At April 30 I’ve posted “Kiss this rally goodbye“. Well, I was wrong by 2 days and 18 points in the S&P. I’ve said that the peak will be 1404 at April 30 but now it looks like the real peak was fixed at 1422 at May 2 (both intradays). After yesterday 3.5% carnage in financial stocks they are tumbling by another 2% today. Financial sector is a leader in rallies and falls, so we won’t see that May 2nd 1422 level for months and, who knows, maybe years or even many years.
What happened? In this post 2 days ago (and the follow up discussion) I’ve suggested that Feds will have to make sacrifices in order to save the bond market. That had to do something nasty to scare the money out of stock market into bonds. My proposal was that the Feds will either suggest that they will allow Countrywide to fall or they will hint of possible rate hike.
Yes, they made a hint that the rate hike is possible, that worked very well – I was right. Second, the SEC declared that investment banks will now have to disclose the liquidity levels. That worked even better. The market is tanking exactly as Bernanke wants it to.
Yes, we know that Bernanke put exists for the bulls. Now we know that Bernanke call for the bears exists as well. Those who think that he will allow the stock market to rise at the expense of the treasury bonds are terribly mistaken. He will make all necessary sacrifices
May 8, 2008 at 11:57 am
What a strong statement!!!
What ever happens you should have the cred for sticking out your nose in the cold!
But with a, for now, strong S&P at 1396 what will really be the trigger that will turn it south? Fine, the VIX is low and turning north. The S&P, Dow etc. are overbought, treasuries are getting popular again and the dollar is getting weaker again! But the bulls seems to be in charge all the time whenever the market dips. They rescue it all the time! There must be a trigger and I do not know what it could be!
Thanks again for your exilent work and sorry for my english!
May 8, 2008 at 1:20 pm
Sweden, I do not predict or expect any crash, I simply have no idea. By my understanding it would be the the best scenario for Feds is to just keep the market between 1350 and 1400 for several months. Prevent any rally. Prevent any crash.
May 8, 2008 at 3:17 pm
Roxy,
Agreed, your calls have been right on the money – the last few times. Judging by the number of comments, your readership is also increasing
Keep it up!
May 8, 2008 at 4:38 pm
Roxy , I think you’re premature with your call. Short term action ( next 4-5 weeks ) for SPY keeps us in a range from 1325- 1425 . So I basically agree with your comment number 2 , except my range is a bit broader. I expect a replay of last summer turbulence during the mid July -mid -August timeframe. Of course this is an election year and I fully expect the Fed to do whatever it takes to levitate equities whenever there appears to be strong downward momentum. that has been the pattern ever since Paulson took over Treasury and combined with Bernanke at the Fed , levitating asset prices – especially equities , has been job number one. i don’t any reason for that to change in the medium term. But we shall see !
May 8, 2008 at 5:36 pm
>>> Anonymous: Judging by the number of comments, your readership is also increasing
Keep it up!
Thanks a lot! The readership is about 600-700 clicks per day. I don’t know how many people are actually reading what they click on
>>> fredw Says: Roxy , I think you’re premature with your call
Absolutely. I’m also quite bad with timing with my trading as well. Most of my calls, the real majority (maybe 70%) are correct directionally, but I always buy too early and sell too late. It’s my single biggest mistake.
May 8, 2008 at 9:06 pm
Roxy , I’m with you 100 percent…. markets can stay irrational far longer than you can remain solvent ! And in an environment where games are played with government stats , where the fed steps in to influence market direction and money flows – even when you’re right your pocket looks like you’re wrong. After last summer , i’ve started looking at things a bit differently . forget fundamentals and look at where the market needs to be taken. Think about why the market needs to go in a certain direction and at a particular timeframe and voila…. the reasons will be supplied and rationale given to justify what is the desired result. That is inconsistent with free markets but let’s get over that. regardless of fundamentals , equities won’t be allowed to go below technical levels. Period. Gold and silver won’t be allowed to reflect their value right now. Period. Oil will continue to rise due to IB and hedge fund activities , coupled with supply and demand realities- and dollar based realities. The wild card is Burma and the fact that we now have the basis for a starving world portfolio. Roxy , can we set up a thread to discuss how to game a starving world ? Forget the credit crisis , let’s talk about what happens when folks don’t have food and water ????
May 8, 2008 at 9:12 pm
Please note that Bernanke Call Option for Bears is now available and will grow in value not because Helicopter Ben is on the side of bears.
It is so because Helicopter Ben doesn’t have any choice going forward. Between supporting the equities and keeping US Government in business, he will (and will have to) lean on the side of the Government.
