The Yellow Rose Street Beat

Let's make this short

2009-11-02T21:52:00.000-08:00

The stock market is a probability game and not a certainty. That being said, there is a high probability that stocks, and now also gold, silver, other commodities, have started the next leg down. This knowledge is a product of fairly diligent research, stats,Elliott, and conceptual interpretation of how markets really function.

The last post was saying this exactly, not including gold and silver, just in a less direct way. It seems a more direct approach is necessary.

The next leg down could devastate 401ks, wealth, and natural order of things. If we are in the next leg down, as the Rose believes is most probable, this is not something to be excited about. Many people have no idea how the market works at all yet their life savings are tied up in this game. Your 401ks are not necessarily safe... are not likely to reach this level in a long time if ever at all. Even those not involved in the market at all can be influenced by the social mood of a true stock collapse.

Don't take the word here as if it were the Word... do your own research... starting with Prechter's last Elliott Wave Theorist if you haven't already read this. It's very inexpensive and the information is pure gold. The last issue is of particular importance. Bob Prechter has oft been mentioned on this sight because he is one of the very few people out there who has both the ability and desire to provide a clear picture of what is going on. No more will be said except that again the Rose has no affiliation with EWI other than a paid subscription. This is true respect for the big picture overview that they have provided... in the way that things should always be conducted... with no strings attached.

Keep searching further until you find what makes sense to you and always realize that probabilities are just that... in this case probable cause for due diligence.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Let's hope we don't get 'caught napping'... the long view can be short-sighted...... (Bulls on Parade)

2009-10-25T22:29:00.000-07:00

Support our Troops...

Just because we peer over a flat horizon does not mean that the world is flat. Just because stocks have generally gone up over time in the US markets since the 1940s does not mean that it will continue to do so. Is the long view really as long as we perceive it to be?

We have not reached a preliminary target of 1150 on the SP. Please understand that this is just one line in the sand. Much more subtle markers are needed to examine the exchange of millions upon millions of dollars.

The Heisenburg Uncertainty Principle, Type I vs Type II error, sensitivity vs. specificity... they are all saying the same thing... the more you know one thing the less you know its counterpart. Therefore, there is no argument whatsoever that trying to be too fine in the market is a big mistake. My belief is that a systematic method can be employed to get you in the ballpark. From there, once the probability is stacked in your favor, it is important to stick to the system and realize that trying to be too fine can mean opportunity lost. At last week's high we were within 5% of my target... and more importantly... statistics imply that that the weather MAY be transforming. Just realize that the stock market is a multi-layered pyramid scheme... and then you will understand that the further we go up the more bearish we should become.

For the more subtle details of this understanding, one that is translatable into quantified methods, Elliott Wave Theory and statistical analysis can help. I won't discuss statistical data but I can say that, though I emphasize while I don't always agree with him, though I do greatly respect his analysis, I think that Bob Prechter provides one of the freshest perpectives in the market and is on the money here. I also want to make it clear that it can take years, decades, or lifetimes, to become a masterful Elliott Wave Technician and since I don't have that kind of time I have chosen to look further for methods that expand upon that knowledge. For individuals who really are masters in the art of Elliott Wave Theory that may be all that is needed. Statistics layered upon Elliott Wave Theory may provide even greater insight. I did see that Mr. Prechter was at one point looking for a statistician so if this interests you perhaps investigate further. Overall, each individual is different, of course, and must do what he or she thinks is best.

All of that being said... nothing in trading is a certainty, and risk management is of paramount importance.

It is also interesting that while my stats are showing potential weakness in stocks I have not encountered that as of yet in the corresponding data points for gold and silver. It would seem logical that a strengthening dollar, decline in stocks, and decline in commodities priced in dollars would all go hand in hand. Yet I am not seeing the smart guys in any way indicating that the rise in gold/silver is over... this could change and probably will but it does make me wonder if a fall in stocks could be accompanied with a continued rise, or at least modest drop, in precious metals. Just something to watch at this time.

One other thing that needs to be emphasized... on a more general level, including but not limited to the stock market... is that dogma can be one of the most limiting elements of this planet... it hinders people from realizing, among other things, that Black Swan events are, in fact, quite common, provided that you take a long enough view... At this transitory moment in time in the market the 'Bulls are on Parade'. An inflection point....?

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Taking Stock

2009-09-29T10:16:00.000-07:00

Hey boys and girls... it's a great time to take stock, so to speak...

It's been awhile since the 'Rose' has examined the stock market prices, largely because the conditions and circumstances laid out in previous posts are still playing themselves out. This post gave potential scenarios for, the long-term, intermediate-term and short-term. This was based primarily on Elliott Wave patterns and market psychology. In the short-term, the idea of selling was premature, though to be fair, it was indicated that the short-term scenario held the least clarity of the three and I was therefore quite careful in this regard.

Since that time I have come to understand that, for me at least, stats and back-testing with the proper think-outside-of the box indicators add layers of understanding with a superior precision. In this casino, the smart money, like the casino bosses, don't like to gamble unless the odds are heavily in their favor. The smart money 'gets theirs.' Quantitatively assessing what the smart money is doing and is likely to do next is of tremendous value... and... in accordance with anything of value... requires hard-work, skill, perseverance, and luck.

If you can figure out what they are doing and surf the waves that they generate then you are on the winning team. If you've ever, surfed, or even if you haven't, you can imagine that you can never decide what the ocean is going to do next... you can only gauge where the waves are likely to be and then make sure you are on the right side of things. If I had more time to do so I would spend a lot more time time with historical price data software to incorporate the stats, my understanding of how the market works, and other factors to quantitatively describe probabilities and then only trade when the probability was favorable.

I don't have the time to be that thorough but I can share a few salient points from what I have learned that may be of help...

First, the longer term picture has not changed... data suggests strongly that we remain in a bear-market rally and nothing more. There is no 'new bull market', though if we begin to hear that persistently the rally will likely be about done. This may suggest that if you are not a trader but a long-term investor with 401ks this could be an opportunity to start cashing out... you can read what Bob Prechter and some others have to say about this... its a delicate topic and no one should take anyone else's advice alone... certainly I am not here to offer advice... just something to seriously consider...

Second, despite the large rise in the market, there is nothing to suggest that bears will not continue to be squeezed in the near to intermediate future. The smart money has been buying, or at least not heavily distributing, ... and will have to sell at some point... but it remains dangerous to short as of this moment... though we are certainly in a range in the market where that could begin to change... However... it is important to realize the third point...

Third... While we have taken out many expected upside targets, and certainly have gone up enough to begin a sharp decline, it is always pure speculation to try to determine where exactly the market will turn. The best traders can do, in my opinion, is to look for potential turning points... and then wait for evidence that the smart money has changed focus to confirm the change price action. That being said, the smart money is likely to start selling when it 'feels' almost impossible to short... just like the market bottomed with 2% bulls in March... when it 'felt' impossible to buy stocks because 'they always go down'. At this point I do not believe we are there yet. It is also true that certain targets have likely been tentatively ascribed by the smart money... just as the 670 region was probably agreed upon for the downside... though these numbers change depending on what the smart money and everyday investor feel, and do, as time progresses.

Obviously, it is a bit frustrating to talk without numbers and patterns to back things up... but I can't divulge that, and each person must use their own methods... I do think Elliott Wave Theory provides some solid probabilistic means, particularly when it comes to 'impulse waves'. I would further recommend that those interested check out the work of the Turtle Traders and the like... for a different perspective, though I neither endorse nor have any personal affiliation with anyone.

Having said that there is no way, without being on the inside, to know where this market is likely to top, I can give one point where I am at least looking at and would await confirmation for... that is the 1150 region on the SP... I like to look at the weekly charts, as it seems many look at these less often than the daily ones. I also think point and figure charts are quite nice because they break down price action into a simpler format. One thing I have learned is that the more 'traditional' and indicator is, in the sense that many people are looking at it for a turning point, the less likely it is to work... though I don't have numbers to back that up quantitatively. Hence... if everyone is NOT looking at it, it may be worth looking into. Also... the 1150 region represents an approximate 61.8% retracement of the top region of the bear rally in 08 and the market low in March of this year.

(1440-670)= 770... 770*.618= 476... 670+476=1146... perhaps a point of awareness...

Also note that we just bounced off of the downtrend line... which very often at least creates a temporary pullback (which it did right here), and may indicate that, since we are in a bear market, we may soon be headed back down, either from this region or after a false and temporary break of this trendline. Again, it is time to start looking for turning points... but such turnings points, until confirmed, can only be fairly described as speculative in nature...

Lastly, to emphasize the weekly chart, take a look at the price action that drew in quite a few bears in June/July... a healthy correction... on this chart you can see that it bounced smartly off of the middle of the weekly Bollinger Band... 20 week MA......

Happy investing and trading...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

It's Time to Revisit the Inflation/Deflation Debate

2009-09-09T19:19:00.000-07:00

It was the summer of 2008, oil prices were through the roof, the government was creating money like it was candy, gold was ‘going to $2000’, and the dollar was ‘on its way out’. Ahhh yes… I remember it…… as if it were only a year ago…

At that time you could find articles about inflation everywhere (especially in the mainstream media) and almost no one was talking about deflation. For me, something didn’t click, and I decided it was worth serious investigation. I wanted to understand what was going on, I realized the importance of such an understanding, and I wanted to share my finding on here when I was done.

Early in the fall of 2008 I created a post each on inflation and on deflation. In the search for the truth I remember at that time typing in ‘deflation’ into you tube and finding that only a few videos came up. One of them showed some maniacal guy talking about deflation and the book Conquer the Crash. I don’t know who he is but he certainly offered a fresh perspective at the time, and I couldn't get him out of my mind (I dare anyone to try). He also, by the way, lead me (indirectly) to Elliott Wave Principle and the great work of Leonardo Fibonacci... (As a side note, for those interested in math/science/nature or even history, he is one of the most interesting figures you will ever come across. In addition to discovering mathematical ratios that underpin everything from the spirals of the galaxy to the human figure to the stock market, he also brought the Arabic numeral system the Western World. If you ever thought algebra, calculus, or economics was boring/confusing, imagine what it would be like if you had to learn them by using Roman numerals!)

Anyway, the question at the time was... are we going to face inflation or deflation in this economic crisis? On the one hand, if the dollar was a measure of the strength of the country, certainly as compared to creditor countries such as China and Japan, then certainly it looked like inflation would rule the roost. This looked to be especially true with the way the 'Fed' was printing money, via 'quantitative easing.' Yet, on the other hand, it seemed to make sense that the implosion of housing bubbles and credit bubbles should lead to deflation, not inflation, as money would be less available (less credit) and prices would have to fall to accommodate this...

Ultimately my conclusion was that there was a tug of war between the deflationary credit collapse (reminiscent of the 1930s style depression) and the Fed's inflationary plan to continue creating money, despite the poor balance sheets of the government and many of its citizens. Given the size of the credit collapse, it seemed apparent that we would get significant deflation first, especially as the global economy contracted, followed a number of years later by some serious inflation. I offered these conclusions to a former professor of mine at UCLA... the one, by the way, who first really turned my attention to the stock market with the company Cameco (CCJ).

For over a year I have held that this conclusion was the most likely to transpire. The dollar is the current global reserve currency. Hence, the contraction of the credit expansion would be expected to cause deleveraging and the need to raise dollars. Additionally, strapped US consumers would have less access to dollars, and the combined effect would strengthen the dollar until the credit implosion started to ease, causing prices to decline in dollars. The contraction of the global economy would further fuel deflation, as Europe and emerging markets would not have as much money to buy products either. All good,(well in terms of a cogent argument at least), so far.

However, there was always one factor that could potentially change things: an accelerated collapse in the dollar from international policy. I am writing this post now because recent news offers a warning in this regard. What if, for some crazy reason (well maybe not so crazy), China decided to stop buying treasuries or to stop taking dollars? What if the middle east stopped accepting dollars for oil? What if these countries decided that, even with the immediate term strengthening of the dollar, the long-term picture looked so bleak for the dollar that it was not worth the risk of taking on more now? What if the deflationary process caused a return to a different currency than the dollar? What would that do?

I am not in any way certain of the outcome, but the logical conclusion is that such an event would accelerate the inflationary process for those holding dollars. That is to say, the inflationary process would kick in sooner. I would expect, further, that we might see continued deflation in US domestic services and products, such as US housing prices, commercial real estate, haircuts, house cleaning, etc., but less deflation and even inflation (perhaps significant) in items that are purchased globally, such as oil and other commodities. In fact, I would not be at all surprised if the recent moves up in gold and foreign currency, against the dollar, were due to speculation of a news release regarding this matter.

The Wall Street Journal recently published an article titled "Dollar Sinks to Low for the Year... Investors Switch to Riskier Foreign Assets in Gamble on Global Economic Recovery. " The article primarily focused on the reason for the dollars' decline on a 'carry trade' where investors could borrow dollars cheaply and get higher interest rates in other currencies, albeit at a higher risk. On the other hand the article only gave lip service to their findings that the UN had announced that the dollar should be replaced as the primary reserve currency and that 'China would be the first investor in a new IMF series of notes'.

What I saw, in between the lines, was that the exact opposite focus should have been given. The creation of a new global currency, or basket of currencies, could drive a stake through the heart of the dollar. I mean... $5 a gallon gasoline may look like child's play in comparison to what could occur should the dollar no longer be favored or even accepted throughout the world. In my opinion, this labor day article should have made headlines throughout the world, rather than being casually mentioned on a one page news blip on Bloomberg dot com.

All of this being said, in the short-term to medium-term, dollar and commodities (and stocks too for that matter) tend to be largely influenced by trading phenomenon. That is to say, by the time the newspapers are headlining stories on dollar lows it probably (hopefully?) means we are getting near the short-term bottom. What these stories do mean, in my opinion, is that the dollar's short to intermediate -term revival could be muted (well... likely not completely but certainly mitigated) and its ultimate weakness exacerbated by the implementation of this policy. Perhaps dollar strength in the future should be looked upon as an opportunity to exchange at least some of your greenbacks for something more substantive, including but not limited to other paper currencies, such as the Swiss Franc. Consider it, at the very least, and insurance policy.

I want to close this discussion with a very interesting essay, Gold and Economic Freedom, which was written by Alan Greenspan in 1966. In it, he argues that to maintain economic freedom you must have currency backed by gold, or at least by some other hard asset. The idea is that free market economics work just fine, and markets regulate themselves beautifully, provided, that is, that the lenders have real money (gold, silver, etc.) at stake when they lend and, essentially, are fully accountable for their actions. It's something to ponder, especially in the the light of who wrote this article and when it was written.

As Linda Richman (Mike Meyers) used to say on Saturday Night Live's Coffee Talk, "Rhode Island is neither a road nor an island... Discuss."

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Knowing is worth Knowing

2009-05-22T00:47:00.000-07:00

Material Added at end
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I know I know... no posts have come along in a long time. But... my friends... that is only because it has been a ripe time to dig deep, experiment, and really figure out how the market works... if that is possible... and never to post if I don't have anything meaningful to say or if, as is often the case, my non stock market life must come first. I am not a professional trader, as you know, and I hope you understand that in this economic environment the first priority is life itself. In fact, I would argue that the meaning of life is.... life!

But, I digress. Let me add some pieces now to the puzzle if you will... the puzzle in the making which in the end hopefully benefits us all.

I have learned that the way the market really works is entirely different, in fact intentionally so, from everything one learns in the media or in economics classes or just about anywhere else. The market is a business in which one group takes from the other... the educated/informed and skilled from the crowd. In order for the true pros to make their huge livings somebody has to pay their bills. Only in times of expanding economic growth or expanding credit can more money flow in from the sky in such a way that everyone can just put money in the market and watch it go up over time.

I believe that those days are over and that, in the same way that one who stares over the ocean's horizon comes to the conclusion that the world is flat so, too, would someone who has been involved in the markets since the 1940s or later think that the stock market has its ups and downs but generally goes up over time. No... the market is in fact a huge pyramid scheme and I have written a whole post on this which at some point deserves to be posted (I know it sounds like Yogi Berra)... but I am feeling a bit playfully enigmatic at the moment.

I can say that the multi-month rally in the early part of the year, mentioned/predicted several times on this blog from no genius of my own but from my increased learning and understanding, at least attempt of understanding, of the smart money in the market, has come to pass. Some of the potential gains since March have been staggering. And it caught most people by surprise... not that it went up, but how quickly and how persistently it has risen. That is by design.

So where do we go next? Well, I am no bearer of a crystal ball or a Philadelphia Experiment time machine but I can say that the market is a bit like science in that if one learns how to read the right tea leaves evidence of the most probable events can be at least hinted at. I like Elliott Wave Theory in this regard but it is only one piece of the puzzle. There are many many other components that are important to watch and try to understand. The more components that point in the same direction the more likely the move. I cannot say that I have hit the 'promised land' or if I ever will in the markets but I am hoping for incremental gains in understanding. Right now, I want to say that I personally believe the market is due for a fairly serious correction, after we get the bounce off of the 880 region on the SP (resistance turned support) that started today. I have no idea where that bounce will end, of course, but I can say that we should see some serious selling once we break the 880 region with conviction.

However, based on the sentiment of the crowd, based on the Elliott Wave patterns and other sentiment indicators, it is unlikely that the rally that started in March will end on the next major sell-off... no in fact there is still too much hesitation among the masses after the brutal sell-0ff since Oct 07. Remember the rally last March through May? In the beginning everybody and their pet iguana was short the market, they got relentlessly squeezed, and then by May some people started talking about the next bull market... right before the market began to tank in the summer and then REALLY tank in the fall?

People were shocked by the fall just as many have been surprised by the sharp upturn after the 800 on the SP was breached on the downside and the market was going to 500 or whatever. No... I read a investment broker guy (name not released)several months ago talk about 680 as the bottom weeks before the market bottomed at... a daily closing price of 676. Coincidence?

I believe that the market has much much further to fall but that we are very likely to, after certain pullbacks and sideways action, eventually see at least 950, more likely 1000 (the Obama Nov 4 rally... this is a very important line so please note this), and perhaps even higher in a rally that still has legs in the intermediate term and may last all year.

Why do I say this? Based on Elliott Wave patterns, historical price moves after the kind of selling we saw, and most importantly perhaps the continued pessimism in the markets among the masses. Ideally, we would see the markets peak and go back into the next leg of the bear market when the media starts talking about the 'new bull market' or the 'resumption of a normal market' or 'time to invest for retirement once again;... that kind of jargon. It will take a lot to shake the sell psychology after the brutal downturn since the market peaks but in all likelihood it will happen. Why do I say that this will not, in fact, be a return to a normal market? Well, we have baby boomers retiring, a country that has borrowed to the hilt and must pay back, and a society that is going to have to live with less money and less money to spend in the economy and in the markets.

People may want to buy stocks but if they don't have the means or the credit to do so, and if the enormous baby boom generation that pushed up the market for so many years starts making their huge withdrawals... you have to wonder how stock markets can 'just go up over time'.

That is not to say that one cannot be successful in the markets. It just won't likely be via buy and hold any time soon in my opinion. It will take a new set of tools... well... the tools that the smart money has always had to be honest, but tools that the ordinary 'beat inflation with your 401ks and let it sit over time' folks will have a hard time doing without.

Enough for now. I gotta go to bed. By the way... I have no affiliation with Stockcharts.com but more and more I begin to appreciate the services that they provide. I recently bought a financial book on their site, instead of on Amazon, to support them and encourage others to do the same, or get a subscription if you think it is worth it to you. This is just one of the many gold mines that they offer every day:

It is clear that to succeed, should one be one of the lucky ones, one has to learn to ignore 90% of what people think is important and examine indicators that really matter. What are these? Well... I am trying to figure that out. One of the indicators you just don't hear your friends talk about (unless they are in the biz) is the Mclellan Summation Index. There is one for the Naz and for the NYSE. It is not full proof but I can tell you one thing... take a look at the RSI moving up from below 30 and the RSI moving from above 70 down... take a look on longer time frames as well...

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Added:

I wanted to fill in some points that may be helpful.
First, on the direction of the markets from here:

Long Term (years)
Longer-term we are still in a bear market and what we are seeing now is almost certainly a counter-trend rally. Credit implosions are serious and, combined with other factors such as retiring baby boomers and government debt, as well as how quickly the stock markets have risen since 1982, there is the potential for considerably more downside in the markets. I mean... some smart people like Bob Prechter and EWI suggest we end in the low 1,000s (I can't be more specific than that)... or lower over several years. Brutal... and they have been wrong before (everyone has except J.C.... not talking about Cramer here ;))... but they have also been very right and are not the only ones to say this. That is the the big picture overview... and it certainly represents the worst case scenario for the market bulls. Regardless of where it ends it cannot be denied that we are in a long-term downtrend right now and that any reversal of this is guilty until proven innocent. However stock markets do not go down in a line and we have seen this since March. Below talks about what is almost certainly a counter-trend rally based on the fundamentals and technicals of the market right now.

Intermediate Term (months to year)
The highest probability outcome is that over the next few weeks/months we should at least see 950 on the SP, probably 1,000 ball bark, and perhaps higher. However it may go down significantly before that. This is based upon several factors. First, Elliott Wave Theory has typically been particularly accurate when it comes to 'impulse waves' such as the one we have been in since the market peaks. Withing such patterns we see a corrective '2nd' wave that retraces the first wave... typically, though not always , it retraces at least 33% or so of that move (according to Elliott Wave International... I believe I read that there but please don't quote me!) which it has not yet done (1576-666)*.33 = approx 300. 666 + 300 = 966. Note also the Fibonacci 38.2% and 50% levels from this move... these are areas I am certainly watching... in conjunction with the Nov 4 level... the smart money, I assure you, has a target on the upside just as they did on the downside. It is a good idea now to at least look for potential areas that these could be.

Of course retracement numbers are not exact but the ballpark of 950 at a minimum seems reasonable. Additionally, the length of the downturn, time wise, suggests a fairly extensive rally in time as well, even if this rally has quite a bit of sideways action in it. Thrildy, and importantly, the sentiment of the crowd, as measured on sentiment trader.com (great site) demonstrates that we are far from the optimism among the crowd that would give the big houses incentive to sell into the next wave down. Remember, positive sentiment means not only more retail players on the long side but also more people putting money back into mutual funds, etc.... so the amount of money involved with a return of sideline cash into stocks should sentiment among the masses really pick up is huge.

Short Term
Here is where the greatest uncertainly of the three lies, however there are some strong signs that the market is getting close to a serious downturn. In addition to the Mclellan Summation Index Chart, shown above, (also check out the one for the SP... they can both be found in the market summary link on stockcharts.com). is moving below RSI 70 at the moment, we also had the 'rabbit ears' RSI bounce at 70 (see chart below)... rabbit ears in stock price and RSI/other oscillators is one of the more reliable indicators from what I have seen... it is a quick double top that fails... essentially. We also had a clear breaking of the trendline in the markets from the beginning of the rally. Additionally the 20 Day MA, which is the middle of the Bollinger Band, was breached, as was the uptrending parabolic SAR, and the MACD turned bearish as well. Further... we have seasonality... sell in May and etc... it certainly happened last year... as did the rally occur in early Spring... just like last year. We also have the Chaikin Money Flow Index going from way above to around the zero line. Finally, sentiment indicators show that more and more come-lately's have been piling back into stocks.

The one thing that has not yet turned bearish is the overall RSI reading, which remains above 50 for the moment...

So... this is either a serious fake... which it could be... or we are on the brink of some serious selling in the near term. I personally am looking for a bit more of a rise off of the bounce from 880 up... and I am a bit concerned about the crowd's still fairly pessimistic view towards stocks right now (though more bullish than have been for a while... bullish enough for selling fo sho). Also, I am a bit concerned about a potential fake-out if/when we break 880 to the downside... we have seen many such events in which the smart money intentionally sells to draw in shorts and then reverses quickly for a squeeze. This happened most clearly when we broke 800 for the first time and then quickly shot up to 950... So... my actions right now have been to liquidate my long positions and initiate some small shorts... though I am certainly wary since we are in an intermediate term up trend at the moment. Beyond that I have to see what plays out... the set ups are there for sure...

