Jeff's Trading Journal

January 7, 2008     The markets sold off pretty good today as this week’s jobs report looms large and negative pre-announcements from Alcoa and Bank of America weigh on investors’ confidence.

I’m still confident the major indexes will post 10-14% gains at some point this month. That would put the DJIA at 9,653-10,000 (just drop a decimal point to calculate the equivalent gains for the S&P 500). Economic activity was just as bad in 1908, 1930 and 1975 (the years following dramatic declines similar to 2008’s) and yet the markets managed to rally 10-14% in January nonetheless.

……….

I actually went back to work at a new IT consulting shop several weeks ago, which explains the infrequent blogs. I’m excited about the drop in home prices and the thought of a 4.5% fixed 30 year mortgage rate. At 36, I’ve never owned or wanted to own a home. But I’m excited about the prospects of buying a place for the equivalent of my current monthly rent at great rates with a nice tax break to boot. The big tax break is still just talk in Washington, but you can count me in as part of the solution to fix home price depreciation if the Federal government entices me with a big tax break.

I’m very good at what I do (and compensated accordingly), so I’ll have the 20% down within six months. And I have an excellent credit score. The mortgage lenders are looking for buyers like me, so I just need the Feds to step up with a big tax break.

……….

I’m pissed that more mortgage lenders haven’t been prosecuted. It’s clear that a huge percentage of home loans over the past three to four years were totally fraudulent. The collapse of juiced U.S. housing action severely curtailed global economic activity around the globe. What a shame; it happened just as the global community began to openly embrace free market economics.

It’s like the overseeing bodies in the U.S. government just turned a blind eye to mortgage lending for the past four years.

And yet most global economic powers continue to embrace free market economics. That’s something the world has never seen. You can absolutely put me in the bullish column this year. I’m particularly attracted to U.S. financials. The Fed has done everything in its power to make them more profitable; more so than any other industry.

I’m looking for the major indices to produce 30-40% gains this year. I don’t see the soup kitchens of the 1930’s in our future; we’re just working through the roughest patch I’ve seen in my lifetime – much like the investors in 1908 and 1975 experienced.

Closing Prices: DJIA  8,769 Chg -245.40 -2.72 | S&P500  906 Chg  -28.05  -3.0% | NASDAQ  1,599  Chg  -53.32 -3.23%

The VIX broke 50 to finish at 49.84.

NYMEX crude finished a bit below $40 on OPEC’s 2 mbpd production cut, while BRENT remains around $45. The oil markets look incredibly confused. Oil traders don’t know if they should anticipate 30-something or 40-something near-term prices. I don’t care; it’s in a range that’s a huge beneficiary to end users.

The dollar’s sharp reversal continues unabated. There’s been a clear break this week between the dollar and its direct effect on dollar-denominated oil prices.

Gold finished a bit higher at $863, but its long-term chart still looks broken.

U.S. Treasuries finished mostly unchanged, but mortgage rates apparently dropped another 20 basis points today. We’ll see what Bankrate.com reports tomorrow.

……….

I’ll remain an active dip buyer for the remainder of the year, while trimming long positions as the DJIA and S&P500 reach 9,000 and 900 respectively.

I plan to be fully invested as the new year begins, and I’m looking for January to produce a 10-14% gain in the major indices. I’m basing my calculations on historical market performance in 1908, 1930 and 1975 -- all years that followed similar spectacular declines.

Closing Prices: DJIA  8,824 Chg -99.80 -1.12 | S&P500  904 Chg  -8.76  -.96% | NASDAQ  1,579  Chg  -10.58 -.67%

December 17, 2008     U.S. markets finished nicely higher following the Fed’s unprecedented rate cut to a record low of zero to .25 percent. A 75-basis-point cut had been priced into FFFs, so the substantial rate cut and strong language were taken as very bullish news. The Fed openly stated rates will remain low for some time, and it will continue to purchase GSE debt to drive mortgage rates lower.

