Thursday, December 17, 2009

Helicopter had a “teaser rate” loan

From, the extended Bernanke interview.

Q: Do you have a mortgage?

Bernanke: Oh, yes, we refinanced.

Q: Oh, perfect. When?

Bernanke: About 5%. A couple of months ago.

Q: Good time.

Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.
Q: So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information.

Bernanke: Thirty years fixed rate at a little over 5%.

With short term interest rates at zero, how does an adjustable rate mortgage (ARM) explode?

It explodes when you get a teaser rate. So a few years ago, in the housing bubble, Helicopter Ben likely took out a teaser rate (low rate initially/high rate after teasing period is over) and gambled that since his house would appreciate in value, he could refinance at similar or better terms at that time.

Wrong! Just like subprime would be contained.

He refinanced at a 5% 30 yr, a rate that low because of the Fed’s one trillion dollar purchase of Fannie/Freddie junk paper at a premium.

He didn’t go with another straight forward ARM at 4% and then switch to a 30 yr if 30 yr rates go lower. He clearly thinks that the 30 year is going up. It probably will as the Fed is scheduled to stop buying the junk in March and if the 30 year treasury yield goes up, as supply overwhelms demand.

However, given Helicopter’s track record, is it possible that that his 5% 30 year is actually a high rate and that rates are headed lower still?

Not saying it happens, just asking?

The guy can't even get his own mortgage right. Why do we think that he can manage the world's economy?

HT to Minyanville’s Branden Rife for pointing this out.

Wednesday, December 9, 2009


The dominoes have started falling...

I don't expect them to be contained.

One of the amazing things to me is that after a ton of failures last year (AIG, Lehman, Citigroup, Merrill, Bear, Bank of America, Fannie, Freddie, GM, Ford etc..) and international disasters (Iceland), since March 2009, things have been very calm.

Until Thanksgiving weekend, when Dubai World basically announced a default prior to a four day Eid holiday.

Dubai World is technically not a sovereign, but basically the equivalent of a crown corporation of its government. The government of Dubai has stated that it will not bail out Dubai World. However, most reports have it holding the majority of Dubai's debt ($60 billion minimum of roughly $100 billion for the whole country- who really knows the true numbers?). Basically, a drop in the bucket in the grand scheme of things, but a possible domino in the interlinked global financial system. Losses in one asset class can lead to selling in other asset classes as leveraged investors sell good assets to pay for the losses, particularly in the case of those banks stuck with Dubai World paper.

My knee jerk reaction to Dubai (sorry, didn't get time to publish it) was that it would cause a short term sell-off until the "it's contained" bulls came out and bought. My thesis was that it would at temper the USD carry trade into risky assets by making people at least question default risk, especially in countries where the rule of law isn't quite as strong as in democratic countries. The market would then relax a little as long as the Dubai story stay contained.

And relax it did (much faster than I thought), and the USD completely reversed the flight to quality from Dubai. The S&P hit a new intraday high last Friday.

This week, Greece has been in the spotlight as it is basically running up too much debt after lying its way into the EU. Greece is another domino. Bigger than Italy, Portugal and Spain. The market now is pricing in a possible Greek default. It has a higher credit risk than Columbia or Panama. It is part of the Euro, so it can not devalue or cut rates to get out of its problems. Greece has to refinance or issue 47 billion Euros in 2010. Good luck with that! My guess is that the EU will force Greece to make massive cuts to its spending and increase taxes before even contemplating any bailout. The EU is reluctant to bail out Greece (and it has no official duty to do so) because it would create a moral hazard and the list for bail out candidates is very long.

Here is a list of other potential trouble spots:

1) Latvia is a small country, but it is on the edge of a devaluation of its Euro peg. Devaluation could spread to other Baltic and Eastern European countries, which have mindboggling debt loads. Where does most of the debt reside? European banks
2) Eastern Europe is a big mess. In the boom, credit was flowing to these countries (again European banks). Housing bubbles, euro mortgages for countries that don’t use the Euro, huge deficits. Ukraine may default and has a crucial election coming up in early 2010.
3) Spain has a bigger housing bubble than the US. It has likely yet experienced the worst of the implosion. Add Portugal and Italy to the list of suspects as well.
4) Ireland, the former Celtic Tiger, is in bad shape. It appears to be taking its medicine but you never know about aftershocks.
5) Dubai and the Middle East: Dubai has technically not defaulted, but realistically it has. It is the posterchild for debt excesses. If it can get bailout money from Abu Dhabi, maybe it can muddle through somehow. And all of this is with $75 oil. Imagine what happens if oil goes to $20!
6)Venezuela and Argentina are also possible trouble spots. According to the CDS market, they have a high chance of default.

Longer term dominoes:

1) China: I am not a believer in the China story. China’s economy is supported by exports and fixed investment. Exports are getting killed, obviously. However, consumer stimulus and fixed investment has more than picked up the slack. There is an investment bubble of epic proportions. Fixed investment is up 50% (!!!) over already inflated levels. Banks are lending with no realistic chance at a decent return. I see a lost decade coming for China at some point. With a rapidly aging population, China is rapidly becoming yesterday’s story and not tomorrow’s as 99.9% of the mainstream media would have you believe.
2) Japan has almost 200% government debt to GDP and is locked in the throes of severe deflation. It has been saved by rock bottom interest rates. If the market ever gets scared that Japan will not be able to pay its debt, interest rates would soar, making Japan’s debt load completely unaffordable. Japan has a ton of domestic savings, you say? Yes, it does, and that has saved it thus far. However, savings are dropping to near zero as its population ages while debt grows exponentially. This is a longer term domino but worth keeping in mind.
3) UK is in bad shape right now. If you get another financial crisis like 2008, good luck!
4) In the US, there is a huge reset in Alt-A and Option-ARM mortgages that is JUST STARTING. Combined with 10% unemployment, I expect foreclosures and defaults to soar in 2010, and house prices to continue to fall. Commerical real estate is a big mess. Budget deficits and growing intolerance for any new bank bailouts are going to make 2010 challenging for the bailout kings if things unravel once again.

Most of these dominos involve the same story. Too much debt, not enough savings.

What does this mean for 2010?

I have been looking for trouble abroad to be the next catalyst. I have laughed at those who have blamed the Americans for all of the world's problems. I even heard one analyst in Dubai blaming the US as the originator of the world financial crisis that has now washed up on its shores. Gimme a break! Dubai has built up a fantasyland in the desert with excess leverage. It was bound to fail eventually.

