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.