Friday, October 30, 2009

Be Careful!

I just wanted to hop on tonight and issue a warning to anyone who has participated in this rally or has a high exposure to equities.

The price action today was absolutely frightening! I guess it was perfect timing considering Halloween is tomorrow night. IMO it is time to lighten up considerably if you are on the long side.

As most of you know, this blog focuses more on the macro/long term outlook on the economy. I have remained consistently bearish because we have not fixed the problems that continue to plague the economy.

When I see nasty sell offs like we saw today, I feel compelled to at least warn everyone that IMO the market is not reflective of the economy. I really don't want to see anyone get hurt like many did in 2008. I remain convinced that we still haven't seen the final capitulation sell off that will finally end this nasty bull market.

I recently have rarely discussed trading because the market simply hasn't traded based on any fundamentals. I tend to run away from markets like this because it's easy to get slaughtered when the bottom drops out! 2000 ring a bell?

The problems remain the same: We are not doing the things that are needed to fix this economy over the long term. We continue to spend money we don't have in an attempt to stimulate the economy. This approach has been a colossal failure. Consumer spending which is 70% of our economy continues to contract as the economy tanks.

Making matters worse: Banks continue to refuse to lend, unemployment continues to soar, and the end of the housing collapse appears to be nowhere in sight.

Here is a perfect example:

Fannie Mae announced today that their 90 day delinquency rate has tripled:

"NEW YORK, Oct 30 (Reuters) - Fannie Mae (FNM.P)(FNM.N), the largest provider of funding for U.S. home mortgages, said on Friday that delinquencies on loans it guarantees accelerated in August, while its mortgage investment portfolio grew in September from the previous month.

The delinquency rate on loans in its single-family guarantee business gained 0.28 percentage point to 4.45 percent in August, the most recent data available. A year earlier it was 1.57 percent."

Quick Take:

Bbbut Wall St said the recession was over! Yeah Riiiight. Are you all tired of continually being lied to yet? Only a fool would believe that a recovery is right around the corner.

BTW, We had 9 more bank failures tonight. Here is the list in case you are worried about your deposits:

North Houston Bank Houston TX
Madisonville State Bank Madisonville TX
Citizens National Bank Teague TX
Park National Bank Chicago IL
Pacific National Bank San Francisco CA
California National Bank Los Angeles CA
San Diego National Bank San Diego CA
Community Bank of Lemont Lemont IL
Bank USA, N.A. Phoenix AZ

The Bottom Line:

Things are bad and getting worse. We have now had two 90%+ down days on the S&P in the last three days. This is a sign of panic selling folks. We also broke through the key resistance level of 1042 on the S&P after closing at 1036.

This could possibly set us up for another sell off on Monday. I am starting to believe that the market technicians may be back in control of this market. This market is folding like a tent after seeing a 50% retrace.

Many TA traders are now worried we may be seeing the beginning of the famed "cataclysmic wave C down". I am not sure we are there yet because the bulls become emboldened after this retrace. They may believe a 10% pullback will create a"buying opportunity". Yeak OK, Good luck with that one!

If wave C down has really arrived we could see a devastating collapse in the market. I have said since day one of this rally that there was no liquidity behind it. It was a government backed stimulus rally.

The stimulus is now done and there is no money left for round two. We are trillions in the hole and the dollar will get crushed if the government attempts to go on another spending binge.

If you have been long I think now might be the time to take some profits. Cash looks like the best option in the near term because there may be some buyers on this pullback.

I will be taking a long dated short position on the S&P via SPY PUTS on any rally because I believe this will be the bulls last stand. Once the Fed stops buying MBS in March it's going to get really ugly.

One last point. Take note that gold and silver held up rather well despite the sell off. Does this mean the world is continuing to lose confidence in the dollar despite it's recent rally? This is certainly something worth watching.

Disclosure: No new positions at the time of publication.


JoeMI said...

I bought some SPY puts on Thursday, just before close, and made a nice 25% yesterday. I guess the real trick is not getting greedy and knowing when to sell.

jeff said...



I wanted to do the same but I was on the road for work.

That 200 point move up off of the GDP number was a joke and a beautiful entry point.

Congrats. Nice play.

flipdippy said...

Wasnt the last morsel of easy QE money used this week as well?

I am ewatching SSRI, CEF, FXP, MDR, and PAAS to add to long term positions during the next few weeks.

Also bought long dated out of the money puts for SRS and URE...even if 1 gets slaughtered the other should do exponentially better.

Wait until a bunch of big banks are put into receivership between now and EOY. I'm still shocked 1st Mariner is standing but it is absolutely on borrowed time.

jeff said...


Nice plays. I might have bought PUTS on IYR vs. SRS though. The slippage on that puppy is really bad.

The QE for treasuries is done.

The MBS fund still has about $300 billion. Once the Fed stops buying that paper its lights out IMO.

I agree on the big banks. I personally think Citi is going to blow.

My guess is the FDIC is figuring out how to do it. Perhaps they break them down into different pieces and then dismantle each division one by one.

The tape on the market was godawful on Friday.