These dominos are likely to strengthen the US dollar especially versus the Euro, and tank commodity prices and stock prices as we go forward from here. I expect many sovereign defaults in 2010/2011 in addition to big problems with provincial and state debt loads in Canada and the US.

I am not sure how it plays out but I suspect that credit spreads are going to widen for most countries and it could even infect the safer credits of Japan, the UK, Germany and the US. The Dubai and Greece experience are going to make many bond investors look at the details of what they are holding (not sure why the experiences of 2007/08 didn't do that, but I digress). In addition, credit losses on defaults are going to hit, what else, the financial sector, with unknown further dominoes, including derivatives and/or bank runs.

In recent days, the US dollar has strengthened due to this return to risk aversion (and a strong employment report on Friday). The US dollar is the most hated asset class and everyone thinks it is going down. I think the dominoes are likely to send the Euro down to par over the next few years, and the US dollar is likely to be very strong in 2010 (target 1.15 to 1.25). This will unwind the carry trade with a steep drop for stocks and commodities. In addition, stocks are overvalued so a move to new lows in 2010 is very likely.

This does not even factor in the effect that an Israeli attack on Iran would have. That has a much higher chance of happening in 2010 than most are contemplating, I believe. (I will need to cover this in further detail at some point).

I suspect that with only a handful of trading days left in 2009, the bulls will keep things afloat for year end bonuses. Perhaps a move to new highs in January even.
I fear that 2010 is looking to be a repeat of 2008.

Meanwhile, the useless mainstream economists (not Rosenberg or Krugman) will tell you that it is going to be a slow but steady recovery with GDP growth in 2010 & 2011 of 2 to 3%. When the catalysts hit, they will say "no one predicted X, no one could have seen Y" as their models can't cope.

Wednesday, November 4, 2009

Winds of Change in USD and SPX?

I have warned about premature celebration regarding the economy.

What does this mean for an investor or a trader?

It is not crystal clear yet for me.

Personally, 2008 was relatively straightforward. As I warned many times over 2008, we were heading a lot lower. However, by late 2008 and early 2009, once we had crashed, the future was looking a big murkier to me. The problems are still there, but a 60% move in 17 months means that at least some of it was priced in.
I correctly saw the potential for a bear market rally but I completely messed up the trading of it and did not allow the rally to run its course.

In recent months, now that the “easy" money (it is never easy) had been made on the short side in 2008, I realized that I needed to adjust my approach.

I began to distinguish my intellectually bearish stance (where I believe this entire rally to be false and doomed to fail) from trading on the bear side. Since August, I have been a lot more selective about waiting for confirmation of the bearish case to show up. I believe we at least have a bearish set up here and I am trading quite heavily from the short side (note that my stance could change tomorrow).

Since the September 23rd Key Reversal Day and more recently, the October 21st Key Reversal Day, the market has looked toppy. A number of technical indicators are at least flashing caution, and since September 23rd, I have played the short side carefully, with small positions and with small gains. We have had a bunch of double tops in key indexes (transports, Russell, SOX) and poor action in key sectors such as financials and homebuilders. Good news is no longer leading to gains, and bad news is met by selling. Volume has been heavy on down days and poor on good days.

In the past week, I have ramped up my short positions as confirmation of at least a correction have shown up. We may be in a selling stampede (Jeff Saut’s term) that normally last 17 to 25 days, and are interrupted by 1.5 to 3 day countertrend moves. By my calculation, we are likely in Day 12 on Thursday, and today’s FOMC reversal might have been the end of a 3 day counter trend move.

The setup is here, and I believe a move below recent lows of 1029 should lead us to 950/956 by around November 20th.

The bull case, in my opinion, is that we bottom around those levels and then rally back by year end or early 2010 to 1100 or higher.

The bear case is that we are going much lower than 950 and will take out the March lows, albeit not in 2009.

I believe in the bear case, but if we get to 950ish, I will pause and see the quality of any rally that develops.

Everybody is now discussing a new US dollar financed bubble (we covered this 2 months ago). If the dollar soars, as I think it might, S&P 950 is a slam dunk. However, to get the bear case to actually happen (beyond the current move to 1030ish), the US dollar needs to take Tuesday’s spike high and take out 77. A USD spike should kill the resilience that commodities have been showing and shave points off the TSX and S&P.

In addition, we need to see further strong selling (similar to what happened between 3pm and 4pm today) show up again this week. That will confirm to me that we are in a selling stampede that is about to get really chaotic.

Note that gold/silver, credit spreads, US long bonds and weakness in financials are all potentially warning of coming problems. Offsetting those signs are resiliency in oil, commodities and China.

I suspect that the market will decide this very soon. If we don’t go sharply lower soon, I will probably have to put away the bear case (again).

Positions in USD, CAD, Euro, QID, SKF, HMD, JPM, BMO, CM

Friday, October 30, 2009

While you were out celebrating the end of the recession…

There have been a series of articles touting the end of the recession this week.

ECRI calls it the
giant error of pessimism (the pessimism prior to a recovery)

ECRI and pretty much everyone now, thinks that we are going to see a stronger than expected recovery and that the recession is over. Q3 GDP came in at 3.5% (caused 100% by government spending, per Dave Rosenberg and others) and I would not be surprised to see positive Q4 GDP. However, this is not enough to declare an end to the recession. A quarter or two of positive GDP, especially with an avalanche of government stimulus, is not enough. The key, in my opinion, will be Q1 2010.

Bernanke and his clueless cohorts continue to cheerlead the recovery from a recession that they did not see coming.

Call me a realist.

I am wondering, where is continuing growth going to come from? The stock market is not always good at giving us guidance on the economy but in a post-bubble credit contraction, when it turns down or up, it can give us immediate clues to the health of the economy. In October 2007, the market topped and so did the economy a month later. In September 2008, the market tanked and so did the economy. Remember, until that point, all the so-called experts were not even conceding that a recession had started! In March 2009, the market rallied and the economy began to improve from a -6% clip to 3% in Q3 2009.