It’s clear that the Fed is tired of reactive measures to stabilize the economy. It’s pulling out all the stops to return the financial sector to profitability.

The 10-year Treasury yield finished at 2.26%, while the 30-year closed at 2.72%.

The 30-year fixed overnight mortgage rate average has been ticking lower for several days; it’s now close to 5.5%

The dollar’s strength collapsed over the past two weeks as foreign currencies surged; the yen has also been very strong. Here’s a sampling of current exchange rates: EUR/USD 1.40, GBP/USD 1.54, AUD/USD .69, USD/JPY 88.5.

NYMEX and Brent crude are both close to $45, while U.S. natural gas is around $5.78.

RBOB gasoline is hovering around a buck, so everyone in the continental U.S. is now paying less than $2.00 a gallon.

Investors’ risk-averse love affair with Treasuries recently extended to gold as well.  The precious metal finished the day over $855 an ounce.

Copper ticked higher to finish at $1.40.

A recent scandal involving Bernie Madoff’s $50B investment Ponzi scheme is having little impact on the equity markets. The market continues to demonstrate strength in the face of nearly exclusive negative news.

……….

Some are calling for further year-end gains, while I think it’s unlikely. However, I’m very positive about 2009’s potential.

I’ll remain a dip buyer for the remainder of the year, with an emphasis on the financial sector.

I’ll have to sell everything in the green before year-end; it’s irresponsible to take any gains into 2009 since 2008 produced so many matching losses.

December 9, 2008     U.S. markets struggled to post positive returns following an opening drop of 1% on lower futures. The major indices eventually finished the day down 1.5%-3%. A spate of lowered guidance calls from a myriad of industries (and from many well-run companies in particular) helped push stock prices lower.

Mortgage rates ticked higher again to 5.70%. What’s worse than mortgage rates ticking higher? When the government floats a plan to lower mortgage rates below 5% and then fails to deliver. This is a key rate to watch going forward since it directly addresses the underlying problem of home price depreciation.

Short-term Treasury yields fell to zero matching the lows set in 1941. The 10-year yield is around 2.75%, while the 30-year sits at 3.15%.

The historical average spread between the 10-year yield and the 30-year fixed mortgage rate of 160 basis points continues to be an elusive reality. The spread is nearly twice its historical norm right now.

Crude fell about a buck fifty to finish at $42.25.

Natural gas finished up a bit to $5.58.

Copper remains weak at $1.44.

……….

I wrote December calls against the remaining open long positions. I’m very negative on any meaningful price appreciation for the remainder of the year, but early next year is a totally different story.

Closing Prices: DJIA  8,691 Chg -242.85 -2.72 | S&P500  888 Chg  -21.03  -2.31% | NASDAQ  1,547  Chg  -24.40 -1.55%

I’m not anxious to short with Obama making news every other day, and we’re in a strong calendar period. However, I’m well aware of the ongoing credit contraction. I’m sticking with my thesis that the indexes will top out soon.

I was a seller all day, and I sold December calls against portions of the remaining positions.

Another month of statistics similar to AUO’s press release, and we’ll see a new round of global job cuts.

Closing Prices: DJIA  8,934  Chg +298.76  +3.46 | S&P500  909 Chg  +33.63  +3.84% | NASDAQ  1,571  Chg  +62.43  +4.14%

I swapped out of a portion of the BGU position into FAS when it was in the high teens. Why? The Bush administration explicitly backs the financial sector, while the rest of the economy can apparently go to hell. I can’t even imagine working in that administration. It would make even the brightest people look stupid; the ideological guidelines preclude any hope of common sense winning the day.

The insurance portion of the financial sector has really taken a beating lately, but today’s positive news from Hartford has the whole sector rallying.

Anyway, I’m trimming into today’s run up, and I’ll probably buy a little on the next leg down.

