Short term sentiments

[Suomodo]

I strongly doubt that many bears have covered their shorts.. Only the quickest and smartest did... 10%? ... the rest waits with their stop losses at obvious technical resistance points ... so 90% upside days are first to come ... And the smart bears wont go short until 50% retracement i.e. some 12100

There are few hints of panic among bears now (maybe the banks a bit)... Inversely they are eager to sell even more if they only could ... persuaded the system is so indebted that it has to fail ...

Until 12000 I dont expect much trust in this rally,mocking it from all corners. And just like we slipped day by day, we may climb day by day with bears waiting for their BIG 10% DROP CAPITULATION DAY.

[rffrydr]

10% cap day?! That's quite a capitulation. How many such days have there ever been? We got 5% on HK in a 10% week--maybe that was it.
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Today is the Tomorrow you worried about Yesterday!

[Suomodo]

Thats hyperbole off course .. bears were, are, will be waiting for some 400 points down day to cover in a big triumph way...

what i wanted to say they can wait now for a while ...

Simply there are now few sellers other than short term speculators

[diesel]

An interesting article about how valuation metrics are calling for a bottom.

http://weekly.inginvestment.com/e_article001149498.cfm?x=b11,0,w
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Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty, lies opportunity. - Albert Einstein

[Odysseus]

Hey Diesel,
Interesting link and interesting piece of work. Thanks, sometimes I get a little wonk's nostalgia.

I wonder if they have data going back to the 74-82 era. It would seem that to compare apples etc. this period would be more comparable.

I understand their methodology but I think combining that with other metrics might narrow the probobilities and add value. The definition of 'book' has changed from 30 years ago.

Probably not the proper forum, but I have an old paper on replacement cost accounting in an inflationary era that I will share at some point.
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Psychic with Alzheimers. I can predict what I will forget.

[HenryTo]

Hi Odysseus,

I would love to see that at some point. Do you have an electronic copy?

best regards,

Henry

[Odysseus]

Hi Henry,

Electronic copy? This was typed on an IBM Selectric circa 1974. If you are going to communicate with us geriatric discards, you need to dumb down just a titch.

Just kidding. My son has been threatening to ret out my attic for my ancient docs. He is knee deep in the EDS/Hewlett buyout but we plan to access the cardboard boxes after he's been deposed.

I hired an MBA from TCU as an analyst in the early 70's that helped me with the math for that paper. I had an HP 80 but didn't know how to program the damned thing. Also had an MBA from Harvard but he was worthless. It does not suprise me that David Tice was from TCU. They have a very underated program.

The piece is a very primitive discussion of the adjustments that need to be made to the accounting for heavy industrials, miners and long lead time infrastructure companys.

Perhaps you guys can use it as a starting point and flesh it out in current math/computer models and use it for valuation purposes. There has to be a CFA paper from this idea for someone.

Last week, a heavy constructor whose name I forget reported a disappointing quarter because of bad weather and sub overuns on an English gas project. The results were predictable and the stock tanked 20 or 30%. Just an example of poor vetting by the analyst community.

I'll give you a triple over the next three years that you can cut your teeth on. These guys are hands on mfg floor managers that just celebrated their 100th year. They, like others didn't realize their dependence on housing but they have a replacement cycle that will kick in in a year or two. BGG. Selling under good book and yielding 6.8%. Only a matter of time til they earn $3/shr. Enjoy.

Sorry for the long winded response but some of us still practice the art of polite but non essential conversation. OMG
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Psychic with Alzheimers. I can predict what I will forget.

