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Wednesday, May 30, 2012
Monday, May 21, 2012
Don't trust the bounce!
Stocks are bouncing today, but this is a classic "dead cat" bounce - there is no fundamental or technical reason for it. Small investors are simply buying because the market went down. This is a stupid reason to risk money, and they will pay for their stupidity. The 200-day moving average is at about 1,275. That's where I will start buying. Although we are up about 15 points on the S&P 500 right now, I do not think it will hold. Be patient and be rewarded!
Friday, May 18, 2012
Facebook IPO a complete failure, unless you were one of the sellers
Facebook came public today at $38 per share. The underwriters, along with the insiders who were selling stock in the offering, decided to not only increase the size of the offering (the number of shares to be sold), but also increased the price range. Then they priced the deal at the extreme high end of the range - the highest possible price. After a 30 minute delay, the NASDAQ finally got their act together and started trading. They were able to get an initial pop, although it was far less than the usual 32% average pop for tech IPOs, with only about a 13% jump, before fading quickly, and within the first few minutes of trading, falling back to the IPO price of $38. The underwriters/market-makers fought hard all day to prevent the stock from breaking the $38 level, even though I saw several trades that came across below $38 (they went back and "corrected" those trades (I place corrected in quotes because the market-makers took any trades below $38 and basically ate the difference and reprinted the trades at $38. This is all about saving face - the underwriters want to be able to say to the sellers, hey, we were right to increase the deal size and to price it where we did because it held up on the first day at that price. Come Monday all bets are off and then we'll see what happens. The underwriters will not defend the bid at $38, and my guess is that the stock will sink.
The utter failure of Facebook is not only a huge blow to Facebook's future potential for selling stock on the public markets, but will also make it much more difficult for any other social media companies to sell their stock. While all deals are evaluated on their own merits, it does matter when the big dog in the industry suffers a humiliating first foray into the public markets. Potential buyers of the next deal will say, if Facebook couldn't succeed, what chance does this company have?
What they should have done was to keep the size of the deal at the original level and the offering price at the original range. The deal would have been smoking hot today, and would have blown everyone away. It would have been at least a double, and would have impressed even the most skeptical, even those like myself that think the valuation is ridiculous. Then, not only could they have come back in 6 months or a year and sold 10 times as much stock for what would most likely have been a much higher price, but they would have established a precedent for other social media companies to follow in the future.
Facebook closed at $38.23, up just 0.6% for the session. Pitiful. I hope Zuckerberg and the rest are pleased, after all he just cashed out about $6 billion, but if I were him, I would be really disappointed. Let them try to come back in a year or so and sell more stock. No one is going to want it, unless they impress with strong actual financial performance. There is far more risk that they will not perform than probability that they will.
I will be absolutely shocked if the stock does not close below $38 on Monday. Regardless of where it goes from here, however, the IPO was not a success, and the valuation of the company, most importantly, is nosebleed high... far too high to justify its purchase no matter how you slice it. Today's trading action provides even more support and confirmation for my position, which is to avoid this stock like the plague.
The utter failure of Facebook is not only a huge blow to Facebook's future potential for selling stock on the public markets, but will also make it much more difficult for any other social media companies to sell their stock. While all deals are evaluated on their own merits, it does matter when the big dog in the industry suffers a humiliating first foray into the public markets. Potential buyers of the next deal will say, if Facebook couldn't succeed, what chance does this company have?
What they should have done was to keep the size of the deal at the original level and the offering price at the original range. The deal would have been smoking hot today, and would have blown everyone away. It would have been at least a double, and would have impressed even the most skeptical, even those like myself that think the valuation is ridiculous. Then, not only could they have come back in 6 months or a year and sold 10 times as much stock for what would most likely have been a much higher price, but they would have established a precedent for other social media companies to follow in the future.
Facebook closed at $38.23, up just 0.6% for the session. Pitiful. I hope Zuckerberg and the rest are pleased, after all he just cashed out about $6 billion, but if I were him, I would be really disappointed. Let them try to come back in a year or so and sell more stock. No one is going to want it, unless they impress with strong actual financial performance. There is far more risk that they will not perform than probability that they will.
I will be absolutely shocked if the stock does not close below $38 on Monday. Regardless of where it goes from here, however, the IPO was not a success, and the valuation of the company, most importantly, is nosebleed high... far too high to justify its purchase no matter how you slice it. Today's trading action provides even more support and confirmation for my position, which is to avoid this stock like the plague.
Facebook opening weak in comparison to most tech IPOs
Facebook priced at $38 and opened (late) at $42.05. That represents a 10.5% pop, which is well below the average first day pop for tech IPOs of 32%. We are fading fast, with the last trade just above $41. My expectation is for the stock to trade below the offering price of $38 today, and possibly close down below $38 for the day. Stocks overall, which were up earlier, and now down across the board.
Facebook is a joke as an investment
Regardless of whether Facebook "sticks" (is not a fad that fades away), as an investment, the company is, simply put, a joke. Today's IPO, which priced at $38 per share, values the company at around $104 billion. With about $1 billion in earnings over the past year, this valuation makes the price-to-earnings (P/E) ratio over 100. This is a valuation that gives me flashbacks to the tech bubble of 2000, when analysts started inventing new valuation metrics because the current ones made the companies look so ridiculous from an investment standpoint.
One thing I have learned over the years is that the small investor never learns. I have no doubt that Facebook will be a hot deal today. When the stock starts trading around 8 a.m. pacific time, I am sure it will immediately trade to a premium. Who cares?? Unless stockholders are looking to flip the stock today, what happens in today's trading is meaningless. As a real investment, I have never seen any company justify a 100 P/E, and I promise you, we are not seeing one today. Facebook, like all other Internet-based companies like it, depends on advertising revenues primarily. There is no way in hell that they will ever generate enough advertising revenue to make a dent in the current 100 times earnings valuation.
I would not touch this stock and you shouldn't either.
One thing I have learned over the years is that the small investor never learns. I have no doubt that Facebook will be a hot deal today. When the stock starts trading around 8 a.m. pacific time, I am sure it will immediately trade to a premium. Who cares?? Unless stockholders are looking to flip the stock today, what happens in today's trading is meaningless. As a real investment, I have never seen any company justify a 100 P/E, and I promise you, we are not seeing one today. Facebook, like all other Internet-based companies like it, depends on advertising revenues primarily. There is no way in hell that they will ever generate enough advertising revenue to make a dent in the current 100 times earnings valuation.
I would not touch this stock and you shouldn't either.
Monday, May 14, 2012
Stocks look to test support right off the open
We closed at 1,353 on the S&P 500 on Friday. Look for stocks to test the 1,340 support for the S&P 500 directly off of the open, as stocks will open down sharply.
Friday, May 11, 2012
As goes Apple, so goes the market
I have written extensively on Apple of late, but to recap, I stated that the chart was going parabolic - the slope was increasing at an increasing rate, or in simple language it was getting steeper and steeper, and that this typically means the stock is about to roll-over. Here is a current 1-year chart of Apple:
As you can see, the stock peaked and has, in fact, rolled-over and has begun to correct. Moreover, it has broken down through its 50-day moving average, which is a very negative indicator. The 100-day moving average is around $525 and the 200-day is around $450. We need to keep an eye on these levels as well for more possible negative breaks.
As I have discussed, Apple was responsible for about 15% of the entire S&P 500 performance int he first quarter - the S&P 500 was up about 12% for 1Q12, so about 1.8% of that 12% came as a result of Apple's strong performance. Apple has become such a huge percentage weighting in the S&P 500 (and the NASDAQ Composite and NASDAQ 100), that it has been pushing these indexes around. As the stock price falls, the weighting also falls, all others being equal, so the negative impact on the indexes will lessen somewhat as Apple declines. However, as other stocks decline in value, the relative weight of Apple may remain high enough to cause significant declines in the indexes, should Apple continue to fall in price.