The same thing happened in 1929 when the economy shrunk in August 1929 and the stock market peaked in September 1929. Ditto for 1873 (hat tip Bob Hoye)

Let’s look at some important sectors that are not joining the celebration:

1) Restaurants: Most US based restaurants bottomed ahead of the market in November 2008. They led the rally since March. Many are down sharply in recent weeks. McDonalds, which is doing well and benefitting from the dropping USD, has said that customers are in retreat mode.
2) Housing: Sure, Case-Schiller is up for 3 straight months. Then why are housing stocks down almost 20% in the past month. There is a ton of foreclosed housing that is not even on the market yet. I believe that this recent rise in Case-Schiller is a blip.
3) Semiconductors: Again, another leading group that led the rally this year. Down about 12% in recent weeks.
4) Transports: A key sector, that has really stunk it up in recent weeks. Down 12%.
5) Russell 2000: Down 10%. This represents smaller companies that have little international exposure, and therefore, a good proxy for the US economy.
6) Financials: Key financials such as Bank of America, Citigroup, Wells Fargo are down over 20%. Also, credit continues to contract at alarming rates as consumers pay down debt and banks cut credit. Again, this is not your father’s typical recovery playbook.

Hat tip to Smita Sadana of who has been tracking these groups.

So what is holding the market up here in the stratosphere?

1) US dollar. The sinking greenback has been giving fuel to commodities and the large sectors in the S&P. In addition, it props up the earnings of the multinationals that dominate the Dow and S&P. Finally, it is the fuel for
the carry trade in which traders borrow USD at near zero and invest it is risky assets. In particular, corporate bonds have done very well, and I suspect that if the USD has put in a bottom, look out corporate and junk bonds. If the credit markets go, so will the stock market.
2) Large cap tech. Apple, Google, Microsoft and Amazon have had great runs of late keeping the Nasdaq strong. Any breakdown in the overall market will force these names to play catch up to the downside.

What is going to lead the recovery?

It does not look like restaurants, housing, rails, semis, domestic companies or the banking sector are going to lead 2010 growth, at this moment.

The sectors that are still holding on?


If the US dollar has put in a bottom, then I would expect commodities, multinationals and tech to enter a downleg, as revenues would fall and cost-cutting will not generate a recovery.

How about pharmaceuticals? These are a fairly steady sector of the economy that is unlikely to generate a strong recovery or start a recession at this time.

How about manufacturing and autos? Boeing and the automakers are struggling and don’t see a big near term pickup. This leaves the 3M, Duponts and Caterpillar. Jury is still out on these, and if the US dollar turns, good luck!

How about the consumer (70% of the economy)? See comments above on restaurants and hosuing. Unlikely, that retail will lead with housing and credit very tight and 10% unemployment.

How about government? This has been the single largest contributor to growth as stimulus and printed money have found their way in to the economy this year. Sustainable recoveries need more than government spending. And with $1.5 trillion dollar deficits as far as the eye can see, even if the Obama administration is somehow able to cobble another stimulus package for the economy, I believe investors are not going to be fooled again.

For a recovery to happen, you will need some participation from retail, banking and housing in my opinion.


I understand the logic of ECRI's giant error of pessimism. I also understand the logic of the message of the stock market and the logic of an aging undersaving, tapped out consumer who is getting foreclosed. I also understand the logic that there is too much debt out there that needs to be extinguished once the banks "extend and pretend" shenanigans are "discovered".

If the US dollar has bottomed and the stock market has peaked, then I believe it is telling us that there was no sustainable recovery. Canada and the UK’s recent disappointing GDP reports only further confirm my suspicion.

Thursday, October 22, 2009

$100 Billion: Not yet a tipping point

Ontario $25B
Canada $55
Quebec $10 (I’m not using their fudged numbers- I’m using the increase in debt)
BC $3
Alberta $7

Total $100 billion (Let’s count the big guys for simplicity).

I warned about a return to deficits almost 2 years ago, when everyone was talking surpluses.

$100 billion is a lot of money. This represents about 7% of GDP. Similar deficits in the 90s caused a lot of belt tightening that was well absorbed by the economy during the booming 1990s. In the 1990s, the population was much younger (baby boomers moving into their peak spending and earnings), the technology bubble was just starting and credit was flowing freely as consumers were just getting started on the shop ‘till you drop mentality. In addition, there was a wave of deregulation hitting the Canadian economy. Remember Wal-mart only came to Canada in 1994, and you had no choice but Bell Canada for your wireline phone.

Now, we are an older population with a looming health care crisis. Health care spending is now almost 50% of most provincial government spending. Education is about a quarter. Consumers need to deleverage and start saving (unlike 1994), and housing is overvalued (unlike 1994).

TD Bank assumes that about $30 billion of this is one-time stimulus. However, to remove this, GDP would drop by 2%. To grow 3% next year as the BoC is expecting, the Canadian economy will need to grow 5% organically. Good luck with that! Therefore, expect the one-time stimulus to mostly remain for 2010 and maybe onward.

If one is optimistic and assumes that this is not a L shaped recovery, then some of this deficit will disappear as the economy grows and new spending is restrained.

However, just remember that during the recovery (again, assuming that there a recovery right now and indeed the recession is over), government revenues have to organically increase by $100 billion more than expenses over the next decade to arrive at a balanced budget. It is possible, as we did it in the 1990s (from about 10% of GDP) but as I mentioned, things were different then. Also, interest rates are historically low right now. Any increase in interest rates (something that should happen if the economy recovers) is going to make that task harder. In the 1990s, interest rates fell despite the boom. Those interest savings were passed on to taxpayers via tax cuts, as well as used to balance the budget and increase spending. Don’t expect that to happen this time!

If I am right and this recession is longer and more severe than most expect, we are going to go beyond $100 billion ($150, $200?) and we are going to reach a point of no return, where we can’t simply pretend that everything will go back to the way things were (I think we are still doing that,
case in point the housing market).

There will then need to be draconian spending cuts, where the medicare system as we know it will no longer exist, tuition increases, large cuts to the payments to the poor & elderly and to the bureaucracy. In addition, tax increases and higher user fees will probably be attempted. If lenders do not wish to pay for our spending habits, long term rates could increase despite being in a deflationary world.

I believe we are heading a 21st century New Deal, where due to the current crisis, government will be forced to step away from the nanny state and focus on a few key services. The rest will be left to the private sector and regulated or managed by the government. It will not be ideology driven. It will be driven by realism. Ultimately, this will lead to a better Canada, but the next decade will be unpleasant.

All this with
the shortest recession….

Tuesday, October 20, 2009

Horn tooting


Last week, blogger extraordinaire Mish put out an
excellent critique of ECRI’s recent record. As I was reading it, I thought to myself: this is very similar to what I wrote back in the summer (original and with ECRI comment). Then, I saw that Mish gave a hat tip to this blog (thanks!). He went even further than I did, and did an excellent analysis.

