Monday, December 22, 2008

Back from Hawaii

I am back from Hawaii, and given the weather difference (among other things), regretting being back.

Hawaii is truly paradise on earth. The trip was very relaxing and even a little life-changing, as being away from the rat race (and the crazy events of this past fall) leads to introspection. I feel somewhat recharged and will look to 2009 and beyond with a fresh focus.

I plan to post again actively but I am a little behind in my market analysis. I still believe that we are in a bear market rally until proven otherwise and I remain about 10% invested. I am looking to get to 20% or 30% possibly over the upcoming weeks and months possibly.

Big picture, I suspect that the rally will last into early spring (March/April) before another retest (and probably break of the November lows) into late spring/early summer. The clincher to the end of the rally will be when the prevailing wisdom will be that "the central banks and governments have rescued us from another Great Depression and that they have acted wisely". I used this sentiment reading fairly well back in May 2008 when the prevailing wisdom was the worst of the credit crunch was over (even the esteemed Warren Buffet said it). In hindsight, at that point, the truth was "you ain't seen nothing yet!".

Wednesday, November 26, 2008

Maybe I was just early?

I am beginning to think that maybe I wasn't wrong but just just early and I have been edging back to the long side (8% long). I plan on buying on any dips but I doubt I'll ever be more than 40% long in this rally. I also got out of most of my US dollars on Monday.

I suspect that the worst of the liquidation is over for now. This means that maybe funds and institutions are still selling but perhaps slightly lower amounts (or at least not ever-increasing amounts). The market has now rallied for about 4 days straight, which I believe is the longest since late July.

I am positioning for a rally into late January to mid March timeframe that could retrace a decent part of the September-November decline. I am now looking for a rally that could take us to roughly 1000-1100 on the S&P. I also expect commodities (and TSX) to participate nicely in this rally and oil to hit $80. The Canadian dollar could get back to the upper 80s.

Risk is still high on a longer term basis, and I expect us to revisit the November lows sometime in 2009 and probably take them out. I doubt that 2009 will be as bad in the stock market as 2008, but I fear that it will much worse on Main Street Canada, and I suspect that it will be another negative year for the markets overall, especially if we rally into year end 2008.

I will probably not be posting for the next 2-3 weeks as I am taking a little time off. I had planned this back in July but when I booked it, although I predicted this to some degree, I had no idea that how exhausting this market meltdown would be.

Time to recharge the batteries. Hopefully, this will also allow me to focus on the challenges and opportunities that 2009 will bring.

Thursday, November 20, 2008

Minus 52%

S&P down 52%. I believe this now outdoes all the bear markets since WWII, and it just over 13 months (from the October peak) or 16 months (if you measure from July 2007).

Unbelievable! As bearish as I was, and I was looking for about 50%, I did not think that it would happen this fast. The speed of this makes me think that we are ultimately going to go to ridiculously low levels. For the time being, 738 is the next target. I did not think that the way we magically bounced off 777 in the morning would hold as it seemed too easy.

What did I do today? I sold some more Canadian dollars (too late possibly) as I can see a scenario where the loonie goes lower. And if it goes higher, I may just buy it back.

The silver lining is that we are probably more than half way through time-wise the longer term bear market (2000-present) and definitely more than half way in price (over 50% from 2000 highs). We are setting up for another 15-18 year super bull market with all this market carnage. I don't think it starts for another 5 years+ (2013-2016?), but when it starts, you may be able to make 15%-20% or so for years and years by basically phoning it in from the beach! When this thing is finally over, no one will want to invest in stocks (as was the case in 1982) and in the first few years, people will basically ignore the huge returns in stocks.


Back in March, I warned about this.

After the election in October, I brought it up again.

In the throne speech, this week, it became official. Deficits are back. Harper is claiming that they will be short term and are not structural. How can he say this? Sure, deficits are somewhat natural in a recession, but maybe those surpluses were not structural. In recent years, a lot of the surplus was due to record corporate profits, record commodity prices and cheap interest rates via a credit bubble. Those are all gone. Exactly like the US surpluses in the tech bubble. Those never came back, as the surplus was not structural.

The easy days of more spending, more tax cuts and more debt repayment are gone for a long, long time. I just hope that these deficits don't get completely out of hand as they did in the 70s, 80s and early 90s. It was stupid cutting the GST as that is the worst type of tax cut (income taxes are the way to go) and a time when Canadians were already overspending and undersaving. Income tax cuts timed at the right time, when the economy is slowing or needing stimulus is a much better way (as was the case in 2001).

If the Liberals had any guts and a true leader, they would topple the Tories on this. They would claim that the Tories hid a deficit at the election and the GST cut ($12 billion) caused it. It may not be 100% true but I think that it would work.

Wednesday, November 19, 2008

I wuz wrong

I was 100% wrong last Thursday to leave the bear den (after about 3 hours). I smartly got out to avoid the bull stampede on a key reversal day, but instead of it being a reversal day, it was actually a short term top. It was a great entry point to short with 20/20 hindsight.

I went a little long (15%) by Monday, but as of today I am back to 97% cash. I took a little hit on one of my gold share longs and broke even on the other.

The morale of the story: It is OK to be wrong, just try to be wrong small.

I now think that the market is going to at least test the 2002/03 lows (around 777) and probably will undercut them. Something around 738 (1997 lows) is possible, and even a move to sub 600 can not be ruled out.

The selling is relentless. I attended a fantastic conference call today by Lowry's, the oldest (and best) technical analysis firm out there. I am a subscriber and they are one of the reasons that I have not lost money in this bear market. They put a major sell signal out on July 26, 2007 and have not looked back since. Their selling pressure is at record highs. I don't want to talk too much about their views as they are a paid service (worth every cent) but they share my pessimism. They were also correct in calling a new bull back in March 2003. They have been right in recent weeks (while I have been somewhat wrong) and I will put even more trust in their service.

I don't listen to anyone who has remained 100% invested and has been calling bottoms all along in this bear market (except to do the opposite, such as Cramer, Abby Cohen, Bob Doll, Ned Riley, etc..) I do listen to those who have been warning about this and who have been mostly right (Barry Ritholtz, Gary Kaltbaum, Todd Harrison, Jeff Cooper, Roubini, John Hussman, Jeff Saut, etc...). And what I am hearing from those who have been right is generally not good. Listen to yourself and your gut in these tough times.

Do you short here? It is very risky as 1000 pt days/2000 pt weeks are always possible. I will probably stay in cash but I would love to put some shorts on as risk remains high.

Name Change

I have changed the title as the question mark is now beyond question, and I wanted to expand the title of the blog to reflect the expanded scope of the blog.

I think that whatever we are in right now is historic and in my mind at least, will be the greatest recession since WWII (and hence since the Great Depression). I do not believe that we are going to top that horrible decade of the 1930s but this will top all other recessions since then. The Japanese experience since the early 90s may be a better proxy but I believe that it will not last quite as long as that one did. The closest proxy in the Canada or the US will be the 1970s to early 80s where we had a string of severe recessions and stagflation although I don't believe we will have stagflation this time (more deflationary). I have called in the Great Recession to make it different from garden variety recessions. I have put 2008-2010 as I believe that the severe recession will technically end sometime in late 2009 or early 2010, although I expect things to "feel bad" for a long period after that.

I hope that you like the new title and I welcome your comments.

Quebec and the rest of Canada

I live in Quebec. Presently, I see little impact from the economic tsunami (in Bill Gross of Pimco parlance) here. I see it only in people in the financial services industry. The rest of the province is in a bubble. Politicians talk about increasing already generous social programs. People seem to be spending for Christmas as if nothing special is going on. The housing market is probably the strongest on earth as we are still positive YoY.

If anything, Quebec should be hurting more than other provinces. Our population is older, less educated and our workers work less. To top it all off, we drive away business with regulations and language polies, we have the highest taxes in North America if you make a middle class income and we have a crushing debt load that keeps increasing despite supposedly balanced budgets.

And yet, I don't see much worry here. Much less than in the US or in the rest of Canada.

I suspect that only once unemployment goes up (and it will unfortunately), the Quebec population will wake up! I am very worried about the economic future of my province and by extension, the political future of the rest of Canada. An unhappy Quebec is a problem for all of Canada, as we saw from 1990-1995. The fact that we were in recession around that time is not a coincidence in my opinion. I am surprised that political analysts are not examining what the political fallout of this recession from a national unity perspective.