Just today, Credit Suisse reduced its sales expectations for Apple due to lowered expectations for iPhone sales. I would suggest to you that the wheels are coming off of the cart. As good as Apple's products are, no company can maintain a market cap this large. I expect to see Apple get down to the $400 level if not lower. At or below $400 a share, I will be a buyer, but not until then, and not unless I feel comfortable with the overall level of the market.
Deja Vu All Over Again!
Is it just me or have we been here before? I am talking about the recently disclosed $2 billion+ loss that JP Morgan just surprised the street with yesterday. Keep in mind that this loss comes out of a supposed hedged portfolio designed to reduce (yes reduce) risk to the bank by offsetting the risk in their mortgage portfolio. They claim that they, meaning the CEO Jamie Dimon, did not know this kind of trading or risk-taking was occurring. Excuse me?? We either have a CEO that is completely asleep at the wheel, or one that is lying and knows that he has traders taking enormous risks and supported it. Either way it is unacceptable.
Keep in mind that we are talking about trades in CDSs, or credit default swaps. Yes, you have heard this term before - these are the same derivatives contracts that put Bear Stearns and Lehman Brothers out of business, and caused the entire world financial system to collapse just a few years ago. Now we have the only U.S. bank that seemed to avoid the majority of the poor decision-making that got us into this trouble, doing the very trading in the very same derivatives that caused the meltdown. Have we (they) learned nothing??
By the way, they claim the loss is $2 billion, but the problem is that CDSs are private contracts and are therefore extremely illiquid. Now that everyone knows that JP Morgan is exposed to these trades, they are going to suffer much greater losses when they try to unwind the trades, so the actual losses will very likely be much greater than the $2 billion stated.
A few weeks ago a Wall Street Journal article discussed a trader in the UK known as "The London Whale" who was placing such large trades in the CDS market - a $10 trillion market - that he was moving the market. Now we find out that this trader was at JP Morgan. What I think happened was that this trader or the group he works with got underwater and started panic trading to try and recoup their losses, which only exacerbated them, resulting in the current situation. Where is the supervision? Why are these traders allowed to place unlimited trades with no size or quantity restrictions and no oversight? This kind of thing happens over and over again, and they never seem to learn from it. Often these traders are young guys straight out of business school who have little or no real market or trading experience and they are given complete autonomy and no real supervision or restrictions, and this is the result.
This latest fiasco lends great support to the case for the Volcker rule, which is coming up for a vote this summer. The Volcker rule will place restrictions on banks and other financial institutions regarding what and how they trade. There could not be a more glaring example of why, unfortunately, we need external regulation of the financial institutions that this latest debacle from JP Morgan. JP Morgan would be rolling over in his grave if he knew what these people were doing in his name. I do not believe in government regulation of financial markets in general, but it is apparent that we cannot depend on the financial institutions to regulate themselves, so we are forced to accept the unattractive by necessary reality of government control over trading operations. The financial institutions have no one to blame but themselves.
Keep in mind that we are talking about trades in CDSs, or credit default swaps. Yes, you have heard this term before - these are the same derivatives contracts that put Bear Stearns and Lehman Brothers out of business, and caused the entire world financial system to collapse just a few years ago. Now we have the only U.S. bank that seemed to avoid the majority of the poor decision-making that got us into this trouble, doing the very trading in the very same derivatives that caused the meltdown. Have we (they) learned nothing??
By the way, they claim the loss is $2 billion, but the problem is that CDSs are private contracts and are therefore extremely illiquid. Now that everyone knows that JP Morgan is exposed to these trades, they are going to suffer much greater losses when they try to unwind the trades, so the actual losses will very likely be much greater than the $2 billion stated.
A few weeks ago a Wall Street Journal article discussed a trader in the UK known as "The London Whale" who was placing such large trades in the CDS market - a $10 trillion market - that he was moving the market. Now we find out that this trader was at JP Morgan. What I think happened was that this trader or the group he works with got underwater and started panic trading to try and recoup their losses, which only exacerbated them, resulting in the current situation. Where is the supervision? Why are these traders allowed to place unlimited trades with no size or quantity restrictions and no oversight? This kind of thing happens over and over again, and they never seem to learn from it. Often these traders are young guys straight out of business school who have little or no real market or trading experience and they are given complete autonomy and no real supervision or restrictions, and this is the result.
This latest fiasco lends great support to the case for the Volcker rule, which is coming up for a vote this summer. The Volcker rule will place restrictions on banks and other financial institutions regarding what and how they trade. There could not be a more glaring example of why, unfortunately, we need external regulation of the financial institutions that this latest debacle from JP Morgan. JP Morgan would be rolling over in his grave if he knew what these people were doing in his name. I do not believe in government regulation of financial markets in general, but it is apparent that we cannot depend on the financial institutions to regulate themselves, so we are forced to accept the unattractive by necessary reality of government control over trading operations. The financial institutions have no one to blame but themselves.
Thursday, May 10, 2012
Enough with the rich bashing!
It is easy to blame the nameless faceless "rich" for all that ails the world. Simple economics tells us that the top earners are also the top investors. Investment is what drives employment and wage increases. Our tax system is one of the most aggressive and most progressive in the world, meaning that the more you earn, the more you pay. Yes, there are a select few that take advantage of loopholes that pay a lower percentage of their earnings that some lower wage earners, but even these individuals still pay literally millions of dollars each year in taxes. The money they don't pay, in large part, gets reinvested into the economy in the form of investment or savings, both of which drive economic expansion, including employment. This witch hunt for the "rich" has got to stop, so we can focus on the real issues, which include a bloated government that wastes billions each year, a over-bureaucratized healthcare system again that wastes billions each year, and a tax code that punishes success.
Stocks are NOT cheap as many pundits would have you believe!
Stocks are cheap based on what metric - P/E?? Those who continue to claim that stocks are cheap right now are using forward P/Es and other metrics based on assumed future earnings, which are nothing more than poor guesses based on inflated expectations for GDP growth and by extension company sales. There is a systematic failure to understand the fundamental weakness in the methodology for calculating these revenue and earnings estimates that underlie these overly optimistic expectations. Stocks, in fact, are not cheap at all, if you consider the very real possibility that the economies of the globe, particularly the U.S. and western Europe, are NOT going to grow at a robust pace for the foreseeable future. Even the so-called BRIC countries, lead by China, are slowing significantly. The overhang of massive debt is crushing any hope of real growth for the economies of the west. Once investors adjust their expectations to more realistic levels, stocks will no longer seem cheap at current prices.
Wednesday, May 9, 2012
Stocks bounce as expected
As I stated this morning when I made my previous post at the market lows for the session, stocks were likely to bounce from the 1,340 level. We got down around 1,343 at the low, which is where we were when I made this morning's post, and we have now bounced to almost even for the day. The S&P 500, which was down around 20 points at the low, is now off only about 1 point. Investors are still convinced that any dip is a buying opportunity, but beware, the big picture shows some serious technical damage has been done. Not only has the S&P 500 rolled over, but the leading sectors, and especially technology are also compromised and look to head much lower. Techs lead the market higher and are now leading it lower. I am watching tech to try to determine where stocks will bottom. I don't expect to see any signs of real support above 1,300.
Stocks accelerate to the downside
The long-awaited correction is in full effect, with stocks accelerating to the downside on renewed concerns over Greece and the Eurozone. Watch the 1,340 level on the S&P 500 (now at 1,343). This is the March low, and is the only support above 1,300. I do not think 1,340 will hold, although we may bounce off of it today, at least temporarily. I will likely start to add some positions once we get down close to 1,300, although I think we could go to 1,250 or even 1,200.
Tuesday, May 1, 2012
Don't let the market gyrations fool you!
The stock market can do things to convince investors that they are "missing the boat" when the reality is that the market really isn't doing much of anything. Case in point - late last week the S&P 500 moved back above 1,400 after sliding as low as 1,357 on April 10th. Today we saw this major index climb as high as 1,425 before settling for the day at 1,405. The run from 1,357 to 1,415, which took only about 20 trading days, represents a 4.3% gain. Sounds pretty good, and if you were lucky enough to perfectly time the market and jump in at the April 10th low, and to sell at today's high, you would have indeed made about a 4% profit after commissions and before taxes in a very short time-period.