Apparently, Paul
Krugman thought so too. While I often disagree with Krugman’s interventionist approach, I can not deny that he is a brilliant person and a Nobel prize winner. To see Krugman, the leading Keynesian of our day, agree with Mish, a strong proponent of the Austrian school is quite unusual.

Once the Mr. Krugman got into the game, ECRI had to do damage control, as it is doesn`t want Nobel prize winners questioning its calls or model. Any doubts about its calls or model can seriously hurt ECRI’s business, especially when that doubt it sowed by one of the preeminent economists of our day.

ECRI put out a statement contradicting Krugman.

The Big Picture then commented.... Not sure, how it happened, but this little blog managed to write a piece that got the ball rolling and indirectly caused comment by a Nobel winner, 2 top bloggers and a top economic forecaster.

The funny thing is ECRI should be sitting pretty right now, as its April call for a strong economic recovery is being corroborated by the stock market which hit a new high this week. This doesn’t mean that it will ultimately be a good call, or that I agree with it. To ECRI`s credit, they came out boldly and early with the pronouncement.

Also, notice how none of this discussion took place in the mainstream media (unless you count Krugman’s NYTimes blog).

Questions on US dollar

Question: is it the USD to watch or the Euro? Just that there appears to be an
inverse correlation between the EURUSD and US equities, gold, etc. I looked at
JPYUSD and didn't see the same correlate, and the 'commodity currencies' like
CAD, AUD, etc seem to rise & fall with commodity prices rather than what the
USD is doing specifically. While I agree that a spike in USD will likely
coincide with a drop in equities would a EURO sell-off coincide with that or
precede it?Does that make sense?

Also, I'm convinced this 'dollar doomism' that seems to be popular these days is rooted more in ideology than reality. Do you think perhaps, without getting into tinfoil hat territory, that there's a deliberate ploy to force the Fed to raise interest rates prematurely?

Not a stupid question at all. Euro is over 50% of the USD index (comprised of a basket of currencies including the loonie). Yen has been the strongest currency since the credit crunch started in mid 2007. I have been long it at times, but not sure if it will do as well in the next phase. Big movements in commodity currencies can influence USD. I watch the Euro religiously. It needs to break down for any sell-off to be meaningful in my opinion (as a sign of unwinding of the carry trade). The Euro is very, very overvalued in my opinion.

I agree that the doomism is more rooted in ideology than reality. Don`t see a ploy. Only ploy is borrow in USD, go long risky assets. A classic carry trade. I believe that since everyone hates the USD and likes the Yen, and there is no difference in interest rates between the two, the USD has replaced the Yen as the carry trade currency of choice. This will result in a soaring US dollar if asset prices drop once again. I no longer think that the Yen will soar the way it did last year, although I think the Euro and commodity currencies will take the biggest hit.

Disclosure: Positions in US, Canadian and Euro cash.

Thursday, September 24, 2009

The second biggest bubble in the world: Canadian housing

A mea culpa is in order. After a good 2008, my predictions on Canadian housing for 2009 are going to be a disaster. I admit it.

However, nothing I have seen to date tells me that the longer term direction of housing in Canada is going anywhere but down.

Due to government manipulation (see this excellent blog posting) which has surprisingly worked and record low interest rates, the Canadian housing bubble has reflated. Reflating bubbles are extremely rare, especially when combined with a stock market crash and a recession. Nonetheless, here we are.

Longer term, the housing market is going to go much, much lower. I believe that this echo bubble is completely nonsensical. Why? We are in a world of deflation, folks. Asset prices, incomes and wages are all either stagnating or dropping. Not just for months but years. Due to this echo bubble, the Canadian housing market has avoided the vicious circle of falling prices that create foreclosures (for now) which create lower prices (California).

However, the amount of debt in Canada is way too high. Despite what has happened to the rest of the world's housing, Canadians still believe that a 4% mortgage with 5% down for 35 years is completely sane. Based on the past decade, they have been correct. When this bubble truly deflates, a very similar experience will happen.

Forget all the explanations of subprime etc.... Those are revisionist explanations and symptoms of the problem. I look at time and price. When time is up on this boom, price will deflate. Canadian prices rose as much or more than US prices, and now for much longer.

Read this G&M article and tell me if it makes sense:

Why, after all the building of the past decade and the unlimited space that we have in this country, is there a perception of a shortage of housing?

The Canadian housing bubble is becoming as bad as the American one. A generational or lifetime high price in housing is happening as we speak and the bears have been capitulated. I plan on writing more on this as time permits.

Wednesday, September 16, 2009

US carry trade

Art Cashin stated months ago that the US dollar carry trade was ruling the roost. I think he was 100% right. The key thing to watch will be the US dollar. As long as it is sinking at an orderly rate, everything else (commodities, credit, stocks, all other currencies) is going up. The world is long assets and short USD.

When it reverses (and I believe it will; a number of technical measures are moving toward a reversal, but not quite yet), this will crush these asset classes. I am watching the USD carefully. A move above RSI 55 may be the key (it is currently 31) and above its previous resistance around 78. First we may need a mini-crisis (perhaps a quick drop to the low 70s) in the near term to trigger the reversal.

Disclosure: Positions in USD, Euro, Cdn cash, positions in select SPY puts, JPM puts, IBM, CM.TO, BMO.TO, TCK-B.TO

The Towel

In a post a couple of weeks ago I posted:
4) USD bottomed in early August?
5) Credit market topped in early August?
6) Gold/Silver doing a double bottom in late August?

Oil and commodities did a double top in early/mid August?
Stock market topped late August?
We need confirmation from the USD (rally to 80+), gold/silver to take out 70/72 and credit markets to tank.

This would likely confirm a top in commodities and stocks and allow for a substantial correction at a minimum and even possible a break/test of the March lows. To this list, I would also watch:

A) Financials
B) Yen
C) TLT (proxy for long term treasuries)

We know know that

4) USD headed lower and still sinking
5) Credit markets are doing just fine (for now)
6) Gold/silver ratio is heading to new lows

Financials are behaving fine (for now), TLT is doing OK and the Yen is soaring (normally a warning, but may be simply a reflection of every currency up vs the dollar).

All, in all, I have to respect what I wrote that day:

If we rally back over S&P 1040 right now after today's move to 998, then the bearish case may have to wait until 2010.

We got no confirmations from any of that list.