Tuesday, November 18, 2008

Minus 10%

CREA reported a -10% last week for October. We hit my target early, and once again, instead of being pessimistic, I was actually too optimistic!

Now Toronto is leading the way down at -10% after what appears to be a horrific September/October. Vancouver, Calgary and Edmonton are all very negative. Ottawa and Montreal are near zero but holding up relatively well so far. I would expect them to be hit hard in the coming months.

I will not go after CREA as this press release was the most factual that I have seen ever. They did not make up fantasy spin, as I suspect that they realized that -10% was even too much for their spin to overcome.

I did notice that they dropped the reference to X of 25 markets being positive as the number is slowly sinking, and they know that it will eventually be 0 of 25 markets were positive YoY.

The carnage in the financial markets is spilling over to the Canadian housing market, and I suspect that we are going to be negative double digits for quite a while here.

Also note the increase in coverage of the falling market now that Toronto is leading the way down, as I suspected would be the case.

Alan Greenspan

Say whatever you want about Alan Greenspan as a Fed chief. I don't blame Greenspan entirely for this mess, but he definitely played a role and he is no Maestro in my opinion.

This is about Alan Greenspan, economist. This is what the Maestro said in the past about the housing market:

October 19, 2004

Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity.
June 9, 2005

Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications. Nationwide banking and widespread securitization of mortgages make it less likely that financial intermediation would be impaired than was the case in prior episodes of regional house price corrections.

October 6, 2006:

"I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out. I don't know, but I think the worst of this may well be over."

April 2008:
It will not be until early 2009 that we will get close to having eliminated most of this'' home inventory, Greenspan told a conference in Tokyo today sponsored by Deutsche Bank AG and co-hosted by Bloomberg LP. "But it is very likely that home prices will stabilize well before that.''

November 2008:
U.S. home prices and stock prices are critical, he noted. Housing values might have another 5 to 10 percent to decline before they bottom, which could come sometime in the first half of next year, he said.
I guess a broken clock is always right twice a day...Eventually, he will be right and expect him to take full credit for a "great call".

Forget decoupling or recoupling. How about resynchronizing?

In 2007, popular opinion held that the rest of the world (ROW) was decoupling from the US. The US could go in recession, and the ROW would still be fine. Even Canada. This was one of the stupidest arguments ever, since the US consumer was purchasing some many of the exports of the ROW. Many of the ROW countries were benefiting from high commodity prices, partly created by the US consumer. Throw in the fact that all the booms were based on a global credit bubble, a global housing bubble and a global commodity bubble and you see what has happened. Every major stock market is down big this year. Every major country is in or near recession. There was no decoupling or recoupling. You need a decoupling first to recouple!

There was a lag where certain economies were ahead or behind others by a few quarters. Case in point, housing. The US housing market started rolling over in 2006 and really went off a cliff in 2007. The Canadian housing market only started rolling over in early 2008, as the commodity boom allowed the Canadian housing market to soar in 2007. However, the lag is getting shorter and shorter?

Why? Resynchronizing! Every stock market is down, every form of credit is in a bust, every country is near recession. A process of resynchronizing has begun so that all asset prices are deflating at the same time. The lags are getting shorter and case in point, the US and Canadian housing markets are now falling off a cliff at the same time.

There are always lags and certain markets may make a bottom earlier than others, but the multi-year lags are over for the world for now. Hence resynchronization.


Interesting comment re CREA:

I'm not sure what you expect them to do. Obviously, they have a self-interest in stemming the panic and helping to stabilize housing prices.If people expect housing prices to go down, then they will, because no one is going to buy when they expect the price to drop 10-20% of their purchase price in the first year.You can't really blame them for trying to inject a little confidence into the market so that we don't end up in a real estate freefall. They can't exactly sound the alarm and send everyone panicking.Of course, just because their position is understandable, doesn't mean you should put any credibility in their predictions. But then again, you should never listen to the advice of someone with a vested interest in the outcome.
What I expect CREA to do is to report the numbers. Then, if they have to spin, at least spin in a way that is not complete make believe. Their "inject a little confidence" is fantasy and I suspect that they know it, too.

Example: If houses are down 10%: State that they are down 10%. Give the reasons that they think that they are down 10%. Don't make up stuff about the weather. If things are expected to get worse, then just don't say anything about the future. You lose credibility when you keep on spinning this as if the bottom is here and things will get better soon. All that spinning by the US equivalent of CREA in 2006 and 2007 did nothing for them. Prices still went lower because people were overleveraged. By making up this fantasy that Canada is somehow superior to the rest of the world, and things will magically stabilize here, they are losing credibility. CREA is free to make up its fantasy, and people like me should be free to criticize them. I just hope that no one is using their fantasy to make decisions as important as buying a house.

Thursday, November 13, 2008

From Bear to Neutral to Bull?

I said on Wednesday that I was back in the bear den. Well, I was in there for about 3 hours. The long awaited break of S&P 840 happened and we sunk quickly to 820 (stops being hit). From there, we went almost straight up with a few back and forths but ended the day up big on nice volume.

My gut tells me that Thursday was a key reversal day and a key retest day. Once we recaptured 840, I knew that this had a chance to be a big green day.

So what did I do? I got rid of a small financial put and stopped looking at shorts. I went long the financials for trade but got whipsawed on the volatility (they were up huge today after being down huge in the morning). I also added some gold shares which were up nicely. I sold off all my US dollars this afternoon, as if the stock market rallies, so will the loonie.

My preliminary thesis is that we are entering a multi-month rally that may take us to Obama inauguration day or so, before we need to retest these levels again. My convinction in this is not high yet and I will admit that there is still some risk remaining. However, as I said earlier this week, the window for the downside is closing. I am still heavy in cash, but looking to add long exposure, provided we get some nice follow through and I can confirm my thesis.

Back in the Bear Den

Back in the Bear Den (thanks Rick for that term)....Today's action was enough proof that the bear is back and risk remains elevated. I was wrong on Monday that risk was reduced (premature possibly) but I did not act on that erroneous read as it was a theory that needed testing and had a mental stop of S&P 900 (later revised to 882).

Two things are happening: The news is bad, but everyone knows that. What I think is more important is that the natural long-term buyers of stocks (pension plans, long term value guys, institutions) are so underwater and facing liquidity problems that either they can't buy or they are actually selling into this. Without these long-term buyers (and worse, many are selling) you get short rallies that fail as higher prices just encourage more selling.

With the break below 882, I reentered the bear den. I tried a little shorting today but I actually took a small loss (whipsaw) as if you are short here, you have to be careful. That being said, I expect that if we take out 840, we're going straight to 777 (2002/03 lows). Even with that, we could easily take that out, as nothing says we have to stop there. 738 is a number that I have been thinking about for a long time (1997 lows).

If we can recapture 882, I am back in neutral.

One comment that Rick pointed out was:

Seems as though the government will allow GM to fail. That's the right tactic, but more bad news for the market. There is nothing but bad news now for at least 2 months. How can the market rally under these circumstances?
I don't think that they will allow GM to fail, but I could be wrong. The last sentence caught my eye: "How can the market rally under these circumstances". The same way it always does. Markets top when news is great. They bottom when the news is horrible.

Who said this in July 2007:

"This is far and away the strongest global economy I've seen in my business lifetime,"

Hint: The same guy preaching gloom & doom right now: U.S. Treasury Secretary Hank Paulson.

How about this one from August 2007:

'I have been in this business for 30 years.... It's the strongest global economy I have been a part of,'

CEO John Chambers of Cisco, who recently admitted that the economy stinks.

Markets top on great news and bottom on horrible news. The day will come when someone goes under and the market rallies. Why? Short sellers will cover. They will see that event coming. The event happens and then the market doesn't tank as much as they expect. They cover, the market rallies. More short covering. At the same time, some of the selling that has been relentless dries up a little as sellers finish liquidating. Buyers start initiating positions and make money. More buying and more buyers come in. Sellers start to take their time selling. More bad news arrives and the market takes it in stride. More short covering, etc...