A bit more on what I believe I have learned about how the markets work... which may be of benefit to you perhaps...

I believe that the smart money... that is to say the big investment houses and well trained groups that take very little chances with their money and have the best and the brightest working for them. The kinds that have every statistic in the book to see where the market has gone historically and where it is likely to go next. This group also has the money to move the markets in the short term. Even Dow, he of Dow theory, admitted that markets can be manipulated in short to intermediate time frames. And so it is. However, Dow also state that markets cannot manipulated in the longer time frame. Also true... there is a tremendous amount of selling pressure that had to be squeezed out of the market thus far to account for all of the inflation of stock prices due to credit expansion, economic growth that is severely correcting, withdrawals from baby boomers, and many other factors. There is likely more selling that needs to be done in my opinion. The big houses cannot undo the underlying fundamentals for the long time frame. What they do want to do is time the market so that they have someone to sell to, someone to buy from when markets get oversold, etc.... they spend a lot of money, (I can't prove this but I find it highly likely) on statisticians, economists, mathematicians, etc. to determined what the sentiment of the crowd is and when, based on historical data and current feeling, is the best time to buy/sell.

This is not a game... it is a carefully orchestrated science with billions of dollars at stake and hence billions of dollars involved in protecting that business. They probably look for probability of highest and most opportune times to make moves just like we should be doing. The difference is that their moves can Make the Market, at least for the short to intermediate term. (We can't do that... hmmm I guess if you are going to go surfing you have to understand that you ride the wave... it doesn't ride you... well sometimes it does and BELIEVE ME that is not a good thing). Put another way... it is imperative to try to understand what these big guys are doing and make sure we are on the right team. This is easier said than done... but in every trade someone is right and someone is wrong... just something to think about...

Finally, I want to mention that the bullish percent indicators and other material on sectors an more in the market summary page of Stockcharts.com offers a lot of insight that can be very useful. I am still learning about this and am by no means an expert but there is a lot of potential here as well. Ultimately, it is the demand and supply of stocks that always matters... all other factors, such as fundamentals, news, FOMC meetings, etc... are contributors to this but the bottom line is always price.

Enjoy the rest of the weekend...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Many thoughts to share

2009-03-21T15:18:00.000-07:00

I was gone until recently on a work related trip and have been quite busy.

Right now I just want to mention that in all likelihood, based on Elliott wave patterns, and technicals, and history, the next bear market rally has begun. That information is derived from the insights of the professionals at Elliott Wave International. I cannot give more detail as, mentioned before, this is a paid service. That being said we are short term oversold in a bear market. Either the pullback we saw at the end of the week was a healthy retrench and we go higher or, more likely, we get a major sell-off but do not hit new lows... and the major sell-off, when it comes to an end, will provide the largest buying opportunity we have seen since 07. If the markets rally above last weeks highs I personally may look to buy QLD conservatively with tight stops. Preferably, we go down hard and then I may examine the opportunity to start phasing in more aggressively on the long side, depending on conditions. I do not have time to add detail but at the very least right now it should be said that the bear market is due for a significant bear market rally, one that lasts for quite a while, and that ideally this would begin after a significant pullback from the recent rally from market lows.

The market tips its hand often as to where it will go next and the recent rally is the first major, consecutive day rally, in a long time... this bullishness should be considered as a potential sign of things to come... even if, and perhaps especially, the market sells off heavily from here.

With the charts below I would like to demonstrate the significance of technicals in demonstrating potential price movement and the potential for big gains. There are still people who don't believe in technical analysis... I don't know what cave they live in but I operate on the basis of scientific evidence... note that technical analysis is just one indicator to use... but a powerful one at that...

Trading is about probability... that is to say putting probability in your favor. The more indicators that favor a given move the more probable it is to occur. Let's look at Feb 9. According to Elliott Wave Theory the most probable move around February was a move to lower lows. One probability in our favor. Elliott wave does not predict exact time probabilities for moves with the kind of accuracy that it does actual price movements... that is to say that although it can give hints as to when a price movement may occur it is more accurate at indicating that the price movement itself is going to occur... which is big in itself and provides a framework... this allows for us to look for behavior consistent with this by using other indicators. On Feb 9 we had:

a candlestick doji after a big move (doji's that make price extreme's are reliable reversal patterns)
a price that was at/above the upper Bollinger Band (also reliable as prices tend to move towards their mean and hitting the Bollinger Band indicates that prices have gone two standard deviations from the 20 day moving average),
An overbought slow stochastic that was ripe for a turn back down
An overbought CCI which was also ripe for a turn back down... also the combination of an overbought CCI and a price extreme is a highly reliable indicator of a potential reversal pattern

Combining this with Elliott Wave Theory, or using it by itself if you are not a fan of Elliott Wave, either way this showed a powerful combination for a downside reversal of magnitude... especially in a primary bear market. Notice that in early January we had a very similar pattern... and also a big price move down... though we first had a gap up (which formed a beatiful island reversal pattern). In this case the Elliott wave pattern did not yet call for new lows as the highest probable event and we did not get them, instead bouncing off the lower Bollinger Band and moving back up... actually a nice trade on the long side if tight stops were used.

On March 10 we had the opposite synergy of technical indicators and had reached the new lows in the markets as predicted by Elliott Wave Theory. The result was a powerful move up to current levels in the markets.

In both cases, by looking at the combination of technical indicators, using predefined stop loss limits, and then using trailing stops when the price action went in the favorable direction, would all have provided the opportunity for nice gains with calculated risk.

That is the name of the game. Additionally, the follow through of such moves helped confirm big picture concepts of where the market might go next. I am a big picture person and for me, at least, I really like to see the forest from the trees and these kind of tools really help.

The SP shows very similar patterns. As has been the case throughout the market the Nasdaq has been the stongest market, followed by the SP, and then the Dow. As a kid I went to high school wrote in the school newspaper during my high school days: "I'll take my coffe de-Kafka"... I say I'll take my market "de-'mark to market'." Investors agree and hence the differences in the relative strengths of the indices.

Right now I want to point out that we again appear to have a similar synergy of technical indicators on both charts... again towards the downside. This could create a nice shorting opportunity as long as tight stops are used. Please note, though, that on a big picture basis, the recent rally is likely to be the beginning of a bigger move up... again as indicated by Elliott Waves... not 'the bottom' but the potential (based on probability) beginning of a bear market rally. There are many people who have become convinced now that to make money in this market going short is always the way to go... that is DANGEROUS after the kind of selling we have had and therefore, while I may short the market if it turns down and use tight stops... I am much LESS BEARISH than I have been in a long time for the intermediate term and mostly want to look to go long when the markets pull back and start to turn... nobody said this was easy... but it is what it is and if you know this you and I probably know more than most retail investors and have begun the move from 'dumb money' to 'smart money'?

On a closing note I recommend that you check out alphatrends.net (I have no affiliation). Brian is doing a market analysis for free tomorrow if you sign up on time. Also, check out 'The Technical Take"... the author has some very nice discussions about sentiment and 'smart' money and other meaninful topics... finally at a later point I would like, if possible, to revisit SIRI, HGSI, and some other individual stocks that were mentioned.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Weekend Update

2009-03-01T17:08:00.000-08:00

Update
This site is a written account of my personal journey in learning the markets. If you gain from it all the better. I did want to say that, upon re-reading this post, it occured to me that it may have been construed as a bit offensive regarding terms such as 'novice' and 'good traders'.... I must have been a bit stressed out when I wrote that and apologize to anyone who was offended... many of the readers of this site have many years of experience in the markets... much more than I do as my background comes from chemistry, not from economics or the markets, though sometimes such a fresh perspective can be helpful. At any rate, have a great week.
------------------------------------

I wanted to clarify the market notes a bit for your benefit and also I cleaned up the last post as I did not have time to proofread it. Take a look again if interested. The important part is this:

As mentioned on the 'bull case' post when the markets were in a trading range we were either going to break 950 on the upside, with 880 a good stop point for bears, or break 800 on the downside and THEN reach new lows on all the major indices. This was according to the market patterns of Elliott Wave as described by Elliott Wave International. The more probable scenario unfolded and we have now seen new lows on the Dow and SP but not yet on the Naz. We are most likely to see the Naz too reach new lows. However, that being said, a major rally in the not too distant future is the highest probability event according to this theory. I cannot expound further as they offer a paid service for this information. What I do want to point to is the Vix, which everyone should check now and again, and daily sentiment indicators, which also requires a paid service but indicates a very low bull/bear ratio right now... and is a contraindicator. The Vix has bounced off of support at 40 and continues to rise. It is a good idea to watch this for a topping pattern and a move back down. This is a possible indicator for a market bottom... not the bottom... but a potential start to the next bear market rally.

Technical indicators such as a flattening of the five and ten day moving averages, a move above the 20 day moving average, as well as oscillators such as RSI, can also gleam very strong light into what may transpire. In this market I have learned that the toolbox needs to effective and efficient... the smart money knows what is going on and if we don't attempt to pay attention to broad indicators we don't have a chance.

I highly recommend that everyone check out alphatrends.net. This is a free blog with videos every day on the market action and is very insightful. The blog is at the bottom of 'blog sites'. I try to combine this with technical indicators and other tools mentioned... there are many more though I am not going to get into that at this time.

Right now I want to say the following concise points:
I am looking heavily to buy strong stocks on market selloffs. I covered my hedge on MOS on the its last major sell off last week and went net long MOS on the day of this post and would have covered the POT hedge as well but didn't want to be too aggressive. I am looking to cover it on the next sell off in this name, should it occur. Because there is still the potential for a big move down in the overall market my plan is to hedge the purchase of strong stocks with a little short exposure to the overall market... Strong stocks in this environment should outperform the overall market... especially after sell offs, going long these stocks and short the market is a hedge that takes advantage of this.

Support lines... it is almost never a bad idea to buy at or near support in a market that is this oversold and sell at resistance... if it goes against you the loss is minimal and the upside is large. When the market was complacent on the long side and the Vix was low buying didn't make much sense except for very short trades... however we are now approaching a fearful market that is much cheaper than it was last summer and ironically has more shorts now than it did when the prices were higher and people should have gone short (remember this post from May... Did you forget about the shorts?). Now perhaps we are getting close to... Did you forget about the longs? ;)? )... Good traders know that it is wise to go counter to popular sentiment... however not to be too aggressive until the momentum starts to shift because the last pop down or up can be a doozy...

Where will this support be? Since we are at lows on the SP and Dow it makes a lot of sense to check out the historical charts on Stockcharts.com for potential areas of support. We should all be aware of this right now. Good traders know their long-term support while novices often don't... again an edge that we need to have or to learn.

I also recommend that you at least become familiar with:
RSI
Bollinger Bands
Parabolic SAR
Stochastics (I like slow stochastics best myself)

There are many other great tools out there and like these are free at stockcharts.com.

Right now this is VERY important... please read... just as a test to share ideas and to take advantage of the online trading community that we are a part of I recently started a subsidiary site called 'Yellow Rose Ninja Trades'. The link can be found just above the Yahoo! search box on the right. The goal is to share ideas on possible trades and set-ups... Now is the time, as I mentioned a few posts ago, to really come up with good buys for when the market potentially takes off to the upside... and this is an opportunity for us all to share such ideas now.......

I will post there for myself for ideas to check out and would love for you ladies and guys (mostly guys... I know... I'm not trying to kid anybody here ;)) to post names or ideas that you really like for everyone to read. Unlike the 'Rose' it is unlikely for there to be much written explanation and in depth analysis... this is really just about quick ideas... it is still experimental at this time and I am not sure where it will go but lets check it out and see. Please take a look after reading this post.

On another note I will be very busy again and probably will not be able to post much on here for the next couple of weeks. I may but only if something is really worth noting. I will check 'Ninja Trades' a bit more for quick ideas... again I am interested to see where that goes... but I will be out of town next weekend and have a lot of preparation to do for that this week so that constrains my schedule... just a heads up and have a great week...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Biotech Corner HGSI CMED MYGN ALXN... plus market notes...

2009-02-28T10:14:00.001-08:00

First a note on the markets: I want to be clear that the markets need to stabilize first but that once we rise up in the markets, we could easily get the opposite market reaction that we have now... that is to say that fear of losing on the long side could quickly turn to short-covering fear and fear of 'missing the rally'. While bull markets are often accompanied with greed and complacency bear markets are driven by fear BOTH when the market declines and when it goes up. Right now bulls are certainly scared and bears, while always worrying about a short-squeeze, may be getting complacent.

I used to try to fit the stock market into some kind of a scientific context based on fundamentals but I have learned in this market especially that you cannot underestimate sentiment. It is HUGE.

A stock may be cheap at 100 one day and expensive at 100 shortly thereafter. How does this work? The reason for this is that, as mentioned before, stocks value is comprised of two factors: intrinsic value and extrinsic value. Intrinsic value comprises of the dividend and recoverable book value. For most stocks this is close to zero. Extrinsic value is the value people are willing to pay because they think the stock will go up. This portion makes up the majority of stock price and is largely determined by sentiment. It is also determined by availability of money or in this case credit. I would really like to go into a very concise analogy of this on another post.

The point here is that once sentiment gets low enough and investors/traders keep taking long positions and getting stopped out people begin to believe that stocks won't appreciate. The extrinsic value drops... as does stock price...... until at one point the price drops so low that the extrinsic value, at least in the short-term, has nowhere to go but up. At that point any good news and reverse in sentiment drives up stocks because the extrinsic value has nowhere to go but up.

The way people feel right now I believe that we are nearing this situation. It is time to be on the lookout, in my opinion, for a turning point, for the market to rally on no news or poor news and sustain this for a bit, and to be ready to go with quality names and ideas for when a rally occurs. This is not to advocate buying early... but mostly staying neutral with ideas and cash ammo ready to go for when sentiment turns...

--------------------------

Now for the original post..... HGSI CMED MYGN ALXN
HGSI
Just Reported earnings that beat expectations guided higher.
Upgraded by analysts
Yet the stock sold off with the medical names... overall market sentiment the key here

More on HGSI
Positives:
Gov contract for Abthrax
Exciting pipeline with phase III trials due this year for several of them
Partnerships with major Pharma
Reduction of Debt and increase in revenue
Low market cap for revenue potential

Negatives: Still has debt... normal for biotechs but an issue in this credit negative earnings but narrowing losses
High institutional ownership
Low inside ownership

Drugs:
Abthrax is better than a vaccine, which must be taken before exposure and requires booster shots or it will not protect. Better than antibiotics because antibiotics destroy the bacteria but once the toxin is in the blood it does no good. This is the first and only drug on the market that can defeat anthrax after the toxin is already in the body. Anthrax is lethal and a terrorist threat via inhalation. This drug uses antibodies (a type of protein) to block anthrax toxin's ability to destroy cells... hence saving lives... vaccines will also be used to prevent anthrax infection but only this drug can provide protection after exposure. Government contracts already signed.... helps with cash flow

Albuferon------- Hep C drug Albumin (protein) plus interferon (antiviral agent) combined . Goal is to attack chronic disease... HUGE global market for this. However, there is already a drug on the market that works differently and this may work better but the disadvantage is that interferon makes people feel terrible... is the drug more effective than current treatment and will it be adopted if it is? These are big questions but if the clinical trials prove very positive the drug could have a revenue base in the 750 to 800 million region according to analysts. Anticipation for the trials could be a catalyst in the proper market. Clinical phase III trial results due in March

Lymphostat B--------- Lupus drug Lupus is an autoimmune disorder. There is no viable treatment at the moment and the drug HGSI is presenting 'stops' -'stat' B lymphocytes (B cells). These produce antibodies (immune response). This drug specifically reduces the activity of B cells that create antibodies that attack the body (autoantibodies)... hence potentially reducing autoimmunity. Clinical Phase III trials are due in May and July (2 trials). Collaboration with Glaxosmithkline in place for distribution/marketing. 5 million people worldwide and 1.5 million in US could benefit if drug is safe/works Lymphostat B also being researched for other autoimmune disorders including Rheumatoid Arthritis Multiple Schlerosis
These trials are not as far along but have gone through phase 2... huge market

HGSETR1----------------------------- Apoptosis inducing anticancer drug HGSETR2----------------------------- Apoptosis inducing anticancer drug
Very exciting science... first one is in phase II clinical trials and second one in phase I ... uses the TRAIL antibody receptor pathway... Enormous potential... if work

Royalty payments from Glaxosmithkline Two drugs in Phase 3 clinical trials... if effective, royalty paid to HGSI

Darapladib---------------- Lipoprotein Associated Phospholipase 2 inhib... heart dz

Syncria------------------ Diabetes drug to control blood sugar and appetite. If effective reduces number of injections needed but would have to be substituted for current leader in the field (Byetta? )... not certain if this will happen but again clinical 3 trial data can always shake things up with stocks.

They have more drugs also under Glaxo but these are not at late stage clinical trials

Summary: We have a company with a market cap of 250 million with late stage clinical trial products that could yield revenue in the billions, or at least a billion, in the coming years if trials go well. The Abthrax provides guaranteed government spending. The company still has significant debt, though the numbers on yahoo are outdated, and is not generating positive cash flow at this time. Additionally, it is unclear whether the drugs in clinical trial will be effective and in some cases even if they are effective if they will supplant competitor's products. Still, with the kind of potential catalysts in place and the better balance sheet it has to be thought that the sell off to these levels was at least partly due to fear of insolvency (much less of a threat now than 6 months ago) and the overall market conditions. At these prices, an upturn in the market and/or any kind of positive news from the drugs could send these shares soaring.

Of course, any further talk of debt burden or major failure in clinical trials could hit this name... which is why it would be wise to book profits and use stop losses should you be in this stock and this name rise. Exciting co... and quite liquid... remember that this company has been around for a while by biotech standards and traded as high as 7 earlier this year and over 100 during the tech boom... biotech companies are probably the only ones that can have their stocks fall from 100 to 2 and still have tremendous prospects... please do your own DD if you are interested. I also want to disclose that I have a very small position long at this time and look to add more potentially

Additional Articles of Value
HGSI sees revenue surge and reduces cash burn
How Abthrax works video
Minyanv on the convertible bonds and the company
Syncria milestone pmnt
Novartis Hep C drug (designed by HGS) clears phase II clinical trials

CMED
I have been following this company for a long time. They sold HIFU and are now a pure diagnostics company. This is a very well run company with major ties to the best universities in China. They have always beat or matched earnings in the past and have had ridiculously good margins. The PEG is also unbelievable. Still the stock keeps getting sold off. Part of this is that many Chinese stocks have been sold. Another part may be that unlike medical care in the US many people pay out of pocket for care in China. Although the government is in the process of implementing broader health coverage it remains to be seen if the downturn in China will affect earnings of this company.

Long term this company, aong with Potash, Petrobras, Mastercard, and others remain among my favorites for secular growth. However, stocks are not companies and I do not advocate any long-term holds in this market... however... there may be some great short-term plays as long as earnings hold up and the market sentiment turns up... with CMED there may be a gem here but it may be a good idea to see how earnings look first.
Earnings are this Monday at 8am Eastern

MYGN
This Salt Lake City biotech company is acting like there is no recession. It keeps blowing away its earnings estimates and its stock has doubled over the past year. Like CMED it is a diagnostics company. It has some very important diagnostic tests and also has drugs in late stage clinical trials. The chart is starting to turn down from RSI 70 and may fill a gap... so it may be a good idea to wait for a better technical set up to go long here... actually from a purely technical standpoint it looks like a good short... though it is always risky and the best method may be to buy after pull back

ALXN
Nice revenue growth... worth a look... has only one major drug, Soliris, but that drug is the only one that is patented for PNH (as far as could be determined). I am not overly familiar with this company but I know a little bit about it. Good for future research.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Time to make a shopping list

2009-02-25T22:32:00.000-08:00

The time for the market to rise significantly is near. We still probably have some more downside to go but we have seen significant price depreciation and markets do not go down in a straight line. It is high time to be ready with a shopping list of great stock buys. When the market makes its next move up I am currently watching in no particular order...

ETFs

Double long ETFs or shorting double short ETFs. QLD, SSO, UWM, etc. These are for trades only (even if those trades last a while). For more on this check out the post on the ETFs as double edged samurai's to insure you understand some of the risks. Note that long ETFs do not have the 'price asymmetry' that I discuss on that post that occurs with inverse ones but the double ETFs still have the rebalancing issue so this is something to be aware of. That makes them great trading vehicles but some profits should be taken if they run too much.

Commodities

Commodities and commodity stocks typically go up this time of year... there has been recent signs of fertilizers, coal (ANR), and some others doing well. Also we could look at sector ETFs like DIG and UYM and XLB

Short Squeezes

Some sectors, like financials and real estate, may be good for some high risk, high reward squeezes. A short of SKF, for example, could yield nice results if there is strong risk management
Also... the dry bulks, they do have big problems but some of them like DSX are better than others and even the ones in the mire like DRYS may get a nice squeeze at these prices

Strong Stocks with good earnings that have been held back by the market

This may be my favorite category. Stocks that have gapped up on a good earnings or have moved nicely when the market didn't sell off, have strong balance sheets, and generally look good but have sold off due to the market are likely to be some of the strongest performers in an extended rally in the markets.

Cheap stocks with strong balance sheets.

Buy low and sell high. Hey this does work when everything's been sold off... as long as the company isn't in danger of bankruptcy or nationalization. I like to screen stocks in the $1 to $15 range with good fundamentals and a reason to move. We will get some doublings and even triplings in some names in a strong bear market rally. This is OPPORTUNITY with a capital O.

Lottery picks

I generally stay away from these but every once in a while you get a penny stock that will either go bankrupt or double/triple and is worth a look. With the recent offer from Liberty SIRI is definitely worth a look for amounts that you can afford to lose... at .14 this may be appealing...

If you have anything you may like in these categories or other please post.
More on this another time perhaps. There are many smart and free-thinking individuals that read this blog and this a time where we can leverage that for everyone... Getting in early is a key to success... as I mentioned recently.......

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Palpable Fear

2009-02-23T22:55:00.000-08:00

... it was thick and heavy, permeating, and deep... omnipresent... like the unrelenting discomfort that fills the air on a humid New York summer's night.

This was not the selling of weak company stocks and the buying of good company stocks like we saw the last few months... this was indiscriminate selling... reminiscent of the fear among hedge funds and big boys that I have only seen a few times prior this bear market...

This is what I was looking for. We are not there yet but this is the kind of action it will take in my opinion. When it looks like October all over again, when it looks like the stock market will never go up again... that's when the smart money that runs the market shall swoop down on their prey like lions tearing into the flesh of the weakest prey on the plains of the Serengeti. That's when we go up again... that's when the next pyramid scheme on the long side shall rise up... until it too washes into the sea...

We did not push back up to over 800... though it is always important to be prepared for the lower probability unexpected events and have a plan in place. We moved the way we 'should' have and if this path continues the flushing of the last optimists could be steep and fast...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Stocks and Notes

2009-02-21T16:13:00.000-08:00

I don't have much time to post this weekend but I wanted to add a few very quick notes. First, the buyers would love to break 800 on the SP to produce an enormous squeeze. If that happens, which I deem unlikely but possible, the resulting move could be a great shorting opportunity and should not be immediately looked at as evidence that the market has bottomed. This market can go a long ways up before it would be considered anywhere near overbought.

Second.... I again want to emphasize some biotech names I really like on an upward move in the markets. HGSI has debt but also has many catalysts. I really like this name and maintain that I would like to do a post on this. MYGN is a very strong stock... though I have not looked at it very recently. CMED represents a stellar company and is on the 'sell China' discount rack. It showed relative strenth earlier on the bounce from below 15 up. A move up in the FXI may be very good to CMED. APWR is not a biotech name but I also like this at current valuations if the market and FXI start to rebound... and I would also throw SOHU into this mix.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Citibank and Bank of America shares downgraded to ‘Yo Mama’ status

2009-02-21T09:40:00.000-08:00

News Brief
Rudders News
New York, New York
2/20

UBS analysts downgraded Citibank and Bank of America shares on Friday from ‘hell no’ to ‘yo mama’, citing nationalization concerns. “Normally we try to be as opaque as possible”, the analyst said, “using terminology like ‘hold’, which means ‘sell’, ‘underweight’, ‘market underperform’, and other completely inconsistent and indefinable terminology. Since, fortunately, there is no third party impartiality requirement, we often provide recommendations for a given stock only after our bank or a related source has heavily accumulated or sold shares. In this case, we decided that no one would take our ‘strong buy’ recommendation seriously, and that ‘Yo mama’ was the only recommendation we could feel good about. In the future we may use various permutations such as ‘Yo mama so fat’, and ‘Yo mama so ugly’.

