A Wild Week

This was a fun week.  Especially if you caught some of the up and haven’t been riding it down all the way. 

 

Citigroup turned the market around this morning.  We would have gone way down based on the earnings that came out last night.  But, Citigroup came out with ONLY a $2.5 billion loss.  Wow.  How would you like to be the CEO getting a pat on the back for ONLY losing $2.5 billion?  But, it was better than expected.  So, for the 3rd day in a row, we had a financial company beat earnings expectations.  First, it was Wells Fargo on Wednesday.  They raised their dividend that day as well.  What a statement that was.  Then yesterday it was JP Morgan.  Today, it was Citigroup.  So, the financials had a huge week.  The biggest I’ve ever seen.  But, it’s amazing these are still at the same levels they were back in June even though some have risen 40-50%.

 

Interest rates were up big this week as well.  You see if Fannie Mae & Freddie Mac bonds are paying more than treasuries because they have an implicit guarantee but not a real one, then if the implicit becomes explicit, you sell treasuries and buy those bonds.  So, up we go on long-term interest rates.  So, bonds in general had a tough week.  Not to mention that money was flowing out of treasuries into stocks.

 

Oil  was down for 4 straight days and goes into the weekend around $129 per barrel.  That’s about an 11% drop this week.  Has that cracked or is it just another opportunity for you and I to load the boat up at cheaper prices?  Too early to tell but I’m not making any moves just yet.  Still holding some drillers.

 

Commodities in general have fallen this week along with the stocks.  Steel, coal, agribusiness, all of these down anywhere from 5-13%.  And, that’s my problem with this rally.  Every time we’ve seen a false rally this year, it’s been comprised of money coming out of global growth and into beaten down areas such as automobiles, homebuilders, financials, etc.  We need new fresh money coming in this market.  We’re not seeing that yet.  There’s a ton of money out there ready to come in but it’s not coming in yet.  

 

It looks like a bottom from the surface.  The volume spiked, the panic spiked.  But, we didn’t see that complete washout where almost all the volume is down volume.  On top of that, we didn’t see a huge amount of intensity Wednesday & Thursday even though the Dow was up almost 500 points in two days.  So, for now, we have to treat this as a bear market rally like the spring rally.  That means if there are stocks you own that wished you didn’t in June, you’re getting your chance to sell them at higher prices.  Also, you’re getting your opportunity to add to or establish short positions.  If this pattern continues, I’ll be doing just that next week.  This is no market to mess around with.  It’s still highly dangerous.

 

Where to go?

 

  1. Gold still is catching my eye.  The Fed has told us they are going to keep the printing presses going 24/7.  They helped bail out Bear Stearns.  They are letting investment banks exchange their bonds for treasuries.  They sent stimulus checks out.  They are backing Freddie & Fannie loans.  Where’s all this money coming from?  So, down will go the dollar and up will go gold.  So, I still like gold.
  2. I think on the way up you still have to short small companies.  These companies have to be struggling with the financial crisis.  Big companies can withstand this.  But, the small ones I have to believe are struggling.  So, there are numerous ETFs that short small companies.
  3. Next.  Financials.  If you believe that the worst isn’t over for financials, you can buy the SKF which is the double beta short financials ETF.  I don’t own this but I’m watching it.  The market could roll over but financials may do well on a relative basis going forward.  In other words, the bottom may be in for financials, but not the market.  That is possible.  I would suggest a pairs trade where you own the best companies individually and buy SKF to hedge essentially making the spread.
  4. Global Growth.  Everyone is panicking and acting as if the billion people industrializing over the next 20 years are all of the sudden going to stop.  I don’t think so.  Will those economies slow.  Sure.  But, these areas are going down fast.  We already know the profits are coming in fast for coal, steel, and agribusiness.  So, add to those on weakness. 

I hope you all have a great weekend.  And as always, thanks for your interest in my work.

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