S&P hit 1068 today. I closed out almost all of my shorts around 1030ish, and I am in wait and see mode. I don't think the bearish case will wait until 2010, but anything is possible here as the bulls are in the driver seat. It remains to be seen if the car is heading off a cliff, though. Almost all major asset classes are at critical levels (gold, USD, Euro, stocks, etc...) and I believe the reversal will be incredible. However, for the short term, I need some sign of a reversal. Thus far in 2009, I have either been wrong or very early. I still believe that I am just early, but once again, I will wait for confirmation. A blow off move has ensued and a move to 1100-1120 is very possible. I still believe that new lows are coming and that this depression is a multi-year process. For now though, discipline must trump conviction.

The position that has caused me the greatest problem this year has been holding too much US cash.

Disclosure: Positions in USD, Euro, Cdn cash, positions in select SPY puts, JPM puts, IBM, CM.TO, BMO.TO, TCK-B.TO

Tuesday, September 1, 2009

Winter Update

On July 6, I stated that I thought winter had started and that a top had been formed in mid June. On July 13, I recognized that a short term bottom was in, and a week later, when it became clear that a bull stampede was in place, that the real move down (ie winter) might have to wait until August.

It's OK to be wrong, in my opinion. Just try be wrong small. Easier in practice than reality, but that is another story.

In my July 6 piece, I identified why a top was in. Clearly it wasn't at that time. I thought it would be a good idea to update (in red) those items:

1) Lowry's Report. Basically, they are saying that the underlying demand and supply of the market is much worse than what the price action of the indexes is indicating. Their head Paul Desmond recently went on CNBC to say this and he expects a break of the March lows. A big change, as Lowry's has become a cautious bull. Therefore, this point is no longer valid for the time being.
2) The gold/silver ratio is warning of trouble ahead (thanks Bob Hoye) by jumping to 70 from 61. A similar jump happened last August. We all know what happened in September 2008! This ratio often leads in a crisis. Signal reversed after hitting 72. It has since dropped to 63, a level which it hit in August and now. Bears watching carefully. I want a move to 72+ to confirm ideally.
3) The US dollar appears to have bottomed. Another nail in the coffin of the bulls if it is true. Another false bottom but recently the US dollar has shown signs of turning up. Again, not clear yet. I want a move to 80 in the USD index with a daily RSI of 55+.
4) Commodities appear to have peaked. Another nail. Commodities rallied but look to be weak again. A true bottom in the USD is necessary for this to be confirmed.
5) Jeffrey Cooper from, one of the best out there and a master of cycles analysis, has been warning of impending trouble from mid August onward. I agree. Still warning, and looking for a real sharp move down in September/October.
6) The green shoots were a myth. The proof is overwhelming that all you had was a slower decline in GDP not a return to sustainable growth (ie underlying demand, not inventory building). You could conceivably have green shoots at some point. I just don't see them yet. The biggest green shoot is the stock market. Yeah, that worked out real nicely in October 2007, when the S&P hit a new high, a month before the recession started, didn't it? Also, last month's US unemployment figures were horrible (while better than earlier in 2009, they were worse than anything in the last recession, including the period after 9/11- remember all those airline layoffs!). Consumer spending has also been atrocious of late. No real change in my view. Inventory building is taking place but final consumer demand looks to be getting worse not better. Case in point, retail sales in July stunk up the joint. Even with the cash for clunkers socialist gimmick, US retail sales were down 0.4%. Wal-mart comps were down 1% and then stated that they are taking market share (I believe it; when times are tough, people are going to Walmart). The stimulus effect is wearing off and there has been little or no positive impact on retail sales. Any recovery with the US consumer (70%) is suspect. If every other sector of the economy picked up (business investment, exports, housing, government), a recovery without the consumer would be possible. So far, That would be complete hope though as there is no sign beyond inventory rebuilding and government intervention that any of this is gaining any traction.

7) The history of monster bear markets is that they often have 40%+ rallies and then ultimately go to new lows. Look at the Nasdaq 2000-03. Ditto for Dow 1929-32 and Japan 1989-? Their purpose is to reset the shorts (by stopping them out or burying them) and suck in the bulls. Bear markets are as much a function of time as price. We have had a severe decline in price (although I think we need more). In terms of time, for a megabear market, this one has been quite short (20 months). More time is necessary to change psychology on a long term basis. No change, except that the rally went to 50%+, similar to the 1930 Dow rally. That rally failed and went down another 83%.
8) Sentiment has become almost universally bullish. It always does in a bear market rally after a crash. There are no shortage of people who have claimed that the worst is over. I believe the worst is coming. Even some of the bears are only looking for a retest of the March lows (the bulls are looking to 1000 to 1300 and laugh at the thought of a retest; they are convinced that a 40% rally means that a new bull market has started). I am looking for a break of the March lows. Sentiment hit 2007 levels last week. Bears are under 20% and bulls are over 50%. Very bearish.
9) International problems are likely to rear their ugly head (North Korea, Iran, swine flu, Latvia, Ireland, Chinese smoke & mirrors- I am a China skeptic). China is the biggest factor. Everyone is bullish on the emerging markets. China is down 24% in the past month. This needs to be watched, but without China, the emerging markets are suspect. Russia is already well off its rally highs. India and Brazil appear OK for now. This bears watching closely, and is related to items 3 & 4. Without China, commodities have headwinds. Without commodities, the S&P has problems.
10) The recent spike in long term interest rates is a possible warning shot of problems ahead. Higher interest rates are sinking the economy and are likely to cause further problems as they spread to non-government bonds. Nothing alarming yet. However, non-government bonds (corporates & junk) are below their recent highs, and again bear watching. Emerging market bonds have also sold off recently (see point 9). Government bonds are rallying.

I would like to add that I am watching the Baltic Dry shipping index, which gave a 1 month warning on the top in commodities last summer, which in turn gave a 1 month warning to the trouble in the main stock markets. This year, the Baltic Dry double topped in early June. This has not yet cracked the commodity markets but has formed a possible double top (June and August) and not allowed commodities to hit a new high despite the new highs in the stock market. In addition, the Baltic Dry has preceded the Chinese stock market top by 2 months. Unlike Chinese statistics, the Baltic Dry is driven by market forces.

I am also watching credit spreads (JNK and CYE are good proxies). These had huge runs since the spring lows and may be rolling over.

I have prepared a separate post on warning signs.

Conclusion: Where does that leave us?

In no-mans land for now (S&P 998). The time for the bear case is pretty much now or never (for 2009)

If we break above 1040, a move to 1120 is the most likely scenario. At that point, I would be forced to drop the bear case for at least a little while and maybe play the long side. If we break below 978, I think a move to 940/950 will be quick. If we take out 940, a confirmed fall sell-off is very likely.