Don't get me wrong. I am still bearish longer term. The economy is in a severe recession. It will remain in a severe recession for months or more. However, nothing goes straight down. The biggest short term rallies are in bear markets. We will get a 20-30% multi-month rally that will kill some of the shorts in the coming months. From what level, I'm not sure, but likely lower. It happens in every bear market, even in the Great Depression.

For now, I am back with the bears, looking at opportunities on the short side, but still trying to conserve capital. The best way to make money this past week for me has been to have lots of US and Japanese cash, as the Canadian dollar is getting killed again.

Wednesday, November 12, 2008

Looking to get out of neutral

Still out of the bear camp and looking to get out of neutral...

It feels as if we are coming to an inflection point. It feels as if the bulls want to rally the market but we’re not quite there yet. Meanwhile, the bears keep sending the market lower, but not below the key October lows of 840, 850, 882. Yesterday we didn’t fall apart late in the day as we often did in October, so that could be construed as bullish.

As long as we stay above 882, I will stay neutral. If the bulls can rally this above 924, the bulls have the upper hand.

A big move is coming (not clear which way yet) and the risk window is closing. I can see both sides here. Any shorting should be done very carefully as should any longs. I am pretty much in cash here although that could change quickly.

I was clearly early on Monday by saying that risk was lowered. Risk remains high but only if we break the key levels above. Time may be up soon for the bears in 2008. Upside and downside risks must be respected here.

Monday, November 10, 2008

CREA predicting negative prices for 2009...

CREA predicts a 1% drop for average house prices in 2008 (down from +5%) and a 2% drop for 2009. It predicts a drop in sales activity of 12% in 2008 and 4% in 2009 (probably way too low).

Now, that CREA has gone negative, is it time to stop picking on them? Nope, they are as out of touch (or spinning as well) as ever!

I won't bother with 2008, since the full year 2008 number looks reasonable (mathematically, we started near +10% in January 2008, so it becomes hard to be very negative overall).

However, for 2009, CREA is delusional. Suppose we end December 2008 at -9% as I have suggested. To end up a -2% for the full year, we would probably have to bottom in December 2008 and then get to a around +7% by late 2009. The CREA quote below even hints at this (see part in bold):

"Canadians are definitely concerned by the economic news out of the U.S., and much of that news stems from distress in the U.S. housing market. Canadians should realize that Canada's economy and housing market are in better shape," said Mr. Lindberg. "This means the downturn in consumer confidence will pass and when it does, housing demand will rebound, especially when they realize the window of opportunity to buy at reduced prices and at low interest rates will begin to narrow once economic growth shows signs of rebounding next year."

Wow, they have reduced what is likely the most severe global recession since 1982 to just a few quarter slowdown that will have us magically rebounding next year.

Let's assume that CREA is right and the economy does bottom and rebound in 2009. This rebound would be from much, much lower GDP levels than today. Much, much higher unemployment levels. We are in the low 6%s in unemployment. We were in the 12% range in the early 90s! A return to double digits here is not only possible, but sadly is quite likely. Canada is in recession and it is going to get much worse before it gets better. And if you want to play the 'blame it on the US' bit, as CREA is, you had better get even more bearish, because Q4 2008 is likely to be a -3 or -4%, something we have not seen since the early 1980s. Those US numbers, plus the global credit crunch, GM/Ford, falling commodities, falling stock markets are going to put such a hit on Canadian GDP, it is making my head spin.

My conservative prediction for 2009 average house prices in Canada: -10%. While that sounds very bad, it is not that hard to accomplish. We are likely to end 2008 with YoY numbers close to that. All we have to do is maintain that negative momentum for all of 2009, which given the factors mentioned above is very likely.

CREA knows that there is absolutely no way to get to a -2% next year as the math is very challenging but it feels that it is better to put that number out in the hope that people will believe this number and snap up the "reduced prices". They did this back in May when they predicted a +5%, even as April numbers were lower than that (meaning that the market was supposed to bottom in April). Here is what they said in May:

“The Canadian resale housing market is on a distinctly different path than the
market in the United States,” says CREA President Cal Lindberg. “CREA expects
the growth in average price to slow in 2008, which is reflected in many markets.
This stands in stark contrast to the U.S. housing market, where prices and sales activity are on the decline.

Now that they are admitting that prices and sales activity are on the decline, are we really in "stark contrast" to the U.S. housing market?

Out of the bear camp

Risk has been finally been lowered, I believe. I am out of the bear camp for now. I remain convinced that we are in a bear market but we may be ready for a multi-week rally into Inauguration Day.

I am not 100% convinced though, but the fact the market held the October 10th lows for a month and did not close below S&P 900 last week needs to be respected. I was looking for aftershocks, and last Wed/Thurs were likely it. I covered my shorts for a profit on Friday morning as the market opened up on horrible US jobs data.

I am planning on staying in cash for a little while here until I can see evidence that the bulls have the upper hand and that risk is truly lower. I may change my mind in a minute, especially on a close below 900 or if some big new development (GM?) occurs.

But for the first time in a long time, I’m actually thinking long instead of short. I suspect that a new bull is quite a ways away, and the October 10th lows will be ultimately broken, but probably not in 2008. I would prefer to see a series of up 1% days than the up 10% that usually fail. I will update if I see any further proof that the bottom is in for now or I think that we are going lower.

Wednesday, November 5, 2008

Congratulations Mr. Obama!

One of my better predictions (Dow 9K) as Barack Obama becomes the next President of the US and the Dow hits 9139 (S&P is lower than I projected 2 months ago, but big picture, it was fine).

What a great day for America and the world! An incredible day for all Americans, especially African Americans. President-elect Obama has a nearly impossible task ahead of him, but he appears to be a transformational figure like JFK and a brilliant speaker. He has a date with destiny and can hopefully rise to the challenge. I wish him all the best!

A belated congratulations to Prime Minister Harper. I didn't vote for him, but he is our PM and I wish him well. I also suspect that Canada's relations with President Obama will be strong once again, as Harper will be "allowed" to cultivate closer ties with the popular Obama. Obama needs its allies, and Canada is traditionally the Americans strongest ally. In addition, Canada's socialism is quite close to Obama's values, so I don't see any major differences cropping up.

One other note, John McCain's concession speech was excellent. He is a great man and a true statesman. He spent as much time congratulating Obama as he did talking about himself. I hope Obama reaches out to him. Is it impossible to offer him a cabinet seat or something?

Novembers after October crashes

I said it last week. Risk was high. From last Tuesday to this Tuesday, the market rallied huge (almost 20%). The US market hit 1005 on Tuesday (Dow 9,600). Does that mean that I was wrong (as I wrote it at S&P 930)? The jury is still out, but today's 5% drubbing back to S&P 953 at least points out that things are still volatile.

I started shorting again in recent days and I still see risk out there. Even if we are in a bear market rally, things got too overextended on Tuesday.

One interesting note from Barry Ritholtz today (courtesy of Dan Greenhaus, Equity Strategy Group of Miller Tabak + Co) talking about true October crashes (2008 of -17%, 1987: -22%):

The only analogous decline was the drop in October in 1987 which led to a subsequent 8.53% drop in November 1987.

the depth of the decline we just went through in October has only one parallel in the post 1950 time frame, which is 1987. So the next logical step is to head back to the 20s and 30s to get a handle on what occurred in that time period. Unfortunately, the Octobers of that time didn’t fare too much better. October 1929 was down 19.93%, October 1930 was down 8.88%, October 1932 was down 13.86%, October 1933 was down 7.82% and October 1937 was down 10.25%. In the first three instances I noted, the subsequent November was actually down an additional 13.37%, 3.31% and 5.89% respectively and November 1937 was down another 10.25%. Only November 1933 saw a gain, moving higher 10.27%.
Ordinary October declines (of the -3% or so variety) are usually succeeded by strong Novembers. Not so for October crashes. This is one of the reasons that I believe that risk remains high!

Another reason: we have had a financial earthquake in September/October. I was expecting aftershocks. Today was likely an aftershock. I expect more aftershocks and maybe another financial earthquake before it is all said and done. Prior to today, this were way too complacent for my liking. I still don't think a 1987 crash day can be ruled out. We are in a world of derivatives, leverage and declining liquidity. Warren Buffet said it best that derivatives are financial weapons of mass destruction. I am not predicting a 1987 crash, only that it remains a possibility here.