Those who believe that Government will save markets need to have their heads examined.
This Government can’t save anyone else. It is going to be very busy trying to save itself.
I do expect spectacular crash (and sharp declines) in equity markets (around the world) in the next 3-6 months. And in spite of the current US$ decline, it will actually strengthen during this period. (And that would be the best time to bail out of it.)
Just my thoughts. Critique welcome.
Shankar
May 8, 2008 at 10:27 pm
Love the action figure.
Thanks, I learn a lot from your blog (and all the commenters).
May 8, 2008 at 11:16 pm
Shankar, I think as much as I can understand the Bernanke philosophy his credo is “I need to buy some time”. Maybe the free market will heal itself given some time.
He has a boat with 5 holes and 4 corks to patch them. He is switching the corks so fast that we have the illusion that all 5 holes are closed
May 8, 2008 at 11:32 pm
I am quite confident that the market will not “crash” badly until most of the stimulus checks are handed out. By my understanding it’s mid-June or something like that.
May 8, 2008 at 11:39 pm
Shankar,
Why a spectacular crash in equities?
What would be the trigger?
Pre JPM-BSC I would have thought a spectacular bankruptcy or bank failure would have been the trigger. The Fed still has some dry powder to do another bail-out and/or increase the alphabet soup facilities.
A dislocation in the market for Treasuries seems more likely to me. But even there the US Govt/FED have some means at their disposal to mitigate that risk.
A slow grind, muddle-through is my prediction, with lower highs and lower lows in the equity markets.
May 8, 2008 at 11:54 pm
Roxy:
You are quite correct. I indicated 3-6 months, between August and March-April.
JohnD:
By crash I don’t mean 25% correction in 1 day (like 1987), but 25% in 3 months (say). The reason I am putting it after August is that everyone is counting on Stimulus to put a bottom in economy and start growing. Once companies start warning after July, the estimates for Q3, Q4 as well as FY 2009 will be reduced dramatically precipitating sharp declines.
Additionally, we have another set of loan resets starting in June-July which will confirm that additional losses will have to be taken, more equity to be raised and many more firms will be exposed.
Shankar
May 9, 2008 at 12:08 am
Shankar,
OK — I understand your view.
I still have a hard time seeing a 25% reduction in the equities markets in 2008. Exports (inc. technology) and ag/energy producers will continue to do very well, even post stimulus I think. Consumer staples will do OK. Consumer discretionary will suffer.
I could see the financials declining another 20+ percent, but tough for me to see on the broader indices.
May 9, 2008 at 12:30 am
With oil closing at $124/barrel, I can’t see how the stimulus checks are going to do much. We are talking about maybe 6-7 tanks of gas for the average person with this rebate check. I cannot see how the average American consumer can possibly have any extra money to spend. Bernanke has been sacrificing the dollar and subsequently the bond market to keep the banks solvent and to bolster the economy. He is at the end of his rope, now that many foreign gov’t are looking at allowing their currencies to rise against the dollar and are also looking at shifting their reserves to stronger currencies. If long term rates begin to rise, then the game he has been playing with the currency is over and this will bring on a wash of bankruptcies, as well as tax increases at all levels of government.
May 9, 2008 at 12:49 am
Let’s say long term rates return to 8-9%, Roxy where do you think that
(1) the equity market will be? I’m guessing 40-50% lower.
(2) Housing will be? I’m guessing it will fall another 35-40% from here, back to 1991 levels.
(3) Employment? I guessing that we will have worse employment than 1974. This data is going to be higher skewed due to people dropping off the list and by the no. of part time employees, who can’t find full time employment.
(4) price levels? I am getting whiffs of price deflation, even now mainly in consumer goods items. However I do not see large price deflation in essentials (energy, food). These may only be off 5-10% in coming years, once speculation is squeezed from the market. I do see a great reduction in gross sales coming. Americans are going to be hard pressed to find an extra dollar to spend here in the not too distant future.
May 9, 2008 at 3:24 am
JohnD:
Exports won’t do much. I anticipate US$ to keep strengthening and that’ll reverse the foreign currency gains companies have had so far.
Additionally, recession in US will be followed by recession in other countries by some lag reducing demand for US exports.
BTW, 25% from the current level in Dow is not that steep. In 2003, Dow Jones was below 9,000 and in late 2004, it was about 10k. So, we would be simply reversing last 4 years of gains. Personally, I think DJIA has a higher probability of dipping down to 5k over the next 5-7 years.