Sounding a slightly more positive tone, Citibank and Bank of America analysts maintained a ‘sector perform’ rating on the stocks, adding that the whole sector is worth about as much as Mozilo's and Lewis' reputation. "Ain't worth sh*t".

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Brief Thoughts on Market Action and More

2009-02-19T18:50:00.000-08:00

Edit-
"However, I did cover a good amount of my shorts around 800 to reduce risk."
This is a generalization... to be more specific and to demonstrate integrity, the shorts were covered between the the 815 and 825 region at the end of the prior week... I apologize for any confusion on this and should have been more specific.
----------------------------

A. The market overall
As we all know the market exited the trading range on the SP from 800 to 950 and did so in the manner most probable- by following the longer-term trend and moving towards potentially lower lows (already experienced on the Dow). Previously I mentioned the bear case but I also wanted to point out that the bull case could not be entirely discounted short-term and that, from my perspective at least, an defined exit strategy needed to be in place in case the bear bias was refuted. The 880 region on the SP held its ground, as did the corresponding levels on the SSO and QLD that I had mentioned as stop points. As a result my positions were never stopped out. Clearly, short exposure from those levels was beneficial. However, I did cover a good amount of my shorts around 800 to reduce risk. This conservative approach was the right one even though it translated into smaller gains than would have been achieved otherwise. I bring this up because it is relevant to what is important: where we may be likely to go next.

The break of major support levels on the indexes is consistent with the assertion that we have not yet seen the completion of Elliott Wave 5 down and that we are likely to see new lows in all of the indexes in the next few weeks or much sooner. Also, the support areas have become resistance and have been tested several times and failed. This also supports the bear. However, while it is most probable that we at least test lows, and probably break them, the sideways action we have seen recently after the major selling in the fall means that it is time to be much more bullish now than last May or October. That is to say, that while we may still go down considerably from here and I still hold short-exposure, it is time to more careful than on the bearish side than it was when the market seemed like it was just undergoing a minor correction or when it was in complete free-fall. My philosophy has been to short the market primarily when it has tested support turned resistance at the former support levels. This is the highest probability area for downward movement and allows for the smallest losses if the market is able to prove to us that it can overcome selling pressure. It is also important to be cognizant of the fact that the markets are short-term oversold and that at some point soon a squeeze is likely. That being said, once this market becomes less oversold short-term the bottom could really fall out in a 'flush out the remaining optimists' kind of way. In such a backdrop I personally do not yet feel comfortable gaining any significant long exposure.. though I may consider some small nibbling action on certain strong names.

This is just my take right now... we of course have to see how it plays out. As always please note that 'the Rose' provides one point of view only and that, while it tries to be informative, it must be always be integrated with multiple perspectives into your overall understanding of things.

B. Nationalize
I also wanted to mention that unlike the selling in the fall the action in the last few months has seen significant disparities between the fundamentally strong names and the weak ones. Financials, real estate, and regional banks in particular, have been hit while companies with strong balance sheets, like POT and MOS, and good earnings, have outperformed the market and in some cases shown considerable gains. One reason for the weakness in banks and other poor fundamental stories is the fear that the government will eventually nationalize banks to stabilize the system. A few posts ago it was mentioned that the 'bad bank' idea was probably a first step towards later doing what is more likely to work- nationalize. This may help the system but it wipes out shareholders and bondholders. Markets can be highly irrational and terrible fundamental stories can do quite well for long periods of time... that is until the word 'bankruptcy' or 'nationalize' comes into play. Traders have no control over the bottom falling out and in such cases must sell early if they perceive they could lose their entire investment.

This is where fundamentals do matter.... and likely always will.

Currently, while I remain short right now and have no net long positions, I am looking to go shopping for strong names for when the time is right. I still like POT, and to a lesser extent MOS, and also potentially MON, as well as CMED, MYGN and many others, especially tech names, that have proven with earnings and charts that they are as well positioned as any to weather this economy. Even if/when we do see a rally I continue to contend, as I did on the Christmas post, that it likely will be yet another bear market rally, even if lasts quite a long time in duration.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Witness!!!!!

2009-02-14T09:59:00.000-08:00

My Brothers and Sisters, I have seen the invisible hand!!! ...
and it's middle finger...

Yes indeed, it manifests itself in the form of a long green candlestick on the charts right around the 800 to 815 region on the SP. Is it Uncle Sam buying stocks, timely news releases, or just pure magic? You decide!

But if you were short the market hoping to come home from work having locked in gains on Thursday then you have witnessed the vanishing act for yourself. Since it is Saturday we might as well have some fun with it.

If you haven't heard of David Blaine he is either a very talented magician, a fraudster, or, as most believe, the devil incarnate. Whether you have never seen his acts or have been following him for years the videos below offer some pretty good entertainment. The first four are of David Blaine himself and the last one is an intelligently crafted spoof. Enjoy!

Dallas Cowboys

Brandy

Hand Through Glass

Chicken Head Trick

David Blaine Parody...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

The significance of 800 as support and the bull case

2009-02-07T12:12:00.000-08:00

A guaranteed way to lose in the stock market is to hold onto a bear or bull bias without always having an exit strategy in mind. On previous posts I have mentioned the number of potential ceilings that could serve as resistance in the SP. We are in a strong downtrend on the longer time frame, and a descending triangle in the short-term (last few weeks/months). We also have not completed the fifth wave down that is characteristic of Elliott Wave structure to end the downturn from all-time market highs. This implies that, based on historical data, we would see lower lows before we get a significant, multi-month, rally in the stock market. However, one cannot deny that the huge rally at the end of the week, in the face of horrendous data, strengthens the bull case for the near-term. It is also important to illustrate that we are just above a very significant long-term area of support at 800. Support is always innocent until proven guilty just like resistance is always innocent until proven guilty. Right now we are between 950 major upper resistance and then the enormous support at 800. Take a look at this long-term chart on the SP from Stockcharts.com.

Lot of people who bought around 800 after the dot com bust had very positive results. History of that magnitude cannot be ignored. Many sellers probably had an initial target of about 800 for shorts and buyers perhaps waited until we got to this region to buy. Also, it was a support after a pullback on the way up in 1997. The smart money that runs the market always wants to be a step ahead and perhaps the terrible unemployment data and fact that others are waiting for a rally allowed enough negativity for people to pause and give them an opportunity to get things started before others got in. Getting in early is a key to success... just like staying too long is a key to failure. That is for another time. Right now I just want to emphasize that there is a strong tug of war between the bear and the bull and there has been since we approached 800 on the SP in October. In the longer term the charts and fundamentals highly suggest that the bear will win. But in the near-term this is definitely a question mark. The strategy I am employing?

Nine hundred and fifty is a long way up and the 878 area proved to be very strong near-term resistance, is the 100% retracement of the recent downward move in the index , and about the 50% retracement from the move from 800 to 950. Also, as I mentioned, Elliott Wave Theory provides a probability science which gives direction as to when one is more likely to be right or wrong and hence continue the strategy or stop out. While 950 would be the maximum point of stop-loss under the guidelines form Elliott Wave International's wave count, a break of the 878 region would weaken the bear case substantially in the very near term... and provides a good place to stop out. Thus, I will cover my shorts this week if we strongly break to the 880-885 region with volume this week. This would represent a loss of less than 15% on the shorting of double longs for me (since I shorted more as we went higher and less, or not at all, as we got closer to 800). As a rule, I do not allow myself to lose more than 15% on any one position... so this all falls into line. At that time I will look for another opportunity to go short since the market is already overbought short-term.

Should we pull back and rally I would be more neutral and may look to go long with very tight stops... and be ready to stay neutral or go short or go long depending on the market action. In sideways moving markets like this one it can be very difficult to accurately determine market direction, and it makes a lot of sense to be neutral or tread lightly on either side here. In a different market I would worry much less about the overall market and probably would have held the strong stocks I like (like POT and HGSI as mentioned on the last post) but in this market the market direction so strongly affects almost all names that I feel compelled to work within the confines of what the overall market is doing. This week we should find out if the rally is for real or just another head fake. It really could go either way... which is why risk management, defined stops and price targets, and objectivity are so important. As an important reminder, and I certainly needed to be reminded of this also, it is always worth it to check out long-term charts now and again. Many of the online broker charts do not provide data needed for a long-term perspective.

Added
Additional Charts of Note.
SSO stop loss is 25 for me
QLD stop loss is 30.55 for me

MOS is overextended near-term, as is EWZ, and many others.

A pullback is expected soon based on Bollinger Bands Stochastics, and RSI.

This pullback may lead to a sustained rally or a move back down...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Yet another picture to pay attention to

2009-02-03T21:00:00.000-08:00

Ceilings Abound?

(Click to Enlarge)

840
845-846 region 50% retrace
853-854 region 61.8% retrace
856 region 20 Day SMA
878 region 100% retrace

Here we have a chart of the SP with Fibonacci retraces overlay of the move down from the recent high (above 878) and the recent low (around 812.) Most important are the 50% retracement, which we fell just short of on Tuesday, and the 61.8% retracement. The 61.8% retrace is of particular value as it also converges near the 20 day Moving Averagee.

On another totally different note I was planning a whole post on a biotech company I came across about a week ago... HGSI... one that has can neutralize Anthrax Toxin, not just provide a vaccine. HGSI also has other drugs of note. This company has guaranteed revenue from military spending... I have been in and out of this name but figured it would take a flush down in the market before I wanted to pick it up. Yesterday the company was broadcast on CNBC and the stock shot up over 30%... which frustrated me for sure... but it fell back today and I would not be surprised if it continues to pare some gains if the overall market breaks below heavy support at SP 800. Soon, I believe, most likely after one more flush down in the market to test the 750 lows and perhaps a bit lower, we may be set up for a very nice rally in the markets as we have been selling for too long now without a major bear rally. Perhaps it has already started.

However, as I mentioned on the last post, I am attempting to be nimbly short and use rallies as shorting opportunities. We either face a break of 950 on the upside, which would signify that a major rally is already in place and I would have to cover all my shorts, or we break below 800 and stay there for a while to hit or break new lows.From my research this seems the more likely of the two. Regardless, it is clear that the market is much more wishy-washy than it was in early fall and the charts are certainly making a case for bullishness on the horizon. It may a good time to make a buy list of strong stocks for when the time is ripe. HGSI is certainly on that list for me, as long as it moves back down from where it is now. POT is as well, as are many others potentially.......

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

A picture is worth more than 1,000

2009-01-29T22:30:00.000-08:00

Oh yes it is. Stockcharts only allows for 3 horizontal lines on the non-paid service so perhaps I would put one at 840 and also at 820... perhaps 915 or so at the top... but these three on here are by far the most important.

I had a very nice short over the last few days on ESI (Trader Mark brought this to my attention) and EBS on Wed... but I have to say I have been fuming all day today because my SSO and QLD stops were taken out on the "Full of Mendacious Crap" meeting that is the only thing that could have risen high enough to take out my stops... then on Thursday I wasn't around to reset the shorts.... It's one thing to be wrong and take a hit and its another to have the Fed come in and ineffectively try to save us and just screw the market for everyone thats not a day-trader. Simply put Bad Bank is like Bad Santa which is to say it's cute but it can never work in reality. Most likely this is the first step towards an attempt to nationalize at least some banks... banks that are not so concerned about going under that they can actually lend to credit-worthy people. However, for the Obama administration to come in and in the first few weeks declare the need for Swedish-style national banks would have people across the country screaming 'socialist' or even 'communist'... even though the Swedish approach in the 90s is the most efffective ever on record... its amazing how much more acceptable socialism becomes when captitalism means losing people's jobs, savings, etc... just look at what's happened so far... but I rant...

For now, with the possible exception of some oversold conditions/day trades or on some stocks that are showing some real relative strenght I am only going short the market and IYR and adding more the higher up we go... and I'm raising my stop all the way to the 920 mark on the SP (equivalent on SSO and QLD)... even though I firmly think we see 750 before we see 900... the reason for this is that I do believe Elliott wave theory... though we must all admit it is not an exact science but a probability science.... and the greatest probability is that we go down significantly unless we break 950... and the downside is more likely. The other reasons are, as I mentioned in my posts last May just before the market collapsed back down, that the worst sectors usually lead the rest of the market and financials and banks and real estate have done this again recently. Additionally, whenever we go up we slam back down quickly and, moreover, all this tentative sideways action is not what historically leads to a sustained rally... first there has to be a serious flushing of the lingering optimists... once we have that and everyone is talking about how this market will never recover that is when I will start looking to buy...

In fact I am making a buy list right now but unless we flush down or break 950 with volume and hold it (which I deem much less likely) I do not plan to buy anything except for short-term trades and even then with caution. This is my take on the current market condition. I would like to talk about the Pyramid Scheme that is the market at another time and have started a post on this but it is not yet complete.

So my strategy is clear... short moderately at these levels... a bit less as we go down and a bit more as we go up... with a stop at 920 area at which point I would look to go short again as we approach 950 or slightly below... on the downside we may bounce one more time off of 800 but I think soon we go right through to test the lows around 750... that's where I plan to cover and reload on the short-side. Just my strategy for now. Thoughts? I am amenable to them. Just don't get me started on that BS bounce Wednesday at the FOMC... from now on I am covering all long and short positions in this market the day before the FOMC reports... Sheeesh!

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

EBS WATCH and more...

2009-01-25T21:38:00.000-08:00

I do like to visit Trader Mark's site... (blog at right under 'blog sites' ) not just because he's good enough, smart enough, and Gosh Darnit people like him (the infamous words of Stuart Smalley... wait Al Franken.... wait the Senator from Minnesota... wait not the Senator from Minnesota... wait... what the heck is going on?... )

Anyway... I posted this on his comment box and thought I'd share it with everyone... and there is much much more that I would like to share time permitting... for now here it is...

TM,
Nice charts. Just like I gave you a hard time for only looking at EMA I now need to remind myself to double check my SMA charts with EMA...

Regarding EBS I really recommend everyone watch this closely because the 20 and 50 are converging... a decision must be made soon: up or down. I admit I have a bearish bias but that has not yet been confirmed by the market. I have also been very careful about head fakes as the smart guys love to move in one direction, let people pile in, and then reverse course. A perfect example of this was the SP 800 to 750 break... the big guys (= wise guys... who like with the Mafia... is the side you always want to be on)... opened up a very nice bear trap and caused a vicious squeeze. This is on a lot of minnows minds I am sure and also the big money is once again playing games... no one wants to be suckered twice... but see that's how the market works... the wise guys are always looking to be a step ahead (note how many people were short in March 08... then were completely flushed out in the bear market rally in the Spring only to be caught long again in May/June...) Eventually we going to go to 750 (this time or the next) in my opinion and the sheep will want to buy and that's when the Wise guys just flush the toilet... of course the market must confirm this but I am looking at what I have seen so far/watchout

Figure out who is who and what is what... sometimes it feels like one of my favorite Floyd Songs... US and Them "Black and blue And who knows which is which and who is who. Up and down. But in the end it's only round and round. "

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

How to Quickly and Easily Find A Safe Bank

2009-01-24T13:39:00.000-08:00

Out here in California another bank went down. Somewhere in the inland empire (east Orange County). Hundreds of banks will go under and it is not at all clear that the FDIC can cover a systematic meltdown. In fact, the Yale graduate Bob Prechter, among others, specifically believes that at some point the FDIC will not be able to return all money to depositors. Even if he is wrong my viewpoint is not to take any chances. The bank rating site is the best one I could find for getting information on the best and worst banks in your area. Just go to tab that says 'Banks and Thrifts' and then enter in your state.

Here are the ratings for the major banks... you know the bastion of financial strength that is buying troubled businesses like Merill Lynch, Countrywide, Wachovia... In a word: scary... that is until you see all the D/D- and E/E- (yikes) banks on the list...

Major Bank Ratings
JPM: C+
BAC: B-
WFC: C+
C: C-

Here are some of the best in Cali:
First Security, Orange A+

Interins Exch of the Automobile Club: A+

Silicon Valley Bank: A/A+

California Pacific Bank: A

Farmers and Merchants Bank: A

While we wish to learn about the markets this should be done with a healthy amount of backup cash in case this does turn out to be the Great Depression 2... or even worse... I really think the risk of this ocurring is very very real... and it scares the sh*t out of me.

I am an optimist but also a realist. Please be smart and don't forget to guard your flanks with cash.

"In times like this, when it comes to savings, far more important than return on capital is return of capital".
-------------
Edit: BTW here are the worst banks in Cali on the list...

1st Centennial Bank, Redlands, CA E

Alliance Bank, Culver City, CA E-

County Bank, Merced, CA E-

Pacific Coast National Bank, San Clemente, CA E+

Vineyard Bank, Rancho Cucamong, CA E+

Actually the first one on the list is now F as in FDIC controlled.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Inverse ETFs: The Double Edged Samurai Swords

2009-01-14T20:11:00.000-08:00

Edit- I was still working on this and published it to view it so a few of the numbers were not correct on the first publish and I moved around some of the links to make it easier to see. Please re-read this if you read it before 12:30 EST (9:30 PST) on the 14th.
--------------------------------

First I want to mention that all ETFs tend to underperform their ideal goal. For example, a single long ETF will often underperform the index it tracks, double long ETFs will tend to perform below 2x the index they track, and so on. The risks that all ETFs face can be found in the Proshares prospectus and include, most notably correlation risk (the risk that the ETF does not perfectly match the index), and counterparty risk, which is the risk that the party Proshares (or other ETF companies) do business with default on their payments. For example, if an ETF uses put options as a proxy for an index and the counterparty cannot pay as originally agreed the index may go down but the ETF loses the money on the puts. Similarly, if the ETF invests cash and interest is not paid as planned the ETF loses this amount. In normal markets such counterparty risk would seem remote but not in this market. In addition to risks, the ETFs companies charge fees. Without going into too much detail (again see the prospectus for more) these fees are taken out of the price of the ETF. To summarize all ETFs face the following notable costs/risks:

Correlation Risk

Counterparty Risk

Fees

There are others too but these are the biggest ones. The key to note with all ETFs is that they are designed to track an index or inverse index on a given day ONLY. When held for more than one day they do a poorer job… and the fees compound as well.

In addition, distributions, and rebalancing, can have affects. It is important to know when an ETF plans to pay out distributions (the result is a lowering of the ETF price on that day I believe). Please read a bit more about this if interested. Now I want to specifically point out why inverse ETFs have additional risks, depending on market conditions.

To understand what is going on let's start with this table of a hypothetical index and the inverse and double inverse ETFs that would track it.

Notice how the hypothetical index goes from 100 to 90 and then back to 100. The net affect is no change. So the inverse ETF should end up even as well right? Wrong. Even without fees and the risks mentioned above the inverse ETF loses even though the index returns to its starting price. This is true of both single and leveraged (2x) ETFs… though it is even more pronounced with leveraged ETFs because the affect is multiplied by rebalancing. Two things here: my understanding of why this is the case and what this means in terms of how to handle these things…

First, the reason for this. It occurs because of the fact that the ETFs reflect the percentage change of the index they track on a one-day basis only. On any given day the an inverse ETF should go up about 10% if the index goes down 10% and the double inverse should go up about 20%. However, when held for more than one day things get more complicated. It comes down to what I call “percentage asymmetry”. If an index goes from 100 to 90 it goes down 10%. So a single inverse ETF would go up 10%. So far so good. However, if the next day that index goes from 90 back to 100 it goes back up 10/90 or 11.1%. Since ETFs are calculated daily, this means that the inverse ETF goes down 11.1%… but it goes down 11.1% from 110… which is a loss of 12.2… not a return to 100 but a move to 97.8 (110-12.2). The point is that 11.1% loss from a higher number (110) loses more than 11.1% gain from a lower number (90) gains. On the flip side… if an index goes from 100 to 110 and then falls back to 100 the hypothetical inverse ETF would go from 100 to 90… then from 90 only back to 98.2 because 110/10 is a loss of 9.09% and a gain of 9.09% from 90 is 98.2 (after rounding).

Second: what this means. Essentially, inverse and double inverse ETFs do well in trending markets but the more volatile the market is the more they underpeform. The more volatility the more “percentage asymmetry” affects you get. Go to this official site and turn to page 20 to see a chart that shows this precisely. It means that inverse ETFs are absolutely NOT buy and hold vehicles except for periods when the market trends sharply down… and should be sold on any large daily or weekly move up. Please note that because the ETFs reflect inverse daily moves a move in the index from 100 to 75 in one day would cause the inverse 2X ETF to go up 50% (2x 25%)… but that a move from 75 back to 100 would then cause the 2x ETF, held more than one day, to go down 2x (25/75) or about 67%… from a higher level (a double ETF starting at 100 would move to 150 and then on the way back 150 x (1-2/3) = 50! You would lose 50% before fees and other risks on the double inverse ETF when the index ended flat! This is an extreme example but you get the point. Think about an ETF that has gone from 100 to 20 in this market… If you held the double inverse ETF from when it was at 100 and did not sell a simple 20 point move in the index from 20 to 30 in one day (or in a short number of days) would have a devastating affect on the inverse ETF and the further down an index has gone the smaller the absolute move needs to be to ravage the inverse ETF. Think about for eg UYG going from 5 to 7 in a few days… that’s a 40% move and can be close to a 80% move (it is if it happened on one day ... a bit less if it happened over several days) down in a double inverse ETF! The overwhelming point: short squeezes wreck these things, and highly volatile periods in the markets also pose financial problems to these things for those long the inverse ETFs.

So how to win here? Essentially here is my short list:

First of all, I much prefer to short the long ETFs generally speaking but there are exceptions that make inverse ETFs good plays for short trades (days to weeks).

Best times to buy short leveraged ETFs:

Day trades that have significant downward movement
Sharply down trends in the market, preferably after bull runs start to turn down. For example, May/June 08 after the Spring bear rally was a great time to use these. So was September/October 08. Double inverse ETFs compound so the ETF automatically buys more leveraged shares as it goes up... as long as the market continues down in a fairly straight line this compounds gains

Best times to stay away from inverse ETFs:

Buy and hold in volatile markets. These are not designed for this due to the fact that they are based on daily opposite percentage moves in indexes. Better hedges are shorting long ETFs and/or using put options
Oversold markets! Short squeezes crush these things
Highly volatile, sideways trending markets, such as the ascending triangle we have seen

Best times to short inverse ETFs: Note these can be very very profitable but of course there is risk because we are in a bear market so this is also for short-term trades

After oversold conditions, ie large dowtrends, when the market starts turning back up. SRS was at 240 or so not too long ago... a short squeeze or even sideways action made for a very nice short from that level.
Upward trending markets
Day Trades

Please note that I always like to limit how much I commit, especially to leveraged ETFs. Risk is high and prices can move very quickly.A major rule for me is not to let a winner turn into a loser.
Others may have different takes on this and feel free to comment if you have any similar or alternative perceptions of this. As I mentioned I am not an expert on this... I just see these things as tremendously powerful tools that are worth a deeper look. Definitely a bit of mixed Bizness...

Here are some good article references... particularly the investopedia article.

Seeking Alpha Leveraged ETF Value Traps
Investopedia ETFs

Also when buying an ETF it is nice to know what the intrinsic intraday value is.
Finding Intraday Values on ETFs

Best,
J

Here's another sweet song from from Beck.
Like Mixed Bizness it can't be embedded (copy write reasons perhaps) only the link...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Biotech Corner: Interesting Article on Seeking Alpha

2009-01-01T17:04:00.000-08:00

Biotech Corner... for now some companies I like (the stocks have to be analyzed still for some) are the companies of the following stocks:
CEPH NKTR BIIB EBS SQNM GILD CMED MYGN. I hope to look at these further in the future.

Here is an article on four biotech stocks trading above their 200 and 50 day moving averages.
AMGN APPY CYPB BSDI FRX.