Toronto down in October

According to the Toronto Real Estate board, prices fell 10% YoY in October 2008. Using CREA figures, Toronto was down 3% in September. We'll see what CREA reports in a few weeks, but it can't be good. I suspect that 10% is overstated as it is an average meaning that if high end sales have tumbled (as they likely have), that will put further pressure on average prices. The 10% figure does show that the stock market carnage and recession are really hurting the housing market.

Listen to the agents spin (get ready to laugh):

“Consumer confidence is being unduly affected by media reports on the United States economy,” Ms. O'Neill (Toronto Real Estate Bord) said. “There's no question (emphasis mine) that in Canada the economic fundamentals to support a healthy housing market remain in place.”

No question...I see. Economic fundamentals? TSX? nope. Recent GDP? negative. Commodity prices? Nope. Media reports? I guess the media is just making up the fact the world economy is in shambles...


Remember that Toronto, Vancouver, Calgary and Edmonton are 4 of the 6 biggest cities in Canada. All are in very negative territory. There is just Montreal and Ottawa left, and I suspect that they will follow soon.

Wednesday, October 29, 2008

Is risk lower now?

I have been warning for some time that winter was coming in the stock market and warning that that risk is high even as recently as this week.

Now that we got a big rally on Tuesday and the Canadian dollar soared today, has risk been lowered?

I am not sure yet. The ability of the S&P and Dow in recent days to stay above the October 10th lows (S&P 839) must be respected. Normally, if the market is truly going lower, it will fall right through the key level. The bears tried for about 2 1/2 weeks and it did not. I was actually quite short at the start of the day Tuesday, but I covered almost all of those positions around 2pm when I saw the S&P rally through a key level 882. I was fortunate as once the market got through that level, it was one of the biggest up days ever as the S&P finished at 940 (up 11%). I also switched a lot of US cash to Canadian cash late Tuesday and a little this morning as the dollar rallied about 5 cents from 77 to 82.

Now what happens? It could go either way, in my opinion.

Longer term, I remain confident that we are still in a bear market. That does not preclude a multi-week or multi-month 15-20% rally (half in one day?) especially since we were at record oversold levels prior to yesterday's rally.

Shorter term, I still believe that there is risk. As mentioned, there is risk here until well in to November. Also, to make me bullish, the market first needs to close above today's high (970), then above a bunch of levels in the upper 900s/low 1000s. If we get to those levels, and the internals look good, I will be on board for at least a bear market rally. I acknowledge that I will have forfeited some nice gains from yesterday's low, but that will be a small price to pay for preserving capital in one of the worst bear markets of all-time (thus far).

I also suspect that if the market can hold these gains for two more days, then it will be November. Then the bulls will be able to claim that a classic October bottom was made and the central bankers were able to preserve the system. And that bullish may lead to a risk of at least another retest of 840. If said retest fails, look out below (S&P 777 or 738 or gasp 662?).

I will keep you posted on my thinking. For now, I am mostly in Canadian dollar cash and I did a little nibbling on some gold stocks today. I could change my mind at any time and if I feel that this rally will peter out like the ones from mid October, then I may go heavily short again.

Sunday, October 26, 2008

The Fed to cut this week (yawn)

The Fed is going to cut again on Wednesday.

1) How much?: I think 50 is likely but the market is hoping for 75. If we crash between now and Wednesday, clearly the Fed will cut more than 50.

2) Is there a joint cut this time? I don't think so. I talked about it a lot last time, but I don't think so since it didn't seem to have a big impact and since it would seem a little overdone doing it twice in a month. If we crash between now and Wednesday, then I would expect a joint cut.

3) Does anyone still believe that after going from 5.25% to 1.50%, that a 0.75% or 1.00% Fed funds is going to really make a difference? Sadly, there are probably some uberbulls out there who do, but I think the "Fed will save us thing" is so March 2008...

Risk remains very, very high, especially if we decisively break S&P 839....

Addendum (Oct 29th): Answers 1) 50 was right. 2) No joint cut was right 3) Still too early but market rallied then sold off post 2:15 rate cut announcement.

Thursday, October 23, 2008

Back in the Bear Camp

Last Tuesday I wrote the following:

For the time being, I will wait and see. My gut tells me that the lows of this bear have not been made yet, but I are trying to remain open minded here. There is still a lot of near-term risk here and a retest of Friday's low is likely over the next few weeks or months. Any substantial take out of those lows would likely lead to a test of the 2002 lows. If those lows are taken out, another crash (THE crash?) would likely ensue...

After I wrote that (at S&P 998), we basically sold off like crazy (S&P 865) and then rallied (S&P 985) and now we are at S&P 897, below where we were at the close of that horrible Friday Oct 10th (intraday low was 840).

I have become bearish once again late last week and have acted accordingly over the past few days. Today's declaration of a currency crunch is only adding fuel to the fire. I have bought SPY puts and am putting a few shorts on again. I did not like most of the "bullish" action of late (with the exception of Thursday, Oct 16). Given the 45% drop in the S&P thus far, I would have expected more than the crummy volume on the rallies.

The strength in the US dollar and Japanese Yen (I hold both), the lack of consistent up days and other indicators that I look at (Lowry's technical service among others) are not yet showing a convincing bull case.

For some "voodoo", we are currently smack dab in the middle of WD Gann's 49 to 55 day death zone (look it up ; 1987 and 1929 saw 55 calendar day crashes) until Monday, October 27th. In addition, there are a variety of important dates after that that go well in to mid-November that give any of my bullish impulses pause here. (I give thanks to legendary trader Jeff Cooper at for educating me about the importance of time and price).

I am loath to give a downside targets here as the volatility and the crosscurrents are enormous. However, I will say that it appears that we are heading for a test of that 840 Oct 10th level and if that doesn't hold the 777 level from 2002 comes back in to focus.

As I stated in the post from Oct 14:
If those lows are taken out, another crash (THE crash?) would likely ensue...
THE crash may not have been the early October version. We may be in a series of crashes or heading for THE crash. The good news? The time for this to likely happen is between now and mid November. Therefore, a bottom (perhaps but not necessarily THE bottom) is near in time.
The bad news? We are dealing with systemic risk where sellers simply swamp buyers and stocks can fall to unfathomable levels. The bottom in terms of price may not be near.

The most likely scenario is a test/undercut of either 777 or 840, but even the late 1994 levels of 450 are a possibility if systemic risk rears its ugly head via a 1987 style 1 day crash.

We are trying to deleverage 18-25 years of credit excesses in 18-25 months. As I have been preaching, this is not a garden variety bear market, as we all now know. This has been the fastest -45% fall in the S&P in the post WWII era. While most severe bears end at around -49%, the speed of the -45% decline (1 year) is possible proof that this one will be even worse. In addition, the unprecedented credit boom/housing bubble/derivative bubble and now a global intervention bubble make this very difficult to forecast.

In summary, we are at a very, very difficult juncture in economic and political history that our children and grandchildren will read about. Risk remains very, very high here.

Wednesday, October 22, 2008

It's official: Currency Crunch 2008

I warned 2 weeks ago that a currency crisis could happen. It is now official! The loonie dropped below 80 cents this morning, and most currencies except the US dollar and Yen are sinking.

On September 25th, I was furiously buying US dollars at 96 cents and warning that the loonie could fall to 85 cents. I thought that I was being pessimistic!

Then on October 9th, as we broke below 85 cents, I warned that the loonie could go to 80 cents. I hate getting more bearish as things go lower, but one must adjust his/her views to take into account market realities.

I sold most of my US dollars in mid October (at 84-87), but I have been buying them back at around 83-84 as I saw the 80 cent target coming back in to play.

Now, if the market crashes, I think the loonie is going to go a lot lower. There are some support levels around 78.5 and then a bunch between 72 and 76. Any of these are fair game in a panic.

Does this currency crisis morph into something like in 1997/98? No idea, as this is beyond my comfort zone. Only thing I know is that in this environment, anything is possible. As Mohamed El-Erian of PIMCO said in September: The unthinkable is now thinkable.

Risk remains very high here despite the 40% bear to date.

Monday, October 20, 2008

Harper and deficits

I tried to warn readers a long time ago about a Tory government and the return of deficits.

First of all, I was wrong about some things in that post. I speculated that the return of deficits could spell the end of PM Harper. Clearly, that wasn't the case and while the possible return of deficits was discussed in the campaign, it was not a big factor in this election. Instead, a related issue, the financial turmoil, was a big factor and the Liberals were not able to capitalize. The financial turmoil will lead to deficits but that is an issue for the next election, not this past one.