The problem is that no one is that lucky consistently enough to short-term trade the market; at least no one I have ever met or heard about. The reality is, in fact, that virtually everyone was either in the market or out of the market during this time, so no one really benefited from this short-term pop in the overall market.
More to my point... the market really hasn't done anything over the past several months. In fact, the S&P 500 was above 1,300 in early January, and broke 1,350 the first week of February. It surpassed the 1,400 level in mid-March. (I sold a significant portion of my portfolios just after this.) So, over the past 6 weeks, the market has gone down a little and back up a little, basically right back to where it was 6 weeks ago, so again, unless an investor got really lucky, the market hasn't provided any real returns for at least the past 6 weeks.
To watch the financial media each day, one would get the distinct impression that the stock market was rallying fast and strong, making people money hand over fist. And while it is true that the Dow Jones Industrial Average did close at its highest level since December 2007, all three major indexes closed well off of their highs, especially the NASDAQ Composite, which had been up over 40 points during the trading session, but closed ahead by only 4 points.
It is easy to get caught-up in the frenzied atmosphere manufactured by the financial media, which thrives on positive market information. However, investors should temper their enthusiasm for joining the mindless crowd, and make investment decisions based on fundamental and technical facts, rather than the ramblings of fools like Jim Cramer and company. Investors need to ask serious and important questions, such as: What is the realistic upside potential for stocks from current valuations, in the short-, intermediate-, and long-term? How confident can they be in the overly optimistic earnings projections provided by investment firms that fired all of the best analysts on the street years ago, most of which have major incestuous relationships and therefore conflicts of interest, since they perform investment banking services for the same companies they are recommending? If the financial media is telling everyone on the planet how great things are, how many people out there are still waiting in the wings to buy this rally?
I could go on and on, but the point is that it is very easy to get sucked into the hype and make bad decisions with good money. Don't be hypnotized by the media. They are idiots, and they don't care at all if you lose money.
The problem is that no one is that lucky consistently enough to short-term trade the market; at least no one I have ever met or heard about. The reality is, in fact, that virtually everyone was either in the market or out of the market during this time, so no one really benefited from this short-term pop in the overall market.
More to my point... the market really hasn't done anything over the past several months. In fact, the S&P 500 was above 1,300 in early January, and broke 1,350 the first week of February. It surpassed the 1,400 level in mid-March. (I sold a significant portion of my portfolios just after this.) So, over the past 6 weeks, the market has gone down a little and back up a little, basically right back to where it was 6 weeks ago, so again, unless an investor got really lucky, the market hasn't provided any real returns for at least the past 6 weeks.
To watch the financial media each day, one would get the distinct impression that the stock market was rallying fast and strong, making people money hand over fist. And while it is true that the Dow Jones Industrial Average did close at its highest level since December 2007, all three major indexes closed well off of their highs, especially the NASDAQ Composite, which had been up over 40 points during the trading session, but closed ahead by only 4 points.
It is easy to get caught-up in the frenzied atmosphere manufactured by the financial media, which thrives on positive market information. However, investors should temper their enthusiasm for joining the mindless crowd, and make investment decisions based on fundamental and technical facts, rather than the ramblings of fools like Jim Cramer and company. Investors need to ask serious and important questions, such as: What is the realistic upside potential for stocks from current valuations, in the short-, intermediate-, and long-term? How confident can they be in the overly optimistic earnings projections provided by investment firms that fired all of the best analysts on the street years ago, most of which have major incestuous relationships and therefore conflicts of interest, since they perform investment banking services for the same companies they are recommending? If the financial media is telling everyone on the planet how great things are, how many people out there are still waiting in the wings to buy this rally?
I could go on and on, but the point is that it is very easy to get sucked into the hype and make bad decisions with good money. Don't be hypnotized by the media. They are idiots, and they don't care at all if you lose money.
Monday, April 30, 2012
Wednesday, April 25, 2012
Apple continues to push the markets around
The Dow, which opened higher by about 100 points off of the open this morning, is only up about 45 points at the moment, or by about 0.35%, while the S&P 500 is higher by 14 points, or about 1%, and the NASDAQ is up about 60 points, or 2%. Apple, which is a large component of the NASDAQ (very tech-heavy), and of the S&P 500, is distorting the overall market performance because it has become such a large weighting in these two indexes. Something will need to be adjusted within the formulas used to calculate these indexes, unless Apple falls pretty dramatically, because we are not getting a true sense of what the overall market is doing anymore. Broad market indexes like the S&P 500, which holds 500 different stocks, and the NASDAQ Composite, which has around 3,000 stocks in it, are intended as a gauge of the entire stock market, and by extension, the entire U.S. economy. Apple is the tail wagging the dog, so something will need to be done to adjust these indexes; otherwise people will start calculating them ex-Apple.
Apple reverses on strong earnings
Apple is up over 10% in premarket trading after blowout earnings and strong revenue gains. The stock should open around $615 per share, still below the high of $644, but definitely a powerful reversal of the recent downtrend. One key thing I noticed in the report was that iPod sales were pretty weak. While the ipod is an older product line, I think it is instructive to see how sales, even of Apple's exceptional products, eventually fade. The point is that they need to continue to release new, revolutionary products like the iPhone and iPad to sustain the lofty prices we are witnessing for the stock. I just don't see anything in the pipeline that meets that criteria, and I don't think Tim Cook, the current CEO, can replace Steve Jobs in terms of developing these types of new products. So, in the long-run, I am not convinced that Apple can keep advancing. If I owned the stock, I would see every share I owned today.
Tuesday, April 24, 2012
Apple is broken!
Apple has broken its 50-day moving average and is down 13.5% from its recent, all-time high of $644.
The 100-day moving average is around $500 per share, and the 200-day is at about $450 per share. As can be seen in the chart above, Apple went parabolic - rising at an increasing rate, and then rolled over and is now in full correction mode. There is no real support on the chart before about $400 per share, so it has a long way to fall.
The 100-day moving average is around $500 per share, and the 200-day is at about $450 per share. As can be seen in the chart above, Apple went parabolic - rising at an increasing rate, and then rolled over and is now in full correction mode. There is no real support on the chart before about $400 per share, so it has a long way to fall.
Don't be fooled! Home prices are not cheap and are not at a bottom!
Today's Case-Shiller 20 City Home Price Index release showed prices for houses dropped to the lowest level in almost a decade, dropping 0.8% from January, and 3.5% from February of 2011 to February of 2012. Even more telling, of the 20 cities in the index, 16 were down and only 3 were up (1 was flat). Keep in mind that prices continue to drop despite the lowest interest rate environment ever! The 30-year fixed-rate mortgage is at an incredible 4.28% right now!
I looked back at the data for median home prices for California overall and for Santa Barbara County to compare where we were at the bottom of the last real estate implosion (1993 - 1996) and where we are today. I also looked at comparisons with the peak of the current bubble, in 2007. Here are the results:
For California overall:
Low (Feb. 1997): $167,790 30-year FRM: 7.84%
Peak (May 2007): $594,530 30-year FRM: 6.39%
Current (Mar 2012): $291,080 30-year FRM: 4.28%
For Santa Barbara County:
Low (Dec. 1994): $169,939 30-year FRM: 9.35%
Peak (July 2007): $878,124 30-year FRM: 6.85%
Current (Mar 2012): $405,380 30-year FRM: 4.28%
For California overall:
Median home prices are up 73.5% from the low of the last cycle (from February of 1997), and are down 51% from the recent peak (may 2007).
For Santa Barbara County:
Median home prices are up 138.5% from the low of the last cycle (from December of 1994), and are down 54% from the recent peak (July 2007).
What's my point?
The point is that, despite the massive declines we have already witnessed, real estate prices are still artificially high due to the historically low interest rate environment. More to the point, because rates cannot stay this low forever (or for very much longer), we still have a lot of risk to the downside for real estate prices from current levels, despite the declines we have already seen.