BTW, in sell-offs or in bear markets, all sectors will decline, its just a matter of degree.
Shankar
May 9, 2008 at 11:23 am
>>> Let’s say long term rates return to 8-9%
Doom and gloom. Pick any horrible thing and it will happen.
But I think 8% won’t happen in the next 5-7 years. My working prediction now is that the 10Y T rates will climb to 4.5%, bounce from there and resume the decline into sub-3% area.
Then we will stay in sub-3% rates for 1-3 years and then you’ll see your rates to climb up to 8%, but it will time to get there.
In June-July of last year everyone was saying that rates going to 6%. I was saying they are going to 4%. Very few people agreed with me back then.
May 9, 2008 at 11:24 am
>>> I anticipate US$ to keep strengthening
I think it’s not that the dollar is getting stronger vs other currencies, it’s other currencies are finally getting weaker
May 9, 2008 at 1:20 pm
Once the oil shorts have all been killed, the price of oil will go down a lot, and the market will rally for a while.
I don’t believe in gold as anything but an expensive doorstop.
May 9, 2008 at 1:43 pm
Roxy,
Interesting that you think that interest rates will stay that low for so long. I have been of the opinion that the FED will be squeezed between controlling inflation and the decline in the dollar to prevent rates from staying in negative return territory. Personally I have positioned my finances to benefit from a rise in interest rates above 6%. After reading “The Bear’s Lair, by Martin Hutchinson” this week, I was surprised to find this excerpt,
“…Almost certainly, it will prove impossible to put the entire US economy on ice until January 20, 2009, so the financial markets themselves, probably the Treasury bond market, will take control. With the US Treasury’s funding need in the fiscal years 2008 and 2009 already around $500 billion in each year, hiccups in the bond market have an almost immediate way of making themselves felt. To avoid a collapse in the bond market and a catastrophic decline in the dollar as foreign central banks withdraw their money, short term interest rates will have to be raised very quickly to at least 3% above the then prevailing level of inflation. That would imply a level of 7-8% today, but probably considerably more by the time the crisis hits…..”
I am betting that rates will fall closer to the 9% mark than 8%. It also goes along with the observations that Fannie Mae is now offering convertible preferred offering priced at a dividend rate of 8.75 percent, as well as Citigroup previously paying similar levels for essentially borrowing money. This is a prelude to the severe operating cash flow shortages in all levels of government. It will be interesting to watch.
May 9, 2008 at 1:49 pm
The treasury market is saved, bonds are going up. But corporate bonds are going down, there is no free lunch
May 9, 2008 at 2:04 pm
(19) Mark,
I agree that there is some speculator activity in the oil market, however keep in mind that China and India have provided a significant increase in the total demand. We are also looking a peak oil in the majority of existing fields.
Gold is an expensive, useless item. However that said if one were expecting total collapse of the country and repudiation of the currency, this would be an ideal way to preserve your wealth. I don’t expect this so I prefer investments in land. At least land can be employed in positive long term investments, like timber harvesting.
May 9, 2008 at 2:08 pm
Roxy,
Thank you for your insight. Excellent post.
May 11, 2008 at 1:27 am
What are your thoughts on the following?
Is it an Oil Bubble? Those trading Gold do not seem to think so. The move in Gold has trailed the move in oil. Historically that has not been the case. Either Gold is about to make a major move up, in which case it is probably not a buble, or Oil will make a move down, in which case…. Do you agree or has the relationship between the two changed?
May 11, 2008 at 11:27 am
Tend to agree Roxy the Fed. has some more work to do before the F.F.R. bottoms; 4.65 % on the 30-year is the “line in the sand.”
As for the greenback and it’s dead-cat bounce it may take 18-36 months to be realized; in the meanwhile foreign capital will come into the U.S. Equity markets looking to call a bottom in stocks. A good example is a Mega-Cap like PFE, half the valuation compared to 1999 sporting a
6.45 % dividend. 7-8% rates on treasuries will be a while!
May 11, 2008 at 11:51 am
>>> What are your thoughts on the following?
Is it an Oil Bubble?
I heard on Bloomberg radio that speculative surcharge on oil is about $30. If oil was $125 this week the fair “supply-demand” is about $95.
Given the fallen dollar it seems that all commodities are fundamentally repriced higher but there is a small speculative bubble on top of that. Another 20%-30% of price.
If the selling panic starts (not that it should happen anytime soon, I have no idea) I think prices should temporarily fall by the same amount to the opposite side. So I would guess that $95 – $30 is $65 – that’s where we should jump in and buy everything related to oil.