Second of all, it appears that a deficit is not in the cards for 2008/09, at least based on Harper's recent statement. There is a likely a lag on revenues from the recession and it appears that there were enough buffers and one-time gains to keep us in surplus for 2008/09.

However, barring major changes to spending, it appears that Canada is headed for a deficit in 2009/10. While the financial turmoil and recession are partly to blame, the Liberals and Tories are also partly to blame.

A little history

The Liberals, especially in the later Chretien years and under PM Martin, ramped up spending like crazy. Some of the spending was due to needs neglected in the belt-tightening 90s. The Martin PM years were mostly runaway spending years with relatively small income and corporate tax cuts. Then, along came PM Harper with big GST cuts, more corporate tax cuts, targeted income tax credits and more runaway spending.

I believe that the income tax and corporate tax cuts were smart but that the GST cuts were a huge mistake. I also think that both Martin and Harper overspent. The GST cuts totalled $12B and were the wrong type of stimulus (encouraging spending when the consumer was already overspending) at the wrong time (the economy was already hot). If Harper had avoided the GST cuts and held spending down, we may have had a $20 billion buffer.

2000 Buffer
In 2000, Canada had a huge buffer ($20 billion plus). Finance Minister Martin's massive (and well timed as luck would have it) 2000 tax cuts helped keep Canada out of a recession. Martin was probably lucky because he cut them in a special election budget that was called just as the economy was starting to sink, and in response to an aggressive tax cut proposed by the Canadian Alliance platform. Super shrewd PM Chretien probably saw tougher economic times coming in calling for an election in October 2000, but few saw a recession back in October 2000.

2009 No buffer
Instead, Harper now has to either cut spending (a sound long term decision) or raise taxes (unlikely) at precisely the wrong time as it may further hurt the economy in the short term. If Harper had a buffer, he could have cut income taxes to stimulate the economy. Harper also has to do this in a minority government.

At this point, big deficits are coming due to the fact that we are entering a severe recession. In such a recession, given our current budgetary situation, I would choose to run a deficit as cutting spending severely would likely make things worse. I would wait until the recovery (as the Liberals did in 1995- again lucky as they only got elected in 1993) to make huge spending cuts.

Notice how the Big Bank economists only starting talking about issues like recessions and deficits this past month, when this blog has been talking about this since last winter!

Saturday, October 18, 2008

More CREA spin and new numbers

So what does CREA now say:

"Informed buyers and informed sellers look at the facts. And the facts right now indicate the real estate resale market is stabilizing in many markets," says Calvin Lindberg, the President of The Canadian Real Estate Association.
Hmmm, I guess sinking is the NEW stabilizing...

It gets better according to CREA per a recent Toronto Star article

"With the sales activity now beginning to slow from its breakneck pace last year, it's taking homes much longer to sell and since people are under no distress to sell, they'll take it off the market and put it on the market on a better day," Klump said in an interview.

"With fewer sales and fewer listings, it's a built-in stabilizer as far as the extent to which you can expect to see prices to decline."

1) So now they are pointing to the slight decrease in new listings in recent months as a sign that the market is stabilizing. This could be transient as sellers do what Klump describes above (take it off the market for a better day). What happens when they realize that the better day is not coming? New listings are going to pick up as the economy tanks and all those foreclosures kick in. And even if new listings don't pick up, I would expect sales to dry up as buyers become more selective and more patient and financing becomes much, much tougher.

2) A better day: When would that be? Houses have doubled or tripled already. It is possible that on an inflation adjusted basis, that houses may never get this high again?

What should they really say if they were forced to adopt a Jim Carrey Liar, Liar tone: "If you have a house to sell, sell it soon before prices plummet! If you want to buy, just wait as there will be bargains in the coming years, assuming that you can get financing. The end of 2008 and 2009 will be a disaster for home prices!".

CREA also trots out a new data series that shows that the weighted average price was -0.6% if you use existing private housing stock to weight the data. This is because activity in the hottest markets (Calgary, Edmonton and Vancouver) are bringing the reported number down to -6.2%. This new number has the same trend (down) and while it may lag for now, I'm sure it will catch up eventually as all markets are going to be going a lot lower. I would guess that Toronto, Montreal and Ottawa have a higher weighting in the new number and since they have held up relatively well vs the Western big cities, this leads to a lower number.

Expect CREA to emphasize the new numbers as it tries its spin. Hey CREA, what happened to the average price will be up 5% in 2009 that you put out a few months ago. Notice that they have not updated their number? Maybe they will try to use their new number to say that they met their forecast. I asked back then if they were just making this stuff up. They just made up a new way of reporting their number.

Friday, October 17, 2008

Answering an excellent comment

I receive many excellent comments which I always enjoy reading. An excellent comment by Chris, in response to my recent posting on recent mistakes, required a response in a post:

Just a thought here: Perhaps a narrower focus on fewer trading vehicles would benefit you.

I am not currently a trader, but did try a couple years ago at swing trading while trying to maintain a day job during market hours. I found it impossible to do because I hyper analysed every facet of an index/etf etc. trying to maximize my profit while cutting risk. The point you make about imperfect hedging reminds me a lot about of techniques I tried.

Anyway, if I was going to take a stab at it again, which I hope to do some day, I would want to focus on three vehicles: outright index futures, sectoral ETF paired trades, and reasonably straight forward option spread strategies.

It just seemed to me from reading the post that you maybe were losing sight of the goal which is to make money, rather than be perfectly right on how things move.

I hope you interpret this more as empathising rather than criticizing. Thanks for the blog.


Chris, thank you so much for the post and I do not take it as criticism.

Thankfully, I am up quite nicely in this vicious bear market, albeit not as much as I should be.

My first goal (and easily the most important) in a bear market is: Capital preservation

My second goal in a bear market is to make some money. Goal #2 can sometimes conflict with Goal #1 and therefore, it is important for me to follow the motto "Discipline over conviction" that I have learned from supertrader Todd Harrison over at

(By the way, these goals were developed in reaction to my experience in the 2000/02 bear market, but that is another story for another time that I will try to share one day. Suffice to say, I believe I have learned my lesson.)

This second goal has caused the mistakes mentioned but more importantly, it has also kept me from getting killed in the bull stampedes that result in a bear market (such as Monday's 11% gain on the Dow; TSX 18% gain Tuesday morning). I try to not allow positions to go against me double digits, although I do allow a little more risk tolerance for deeply held convinctions for long term positions (such as shorting financials in Sept 2007- I was early by a month or so and watched the position go against me by about 20% as Bernanke cut rates).

In this post, I illustrated these mistakes partly for therapeutic reasons as this market is tough with 9-10% intraday swings. Many pros that are leagues ahead of me in trading skills are finding this market the toughest of their lives. The other reason was that I wanted the reader to understand that I am not always right. I have many posts where I "brag" about a good prediction. This year, my predictions have been fairly accurate but that has not and will not always be the case.

I do agree with Chris that especially if this is not your full-time vocation, that a narrower focus on fewer trading vehicles is good, and I have been and will continue to try to keep this focus. The only problem with too narrow a focus is the lack of diversification and potentially greater risk. I have tried to cut the number of positions, but as you can probably tell from my blog, I have many ideas/predictions and it hurts me to see things go according to plan without being on board (case in point: Oil is now at $70). He also makes smart mention of imperfect hedging and I will try to heed the lessons of my HGD "mistake", which has been recently compounded by selling HGD on Wednesday ahead of its 20% rise on Thursday-Friday.

I made mistakes as mentioned in the post. I did not mention the successes which have been holding some of my cash in US dollars and some timely puts on C, MBI, MER and AIG back in August.

Wednesday, October 15, 2008

Toronto & the end of Overprime

Lots to address in the latest release from CREA...

1) First Toronto
Toronto is easily Canada's largest city and much of the English Canadian media is based there. It is the financial capital of Canada and it where most of the financial industry is located. The area around the GTA (if you include Hamilton, Oshawa, etc..) represents over 20% of Canada's population. Toronto matters. As I mentioned before, the negative housing articles will really pick up steam once Toronto goes negative. (While I am a Montrealer, unlike most Montrealers, I have no axe to grind with Toronto and I even lived there for almost four years.)

