Think The $700 Billion Bailout Cannot Be Repaid? Try This On, Americans Have $900 Billion In Credit Card Debt
October 29, 2008 10:49 PM
People are worried about the near trillion dollar bill that will be handed to U.S. taxpayers because they think it cannot possibly be repaid and will put our grandchildren in debt forever. Fair enough, but the government can create inflation and reduce the “real” size of this number and I believe that is exactly what they will do. Therefore, the number will never be truly repaid in today’s dollars.
A far more troubling problem, that i have long warned about, and possibly the next tidal wave to hit the market is credit card debt. Actually, it will more likely resemble a slowly rising flood than a tidal wave. But either way, it ends up being an ugly flood with serious consequences. U.S. consumers have a staggering $900 Billion dollars in credit card debt. Keep in mind that is accruiing at an interest rate of well over 10% while the federal government can borrow at 3% or less. So if you are concerned about the federal deficit, and believe it cannot possibly be repaid, you want to reconsider the true problems facing the country - consumer debt.
I have long mentioned that real incomes have been falling since 2000 and I believe that trend will continue. The economy had forged ahead on massive leverage and debt, for which we are now paying the severe price for. It was not built on anything real. It was borrowed time. Consumers financed the economy via their house that was used as an ATM machine and credit card debt. The housing fiasco has already come to bear. Next up - consumer credit.
There is no possible way, period, that this money will ever be repaid. Ever. It is not possible. It is not inconceivable that consumers cannot even afford to repay the interest on this debt, let alone actually paying down the principal. You will begin to see this as an issue soon i believe. Banks and credit card companies are going to have to take huge losses on this debt - at some point.
The five largest companies that issue credit cards (they issue 90% of all credit cards) are Discover, Citi, Bank of America, Chase and Capital One. I would consider avoiding these companies like the plague. As we have seen, the balance sheets cannot be trusted as they refuse to own up to the problems until the ship is calling mayday, mayday. If you must be long this train wreck with the Dow approaching 10,000 I see no reason to buy these companies. There are thousands of other stocks that likely are financially better off, longer term, IMO.
Market Recap: Huge Short Covering Rally Pre-Fed
October 28, 2008 4:11 PM
Well I mentioned that the market tends to have a positive bias before the Fed meeting because the trade is one sided as a general rule - no shorts. Today was no exception. It very much took me by surprise as we had no firm intraday low. What i did not notice is that the SP briefly went negative. Once that happened and it became obvious that it was going to close above the open and shorts began to cover. Once we cleared Friday’s highs I said ” I guess we are going to 8800 maybe higher” as there was nothing left to stop it.My bad as i simply saw no indication of this happening on an intraday basis - at all. It was simply buying above the low and see how it played out, basically.
These moves with no firm intraday lows are very difficult to say the least. There was no warning of a low that I could see. I should have just listened to my own instinct that shorts would not take out the Dow low before the Fed meeting. It was just very unlikely.
Anyhow it was a frustrating day as I was wiating for a firm low and didn’t get it. I should have just went “blind” long above the Dow low and waited it out. As this is basically what happened apparently. I am not sure where we are headed next. These Fed days become impossible to predict as huge moves can happen because of short covering and very little, if any, indication.
Market Action: Lower Lows and Lower Highs - Not Good
October 27, 2008 6:10 PM
I thought the market would remain in a tight range before the Fed cut Wednesday. While this still may be the case, we continue to make lower lows and lower highs on the SP. This is not good. True buyers (not traders) are not being rewarded for being long the market. They are gradually losing ground each and every day.
With that said, the only thing holding the market here is the Dow low. I have mentioned many times that I do not consider the SP low a valid low and believed it had to clear - eventually. We may see it clear soon, possibly tomorrow. I believe the game of buying above the Dow low will likely continue however. If it clears, we HAVE to reverse and go positive. If we cannot, we will likely see panic selling into the close. The market may attempt to hold the 2002 low. That would be a logical place to hold next step down.
The most obvious next support on the Dow is about 5900. Yes, I know, that is far, far lower, but that’s what I see on the charts. This is also probably why Cramer made the comment that the Dow could fall all the way to 6,000. Do not be the Lone Ranger here if we clear the Dow low and be buying some concept of “value”, IMO. The market will tell you what it considers value, and what it doesn’t. The recent action suggests that it does not consider the 8000 area as value relative to the downside risk we are facing. But one thing at a time - the Dow low has to clear. The fake toy train of an economy could get far worse and we might be wishing the market was at 8000 soon enough.