May 14, 2008 at 9:05 am
Roxy , as a follow up to my post at # 6 above , yesterday you had a number of fed speakers including Janice Yellin making very bearish grunts about inflation. Yet today , CPI is reported as very mild – core at .1 and headline number at .2 ! If you believe this report , energy prices were noted to be unchanged and gasoline actually was reported to have dropped 2 percent. Maybe this report is for another country or reflects a parallel universe because not my observation of gasoline prices. What was the effect of this report ? Well , futures loved this data and jumped accordingly. So , when we look at what may happen with stocks and where they may be headed , my point is there is a built in bias for higher stock prices and stats will be manipulated to get there. So , I think your call on the S&P is wrong – not due to any fundamental flaw , but rather due to a failure to account for politics in an election year , the ability of the government to play reindeer games with stats and the need for a new bubble – this time in stocks.
May 14, 2008 at 11:02 am
fredw, yeah, today report is bogus, read more from Russ Winter today.
I don’t see how they can rally the stocks without diverting funds from bonds. It’s a dangerous balance, if they accidentally crash the bond market it will be a ripple effect through all debt markets, especially mortgages
May 14, 2008 at 12:02 pm
Roxy , I always read Wall street Examiner and in particular Russ. And it absolutely is bogus , but that isn’t the point. Look at the investing environment at the present time. real estate is a blackhole and will be for the next several years at a minimum. Treasuries have had their run and yields have been mving higher. Gold and silver are presently stymied and the average investor doesn’t dabble in other hard commodities let alone softs . Which leaves stocks as the option for levitation at the present time.
May 14, 2008 at 3:08 pm
fredw, then we are back to last June scenario. When the bonds crash it takes 4-5 weeks for the credit market to feel the full pain.
Bonds crashed in mid-June, credit markets in early August, stocks crashed in mid-August.
If the bonds crash now we will have a perfect storm in July.
May 15, 2008 at 6:10 am
Roxy , the difference between this year and last year are the Fed vehicles ( TAF / PDLF / TSLF ) and whether these devices will prevent a credit lockup like the one last August. with already signalling he’ll pour more treasuries into these facilities , markets may continue the current complacency until those devices fail to provide relief. I expect this will be tested in the Jul / august timeframe and then we’ll see.
May 15, 2008 at 2:18 pm
fredw – add here mortgages and corporate bonds – they will feel the pain very quickly
May 15, 2008 at 3:46 pm
Roxy , what is the opposite of climbing the so called “wall of worry ? ” Is it descending into the valley of complacency ? Anyone who is convinced the worst has past , the bull will be raising its head shortly and the economy has turned the corner is just flatout nuts. But we are a period of irrational complacency. Even discounting the validity of certain reported data from the government , equities have stepped past negative economic reports without a care in the world. Volatility as measured by the vix is low. Corporate bonds are presently selling well , especially new issue ; since the BSc debacle , liquidity has recovered although re haven’t achieved the levels of the first Q 0f 07 to be sure. Mortgage backed securities are trading well presently . Leveraged loans that had stacked up like logs on the books of the Bank are being bought ( with a nice haircut and probably with funding – but my point is they’re still being bought.) Until something breaks , it appears we will continue to meander along. Then we will see how the Fed’s tools handle the next phase in the credit crisis.
May 18, 2008 at 2:40 pm
>>> Roxy , what is the opposite of climbing the so called “wall of worry ?
Sliding the slope of hope
Must be some inflow of Gulf oil money. They still can’t find anything better than bidding GSEs.
May 18, 2008 at 11:20 pm
Roxy , money is flowing in stocks because that’s an easier bubble to try to reflate. Looking at the data and news from last week , stocks should not have had a positive week. But they did post gains , so what does that tell you for the short term ? Regardless of the news and data , the bias seems to be to tug equities higher. I think that continues until we start to see earnings for Q2 come in. S&P closed over 1422 and my upside target of 1425 short term seems to be in the bag. I don’t think we see a repeat of last summer…. until the new Bernanke puts fails to put a floor under financials , the game plan seems to be the run the clock out through the election – which will effectively push whatever truly bad reactions in equities into 09.
May 19, 2008 at 1:05 pm
Roxy , looks like 1435- 1440 is next area of interest for S&P. Still rising whether bad news ( consumer confidence from Friday as the icing on a cake of bad news last week ) or a mild increase with leading indicators today – unchanged from March for perspective. The tape is what the tape is and this is where things are being pushed…. for now.
May 19, 2008 at 9:51 pm
Yep, still up, but financials are falling. Raly is very tired…