Toronto was down 3% YoY, a sharp decline over previous months. Conveniently, CREA chose to ignore that news in its press release. Nation was down 6.2% YoY.

Let's update a little summary that I prepared a few months ago:

Let's start from West to East with all cities over 1 million:

1) Vancouver: Down 8%
2) Calgary: Down 6%
3) Edmonton: Down 6%
4) Toronto: Down 3%
5) Ottawa: Did not see the number
6) Montreal: Up 4% (down from 6% in August)

I also wrote 2 months ago:
I would expect to see Calgary, Edmonton, Vancouver and Toronto all negative by October latest.
This was accomplished in September.

CREA always keeps talking about how most markets are up. In June, it was 21 of 25. In July it was 20 of 25. Now it is 17 of 25. This is meaningless in the big picture. 4 of the top 6 markets, and all 5 of the most expensive markets (Vancouver, Victoria, Calgary, Edmonton and Toronto) are all negative and sinking fast.

2) October 15th

Today is October 15th: No more 40 year amortizations. No more 0% down. Overprime Lite begins today. CREA even reports that activity picked up in September (favoring the sellers as buyers bought ahead of October 15th). This means that the Q4 numbers are going to stink, especially when you throw the sinking stock and credit markets in to the equation.

3) Update to the lag

I mentioned that Canada was lagging the US by about 1 to 1.5 years using an apples to oranges comparison. Using that same comparison, Canada is now where the US was back in September 2007. Since I know that it is apples to oranges, it is likely that this lag is probably a little greater. The US had more foreclosures in September 2007 than Canada does today, but part of it may be that CREA's data is different than Case-Schiller, and part of it is that Canada's housing market is imploding faster than the US did and that foreclosures are likely to skyrocket in the coming months.

4) My new predictions

My prediction of 6 to 9% down by year end has already been accomplished. Look for the lower end of the range (-9%).

I don't have a number yet for 2009 but I would expect it to be worse than 2008 and in the negative double digits.

Tuesday, October 14, 2008

After the crash...

Since we officially crashed into Friday (and subsequently rallied almost 2,000 Dow points), now what?

I will have more comments in future days, but for now, it is wait and see. The 11% rally on Monday is actually typical of a bear market rally, but given the fact that we took off 45% in 1 year (and 18% in 1 week), a substantial bear market rally or even a new bull market can not be ruled out. I will wait for volume to pick up, leaders to show up, and selling (forced liquidation) to dry up, among other things.

For the time being, I will wait and see. My gut tells me that the lows of this bear have not been made yet, but I are trying to open minded here. There is still a lot of near-term risk here and a retest of Friday's low is likely over the next few weeks or months. Any substantial take out of those lows would likely lead to a test of the 2002 lows. If those lows are taken out, another crash (THE crash?) would likely ensue...

Thursday, October 9, 2008

In a bear market, no one makes money?

I have always heard this expression. Bulls clearly lose in a bull market, but shouldn't bears make money as well. Yes and no. Shorting in bear market can be treacherous.


  • The biggest one-day rallies in history have come in the 1930s (Dow) and 2000s (Nasdaq). If you are short, you have to have a strong stomach. Recent example was the short squeeze manipulated by Paulson & Co on Sept 18 & 19 (1000 Dow points in about 8 hours of trading).
  • Vicious multi-month bear market rallies that can find 20% rallies in a few months (example Sept 2001-January 2002)
  • Now, a non-level playing field where you are basically betting against the government.
  • As such, you have to time things really well
As I originally wrote in August, the S&P was going to the upper 1000 range. Then last month, I suggested upper 900s. Very recently, I even suggested that a crash was possible.

Mistake #1 (20/20 hindsight): You would think then that I would be making a lot of money shorting? Nope. Due to the Sept 18/19 fiasco where I was very short, I got nervous and reduced those positions for modest gains (around 1200 S&P)

Mistake #2 (20/20 hindsight): The one position that I held until Monday (SKF Ultrashort Financials). I sold it for a modest gain as it is heavily weighted in the big banks which until recent days had held up well. I knew that they would fall eventually, but in suspecting a big rally day was coming, I booted them. Since Tuesday to today, SKF is now up 40% without me.

Mistake #3:I have been bearish on commodities. Am I making money on this? Barely, as I have covered my short positions way too quickly and I have gone very small on these positions.

Mistake #4: I hedged a gold mutual fund position with HGD. What happened? Everything was working perfectly until Wednesday, when HGD was down 35% and the underlying mutual fund was only up 6%. Imperfect hedging...

Mistake #5: Then I thought that after the worst start to any month EVER, that we were due for a big bounce before either going lower or testing the lows. I took a few small long positions (10% of the portfolio) and in most cases, I got stopped out for a loss. However, I made the mistake of hanging on too long to a long position that I put on yesterday at S&P 1020 (thinking that we were going off to the races; compounding that, there were delays by TD Waterhouse reporting the fill so I only realized that I got filled a few minutes before yesterday's horrible close). I got stopped out on 50% today but I am still stuck with a small losing position.

To be short throughout this, you are either an incredible trader/investor (almost all the ones that I know are in cash or looking for a snapper and getting stopped out) or disregarding all rules of managing risk. To be short here would normally be hazardous as you could have an up 1000 day any time now. We are at record oversold levels. Sentiment is as bearish as can be.

Morale of the story: I have been expecting 80% of all this and I am barely making money and in some cases, losing.

I am looking forward to less volatility as this is crazy!

Credit Crunch = Currency Crunch?

I wrote this on September 29th (Cdn dollar near 96 cents; today at 87 cents):

One note about the Canadian dollar: While I have a lot of Canadian dollar cash (mostly in the CDIC insured Altamira Cashperformer), I am very bearish on the loonie here. Back in April, I saw the Canadian dollar heading to 92 to 94 cents (it was at 98 at the time). We hit 92ish 2 weeks ago and since then, we have bounced all the way back to 97! I have been buying US dollars this week.

My reasoning: This is an oversold bounce for the Canadian dollar as oil bounces and as the perception is that US finances are in shambles (they are). However, in a credit crunch, debt gets extinguished and much of the debt out there is denominated in US dollars and was used to buy real estate and lever up in commodities. As most asset classes fall (a global margin call), the US dollar will rise, as it did since mid July (while gold & commodities sold off).

I hold some US cash as I think that if we take out 92 cents, we could eventually settle at 85 cents, if we get a market meltdown this fall.

Here is a portion email that I wrote last night to a very wise friend on currencies. I have excerpted the key passage:

--- On Wed, 10/8/08, Adil Burney wrote:

From: Adil Burney
Subject: Currency crunch?
Date: Wednesday, October 8, 2008, 11:06 PM

If you get a chance, look in detail at the Yen chart.

The Australian dollar (which is the symbol of the carry trade vs the yen as it had about 7% interest rates) is getting smashed (see at bottom of chart). Also, look at euro/yen.

Remembering that currency markets are bigger than the stock market, it looks as if there is serious unwinding of that trade. The Brazilian real, peso etc... are all getting killed. The Canadian dollar is suffering to a lesser extent.

This all makes sense and if you remember your lessons from currency crisis of the 90s, the money flows out of these currencies in a hurry. It is doing that now. You have to wonder if we have a currency crisis coming up again on top of the credit crunch...

Conclusion: The unthinkable is now thinkable, as PIMCO's Mohamed El-Erian has said recently. Therefore, while I predicted a mid 80 cent loonie in a market meltdown, I now don't know. We could stop here or this could morph into a true currency crisis whereby some countries will almost be forced to RAISE interest rates in this environment. Since they really can't here, I am not going to rule out a Canadian dollar at 80 cents or below. This is NOT A PREDICTION only something that could happen.

I don't want you the reader to think that I am always right. I also want to point you to my other post today where I 'fess up to mistakes I have made recently.

All the recent currency crises happened in relatively calm stock markets.

Wednesday, October 8, 2008

What will they create or announce tomorrow?

Let's see:

Friday: House passes Bailout (Market drops)
Monday: $900 billion in the TAFF (big increase) & pay interest on institutions' required reserve deposits (Market drops)
Tuesday: Creation of commercial paper funding facility CPFF & coordinated central bank action to increase in US dollar (Market drops)
Wednesday: Coordinated global interest rate cut (Market drops)

Maybe if they don't announce anything tomorrow, the market will rally?