On the long side healthcare still offers some of the best prospects. Caution is paramount of course.

Added: Here is a good article on CEPH in IBD
Best,
j

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Deflation/Inflation From Bob Prechter (2003)

2008-12-31T16:06:00.000-08:00

This is exactly the scenario I came across in my recent research on the markets. This is what we face.

Anyway... just thought Id post... 4:00 on the West Coast and time to get ready for New Year's!
Happy New Year's...


Q: Will we have hyperinflation after deflation?

Responder: Bob Prechter	Date: 12/16/2008
This is what Bob Prechter told Jim Puplava, the host of Financial Sense Newshour, in January 2003. Jim Puplava: What are the possibilities that somehow they really get this wrong and we have hyperinflation? Do you think it is deflation first, then hyperinflation after that? Is there a possibility that we head straight to hyperinflation? In other words, if we look at Germany in the 1920s, did they experience deflation first, then hyperinflation after that? Bob Prechter: What the German government was doing was printing bank notes, actual cash. What the Fed typically tries to do is to get people to borrow. I don’t think there is any chance that it is going to get people to borrow enough to overwhelm the deflationary forces. Borrowing is the problem, and credit is what is about to deflate. If they started printing bank notes, I think it would panic the credit markets. So I think we will get a deflation first. I think we will have a hyperinflation after the deflation, but that is not a monetary or market analytical conclusion. It is based on what I think is likely in politics... Our last national crisis, unlike Germany’s, was not inflation but deflation. The people who are running the Federal Reserve System are definitely afraid of deflation, because that is what brought on our Great Depression. It is very likely that they will turn on the monetary spigots and try like crazy to reverse the deflationary forces."

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

MERRY CHRISTMAS From 'The Rose'

2008-12-24T20:48:00.000-08:00

Added at bottom: POT discussion and More
----------------------
Happy Holidays Everyone.
Thanks for reading the Street Beat thus far. I hope it has been entertaining and helpful to you.

As we look at the year in review in the markets we can say that for even the best and most experienced investors/traders such as Buffett, Soros, Danoff, Rogers this market has lead many to, to paraphrase Bill Clinton, question what the meaning of 'is' is.

Many things people once thought they knew have been tried and tested. That is largely because the US has enjoyed a bull market in stocks since the 1940s with only a few hiccups along the way. It is hard to fathom that as recently as 1982 the Dow traded under 1,000. In 1942, the Dow traded around 100. That is to say in 25 years (82 to 07) the Dow went up 14 times, or more on a percentage basis, than it had in the prior 40 years. Those 40 years, additionally, include some of the most robust economic growth of any civilization, ever. Please think about that, and then consider how much of the most recent market rise was fueled by credit rather than true economic expansion. Then you may have some perspective on how low this market may go.

The corrective phase has begun and requires that the everyday trader/investor gain a whole new set of tools. In some ways, this is a great time to learn about the markets because investors today have an understanding of how markets operate in bull markets and now are learning in a hurry how to complete their understanding of how the market works in protracted bear markets (I do not consider the dot com bubble to be anywhere near what we face now). Even though I have been very bearish on the market going back to last year and was very nimble with most stocks as a result, I certainly have made some mistakes this year, particularly with POT (and to a lesser extent MOS)... and the results have been to force me to expand my entire thinking on how the stock market works. When I got into POT and MOS I wrote on here that I was going to throw my best pitch based on my understanding of the markets and what had worked in the past. Namely, a great company with tremendous long term prospects, good management, a product that is in short supply and cannot be substituted, in one of the safest countries in the world, and a product that takes advantage of the secular trends in global constraint on food supply.... and all at a PE that by all metrics measured in previous markets was quite cheap relative to growth over time.

Well, when you throw your 95mph heater and it gets slammed over the fence you have to figure out what you missed and what needs improvement. That is exactly what I have attempted to do. Before the year started I put much less emphasis on charts and more on fundamentals than I do now, was much more accustomed to the 'Buy and Hold' culture that we had been trained to follow, and knew nothing about Elliott Wave Theory. I also had not yet ascertained how inflation, deflation, the yen, the dollar, commodities, etc. all fit into the bigger picture. While I do not claim to now all of a sudden know all the answers I do feel that I have found where some of these pieces may fit together and the import of all of this. At another time I hope to share the thoughts that I have generated over the past months and the knowledge that I have surmised. For now I want to mention that I am not ducking POT. Yes they guided lower and this needs to be discussed. The company is still in very good shape for the long term but a global depression, as we are likely to face, is nothing to laugh at and has taken its rightful toll on the stock of this company. Even more importantly, the whole concept of linking stocks to corporate performance and using buy and hold as a vehicle for growing assets over time may be challenged here.

This is much deeper than still most of us realize. We are still very early in this bear market in my opinion even though we are set up nicely for a major rally sometime early next year.

As the credit crunch deepens.... stay tuned... we, as investors and as citizens, are likely to change our assumptions, approach, and attitude in many many ways. If ever there was a time to seek ideas that stray from the mainstream media that time is now. The truth, and the success that this knowledge can engender, is afterall what we seek...

But these topics are all for another time.

For now, I want to leave you with a clip from Bad Santa. No matter how much we learn and keep an open mind sometimes it feels like the market is just laughing at us. Oh well, sometimes you gotta jus' roll with the punches .

Best wishes this holiday season.

PS: On the long side the two best charts I could find right now? FXY (as long as it stays above the 20 Day Moving Average and EBS (ditto on the 20 Day MA). Check them out if you haven't yet. Also, as you may know, I have a background in biochemistry and am always looking for exciting biotechs. That is, when the market allows for any trades that are long stocks and the charts support an upward move.
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Added
POT and more
I discuss POT a great deal because this company and stock, more than any other ever, has inspired me to question everything I thought I knew and seek new knowledge... seek to understand how the markets really work. PE ratios, DCF models, cash flow statements, etc. are nice but what really matters is demand for stocks and it is imperative to realize that these indicators are just part of the story. Perhaps I can discuss this in much more detail another time. It is very important in my opinion if one wants to succeed. For now let me turn to POT and its recent lowering of earnings guidance. Here are some salient points on fundamentals:

POT guided lower, citing that it has also been affected by the credit crisis
Bill Doyle was certain that potash demand destruction was not in sight several months ago. According to him corn would have to go to $2 (as an indicator for also grains as well) to see demand destruction. Yet, corn is now at $4 and we have seen demand destruction for not just phosphate and nitrogen but also for potash. It is important to note that potash companies, including Potash, are reducing volumes rather than accepting significant price cuts. This implies that they believe that the tight supply of potash and the return of demand to grow food makes potash too valuable to sell at low prices. It is true that while other commodities do not need to be used in a recession food production cannot just stop or people starve and riots break out. No government wants this. This is a major reason that I stayed away from all other commodity stocks... I felt that food would be the only commodity to weather the storm. However, as bearish as I was on the global economy I still may not have been bearish enough when I bought in here. We will see going forward if potash volume sales increase in the near to intermediate term.
The lack of credit may be responsible for demand destruction on potash. Perhaps farmers want potash but just can't get the credit right now to buy it. Farmers are among the lowest risk lenders there are and governments are likely to ensure that food production continues. Thus any easing of lending by governments or otherwise directly to farmers may help here
Potash Corp noted on their press release that the credit crisis makes it more difficult for competitors to develop new mines. Potash has the world's largest reserves and has cash. Thus if it does build out, as it plans, when the credit crisis ends there is likely to be a major major supply squeeze for potash, other competitors will not have built out, and Potash Corp will be by far the best company to take advantage of this... remember that even without credit constraints it takes at least 5 years and a lot of $ to build a new mine (very high barrier to entry).
Important note: only about 1/3 of Potash's revenue currently comes from potash. Phosphate and nitrogen also equal about 1/3 each... and both of these have seen BOTH volume decrease and price decline. Eventually Potash will likely generate a higher proportion of revenue from potash but until then, even if potash demand stays high, the business is likely to feel affects from the other businesses... For companies like MOS and even more CF these factors are likely to create bigger drags on earnings
The biggest threat to potash fundamentals is a decrease in the demand for meat and better food as the citizens of developing nations like China move back to their old towns and resume their old eating habits. While in the long term I strongly believe that the genie is out of the bottle and developing nations will demand to eat better and more this credit crisis is so deep that the secular trend towards more and better food may be delayed for quite a while.
Overall... fundamentally the POT story is still in very good shape for the long term. That is to say after the credit crisis turns around... which could be years and years... In the meantime the credit crunch will affect business and it still remains to be seen how much and for how long. If someone is going to be in any commodity food is still probably the best from a pure fundamental perspective. Of the fertilizers POT is by far the strongest company. Companies that mine potash are still likely in better shape than companies that do not at all. MOS>CF

Ok... so I have been saying that fundamentals are only a part of the story and this is very very true. So now some points about how I feel regarding the stock POT and others in this space

Lesson 1: CEOs do not determine stock price... investors/traders do. I have learned that one has to be wary of any CEO that is too bullish... even a seasoned CEO like Doyle. With many companies (outside perhaps technology/biotech) the big houses may know more about short term fundamentals/likely stock movement than the management. Note that the CEO of CHK was so bullish that he bought lots of his own stock on margin and then faced margin calls and losses when natural gas prices fell and the stock went with it.
This credit crunch causes people to hoard cash. Even if fundamentals improve substantially for fertilizer companies there is no rule that says stock prices have to go up. Without credit and leverage stocks of any company may stay subdued. However... and this is a very important point... with so many shorts out there and so much volatility in the market there are likely to be major short squeezes and short term rallies in these stocks (and many others). Going long makes sense... but primarily for trades... the more a stock goes up the more we need to look at selling and/or going short. This is especially true when we hit major resistance areas.
Fertilizer stocks tend to trade together... so those who hold MOS, CF, etc. should look at POT because it is the sector leader. Commodities trade together but may diverge as oil has from some other ones recently. It is still always important to know what Oil is doing and what commodities in general are doing. Also, I like to look at DBA... the Ag commities futures... it has gone up recently...
The market and sector must be taken into account at all times. We are currently in an ascending triangle in the markets (corrective intermediate wave 4 in Elliott Wave jargon).....this enables some stocks to go up or go sideways... in a declining period most stocks are unlikely to go up... opposite is true for a major bear rally
The recent major rise in POT and MOS (they nearly doubled from lows before falling back) has been a great opportunity to lock in gains. It was fueled in part by a major short squeeze (I tried to short shares of both as a test and could not find shares to short until recently.... in such a scenario a move up is likely). However, there is major resistance in most stocks when they reach their November 10th highs (around 85 for POT and 40 for MOS in this case). Please note that if the market overall gets this high this should offer serious resistance as well. November 4... the Obama election rally, would offer even more resistance if the market/stocks go there. It is important to study major points of support and resistance. I have come to realize that when stocks hit major resistance areas and fail... as POT and MOS did, it makes sense to sell (in my case I sold short along with the longs... I do this for bookkeeping purposes) and ask questions later. Let the market prove that it can overcome resistance. If it does we can always buy back a little bit higher... and prevent the risk of losing major gains. Currently I am fully hedged in MOS and POT... we are at RSI 50 and teasing the upper Bollinger so I really feel these stocks could go either way right now short-term. We still have to break major resistance before I would cover and let the longs run.

OVERALL, in sum, regardless of the stocks you own or are short it is imperative to pay very scrupulous attention in this market. Until proven otherwise every rally needs to be looked at skeptically. I think we go much much lower before we bottom... perhaps under Dow 1,000... in a long and severe stock market downturn that could last half a decade or more. It is time to throw out prior tools in the market that don't work now and always try to learn more... I really wish that I could be more optimistic and I am not by any means a nihilist... and I can say that in the next months I am optimistic about a nice rally... However... I am a realist and everything I have seen so far makes me contend that we have a long way to go here on the downside. I guess it does make me quite optimistic... about going short once we've had a nice rally up... A lot of other ideas are in my mind as I continue to learn and develop in this new market... I hope to share them, time permitting, as time goes on.

Here is a really good article entitled:Don't Believe the Hype that I recently came across...

My feeling is: be smart but don't forget to still cherish the Holidays... there is still good out there...

Let's Do it Again...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Important Rally Indicators- RSI and the Bollinger

2008-12-07T23:59:00.000-08:00

EDIT- 12-8
Please note that despite the recent rally we have not yet established firm control and consistent movement into the upper RSI and Bollinger levels. Still tenous at best here but looking potentially good. Not a good idea to be aggressive on the long side in my opinion. Nimble and careful with stops and trade targets. Please read my post on risk management if you have time and haven't yet. I hold some small long positions but in fact shorted XHB at the end of the day as a hedge and because it has gone up too far too fast in my opinion. I am looking for a pullback followed by consistent behavior.

I want to point out that these, along with the 50/200 moving averages, have been excellent indicators for trading opportunities. In an intermediate term rally (weeks to months) for the market or for a given stock the RSI tends to move between 50 and around 70. We also tend to see movement in the upper Bollinger Band (between the 20 day moving average and upper band). In contrast, during a decline in the markets or in a particular stock we see movement typically between RSI 30 or so and RSI 50.

In a period where the market is trying to reverse course we often see several tests of the RSI 50 region (from above going down when the market is moving from a rally to a sell-off period and from below RSI 50 testing it moving up when the market or stock is trying to move from selling off to rallying for the intermediate term.

Some of the best shorting opportunities recently have occurred when the markets or a stock hit RSI 50 and started to decline back down. Right now we are see many stocks tthat have tested the RSI 50 level several times from below and a few stocks that have already crossed RSI 50 and may be moving up. Also we are seeing some moves into the upper Bollinger Band. This is a potentially very bullish sign for the intermediate term. We are also seeing some higher lows and there are a number of reasons that the touch of the 2002 lows on the SP around 800 may have signaled an intermediate-term bottom in the markets. For one thing, the many shorts have to cover and take profits somewhere and are looking for an exuse to do so. Longs know they are likely to cover and may jump in here. Additionally, Christmas season often brings a rally, the markets have been sold off heavily for quite a while now, and for those who follow Elliott Wave Theory at some point in not too long from now we should expect Wave 2 of primary degree to show up if it hasn't already begun (which I think it has as long as the market moves into the upper RSI range and Bollinger Band). This could be a fairly significant rally that lasts several weeks or even months.

If that does happen I would look at as nothing more than a Bear Market Rally. There is likely to be much more selling to come in this market and the next leg down could surprise a lot of people as to how low the market can go. The depth of this problem is years and years in the making and will not correct itself in one year of market decline in my opinion. A rally here, should it come, thus remains a great time to sell longs if it gets over-exhuberant and a great time to re-initiate short positions potentially. The writing is all on the wall. It's called the charts and it diagrams the only thing that is importtant in the stock market: demand for stocks and the actions, not words, of the market. Right now I am looking at V, MHP, FXI, XHB, URE, in addition to the plain vanilla SSO, QLD, DDM, and a number of others as charts that are starting to look very good here for a rally, while some of the charts that have shown strength during the recent down turn, such as TLH, UUP, and others may be good shorts here, should we move into the upper RSI and Bollinger ranges in the marektsand stick there for a while. If not we could have significant selling as the recent moves up would have failed and could retrace. So I am cautiously optimistic right now but it is also dependent on the very near-term market action imo.

Here are the charts:

Some Potential Shorts?

Some Potential Longs?

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Do yourself a favor...

2008-11-28T21:56:00.000-08:00

Added-Important-at Bottom

Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression
Robert Prechter Jr.

I highly recommend that you read this book. It is excellent and it is amazing how much of it has already come true. Protect yourself! I am in this Fri evening and I have re-read parts of this book. I bought it used earlier this fall at Amazon for 10 bucks. Really. I plan to give a copy to my friends. Easy read. Excellent for investing ideas and understanding... and equally good just for learning how to protect yourself for what is coming. This book was written when housing prices were rising and everything was looking great... those who understood the principles of this book a year ago or two years ago or longer had the insight that few have had. The insight that still few have now. Up to you of course but...
-------------------------------

The bear market rally appears to be in swing... especially if it the RSI goes above 50 and we stay in the upper Bollinger Band on the major indices. This may last for a while. However, it does not change the underlying issues and, while I am more bullish on the stock market than I have been for a while, at least in the short-term, I am more bearish than ever on the long-term health of the economy. We haven't seen it or felt it yet. It's coming. On this post while the market was going up, I warned of the calm before the storm in the stock market. Now I am saying to protect yourself from the economic fallout. Also, the stock market has not bottomed in my opinion. Just another bear market rally.

Best,
Jon

May the above provide REVELATIONS... speaking of which... this is really one of my favorite songs of all time. One of the very best songs of the 80s for sure.

PS: I have never been wrong on the fundamentals of POT. Just wrong on the idea that fundamentals necessarily correlate with stock price. I have operated successfuly in in the past on that assumption but this market has taught me how the stock market really works. And for that I thank a great company like POT and a terrible market on the long side like this one. Fundamentals are only one indicator of demand for stocks... in this environment the other indicators, such as the declining markets, charts, moving averages, etc. have been altogether more powerful than fundamentals. These indicators will not always align against fundamentals... that is to say that the poor fundamentals of the market and of other commodities will improve and/or disassociate themselves more from the charts of POT if history is a guide. This is a great company. The stock is cheap and the market is gaining some short term momentum. Now is a great time to be bullish in my opinion... though always with risk management in place.

Here are some nice articles
Potash prices remain high and long term outlook
(note that 2/3 of revenue comes from Nitrogen and Phosphorous as of now so next year may see some slowdown in earnings even if potash prices stay high)

A bullish case for Potash as prices stay high

---------------
Added
The significance of moving across RSI 50 and into the Upper Bollinger Band is very important for maintaining a rally. I wrote above that I was more Bullish short-term, especially if we move above RSI 50 and the upper Bollinger Band. This market can change on a dime and these, along with 50/200 moving averages, have been very reliable areas of support/res. The market decided that we would not today... bringing question the sustainability of this rally for sure. There's no continued rally unless significant indicators/levels hold.

Don't Think Your Bank Can Fail? Think the FDIC can cover a complete meltdown?

2008-11-26T00:39:00.000-08:00

Think Again.

Seriously... the FDIC probably will hold but is probably good enough? For me at least it is worth it to know where I stand. If you feel the same way here is a great article that includes the best and worst banks in the US of A.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Deflation and Inflation Posts

2008-11-22T14:30:00.000-08:00

Understanding the deflation/inflation circumstance of the market is absolutely critical. In inflation typically the dollar weakens and commodities spike. In a deflationary situation the dollar strengthens and just about every non dollar asset, including stocks and commodities, declines. Below are the top two posts that looked at both sides of the coin. We should, from the research I have done then and since, see substantially more deflation before we eventually see significant inflation. Thus, while sentiment is getting so negative that we are setting up for another probably substantial bear market rally somewhere along the line, this is not the environment in which to buy and hold stocks yet in my opinion. (Note that I have learned from my MOS and POT purchases earlier in the year that no stock, even POT, is a buy and hold in the early stages of a bear market. Especially this one. Lesson learned... as I have described on previous posts.)

Buy and trade perhaps but with a lot of caution and with one finger near the sell trigger at all times. In a bear market shorting makes more sense... with caution when we are deeply oversold. We have to break the 200 day Moving average before one can even seriously start talking about a new Bull Market. I think that is still a long way off.

The deflation, according to Prechter, is still early in its stages. I agree with him and he has been the most accurate of anyone I have seen, though Roubini and others have been quite good as well. We are unwinding 25 + years of easy credit with a mania spike in the last few years. That easy credit led to enormous inflation and the collapse back down must be accompanied with tremendous deflation. The government bailouts and interest rate lowerng have been attempts all along to combat the deflation. However, there is no way they can do it. Too big. They may prevent a total meltdown. Maybe. The cost, in the long run, will probably be further inflation of the dollar.

For those who have not read it I do recommend Conquer the Crash by Robert Prechter. I recently signed up for Elliott Wave International's paid service. For 60 bucks a month (money back guarantee cancel anytime etc.) I get the kind of insight that the pros get. These guys ARE the leaders of this whole theory... not the also rans... and I read somewhere that every major investment house has an Elliott Wave professional in this market. Conquer the Crash and Elliott Wave Principle come free with the subscription. I had already read both several months ago and they are excellent.

Please note that I do not have any affiliation with these guys. This is not an ad. See for yourselves if you like them if you want. Or don't... up to you. I just recommend them from personal experience. The theory is fascinating and provides a framework for what is going on.

Here were the two posts from before. They are also now under the top posts at right
Inflation
Deflation

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

POT CC- We are not like the other fertilizer Cos

2008-10-23T12:10:00.000-07:00

Edited Th pm
-----------------

I was only able to hear brief parts of the call bc had to work but this is what I took away so far. This is a great company and even though nitrogen and phosphate businesses are likely to suffer in the next few quarters their primary business by far in terms of world reserves, stock in international players, and production growth is potash and potash is its own animal.

I reiterate that this is a great company. It is unfortunate that the market has treated it like the other fertilizers and like all other commodities. Months ago I had considered going long POT andshort MOS or another fertilizer as a hedge. I didn't bc the strike concerned me and I thought would benefit MOS or AGU. It turns out that AGU is big in Nitrogens and MOS big on phosphates and so though all three sell all three it makes sense to do a spread long POT and short one of these or CF or UYM. I tried to add to POT today and go short MOS but MOS was already down 14% so someone beat me to the punch. It also makes sense to go add to POT and go short the market on a bounce in the market.

One thing is clear: no matter how good the company you have to be hedged in this market to reduce risk. Also, I don't fight the charts unless the market is missing something.

Here I think the market now realize that POT is its own beast. Still, this only works if someone in the market is willing and able to pay for it.

It is clear to me by the open interest in puts that the big houses were once again as was the case just before the last cc, ready to sell POT off heavily. This was to be the last wave down that would completely collapse the fertilizer stock (though not company as the companies are very viable) bubble. POT was going back to 30 eventually and MOS to 10. That is where the companies started several years ago.

It is true that the collapse of grain prices, which can be controlled in the short term by speculators and firms like GS, can affect nitrogen and phosphate demand and prices significantly. I said that I thought POT would miss bc of these two businesses. The reality is that the sharp drop off in nitrogen and phosphate products has really occurred now rather than on the earnings reported from last quarter. These price declines, combined perhaps a bit with the strike, is why POT said they are now expecting full year earnings to hit the lower end of the guidance from $12-13. Still, given the way ag commodities have sold off it is extremely impressive that they have been able to maintain guidance.

So much so that the GS analyst on the conference call asked why heck they couldn't get potash prices to go down like that of the other fertilizers. Clearly in my view the big firms have been shorting these names since the last CC and expected on more bang for their buck. Note that the rest of the ag sector sold off today. The fact that POT did not should not is a huge testament to the underlying value of this company. The question now is whether the stock gets sold off anyway. After the last CC POT beat earnings and guided up and the stock got crushed. Now that the speculators and conditions have done their worst on the grains and fertilizers and POT is much cheaper the question is whether or not the sellers will be confident enough to bring it down further.

I still have my POT put hedges I bought yesterday (though they are small in comparison the the longs). I feel that one of the best companies in the market is on deep discount and I want to buy a ton more. However, in this market I will only layer in, wait for the market to confirm my moves, and short UYM or MOS or CF or some other fertilizer name so that if a great company gets dragged down with everything else I will not take a hit like I did on my original purchase.

I have been successful in the past picking excellent companies at reasonable or great prices. I think I did the same here but the market showed me that all stocks are essentially a type of pyramid scheme with the caveaut that in the long term they do represent real companies. We have a great company on sale at a firesale price. But the market is awful. In a downtrending market with a downtrending sector in oversold conditions it just makes sense to buy a company like POT for the long haul while going short other vehicles as a hedge to take advantage of the difference in quality and sentiment for this company AS COMPARED TO other securities rather than on absolute terms. Please also note also that in my opinion while there is a core long position for me here most stock buys or short sells are trades only. On any overexhuberance in either direction in this market profits must be taken in my opinion.

These strategies are great examples for all traders and investors in this market regardless of actual security held. Like PBR at these prices? Maybe buy some with a hedge of going short some XOM shares for example. Just a hypothetical idea. One thing that I love about this market...

