to manage money prudently, but by prospectus, most of them have to be FULLY invested.
If you were a trend follower, your money probably would have been on the Patriots.
Being a trend follower makes a lot of sense.
But realize that with any methodology or system, there are always trade offs. In the case of trend followers, by definition, they are always going to be late to buy and late to sell. ALWAYS.
If you wait for a trend to develop, you give up gains at the front end and the back end of a move. Nothing wrong with that if your goal is to capture the middle 2/3 of a trend.
What trend following fails to recognize is the initial early shift in the market between supply and demand. I have said it before, and I’ll say it again: markets move based on supply and demand. That is the bottom line.
Trend following, using graphs and technical analysis is only a way of measuring the results of supply and demand by looking at price movements on a chart. It is not supply and demand itself. It is a derivative.
Markets do not move according to charts. The Fly’s (www.ibankcoin.com) humorous statement about technical analysis being “the lazy man’s way” has some ring of truth to it.
Sometimes you have to force yourself to change the angle of your perspective and view things in a different way.
That said, I am not against technical analysis. I am for making money, using all kinds of ways to look at the market. At certain times, some ways to look at the markets are better than others.
Lately the bad news has been overblown, in my opinion. People start talking about how terrible things are, and before you know it, the herd mentality develops. This is basic human nature. It is true on the other extreme, as well, where people develop “irrational exuberance”.
I think we work our way back up from here. The demand factors, right now, seem to indicate that. I know that is not the opinion of the majority, and I take some comfort in that. If you wait to put cash back to work in this market until you feel good about it, you’re missing the move.
Parting thought: Where else are institutional investors going to put their money? In cash? With interest rates going down, the return on cash or bonds won’t even beat inflation. There are some very good names that are bargains right now. Mutual funds not only have a fiduciary duty to manage money prudently, but by prospectus, most of them have to be FULLY invested.
If you were a trend follower, your money probably would have been on the Patriots.
Sunday, February 3, 2008
Time to Buy
If you read the previous post of my analysis of the move in the S&P 500 on Friday, you would realize that you should be putting together a list of buy candidates this weekend for the market opening on Monday, February 4, 2008.
Yeah, I know it's Super Bowl Sunday. But what's more important? Sitting on your ass,stuffing your face and living vicariously through athletic, super-freak physical specimens on the tube..... or banking coin?
The recent blood-draining selloff from October thru late January, was just what we needed to provide bargain prices for a long rally up. Well, it looks like we got what we needed. The Market is going up (for now).
Here are some stocks on my buy list:
PCZ, $46.34
AAPL, $133.75
RIMM, $92.24
PCP, $115.81
If you don't want to take individual stock risk, use ETF's. Here's my current buy list:
RKH
ITB
IWM
SLV
QQQQ
DBA
SPY
XLF
GLD
There you have it. Now go watch the football game.
Friday, February 1, 2008
Analysis of the Market Today
The Market continues its winning ways. Today, the DJIA close at 12,743 + 93. The S&P had an excellent showing also, closing at 1,395 up almost 17. Today's move in the S&P was significant.
What we have now is an Ascending Triple Top Breakout on the S&P. Take a look at the P&F chart:
This is a very strong bullish pattern with high probability of follow through to the upside. The last time I saw this pattern was last September when the S&P ran up from about 1477 on 09/18/07 to the high of 1576 on 10/11/07.
From where we stand now, it looks like we may not run into resistance until 1420. While we are not completely out of the woods pertaining to a downside reversal, the situation for the bulls has improved greatly this past week.
In regard to a potential downside reversal, given all the news and “noise”, the market could get “bitch slapped” around a bit next week. However, I wouldn’t expect to see a confirmed reversal of this recent leg up, until we get down to around 1360 or a little lower. So the bulls shouldn’t get too worried if we see a pullback from here. Right now, the market is trading off of technicals, not fundamentals—obviously.
The risk reward on an S&P trade right here looks promising. The upside target is 1490 and the downside reversal point is at 1360. From the current level of 1395, that is a positive risk/reward of over 2 to 1.
I will provide a more in depth technical analysis of the S&P and my reasons for why I prefer to use the P&F charts, later on this weekend (before the Super Bowl of course).
Go Giants!
Developing…..
What we have now is an Ascending Triple Top Breakout on the S&P. Take a look at the P&F chart:
This is a very strong bullish pattern with high probability of follow through to the upside. The last time I saw this pattern was last September when the S&P ran up from about 1477 on 09/18/07 to the high of 1576 on 10/11/07.
From where we stand now, it looks like we may not run into resistance until 1420. While we are not completely out of the woods pertaining to a downside reversal, the situation for the bulls has improved greatly this past week.