[Rubedo]

Seems everyone is bullish on banks now. The street.com poll is at the bottom of this link. It's the number one voted most bullish sector, after being the most bearish for months.

http://www.thestreet.com/print/story/10427664.html

Meanwhile, all the magazine covers agree.

http://bigpicture.typepad.com/comments/2008/07/its-unanimous-b.html

Its Unanimous: Banks Have Bottomed!
Saturday, July 19, 2008 | 10:12 AM
in Contrary Indicators | Credit | Dividends | Financial Press | Valuation

Barrons_bank_covr Very strange confluence of media coverage this morning on the banking sector. All three major financial papers (WSJ, NYT, Barron's) have stories on the bottom of the banking sector:

WSJ: Jitters Ease as Citi, Rivals Show Signs of Bottoming Out

NYT: Hope, and Hints, That Financial Stocks Have Finally Touched Bottom

Barron's: Buy Banks -Selectively (cover story)

Can you recall the last time 3 major media players all picked the bottom in a market or sector on the exact same day -- and were all proven correct?

Perhaps the caveats are worth noting -- I found it interesting that all publications had some moderating hedges in place (as opposed to some recent embarrassing cover articles).

Bad_but_betterAs we noted early this week, we covered most of our shorts in the financials, and are now looking for a bounce play in these names. However I remain unconvinced that Banks are now a good long term investment.

Why? The business model of Leverage and Capitalization is now kaput. Its a new era of De-leveraging, and Re-capitalizing.

A long time ago, Banks were 3-6-3 spread players. Pay your depositors 3%, make loans at 6%, be on the golf course at 3pm. But the end of Glass Steagell, and the mergers with investment banks, have put an end to that simple but profitible business. For the past 10 years or so, we seen a model that involved taking on a lot of risk, then leveraging it up 25X, 35X, even 65X (for Fannie).

Now that model has come unglued. Banks of all types are unwinding risk, de-leveraging (selling off assets held on borrowed money) and raising capital. This means that until a new model is developed, profits will be anemic and the shareholder capital structure is about to get wildly diluted.

BounceFreddie Mac (FRE), with its $6B cap, is seeking to raise $10B. That will be enormously dilutive to both future earnings, and shareholder equity. Remember that Lehman Brothers (LEH) capital raise? $6 Billion secondary priced at $28 with 8.75% coupon and an %18 conversion premium? The stock is now $19m, the cap is $13.3B. After the last debacle, good luck with future capital raises -- they are likely to be treated much more skeptically.

Is the bottom in?

Well, it certainly looks like "A bottom" is in.

But longer term, this is a sector that is likely to have continued write downs, weak earnings prospects, and a whole lot more regulation and government supervision than it got away with in the past. P/E compression may also be in the cards -- especially if we see some dividend cuts from some of the bigger houses.

Unless you have a decade long time horizon, does that make you want to rush out and own these things anytime soon? Me neither . . .

[rffrydr]

We should find that Wells Fargo is not like other banks as the earnings come in. CDO's were not part of their CEO. However bigger trends are afoot. The falloff in the commodity stocks, with the oils front and center, offer some conformation of this. Look for more failures ahead...but that was discounted at Bear. Don't expect anything like the historic norms as pool has been consolidated 75% or so since the late eighties.

It's dispiriting the extent to which the financial press is manipulated these days. The SEC is on track with this. (though don't understand their hesitancy on the naked shorts stuff. Short Interest now has a new twist: Master H., if a company goes bankrupt and you were short their shares, you would never have to cover and as a result you would never have a taxable event, yes?) The three-pronged bottom call from "on high"? Sumodo?

We bounced off a 200DMA of considerable importance this week.

http://stockcharts.com/h-sc/ui?s=IFN:$SPX&p=W&b=5&g=0&id=p26439169746

Another one to come?

http://stockcharts.com/h-sc/ui?s=XOM:XLF&p=W&b=5&g=0&id=p26439169746
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Today is the Tomorrow you worried about Yesterday!

[Suomodo]

I think that there are few "converted bears" on board ... most of the rally IMHO came from short covering, maybe some DJIA 200 points bought by pension plans, 150 by smart money ...