There are no holds barred. Every tactic in the book to take our money is being utilized. Thus if we can make it here we can truly make it anywhere.

That is, as long as we make sure we hold a healthy amount of cash at all times so that by the time we've reinforced our techniques in the toughest of battlegrounds we still have enough capital at the end to employ them.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Just a WARNING... POT likely to miss

2008-10-21T20:59:00.000-07:00

A look at Ammonia Prices, Phosphorous Prices, the Strike, etc. and the fact that estimates have not come down, combined with the fact that the message boards are still full of people that believe POT can not go lower... I think POT will miss on Thursday and I will be looking to get short exposure to hedge if we have a rally tomorrow on the AAPL earnings and OPEC oil tightening threat. Also Cargill is released to buy MOS shares tomorrow and this may drive up the prices of MOS and perhaps the others as well.

POT is a bit risky here and I am looking to hedge with puts and/or short exposure. I have been very bullish on the fertilizers all year and I have to admit in the short to near term this has been the biggest investment mistake I have made. Period. I will probably look back at POT and MOS as one of those epic reminders of how to never make exceptions and always check assumptions at the door. The food commodities and potash/fertilizer trend is very much in an upward long term formation. However, the stocks went up to fast in the last years and it was a bubble. I believed that it was not a bubble because earnings supported the stock price but it turns out that the key drivers of earnings, ag commodity prices, were themselves in a bubble and that the earnings of the big 3 fertilizers are affected by the prices. It may be true the potash sees little demand destruction with drop in corn price to this level but the other businesses, which compriseof 2/3 of revenue combined, are clearly affected by the drop in prices.

I, like Jim Rogers and others (though I do not in any way claim to be he), are a bit early here. Commodities and grain commodities and potash and others will likely be in a long term bull trend for a long time but they went up too fast since 06 in comparison to demand. Demand comes from increase populations and increase demand for meat and decreases in arable land and other factors. All of this is true. However, it takes time for this to develop and the tripling of stock price was only sustainable short term as long as commodities prices stayed high.

If I am wrong I am more than willing to take a small hit on my hedges. However, I would be much more surprised if POT does not miss than if they do. The earnings may still be great but in this environment a miss may be treated brutally. It makes sense to seek some protection. Another option I am considering is shorting or buying puts in CF or TNH... but likely I will take shelter in POT itself. If they beat and the market turns that is fine. However, in this market the downturn must be assumed until proven otherwise.

I'm not sure why I treated these stocks as exceptions. I am generally very very careful and use very precise risk management but somehow I got carried away a bit here. Fortunately, the long-term fundamentals remain in tact. Still, I will look to get some short-term risk protection if we rally tomorrow.

Fertilizer Works Price Chart
Wiki POT breakdown
Also take a look at the Minnesota Blog at right

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Our Great PREZ: Economy will be fine in the long run

2008-10-18T18:49:00.000-07:00

Why is it that I have never, going back to 2000, felt encouraged by Bush's 'words of encouragement'?

Thanks so much for your encouragement. Meanwhile there is a lot of stuff going on in the 'short run'. Like the economy seems to be doing fine for the execs at GS and other top corporate brass. After years of pillaging our country and serving USA Inc. over the last years the Cheney administration is finally also getting the boot in the 'short run'. Here is one case where I can say 'God Bless America' without being facetious. This is not a political blog but I can say that either McCain or Obama can do no worse by America and the world than the current admin.

Let the healing begin. It's going to be tough but at least, perhaps, it can start soon.
----------------
Regarding the last post.... whew that was therapeutic for me and and made me laugh.

I have never heard a CEO as bullish on his company as Doyle. For someone who has lived and breathed this company for so long I have to believe that even he is bewildered by the recent stock performance. It goes to show a lot of things. First, big investors may know more about how a stock will perform than the CEO. Corporate knowledge only goes so far. Take a look at the CEO of CHK for more. Second, as a scientist it is clear to me after seeing the market this year that my approach of treating the market in a similar way to a science, and using fundamentals and technicals as such, is not an accurate one without multiple points of confirmation and specific risk management regardless of company, stock, or any other factor. The science approach has its role but it is clear from this market that the rules that have worked in the past are not refined enough to function like they could in a market as tough as this one. Well, actually the stringent rules detailed on the post: 'Stop: Let's Talk About Risk Management ('See Top Posts) is effective. This has worked for me... relying on fundamentals has not up to this point.

This market really separates the most seasoned pros from everyone else. Even some of the top pros are having their difficulties. I have done well in the past but I admit this is like no market I have ever seen. That is true for everyone. I continue to learn and to grow. That is why, in this market especially, it is important to realize that this blog does not give investment advice. It is a journey that intends to use my education, ability, and working knowledge of the market to truly filter out any weaknesses in my techniques, expound upon the strengths, and continue on until the system developed is as battle proof as possible in all markets. It is really about seeking knowledge and sharing that knowledge. From my journey I hope that you too may benefit.

I admit that in a market like this I am still very much learning the rules. Then again, when Niederauer, the head of the NYSE, was interviewed and asked to share his years of experience in the markets with viewers, he replied that in this market no one feels like they have any experience. That about says it. This is a snipers' market... that is to say the way to win is to be extremely nimble, to only trade when all of the probabilities are heavily in our favor, and to use very strict risk management regardless of how good or bad a company may be. We always have to ask how much we are willing to lose before initiating a trade in my opinion. Also, if we don't have the time to follow the markets, to be extremely precise, to employ sure-fire techniques then it is probably best stay clear. I have seen a number of opportunities that I just could not take advantage of because I am too busy to follow the market day by day and hour by hour right now. In fact, I knew going in that this was a market that really requires scrupulous attention and that, due career related activities I would not have the time to fully engage in that right now. This is a market that cannot be fudged.

Overall this market has been very educational. Not easy and not always fun but always educational. I have some more thoughts on the perspective by which I now see the market and how that may be helpful in the future. That is for another post.

Here is my favorite sentence from the article above on CHK:
"I was thinking during the day that the financial types that were shorting Chesapeake and other nat gas companies into the ground (and buying Credit Default Swaps just like they did with Lehman and AIG) would pat themselves on the back for making good coin, then go home to find no heat, plastic bottles or diapers."

Thank goodness I once again have the opportunity to use my droll sense of sarcasm when I say "God Bless America".

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

BREAKING NEWS- Potash CEO William Doyle Taking Drastic New Steps to Deal With the Crisis

2008-10-16T00:21:00.000-07:00

Source: Rudders News

After the stock of Potash Corporation continued its meteoric plummet on Wednesday William Doyle, Potash's CEO, was briefly spotted near company headquarters late Wednesday afternoon.

Rifle in hand and helicopter in close proximity, Mr. Doyle appeared flustered and delusional. He was found repeatedly uttering incomprehensible statements under his breathe to himself like "the next five years will see the greatest growth at our company", "we've waited over 20 years for this unique moment in history to arrive ", and "corn would have to fall to $2.00 before we would see demand destruction and we just don't see that happening."

When asked what he was doing with a rifle and a helicopter he admitted that after watching 'Sarah Palin Porno' to make himself feel better about things, followed by watching his stocks go down, followed by watching more Palin Porno, followed by more watching his stocks go down he was slowly becoming convinced that there was more to Sarah Palin than just her 'naughty school teacher' look.

"She's really got some good ideas" Doyle was quoted as saying. "At first I thought that getting into a helicopter and shooting down animals that couldn't defend themselves was just nuts. That was a long time ago... like when POT was trading at 190. I've learned so much since then and now I know how good it feels to pulverize their little defenseless bodies. Sarah was right all along".

When asked how he felt about the imploding hedge funds that were leveraged 30:1 and the hedge funds that were shorting the sh*t out of his stocks he replied that he liked apple sauce and that the hedge fund selling felt a lot like ‘clothespins on his nipples’.

“Gotta go.” Mr. Doyle said, as he climbed into his helicopter. “Ospraie may have bent me over but these little wolves… their asses are mine”.

The "Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice

Fair Warning!

2008-10-12T14:25:00.000-07:00

We all know that there was huge buying interest at the end of the day on Friday. Was this the bottom? Was this the start of the next Bear Market Rally? The Answer:

Achtung!

Above is the first song on Van Halen's Fair Warning Album. Considering the times we are about to face Mean Street might be very appropriate.

My feeling as I mentioned before is that it is way to early to call a bottom here. We still have no trust in the financial system (as evidenced by LIBOR and US lending rates) and we still have no idea what happens to this economy when the financial element hits Main Street with tour de force, and we still have not seen any stabilization in the housing market.

Could this be the start of a bear market rally? Maybe. However the charts have to support this. No question a lot of companies have been oversold. Some companies with very solid earnings potential have been hit hard because of margin calls and deleveraging. In the case of CHK the CEO had to sell most of his shares due to margin calls. A bounce may be likely. However... this is an unprecedented market. So much of the gains in stocks over the last 25 years was induced by credit expansion, easy access to money, and the desire to put this money to work in stocks. Turning off the credit tap may affect the desire and ability to buy stocks for a long time to come. My feeling is that it is a great time to make a list of stock buys right now. Solid blue chips with dividends, great companies like GOOG and AAPL, perhaps the Asian ETF FXI and some individual names like SDTH, may be worth looking at. However, as long as all the trends are down and every rally is immediately followed by a sell-off I believe being overly aggressive is a mistake. I am being very careful and using very small amounts of money and mostly paper trading right now. This is like no market I have ever seen and I'd rather miss an opportunity than be wrong.

I'm not saying this is 1929 but it is the closest thing we have seen in my opinion...
Check This Out on Catching a Bottom in 1929.

This video says it as succinctly and poignantly as any...

"The Yellow Rose Street Beat" is for Informational purposes only. It does not give investment advice.

Interesting post on Roubini's RGE monitor

2008-10-10T20:19:00.000-07:00

By Someone named 'reality check':

My friends, a few weeks ago, Germany's finance minister stood before parliament to proclaim the death of the world financial order.

"The US will lose its status as the superpower of the world financial system. This world will become multi-polar with the emergence of stronger, better capitalised centres in Asia and Europe"

That's what Peer Steinbruck said and he was spot on. The global markets right now isnt just a recession...its not even just the biggest recession in decades.

What we are witnessing is nothing less than a massive realignment of global economic power. Economic and financial power is shifting eastwards faster than almost anyone could have imagined and its causing huge disruption in the finacial markets. We are about to see the biggest transfer wealth in history. By 2010 the Western economies will be in irreverisble decline. The Oil-rich Arab countries and Asian industrial powerhouses will move to the centre of the global economic universe.

By 2010 Oil production by Non-OPEC countries will be in decline and this is terrifying for oil-dependent Western countries. It leaves OPEC in total power and Western leaders know this. Soemthing even more frightening is happening and mainstream media has kept quiet about the coming financial tsunami.

On September 18th the Gulf Co-operation Council took the first steps towards setting up a common Gulf currency. They have been talking about this for some time. A few weeks ago GCC finance ministers approved a draft agreement on the general structure of the monetary union. They are now discussing the location of a central bank. Bit like the eurozone. A final agreement is meant to be signed the end of this year. The target date for the new Gulf currency could be around 2010. This will have an enormous impact on the world economy. The reason??

You can bet the Gulf countries are going to price their oil in their own common currency. THE NAIL IN THE DOLLAR'S COFFIN. The almighty dollar receives a huge ammount of support from being the standard currency for international trade. Oil is prices in dollars, bought and sold. Consider the impact on the dollar when when those countries say they don't want to be paid in dollars anymore? It looks like the dollar will have its legs kicked out from under it in the next couple of years.

The great money merry go round has broken down. One of the clearest signs of that shift of power are the buy-outs and strategic investments that the Arabs and Asians have been making in Western assets recently. Nomura has snapped up Lehmans for $2.00 (yes just two dollars!) The Gulf state of Qatar is the biggest shareholder in Sainsbury's and Barclays. Citigroup had to go to the Arabs and Asians to keep operating, the list goes on and on. All that money drains out of the West and undermines the economy. This trend has been gathering speed for a long time. But the smart chaps in Washington, Wall Street, London were able to ignore it for a long time. The reason? because a lot of that money made its way back to Western countries through the all powerful financial industry that has just collapsed.

The US & UK governments whine about how the "global credit crunch" is at the heart of the problem but that is a flat lie. There isn't a global credit crunch, this is just a Western problem. The Gulf is awash with capital. The banks are still lending in Asia. What about HSBC?? Their economies are growing and their profits are rising.

When the dust settles and unless the West comes up with an answer... there will be a NEW EASTERN ECONOMIC ORDER.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

My response to the action in the market

2008-10-09T13:28:00.000-07:00

I am busy but once in a while my thoughts can be properly and expeditiously expressed from a blog response I already laid out, so I just copied and pasted it...
------------------------

-Did you hear the booo's when we went below 9000?

Who else thought this could happen... just not so soon?
Quote from anonymous source on Earth to Wallstreet Board
----------------------------
My response

Robert Prechter of Elliott Wave Intl said this kind of correction was gooing to happen in the beginning of this century. He called it in 1979.

He thought the Dot com bubble was it but the credit expansion under Greenspan delayed it... making it even worse now.

Roubini is calling for Dow 7,000 and he has been right on for years now. I mean right on the money.

That is why I pointed out the 38% Fibonacci retracement on my blog. That fell through and the next likely retracement is 50% of the 20th century gains. Cut all the levels from October 07 in half to get there.

Edit- not on the blog response but added here.
The 2002 lows may also provide support but as I think we would have gone down further without Greenspan's policies and also they eventually deepen it I think the 2002 lows will probably provide short term support but I would not bank on them to be the bottom either... just my take.

I still think we see some kind of a bear market rally somewhere here. We have had it in the fertilizers until the market collapsed again.

I wish I had more time to day trade. The opportunities are enormous. I called a drop in commercial real estate a week ago and it has tanked. Same with Foreign Banks. Regional banks? Whose going to buy them out? The big 3 already have their hands full and capital is scarce and everyone wants to hold onto it.

I get the idea that there is fear and blood on the streets and that is a buying signal but this is like no market we have ever seen. We are likely to get a very very choppy and slow recovering bottom in my opinion. It may take a year to bottom. Until LIBOR spreads and trust returns how can we call a bottom?

If people want to day trade or layer into names like POT and DRYS and SDTH and FEED and many othersor years and years that can be a winning strategy. Otherwise I think it remains quite risky out there.

I dunno I could be wrong. I certainly have been so far in this market. So far I have been able to pick great companies at reasonable prices... however when the market re-values what the rules are... well that is something I did not have the experience to anticipate. IT's like a somebody selling a Porche for $10,000... super cheap right?

But only for those who have the cash, don't need that money to eat and clothe themselves and secure their job, and don't mind it going down to $5,000 first.

If nobody has money a $2,000 Porche is expensive.

Eventually people will have money again but to try to predict when without support from LIBOR rates, flattening out of home prices, etc. it just seems like a gamble to me to go long here except as mentioned with very small amounts and layered in.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

BEWARE: This is a double diamond market

2008-10-04T21:02:00.000-07:00

Update-
The naz bounced directly off of the 38% Fibonacci retracement level for the overall market gains from the 20th century. The other indexes also lost 30% or more from their peaks to the low set on Monday. They are at very key short term support areas (10,000 and 1,000... round numbers like this are usually huge support and resistance areas). The Vix is off the chart.If there is enough cash to go around(and in a liquidity crunch there may or may not be) we may get that next bear rally I was looking for a few posts ago. I went short on MOS on Friday since I expected Monday might be a further sell-off. I will cover if this rally looks to continue from the inter day lows on Monday.

Let the market and charts decide.

On one other note: Hey the stuff on this post is more than meets the eye. Please remember for the rest of this market that only the demand/supply for stocks drives the market and nothing else. Fundamentals are very good indicators for demand in the long run and technicals may offer indicators in the short-run but always remember that these are nothing more than indicators for the real desire to buy/sell stocks and assets. One of the most dangerous things to do in the market is stick to a paradigm that everyone else is following when it does not work at the moment. Just because some names are trading at a PE of 5 with 30% growth it doesn't matter if there isn't the money or desire to buy.

That being said I paper-traded purchases of APWR, SDTH, and others Monday. Also note that FEED went up even on Monday bc they announced a buy back. See... they are where the cash is (China) and where the political machine that will do everything to satisfy the populace lives (China) and they sell 'what's for dinner'! For those with a longer range investment objective and plenty of cash I recommend this stock as a 'some purchase' at these prices (but do your own DD). If cash decides to come out of hiding (I know that some smart people held it and are ready to go) then we may see a nice bear rally again here. However, when it turns back down I believe we are likely still headed for Dow 9,000 or 8,000 or even 7,000. We'll see.

Note for those worried about POT and MOS and AGU in my estimation these are still very very good companies and should do fine. There is a long-term bull market in these names and in ag commodities and all commodities. It may take quite a while before we see the levels these names were trading at this summer (it may take years) but for those like mewith a very long horizon on these names there is no reason to sell as long as fundamentals remain intact. Note that MOS remained very bullish on the long-term phoshpate fertilizer market and I am glad that they are not buying back shares... I would rather they protect the health of their long-term business and insure that they have enough cash to gain sufficient liquidity to pay workers and operations.
----------------------------

Skiers and snowboarders are familiar with the term "double diamond". The double diamond runs are the ones designated for experts only. On double diamond runs beginners tremble in their ski/snowboard boots, intermediates realize how much they still have to learn, and even experts fall..

I like to go skiing and snowboarding at the Sugar Bowl in Lake Tahoe. One of the most daunting runs, and clear double diamonds, at the Sugar Bowl is the ‘58’. I’m an advanced intermediate skier and an intermediate snowboarder and this run always scares the sh*t out of me. It’s a thrill but man is it always tough.

Guess what? We are now facing the ‘58’ of the stock market.

As I noted I have been pasted by the MOS, and especially POT, sell-offs recently. I have been very bearish on the stock market and very nimble but this the one case where I have really been nailed thus far. I am not the only one. In fact, quite a few of the pros, and even some of the top pros, have been caught off guard by the sell-off in these names. Mish Shedlock (Global Economic Analysis… blog at right) is a professional investor/trader. He wrote an article before earnings on how he was trying to defend MOS.

He was talking about earnings and PE ratios and the hedge fund unwind and many of the elements that I have broached. Bridgeway Aggressive Investors 2, run by John Montgomery, and a stock that had until recently returned an average of 20% a year over the last 5 years, has just fallen off a cliff recently. It has lost almost 33% of its value in a little over a month and was down over 11% on the day of Mosaic’s conference call. This company uses quantitative methods, designed by the MIT trained engineer John Montgomery, to pick stocks with great earnings momentum, fundamentals, sentiment, etc. Two of his top three holdings as of the last quarter were MOS and POT (ANR being the other one). The chart of BRAIX is posted below.

****WARNING
This chart is of an adult nature and may induce very strong or sexual language, strong violence and gore, or strong drug content. No children under the age of 17 admitted without parent. No adults over the age of 18 admitted without immediate access to extensive psychiatric therapy.

This market has been a tremendous learning experience for me. I am really appreciative of this (though the stock hits have been less than fun) as I never would have been compelled to search and learn so much in any other market. So… what is being missed here? Well… it is critical to look at the stock market for what it really is and to put everything in this context. Fundamental analysis, discounted cash flow, technicals, etc. do not drive stock price. They are just indicators of the probabilities of how stocks will be valued in the future. The real value of a stock is driven by only two things: I will call them the stock’s intrinsic and extrinsic value.

All investments, including cash and gold and stocks and bonds, have an intrinsic and extrinsic value. The intrinsic value what the asset is worth regardless of external conditions. A piece of gold is worth something no matter what happens. So is a bushel of wheat or a red ruby diamond.

On the othe hand the stock of any company is just a piece of paper. At any one moment in time the ‘instrinsic’ value of a stock is nothing more than the dividend it pays out and recoverable book value were the company to go bankrupt. Many stocks thus have an intrinsic present value close to zero (despite the stated book value... what do think you would actually get upon bankruptcy?.)

THAT IS WHY THAT WHEN PEOPLE SAY A STOCK MUST GO UP BECAUSE IS TRADING AT PEG OF .5 OR .2 OR ANY OTHER NUMBER THEY (AND I) ARE WRONG.

The rest of the stock value is completely determined by the demand for the stock’s extrinsic value. This can be defined as the willingness, and ability, for people to trade money for a stock. If either the willingess to buy (because people think the stock will go down rather than go up or because they think that competing assets such as cash and other stocks are more valuable than the stock at a given price) or the people’s ability to buy (because they are leveraged 30:1 and must sell no matter what for example) decreases then the value of the stock goes down irrespective of the underlying fundamentals of the company. Since people buy stocks for the purpose of making money by selling it at a higher price later, rather than for their underlying value (like they do for gold or other hard assets) the ‘extrinsic’ value determines the majority of stock price.

For these reasons the public’s psychology, perception, as well as available wealth are extremely important components of stock price. In a healthy market (an investment market) or when one takes a very long-term view (again an investment) underlying fundamentals may be very good indicators of future extrinsic value. However, in a traders market such as this one, over the short to medium term, the components mentioned at top become more important than ever.

Just as a test run I went onto the POT message board a few days ago and said that I thought the POT price was going to 100 (this was before the MOS results and POT was trading around 160 at the time). I did this because I wanted to see what people would say. I was curious what the psychology would be and why people would or would not defend the stock. It turned out that I was attacked from all sides as an imbecile. The reason? There is no way that POT could trade that low because it wouldn’t make sense from a PE relative to growth perspective. Everybody was telling me to buy and that the charts were an anomaly. I was a ‘rookie’ who clearly did not understand the way the stock market works according to the others. Then I realized that I had been touting the same principles for POT in the past as the others were now. Despite what the market, as indicated by the charts, was telling me. Despite the fact that we are in a deflationary market where cash is king. Despite the fact that every bounce in the market has been met with a pronounced sell-off. I thought of what V. had been saying on Earth to Wallstreet and I felt for the first time what it would be like to go against what everyone was saying, including some of the very smartest and most respected investors. I was starting to feel some clarity here. The stock market, though it does have a scientific element to it, differs from science in a very profound way: in science the laws are the laws are the laws but in the stock market the laws can change based on the psychology and investment capability of the market. In the bull market of the last 25 years PE ratios and PEG ratios and other scientific fundamentals have, for the most part, been very good proxies for the underlying demand for stocks. We have become used to using fundamentals as if the stock market was a science that followed certain laws of nature. It does not. As a result we must revert to the actual law of the stock market which is governed by the supply/demand for stocks as mentioned not the indicators and fundamentals that serve as one indicator of potential supply/demand .

Hold on a second. What about people like Buffett who value invest . Are they wrong? Absolutely not. It is very important to always distinguish between true investments and trades. If you are buying a piece of the company (even with a few shares) and are planning to hold on to it for a decade or so or more then the fundamentals still rule. However, when most of us ‘invest’ we are not thinking in these terms. We may say that we are planning to hold for years but we get upset or even panic when our stock goes down 25 or 50% and may not turn for several years or longer. We may be buying and holding but do not really have an investment objective in such a case. I have thus learned to look myself in the mirror and really ask myself whether I am looking to buy a piece of the company for the very long run or am really trying to trade for shorter term profits. We all need to do this and realize that in a trading environment the fundamentals only mean so much. What we cannot do is buy and sell with an investment mentality when our real objectives are of a trading nature. We have to be honest with ourselves here.

Let’s move back to MOS and POT for a moment here. We have just hit serious support around 40 for MOS (also the 200 week moving average area) and around 100 for POT. The PEG ratios may be ridiculous and they have cash flow etc. If we are looking to hold these companies (especially POT in my estimation) for a very long time this may be a great time to start nibbling on the long side. If we are looking for oversold bounces (RSI turned from the 30 region on Friday and was a great buy in the morning for a day trade until it turned back down) then it is also a good buy right now. However, if we are investing at these prices with the idea that these stocks must go up in the next few months because the PE ratios are so low and the companies are still fundamentally solid then we are fooling ourselves. The stocks may go up but they also may not. In fact, I would expect that POT may test it’s 200 weekly average around 80 at some point and I would not even be surprised if MOS broke below the 40 region at some point soon and fell to 30 or even 20. Why is that impossible? Because the PE ratio is… what? Because the earnings last year were less than now and the stock prices were double where they are now? That was last year when the extrinsic component of the stock price, that is the belief that stocks would go up and the capital necessary to buy, was there.