In regard to a potential downside reversal, given all the news and “noise”, the market could get “bitch slapped” around a bit next week. However, I wouldn’t expect to see a confirmed reversal of this recent leg up, until we get down to around 1360 or a little lower. So the bulls shouldn’t get too worried if we see a pullback from here. Right now, the market is trading off of technicals, not fundamentals—obviously.
The risk reward on an S&P trade right here looks promising. The upside target is 1490 and the downside reversal point is at 1360. From the current level of 1395, that is a positive risk/reward of over 2 to 1.
I will provide a more in depth technical analysis of the S&P and my reasons for why I prefer to use the P&F charts, later on this weekend (before the Super Bowl of course).
Go Giants!
Developing…..
Market View 02/01/2008
Well, we made it though the first month of 2008.
For the month, the DJIA was off -4.63%
S&P 500 down -6.12&
Nasdaq 100 down -11.68%
Nasdaq Composite -9.89%
Russell 2000 - 6.88%
However, I am seeing strength in the market:
The DJIA broke a double top yesterday at 12,500, closing at 12,650. This is a bullish sign and I would be a buyer of DIA today at 127 with a price target of 138.50. Keep a stop loss at 124.
Interestingly, the Dow Transports have been climbing with little attention. The airline industry on average, recently posted net positive earnings. I can't remember how long it has been since this has happend. The Transports reversed their bearish downtrend on 01/23/08 at 4,200 and closed yesterday at 4,752. It also broke resistance at 4,650. One way to play this is through the iShares IYT. It closed yesterday at 84.87. I would be a buyer at 85. Stop loss at 82.
The Dow Utilities have now broken out of a double top. Again, a bullish sign. It closed yesterday at about 503. XLU closed at 39.22. I would be a buyer of XLU here this morning under 40. Stop loss is 37.
With all three major Dow indices breaking out, we have a very bullish scenario for the Market. Keep in mind that we have had a very volatile market. However, the VIX is coming down, so trade the Market to the upside for now. Be aware that we could have a reversal at DJIA 13,200, where there is some resistance. The heaviest resistance is at DJIA 13,400 so expect the market to stall out between those points. If we blow through those levels, that would be very bullish and we could probably say the bottom is in.
Sector ETFs:
XLP bearish
XLY hold; don't buy- keep on watch list
XLE bearish
XLF hold; don't buy - keep on watch list
XLV bearish
XLI slightly bullish; reversal pattern; buy on a breakout over 38.
XLB slighty bullish; reversal pattern; buy on a breakout above 40.
XLK slightly bullish; reversal pattern; buy on breakout above 24.
IYZ bearish
GLD very bullish; ascending triple top breakout; buy under 92.
USO slightly bullish; reversal pattern; buy breakout above 74.
Keep stops at $3 below entry.
For the month, the DJIA was off -4.63%
S&P 500 down -6.12&
Nasdaq 100 down -11.68%
Nasdaq Composite -9.89%
Russell 2000 - 6.88%
However, I am seeing strength in the market:
The DJIA broke a double top yesterday at 12,500, closing at 12,650. This is a bullish sign and I would be a buyer of DIA today at 127 with a price target of 138.50. Keep a stop loss at 124.
Interestingly, the Dow Transports have been climbing with little attention. The airline industry on average, recently posted net positive earnings. I can't remember how long it has been since this has happend. The Transports reversed their bearish downtrend on 01/23/08 at 4,200 and closed yesterday at 4,752. It also broke resistance at 4,650. One way to play this is through the iShares IYT. It closed yesterday at 84.87. I would be a buyer at 85. Stop loss at 82.
The Dow Utilities have now broken out of a double top. Again, a bullish sign. It closed yesterday at about 503. XLU closed at 39.22. I would be a buyer of XLU here this morning under 40. Stop loss is 37.
With all three major Dow indices breaking out, we have a very bullish scenario for the Market. Keep in mind that we have had a very volatile market. However, the VIX is coming down, so trade the Market to the upside for now. Be aware that we could have a reversal at DJIA 13,200, where there is some resistance. The heaviest resistance is at DJIA 13,400 so expect the market to stall out between those points. If we blow through those levels, that would be very bullish and we could probably say the bottom is in.
Sector ETFs:
XLP bearish
XLY hold; don't buy- keep on watch list
XLE bearish
XLF hold; don't buy - keep on watch list
XLV bearish
XLI slightly bullish; reversal pattern; buy on a breakout over 38.
XLB slighty bullish; reversal pattern; buy on a breakout above 40.
XLK slightly bullish; reversal pattern; buy on breakout above 24.
IYZ bearish
GLD very bullish; ascending triple top breakout; buy under 92.
USO slightly bullish; reversal pattern; buy breakout above 74.
Keep stops at $3 below entry.
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