Do we break the March lows? I am painfully aware that a move to S&P 666 is approximately -35%. Is it possible this fall? Yes, if we get some real ugly events (bank failures or country failures) like we did last year. Forecasting such events is perilous at best. I firmly believe that we are going to test and ultimately break those lows. Will it happen in 2009? I honestly don't know.

One scenario that I am grappling with is that we sell off to a higher low such S&P 800ish and then rally to a new high in early 2010 (1120?). This would gets people crazy bullish with a higher low and higher high. This would be a false hope and we could then crash later in 2010.

Another scenario is that we could hit 800 and then rally to a lower high, and then fall later in 2010.

The final scenario (and one that I still believe in, albeit less than earlier in the year) is that we crash this fall and take out S&P 666.

I strongly believe that a sharp move lower is coming over the next few weeks that should take us to the low 800s on the S&P for now.

When the move down is confirmed by the price action, I will revisit this whole "break the March lows" issue. To get to the March lows, you need the financial sector to be in shambles as was exposed in late 2008/early 2009. If the financial sector is able to avoid another debacle, then a higher low is likely.

If we rally back over S&P 1040 right now after today's move to 998, then the bearish case may have to wait until 2010.

Disclosure: Positions in SKF, QID, HOD.TO, FXP, SPY, EUO, POT, TCK-B.TO, HDU.TO, Cdn & US financials options and stock, US&Can cash

Checklist for market warnings

I have prepared a checklist for intermarket warnings as most markets peak before the stock market, and all markets are interconnected. I have left out US treasuries for now as they haven't warned (yet?). They may in the future.

There were 6 major warning signals given last year that warned of the debacle in the fall of 2008. This year, 3 of them are giving warnings, and another 3 are still up for debate (in red). For a major top to be confirmed (S&P 1018 as of August 7th; currently 996 as of August 19th), the USD has to rally big-time and commodities and credit markets have to sell-off.

The remaining weeks of August into early September should be telling.

Summary of 2008:

1) Credit markets peaked in early May. Major warning. Major problems continued into the summer.

S&P peaked at 1440 in mid May (2 week lead)

2) Baltic Dry peaked early June. (Chinese stocks already topped in early January and resumed downturn before Baltic Dry in mid-May)

3) Commodities (incl oil) peaked early July (1 month after Baltic Dry).
4) USD bottomed in mid July (2 weeks after commodities topped)

5) Chinese stocks rolled over in early August.
6) Gold/Silver ratio soared in early August.

S&P topped Aug 11 and double top Aug 25 but was basically in a trading range until early September. It rolled over and did a waterfall decline into early October.

In 2009

1) Baltic Dry peaked again in early June.
Gold/silver bottomed in early June.
2) Oil and commodities did a first top in mid June


Stocks bottomed in early/mid July and then embarked on a blow-off top into late August

3) Chinese stocks rolled over again in early August and head sharply lower.
(Baltic Dry down sharply)
4) USD bottomed in early August?
5) Credit market topped in early August?
6) Gold/Silver doing a double bottom in late August?

Oil and commodities did a double top in early/mid August?
Stock market topped late August?

We need confirmation from the USD (rally to 80+), gold/silver to take out 70/72 and credit markets to tank.

This would likely confirm a top in commodities and stocks and allow for a substantial correction at a minimum and even possible a break/test of the March lows. To this list, I would also watch:

A) Financials
B) Yen
C) TLT (proxy for long term treasuries)

Disclosure: Positions in SKF, QID, HOD.TO, FXP, SPY, EUO, POT, TCK-B.TO, HDU.TO, Cdn & US financials options and stock, US&Can cash


I have moved within Montreal so I have been swamped and I haven't had the time to post.

Did I buy something? Nope.

I still believe that housing in Canada is in a huge bubble, and also for non financial reasons, I am still renting.

I really enjoy posting on this blog and I welcome all feedback, both positive and negative.


Tuesday, August 18, 2009

The biggest bubble: China

Twenty years ago, when I was in high school, Japan Inc. was all the rage. Even in my university years (early 90s), Japan's version of capitalism was considered by academics and the mainstream media to be superior to the US.

Japan had keiretsu capitalism, whereby a group of companies were interlinked. The Japanese were hard working. They had to be forced to take vacations. They were smarter than Americans (or Canadians). They were buying up prized American assets. They had lifetime employment.

In reality, they had a huge stock market and real estate bubble. They had poor demographics (they did not enjoy the baby boom post WWII for obvious reasons). Their smart workers were not as creative as the "fat and lazy" Americans (look it up: that is what one official called Americans back in the early 90s; also a fantastic SNL skit with Mike Meyers). They are good at high end manufacturing (witness Toyota, Honda and Sony) but I'll be surprised if anyone can name any high-tech startup from Japan with any international significance. Keiretsu capitalism is now known as crony capitalism. Their banking system was insolvent. We now know that their system was not very adept at dealing with poor economic times, and their reaction to their depression was quite poor and not very dynamic.

All this is not to Japan bash. In fact, their story is remarkable. The Japanese are a smart and hard working people. They rebuilt their economy after the devastation of WWII (imagine the loss of millions of citizens and 2 cities being annihilated by nuclear weapons!) in one or two generations. I believe that things got ahead of themselves in Japan in the 80s and their system was not built to succeed for the 21st century (with creative and dynamic companies). I also believe that when this global recession/depression ends, Japan will fully participate in a recovery.

Again, when I was a young kid, the USSR was feared. Their hockey teams and Olympic teams were dominant. In Hollywood, their characters were always tough villains (think Rocky 4) or they were ready to launch nukes on us. On TV, their pre Gorbachev communist leaders were old and scary. Their military was very powerful and we were always worried about doomsday clocks and nuclear war.

In reality, the Soviet Union was a paper tiger. Yes, they had nukes but their economy was in shambles and much of their military was dysfunctional. We confirmed that totalitarian communist governments don't work. Their union was a joke and many of the countries that they kept in the Union by force either became separate countries or are still trying to get there. The Russian people were not to be feared and they wanted many of the freedoms that we have.

Why the history lesson from the eyes of someone born in the seventies? Because I am now old enough that I feel as if I have seen this story before. I am talking about China.

China has some strengths but unfortunately, it shares some of the worst qualities of Japan and the USSR.

China is a one party totalitarian government. To their credit, they have moved away from communism, but nonetheless, the central government has a ton of control over the economy. The recent stimulus is a case in point. The central government is also very involved in banking and fixed investment, which is supporting the economy at present, despite a huge drop in exports. We currently fear the Chinese military, although not to the extent of the USSR circa 1985. We all remember the disgusting Tienanmen Square massacre of 1989.