In addition, I also firmly believe that the eventual low will be made once volatility subsides. The end of bear markets generally do not come on massive moves off a low but rather finding a bottom over time. Those are tradeable lows, not ultimate lows, IMO. This is why I believed that these lows would eventually be proven to be a bear market rally off a temporary low on the way to further downside. Look at 2002 for an example. The market made huge moves to the upside periodically, but they all failed. Once the market finally stabilized and volatility subsided, we found a bottom. There are reasons for this, but one of them is confidence and a reduction of fear. Traders often mention that the time to buy is when fear is greatest. While this may the case for a trade, I would strongly argue that is not the case for long term investing.
Market Recap: The Game Continues As Mentioned
October 27, 2008 3:55 PM
Well, the game continues, as I mentioned Friday. Buy above the lows and sell into rallies. I said Friday that traders will continue this nonsense until they get scorched. They know where they are wrong, so they have the numbers to be long above. Today was a very difficult call as we had zero intraday lows that i liked. It was all about buying above Friday’s low. I had thought we were going to continue higher once the Dow cleared Friday’s intraday high, but had not noticed that the SP did not.
At any rate, this game will continue, most every day, until it no longer works. With the Fed coming up, I am not certain of the direction as the market will likely get very volatile - one way or the other - after they cut. The market does seem very weakhowever, as pre-fed tends to rise as shorts will likely sit on the sidelines. That tells me legitimate buying interest is marginal, at best.
Close Update: They sold it HARD into the close. It fell 150 points in the last 5 minutes. The same setup that happened Friday happened today. The Dow had to clear 8445 into the close, it got to 8440 and fell back. We had no firm intraday low to stop the fall - and down she went. This is why i mentioned I hate sma related trading - especially in this market. Once the market get’s below them, there is nothing to stop the fall. We saw the result in the last 10 mins today.
StockBlade Opinion: The Crisis Is Far From Over
October 26, 2008 4:21 AM
I have been harping on the fact that people grossly misunderstood what really was going on for a year. The world economy was largely built on not only paper - but leveraged paper. Virtually all of the Talking Heads kept reassuring investors that all would be fine and people were far overestimating the housing crisis. What did I say? They were dead wrong.
This crisis is not over. Not by a long shot. It has filtered over into all kinds of paper. Companies cannot get loans, even to operate on a daily basis. Consumers cannot get loans and they are losing their jobs by the tens of thousands with virtually all industries announcing layoffs daily. Housing has likely not even hit a bottom. Even if it has, there are millions of homes to be sold.
What does this mean? At the very least it means major uncertainty going forward. Not good for the stock market. At worst, we will face another round of financial crisis that could bring near financial collapse. What people do not understand is the magnitude of the CDS’s (credit default swaps) and what will happen when these unravel. CDS’s are essentially insurance against losses for these securities. Obviously these are mostly near worthless and whoever holds these CDS’s are in huge trouble. AIG was the largest holder of CDS’s. They obviously collapsed.
The trillion dollar question, probably literally, is are there more AIG’s out there? My guess is yes. Even if there aren’t, the market cannot possibly have sustained moves higher until all of these are gone. Investors have to know, with some level of certainty that the balance sheets they are looking at reflect reality. While I love to go against Cramer in his picks, I completely agree with his complaint that why are companies allowed to pretend there isn’t a problem after Sarbanes-Oxley? Last I checked, companies were supposed to provide real data. Have the brokerage companies provided real data this year? Obviously no. Not even close.
The point being, nothing can be trusted with regards to financials. If companies would have come clean day one, we may have just had company failures and moved on. But that didn’t happen. Now even banks are afraid to lend to one another because everyone is afraid they are liars. If banks cannot trust other banks, then how in the world can an investor. This is a huge problem.
Anyhow, there is a long list of companies and industries trying to get at some of the federal bailout money. What does this tell you? They need it. They would not be after the money while the market is down if they didn’t need it. Buy low, sell high. They are selling low.
Therefore, remain very skeptical of all moves higher. Investors that have been long this market in the face of reality have got crushed, and there is nothing that suggests that will stop. This is a traders market and will remain so, for a long time.
This is how i view the market, for long term investors. The lows of 2002 are still below where we are today. Is the economy better off or worse than 2002? The economy is FAR worse, and it isn’t even close. While many may argue that balance sheets are far better now than then, that doesn’t consider the fact that earnings were based upon a false economy via paper leverage that likely will not be repeated soon. Probably not in a decade.
While we may not have a total financial collapse and go into a depression, any notion of a bull market is complete nonsense as I see things. I could go on and on that virtually 100% of the forces of a bull market are not in place, and will not be for many years.
Factors That Create Bull Markets:
1. Lowering Tax rates: We have to raise them because the financial mess and grossly negligent Congress over the last 10 years
2. Expanding Economy: Not happening anytime soon. Housing will take 5 years to rebound with the glut
3. Real Incomes Rising: Real incomes in the U.S. have fallen since 2000. i have long said that the economy would eventually fail because real incomes were falling, unlike anytime since the Depression.