This is not last year’s market.

There are many other great stocks for the long haul. MA, V, PBR, GOOG, CMED… these are some of the stock I would just love to hold for years and years at these prices as long as the fundamentals remained in place. It is also true that commodities themselves, buyable through etfs such as DBA and DBC, remain very good long-term investments. That is why Jim Rogers is still buying… he is the antithesis of a trader. However, if I were going to buy these now I would have to accept the very real possibility of near to mid term declines. I would have to ask myself if holding these stocks was more important than holding cash right now. On the MOS conference call the management said that they were not increasing dividend or buying back stock because in a market that has liquidity problems the only thing that speaks is cash. They spoke of building a ‘fortress balance sheet’. This is not a financial institution or a homebuilder that may run out of money tomorrow. This is one of the companies that is sitting on acres and acres of gold (potash and phosphate). However, the State of California has to borrow from the Treasury because they can’t get the short-term credit necessary to pay their workers. In a world with limited credit the ONLY thing that speaks is cash. That is why the dollar has gotten stronger recently, that is why even the strongest companies are hoarding cash, and that is why it will be very difficult for stocks to go up (other than quick bounces) any time soon. In the light of all this doesn’t it make sense that we, too, heed the messages of these companies and try to build our own ‘fortress balance sheet’ by hanging onto cash and paying off debt/bills etc?

Did I mention that cash was king right now?

Returning to the market, then, it is obvious that fundamentals are not good enough by themselves to trade in this market. The only consistent indicator of where the market and individual stocks in the market, may be going in the medium term, in my opinion are the charts. The tell you what the market thinks. They are the comprehensive, all-inclusive, piece of the puzzle as of this moment in time. However, we care about the next period and what about in the Spring when financials were going up and in October 07 when the stock market was going up? Were those good indicators of the future? Yes and No. They demonstrated what the market felt at those moments in time but if one looked at indicators such as RSI, moving averages, Bollinger Bands, and more it was possible to see that the market was changing and put the probability of success in one’s favor. The bounce of the market off of the 200 day moving average in the Spring, and the island reversal of UYG in May, and the breaking of critical moving averages for the Ag names in the summer… all of these were tremendous warning signs that could have put us in the best position for success. That is, as long as we were willing to listen to what the markets were saying instead of chiding the markets for being unreasonable and irrational. Obviously, understanding the fundamentals could help make us aware of the turning in the charts (such as the financial an overall market downturn in the Spring) and thus fundamentals certainly do have value. However, they are just one piece of the puzzle that can put probability in our favor. If there is a battle between fundamentals and charts the charts almost always win. At the very least, in such a case, it is wise to stay the heck away. That is true both on the short and the long side of the market.

To summarize my action from here on out:
1. Hold on to cash as everyone will want and need it
2. Defy the charts at own peril.
3. Put the probability as much in favor as possible, try to determine the psychology of the masses and the smart money, and if I don’t know don’t go (do nothing).

Rough week last week. It’s called paying dues. That’s how you learn and improve.

BTW... The blog Snot Wheel recommended selling the fertilizers last summer when they broke long turn trend lines. They were not talking about fundamentals but the real risks of that event happening. Also, please note that Elliott Wave analysis shows a clear 'impulse wave' up on fertilizer names that ended at 160 MOS and 240 POT. Very clear as I look at it now having learned more about this topic.

Note: I have not sold my MOS or POT longs. They are in the category of very long-term investments for me unless the fundamentals change. However, if we break key support areas or reach key resistance areas I will once again go short along with my longs with buy-to-cover stops. Note that the quick bounce to 98/185 on POT/MOS took out my buy to cover hedges and when it turned back down I got screwed anyway as I made a mistake and did not re-instate them. Otherwise I would have been still been down but not nearly as much here. Every major bounce up has to be viewed as a trade and an opportunity to sell or go short as a hedge at the very least until conditions change.

This is probably the greatest ski jump of all time. It's only 3 seconds long but it is enduring and memorable.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

MOS gets slammed on earnings miss... NO EXCEPTIONS- I don't duck mistakes

2008-10-01T20:35:00.000-07:00

I have been big MOS and POT for a long time now. I have mentioned that I am more heavily weighted in POT (2:1) just because, among other reasons, phosphate and nitrogen demand is more elastic to lower grain price than is potash. All three produce multiple products but MOS is king of phosphate and POT is king of Potash. AGU has some seed related businesses as well I believe.

I was reading a few weeks ago that farmers were not laying down phosphate in certain cases because of the lower grain prices. This concerned me a bit and has been a reason that I have not added to MOS since the first purchase. I really wanted MOS because this serves as protection against earnings deterioration from the strike at Potash. Assumedly, companies like MOS and AGU should benefit if Potash is unable to sell as much supply due to the strike.

The charts were already pointing down due to the hedge fund unwind. It is also true that many of the houses that own the fertilizer companies also influence grain commodity prices. I have to assume that they knew that phosphate demand would slow with lower grain price. On the last POT call Doyle said that declines in grain price would have to drop by 2/3 to affect demand for potash and in fact on the MOS release it says that potash price had remained high and supply had remained tight.

So really this makes the case even more so for POT over MOS and I wish I had gone roughly 4:1 POT to MOS as originally planned. At any rate all of these names will be sold off with the current catalyst of the earnings miss and the statement by Mosaic that they will be decreasing phosphate shipments for the rest of the year due to essentially inventory buildup from sales over the summer and from slackened demand at the lower grain prices.

I am usually very very cautious but when a CEO like Doyle, who has been in the business for two decades, is as bullish as he has been on the last conference calls and the stock was trading at very low multiples I passed up on my rules of never letting a winner turn into a loser, don't take more than a 10% hit on any position, etc.

The lesson here: There are never exceptions to the rule. Never. I should have read my own post on risk management (under top posts) and NEVER EVER allowed any stock, no matter how promising, to be an exception. The charts rarely lie (the only case is like with CMED where I knew more about the company than the market because of my educational background). This is not a buy and hold market (as I have been saying all year), this is a market where cash is king and shorting, especially when the Dow was over 12,000, makes more sense then going long in most cases, and this is a market where cash is king. I would have been in almost all cash with a few quick trades but I really felt that these companies, especially POT, would be able to weather this recession fairly well.

These companies still produce a ton of cash and will be very viable for the long long run. However, near term, even if MOS offers to use their cash to buy back shares and provides a positive call tomorrow, there will be serious pressure in these names and unbelievable hedge fund selling. I think this sends us to the 200 weekly moving average around 40 for MOS (not all at once) unless something changes. On a bounce I may very well flip around and go net short... while keeping the longs for the very long term. I certainly will not buy any MOS anytime soon (unless we get a very oversold bounce for a trade) and will stick to POT for any additions for the very long term (and maybe some AGU). Mostly, though, I plan to treat these stocks like I have treated every other stock in the market and not give them any special privilege. It will be interesting to see what Doyle says on the 23rd as insiders have been buying at 180 and he is very bullish on the company. Of course, the 23rd is a long ways away.

The other thing to learn from this is that is imperative to hedge. I have protected some downside with hedging. However, were I to do it again I probably would have gone close to 1:1 long ferts and short UYM. That kind of protection is the only way to go in this market in my opinion if one is to go long. The other answer is just to stay in cash and be extremely nimble. Some people I respect have said that they rarely even let a stock stay in their account overnight. If they can't day trade it they don't trade it. This is probably going a bit too far and is not applicable/possible for all people... certainly I am not able to do that. However it does bring up a very relevant point: Cash is absolute King in this market so anything on the long side... I mean anything, needs to be made as a trade only with specific exit points in mind. Buying and holding anything, even the stocks that one may thinks breaks the rules, is just unacceptable unless one is willing to wait for a very very long time.

I still look to go short when the market stabilizes as I think we have further down to go before the end of this bear market. But shorts from here, now that the meat has been taken out, are also trades. Everything is a trade... even if that trade is several weeks or even months long.

Lesson learned. I'm not going to say it doesn't hurt because it does. However, I do not ever invest money that I need right now and I do not leverage beyond my means...ever.... so unlike hedge funds and others I can choose to sell or buy when I feel it is right to do so. However, I will be much more nimble right now (like I was with every other stock in the past year) and will be doing a lot of paper trading to sharpen my skill in this market. What has worked for me with other stocks in this market... including using tight stops and very defined risk management, always heeding the charts, being very cautious... that will be employed for all stocks from now on in all of my investing... as will the incorporation of new techniques as I learn them such as Elliott Wave Analysis.

Here are the Weekly Charts of MOS, AGU, POT, and UYM. If they test the 200 at some point we could still have a long way to go.

"I never make exceptions. An exception disproves the rule."
-Sir Arthur Conan Doyle

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Are we setting up for another bear market rally?

2008-09-30T18:24:00.000-07:00

Update-
Well the answer right now to the question of "bear market rally" looks like not a chance. This is a sign of how bad this market is. I was stopped out on the extra Potash purchase. It was very small. Nonetheless. This is why I am paper trading right now primarily. Until I prove repeated success in THIS MARKET as opposed to all seen before (and even the one we saw several months ago) I remain very cautious when it comes to trades. I really want to go short but the oversold market makes me nervous in that direction as well. If you haven't please read the last post on why stocks with good earnings have gone down and some stocks with poor earnings have gone up. It's a cascade of hedge fund forced deleveraging and ironically it hits the best companies the most because they are the ones that the Quant funds locked into and leveraged to the hilt. Once the price went down from the 200 level we started getting a cascade effect of margin calls and deleveraging. If someone was selling a Porche for 10,000 but no one had any money that would be one expensive Porche and the price would come down. Same here with stocks like POT. There will still be nice trades once in a while but capital must always be preserved. Great Earnings? Who cares if no one has the money to buy shares?

Up is Down and Down is Sideways. Again, only the charts tell of the whole picture... In this market the best companies can also be the very worst stocks.
---------------------------------------------
Stocks have fallen a ton from their highs when we were at Dow 14,000, SP 1570, and Naz 2870.

As VFRTXN (V) pointed out on the blog Earth to Wallstreet blood in the streets and fear is often the time to start thinking long not short. The smart money waits like vultures for the moment that fear takes over and then swoops in to take the gains.

V. recommended buying AIG when it reached around $1.25. Hats off to him on this. Really. It is impressive. Not the first time he has made gutsy calls that have been right on either. He is perhaps the ultimate contrarian. This naturally makes him a target of people's ire. He is not always right (unlike me who is perfect ;)... for those who do not know me that would be a joke.) However, his views can be very refreshing and it is always worth it to give credit when credit is due.

When it comes to anything financial I have stayed away because of the real threat of bankruptcy in certain cases. In the case of AIG it has already been bailed out, more or less. It is a very profitable business overall and the stock may still be headed higher. WB was another huge score for anyone who got in recently. Personally, I do not have the time right now to do the DD necessary to investigate financials and see how viable they are. Half way doesn't get it done here so I have stayed away.

However I bring this point up for several reasons. First, this ties in with the idea of the pendulum on a previous post. The large sell-off yesterday and the fear and the publication in the news and the fact that even my college alumni friends were talking to me about the stock market yesterday is a HUGE contrarian indicator. Smart money was waiting for some panic selling and yesterday they got it. Some people made incomprehensible amounts of dough today. For every loser there is a winner. As I said on the last post it is always important to try to ask what the smart money is doing.

The real questions now are: Was this the bottom? Was this the temporary bottom? Was this just a snap-back day rally from Monday sell-off?

We may get some more clarity on this tomorrow. However, I will provide my thoughts at this point and provide some of the reasons for my assertions. Please note that the market always rules... it could easily prove me wrong and in such case I turn on a dime.

My feeling is that there is a high probability that we are close to a temporary bottom in the market. I don't think we have seen the bottom of the market overall but I do think we may be setting up for another bear market rally here. This is the worst market we have seen in years and a credit mess like this will take a long time to resolve itself. This is much worse than the market of the 80s or the 70s or prior in my opinion. However, we have been going down for quite a while now and many short-term indicators are showing that the market is very oversold. Certiain names especially, like APWR for example, are at absolutely ridiculous levels. So are select financial companies and other areas of the market.

This may be a time when it is well worth it to dig through the rubble in order to filter those stocks that have been unfairly cast aside.

I added a little more POT today at just under 130. I have a stop placed just under 127 and I am not willing to commit too much here yet. I am also paper trading certain names just to see how I do. I have done well in the past by identifying great companies trading at reasonable prices and using some other techniques (see Building Your Arsenal). However, in a market where fundamentals only partly matter I have had to learn and use new methods and therefore I am trading the names I know best and paper trading some others. This is a great market to learn new techniques in. Eventually, this training ground will provide very effective tools for the future. And with cash at hand and knowledge to boot we we all hopefully be able to pull some Buffett's out of the hat. (Did I mention that SDTH traded around 6 yesterday and APWR was in the 8s.... and... what happens when the job losses come through and the fear hits Main St as much as it is hitting Wall Street... or will the market already be recovering by then?)

Anyway, the average recession lasts about 10 months according to this link, falls about 25% from peak to trough, has a large wash-out before it moves back up... etc. So by some counts many people may believe that we have hit or are close to a bottom. Maybe we are. However, I think that this is far from an average recession. Read the article from Minyanville below and see what you think. I happen to agree with them right now.

Here is some of the data that suggests we are not out of the woods:

Home prices are still falling

LIBOR rates are not coming down despite the bail-out possibility.

The real credit mess in Europe has and Asia has noteven close to played out yet in my opinion.

The credit crisis is at least 25 years in the making (and the credit based consumer lifestyle is much longer in the making)

The US government is also broke. We can't just use the government to kick-start spending projects because they don't have the dough

Baby boomers are starting to retire and will pull out their IRAs

Investors want to protect themselves against the potential for the expiration of the Bush Tax Cuts.
Roubini (Who I turned to this am first actually) said at 11,000 we still had 20% more to go. Check out his RGE monitor (blog at right). He is not for the bail-out

Please note also that the dollar has gotten stronger lately. This is partly because the rest of the world is starting to weaken and partly because there is a liquidity (cash) problem that is driving up demand for US dollars. Longer term the dollar must weaken but as long as companies need dollars to pay for business expenses we may see further strengthening short to medium term. I plan to play this by watching and using the charts. Only the charts contain evidence of all the info available. Right now I am not short the dollar though I do have a bunch of cash ready to go to be transferred into Swiss Francs and I also look to short the dollar when apropos.

Minyanville article: Here it is.

Here is some excellent reading ala Bloom...
US stocks surge but LIBOR up
The Dollar and the Yen and More

``There's a dollar shortage globally,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Demand for liquidity trumps the fundamentals. Fundamentally, the U.S. is awful, and Europe is awful. Fundamentals are irrelevant today.''

Japan Turns Pessimistic
Iceland's third largest bank bailed out; credit ratings reduced by Moody's

Yahoo news

How the Svens from Svedin dealt with finan meltdown (Hint: Smarter than us).

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

China: US Bail-out Plan like Fast Food (Yup... They Were Laughing at US)

2008-09-27T13:18:00.000-07:00

Update-
No moves made right now though SDTH is looking interesting. POT maybe holds 135 to close? Caution there though. I said that one way to succeed here is to 'short the hedgies'. This certainly has worked today with KOL SMN, DUG, etc. Also I suspected that the market would not go up with the bail-out announcement (though I did not write that here) because when everyone says there is going to be a bounce it is usually a good sign that there will not be.

Here is an interesting article from Minyanville on quants and deleverging,
Also note that the downgrade of AGU on Friday broke its 50 day weekly MA (the only of the three ferts that was holding it.) The reason: Strong fundamentals but hedge fund unwinding. You see... it turns out that if you want to go somewhere in this market you not only have to pick the best train but you also have to pay close attention to the quality of the passengers that are already on board.
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The financial crisis, Iraq, relations in the world... all I hear about the US from the perspective of foreigners is immense disrespect. From admiration and even some degree of idolization to contempt and disrespect. That's where we are now.

Here is the article

Also... here is a nice piece from Ron Paul on the bail-out and on the weakness of the dollar...

Here are some of the core principles that I am convinced will be necessary to succeed in this market going forward:

CASH: Eventually this market will recover (probably no time soon) and at that time some great stocks will be on deep discount. It's like JPM buying WAMU for almost nothing and BAC buying CFC for almost nothing, and Buffett getting a tremendous stake in GS for almost nothing...etc etc. The Fat Cats get first picking but the little guys will also have great opportunities later, down the road, when the market turns. The best thing we can all do is keep some cash handy for quite awhile. It may take patience but this is a great time to learn about the market with limited capital so that when things turn we will have the knowledge of stocks and the market to take advantage. In a market like this sometimes the most profitable move is just waiting things out. A caveat on cash: if we inflate enough then it also makes a lot of sense to hold cash and short the dollar and/or convert cash into foreign currency like the Swiss Frank or hard assets like gold. It is clear that this financial crisis is deflationary unless the government so extensively inflates that we throw away the dollar. In that case commodities would soar... and they will anyway in my opinion once this credit crisis ends (whenever that is).
Short-term trades with stops: The volatility of a market like this can create some great trading opportunities on the long side and the short side. Extensive research, constantly looking at stocks for trading bargains (for example SDTH is just over 7 right now. APWR is trading at 11. POT is testing support at 145... I mean this is a company that will do $12 in earnings THIS year and 20 or more next year. When great companies hit serious support areas (135 would be a 50% retracement of POTs large move over the last years from 30 to 240... so far it has stayed above 140 and found recent support at 145) it makes sense to look for trades. I am strongly considering putting a little into some of these names with defined price targets as exit points. If I am wrong the losses will be minimized.
Strong trends that are in their early stages or are still unfolding and that are very unlikely to stop. The overall market imo and according to Prechter and Schiff and Rogers and Roubini and everyone I respect still has a ways down to go. Short the market is something I am looking to get back into. I like DXD as a start... Can't short UYG but DXD has some of this. SDS. QID. SRS. I really believe that commercial real estate will be in big trouble going forward, especially companies like SGL and BXP that have exposure in areas hardest hit... I also like a short on regional banks. on the dollar if the bail-out goes through (and long precious metals and commodity future ETFs like DBA and DBC if this happens as this is really a short the dollar trade in this case), on US treasuries (though they may lower rates agian short-term which would bring them up a bit short-term, ), and on many others. In all cases I do not simply want get into the trend but want to used technical indicators to align with trend fundamentals. I plan to use stops just in case as well... If the losses are small several stop losses can be much more than made up for by a nice success here.
Consideration of where the smart money may be going. When POT blew away the numbers last quarter the open interest for the 180 puts had skyrocketed. This means that lots of people were betting the stock was going down. Were they wrong and uninformed investors who though POT earnings were a bubble or were the astute investors who knew something others didn't (in this case the peril of over leveraged hedge funds). When too many people are bullish or bearish and the fundamentals are public knowledge the charts must support the move to get in. I went against the charts with POT bc of the fundamentals and have learned from my mistake. When POT bounced to 185 recently on the bail-out short squeeze and hype the smart money were the ones that had bought in the 140s and were looking for an exit with profit, along with the shorts that knew the unwind still had a long way to go.... I always try to find evidence of where the smart money may be going... if I absolutely have no clue than I am probably on the wrong side... the charts (especially for big companies with heavy institutional ownership) often provide the best clues as to what the smart money may be doing. That's why I reiterate: Don't fight the charts unless you know something about a company that the market does not.
As Soros said (paraphrased): In this market you have to be cautious or you have to be nimble. This market has a tendency to destroy capital.

Some other useful notes:
Here is an article on REITs/Commercial Real Estate
Regional Banks: Roubini thinks hundreds will go under as mentioned... RKH, KRE are on my watch list for shorts....

Deutche Bank: According to Roubini's European RGE Monitor some European Banks are even more leveraged than US banks and are in deep trouble. DB is levered 50:1 according to the article. DB stock has fallen from its highs but is still up quite high. If it falls below 80 it may also be a potential short along with some other European banks with US credit market exposure like Credit Swiss.

What a mess.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Shadow on the Sun

2008-09-23T21:34:00.000-07:00

This market is like a Shadow on the Sun. No reason to fight it. Live by the new rules.

I am P'Od that POT and MOS, after I covered my shorts, failed resistance and just got smacked again today. Never underestimate the de-leveraing of hedge funds. That's it... resistance areas:
POT
185 major resistance
160 current support

MOS
100 major resistance
95 substantial resistance
85 current support

When POT gets into the 180-185 region and MOS gets into the 95-98 region I am planning to short with stops over 186 and 101 respectively. I am tired of playing by rules that worked in old markets. These are great fundamental companies (AGU too... I actually like it a bit better than MOS) but in this market the deleveraging is so great that even Doyle and Co. can't stop it. Only a generous bail-out... the kind of bail-out that gives Paulson broad authority to be a crook (I mean shepherd of the people) takes the raw fear out of these hedge funds that levered 30:1 and higher and acted in a completely irresponsible manner. I am not going to pay for their mistakes. Instead...Screw 'Em. Usually the retail investors are the prey to the hedgies but now these greedy overleveraged bastards are right for careful picking...

Here may be the best strategy for success:

Short the overleveraged hedge funds.
We can't do this directly but when we find areas of the market that we know are heavily invested in by hedge funds we know we have a short opportunity (I always try to use stops to go along with this in case I am wrong to minimize loss). If POT goes back to 180-185 and we do not have a bail-out or other event I plan to play by the new rules and go short to nail these bastards.

Just don't forget the pendulum. All of this needs to be done with subtlety and care and never by fighting the charts. I probably will be very conservative as I hopefully learn how to win here

Short with the oil trade on overexhuberance

Same with techs perhaps

Same with anything I can find that has heavy hedge fund exposure.

On the long side perhaps I will take advantage as well though I never buy financials because who knows they could go bankrupt and in fact since I can't short 'em I may buy puts after this bail-out charade is over...

Medical stocks... this is the only sector I currently want to go long. I have a background in this field so I should be spending time on this sector... I am busy as heck right not though so only when I have time. I would love to dig deeper into some of these companies... Medicine will be te largest growth segment going forward here in my opinion. The possibilities are endless...

The one thing to look out for thoug are companies that need credit to expand. This makes many solar companies and clean tech potential shorts. Ditto with medical or other companies that need cash to grow.

Take it from Cuban on this one. A credit crisis is 'industry agnostic'.

The way to really do well in the market it seems as I learn more and more is to get into early trends while everyone else still has their head in their clouds...

Short the market (I am waiting for this bail-out pressure to subside... I like SRS though among others right now or on bounces)

Short commodities (uness they inflate insanely with the bail-out)

Short the dollar (UUP)

Short US treasuries (TLH, TLT)

Short technology

Short casino stocks (credit is needed) (BJK, PEJ)

Lots of others.

Perhaps long some medical stocks. JNJ did very well in the last recession. Lots of diagnostic companies look good as well. Look for companies with CASH FLOW and LOW DEBT imo.

On the other hand for shorts I plan to look for companies with high debt and low cash flow are flags...

I am not short any right now but at the right time, when the pendulum shifts upwards and conditions get ripe... there may be some very nice plays here.

MORE than ANYTHING I am starting to believe that this is a tremendous opportunity market. Cash is so big here that if it isn't just right there is no reason to get involved. On the short side... probably something juicy can be found at the right time and right place so why accept just anything. This is the market for discerning minds, care, and surgical expertise. That is why I try to gather ideas from those I respect and try to assemble the new rules of the jungle.

I know I know I said I wouldn't post as much but so far it has been a great way to let off steam amidst my other work...

BTW I said we are in the 5th wave of the 5th wave on Ell. I meant we finished the 5th of the 5th in October and now we are in a major correction that could easily send the DOW to 8,000 or lower before we are done in my opinion... At the very least we have much more downside to go regardless of the bail-out plan... Deflation or Stagflation? Perhaps the Fed does have the power to decide which one of the two by using methods that would normally smack of a cheesy movie.

