February 25, 2008
I’m looking for a stronger pre-market, with a fast spike higher, that I would be looking to get Short on. If I miss the spike, or it doesn’t happen, I’m looking short mid-morning.
I expect the close to be bearish, closing near the low’s for the day.
The bullish momentum might carry through the mid-morning, but I would expect this to weaken and re-test the lows of Friday by the close.
February 25, 2008
Even the fully fledged economists are arguing this one.
Inflation is defined as; a loss of purchasing power.
Deflation is defined as an increase in purchasing power.
So here is the situation, outside of America, the US$ is purchasing less today, than it did. You could purchase Gold, Oil, far cheaper 2yrs ago, than you can today, thus our definition of inflation [outside of the US] is fulfilled.
Within the US, we have a mixture of Inflation and Deflation.
Deflation; you can buy stocks [DJIA] cheaper today, than you could 4mths ago. You can buy a house, cheaper today, than you could 6mths ago.
Inflation; it is more expensive to buy petrol today, than it was 6mths ago. It is more expensive to purchase your groceries today, than it was 1yr ago.
The reasons for this are fairly straightforward; the US$ is losing value.
Easy to see, the Dollar has headed down, losing value from the peak in 2002. Meanwhile, the prices of commodities have been rising;
Meanwhile the Treasury has not been printing money, thus the usual suspect is innocent in this case;
Money supply M2, is contracting.
The source of the “Deflation” is the extreme credit contraction. This has been generated from the Financial system that is currently capital impaired, or insolvent, due to poor lending standards causing excessive credit creation, that is now driving the deflation in financial assets, that creates deflation, or increased purchasing power for financial assets.
February 25, 2008
Lehmans Collection ratio of 0.76 was a bit of a surprise, as it was pretty bad. Normally you would be looking for a ratio of 0.95+
As a quick comparison then;
Company………………………………………Ratio
Morgan Stanley…………………………….1.05
Goldman Sachs……………………………..0.95
Merrill Lynch……………………………….0.61
So two far better, one, even worse.
February 25, 2008
LEH has been pegged as one of the worst Investment Banks for exposure to CDO’s and other woe’s currently.
Therefore a quick and dirty analysis of LEH.
Line Entry………………………2007………………………..2004
Receivables……………………..+54%, +29%, +15%, +22%
L.T debt…………………………+51%, +50%, -4.5%, +30%
Accts Payable………………..+46%, +29%, -13%, +28%
Accrued Expenses…………..+9%, +34%, +3.3%, +14%
Operating Income…………+1.8%, +22%, +37%, +38%
Current ratio…………..0.54
Collections ratio ……..0.74
Thus Lehman is on very shaky ground. Operating Income growth anaemic, while the Current liabilities exceed Current assets by almost 2:1 necessitating further borrowing. This business is already leveraged higher than is prudent, and with the poor collections on Receivables, further cashflow problems are likely.
That the banks [and brokers etc] are rallying currently, on bailout news, or other, certainly makes the market seem a tad irrational.
February 25, 2008
The analysis from the weekend was wrong. GS opened weak and traded down. As this nullified the initial analysis, I was a spectator till mid-morning.
With the morning low in the range traded Friday, I was looking long for a bounce back to resistance, missed the initial bounce, but caught the pullback, and sold at resistance [the Open high's]
This was in essence the reverse set-up from the weekend analysis.
Watched the chop, looking long, thought about it, thought about it…missed it. Almost a carbon copy of Friday…which I also missed.
February 24, 2008
Read the quote first.
It is this basic psychological pitfall that I try to avoid by defining as precisely as possible trades [set-ups] that I will trade, and those that I will avoid.
In essence we have an Entry and two potential exits. The first exit will be for a pre-defined loss at a Stoploss exit. The second exit will be for a profit at a profit target that exits our position.
The MINIMUM entry that I will consider is a 3:1 ratio. I would prefer a ratio in excess of 6:1 [or greater] Thus as an example; The low of the day is $177.33 and current trades are at $178.00 on an analysis basis I feel that price will reach $182.30
My stoploss will be $177.23. Therefore for each 100 shares I risk $77.00 for a potential reward of $430…this trade will be placed with the maximum number of shares that defines my trading capital defined maximum loss. On a daytrading basis, that stands at 0.5%-1.0% which is pretty tight.
This brings us to the important point. Stops are easily defined and are historical fact. Profit targets lie in the future, and are speculative, based on probabilities of your analysis or set-up.
I subscribe to randomness in daytrading, thus all entries are 50/50 at best. How then to define a probability of a profit target being reached?
This is quite a complex question, and all traders will have their own methodology of deciding upon profit targets; previous price levels defined as resistance/support that are measured via trendlines, pivot points, P&F, EMA’s, MA’s, Oscillators, etc.
From William Eckhard;
“One common adage on this subject that is completely wrongheaded is: you can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”
February 23, 2008
NEW YORK (Reuters) - One-tenth of U.S. homeowners hold mortgages that are larger than the worth of their homes, Moody’s Economy.com said on Friday.Nearly 8.8 million homeowners, or 10.3 percent, are in over their heads, its chief economist, Mark Zandi, estimates.As a result, millions of U.S. homeowners have the incentive to abandon their properties.With an already unwieldy supply of homes for sale, more inventory could prolong a recovery of the hard-hit U.S. housing sector, suffering one of the worst downturns in history.Zandi earlier this week told Reuters he expects home prices to drop by 20 percent from their peak in 2006.He expects home sales to hit bottom this spring, housing starts to reach a nadir this summer and house prices to trough in the spring of 2009.The surge in foreclosures is putting further downward pressure on the housing market because it adds to the inventory of homes for sale, already at a lofty level.Each foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent, Zandi said
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The screen shot, stolen from “Mish” rather highlights the aforementioned article in very stark terms.