Tuesday, October 7, 2008

Could it be Thursday?

Some thoughts:

There seems to be a lot of coordination between England and the US for the short ban last month. Notice that Canada wasn’t even involved in that initially.

Fed announces that they are going to buy commercial paper. PIMCO’s Bill Gross asked (told?) the Fed to do so yesterday in his monthly must-read newsletter. What else did he ask (tell?): set up a clearinghouse for transactions and do a 100 pt cut, preferably coordinated with other central banks. Remember he asked for a Fannie bailout (he got it) and he asked for a “new balance sheet” (ie the Treasury) to buy us out of this mess (he got that too).

Bank of Australia cut 100 today. There was no coordination but it is unlikely that Fed would want to team up with a lightweight like Australia (or Canada) here. They are going with the A team of BoE and/or ECB.

BoE is not going to go before Thursday since it is unlikely to move up its meeting barring a crash
BoE will need to cut more than the 50 expected; therefore 75 is likely (100 can’t be ruled out but it may look a little desperate).

BoC, Fed and Bank of New Zealand have meeting at the end of October (an eternity in this market). I think they join for 75 each.

ECB is the toughest call since they are inflation hawks but their meeting is in November. I think they go along for 25

Australia, which cut 100 today, could even go along for symbolism for 25 but that may be asking too much.

Summary: BoE, BoC, Fed, BoNz cut 75 on Thursday. Maybe ECB and Australia cut 25..

Addendum: Wednesday 8am (Oct 8th): Looks like it happened today! 50 pts across the board. Looks like after Black Tuesday, they couldn't wait any longer ...

Addendum #2 Wednesday night: I guess they felt that they didn't have the luxury to wait another day, although it was a horrible close (yet again)...

I have tried a few very small long positions and got stopped out. The volatility is killer. I have to remind myself to stay in cash.

Monday, October 6, 2008

Now What?

After one of the craziest days in recent times (TSX down 1000+ twice, Dow down 800; both cut losses in half), it is time to revisit previous posts with the interest not of gloating but looking forward: 1) I said this on Sept 6th after making a similar warning on Aug 8th:

Cash is king here for all but experienced investors (who can short carefully). Stay out of debt. I saw (and still see) a move to about S&P 1078-1090 (Dow 9Kish?) for this downleg which should last into November, around the time that Barack Obama (or John McCain) becomes the new President.
I added to this on Sept 25th:

I think that there is now a risk that if the market is not saved here, that we go lower than I initially thought (S&P 1080) to S&P 990. This would translate in to roughly 9000 on the Dow.
What do I think now, after we hit 1007 S&P (not quite yet 9K on the Dow): CLOSE ENOUGH FOR NOW.

Barring the low probability (but definitely a possibility here) of a full 1929 or 1987 crash, we may get a bounce.
This is not a bottom call. We could still crash or we could rally huge for a few weeks or even months. Very tough to call here.

I am now almost totally in cash (sold off remaining shorts this morning; have a few puts left).

If we had a sharp rally here and certain things that I look for don't "confirm" that rally, then I would even consider shorting again. If things did "confirm", then I would get more invested.

I may even take a small (10-15%) dip in the ocean if I feel like it with tight stops.

At S&P 1007, we were about 36% off the highs. I think we ultimately go lower, but at least at 36% you have finally passed a garden variety bear market.

A severe bear market (1907, 1937, 1973, 2003, etc...) often gets you to 49%. My gut tells me that is where we are ultimately heading to 49% but that could be next week, next month, next year. Not quite sure. My gut also tells me that today was not a bottom and we go lower either in October or November but I'm not quite sure here.

Even in vicious bear markets, you often get multi-month huge bear market rallies (example September 2001 to January 2002) before making new lows. I suspect that we are getting near to a multi-month rally but first we likely have to retest 1007 (could be tomorrow, this week, this month or in Nov/Dec) and not break it.

If we retest and break, then we go to 777ish S&P (which could be via a crash).

Stay tuned...

2) Fed surprise cut

I speculated last week that it would be either on Monday or Thursday. Clearly, it was not Monday. I speculated that they want an up day first (I wrote the post when the market was up huge pre House vote on Friday). Today might have qualified since the market rallied in the last hour....Therefore, Tuesday is fair game IMHO. I would expect 75 points at least since the market already expects 50. In theory, the market should rally but some of that rally likely happened between 2:48pm and 4pm today....

Thanks for nothing

"Canada heading for recession, say economists"- CBC, October 6, 2008

Yeah, thanks for that now that the TSX is down about 30%. Until a few weeks ago, these bozos were pretty much dismissing a recession in Canada. Now it is a certainty. Thanks for the heads-up.

When I wrote this back in February, very few were even discussing this as a possibility in Canada. Decoupling and commodity super boom forever were all the rage. The credit crunch was supposedly winding down...

Pretty sad that all these economists either missed this or didn't want to say so in public. The same thing happened in the last slowdown (2001 didn't qualify as such in Canada) and probably the 1990 recession too.

Friday, October 3, 2008

When will the Fed do its "surprise" rate cut?

An open thread: When will the Fed do its "surprise" rate cut?

In Fedthink, the credit markets are frozen now and waiting until the end of the month will only hurt the economy more. In all these Bush, Paulson & Bernanke meetings, there must be intense pressure on Bernanke to cut. There is no way in my thinking that the Fed will wait until its scheduled meeting on October 28/29 to cut rates. Note that the Bank of England announces its rate cut (75 points as the market expects at least 50) next Thursday.

There is a lot of global coordination going on behind the scenes. The ECB's Trichet has been on conference calls with the US government related to this bailout (see the great NY Times article "As Credit Crisis Spiraled, Alarm Led to Action")

I think that the Fed is reluctant to use monetary policy in this way (unlike Greenspan) as they are using more direct tools to free up liquidity. However, they know that they have to break the negative psychology. To some degree, they needed the markets to go down but not crash this week to get the House to pass the bailout. Note that the bailout passage will allow the temporary shorting ban to elapse after 3 business days. Therefore, if the House passes the bill today, the ban would end Thursday morning. Hmm, timed with the Bank of England?

I think the Fed want to avoid cutting after a big down day (like this past Monday or yesterday) so they don't look panicy as they did on the SocGen bottom back in January.

If we close up on Friday on the back of a successful vote in the House, I expect the Fed to cut 50 points either Monday, probably before the open, or Thursday with the Bank of England and when the short ban expires. I would expect the discount rate to be cut 50 or even 75 points.

I also expect Bernanke to have a few other countries to join him in their cut, including Canada , England and even maybe the ECB (which laid the groundwork for a cut yesterday).

Ultimately, I don't think this really matters or works since all the Fed Funds rate does is control the very short end of the government T-Bill market, which is already at near zero rates. The rest of the bond market is where the trouble is, and this will do nothing to help that except a psychologic 1 or 2 day boost. If rates at 2% are not working, I doubt 1 or 1.5% rates will make a big difference.

What say ye? Please give your thoughts....

Thursday, October 2, 2008

Warning on Potash, Encana and RIM

TSX down 800 to below 11K today as Potash got annihilated. Last week it was RIM getting annihilated.

While I feel horror and sympathy for anyone heavily invested in the TSX or other markets, I wrote these words back on May 13 (as the TSX hit a new high) to try to help people:

It bears repeating again: Just recognize that the TSX is not a very diversified index. 75% of the TSX in 3 groups (mining, oils and financials). There are 3 mega cap stocks in Toronto (Encana, Potash and Research in Motion). We all remember what happened to the TSX (TSE back then) in the Nortel crash. This could be similar...

Say we get a 30% hit to energy/materials and 20% hit to the financials everything else, that would be an 11,000 TSX (25% off)

These are not outlandish scenarios in my book. If we get a typical 30% bear in the US and the commodity bubble bursts, I would expect the TSX to at least test the 11,000 level.

Keep these things in mind as we hit a new record...

I think we still go lower but please remember this the next time we have a boom and the TSX chart looks like the Eiffel Tower.

The TSX is not diversified and will probably never be diversified (in that it is unlikely to have high weightings in pharma, retail and consumer goods and not be dominated by more than a few megacaps). It was Nortel and a bear market in 2000, it is RIM, POT and ECA and a bear market in 2007.