One way to succeed is to have a Cuban
"Any company that is built around the need to add debt is in trouble," says Mark Cuban, owner of the Dallas Mavericks and founder of HDNet. He ranks 161st on The Forbes 400 this year with a net worth of $2.6 billion. "The process of deleveraging is industry agnostic. If I had the time, I would be researching every company that needs renewable and expandable debt to survive and would short the sh*t out of it."

Roubini
Correctly predicted the demise of banks, of investment banks of homes etc... to the tee. Next up on the list?

According to Roubini over the next few years not only will 100s of banks go bankrupt but so too will many hedge funds. Many are run by people who do not know what they are doing and we will see a survival of the fittest here. People are already starting to pull money out of hedge funds and the credit crisis is forcing many of them to reduce leverage... as stock prices go against them they must reduce even further and we have just seen the beginning of this.
Guess what... this means that anything heavily invested in by hedge funds on the long or short side is a potential target. Many hedge funds got toasted by the Fed's ban on financials short-selling... and it can be expected that terrible areas of the economy such as consumer spending and housing may go up as hedge funds are forced to liquidate their shorts in order to pay off liquidating personal investors and cover more stringent margin requirements.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Keep this image in mind... Power of the Pendulum

2008-09-21T15:11:00.000-07:00

Update- Tues
What the heck am I doing talking about a pendulum when we are facing markets like these and events like these? Did you go long oil? Alternatively did you go short financials in May after the bear market rally? Did you sell FSLR after its earnings run up ? Did you sell POT at 240 on the flip down from oversold RSI. Neither did I... but as I seek to understand the market more and more I always now think where a stock is in terms of the pendulum and at least consider this in my decisions. The pendulum is a more concrete mental way of incorporating the information from well-known oscillators like Stochastics... very imp it is.
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A pendulum swings from one extreme to the other and increases velocity as it moves through the center of the pendulum swing. A pendulum is slower at the end of its swing range, speeds up as it hits the middle, and slows as it reaches the other end. Then it repeats the process.

In the market many people jump in at exactly the wrong time. They see the pendulum start to swing one way (up or down in the market), see it gain speed, begin to feel like they are going to ‘miss the move’ and that they better ‘get in before it’s too late’, and then end up perfectly aligned for the full brunt of the reversal against their desired direction. The human tendency to get overexcited at just the wrong moment is one of the reasons we see bubbles on the upside and significant over-corrections on the downside. It’s human emotion at work. In fact, the best time to get into a position is when the pendulum has swung too far in one direction or the other and has already just begun to reverse. The goal is to get in on the nascent swing, not the previous one. The maximum gain occurs this way as one can get the most swing from the pendulum. Also, if a trader is too early on the momentum change a stop loss can substantially minimize losses and allow a new entry once the pendulum has swung even further to one end.

Importantly, it may be emotionally difficult to enter a position when the pendulum is at one extreme because our recent memory is strong and has spoken of the large swing we just experienced. However, to be successful we have to be able to use our mind to override false inclinations. We take advantage of the historical precedent and pattern of the market rather than be caught by it.

My view of this market as a pendulum helped me from going short last week. Instead I did nothing, covered my MOS/POT shorts (that I had used at hedges from awhile back against my MOS/POT longs) when the Paulson news came through, and let the market ride. The market was short-term oversold, especially in certain stocks. The oversold condition of the market was evident in the technical indicators such as RSI, MACD, and Stochastics, along with confirming indicators such as volume. I mentioned that the market was oversold in this post.

The market would probably have collapsed further without the Fed bail-out. However, … do you think the massive 700Billion (really prob over a Trillion) bail-out we just saw would have happened if the Dow was at 12,000 and the SP was at 1400?… it is when the swift part of the pendulum kicks in and overextends (threatens to swing right off of its hinge in this case) that we also tend to see Fed action. Overall, we never know when or how the reversal occurs. The oversold or overbought condition, or the extremes of the pendulum, just tell us to watch out for a reversal. When the market or a given stock is on reversal watch this is not the time, in my opinion, to initiate a position. I would rather miss a move than get burned by one. In this market, especially, the rule #1, as Buffett says, is don’t lose money. Capital preservation is extremely important here.

It is important to note that the pendulum analogy is not a perfect one. Unlike a pendulum, the market overall does not always remain in a defined range. It oscillates like a pendulum with a net bias in one direction or the other over time. This enables markets to go up or down. Elliott waves give a more precise picture of how the market moves overall. It combines the oscillations and progress of a wave. I again recommend Elliott Wave Principle by Frost and Prechter. Small book, fascinating material, cheap on Amazon used, excellent background on the market and interesting scientifically.

Right now it is important to remember that we are in a downward move overall. This move is still early in its longer cycle… and PLEASE don’t think that everything is now ok on the long side of the market bc of the bailout. While we may get another bear market rally here the Fed cannot keep the market from going down further in the longer term. I have been waiting for the time when the pendulum would move the market back up so that I could get a better opportunity to short. I am not sure when the Fed bounce will end but I plan to watch it closely. The best part of the Fed bail-out, from an investors’ perspective, is that it provides an opportunity to exit longs at better prices and to go short when the pendulum once again shifts.

Perhaps more importantly, it buys us all some time to try to protect jobs, finances, pay off credit cards, etc… and maybe in the long run it will prevent a cascade effect of panic that would cause the market to over-correct on the downside even more than it naturally should. There is no doubt in my mind that some plan needed to be assembled. However, I do not trust that the current plan holds the culprits of this mess accountable, reduces moral hazard, and generates the transparency necessary for trust to re-enter the financial markets. One thing is clear regardless of what the Fed does- when the drink tab gets too high at some point the bartender stops pouring the drinks and starts demanding payment. The bouncer isn’t going to let America out the door without cold, hard cash. It’s just that simple.

The pendulum can give us short-term warnings and clues. The Fed move may have bought us some time (though at what cost?). In the long run the bill is due.
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Note-most of this post was written on Sunday... published on Monday

Note: I encourage you to go to market-ticker (blog at right) for an excellent look at the current bail-out law and subsequent repercussions.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice

I'm too distracted to get my work done right now

2008-09-18T07:26:00.001-07:00

What a delicate, scintillating, ineffably beautiful, girl. If you have a girl like her on your mind you just can't get anything done.

This market is having the same effect on me but in a much more unpleasant way. At times like this I wish I was just out of the market altogether and lived in a world of ignorance and bliss...

Today's action was awful.

This is why I did not go short yesterday. I can't predict what the government is going to try to do to save us (the rich Oligarchy like Goldman Sachs) and preserve democracy (make the candidates look tough on corruption and compassionate). At the same time the market has to correct. Civilizations do not advance in a straight line

US Government proposes to buy all bad debt and put it on Government books? The kind of move that ends Empires. We are not a rich nation anymore. We cannot take on more debt. Let the stock market fall. Stocks go up and correct... take out the major disasters like BSC and AIG and then let it... But this proposal is sickening. One thing is for sure... foreign currencies like the Swiss Frank (check out FXF) will be a great place to be when the dust settles. The dollar is going to be the next toilet paper currency. I would recommend gold but not right now... this is a temporary mad rush... and this market is deflationary... everyone from Roubini to Prechter to the Fed themselves has said this... The Fed cannot stop the deflationary credit crisis no matter what... they can lower rates to 0% and sell treasuries for trash but that will only temporarily ease things and eventually, when this crisis settles, all the garbage on the books will make the dollar worth much less than we could ever imagine it could be. When the deflation starts to ease I will load up on Gold and I already hope to start moving some money into Swiss Francs... The Swiss are the biggest savers in the world and their currency is one that people will always want... Also... eventually countries will pull their money out of the treasuries. Roubini calls this crisis the 'beginning of the end' of the American Empire. I agree.

Stick with the Europeans. They make more sense and are prettier anyway...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Oversold for a bit it appears

2008-09-16T16:25:00.000-07:00

Update-

One more point... I would have loved to go short on Tues financials and others instead of just staying out but since I was not able to watch the markets all day and I did not want to risk some unforeseen government bailout or the like I chose to do nothing.
No moves were made this am. Yesterday's afternoon bounce WAS the bounce it appears. It has to be perfect to go long so if it isn't just do nothing. It now looks like coal may have had a bounce..... I am constantly looking for charts that have had nice runs and then start to fall apart for shorts. I stopped paying attention to PICO and missed it. But this is the kind of thing to look for in my opinion. In the Spring a lot of people still bought into the 'maybe there will be no recession' theme... right now there just doesn't look to be firepower left... if you are waiting for a bounce to short this is like buying into a raging bull market that doesn't offer many desirable dips in which to buy.
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Commodities getting Cheap. Short-term oversold... We should see a bounce if the deleveraging doesn't get in the way. I am looking to buy more POT on dips with tight stops. There are some other commodity longs that might have a nice run here. We are in a bear market so anything on the long side is a trade... but POT now minimally 33% undervalued, even in this market. Please not that the Weekly 50 SMA is around 160... if it continues to bounce back and hold this region 170 is next as resistance. I am waiting for the time when Oil goes down and some other commodities go up... today may have been the start of this...

I am very bearish in the intermediate term and look to go short but I feel that this market is short-term oversold especially in certain stocks. If I am wrong stops will minimize losses.

APWR, SDTH, FXI, FEED, others may also be due for a bounce. Again... I would never buy and hold these names unless the time perspective is a very long one... but a quick trade maybe... Also for a short check out JNK. That's right... JNK bond ETF! It also may be due for a bounce but do you really think it is possible for Treasuries and especially junk corporate loans to stay up over the longer term with all that garbage out there? If the Fed decides to lower at some point these may go up a bit further but ultimately they have to go down. Jim Rogers is shorting US treasuries. For Good Reason!.... Please do your own DD...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Some thoughts...

2008-09-14T19:15:00.000-07:00

Update-
This today was bound to happen sooner or later. This bear-fest still has a long way to go... perhaps after an upward bounce, perhaps even a rally, off of Dow 11,000, though I would not count on it. A break below 11,000 that holds is a watch out below. Most bounces need to be looked at as shorting opportunities or selling opportunities for longs. There are some exceptions (for example I have not sold MOS and POT... though I do go short to protect downside) but not many. I want to make it clear that while I like ANR, AAPL, etc in normal markets because they represent great companies the only stocks I have bought on the long side other than trades anywhere close to recently have been MOS and POT because they have the best fundamentals. This was still a mistake because you just don't fight the charts... things that you could not know about (hedge fund de-leveraging for example) may affect the action of stocks and can only be interpreted "scientifically" by looking at the charts rather than directly from knowing the underlying causes.

IF the Fed lowers interest rates we probably get some rise in the stock market temporarily but the best that would occur is another bear market rally. I wouldn't step in front of this on the short side but I would wait for it to turn back down and then go short. Roubini, who I read frequently and respect, says we have 20% more down to go in the market peak to trough. I think that this is at best. Elliott Wave theory demonstrates that we are in the 5th wave of the the 5th wave... the 5th wave indicates the end of trend and the start of a correction... the current bear market was predicted in 1979 and is a culmination of the 20th century bull market and more recently of the bull market, fueled by credit, that started in the early 80s. Whether you believe in Elliott Waves or not ( I do... but they are unfortunately often misunderstood) the market is in serious trouble just based on fundamentals. Smart and Careful is the rule here... Below is the original post
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Here are some quotes (paraphrased) source- Alan
Greenspan

Fannie and Freddie
"Socializing losses while privatizing gains"

"The type of occurrence that happens once every 50 or 100 years"

"Inflationary period we haven't seen in a long time-but not until after financial meltdown eases"

"I can't promise that will improve in 2009" (2009? Maria, are you on crack?... Alan thought)

"Why is the economy in the world still in positive territory?"
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This is by far the most dangerous economy and stock market on the long side in a long long time in my opinion. It is interesting that Greenspan claims that we will have a tremendous amount of inflation because of the fundamentals Schiff and Rogers are talking about (weak dollar and growing wealth overseas) but that it will not occur until the deflationary pressure from this credit crisis abates.

The only way to go here in my opinion, except for a few trades and oversold bounces and maybe some very select stocks, is short. It has been since October, with the exception of bear rally in the Spring- which was just an opportunity to make even more when the oscillators shifted. I am primarily looking for shorts and some trades that have nice charts. That being said it is imperative to never be greedy and to take gains when you have them or at least use stops to lock in gains and minimize losses whether you go long or short.

This is a very different market from what most of us have ever encountered. The tactics that were effective in the past often don't apply here. I work hard to try to pick the best companies at the best prices when I go long. I always have. In the past this method has been rewarded. This makes POT, ANR, PBR, CMED, AAPL, and others some of my very favorite stocks.... but in this market longs should only be purchased as trades when the charts support it and with stops in case it goes against to protect capital.

As you can see from the last post, among other posts, POT is an excellent company and is trading at a very discounted price. I keep bringing up this company because it demonstrates that even the very best companies whose earnings will remain strong in this economy can have their stocks crushed in this market. Regardless of the buybacks and great fundamentals I made a mistake by buying these companies (MOS and POT only were bought) against the charts. I hope this is a lesson that you can learn from as well.
Generally shorts should always be considered before longs in this market unless/untils we go into the next bear market rally. And then again they are trades... even if the trades last for several months.

I am very busy partly because I want to do everything to try to protect my financial future. This is not the time to take chances. I strongly recommend that you do what you can to batten down the hatches, get your financial records straight, spend only what you can afford, pay off credit cards etc... and be smart now while the Fed is buying us time. This is where the smart people prepare while many others live in a bubble...

Cash is KING here. This market and economy concerns me quite a bit...
Just my opinion, of course.

Greenspan 1
Greenspan 2
Greenspan 3

Seeking Alpha on Dollar Manip Hedge Fund
Ospraie and the non-earnings related Commodity Sell-Off
Hedge Fund Commodities and More

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

POT doubles share buyback program and declares dividend... Who's Your Daddy NOW?

2008-09-11T21:51:00.000-07:00

POT doubles buyback program
POT increases dividend

This was pointed out by Trader Mark (blog at right)
It gave me a quick opportunity to mention my thoughts on the market as well

Doyle to the hedgies:
'Who's your Daddy Now.

That's why POT is my largest holding. In fact, POT and MOS (though AGU works also) are currently my only non-trade holdings.

So I'm hurting because of the hedge fund unwind but fundamentals always matter eventually.

Still, while there will likely be a bounce the leverage used by hedge funds is so large that I do not expect a rapid incline in stock price to reasonable levels unless a lot of new money flows in.And what if the bounce is fairly flat in the face of more Ospraies using this as a chance to unwind their positions (whewww... we were already starting to write our bankruptcy speeches... oh wait... we have the same leverage in all the other commodities so now all we need is for all the other companies to do the same)

Regarding APWR I think this is why the charts just cannot be ignored. We can never get inside the heads of the hedge funds but we can see the writing on the wall in the charts. Why did POT and MOS fall despite the earnings?

It turns out, in large part, that the hedgies were way overleveraged and a lot of the money in there was fake. They knew this. We did not. But the lower highs and lower lows on the charts spoke all. When a stock starts to move into the lower Bolling Band after a large run up, when any stock closes below the 200 or reaches major resistance like the 200 or 50 or previous support (double top on APWR for example) I'm just selling and assuming it will go down until it proves otherwise.

Also I am looking for shorting opportunities primarily and I always try to look at all of the proshares sector ETFs and other sector ETFs each day to see where the money may be going.

I've seen too many stocks just fall off a cliff after breaking through support. I've seen too many great companies have their stocks get trounced and terrible companies have the stocks make a run.

The only place that has as close to the complete picture, even if it makes no sense, are the charts. In this market I am starting to believe that this is the first place to check, along with what the hedgies might be doing, and third the fundamentals.

That may be what is working in this market... until it proves otherwise I am not here to go up against trillions of dollars... well maybe POT remains the exception.

Ah... a chance to write a bit of thoughts. Therapeutic when I have been doing science amost of the day..

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

I closed My Washingon Mutual Account!

2008-09-10T16:18:00.000-07:00

Ok, Maybe it isn't quite as impressive as 'The Catch'... but while everyone else, like ignorant sheep, was depositing their money into the bank

I was feeling like a Champion ;)

I know... it's FDIC insured... but still a waste of my FDIC'in time...
Here's the story on WAMU.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Deflation USA, Elliott Waves, Potash, Important Word

2008-09-07T17:59:00.000-07:00

Deflation Image Here- Will the Globe Follow Bush?

To all readers of the 'Yellow Rose Street Beat'

I want to begin by saying that as much as I love to write the Yellow Rose Street Beat my time considerations are such that it will be difficult to add consistent posts for the intermediate future. In addition to my regular busy lifestyle I have decided to study for the GMAT (Graduate Management Achievement Test). I am not sure if I will apply to an MBA program but I want to keep this option open. I have done some research and the combination of a science background and a business degree may be of great use to me. At this stage I just want to test the waters.

I am already working hard and for a period of time will probably become almost invisible to many people. I think it's worth it so I'm going for it.

I will not stop writing the Yellow Rose Street Beat. If I have time to squeeze it in I will place an occasional post. Down the road I may resume more active posting. For now, all of the content should remain here (posts already provided) and you may want to pop in every once in a while to see if something new can enlighten you.

I want to say that I highly recommend the blogs in the list on the right of the page. I like them all, equally, though Trader Mark, Earth to Wall, Market Ticker, Junk Yard Dog, and Roubini, and Global Economic Analysis, I like a bit more equally than the others.
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A word about the potash stocks and Elliot Waves.
I am always trying to learn and I am now, in the sparse minutes I have, reading a bit about Elliot Wave Theory. If you are interested in this I recommend Elliott Wave Principle by Frost and Prechter. It's the best Elliot Wave book out there. I got it used at Amazon for $11 plus shipping. What can you lose? Up to you of course. I also recommend all the books I have on the list on the bottom right of my blog (I own all of the books mentioned).

Regarding MOS and POT... I have used hedging a bit but I still am down big on these two names. This is not a buy and hold market on the long side (as I have said many times) but the fundamentals are so good on these names, and will almost surely continue to be, even in a slowing economy, that I made an exception.

This was a mistake. I openly admit it. I ignored the charts because I just couldn't believe that companies that are so cheap on PE basis, will actually meet earnings guidelines, and have insider buying, etc... would get trounced so much in direct contradiction to fundamentals. However, I did not know about the commodity unwind, the hedge funds that are scrambling to cover margin calls, the Elliot Wave golden ratio and Fibonacci number reliance, nor a number of other factors. These I have sought to learn further for purposes of doing better in the future.

The most important point is that if you are going to go against a chart you had better believe that you know something the market does not. This was the case with CMED and hence I was rewarded for buying a broken down chart. Most of the time the chart has information for you (the brief breakdown at 180 on POT a few months ago proved to be an early warning sign, for example) rather than the other way around. This is especially true of funds with heavy institutional ownership. You can't know what is going on inside the doors of the big firms on the 'Street without being there but the charts may offer some of the scientific evidence you seek. When it comes to MOS and POT, the big houses knew that the earnings would be phenomenal. They knew how good the story was. These are the ones, after all, that got in when POT was around $20. The earnings came as no surprise to anyone. Those holding the big money knew that profit taking was coming and deleveraging was on its way. Earnings or not. Also, if you read about Elliott Waves, you will see that nature itself does not advance in a straight line. At some point there is always a zag before the next zig. Earnings and guidance matter little if you step in front of a zag of this magnitude.

Let me say that I have not sold any of my shares. The longer duration story here remains incredible. However, this is not the kind of market where one can afford to be stubborn or hopeful. I have gone short along with my longs when certain areas were breached to protect myself. As I learn more I may more often go net short despite the incredible longer story. It does not help you to scream with indignation when some stocks refuse to follow fundamentals. You may be right about the value of the company and the fact that the sell-off is unwarranted. But what do you want? A cookie? The market cares not. And if we follow a deflationary course, as Prechter believes we will, money will become so valuable that very few factors, including earnings and guidance, will make stocks more significant than cash.
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That leads me to the last part of the post. It is hard to overcome prior training. Stocks go up, right? They have for years. However, stocks do not have to go up and in some cases most must go down. This is the case in this market. This means that, unless you are one of those pitiable ;) individuals who is trying to start a mutual fund and therefore must have a long bias, you should be considering shorts before you consider longs.(Hey Trader Mark, to his credit, is holding up quite well in part because he understands the value of risk management and is flexible enough to bend to the rules of this market.) M*, I saw, came up with a recommended list of shorts, not of buys, and I think this is the right philosophy. We are on the tails side of the quarter right now. We are in the Southern Hemisphere where the toilet flushes the other way. Keep this in mind at all times.

There are naturally always exceptions. You would never buy certain stocks in even the best bull market. Similarly, you should not short certain stocks in certain situations in this market. There are even a few longs that may do quite well overall in this market. I would expect that most of these will be found in the healthcare sector. Know, also, that intermediate trend of the market (See It Pays to Be Trendy under top posts) is very important and Sector Rotation (See The Layers of an Onion-Sector Rotation also under top posts) should also be at least considered. Overall, let me emphasize that the vast majority of our moves in this market on the long side should be considered trades unless we have a very long time horizon. I learned this to be true in even one of the best fundamental stories out there.

The point is that overall cash is king here. Shorting generates cash while stocks require cash. If we go into an inflationary situation a few stocks may be worth more than cash, but if we go into a deflationary scenario watch out... you're going to need all the cash you can get. On the last post I provided links to those who predict an inflationary scenario. Here, I provide the deflationary case. I have to admit that I am leaning more and more towards this side unless the Fed jumps in and starts lowering rates again. Even then, how much further can they lower? I do not believe the hypothesis, proposed by the President of Eurocapital, that we will see inflation from due to the new wealth in the the BRIC countries. That would be true if these countries were so advanced that they could do fine without the US and Europe. One day that may happen just in the past we did not need a strong economic China to be prosperous. However, I don't believe these countries are there yet. I also do not believe that foreigners will suddenly pull money out of the US federal reserve and spend. This would so destabilize the US that the countries that did this would quickly feel the economic effects as well.

This is to be a recession of the global variety. Given that much of it was fueled by false wealth creation in the US, I would have to believe that we are setting up for deflation here. We shall see. There are smart people on both sides of this debate for sure.

Interesting take on Gold and deflation
High quality take from the author I mentioned above

Best, thanks for reading so far, and as I have said the 'Rose' plans to keep running, just less often until the main editor and producer and writer (that would all be me) has the time resource necessary to improve production frequency. That is, without sacrificing what I believe to be the most important aspects of these posts- content quality.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

The Great Commodities Bubble, the Dollar, Gold, and More

2008-09-01T12:06:00.000-07:00

If you have $100, and $50 of that is borrowed, you own a net of $50. If you have $100 and by inflating the currency that $100 can only buy what $50 used to buy (is worth half as much)... you in effect also have a net of $50.
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If you own commodity futures, commodity stocks, gold or silver, foreign currency, or Cash as denominated in US dollars, then this post may be of interest to you. Put in different terms, this post has relevance to everyone... unless say, you are a robot on Mars. And even then...

This Labor Day edition of the 'Rose' is organized like this:
I. Overview
II. Inflation, the US dollar, Government policy, and why we are in this mess
III. Schiff and Rogers on the dollar
III. The potential role of hedge funds in all of this mess. Hint... it isn't small
IV. Summary, putting the pieces together, and closing comments

I. Overview
A number of very smart individuals have claimed that the US is on the cusp the greatest economic crisis since the Great Depression. My take is simple: I don't know if it will be that bad but I do believe that a serious recession is close to a foregone conclusion and that economically things are likely, as Lily Tomlin said, to get a lot worse before they get worse. In March (actually earlier but it was posted here in March) I wrote a post, titled In a Picture and a Word: Why this Market is So Dangerous. In there I described the reasons why I was very cautious about being long the market for most stocks. I have referred to this post many times on the 'Rose' because I believe it does a very good job of rationally putting the circumstances we confront into perspective.

I am a big picture kind of person and always have been. The top to bottom kind of approach that I use is what helped me excel as a biochemistry tutor back in my undergrad days at UCLA. It has also helped me in my investing decisions. Hopefully the explanation of my approach, as chronicled in the 'Rose' , has, or can in the future, help you as well.