The bears have made good money and are pretty aware that fighting the FED and Treasury and SEC in the next weeks is stupid.. so they wont re-sell, leaving the ground for bulls

Thus there are still no quick sellers at disposal .. mid term sentiment still in cellar

If we hoover around or climb, the folks will first start jumping in, SPX 1280 can be easily broken?, 131x and 138x will be first major resistances I suppose..

If there are no catastophic news, probably the first real selling comes one or two weeks before options exspiration in august 6-14 depending on how much overbought we will be by then by long-covering bulls..

[rffrydr]

[mtvk]

rffrydr,

Well said. I thought of the same way when reading ING's finding.

What's the REAL "book" value of the leveraged guys?

Only few smart investors avoided the stocks for which they can't find THE
TRUE book value.

XLF lost 50% from oct to last week bottom. Could be a bottom OR just
a wave A. Wave B could be 38% (xlf = ~24) or 50% (xlf = ~26)
retracement.

The following article confirms the retracement and not the next bull run.
Hopefully resource stocks correct to the bottom in few months.
http://seekingalpha.com/article/85649-was-that-the-bottom

[HenryTo]

Guys,

The financials sector is not the only sector responsible for the drag in performance of low P/B stocks. This has also been occuring within the consumer discretionary sector as well. Besides - within the financials sector - there are also other industries outside of commercial banks and broker/dealers that have seen extreme selling, such as asset managers and consumer finance companies.

Note that financials make up 29% of the S&P 500 Pure Value Index, but Consumer Discretionary comes in a close second at 23%:

http://www.rydexfunds.com/etfcenter/products/holdings.rails?rydex_symbol=RPV

Also, the gist of the ING article is an articulation of what we are all exactly concerned about - that everyone and his neighbor are questioning the "book value" of these financial institutions. If no one was questioning it, then market efficiency would've eliminated this anomaly a long time ago. Not coincidentally, the last time folks questioned the value of banks' balance sheets was 1990. Buffett bought Wells Fargo in October 1990 and everyone said he was a fool.

Sure, book value can still decline much further but the time to question the banks' book value was back in August/September of last year, not a year later - after over $400 billion in write-downs and nearly $350 billion in recaptalization deals done over the last 12 months. Assuming Congress backstops the GSEs with an unlimited credit line, the period of maximum danger in the US financial system has passed. It is now time to look at Europe - where conditions (both in their financial system and within their consumer sector) are now deteriorating at a tremendous pace.

Best of luck,

Henry

[Odysseus]

Excellent points, Henry.

Consumer discretionary values seem to be reflecting the thought that consumers have no discretionary, as in 'my dog ate my HELOC.'

Price to book is like price to earnings. The only thing certain is price. Other metrics are subjective and rely for the most part on accounting standards. I am sorry to say that todays accounting standards are similar to the standards of the ratings cartel a few years ago. But this is arguementitive. Yet I still suspect that the guys with green eyeshades still lack the proper philosophical objectivity from 30,000 feet to to see the smouldering brushfires.

On Europe, I could not agree more. A round of rate cuts on the house. The 'Old Lady Of Threadneedle Street' probably goes first followed by the EU and shortly after Sinoland. I believe it is called, begger thy neighbor. It seemed to work well in the 70's.

I too believe that the plague is off our doorstep for now. The rollover of commodities should give the cover needed for additional rate reductions worldwide. Hey, it worked in the 70's.

WOW. What a potential setup. Stuff and stuff stocks down 30 to 50% as the worlds central banks flood the system with liquidy. We COULD be talking real money!!!

The markets are the master. I humbly bow to the master and master To.

I saw somewhere today a graph of Shiller's PE10. It rather wraps up historic 10 year rolling averages with a ton of imputed variables. It is obviously not a stat that can be used for even intermediate let alone short term investing but I find it instructive as a long cycle overview. If I can figure out how to link stuff, I'll post it for comments.
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Psychic with Alzheimers. I can predict what I will forget.

[LaBelleInvestor]