There’s Never Been A 300-Point Rally in A Bull Market

I found an interesting article written by Keith Fitz-Gerald, An Investment Director of Money Morning, on August 12 2008. He wrote, "Yet, at the same time, the Dow puts in two barnburners like those last Tuesday and Friday when the index rose 331.62 and 302.89 points respectively. Which begs the question… what do we make of the rallies?

Two words – 'bear trap'."

David Rosenburg, an investment analyst with Merrill Lynch & Co. Inc. (MER), points out something we know from our own proprietary research to be true. There’s never been a 300-point rally in a bull market. Let alone two of them in one week.

Click to Enlarge

Keith added that If history holds true, then there are three key takeaways:

1. Until the rebound reflects stronger earnings, sales growth and a generally improving economic scenario, rapid upside moves like those last week are nothing more than king-sized bear traps ready to snare the unsuspecting.
   
   
2. Companies are girding for rougher times ahead by selling into strength. This would not be the case if things were truly getting better. Nor would London Interbank Offered Rate (LIBOR) /Treasury spreads be widening the way they have been recently.
   
   
3. What we are experiencing now is nothing more than a continuation of the broader bear market patterns that began in 2000 and which may continue through 2012 or 2015.

Related Posts :

1. Six Reasons to Short Financial Sector Again
2. US Stocks are Still Overvalued
3. Market Lessons From 2007
4. Valuations are The Key to Long-Term Returns
5. Dow Jones 300+ Point Moves and Bear Markets

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Six Reasons to Short Financial Sector Again

Here is the article of Trade Radar Operator on SA today entitled "Six Reasons To Buy UltraShort Financials Again":

Here are my reasons why I think now is a good time to own SKF:


1. Financial stocks are emerging from earnings season. The somewhat misplaced enthusiasm over the way many of the financials exceeded drastically lowered expectations is beginning to fade. In terms of year-over-year results, these stocks, pretty much across the board, stunk up the place. We are now seeing some analyst downgrades, even for the likes of Goldman Sachs.
   
   
2. The winds of adversity are blowing in the direction of the financials again. Auction Rate Securities are negatively impacting a range of financial institutions. They are engaged in buying back illiquid securities and are facing potential fines as the New York Attorney General generally makes life miserable for them. It appears that bonds backed by consumer loans and credit card debt are becoming increasingly shaky. Credit requirements are tightening according to surveys of loan officers so lending is slowing. Merger and buyout activity has slowed drastically, curbing yet another potential earnings stream.
   
   
3. Housing has not improved. Indeed, we have probably seen the peak for 2008. It is already August and as fall approaches, the residential real estate market will go into hibernation until spring of 2009. This won't help the mortgages or mortgage-backed securities still on the balance sheets of many financials.
   
   
4. The SEC ban on naked shorting of financial stocks is set to expire on Wednesday.
   
   
5. We have seen the short energy/buy financials trade evolve into short energy/buy tech. Tech stocks are getting all the attention and financials are getting all the bad press.
   
   
6. SKF had fallen to support at about the $110 range (see the horizontal line on the chart below) and was trading at its 200-day moving average. On Monday the ETF dropped nearly to $106 but recovered and closed over $110. With the fundamental picture for financials deteriorating once again, it appears safe to buy SKF again. As I have written in prior posts, though, it doesn't pay to chase the ultra ETFs. Having fallen from its July peak of over $200 down to $110, Monday looked like it was presenting a pretty good entry point so I picked up the ETF at $111 and change.
   
   Closing yesterday at $119.75, SKF has at least started out on the right foot. If the financials wilt as I expect, it may not be too late to jump on this trade.

Related Posts :

1. GS was Downgraded: The Credit Markets Will Not Calm Down Until Housing Prices Stabilize
2. US Stocks are Still Overvalued
3. Banks' Subprime Losses Top $500 Billion on Writedowns

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

GS was Downgraded: The Credit Markets Will Not Calm Down Until Housing Prices Stabilize

According to David Reilli's article on WSJ entitled "Home Prices Hold Key", J.P. Morgan Chase warned of $1.5 billion in mortgage-related losses in the still-nascent third quarter and after a pair of prominent analysts downgraded Goldman Sachs Group.

A Goldman Sachs-led (GS) group, including Alpinvest Partners and Canada Pension Plan, is paying about $1.5B for a large portfolio of existing private-equity investments that are being divested as part of the $101B splitting up of ABN Amro (ABNYY) by Banco Santander (STD), Royal Bank of Scotland (RBS) and Fortis, according to the Wall Street Journal.

A Deutsche Bank(DB)'s Analyst, Mike Mayo, downgraded GS on August 12 citing the company's high exposure to equities and capital market pressures, especially if there is weaker European growth. Target to $192 from $209. Mayo cut his price target from $209 to $192. According to Reuters, Deutsche's European economics team believes both regions are or will soon be in recession.

Goldman also has among the highest exposures to equities during a period of more significant equity market declines, including areas of expansion such as China, Mayo said. The result is likely to be weaker-than-expected earnings, the analyst added.