While I do not expect interest rates to rise dramatically in a short period of time (that would crush the economy), I do expect them to rise over time, back to 7.5% to 8% area for the 30-year fixed-rate mortgage. If this occurs over the coming 3-year period, (which is what I expect), the rising rate environment will put continuous pressure on real estate prices that will, at a minimum, prevent prices from increasing by any sizable amount. That is the best case scenario! It is much more likely to push prices down even further; substantially further for markets like Santa Barbara.
Here is what I expect to see:
For Santa Barbara, I see prices declining by at least another 30% from current levels, which would place us in the $280,000 area for the county, for median home prices (my target median home prices for Santa Barbara County is $250,000). Keep in mind that the median home price bounces around quite a bit for Santa Barbara County, because we are relatively small, so sometimes we don't get that many sales. A good example of this is the change from February to March - $345,000 in February, and $405,380 in March (I assure you that prices didn't jump by 17.5% from February to March).
Keep in mind that Santa Barbara County has the north county, which tends to have lower-priced properties, and the south county, which includes Santa Barbara (city) and Montecito.
One can argue about statistics and what they really mean "'til the cows come home," but at the end of the day, the trends are clearly showing declining prices. Further, one cannot argue that rising interest rates are not going to have a negative impact on housing prices. The only valid point of contention will be the degree to which rising rates impact prices.
I looked back at the data for median home prices for California overall and for Santa Barbara County to compare where we were at the bottom of the last real estate implosion (1993 - 1996) and where we are today. I also looked at comparisons with the peak of the current bubble, in 2007. Here are the results:
For California overall:
Low (Feb. 1997): $167,790 30-year FRM: 7.84%
Peak (May 2007): $594,530 30-year FRM: 6.39%
Current (Mar 2012): $291,080 30-year FRM: 4.28%
For Santa Barbara County:
Low (Dec. 1994): $169,939 30-year FRM: 9.35%
Peak (July 2007): $878,124 30-year FRM: 6.85%
Current (Mar 2012): $405,380 30-year FRM: 4.28%
For California overall:
Median home prices are up 73.5% from the low of the last cycle (from February of 1997), and are down 51% from the recent peak (may 2007).
For Santa Barbara County:
Median home prices are up 138.5% from the low of the last cycle (from December of 1994), and are down 54% from the recent peak (July 2007).
What's my point?
The point is that, despite the massive declines we have already witnessed, real estate prices are still artificially high due to the historically low interest rate environment. More to the point, because rates cannot stay this low forever (or for very much longer), we still have a lot of risk to the downside for real estate prices from current levels, despite the declines we have already seen.
While I do not expect interest rates to rise dramatically in a short period of time (that would crush the economy), I do expect them to rise over time, back to 7.5% to 8% area for the 30-year fixed-rate mortgage. If this occurs over the coming 3-year period, (which is what I expect), the rising rate environment will put continuous pressure on real estate prices that will, at a minimum, prevent prices from increasing by any sizable amount. That is the best case scenario! It is much more likely to push prices down even further; substantially further for markets like Santa Barbara.
Here is what I expect to see:
For Santa Barbara, I see prices declining by at least another 30% from current levels, which would place us in the $280,000 area for the county, for median home prices (my target median home prices for Santa Barbara County is $250,000). Keep in mind that the median home price bounces around quite a bit for Santa Barbara County, because we are relatively small, so sometimes we don't get that many sales. A good example of this is the change from February to March - $345,000 in February, and $405,380 in March (I assure you that prices didn't jump by 17.5% from February to March).
Keep in mind that Santa Barbara County has the north county, which tends to have lower-priced properties, and the south county, which includes Santa Barbara (city) and Montecito.
One can argue about statistics and what they really mean "'til the cows come home," but at the end of the day, the trends are clearly showing declining prices. Further, one cannot argue that rising interest rates are not going to have a negative impact on housing prices. The only valid point of contention will be the degree to which rising rates impact prices.
Apple teetering on its 50-day MA
Apple is down another 11 points, or by 2% right off of the open this morning, and is sitting right on its 50-day moving average. If (when) it cracks the 50-day, the stock should fall with more pace as the correction gathers steam. Watch for Apple to continue to lead tech and the markets lower throughout this correction phase.
Monday, April 23, 2012
Head and Shoulders Pattern Now More Defined
The S&P 500 has been developing a head and shoulders pattern, which I mentioned in a post last week. After the past several trading sessions, the pattern has now become more defined:
You can now clearly see the left should (from about February 20th through March 5th), the head (from about march 12th through April 9th), and the right shoulder, which started to develop around April 9th, and is still developing. Keep an eye on the 1,358 level, which we could easily crack as early as tomorrow, but I suspect will be violated within a week (the low today was 1,358.79). Head and shoulders patterns can be very powerful - what this pattern usually means is that, once the right shoulder forms, a technical break-down (in this case through 1,358), should mean a significant decline for stocks.
Let's not forget about the NASDAQ! Remember that last week I also mentioned that it was forming a head and shoulders pattern, and on Friday that the index closed a hair above 3,000. We cracked 3,000 today with a 30 point drop, and the head and shoulders pattern for this index is also forming nicely, although it is not quite as well-defined as that of the S&P 500:
In this chart (above) one can see the left shoulder from also about February 20th through about March 5th - same as the S&P 500, the head formed from about March 5th through April 9th (again the same as the S&P 500), and the right shoulder from about April 9th through this past Friday. The key difference here is that after today's trading, the NASDAQ Composite has already broken down! You can see the gap down from today's action, and the steep decline. The 2,900 level is the next support for this index, but I strongly suspect we will fall right through that level.
Keep in mind also that markets do not typically go straight up or straight down. With some good earnings reports we could easily see stocks bounce more than a few times along the way to lower levels. However, a correction is clearly underway; the only question is: How low will we go?
You can now clearly see the left should (from about February 20th through March 5th), the head (from about march 12th through April 9th), and the right shoulder, which started to develop around April 9th, and is still developing. Keep an eye on the 1,358 level, which we could easily crack as early as tomorrow, but I suspect will be violated within a week (the low today was 1,358.79). Head and shoulders patterns can be very powerful - what this pattern usually means is that, once the right shoulder forms, a technical break-down (in this case through 1,358), should mean a significant decline for stocks.
Let's not forget about the NASDAQ! Remember that last week I also mentioned that it was forming a head and shoulders pattern, and on Friday that the index closed a hair above 3,000. We cracked 3,000 today with a 30 point drop, and the head and shoulders pattern for this index is also forming nicely, although it is not quite as well-defined as that of the S&P 500:
In this chart (above) one can see the left shoulder from also about February 20th through about March 5th - same as the S&P 500, the head formed from about March 5th through April 9th (again the same as the S&P 500), and the right shoulder from about April 9th through this past Friday. The key difference here is that after today's trading, the NASDAQ Composite has already broken down! You can see the gap down from today's action, and the steep decline. The 2,900 level is the next support for this index, but I strongly suspect we will fall right through that level.
Keep in mind also that markets do not typically go straight up or straight down. With some good earnings reports we could easily see stocks bounce more than a few times along the way to lower levels. However, a correction is clearly underway; the only question is: How low will we go?
Friday, April 20, 2012
NASDAQ suffers third weekly loss in a row
Despite the overall positive tone of the markets this week, the NASDAQ Composite index closed lower for the third week in a row with a 7point loss today. Apple contributed, losing 10% in the past 10 trading sessions. The NASDAQ closed a hair above the critical 3,000 level:
Some of you may notice the same head and shoulders patterns forming that is already well developed for the S&P 500. If we break 3,000 next week, we could certainly see more downside in the near-term, especially if selling continues in Apple. Those so bullish previously on Apple cannot point to the overall market to place blame, but rather must acknowledge and accept that Apple is dropping because investors are losing confidence in the stock as an investment, at least from current, very lofty levels.
Some of you may notice the same head and shoulders patterns forming that is already well developed for the S&P 500. If we break 3,000 next week, we could certainly see more downside in the near-term, especially if selling continues in Apple. Those so bullish previously on Apple cannot point to the overall market to place blame, but rather must acknowledge and accept that Apple is dropping because investors are losing confidence in the stock as an investment, at least from current, very lofty levels.