The questions that have persisted in my mind since I first started to understand the state of this economy are simple: What can we do to protect ourselves economically now that we still have time and, if possible, how can we gain from the situation that lies at hand? These questions inspired me to look into the soft and hard commodities, the dollar, foreign currencies and more, and to ultimately seek some preliminary answers. The rest of this post looks at what I have found so far. Please note that this is still the beginning of an intellectual pursuit on my part. There is much more to come down the road. However, I hope that this provides a nice start, or, if not a start, a nice follow up, to the post mentioned above.

II. Inflation, the Keynesian approach, and why we are in this mess.
We all know that inflation occurs. A dollar buys less today than it did ten years ago and even less then it did 50 years ago. Many of us accept this as just one of the natural world's key tenets. We need air to breathe, water to drink, and more money now then we did in the past to buy the same goods. Don't ask why... just accept...

The truth is, however, that inflation is usually made by man. More specifically, it is made by the Federal Reserve. The video below, by a person I do not recognize but who knows what he is talking about overall here, describes how the silver in a pre-1964 quarter could buy close to about as much gas now as it could then... while a quarter itself buys almost nothing.

The point is that the real currency is not USD or any other currency but is gold and silver. Some people do not understand it in these terms... but really paper money is the secondary currency to items that never lose value. When gold goes up in terms of USD it mostly is due to inflation in the dollar rather than the change in the value of gold. It's like the Earth and the Sun: we live on the Earth so we view the Sun from the perspective of the Earth... but really the Earth revolves around the Sun and not vice-versa. Along these lines, the dollar revolves around fixed assets like precious metals, not the other way around.

When the Federal Reserve inflates the dollar (by lowering interest rates) it makes the purchasing power of the dollar decline. Why would the Reserve want to do this? What are they thinking? This delves into the very roots of what has lead to the economic weakening of the United States of America. It all harkens back to the Great Depression.

The Keynesian approach to finance

The Great Depression in the US, as most of us know, followed from the enormous credit crisis (leveraged stock buying) in the 1920s that eventually collapsed in 1929. The exuberant stock market incline gave people a false sense of wealth. They had a lot of money but the money was not real. People's perceived wealth was all built upon the assumption that the stock market would keep going up or, at least, would not come down. People thought they had more money, so they bought more real assets (real estate, jewelry, cars, etc.) and the prices went up. This was inflation. Goods kept costing more money and people 'had' more money. Such inflation, which was purely generated at hands of the market (as opposed to the Government), had to correct. When it did, as is often the case with the popping of bubbles, the correction overextended on the other side. Suddenly people had much less money then they did before. They could buy less and so prices went down. This was classic deflation. Because people could buy less businesses were not able to sell their products, went out of business, which caused people to lose their jobs, which in turn meant they could buy less and prices declined further, which spurred more job losses, and on and on. A dollar in 1934 was worth more, not less, than a dollar in 1928. Those that had a decent amount of money were rich. The problem is that very few had any money or were losing so much in business that they were soon not to have much money. Also, it was nearly impossible to borrow money because most people and businesses were afraid they would not be paid back. Their was a restriction in the supply of money. Without any money flowing through the country everything became locked up.

At the time, unlike today, the US government was quite wealthy. They had a fair amount of gold stashed away in their banks. They just let their gold sit there. In retrospect many argued that a different approach may have significantly shortened the Great Depression. If the US had lent out more gold, or printed more money, this may have once again started money flow through the economy. People would have money (or gold... which backed the dollar at the time), could buy things, which would in turn spur business, get people employed, give them more money, generate more business, give people more confidence to lend money, generate more buying power, spur business, etc. Grease the wheels a little, at least in principle, and the economy would be able to pick itself up.

The underlying phenomenon that occurred led to what has become the fabric of US policy... the Keynesian approach.

The key idea of Keynesian economics is that markets cannot simply be left to themselves. Over corrections are likely to occur. In such cases the government needs to step in to intervene, at least temporarily. Regardless of how you feel about this it is clear that there is a price to pay for using the Keynesian approach when it is not necessary. The disadvantage of inflating the dollar is that it makes it worth less... and eventually worthless. In certain cases, such as the Depression, I would agree that pumping money into the economy, at least until it starts to pick itself up again, may be a good idea. The problem is that the Keynesian approach has been adopted by the Fed as a general policy that is appropriate even in less than dire circumstances. The voting public loves to make money, loves to buy whatever they want, loves to feel rich. They do not like to be told that every boom requires a corrective bust. The business cycle is such that when things go too far in one direction the market corrects and there needs to be a period in which people get poorer, need to work harder, have to save more, etc. This is natural and healthy. Unfortunately, in the US, people don't want to hear this and politicians that tell America something to the effect of... we need to get poorer for a while, or we need to work harder or improve our educational system so that we work smarter, or that we need to drive less and do with less... don’t get elected! As such the Keynesian approach, in my opinion, has been used inappropriately. The only real way a person can become rich is to produce more than he or she consumes. When people obtain riches any other way the wealth is false and hence unsustainable.

In 1990s the United States became a richer nation due to the internet. The US produced a brilliant new product for the world to consume. Money flowed into American business and the workers did well because they were a part of real wealth creation. However, as we all know, a bubble formed and the riches went up too fast, too much, etc... There were a lot of 25 (and less) year-olds in San Francisco who were making $150,000 plus while working for businesses that were not generating any cash. This had to correct. There should have been a fairly substantial economic downturn in the US to flush this out of the system. Instead, under Greenspan, interest rates were lowered to almost nothing because, following the strict Keynesian approach, the way to dampen a recession is to artificially increase the money supply by inflating. This worked like a charm... and the recession lasted for less then a year. However, we have to ask ourselves, was this the kind of situation that required the drastic tactics that may have been necessary during the Great Depression? Or was this the abusive use of a tool that should only be employed in very specific circumstances?

The result of Greenspan's policy, in addition to lax Government regulation under the current administration, was to create an enormous, artificial, asset bubble that caused people to buy, consume, invest, etc. money that they didn't really have. By inflating the currency Greenspan made the dollar weaker, allowed shrewd individuals like Mozilo (Countrywide) to game the system, and had Americans buying products, often from Asia and the Middle East, that were way beyond their productive means. Make no mistake here: inflating the currency is just like borrowing money. If you have $100, and $50 of that is borrowed, you own a net of $50. If you have $100 and by inflating the currency that $100 can only buy what $50 used to buy (is worth half as much)... you in effect also have a net of $50.

Now, to come back to the Depression situation, let's see what the difference is between proper and improper use of Keynesian economics. If you are a business that has $100 and you know that by borrowing $50 you can use this extra $50 to build your business and eventually return more then you borrowed, then borrowing the $50 is a good idea. You pay back the $50 and come out ahead. This is the idea of inflating in the Great Depression: give the people enough money to get them back on their feet and they will be able to undo the financial lock-up and make more back than what they borrowed. In fact, many might argue that the Roosevelt Era New Deal projects involved this kind of approach. On the other hand, if people who can live with less than they have but are spoiled, borrow $50 in order to buy a bigger plasma TV made in China we have a very different circumstance. In this case they need to work harder or smarter instead of borrowing money that they just end up throwing away.

Unfortunately, because the US has been rich for so long, a consumer-based society, rather than a responsible producer-based society, has formed. This type of society may have been sustainable when America as a whole was rich and getting richer. However, this mechanism of doing things... of consuming and wanting more and more and saving/investing very little, does not work when the economics turn south. The government has encouraged the consumer-based approach by lowering interest rates ( = Americans borrowing) whenever the economy slowed down. In addition, because the US taxpayers do not like to pay taxes, and because the government has won votes by promising social programs to America, funding wars, buying foreign oil... etc that was never paid for, the US itself has become just like its citizens- a debt-laden, consumer orientated, dependent nation. The way out of this? Inflate the dollar.

It's just like the kids of the really really rich and successful. They get lazy and often don't do anything themselves. La Jolla, just outside of San Diego, is one of the richest towns in the world. I love to surf and I like San Diego in particular. I have been to La Jolla quite a bit. One thing I always joke about is that during the week the busiest time in La Jolla is always around 2:00 in the afternoon. That's the time that all the people in their 20s,30s, 40s, and 50s... the kind of people that are working EVERY WHERE ELSE, get up to eat breakfast...

When a country has become spoiled and dependent upon an infrastructure that works only as long as the country remains rich... the result can be serious trouble. I like to think in these terms for those SAT fanatics:
Stock is to Company as...

Currency is to Country

I'll let you draw your own conclusions...
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III. Schiff and Rogers on the dollar

Ok... that tells us why we are here. Now let's get into what we as Americans, or as foreigners (as I have mentioned most of my extended family lives in Western Europe) can do to protect ourselves and make the best of the circumstance we are in.

The knee-jerk reaction to a Keynesian Fed policy in times such as these would be to buy precious metals. Gold and silver have corrected down in price recently. Is this a tremendous buying opportunity? In order to have any chance of paying off the Government debt it is in the Fed's best interest to inflate the dollar. This makes the value of dollar, in terms of hard assets such as commodities, cheaper and hence easier to pay back. Additionally, the US now does face a potential Depression like crisis scenario. If the Fed were to significantly raise interest rates in order to salvage the dollar, or if the Fed refused to bail out companies like Bear Stearns that are connected through and through to almost every segment of the economy, it could be argued that an economic collapse, a run on the banks, and fear of lenders to lend at any interest rate, and other cascading deflationary events could ensue. I am not sure if this would happen but it is definitely a possibility. The idea here is that the Fed cannot deflate. without significantly affecting the economy in the short-term. It has it's hands tied: the only thing it can do is to inflate or do nothing, or face the consequences of a severe economic collapse. If you fundamentally believe that the Fed will only inflate further, then purchasing precious metals and commodities in general (like agriculture commodities), makes a lot sense.

The other element to consider here is the amount of garbage (SIVs and other home loan products) that are worth nothing and are sitting on Government books in exchange for Treasury Bills. The Fed did this to help prevent the deflationary collapse discussed. The problem is that this HAS to weaken the dollar. When you trade Billions or Trillions of dollars (treasuries) for garbage this makes the dollar weaker. It increases the supply of dollars (think of the garbage as printed money... since most of it will never be paid back unless the government forces the companies that borrowed to pay up and go bankrupt). So buy Gold and Silver?

Unfortunately this is such a complex issue that knee-jerk reactions just don't cut it. The argument could also be made that interest rates are already at 2%, that the Fed only has so much money with which to bail out companies and banks, and that the economic result of defusing the financial bubble is still just starting to be felt. As people lose their jobs and pay less taxes and less people can pay off their credit card bills (and default... and have less credit to spur the consumer driven economy) and baby boomers retire and require government Social Security and Medicare and on and on..... where will the government get the money to inflate... at what point can they no longer stop the deflationary collapse. After all, if you took the government out of the equation the US economy, as driven by American citizens with US dollars, would have to deflate. The natural correction for the inflation of the housing bubble is deflation. People have less money, prices drop, etc. In a deflationary situation the dollar strengthens (since no one has any) and gold/commodities drop in value when compared to the dollar. A deflationary situation is a terrible one in which to buy precious metals. That leads to the question: is the gold and silver trade over? The government has inflated as much as they can and now gold/silver are on their way back down?

I have held the question for a very long time as to what gold and silver are likely to do next. Since I didn't know I have looked to some very smart people that perhaps do. Peter Schiff, the president of Euro Pacific Capital, is someone that I respect. He has been a gold/silver bull for a long time and correctly predicted the housing bubble collapse and economic slowdown in the US as far back as 2005. He predicts that gold will likely be around $2,000 an ounce in the next year to two and is likely headed much higher then that going forward. Here is a video of him saying just that:

One of his interviewers had the same question I did: the current US crisis seems deflationary. How is that a bullish case for gold? His response is that the US will get poorer as the rest of the world (especially Asia) gets richer. That means that he expects the prices of goods and services that are restricted to the US (such as haircuts... etc.) to deflate but that goods that are purchased globally, (which I interpret as commodities, certain electronic goods, etc.) will continue to inflate in US dollars because the US dollar will get weaker. In fact, he expects that the currencies of countries that are major creditors rather then lenders will go up. This means that it will cost a Japanese or Chinese citizen less to than it does now to buy global goods even as it costs us more. Deflation for them. Inflation for us. If you have ever been to Mexico you know that you can often buy a burrito for almost nothing. When we go to Mexico we drive up the prices that locals have to pay even if we buy a burrito for only $1.00. They may pay the equivalent of only $.70 normally and now they have to pay $1.00. The same thing could happen here but in reverse. What if a $1,000 IPOD was cheap when looked at in Japanese currency? So Apple started selling all of their iPods for over $1,000... or just stopped selling the higher end iPods in the US altogether and started selling the shuffles only for $250 instead of $80 or whatever they charge now. Would that be deflationary from our perspective? In such a case the crappy US economy could deflate and prices would still inflate. That is a very scary scenario if it comes to pass and certainly makes the case for buying gold/silver and/or buying foreign currencies. Please note that Jim Rogers (Soros' former partner) has been saying for a long-time that he was getting rid of all of his US dollars. He was waiting for a rally in the dollar... now that he got it I assume he is out of dollars altogether.

Here is the video from Schiff regarding inflation and deflation and the dollar:

Jim Rogers on the dollar and on commodities: Video

III. The role of Hedge Funds/Speculators and the potential commodity collapse
If there is one thing that you need to learn about this market it is that you can almost never make a final decision without first asking: What role might the hedge funds/speculators have in all of this? Hedge funds and investment banks run this market. That is why we see perfect bounces off of the50 and 200 day moving averages, moves that fit almost too tightly into Bollinger Bands, and sell-offs and rebounds that often seem to happen irrespective of earnings. Enormously powerful computers go to work each and every day in the stock market.

The commodities market, which influences the stock market and global economies as well (I would say that $5 gas can affect the economy), is even more affected by big institutions because there is more leverage and less regulation involved. Many people would argue that the huge run-up in commodity prices has been due to increase in global demand. To a certain extent this is certainly true. However, the dramatic price increases, and sell-offs, that we see clearly go beyond pure supply/demand economics. I have argued for months that the price of OIL has been largely manipulated on the London ICE. If true, we would expect similar occurrences in other commodities that are traded on international future exchanges. If it is true that investment banks, hedge funds, etc. have made a ton by driving commodity prices higher then they are worth then we should also expect a corrective downside that could be much more dramatic then most people, perhaps even people like Rogers and Schiff, have anticipated. Some argue that this situation is unique because the commodity demand is external from the US economy. However, even if you agree with this, if speculators have over inflated the prices in order to make substantial gains then these same speculators may look at historical patterns as mechanism for justifying their profit-taking. A profit-taking scenario of this magnitude may cascade upon itself and create fear, panic, and a dramatic pullback in commodity prices. Remember that oil was $140 a barrel only a few months ago. Do you really think that the demand has dropped that much in a few months?

Here are some very interesting videos. I especially recommend these for anyone that holds commodities or commodity stocks...
Why Commodity Prices are in the Process of Peaking
The Great Commodity Bubble and Hedge Fund Unwind

IV. Thoughts and Tying Things UP.
I was hoping to conclude this post by coming to some kind of a definitive answer about how we may gain here. A great conclusion would be: consider buying gold or consider shorting commodities or think about going short oil and long corn... etc. However, the issue at hand here has so many complexities that as I search further I only come up with more questions rather than with answers. This is still a very valuable piece, however. It does not provide an answer but it does offer insight into what to look for. It is interesting that Goldman Sachs called recently called for a return to high prices in oil but the markets have just not really moved much. The hurricane threats create slight spikes but as soon as the threats diminish the price of oil falls right back down. This paints a very bearish scenario for oil... and a bullish scenario for oil shorts such as DUG. What about mining companies? If de-leveraging of commodities by speculators is real then it would not be a great idea to be long miners. This is especially true if BRIC countries slow more then is currently forecast and if the rapid decline in the stock markets of China and India are accurate foretellers of the coming economy over there. On the other hand if Schiff turns out to be correct then putting some money into gold or silver coins or ETFs such as CEF and GLD, may be wise ideas right now. It's hard to say. However, there are a few closing points that may be of value

Considering the competing influences a work here it is very important to gauge the commodities situation closely. If you have considerable commodities exposure and you start to see a significant move one way or the other this post may shine some light on what is going on and what to do next. I will continue to monitor the charts of UYM, SMN, DIG, DUG, and others to use technicals and trades as means of spotting potential trends. You may choose to do the same.
It may not be a bad idea to hedge here. If Schiff is right and the dollar is going to weaken considerably it would be great to have some gold or silver right now. I am considering buying a little and seeing what happens. I may also buy CEF and short DIG or buy CEF and short UYM... and see what happens next and use the information learned and learn new information to make the best decisions
Not all commodities are equal. My favorite commodity remains potash for a number of reasons. First, as far as I know, it is not traded on futures exchange and therefore is not subject to speculator price manipulation. Second, even in a slowing global economy, the potash supply/demand dynamics are way out of whack. Third, a country like China wants stability at all cost. They will do almost anything to make sure that their people receive the food they want. Once people realize how they can eat it is very difficult to put that demand back into a bottle. Metallurgic coal is probably my second favorite commodity (not including gold/silver which I am still deciding on). This high-grade coal is needed both for steel making and secondarily for energy. The supply/demand deficiency here means people can't stay warm in the worst-case scenario. That is also a big problem. I still like the potash story better and I do not own coal names but I like the names such as ANR better then most.
Unless you really feel that you understand which way this thing is going (and if you do please comment) it may be wise not to be too overexposed on the long or short side of the commodities story until there is more clarity as to how much the slowdown in the US and Europe will spread to the rest of the world. As always of course I recommend that every person do what they think is best. In order to do that, without simply getting lucky, requires you to have a firm understanding of this complex issue.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Grains of Gold

2008-08-27T23:26:00.000-07:00

Some excellent articles on POT. The more I read the more bearish I am getting on the dollar. Some stocks may be safer than cash. This is not a recommendation... more on this another time...
POT sell-off overdone
POT insider buys shares
SP Report on POT
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I have spent a good part of my free time examining this economy, the gold situation, agriculture, and more. The more I see the more daunting this economy appears. I don't have time to post the numerous thoughts and details I have come across at this moment. I hope to share the ideas at another time.

For now I want to point out that agriculture (food commodities and related) tends to be much more resilient to a recession then almost every other sector of the market. This is especially true because of the growing middle class around the world and their need for meat and better food in general. You know I am big on the fertilizer stocks... especially the potash ones. CF is also a great stock... The pure nitrogen stocks I'm a little less big on because, unlike potash and phosphate, nitrogen products can be produced in a lab... the supply constraints in the longer term are not as tight. However... it may still take quite some time to keep up with global demand... so they may be fine... just a little lower on my personal priorities list then potash and phosphate stocks.

I also want to briefly discuss ways getting involved in agriculture futures without actually buying futures. On a previous post I mentioned Exchange Trade Notes such as JJA and JJG. The problems with all ETNs is that they are really just bonds. Most are issued by Barclay's. If Barclay's credit gets downgraded these automatically lose value regardless of the underlying futures prices. Also, the prices are based on rolling over futures contracts... that is to say buying new ones due several months from now and selling the ones that are due now. I am not going to get into the details of futures contracts, such as contango and backwardation, on this post. However you are free to look this up yourself if you want learn more. This can be a starting point. Investopedia has some nice information here.

The point is that the more I learn the more I prefer ETFs over ETNs, all things being equal, in this space. UNG is a nice natty gas ETF that tracks the price of natural gas. USO is an ETF that tracks oil price.

Jim Rogers believes very strongly that agriculture commodities may be the place to be... I think I agree... but I have not committed to this yet. So far two ETFs I really like are DBA and DBC. Both have fallen quite a bit from their highs and are starting to move back up. DBA involves several food types, not just corn, so it is probably a bit safer. I have not bought either at this point but I am watching them closely as I monitor some of the best ways to seek shelter in the impending economic slowdown.

This is just to plant the seed in your mind that there are alternative to the traditional stocks, mutual funds and cash. Precious metals provide one such alternative. Agriculture provides another. Store these concepts in your memory banks somewhere. I may very well talk about these and others again. Further, you want to have all the tools at your disposal that you can find. Even if you end up deciding not to use them. We're likely going to need everything we can get here.

How many people think of putting some of their money in food futures instead of into cash? The smart ones. The 'Rose' tries to give us insight into what the smart people are doing. Then we can make our own decisions based on all the knowledge available to us... not just that which is fed to us in the media...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice."

May the Onion be with you

2008-08-26T15:01:00.000-07:00

The last post, Layer's of ze Onion, may be used as a 'cornerstone' of understanding some of the bigger moves that happen in the market. It took a while to construct (since I do not live and breathe the market 24/7) and was finished a week-ago Tuesday. I felt it needed to be presented on a weekend so as to be best absorbed and reflected upon. I already refer to it over and over myself to find links on market carpets, the ETFs, and much more, and have tried to read the articles attached to the links several times. I can't emphasize enough... the topic is big stuff... it can put the everyday moves of the market into a broader envelope. That post was a building block. Part of the infrastructure, if you will. Much more can be layered on top and should be in order to try to understand what some of the big houses are doing. Ultimately, this can align us properly as well... or at least erase that dumbfounded look from our face when our favorite companies shine and the stocks get decimated anyway, or vice-versa.

For now I want to point out two ETFs that most people have not heard of: XRO and CRO. XRO is a sector rotation ETF... I don't know too much about it at this point other then that it has outperformed the SP over the last two years. The chart is here. CRO is similar except that it rotates between different countries rather then different sectors. It seems to be less liquid (lower trading volume) then XRO. The full comparison charts are here. These may or may not be good investments but I bring them up because it just goes to show the significance of sector rotation in today's market. You know you've made it when there is an ETF for you...

As just one example of how sector knowledge can be expounded upon take a look at TAN, and then at the other solar stocks. Many move in tandem. We are all busy and time is of the essence. A look at sector ETFs may expeditiously clue you into charts that you may need to watch... either of stocks you own or are interested in. The charts look quite similar between TAN and some of the other solar stocks. When I see a chart that has had a large run up in this market start to flatten out, especially going into earnings, and I hold the stocks, I personally would strongly consider taking some or all off of the table. I would dig a little deeper to confirm my moves (and I do not own solar stocks at this time and this is not a recommendation... ) ... but my instinct would be to consider selling in this market... at least until we have proven an upwards intermediate trend (like we had in the spring). That's just me... unless I felt I knew something about the companies or sector that others did not.

Here are the charts of some of the solar companies...

I have to tell you, also, that I have started to look at trend trading software. I don't know if I'll buy it or use it but at the very least I want to know what the big houses may be doing. Also, as I mentioned, correct early trend identification can lead to unbelievable success. Jim Rogers had made his Billions that way. He hasn't done it by using charts as far as I know but by finding fundamentally driven trends extremely early. He correctly identified that the British Sterling would weaken in the 90s and made a ton shorting this currency. More recently, starting around 1the late 90s, he correctly identified the coming boom in commodities. Now a days his focus is on China (and still commodities, especially soft commodities (food, coffee, cotton, etc.)) He is particularly interested in Chinese companies involved in water clean-up and management... this is all for a different post.

The point is that his means of using trends has been very successful. The other main way trends are used are by using technical indicators and/or fundamentals in the stock market. A brief look though can be informative and can show you the concepts of trends and sectors and how integral they are into today's market. Some of the software I encountered accurately predicted market tops and bottoms (with reasonable accuracy) and ditto for stocks. Others were able to distinguish pro investors from retail investors and make sure they were on the side of the pros... interesting when the shift happened where the pros were leaving or entering a stock I encountered the flat pattern in the stock that inspired me to sell the CMED calls (discussed in this post). There is a wealth of information out there. How much you choose to take advantage of depends on what your interests, goals, time, objectives, etc. are. I am just gathering information right now. However... I am not willing to be closed-minded and ignore anything with at least checking it out... At the very least...

Understand your enemy... and if you can't beat 'em... join ;)

"The Yellow Rose Street Beat" is for informational purposes only.