Monday, January 5, 2009

Blah Monday

Good Evening Folks!

Just a little commentary tonight.

Stocks closed mildly lower today as traders continue to worry about the severity of the recession. Volume was very light and the news flow was very quiet.

I think its interesting how much the market has quieted down since the beginning of the December. Watching the market right now is just a tad more exciting than watching paint dry after watching all of the action last year especially this fall. I mean 1000 point swings in one day were not uncommon there for a little while this fall. Daily 500 point trading ranges started to become norm. Now when you see a 100 point drop, it feels like the markets were flat for the day!

It appears we have hit a crossroads right now in the markets. We have rallied about 24% on the S&P from the lows which is a significant bounce. Traders seem a bit confused as to what to do next.

The question being asked now is this: Will the Obama stimulus be enough to to kickstart the economy in the second half of the year? I can answer that one: NO FRICKIN WAY! Many are also trying to figure out how bad this recession is going to be. We start getting some answers this week. Some retail numbers are due out this week as well as the big jobs report on Friday.

Enjoy the quiet day today! I expect the market to be back to its bipolar self once we start getting some data from the 4th quarter by the end of the week.

Financials

I still continue to hold FAZ. I think we could possibly see another leg down in the financials in the near term. There was an interesting research report that was released on JP Morgan by a very well respected analyst:

"JPMorgan fell $2.10 to $29.25, the steepest drop in the Dow. Deutsche Bank AG analyst Mike Mayo expects the bank to earn 18 cents a share for the fourth quarter, a drop of 53 cents from his previous estimate. The number includes a one-time gain of about 19 cents per share from the ending of the New York-based bank’s Paymentech joint venture, he said in a research note yesterday.

Separately, CNBC on-air editor Charlie Gasparino said JPMorgan may report a fourth-quarter loss, citing unidentified analysts."

Quick Take:

Mike Mayo is one of the guys the street really listens too, and he took JP's earnings estimate down to .18/share from his previous estimate of .53 a share for the fourth quarter. This is a huge adjustment folks. I continue to be convinced that there are many huge writedowns that the banks haven't been taken yet. Their balance sheets are all based on home values, and they will be forced to take more and more write downs as long as housing prices continue to plummet.

One thing I have noticed during this rally is the financials are hardly participating(other than GS). This is something to take notice of. One analyst I listened to today made a great point:

The market usually doesn't recover using the stocks that drove them into the bear market. For example: Tech stocks were not the catalyst that got us out of the tech bust. It was housing and the financial stocks. My guess is it will be another sector that eventually gets us out of this currentdownturn.

One thing is for sure. The 40-1 highly leveraged finance bull market is toast!

Who knows what will trigger the next bull? Could it be alternative energy? Perhaps, but for now, I think its easier to short the stocks that got us here versus trying to find the next bull market because I think we are years if not a decade away from finding that catalyst.

For now, the banks in my eyes are nothing but walking zombies. They have no business model, No one wants loans because they are already in debt up to their eyeballs. The credit market remains frozen so there are no IPO's or CDO securitizations. Mergers and Aquisitions continue to remain at very depressed levels. A lot of venture capital is on the sidelines waiting to buy up distressed debt IMO. I simply see no way for the financials to make much money.

I also don't see this changing anytime soon. Many of these stocks have bounced back up considerably since they were bailed out. I think we could very well see another leg down once people realize these capital injections from the Fed did nothing but allow the banks to repair their balance sheets.

Repairing bloated balance sheets is not profitable folks!!! The sad thing is, I still don't think their balance sheets are even close to even being fully repaired! There are trillions of dollars of bad loans continue to sit on their books. I expect nothing but continued writedowns for the next several quarters.

I plan on staying short via FAZ for a long period of time. I may start to look into some PUTs on a few individual names. Wells or GS perhaps?

Bottom Line:

Those are my thoughts today. You could hear crickets on the trading floor this afternoon. The big three December auto sales were horrific. Sales were down anywhere from 30-50% for the month.

I did add a new position today. I bought some (CHK) Feb $20 calls. This is a natural gas play. I like this one for a few reasons: Geo-political instability in the Middle East, Russia's fight with the Ukraine on natural gas along with Russia's reduced shipments to Europe, and a potentially brutally cold winter here in the US. The stocks been acting quite well. Lets see how this works out.

That's about it for today.

Stay Tuned!

4 comments:

Joey said...

Nice trade ideas Jeff.

The only thing I would add is maybe taking a look at UUP due to deflation. It doesn't have a big trading range but I like UUP for it's consistency.

$DXY or $USD is the index (gotta use stockcharts for $USD - TOS doesn't have it). As long as it stays above 83, I think it's good to go. Should the $ reverse (nose dive) just grab the inverse, UDN.

Best,

Jeff said...

Joey

Thats an interesting play. The dollar scares me right now. I haven't seen UUP before.

That worked nice today for you. All of these bailouts have me nervous about the dollar.

The dollar a great deflation play, but the Fed actions are so counterproductive as they continue to blow up these deficits.

At some point I think are currency takes a hit and when it does its going to be violent. I think we have a ways to go before it happens tho.

This inflation/deflation debate is going to get interesting down the road.

Gold got creamed today because of that move in the dollar.

Great ideas! Thanks.

Joey said...

Gold was interesting today. I shorted on the initial gap down this morning but was surprised to see it rebound about half it's decline.

UUP is a few weeks / months play, imo but your concerns are duly noted.

Jeff said...

Joey

Yeah

I don't like gold here either. Deflation is the trade for now.

TBT worked again nicely today.
Some are calling for a rally heading into the jobs report.

I am not so confident. Futures are down a shade and almost all the world markets are green tonight.

Tomorrow will be interesting.