I hate to be doom and gloom, but I said 6 months ago the same thing and people ignored it. People had this belief that because we were the United States that all would be fine. Wrong. While I mention often that the scariest words on Wall St. are “it is different this time”, well, it is different this time. And have said so - often. Real incomes rose for over 70 years and led to a multi-generation bull market. That is not the case now, and will not be anytime soon.
The only issue that i am not sure of is the effect of printing money. Stock prices are a hard asset, to some extent. They represent a percentage of hard assets and company earnings. Will the market rise over time because of inflation? This I am not sure of as this has really never happened before. My guess is no as the market is generally a reflection of future earnings, not balance sheets. If all companies were trading just on balance sheets I would buy puts right now as the market would be cut in half tomorrow.
This economic train is likely a toy train, and be careful. This isn’t over.
Market Direction: Uncertain Near Term - Fed Week, But SP Low Is Not A Firm Low
October 25, 2008 8:29 PM
News should dictate direction here near term, but the sentiment is clearly to the downside. The Dow lows are key, IMO. There is no low in the SP I like. Therefore, I believe the SP has to go lower. If we gap down on Monday, I doubt it will reverse as we should clear 8165. There could be buying near the close depending on how low we go. I do not think the Dow low will clear on the first trip down there, but anything is possible.
I am very skeptical of any move higher here. Sideways would be a win for the market at this point. One thing is very important. If we clear the lows, it does not necessarily mean the market will collapse, but it is possible. It will depend on when it clears and where the open was. For instance, if we opened up on Monday, and then cleared the Dow low as the day went on, the market would be in HUGE trouble, IMO. Down 1000 or more would not be out of the question. In fact, I think it would be likely.
At any rate, I do believe we HAVE to make a new low on the SP. I do not thnk the SP low is very important. It will get people’s attention a bit, but the Dow low is still key. Also, the market did close above the open on Friday. Therefore, Friday’s low is somewhat important. I think it is a false low however, and traders likely agree with the selling into the close as I said I thought very likely.
The Fed meets this week and we all know that those days can be very unpredictable and very volatile. One thing I do find likely is this. If they do cut a half or .75 and the market cannot find a floor, the market is likely in big trouble. If they cut they will not have much ammo left - and that is the danger here.
Market Direction: Uncertain, But Important Lows Are Still Valid
October 22, 2008 7:30 PM
Today seemed to be a “tell” that there is more selling than buying interest as I said in another post that was appropriately named “why buy?”. With that said, I am not certain where we are headed here. If we get some more very ugly news, the lows may be taken out soon. There were buyers above 865 as I thought was likely, but I am still very skeptical. Look at it this way. If the market truly wanted to move higher, especially tech, they would have used Apple’s big numbers as a catalyst. Instead the market was sold hard. If good news from AAPL could not lift the market, just think if they had missed and we had Wachovia’s huge loss - the market would have got demolished. No, down 500 is not demolished by today’s standards.
Technically, we are still “ok” here as two important lows on the SP and Dow have held - for now. Today’s test of 865 on the SP may be a clue whether it will hold next visit in that range. My guess is no. But as I mention often, do not guess, especially in this market. If it clears, get out of the way is how I see things. If we had cleared those key lows today the market would possibly have plunged 1000, maybe more, as sell programs would have been triggered.
News and earnings (or lack thereof) will continue to dictate direction. I cannot imagine that any company will have much good to say going forward. Most all will likely warn, guide down, or like Apple, have nothing much to say. Retail sales WILL be ugly going forward as I mentioned about 2 months ago when i saw retail stocks leading the market higher and I wrote that it was pure comedy and could not last.
In summary, be very careful and use stops, IMO. This is not a market to be guessing in.
Market View: Trading Range
October 21, 2008 4:34 PM
I mentioned that the volatility should calm as we have very clear highs and lows until one clears. Therefore, while we still see intraday swings of 200-300 points, we are not seeing up and down 600-700. The ranges are as follows, IMO.
Dow: Key Lows 7773 and 8176 and High 9924
SP500 865 low and 1044.31 high.
(I do not consider the absolute low for the SP as important as 865 for a variety of reasons)
Until we clear one of these numbers, we will continue to trade between them and volatility will likely continue to narrow. If we do clear the lows it is not a given that the market will meltdown immediately as we still have the 2002 lows that may hold. Maybe. Traders will be looking at them for certain.
At any rate, the point here is you will have to be choosy in picking stocks in the environment and will most likely have to watch intraday charts for direction. We are either building key support in this 950-985 range or we are building key resistance depending on which way the market breaks here.