China is similar to the USSR in that it too is not truly a union. Tibet and Taiwan are two of the high profile cases. However, much of China is not homogenous. You have Christians, Muslims, Buddhists and different ethnic groups. You also have hundreds of millions of rural and mostly uneducated citizens as well as hundreds of millions of educated and urban Chinese that live centuries apart. All these interests are united by a totalitarian government. It is unlikely that China will stay together in the future. At some point in the future, China may well have the same problem that the USSR did and fragment.

China is also similar to Japan 1989, in that the West is so bullish on China, that they are suspending all rational thought.

Take a look at this gem of a quote from a survey discussed in Bloomberg:

Two-thirds of respondents say they are optimistic about India’s prospects, as are 70 percent on China. “The Chinese economy is run by the government, managed by the government, helped by the government,” says Omri Beer, an options trader at Nomura Holdings Inc in Tokyo. “It’s easy to be bullish.”

Or the Yuan as a global currency. It is not even the dominant Asian currency. It is not even freely traded. Even the respected Nouriel Roubini has been talking up the Yuan as a replacement to the US dollar. I vehemently disagree. One day, the Yuan may be considered in the same light as the Japanese Yen, but not as the senior world currency. Not any time before 2050 and probably not at all. It took the US dollar decades AFTER it surpassed the UK economy, and two world wars, BEFORE it became the dominant world currency. Even if China becomes the dominant world economy one day, it may take decades after that for the Yuan to become the dominant world currency.

Most in the West believe that the Chinese government is so wise and all-knowing. Their stimulus plan is genius. Their management of the economy is superior to a market based economy. They are combining the best of communism and capitalism. Their stockpiling of copper is genius, despite prices being historically high. Their GDP is growing while ours is shrinking.

The reality is very different. Have you seen their leaders? I wouldn't trust them to run a multinational company let alone one of the biggest economies in the world. Sadly, I could say the same about President Obama, but I digress.

I wouldn't trust any number coming from their government. Studies have shown that their GDP numbers are way too smooth given the relatively early stage of development that their economy is in. So when they report GDP, take it with a grain of salt. I will acknowledge that their stimulus appears to be "working". Yes, because they are forcing banks to lend, fixed investment to continue regardless of return on investment and people to consume. This can work for a short period of time, until the banking system is shown to be insolvent (Japan), the fixed investment ponzi scheme is exposed and the demand from consumers is saturated.

Their exports are mostly based on being the lowest cost and the quality is often suspect. Part of the low cost is the huge labor surplus and part of it is the manipulation of the Yuan. I suspect that China will attempt to move upmarket in the future, but I don't believe that the Chinese share the Japanese' love of quality. Also, there is again the same problem that the Japanese have with creativity and innovation. Name a truly international multinational coming out of China that is changing the way we live, like RIMM or Apple?

I have no idea when the China bubble will burst, but when it does, I think it will rival Japan's bust. It may not last 20 years but 10 years is a definite possibility.

I know the math about how China gets to be the dominant world economy. You take 4 times the US population and 25% of the GDP per capital of the US and presto, you get the biggest economy in the world. If only it were so easy. That population could shrink in a fragmentation scenario and their GDP is inflated by their own bubble. Again, I don't think the Chinese people are any different than you or me. They want the same freedoms and opportunities that we have. Many of them have immigrated to Canada, and they are a great asset for us. I just don't think that the Chinese system is superior and I believe that over the next decade, China will be derided for all of its mistakes.

Disclosure: position in FXP.

Monday, August 10, 2009

$17 OIL

Last July, near the $147 oil & TSX 15K high, I put out an outlandish target of $60 oil and TSX 9000. Ultimately, in the depths of the winter despair, oil hit $33 and the TSX 7,500.

Now that we are about 100% up in oil ($74 was the high) and the TSX has rallied to 11K, and the bulls are strutting, I wanted to put this out.

Even prominent bears such as David Rosenberg believe in the commodity super bull market. He points that even at the lows of 2008/09, all commodities had higher lows than earlier in the decade (2001-2003). Take oil for example. It bottomed at $17 in 2001. It bottomed at $33 earlier this year.

My problem with that view, is that it assumes that those lows will hold. (And they might).

I take the view that the credit bubble that inflated profit margins, housing values, stock market valuations also inflated commodity demand. You could make the argument that things are worse today for the economy than back in 2002/03. Therefore, demand does not necessarily support prices at $74 let alone $33. I understand that BRIC demand is way up since then, but that does not compensate fully for the drop in G7 demand, nor does it preclude a continued drop in BRIC demand as their exports continue to get smoked. Also, the commodity boom allowed tons of supply to come on stream making supply much higher than it did back in 2002/03. Throw in all the consumers that got religion on energy conservation from years of high prices and the green movement. Heck, even I just bought a front load washer because I calculated that it will save me some money over its lifetime. SUV demand is not coming roaring back despite the 50% drop in oil prices. Companies are looking to cut costs, including energy costs.

If we are in a sustainable recovery, then I agree, forget about $17 oil. If we are in a L or W shaped economy, then $17 oil should be on the table. Even back in the prosperous days of 2005, with the Katrina effect, we didn't surpass $70 oil. And here we are in the steepest global recession since WWII, and oil prices are at $74. Inventories are at multi year highs.

Philip Verleger's view are right on, in my view. Not necessary that we get there in 2009, but I think that $17 or $20 is much more likely than $100.

Saturday, August 8, 2009

Updated jobs prediction

Back in early February, when economists were talking about 8% unemployment by year end (we hit that in spring!) and shuddering at 8% unemployment and 325,000 job losses by year end, I made this prediction that seemed somewhat alarmist:
For 2009, I would look for an average of 50-60K in job losses (600K-720K annualized). This is optimistic, and it could be worse. I project an increase to 9% or 10% unemployment by the end of 2009.
I also predicted
it (unemployment) will be at 8% in April. By mid year, at the absolute latest. 9% by year end is looking conservative. Remember in the last 2 recessions, unemployment went to 12%.

In this job loss hurricane for the next few months, 50 to 100K should be the range.
Let's revisit this:

When did it hit 8%? April. good prediction
9% by year end? That is now the consensus (doesn't mean it will happen, but no longer outlandish). 10% I address in my prediction below.
In the job loss hurricane (which ended in March, as I acknowledged on May 11th when the April numbers were out) 50 to 100K was about right.
So far in 2009, job losses YTD are 331K. That projects to roughly 662K by year end, again roughly in line with 600K-720K. Too early to say...