December 5, 2008     With NYMEX crude at $44 a barrel, Merrill Lynch released a report calling for $25 crude. Investment bank reports finally recognize the supply/demand imbalance premium is off the table, which brings production costs to the forefront. Like I said before, the vast majority of crude is produced at $10-$25 per barrel. I don’t think crude will actually trade to $25, but $30-$40 is definitely in the cards.

The last time I accumulated RIG in a cyclical down cycle in 2002 it traded about 15% below its book value at its absolute best purchase price. It has far more debt this time around, so it may trade a bit lower. I’m looking for RIG to eventually trade down to $40 as crude weakens and the dollar strengthens.

In the past, markets rallied on declining energy prices. But this market is having a hard time differentiating between sectors. When it sells off, it takes virtually everything down with it. Eventually we’ll get a divergence from this action, but I think we’ll have to hear about the positives directly from managements in conference calls before the market takes notice.

Sweden, Great Britain and the EU lowered rates 1.75, 1 and .75 basis points respecively yesterday, but our markets all finished lower in anticipation of the worst U.S. job report in decades.

Mortgage rates have temporarily stabilized around 5.60%. With 4.5% expectations on the table, we need to see this rate continue to tick lower. Without it, the bears are emboldened to resume a stronger downside bias.

The gap between Bush’s exit and Obaba’s inauguration feels like the Grand Canyon some days. Today is one of those days.

The November employment report is out and it’s ugly. The unemployment rate rose to 6.7% after losing 533,000 jobs in November.

The S&P 500 is set to open down 20 points on lower futures.

December 3, 2008     PIMCO’s Bill Gross isn’t very good at predicting stock market performance, but he’s very good in the bond arena. He’s calling for 30-year fixed mortgage rates to fall below 5%.

There’s huge pent up demand for rates in that range, and it doesn’t factor into the bears’ plans one bit.

Gross is actually looking for rates in the 4.5-5% range in short order. The general rule of thumb is that rates need to drop 50 basis points below a borrower’s current mortgage to generate positive refinancing terms.

The banks win with the refinancing activity and borrowers lock in lower monthly payments. And it get’s prospective new home buyers off the fence. This is the forward looking data that can truly affect stock buyers’ appetites.

It hard to short with the Fed finally targeting the source, and Obama will take office in a few months. Obama has an uncanny knack of absorbing all available information and making the right decision. He’s the complete opposite of the sitting president.

The market finally has something positive to look forward to in the future.

……….

Meredith Whitney piped in with more dire news the other day about the financials, and when pressed she said her number one short is WFC. She’s been dead wrong on WFC for three strait quarters, but no one calls her on it.

I think WFC will report another good quarter. It’s had only a smidge of CDO exposure throughout this whole mess, and it isn’t off investing in Chinese banks and the like. It just sticks to its knitting and produces solid profits quarter after quarter.

November 25, 2008     After two days of huge snapback rallies in U.S. indices, we’re back to negative economic reports and further government intervention. Unsure which news stories will take precedence in traders’ minds, the market has waffled between positive and negative all day.

Home prices are still falling off a cliff, and now we have the Fed injecting capital into the GSEs and consumer credit by purchasing $800B of debt -- $500B of GSE MBSs, $100B GSE/Federal Home Loan Bank debt and $200B consumer debt and SBA loans. The Treasury will provide $20B to cover any potential losses from the consumer debt.

Wow. It’s an impressive move, but I have to ask the question: Why did the banks and Federal government wait until the stock market declined almost 50% before directly addressing the problems on Main Street?

The 30-year mortgage rate has already dropped close to 50 basis points today. It was trending below 6% already thanks to falling long-term Treasury yields.

……….

If the major indices manage to bounce 22% from the new lows set last week, it would put the S&P 500 at 900 and the DJIA at 9,000. So my new game plan is pretty simple. I’ll sell leveraged long ETFs on runs to the high end of the range and purchase the inverse products. I’ll do the opposite on the way down.