Apple off 10% from high; approaching 50-day moving average
Keep a close eye on Apple... the stock has now corrected more than 10% from it's recent all-time high of $644 to the current $576, or by more than 10%. The 50-day moving average is around $558, and we are getting pretty close to that level.
Stocks overall are up today, even though Apple is down by almost 2% today so far. However, we are off of the day's highs, and could easily close lower today. Also keep an eye on the Dow... we broke below 13,000 earlier this week, then reversed above it, only to close once again below 13,000 yesterday. We are at 13,037 currently, and if we slide to a close below 13,000 today, investors and particularly technicians may question the market's ability to resist a correction in the short-run.
Stocks overall are up today, even though Apple is down by almost 2% today so far. However, we are off of the day's highs, and could easily close lower today. Also keep an eye on the Dow... we broke below 13,000 earlier this week, then reversed above it, only to close once again below 13,000 yesterday. We are at 13,037 currently, and if we slide to a close below 13,000 today, investors and particularly technicians may question the market's ability to resist a correction in the short-run.
Monday, April 16, 2012
Thursday, April 12, 2012
Possible "head and shoulders" pattern could signal further stock declines
The S&P 500 appears to be forming a classic head and shoulders pattern, which simply means that if you look at the chart, the shape that the chart is forming resembles a left shoulder, higher head, and then a right shoulder:
If the chart tops before reaching the recent highs and turns negative again, we will have a right shoulder. Typically, and head and shoulders pattern signals further declines for stocks, which is exactly what I expect to see. However, should stocks continue to advance, pushing past the recent highs, the head and shoulders pattern will not form, and we could see even higher levels for stocks. This is certainly a possibility, but I believe the probability is with lower stock prices in the near-term. We shall see!
If the chart tops before reaching the recent highs and turns negative again, we will have a right shoulder. Typically, and head and shoulders pattern signals further declines for stocks, which is exactly what I expect to see. However, should stocks continue to advance, pushing past the recent highs, the head and shoulders pattern will not form, and we could see even higher levels for stocks. This is certainly a possibility, but I believe the probability is with lower stock prices in the near-term. We shall see!
Wednesday, April 11, 2012
Today's bounce a critical test
Stocks are rebounding so far this morning, after yesterday's 214 point drop on the Dow - the worst day for 2012 to-date. Ten minutes into the trading session, we are up a little over 100 points on the Dow. Today's bounce will be a critical test of the correction that began only a few trading session ago - if stocks can print a positive result today, the downtrend could potentially be broken, giving investors confidence to come back into the market. However, if this bounce fails, and stocks end the session lower, the downtrend will be confirmed and investors will likely look for the exits in increasing numbers.
Monday, April 9, 2012
Median home prices in Santa Barbara County down 61% from the peak
Yes, you read the title correctly, the median home price in Santa Barbara County has fallen from a high in July of 2007 of $878,124 to the current (February 2012) $345,000, or by 61%. Those who refuse to believe the obvious will argue that the median price for the county includes the north county, which has experienced a much more severe drop in prices that the south county, which includes the city of Santa Barbara. True enough, but the peak median home price in July of 2007 also included the north county! Detractors may also argue that because we are a smaller area, the number of home sales can skew the results. True again. However, we have to look at the long-term trend, and looking at the decline in median home prices, it is more than clear that prices have been absolutely pummeled from the 2007 peak until now. Further, it is clear that we are not experiencing a bottoming process. We are still declining, despite some fairly significant fluctuations on a month-to-month basis.
I do not think we have seen the bottom yet, specifically because the economy has not really recovered significantly, and most importantly, because interest rates are still historically very low. When (not if) rates go back up, prices will be forced down further to reflect affordability and the continuing unwillingness of banks to lend. Rates in the 7%+ range will force prices down at least another 20% from current levels. We won't see rates climb back to that level for at least another 18 to 24 months, so we will not see a bottom in real estate prices until sometime after rates move up and then flatten out. Real estate cycles take many years to play out, and we are still in the early stages of the boom to bust cycle. I expect the bottom to happen in 2014, to take a year or two to form, and then a slow recovery for prices should commence, probably starting in 2016 or 2017.
I do not think we have seen the bottom yet, specifically because the economy has not really recovered significantly, and most importantly, because interest rates are still historically very low. When (not if) rates go back up, prices will be forced down further to reflect affordability and the continuing unwillingness of banks to lend. Rates in the 7%+ range will force prices down at least another 20% from current levels. We won't see rates climb back to that level for at least another 18 to 24 months, so we will not see a bottom in real estate prices until sometime after rates move up and then flatten out. Real estate cycles take many years to play out, and we are still in the early stages of the boom to bust cycle. I expect the bottom to happen in 2014, to take a year or two to form, and then a slow recovery for prices should commence, probably starting in 2016 or 2017.
Saturday, April 7, 2012
Those looking for a Fed bailout via QE3 will be disappointed
Much has been discussed regarding a third round of quantitative easing, or QE3, where the Fed would borrow and then use the proceeds to buy long-term bonds, driving rates down, bond prices higher, and in the process flood the economy with even more cash. Many (incorrectly) assume that the previous two rounds of quantitative easing have been undertaken as a direct response (by the Fed) to weak stock market performance. In fact, both previous rounds - QE 1and QE 2 - have taken place immediately following significant drops in stock market levels. However and very importantly, Fed action with regard to QE has not been the direct result of stock market declines, but rather the economic turmoil that caused stock market declines. This is a very important distinction, because, if we are trying to predict when and if the Fed with conduct a third round of QE, it would be incorrect and even dangerous to assume that if the stock market corrects to a certain level or percentage decline, that the Fed will step-in to address that correction with more QE.
The old adage - correlation does not equal causation is a critical and accurate description of the Fed's previous QE operations. In other words, the Fed did not conduct QE because stocks corrected, but because of the economic factors that caused stocks to correct; namely the financial market collapse and disruptions of late 2008/early 2009, and double-digit unemployment and negative GDP growth coupled with real estate market foreclosures and other severe economic problems that we saw at the end of 2010. Falling stock prices did not motivate the Fed to conduct QE!
Now that the economy is showing signs of sustainable improvement, I do not believe that, should we see a correction in equities begin, that the Fed will automatically step-in with more QE. In fact, the minutes from the most recent Fed meeting specifically indicate that the Fed is not planning to conduct Q3, at least anytime soon, and only if the economy contracts significantly. Any belief to the contrary is nothing more than wishful thinking of overly optimistic market pundits searching for any justification to keep stocks moving higher regardless of the current obviously over bought market.
Investors would be wise to avoid falling into this mindset and accept the fact that stocks have rallied to unsustainable levels, at least in the short-term, and are therefore due for a pull-back. Expectations of a Fed bailout to sustain the current, long-standing stock market rally naively assume that the Fed somehow cares about whether stock investors make short-term paper profits. I assure you that they do not. The Fed is concerned with long-term, structural and fundamental trends in unemployment and GDP growth. The day-to-day, week-to-week, and month-to-month gyrations in stocks are of very little concern to the Fed, and they are certainly not going to borrow additional billions of dollars more just to prevent stock investors from giving back paper gains they have attained over the past 6 months.
Keep in mind that if market pundits are at a point where they need to grasp at straws, meaning depending on the Fed for QE3, to bail them out as their only chance of sustaining the current stock market rally, instead of valuations, earnings, economic growth, etc., anyone long stocks should be very concerned! I personally like stocks for the long-term, and feel that they are the most attractive investment vehicle, in comparison to real estate, bonds, commodities, etc. However, I feel very strongly that stocks are overdue for a significant correction, which is why I am holding very large cash positions at present. This coming week marks the beginning of earnings season, which looks to disappoint.