With all that said, I have also mentioned that these moves higher appear to be a house of cards and likely short covering. We have never made any intraday lows that I like on these moves higher and if we get bad news the only thing to stop the fall are moving averages and daily highs/lows. If we spikedown here, we have to make firm intraday lows to be long as I see things.
Market View: Why Buy Here?
October 21, 2008 1:39 AM
Here is the fundamental problem with the market with the SP approaching 1000. Why buy? It is a simple, yet fundamental reason to be long the market. Let’s look at it this way. If the market was a strong sell at 1200 (it was) then why buy at 1000? What is the upside versus the risk? it isn’t there. Therefore, even if we clear Tuesday’s high, there simply is NO reason to buy this market unless it is a trade. Earnings are falling, not rising. The financial risk is still there regardless of the measures put in to stop banks from failing. Keep in mind that only the major banks have been backstopped by the government to not fail. Many mid to small banks in the SP will fail, at some point, IMO.
People have to understand that we are in a bear market. Therefore, EVERYTHING to the long side is a trade, NOT an investment. Let’s examine things like this. The 2002 low was lower than the lows put in. Is the economy better or worse than 2002? Far, far worse, it isn’t even close. Therefore, to make the case that the market should be higher than in 2002 long term is complete foolishness. This is a bear market rally off the low, nothing more, IMO.
One last point. This site has made the case, repeatedly, that everything is determined by supply and demand, nothing more. Is the public buying stocks or selling? They are selling. How can the rally last if there are more sellers than buyers? It cannot. This is a fools gold rally and should be sold into, IMO.
I looked dumb when the market rallied for weeks when I said (over and over) that 1200 was NOT the low and we would go lower but was proven correct. This low will be revisited, long term is my guess. Huge moves to the upside have ALL been made in bear markets, as I have mentioned, not bull markets. Bull markets are slow grinds higher based on fundamental - not parabolic moves based on short covering and greed. This move will NOT last, eventually, in my opinion.
Market Direction: Most Every Stock Is The Same, What To Do? Some StockBlade Thoughts
October 18, 2008 11:49 AM
When there are huge moves in the market as we have seen, virtually all stocks move in the same direction and have the same basic buy/sell points. Meaning until the market becomes rational again and people begin to trade stocks based on earnings prospects, it does not make much of a difference which stock you are long or short. The moves have been very similar regardless of which stock you examine. Therefore, virtually all stocks are a short under Tuesday’s high and a buy above Friday’s low.
There are exceptions to this, such as SMH, the semi ETF. it did not make a decent low until Thursday. It’s relative strength in this sell-off is suspect, at best. With that said, the question is, should people simply buy the index or be selective and choose names? My personal view in this severe uncertainty is this:
1. Financials: My view on these was posted 6 months ago and has not changed. If you want to be involved in this sector you should only choose an ETF because of the risk of an individual name going under or reporting severe losses. Owning an individual name is not worth the risk in my estimation. XLF is a non leveraged ETF for this sector and UYG is leveraged.
2. Dow: I think owning the Dow, long term, is possibly a bit safer than the overall market as if we enter a severe recession, which I believe is a certainty, the bigger market caps should fair better. My only issue is GM and F. A long lasting recession will likely put severe financial strain on both and will likely require a merger and/or government assistance to save both, in my estimation. The only other possibility I see is that the “green” cars are a huge hit and saves GM. The financials in the Dow are under the government bailout plan so default is almost impossible, but further huge losses are still possible/ likely. The financial with the most exposure to a severe downturn in the Dow is American Express. They will report Monday and my guess is what they have to say may move the entire market.
3. If I knew for certain that oil would not hold under $50, I would consider putting some money into oil and natural gas trusts.These trusts pay all profits to shareholders. These trade like stocks and will move in relation to the price of the commodity, in general.
Permian Basin Royalty Trust (PBT) has a current yield of 14%.
Hugoton Royalty Trust (HGT) is a Canadian natural gas trust that currently yields 23%.
Here is the huge problem with these. Trust yields are based on the profits of the trust for that period. Therefore, a 22% yield can, and may, plunge to a low number. PBT seems to be more exposed to a severe drop in oil prices because their wells are in west Texas and they may have marginal producing wells, but not certain. If that is the case, marginal wells profitability is significantly related to the price of oil. Without doing further study of each, my guess is that HGT offers a better risk/reward because of the high yield. But everyone needs to do plenty of their own research on these before plunging in.It would be nice if we had a firm number for both oil and gas prices where they would no longer profitable. Perhaps an analyst has done that research and is available.
In summary, most people are far better off in these uncertain times to choose an ETF to reduce their exposure to a company collapse because of some yet unforeseen financial risk. The returns should be similar and you take much of the downside risk out. If you want to be more particular than just the Dow or SP500, choose a sector. I have the links for ETF’s on my site that you can examine.
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