What a rout. I’ll steal a line from John Stewart’s The Daily Show before highlighting some of the day’s action.

ClusterF*!K to the Poorhouse

……….

The Democrats pushed an automaker resolution out to December.

Paulson gave a speech that demoralized everyone except the bears.

Paulson and Congress collectively gave the bears a green light to short without fear of any near-term intervention, and the bears smartly took advantage of it.

……….

Oil broke $50; it’s currently around $49. The oil and gas equity complex were beaten beyond recognition. Even the airlines were crushed.

The agriculture, alternative energy and engineering/infrastructure complex were equally punished.

How bad was it? RIG 55.18 -11.79 -17.60%; PBR 14.94 -2.92 -16.35%; CHK 13.98 -5.32 -27.56%; MOS 22.31 -6.44 -22.40%; SPWRB 11.94 -3.86 -24.43%; FWLT 14.03 -2.88 -17.03%

……….

Basic material equities were mixed with gold finishing up $8.50 to $744.

The homebuilders were slaughtered.

The financials were crushed again for umpteenth time in row. Almost all of them are at 10-15 year lows.

Even the drugs, biotechs, utilities, consumer staples and tobacco stocks finished lower.

Retail was bizarrely mixed. Someone was actually buying in that sector, but it was the only one.

……….

The 10-year Treasury fell to an amazing 3.01% yield. The 30-year dropped to 3.50%.

……….

I feel sorry for overseas markets. They’ll get smoked overnight. Several of them are still miles away from long-term support (not that it helped us much today). For example, the Hang Seng index could easily fall another 3,500 points.

……….

Congratulations America; you’re single-handedly destroying the global economy one partisan/ideological decision at a time.

Closing Prices: DJIA  7,552  Chg -444.99  -5.56 | S&P500  752 Chg  -54.14  -6.71% | NASDAQ  1,316  Chg  -70.30  -5.07%

November 20, 2008     The S&P 500 is around 775 after trading at 1,000 only 12 sessions ago. That’s right; the index is down almost 23% in two and a half weeks.

There have only been four years in the S&P 500’s history that declined even more over the course of an entire year: 1930 -24.0%, 1974 -26.47%, 1937 -35.03%, 1931 -43.34%.

The broad-based index is now down 47% YTD.

With the Bush administration on the sidelines, the bears are in total control. How sad.

November 19, 2008     The VIX finished around 75 as two of our major indexes posted new yearly lows.

Unfortunately Paulson testified before congress that his “mission was accomplished,” and the market recoiled from the news.

The lack of leadership in Washington is amazing.

If only Bush could leave office early. You know, kind of like taking his accrued vacation time and applying it to his final months in office. Oh, wait. He used all of his vacation time in the first term!

The percentage declines in the financials today are mind blowing:

HIG -28.63%

PRU -14.57%

MER -15.79%

MS -16.71%

BAC -14.88%

C -22.85%

Hey, Paulson. You’re not done dude. You have to keep spending until we have a guy with a brain in the White House.

Politicizing the Detroit bridge loans is sickening. The last time we “accepted” a major bankruptcy (Lehman Brothers) in this environment, the markets blew up. Ideology continues to be the economy’s worst enemy.

We have to backstop anything that poses systemic risk. Further deterioration will snowball out of control. It’s that simple.

The S&P 500 finished the day down 45% YTD. It’s currently sitting at its worst annual return ever. It last posted a 40%+ loss in 1931 when it finished the year down 43.34%.

Closing Prices: DJIA  7,997  Chg -427.47  -5.07 | S&P500  806 Chg  -52.54  -6.12% | NASDAQ  1,386  Chg  -96.85  -6.53%

Today marked the lows of the year for two major indexes, and we came within a hair of the DJIA’s. So I’ll use the lows set today in the DJIA to calculate the remaining potential positive returns available this year.