We have had consistent earnings outperformance since the fourth quarter of 2008, which has contributed to the strength and longevity of the current stock market rally. For the first quarter since the end of 2008, we will have a weaker, disappointing quarter where companies overall show slowing growth and many disappoint in terms of earnings projections. This, coupled with the weak jobs report for March - only 120,000 jobs added; far less than the 200,000+ expected, should result in continued selling pressure on stocks. A correction, therefore is not only likely, it is a healthy component of any bull-market rally, and should come as no surprise to any seasoned investor. No market goes straight up or straight down, and the more investors try to fight the natural course of market dynamics, the more losses they will suffer. Savvy investors will understand that corrections are a natural and necessary part of any long-term advance for stocks, and will embrace this process.
The old adage - correlation does not equal causation is a critical and accurate description of the Fed's previous QE operations. In other words, the Fed did not conduct QE because stocks corrected, but because of the economic factors that caused stocks to correct; namely the financial market collapse and disruptions of late 2008/early 2009, and double-digit unemployment and negative GDP growth coupled with real estate market foreclosures and other severe economic problems that we saw at the end of 2010. Falling stock prices did not motivate the Fed to conduct QE!
Now that the economy is showing signs of sustainable improvement, I do not believe that, should we see a correction in equities begin, that the Fed will automatically step-in with more QE. In fact, the minutes from the most recent Fed meeting specifically indicate that the Fed is not planning to conduct Q3, at least anytime soon, and only if the economy contracts significantly. Any belief to the contrary is nothing more than wishful thinking of overly optimistic market pundits searching for any justification to keep stocks moving higher regardless of the current obviously over bought market.
Investors would be wise to avoid falling into this mindset and accept the fact that stocks have rallied to unsustainable levels, at least in the short-term, and are therefore due for a pull-back. Expectations of a Fed bailout to sustain the current, long-standing stock market rally naively assume that the Fed somehow cares about whether stock investors make short-term paper profits. I assure you that they do not. The Fed is concerned with long-term, structural and fundamental trends in unemployment and GDP growth. The day-to-day, week-to-week, and month-to-month gyrations in stocks are of very little concern to the Fed, and they are certainly not going to borrow additional billions of dollars more just to prevent stock investors from giving back paper gains they have attained over the past 6 months.
Keep in mind that if market pundits are at a point where they need to grasp at straws, meaning depending on the Fed for QE3, to bail them out as their only chance of sustaining the current stock market rally, instead of valuations, earnings, economic growth, etc., anyone long stocks should be very concerned! I personally like stocks for the long-term, and feel that they are the most attractive investment vehicle, in comparison to real estate, bonds, commodities, etc. However, I feel very strongly that stocks are overdue for a significant correction, which is why I am holding very large cash positions at present. This coming week marks the beginning of earnings season, which looks to disappoint.
We have had consistent earnings outperformance since the fourth quarter of 2008, which has contributed to the strength and longevity of the current stock market rally. For the first quarter since the end of 2008, we will have a weaker, disappointing quarter where companies overall show slowing growth and many disappoint in terms of earnings projections. This, coupled with the weak jobs report for March - only 120,000 jobs added; far less than the 200,000+ expected, should result in continued selling pressure on stocks. A correction, therefore is not only likely, it is a healthy component of any bull-market rally, and should come as no surprise to any seasoned investor. No market goes straight up or straight down, and the more investors try to fight the natural course of market dynamics, the more losses they will suffer. Savvy investors will understand that corrections are a natural and necessary part of any long-term advance for stocks, and will embrace this process.
Friday, April 6, 2012
Futures down hard after jobs data
U.S. stock futures are down dramatically after the Commerce Department reported that only 120,000 jobs were added in March, well below the expected 200,000+, and the smallest increase in 5 months. Today is a trading holiday for Good Friday, so traders and investors will have to wait until Monday to react to this news. We also have earnings season for the first quarter kicking off on April 10th with Alcoa's report. Earnings look to be weaker than previous quarters, and I expect a negative reaction from stocks, unless we see consistent surprises to the upside throughout earnings season. I remain cautious and have substantial cash positions waiting for a pull-back. I like stocks in general and want to re-enter the market, but only at lower levels. I will look to phase back into stocks as the market corrects, working through the technical support levels to select the most appropriate time to buy.
Monday, April 2, 2012
Monday, March 26, 2012
Monday, March 19, 2012
New Column in the Santa Monica Mirror
I am pleased to announce that I will be writing a new column that will appear in the Santa Monica Mirror every Monday. I will post links here in my blog for each article. Some will be republished articles that I have already published in other publications, and some will be new content. Please visit my blog often, and also please visit the Santa Monica Mirror website at:
http://www.smmirror.com/#mode=picks
http://www.smmirror.com/#mode=picks
Stocks ripe for a significant correction in the short-run
We are currently at 1,406 on the S&P 500; a level which gives me great pause. I have been and continue to be one of the most optimistic commentators on the markets, with a 1,500 target for the S&P500 sometime this year. However, I did not expect to see the index skyrocket straight up to 1,500 with no pull-backs. We ended 2011 at 1,257. So far, we have seen the index rally almost 12% year-to-date. Apple has been a key driver for the markets, rallying from $405 a share at the end of 2011 to about $600 per share, or by 48% year-to-date. As I have written, the chart is parabolic - going vertical. This pace cannot be sustained, and the higher Apple and the market go, the more risk to the downside we face.
The small investor is largely responsible for driving the current overbought condition the markets are experiencing. Cash has now begun to come out of the long end of the bond curve and into stocks. This means that bond investors are assuming more risk than they are comfortable with, to try and capture some additional return, since bond yields are so low, and bond prices are so high, leaving little room for attractive or acceptable bond market returns. Bond investors are extremely fickle when it comes to risk, and will exit very quickly from stocks, at the first sign of trouble.
Just as we have witnessed accelerating buying on the upside, and markets driven to extreme overbought conditions, we will see momentum build on the downside as the markets roll-over. Virtually everyone who has invested in stocks over the past six months has a significant profit (on paper). They will not want to see those profits erode, once stocks start to sell-off. The rush to lock-in paper gains will drive an avalanche of selling pressure, which will drive the stock market down well past normal correction levels, to an extreme oversold level.
Stock investors must accept and become accustomed to the wider swings and heavier volatility of today's equity markets, which are driven by small investors, more fluid capital flows from all asset classes, including bonds, gold, and even real estate, and the linkage of international markets and currencies, making it much easier for foreign investors to get in and out of U.S. markets. With this greater volatility comes greater risk, but also greater opportunity. However, it also demands that investors alter their was of thinking and investing to both protect profits from significant corrections, and raise cash to increase flexibility, to have the ability to invest when markets correct to oversold levels. While there may be certain times when a buy and hold strategy can work for a given market environment, these times will become increasingly rare. Those who stick with the old way of investing using buy and hold are akin to the military commander fighting the last war. Investors must adapt to the ever-changing investing environment, and that environment today demands more active management, flexibility, and a new way of thinking regarding the use of cash as a true asset class within all portfolios.
The small investor is largely responsible for driving the current overbought condition the markets are experiencing. Cash has now begun to come out of the long end of the bond curve and into stocks. This means that bond investors are assuming more risk than they are comfortable with, to try and capture some additional return, since bond yields are so low, and bond prices are so high, leaving little room for attractive or acceptable bond market returns. Bond investors are extremely fickle when it comes to risk, and will exit very quickly from stocks, at the first sign of trouble.
Just as we have witnessed accelerating buying on the upside, and markets driven to extreme overbought conditions, we will see momentum build on the downside as the markets roll-over. Virtually everyone who has invested in stocks over the past six months has a significant profit (on paper). They will not want to see those profits erode, once stocks start to sell-off. The rush to lock-in paper gains will drive an avalanche of selling pressure, which will drive the stock market down well past normal correction levels, to an extreme oversold level.