Notes on the July numbers:
Every month, we get tons of new self-employment jobs (75K and fluctuating wildly since October). That to me is complete BS. That number is way too high and volatile to be believable. Since my predictions thus far have been quite good on the jobs front, I am now going to make predictions excluding this number, as it seems silly. I will predict the numbers ex self-employment.
The July losses excluding self-employment were 79K. That is astronomical for an economy supposedly exiting recession. Even when you add the 35K of self-employment, the number becomes 45K. Now, some of the July losses were probably due to the fact that April and June were quite good. Perhaps August will be better. Also, interesting that Quebec finally had a bad month (-37K; more than 50% of the job losses since October). I live in Quebec and I am shocked and stunned by the complacency here. Quebec is on a different planet. Perhaps this report will take Quebec from a 2007 mentality to something closer to 2009.

Now for my new predictions:

1) Unemployment in the low 9% range by year end. 10% will only happen (I don't want it to happen) if we get a repeat of last fall's market carnage.
2) Lowering the job losses excluding self-employment to the lower end of the range (600K). We are close to 400K right now, so this is a deceleration from the first half. The 720K only happens if we get a repeat of last fall's market carnage.
3) The jobs report be relatively good for August & September as companies become more optimistic that the economy has bottomed and therefore, they don't lay off as many. October to December may be very bad though as I believe more people will realize that this optimism was misplaced, that this was not a regular recession and the recovery will be anemic. Again, this assumes no market carnage.

Wednesday, August 5, 2009

Go ahead, buy a house if you can handle it

Interesting question from an anonymous reader. It would preferable to have a name and maybe some followers (on the top right of the site), but I digress:

I have been following your articles which stop me from buying a house.... and now the housing prices have been going up, up and up... I cannot even afford a house now... please tell me if the housing prices will ever go down again.. please...

Please don't use my blog for direct advice on buying a house. I'll leave those decisions to you and your family. I have my views, which I am sharing, but no one is always right and you will have to live with whatever decision you make.

I still don't see how housing in Canada can be immune (the only country in the world?) to the deflationary forces out there. Anything is possible, though. I suspect that CMHC and the oligopoly (govt & banks) are responsible for keeping credit flowing. Record low rates and prevailing sentiment that Canada prices aren't going down are keeping the bubble alive.

Does it make sense to me that the same house in Canada costs 2X a house in the US (a recent study showed this)? We have more land, less people, crummy weather, no interest deductibility on our taxes, lower salaries, higher taxes. Either our prices are way, way overpriced or theirs are way, way underpriced. I suspect the former. People in Canada are all esctatic that our prices haven't gone down much while US prices have gone down 30%. That tells me that maybe our prices are overpriced. Instead, the real estate industry tells you that this is automatically a good thing.

Believe me, I have everyone I know telling me the same thing: Canadian housing prices are not going down. You were wrong.

Perhaps, but only with the fullness of time, will we know. I am currently moving from one rental to another rental. I don't want to buy now for a few reasons but one of the reasons is that I am very worried about a 30% minimum decrease in my equity. That means if I put 30% down, I get wiped out. I personally have difficulty sleeping with that type of risk. I think that we are at or near lifetime highs in real housing prices (meaning after inflation).

Even if you don't buy my views, ask yourself what happens if housing prices decline 30% over the next few years. That would only take prices to where they were earlier in the decade. If you can afford a 30%+ decline in your house equity and still live a happy, healthy life, then go ahead and buy a house. I have family members who have bought in the past few years because they could answer yes to that question.

The fact that the question is posed in such a desperate way tells me that this a bubble as people are thinking that prices are running away from them again and that they better buy soon. Historically (based on US history however), Professor Schiller has demonstrated that after-inflation, housing prices basically do nothing over decades. I wish there were a similar Canadian chart (there is no frickin' info in this country!). We are probably at a very similar place to where the US was in 2006. If you wish to pay roughly 2X the real value of a house, then be my guest. Also, realize that overvaluation or undervaluation can last for years and even decades. I suspect that we are heading for a long period of at least fair value or undervaluation.

Hope this helps clarify my views. Read my blog and other blogs that are bullish. If my reasoning resonates, it may be because you have some of my worries. If you think that I am wrong, please feel free to read all the stuff coming from bullish blogs or CREA.

Thank you for the comment

Sunday, August 2, 2009

Hard being a bear

It is hard being a bear these days. The S&P has bounced to a new YTD high. Commodities and corporate bonds continue to improve. The overwhelming consensus is that the worst is over, even by some of the big bears who saw this coming, such as Nouriel Roubini. ECRI continues to talk about an imminent recovery and actually removing stimulus. The central bankers and politicians are all patting each other on the back about moving the economy away from another Great Depression (ironically after downplaying even a garden variety recession for much of 2008). Despite the fact that there a few real signs of green shoots, the bulls are optimistic and talk as if the recovery was already well under way.

Magazine covers (Newsweek) and many of the "man on the street" are all talking about how the recession is history (the Bank of Canada said so!). I am getting a lot of grief from people about "see Canadian housing prices have hardly dropped. In Montreal, they didn't even drop!". I am surprised by how much confidence there is right now and by the complacency.

I may be completely wrong about all of this (continued recession for 2009 & a breaking of the March lows this year) or all this optimism about an imminent and powerful recovery is the natural contrarian setup for that downturn.

The short positions that I reapplied between S&P 930-950 or about 5% ago (after thankfully covering for small gains around 890-900) have now been mostly covered for losses when the S&P broke through 985 last week, as a belated show of discipline over conviction.

We are now entering what I believe to be the critical month of August. I have long ago flagged this as a natural beginning to the next downleg. That window is now open and some of the research that I follow point to a possible blow-off top climaxing this coming week. Monday will be Day 16 of a classic buying stampede. Most buying or selling stampedes last between 17 to 25 sessions and are characterized by a clear trend with only 1.5 to 3 day counter-trend moves before going to new highs/lows (thanks to the bullish Jeff Saut at Raymond James for this). That translates to either this week or next. A number of important cycle indicators and historical patterns also point to this week as a critical week. We have a key employment report on Friday.

A key area is that former resistance of 940-956. I will be watching carefully to reapply my shorts (in an even bigger way) if I start to see signs of waning momentum.

Only time will tell, but the time for the bears to make their stand is within the next few weeks and months.

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