First I need to modify some figures I’ve posted on my blog about year-end returns in 1907 and 1929. I collected new data from multiple reputable sources vs. the charts I used the first time which didn’t actually list the closing prices of the Dow.

So here’s the Dow data I’m working with now:

1907 market low: 38

1907 rally high from the low: 46 (+21%)

1907 year-end finish: 43 (+13%)

............

1929 market low: 199

1929 rally high from low: 245 (+23%)

1929 year-end finish: 245 (+23%)

............

2008 market low: 7,965

2008 rally high from the low: (projected) 9,717 (+22%)

2008 year-end finish: (projected) 9,398 (+18%)

I took the average returns of 1907 and 1929 to calculate the 2008 projections. I know it’s not a lot of data to draw a decisive conclusion from, but the two years experienced almost identical declines as 2008's. So I think it’s very solid historical data to draw a relatively accurate forecast.

With the DJIA finishing at 8,835 today, there are another 882 points on the table. That’s another 10%.

You can’t let the fundamentals cloud your judgment if you follow this strategy. We all know the fundamentals are lousy and in many respects getting worse. 1907 and 1929 were just as bad with similar recessionary and employment headwinds, but they managed to rally nonetheless. If I had to guess why, I would simply say you can only discount so much in one year. It’s hard to price in a possible depression without actually seeing sustained depression era statistics.

Long the next 882 Dow points. (I trimmed some TNA into the close, so I'll add more if market dips are presented on the run to Dow 9,717)

Closing Prices: DJIA  8,835  Chg +552.59  +6.67 | S&P500  911 Chg  +58.99  +6.92% | NASDAQ  1,596  Chg  +97.49  +6.50%

Sure enough, the S&P 500 and NASDAQ are making new lows for the year. And the DJIA is within a few hundred points of the October 10 intraday low.

Remember this is exactly what happened in 1907 and 1929. In both instances, the market sold off almost all year. And October produced crushing results, and yet both finally bottomed on November 12 and 15. It’s almost identical to what’s happening right now.

 It’s also worth mentioning that the worst year in the DJIA’s history, 1931, produced a 52.67% thrashing.

With the Dow below 8,000, it’s off 40% this year. If it were to finish here, it would be the second worst year in the DJIA’s history.

I think we’re making the lows of the year right now. I mean c’mon: the Dow just dropped 1,200 points in four sessions.

I think it’s a foolish time to short, and a great time to add longs. Unless you think it’s different this time. But anyone that studies history knows it’s never really different this time.

November 13, 2008     Intel guided down yesterday after the close, but U.S. futures are slightly higher this morning. I haven’t mentioned solid state drives in my blog lately, but it’s worth noting that Intel’s new MLC SSDs rank at the very top of the pack. And we all know these guys are just the absolute best at producing the smallest nanometer chips, which bumps up the yield/margins (INTC produces the smallest nanometer processors and flash chips in the industry). So it’s no surprise that one of the world’s best technology operators is poised to capture a huge swath of the storage market. I wouldn’t be surprised if Intel controls 30-40% of the SSD market in a few years. Solid state drives will eventually replace hard disk drives outright. I’ll say it again: the hard disk drive manufacturers’ and component makers’ (WDC, STX & HTCH) business model is toast.

This week is playing out exactly as I predicted weeks ago (I wish I had positioned a little better for it, but that’s old news). It’s almost a mirror image of the action in 1907 and 1929. If it continues to play out as I expect, we’ll finish the year higher from this week’s lows. And early next year will produce terrific returns. If the economy manages to stabilize and recover slightly, 2009 will produce spectacular results similar to 1907/1975. If the recession is mismanaged, we’re headed for a painful 1929-1932 repeat.

The market swings are crazy. The Dow’s moved 600 points in the last two days, while the S&P 500 dropped 60.

Once again, there are tons of individual stocks at jaw dropping prices with amazing cash flow ratios, net cash and dividend yields. Even if cash flow in ’09 is severely reduced, many stocks still look attractive.