Stock investors must accept and become accustomed to the wider swings and heavier volatility of today's equity markets, which are driven by small investors, more fluid capital flows from all asset classes, including bonds, gold, and even real estate, and the linkage of international markets and currencies, making it much easier for foreign investors to get in and out of U.S. markets. With this greater volatility comes greater risk, but also greater opportunity. However, it also demands that investors alter their was of thinking and investing to both protect profits from significant corrections, and raise cash to increase flexibility, to have the ability to invest when markets correct to oversold levels. While there may be certain times when a buy and hold strategy can work for a given market environment, these times will become increasingly rare. Those who stick with the old way of investing using buy and hold are akin to the military commander fighting the last war. Investors must adapt to the ever-changing investing environment, and that environment today demands more active management, flexibility, and a new way of thinking regarding the use of cash as a true asset class within all portfolios.
Thursday, March 15, 2012
Short Apple!
Okay, I know I wrote about this before, but my previous post was more of a suggestion. Apple is now hovering around $600 per share. The chart is the textbook definition of a parabolic curve - it is going vertical. There is no way to tell exactly where this stock will top out, and they do have over $100 billion in cash. However, the stock has made a gigantic move over the past few months and is now worth more than 11% of the entire S&P 500. It is responsible for 34% of the entire year-to-date gain for the NASDAQ 100 index. For this price and momentum to be sustained, one would have to believe that the company can continue to produce the same level of explosive growth and product development.
As I wrote previously, I do not believe the company can sustain its previous product development pace and quality without Steve Jobs. The recent release of the iPad 3 only serves to reinforce this belief - rather than releasing a new, revolutionary product, all they have done is improve an existing product. Granted, the improvements contained in the iPad 3 appear to be very significant, especially with regard to the display graphics, but this is not going to be enough to get most people who currently already have an iPad to go buy a new one. Yes the iPad 3 will sell well, but at the end of the day, for the vast majority of users, the iPad is nothing more than a gadget; a toy; a novelty. The market will eventually become saturated, and demand will wane.
My previous article, which explored the future of Apple, post Steve Jobs, was more of a strategic, long-term opinion about the company's ability to continue to release completely new products that establish new categories, etc. My call today is a short-term, tactical call, based on the pace of the stock price increase and the backdrop of the overall stock market rally we have experienced over the past few months. I believe strongly that the market is due for a correction, and the higher we go in the short-run, the more severe will be that correction. Should we get a 10% or greater pull-back in the overall market, I believe Apple will suffer at least twice the percentage drop.
As I wrote previously, I do not believe the company can sustain its previous product development pace and quality without Steve Jobs. The recent release of the iPad 3 only serves to reinforce this belief - rather than releasing a new, revolutionary product, all they have done is improve an existing product. Granted, the improvements contained in the iPad 3 appear to be very significant, especially with regard to the display graphics, but this is not going to be enough to get most people who currently already have an iPad to go buy a new one. Yes the iPad 3 will sell well, but at the end of the day, for the vast majority of users, the iPad is nothing more than a gadget; a toy; a novelty. The market will eventually become saturated, and demand will wane.
My previous article, which explored the future of Apple, post Steve Jobs, was more of a strategic, long-term opinion about the company's ability to continue to release completely new products that establish new categories, etc. My call today is a short-term, tactical call, based on the pace of the stock price increase and the backdrop of the overall stock market rally we have experienced over the past few months. I believe strongly that the market is due for a correction, and the higher we go in the short-run, the more severe will be that correction. Should we get a 10% or greater pull-back in the overall market, I believe Apple will suffer at least twice the percentage drop.
Monday, March 12, 2012
Tuesday, March 6, 2012
At least Cramer is consistent
Remember when I wrote about how idiotic Jim Cramer is back in December when he was saying that Bank of America might file bankruptcy and he hated the financials? That was when they bottomed before rallying huge. Just last week, he began saying how much he loved financials, after that giant up move. Here is the chart of the XLF - the S&P financials sector spyder:
I know I don;'t need to state the obvious, but I will, because I enjoy pointing out how completely stupid Jim Cramer is, and how he should be banned permanently from television, or from any medium where he can give investors terrible advice. You can see in this chart that he came out negative on the financials in mid December, right when they hit there recent low, then they rallied about 22%. Then, last week, right at the peak, he said he loves the financials. Since then they have fallen (so far) about 3% including today's drop. As I have stated many times, a reasonable strategy would be to do the exact opposite of what Cramer recommends.
I know I don;'t need to state the obvious, but I will, because I enjoy pointing out how completely stupid Jim Cramer is, and how he should be banned permanently from television, or from any medium where he can give investors terrible advice. You can see in this chart that he came out negative on the financials in mid December, right when they hit there recent low, then they rallied about 22%. Then, last week, right at the peak, he said he loves the financials. Since then they have fallen (so far) about 3% including today's drop. As I have stated many times, a reasonable strategy would be to do the exact opposite of what Cramer recommends.
Stocks crack
Stocks are down significantly today, which may lead to the first triple-digit drop for the Dow this year. All three major indexes are down well over 1%, with the NASDAQ leading, down over 1.6%. Technically speaking, we have broken down through the breakout zone on heavy volume, which is a short-term negative. Investors may react in the very near-term with some buying, thinking that this is a good opportunity to get in, so we could see a quick bounce this week. However, as I have been writing, I believe we are due for at least a 10% pull-back, so I am sitting on my 50% cash position for the time being.
Monday, March 5, 2012
Tuesday, February 28, 2012
Apple goes parabolic - stocks looking extended
I have written recently about the possible challenges Apple could face with the loss of Steve Jobs. My concern stems from my belief that without Jobs driving the bus so to speak, it will be difficult to keep the large team of highly skilled talent in place with so many other opportunities at their feet. Additionally, Jobs was the "polish" that made new products released by Apple so sleek, so tactile, so ergonomic, and just so cool. My question is, where will the new products come from that will be needed to replace the iPad, iPhone, and iPod, once those produce saturate the market? Keep in mind that at some point, as with any product, Apple will run out of customers. Yes, they can continue to offer enhancements to existing products, but that is never enough to drive continued consistent powerful sales - sales levels that are needed to sustain a very high stock valuation.
As can be seen in the stock chart above, the price of Google shares is going parabolic, meaning that the slope of the price curve is increasing at an increasing rate, or more simply, the chart is going vertical. This cannot last. At some point the stock will peak. Following that peak, stocks typically experience pretty severe declines at a rapid pace. Apple is also approaching a $500 billion market-cap - the value of the company if you multiply the number of shares outstanding by the current share price. This is a very large number, even for Apple. Apple has also appreciated dramatically over the past few months, rallying from the December market lows, when the stock was about $375 to the current $532, or by 42% in just 2 months.
I like Apple's products as much as anyone, but from an investment standpoint, I see some serious risk in the shares of Apple at current prices. It will certainly take a while for the shine of the latest batch of Apple products to lose their luster. But unless Apple can continue to develop and release new, equally amazing products, the stock is going to suffer. The real question is: When will the stock peak? I can't answer that question, but I can say that I do not want to be holding the shares once the stock rolls over and begins it's inevitable decline.
As can be seen in the stock chart above, the price of Google shares is going parabolic, meaning that the slope of the price curve is increasing at an increasing rate, or more simply, the chart is going vertical. This cannot last. At some point the stock will peak. Following that peak, stocks typically experience pretty severe declines at a rapid pace. Apple is also approaching a $500 billion market-cap - the value of the company if you multiply the number of shares outstanding by the current share price. This is a very large number, even for Apple. Apple has also appreciated dramatically over the past few months, rallying from the December market lows, when the stock was about $375 to the current $532, or by 42% in just 2 months.
I like Apple's products as much as anyone, but from an investment standpoint, I see some serious risk in the shares of Apple at current prices. It will certainly take a while for the shine of the latest batch of Apple products to lose their luster. But unless Apple can continue to develop and release new, equally amazing products, the stock is going to suffer. The real question is: When will the stock peak? I can't answer that question, but I can say that I do not want to be holding the shares once the stock rolls over and begins it's inevitable decline.
Monday, February 27, 2012
Tuesday, February 21, 2012
Wednesday, February 15, 2012
Stocks struggle with technical resistance
Stocks are declining today after attempting and then failing to push up through resistance at the 1,350 level on the S&P 500. As I have written extensively of late, there is a sizable amount of congestion at the 1,350 level for the S&P 500, and my feeling is that we will see a pull-back in the near-term of at least 5% to 10%. I would like to see the S&P 500 come back to about the 1,200 level. If we see a decline of this magnitude or better, I will put my 40% cash position back to work.