Please remember this the next time that experts (Jeff Rubin) are touting that Canada has decoupled (and TSX 16,000 and $200 oil) in the midst of an obvious US recession.

I know what it is like to be on the imploding side of a bubble. I invested heavily (not big dollars since I was starting my career) from 1996 to 1999 in technology. I made fantastic returns but gave all those gains back in 2000-2001. I even saw overvaluation (calling it a bubble but not fully understanding what that meant) in early 2000 and raised cash, but I got back in too early in late 2000 and stupidly on margin.

Since then, I have tried to learn about bubbles. When bubbles burst, they often do a round-trip (ie return to the levels that the bubble started) or more. Potash at $100 has arguably not done a round-trip (it depends where you decide that the bubble started). RIM and Encana probably also not a round trip. I am not using any of my cash to buy these imploding bubble stocks here as they could still go a lot lower here. These 3 stocks are back to 2007 levels. I think that they could easily go back a few more years...

Full disclosure: I was short Potash last week for a profit but I covered about $50 ago

Is there subprime in....?

I talk to many intelligent people in the Canadian financial services industry. Despite their intelligence, and this is admittedly anecdotal, I keep hearing opinions that housing in Canada (and in particular Montreal) will slow down and maybe go down a little, but nothing too serious. Why do you assume that I ask? It usually comes down to some variation of "our banks and regulations were sound and we have no subprime"

Was there subprime in the UK? Down 13% YoY

Was there subprime in Spain? Down to -0.3% YoY (supposedly understated and dropping rapidly)

Was there subprime in Ireland? Down double digits YoY (I've seen reports of -14%)

Was there subprime in New Zealand? Down single digits YoY

Was there subprime in Portugal? Down single digits YoY

There are reports of falling prices in many other countries in Asia and Europe.. Was there subprime there?

Every country had its own problems that can be summarized as follows: Time and price.

When prices go up forever (time), it encourages people to pay too much thinking prices will continue to go up, borrow too much and the financial sector lends too much and levers up too much. Pretty much everywhere in the world. The boom was global and the bust will be global.

Monday, September 29, 2008

What a mess!

TSX down 840; Dow down 777; S&P down 106; Nasdaq 100 down 10%

What a mess! This is the kind of stuff that I was worried about when I wrote this, this and this.

While I did not expect the bailout to get rejected today, I mentioned back on the mother of all bailouts that a crash was a definite scenario. Today was not a crash but perhaps a mini-crash or a slow crash. I wish that Paulson & Co hadn't manipulated things so much that I could have been more short but the volatility is too intense.

Today was the first time in this bear market that things really got panicky. Not enough panic to set a bottom in my opinion. But maybe a bottom for 2 days to 2 weeks if we get any type of good news (ie government manipulation).

However, for there to be a real bottom, IMHO, we need it to be one without government intervention, in that sellers have to become exhausted naturally.

I feel bad for those affected negatively by this (and it will probably spread to affect everyone including yours truly). Hopefully, the readers of this blog have taken note and spread the word to friends and family. Cash is king, debt is bad.

We have had a long uninterrupted boom (with a brief hiccup around 2001) for about 17 years. We are only about 1 year into this and to expect a magic wand to be waved and everything to go back to the way things were before is folly.

Every single asset class except cash, short term government bonds and selected currencies (Yen, the US dollar) and maybe gold are holding up here. Everything else (stocks, most bonds, real estate) are getting annihilated. I suspect that we are getting close (in time but maybe not price) to a multi month bear market rally that should start in late October or November and should last into January or so. But we have a few more storms to go before this financial hurricane lets up.

Expect to see one or more of the following government steps announced on Tuesday: temporary ban on all short selling, return of the uptick rule, there is the talk of the elimination of much of the credit defaults swaps out there. Also a global interest rate cut can not be ruled out any day this week. Plus, this bailout will likely get reworked and go for another vote this week. All these measures will ultimately fail though but may cause another short term spike.

By the way, is there anyone out there that can still say that Canadian housing is going to be up this year (with a straight face) or that a Canadian recession is not a distinct possibility?

Credit crunch hits Canada (again)

From Friday's G&M "Mortgage rates climb as squeeze tightens"

In Canada this week a number of banks raised mortgage rates, and it's a matter
of days before others follow. The posted rate on the popular five-year fixed
mortgage, for example, has gone up by 0.35 of a percentage point to 7.2 per

Back in mid-December, 2006, when the Canadian housing boom was
full swing, the spread between posted five-year mortgage rates and bond
was 2.59 percentage points, close to the average level over the past

Today, as the credit crunch persists, the spread has widened by
56 per
cent, to 4.05 percentage points as a result of tighter liquidity and

Executives at Canada's big banks say the
industry will cut
back on lending and raise rates as a result of the current

In an interview this week, Tim Hockey, head of Canadian
banking at
Toronto-Dominion Bank, said that loan growth will slow in the

"Clearly, one of the things that's happened as a result of the
credit crisis is that the absolute cost of funds has gone up. And
that has
effects on both the price of lending, as well as on ... competition
deposits," he said.

Just another thing that will hurt the financing aspect of this housing crash. We have the October 15th change, interest rates rising and the access to lending which is all drying up.

Combine that with falling house prices and falling stock prices and you have a recipe for a disastrous housing market for the fourth quarter of 2008.

Unless you absolutely need to buy a house right now (downsizing or you can't rent) or you completely ignore the news about this stuff (and yet are still willing to spend hundreds of thousands), I wonder why anyone would be buying a house here....

Thursday, September 25, 2008

Odds & Ends

A few housekeeping issues:

1) Here is a list that I put out on September 11, 2008 (just 2 LONG weeks ago: feels like 2 months ago given all that has happened since then):

Given that WaMu appears to be done as of tonight, a review appears to be in order...

Here is my list of candidates once LEH and WaMu are done. I have no special insight, just the way that they are trading:

Bear Stearns



Very Likely and soon?

Lehman (Sept 14th)

WaMu (Sept 25th)

National City (not yet?)

MBIA (not yet?)

Ambac (not yet?)

Wachovia (not yet?)

AIG (Sept 17th)

Eventually? Some type of takeunder/breakup?

Merrill (Sept 14th)

Citigroup (not yet?)

Morgan Stanley (not yet?)

While the list is shorter now, there are still plenty of candidates left.

I think that JPM got a nice deal on WaMu and I may actually look at buying some JPM when I feel that this bear is ending AND if JPM shows good earnings and technicals at that time. Note that "that time" could be in a month or in 5 years...

2) I kicked out some of my shorts on Tuesday and gold today and I am currently about 90% in cash with a few small positions left. I did so anticipating a big up day (today would qualify) once the bailout's passage seemed likely. Tonight there is news that the bailout is in trouble, so Friday may be a down day. While I believe that the bailout won't ultimately work, the market perceives this bailout to be necessary to avoid a crash, so if we don't get a bailout by Monday morning, look out below!

Assuming a bailout, I think the market has an upward bias here, but I am looking to reinitiate at higher levels in October. Just not sure how to make money on the short side given all the recent manipulative actions from the SEC.

3) One note about the Canadian dollar: While I have a lot of Canadian dollar cash (mostly in the CDIC insured Altamira Cashperformer), I am very bearish on the loonie here. Back in April, I saw the Canadian dollar heading to 92 to 94 cents (it was at 98 at the time). We hit 92ish 2 weeks ago and since then, we have bounced all the way back to 97! I have been buying US dollars this week.

My reasoning: This is an oversold bounce for the Canadian dollar as oil bounces and as the perception is that US finances are in shambles (they are). However, in a credit crunch, debt gets extinguished and much of the debt out there is denominated in US dollars and was used to buy real estate and lever up in commodities. As most asset classes fall (a global margin call), the US dollar will rise, as it did since mid July (while gold & commodities sold off).

I hold some US cash as I think that if we take out 92 cents, we could eventually settle at 85 cents, if we get a market meltdown this fall.

4) My winter outlook may not be "cold" enough as I think that there is now a risk

that if the market is not saved here, that we go lower than I initially thought (S&P 1080) to S&P 990. This would translate in to roughly 9000 on the Dow.

Risk is high here, bailout or not...

Amazon Contextual Product Ads