Several large money center banks announced plans to restructure mortgages in the last couple of days, and the GSEs just chimed in with a similar move. They’re offering homeowners very attractive rates, but the whole process just feels so piecemeal.

Everybody and their mother are still trying to pick the bottom in oil and oil/gas related equities. No thanks. I think they’re still the most vulnerable group out there. With massive amounts of crude production costs in the $10-$25 range, $60 oil looks insanely high in this economic environment.

Closing Prices: DJIA  8,693  Chg -176.58  -1.99 | S&P500  898 Chg  -20.26  -2.20% | NASDAQ  1,580  Chg  -35.84  -2.22%

November 11, 2008     With the U.S. auto industry on deaths door, the Bush administration is reluctant to provide bridge loans. The tentacles of the auto industry are just as deep and far reaching as any financial institution. I can’t believe the current administration can dismiss the auto makers as a systemic risk.

I’m not a huge fan of Detroit auto makers, but even I understand it’s not the time to throw these guys under the bus.

Bush is well aware that his presidency is one giant f-up, so he’s horse trading with the dems for some free trade agreements (you know … something for the history books other than the fact that he’s just a total douche bag). He says he’ll support a Detroit loan if the democrats approve his free trade agreements.

Are you kidding me? Is this guy for real? Is he really this obtuse? Hasn’t he looked at his brokerage statement in the last year??? He’s a serial 401k destroyer.

Long the market, but I wish I had a giant Bush put.

Just for the record: I’m an independent that used to lean right, but I don’t even recognize the right anymore. In fact, I recognized Bush was a total tool from day one. I voted for the other guy both times even though I didn’t like the other guy that much.

I’m still positioning for a late-year rally. I have no idea what will drive it higher, and at this point I don’t care. I’ve seen too many fundamentally unexplainable moves in the past month or so. I’m way past trying to figure out the day-to-day action. At this point, I’m trading on historical market action in similar declines. It’s totally technical, but that suits me just fine.

I have zero interest in touching individual stocks right now. It’s just too hard with potentially crushing results -- even if you do your homework.

I purchased my first ETF on October 10, 2008, and now I’m in love with them. I’m not alone; there’s a tremendous amount of volume in them every day.

Closing Prices: DJIA  8,870  Chg -73.27  -.82 | S&P500  919 Chg  -11.78  -1.27% | NASDAQ  1,616  Chg  -30.66  -1.86%

November 10, 2008     China announced a $600B stimulus plan over the weekend. Overseas markets are nicely higher on the news. We opened higher on strong futures, but we’re headed back toward Friday's closing prices.

I like the action. This is a great chance to close my short position and go even longer.

I’m plowing the short proceeds into BGU and TNA.

November 7, 2008     Obama is scheduled to have his first press conference soon. He’s said he’ll tell the truth, and I believe him. And right now the truth is just brutal.

I need some protection until next Friday (which I expect will be the final day of absolute weakness this year).

With the S&P 500 up 20, I reloaded the SSO puts. I also exited BGU. I guess I’m looking for a true retest of the October 24th lows next week, or at least another 500 point swing down.

In this volatile market, it’s better to be safe than sorry.

I exited my USO and SSO puts today. With the DJIA down almost 1,000 points in two days, and the S&P 500 within 60 points of its low for the year, I didn’t want to overstay my welcome.

I plowed half of the proceeds into the new BGU ETF.

………….

The VIX surged another 10 points higher finishing around 64.

The European markets finished down 5-7% despite the rate cuts. Asian markets posted equally poor results overnight.

Mortgage rates are around 6% again after surging to 6.5%. At least that's a bit of good news on a day when everything is in the red.

Closing Prices: DJIA  8,695  Chg -443.48  -4.85 | S&P500  904 Chg  -47.89  -5.03% | NASDAQ  1,608  Chg  -72.94  -4.34%