February 23, 2008
Some further analysis.
The long term debt is at variable rates of interest. Thus swings in the interest rate will effect a swing in cashflows due to interest paid. Thus the paying down of debt reduces the gains/losses to this variable.
The largest customer [NHC] who lease 41 properties, reached agreement to extend the leases through 2021
Increased diversification through customer base; this is important as when this REIT was started in 1991, NHC was the sole customer and constituted 100%. Currently NHC constitutes 14.1% of the portfolio.
Hidden value. When the assets were purchased [transferred via non-taxable exchange] the properties were valued at net depreciation book value, after 20+yrs of depreciation. Thus the actual values [land] will have appreciated at 4% compounded to provide increased [undervalued] assets.
No value is provided, but we can use some arbitrary numbers;
Assume $10 Million Book value in 1991 depreciated @ 5% but actually rising in value by 4% compounded we then have a starting value of $26.5 Million in 1971 with a value circa $104.5 Million today. These figures are not actual figures, so it is not yet possible to ascertain whether the value is recognized and priced in, or unrecognized, and thus represents some hidden value.
February 23, 2008
Friday’s rally into the close really pre-empted Monday’s trade and turned a potential easy analysis into a rather difficult one.
Monday will open at an inflection point.
This basically means…anything could happen. Pretty useless information.
Scenario #1…What I expect to happen at the inflection point is this. Momentum from Friday will carry GS and probably the general market higher into late morning, 10.30am-11.00am, where we will then retest the Opening prices.
If the Open holds, prices will then be bullish into the close.
Scenario #2…GS opens very strong, and sells off hard into Friday’s close. Here, one of two things will happen, price will bounce, and trade back to the high’s, or, they will trade down, probably for the rest of the day, possibly to the lows of Friday.
Trade #1…Wait for the pullback, try to enter long.
Trade #2…Sell Short @ or just after Open, cover at *support* and wait to see what happens.
February 23, 2008
The market rallied hard into the close on Friday on the news [rumour] that a group of Banks were going to provide an infusion of capital to AMBAC, thus ostensibly preserving their AAA credit.
Why would the Banks do such a thing?
Obviously the Banks have something to gain. They are not charities.
The most obvious gain for the Banks is to maintain, at least for the moment the ratings that currently exist on existing CDO’s. If Ambac were to go under, or be broken in two, the ratings on the CDO’s must fall, as their rating is based on the underwriting insurance from Ambac.
This would result in further losses to the Banks on a number of potential area’s.
*CDO’s
*CDO’s squared [derivatives of CDO's where the CDO is collateral for the squared]
*CDS contracts.
The losses on the CDO’s would damage any Banks that still held existing CDO’s which can be easily determined simply from examining the list of rescue Banks; Citi [always in trouble every cycle] Royal Bank of Scotland [shame on you] UBS, Wachovia Corp (WB), Barclays (BCS), Societe Generale SA, BNP Paribas SA, Dresdner Bank AG
CDO^ are derivatives of CDO’s and seemingly haven’t been in the news much yet. Who actually hold them? Who knows. The problem is that being a derivative, they are even more leveraged than a CDO, thus will accelerate gains/losses.
CDS are insurance contracts that were supposed to provide a hedge for the Banks, who hold some $45 Trillion in notional value.
The dissolution of AMBAC would as stated trigger downgrades on CDO’s due to the loss of the underwritten insurance that provided the AAA rating in the first place. As thay lose this, and are downgraded this will trigger movement, and very significant movement in the CDS contracts.
CDS contracts can be triggered by; Default in the underlying, Downgrades in the underlying, Widening credit spreads in the underlying.
The Banks put in place hedges, to try and protect themselves. So if UBS held say $10 Billion in CDO’s that they didn’t want exposure to, they would PURCHASE a CDS contract, typically from another Bank, say Citi, to insure their exposure.
Citi however may no longer hold that liability. They may have sold it to a Hedge Fund, that thought selling a PUT, was easy alpha.
The problem now is this. UBS may have already approached Citi and said, hey guy’s, get ready to pay out, our exposure is $XX, Citi reponding, sorry guy’s, Hedge Fund XXX hold the contract now as we sold last year.
UBS contact Hedge Fund XXX, who say, sorry guy’s, we can’t pay, we don’t have the capital, and have no way to raise it.
This is counterparty risk.
The writedowns that we have seen to date are most likely the UNHEDGED components that the Banks were holding as an *investment* or couldn’t hedge, and couldn’t sell in time.
The writedowns that the Banks are trying to avoid by saving AMBAC could very well be the start of the *hedged* book, that possibly has become un-hedged due to counterparty risk. This is far, far larger than the straight directional exposure [huge though it was] and will threaten the viability of the financial system, as failure in one [or more] Banks on that list will have a huge domino effect within the financial system.
Thus the proposed bailout will have to take place, even though the Balance Sheets of the Banks CANNOT support such an undertaking. Their Balance Sheets are so badly damaged from the losses already sustained, that it is almost suicide to try and provide capital to Ambac. That they are attempting to do so, really tells you just how bad it is yet to be.