While Oppenheimer's analyst Meredith Whitney cites similar concerns, and cuts her Q3 estimates for the firm. She slashed her Q3 estimates from $3.54 to $2.15 and her FY08 estimate from $15.75 to $14.32.

Related Posts :

1. Money Markets Getting Tighter Again
2. The Citi Killer Strikes C, UBS, MER, BAC and WB

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

US Stocks are Still Overvalued

Here is a copy of Henry Blodget's Article on ClusterStock.com on August 13, entitled " Wish It Weren't So, But US Stocks Still Expensive":

After a 20%-ish decline in the US stock market, it would be nice if stocks were cheap, but they aren't. The two best valuation measures we know of--cyclically adjusted P/Es and Tobin's Q--suggest US stocks are still well above their long-term averages.

Although these (or any) valuation measures are not particularly helpful in predicting near-term market performance, they suggest stocks remain priced for mediocre long-term returns. They also suggest that the current bear market has farther to go.

Click to Enlarge

Last month, we described the cyclically adjusted earnings measure used by Yale professor Robert Shiller, London-based economist Andrew Smithers, and others. This measure compares prices to an average of corporate earnings over the previous ten years, thus adjusting for the effects of the business cycle. Profit margins are mean-reverting--high in good times, low in bad times--so comparing the market's value to only one year can be misleading. Cyclically adjusted PEs do assume that the future will be similar to the past--which some analysts are always rightfully skeptical of--but they are far more predictive than straight PEs.

Cambridge Associates, an institutional consulting firm, looked at the US market at the end of July using cyclically adjusted PEs and came to the same conclusion we did: It's expensive (and that was before the recent rally). The good news, as we noted last month, is that the market is less overvalued than it used to be:

U.S. equities are overvalued. Despite the 20% decline in stock prices since October 2007, headline
P/E ratios continue to tick higher as reported EPS fall faster than stock prices. The trailing P/E ratio
for the S&P 500 has risen from 17.7 at the end of June 2007 (when EPS peaked) to 22.2 at the end of June 2008, as earnings have slumped by close to 30% since last June, while the S&P is down 15% over the same period. At a P/E ratio of 22 times preliminary second quarter trailing GAAP earnings of $57.66, the S&P remains 1 standard deviation above its post-1900 mean of 16.

Normalized valuation measures [cyclically adjusted], however, show that while the S&P remains overvalued, valuations are rapidly improving, with a P/E ratio based on ten-year average real earnings at 21.5, or 0.8 standard deviation above the long-term average of 16, down sharply from 1.5 deviations back in September 2007. Indeed, at 21, the “Shiller” P/E ratio is at its lowest level since 2003. ROE-adjusted P/E ratios (based on the MSCI U.S. Index3), show U.S. equities trading at 20.5, or 0.5 standard deviation above a long-term mean of 16.

What does all this mean? That US stocks are still priced to deliver far lower long-term returns than most investors are probably counting on: low- to mid-single digits, versus the "10% a year" that is baked into most retirement calculators.

Henry Blodget also wrote an article entitled "You Bought That Cramer "Bottom" Crap? DOW Headed Below 10,000."


Jim Cramer, Hank Paulson, Tom Brown, and a host of other pundits have pronounced the bear market dead. Barry Ritholtz thinks they're hallucinating:

Related Posts :

1. Market Lessons From 2007
2. Banks' Subprime Losses Top $500 Billion on Writedowns
3. Valuations are The Key to Long-Term Returns

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Banks' Subprime Losses Top $500 Billion on Writedowns

Bloomberg on August 12 wrote that Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion.

Auction-rate securities have begun adding to the losses as regulators and prosecutors force banks to buy back bonds they'd sold as safe investments. UBS set aside $900 million to cover potential losses from repurchasing the securities, while Citigroup Inc. and Wachovia Corp. estimated losses at $500 million each.

The collapse of the U.S. subprime mortgage market last year has saddled banks worldwide with $501 billion of losses from declining values of securities tied to all types of home loans and commercial mortgages as well as leveraged-loan commitments.

Banks and brokers have raised $353 billion of capital to cope with the writedowns, according to data compiled by Bloomberg. The gap between losses and capital infusions, which now stands at $148 billion, has regularly narrowed to about $80 billion as capital raising follows writedown announcements.

Here is the total write-downs and cap raises :

click to enlarge

click to enlarge

Here is the comment of Barry Ritholtz from The Big Picture:

Remember the good old days? Ahhh, a simpler time, when we were repeatedly told that sub-prime didn't matter, that it was contained, that the losses were a mere $60 billion dollars at most, and overall, this would have zero impact on the broader economy?

Only not so much.

We learned via the number crunchers at Bloomberg that the $500 Billion mark in losses and write downs has now been crossed

The $500 billion in losses don’t yet include any real Alt-A (option ARM) losses that were estimated as much as $1.6 trillion.

Related Posts :

1. Writedowns of Largest Banks Reach $274bn
2. Bank Collapse Update: $400 Billion of Writeoffs So Far, $600 Billion to Go (WM, WB, JPM, FNM, FRE)
3. Bridgewater warns Bank losses from credit crisis may run to $1,600bn

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.