Monday, February 13, 2012
Greek austerity measures pass parliamentary vote - now comes the tough part
The Greek Parliament early this morning, passed the austerity measures required by the Eurozone Finance ministers for the next traunch of the 130 billion euro/$170 billion bailout. These austerity measures include massive government layoffs and a 22% cut in the private sector minimum wage. The problem is that a vote is one thing, and actually implementing and sticking to austerity measures over time is quite another.
Let us not forget that Greece got into this situation by lying to the EU about how much debt they were carrying in the first place; overspending until their debt was something like 130%+ of GDP, and until it was so out of control that they basically had no choice but to crush their own economy to attempt to get it under control to get the loans they need to avoid default.
I have zero confidence that the unstable Greek government can stick to the plan and permanently cut spending as they must, to avoid defaulting on their sovereign debt. Keep in mind also that a big part of this plan includes cutting the value of their outstanding debt by 70%, which means that the people that loaned them money previously are only getting back a maximum of 30 cents on the dollar.
The only realistic outcome I can see is an eventual Greek default. Just as with mortgage-holders here at home that borrowed money to buy houses they cannot afford, if Greece is going to eventually default, it would be much better for all of us if they just went ahead and defaulted now, rather than dragging it out for years, only to default anyway at some point in the future.
Greece must submit their overall plan for the repayment of their outstanding debt, which again they plan to only pay back a fraction of the principal amount owed (30%), by February 17th. They need to make this deadline so that the IMF and EU will release more bailout money, so they can meet a refinancing of 14.5 billion euros that comes due on March 20th. Under these circumstances, I would submit that Greek politicians are going to say and vote for whatever they have to, to secure the money they need to avoid the default. Voting for something and actually following through with it are two very different things, however. Investors would be wise not to get caught-up in any rally based on the belief that Greece has secured its financial future with today's vote.
Let us not forget that Greece got into this situation by lying to the EU about how much debt they were carrying in the first place; overspending until their debt was something like 130%+ of GDP, and until it was so out of control that they basically had no choice but to crush their own economy to attempt to get it under control to get the loans they need to avoid default.
I have zero confidence that the unstable Greek government can stick to the plan and permanently cut spending as they must, to avoid defaulting on their sovereign debt. Keep in mind also that a big part of this plan includes cutting the value of their outstanding debt by 70%, which means that the people that loaned them money previously are only getting back a maximum of 30 cents on the dollar.
The only realistic outcome I can see is an eventual Greek default. Just as with mortgage-holders here at home that borrowed money to buy houses they cannot afford, if Greece is going to eventually default, it would be much better for all of us if they just went ahead and defaulted now, rather than dragging it out for years, only to default anyway at some point in the future.
Greece must submit their overall plan for the repayment of their outstanding debt, which again they plan to only pay back a fraction of the principal amount owed (30%), by February 17th. They need to make this deadline so that the IMF and EU will release more bailout money, so they can meet a refinancing of 14.5 billion euros that comes due on March 20th. Under these circumstances, I would submit that Greek politicians are going to say and vote for whatever they have to, to secure the money they need to avoid the default. Voting for something and actually following through with it are two very different things, however. Investors would be wise not to get caught-up in any rally based on the belief that Greece has secured its financial future with today's vote.
Wednesday, February 8, 2012
Stocks appear poised for a pull-back, based on technicals
Stocks have rallied dramatically from the December lows, with the S&P 500 gaining over 12% and the NASDAQ up an incredible 15.5%, hitting a new 11-year high - the highest level we have seen for this index since the peak of the tech bubble in early 2000. Stocks are extremely overbought on a technical basis, and appear ripe for a short-term pull-back of at least 5% to 10%.
In the chart of the S&P 500 above, we see a significant amount of congestion around the 1,350 level. The high over the past year or so is 1,364. While we are experiencing a strong uptrend from those December lows, I believe stocks will have a difficult time penetrating the resistance at the 1,350 level, and will most likely experience that pull-back very soon. Should we advance through 1,350, we could certainly trade up into a new, higher trading range. In fact, eventually I believe that is exactly what will happen. I have a 1,500 target for the S&P 500, sometimes during 2012. However, I do not think we will get through this level before we see a pull-back. As a result, I have trimmed positions and now hold approximately 40% in cash for stock allocations. I am still 60% invested in stocks, because, of course, I could be wrong! I also sold calls against existing positions with March expirations to raise additional cash.
I will look to put cash to work should we get a short-term pull-back, focusing on those sectors that will benefit most from the U.S. economic improvement I believe will come over the next few years. This would include Technology, Industrials, Financials, and Consumer Discretionary stocks. I will look at energy in the future, but with oil near $100 per barrel, I am not a buyer.
In the chart of the S&P 500 above, we see a significant amount of congestion around the 1,350 level. The high over the past year or so is 1,364. While we are experiencing a strong uptrend from those December lows, I believe stocks will have a difficult time penetrating the resistance at the 1,350 level, and will most likely experience that pull-back very soon. Should we advance through 1,350, we could certainly trade up into a new, higher trading range. In fact, eventually I believe that is exactly what will happen. I have a 1,500 target for the S&P 500, sometimes during 2012. However, I do not think we will get through this level before we see a pull-back. As a result, I have trimmed positions and now hold approximately 40% in cash for stock allocations. I am still 60% invested in stocks, because, of course, I could be wrong! I also sold calls against existing positions with March expirations to raise additional cash.
I will look to put cash to work should we get a short-term pull-back, focusing on those sectors that will benefit most from the U.S. economic improvement I believe will come over the next few years. This would include Technology, Industrials, Financials, and Consumer Discretionary stocks. I will look at energy in the future, but with oil near $100 per barrel, I am not a buyer.
Monday, February 6, 2012
Wednesday, February 1, 2012
Cramer makes another moronic call
Jim Cramer, once again, make an idiotic call this morning, stating that Apple is "building momentum" and should continue to perform well because they are selling iPhones and iPads. This after the stock has gain about 75 points in a very short time, and at a point where most people that want to have an iPhone or iPad already own one. Yes they can upgrade as new versions are released, but the point is that Apple's stock price already reflects the maximum possible impact from tremendous iPhone and iPad sales. Where are the new products - the next iPhone, iPad, or iPod?? Without Steve Jobs driving innovation, I am not convinced that Apple will continue to release strong products, and without new products that rival the iPhone, iPad, and iPod, I do not believe they can sustain their stock valuation. As I have written, a strategy where the investor basically does the opposite of what Cramer recommends is probably a winning strategy!
Monday, January 30, 2012
Wednesday, January 25, 2012
Time to short Apple?
Apple reported stellar performance for their fiscal first quarter, mainly on explosive iPhone sales. As of today, with the stock up about 8% for the day and to around $450 per share, Apple is not the largest company in the United States by market cap, surpassing ExxonMobil for the top spot. You will hear nothing but positive opinions on Apple from pundits across the board, whether they be value or growth managers, fundamental or technical analysts, etc. So why would I suggest shorting Apple? Exactly! Everything positive that could be said about the company has been said, and they have milked their current product line for all it's worth!
I wrote an article not too long ago about Apple and about the loss of Steve Jobs specifically. My contention is that he was the driving force behind the innovation at Apple, and without his direction, leadership, creativity and all-around genius, I do not feel that Apple will be able to continue to innovate at the same level of quality and output as before. There are a lot of highly talented people at Apple, but my feeling is that without the glue that was Steve Jobs there, day to day, to hold this team of diverse, highly talented and skilled individuals together, the team will disperse, with members leaving for other, possibly more lucrative, fulfilling, opportunities. Even though under some valuation metrics Apple is still "cheap," the reality is that the stock has rallied from a low of $310 a share 6 months ago to the current $450, or by 45%.
Shorting is not for everyone, but for those who can handle the risk, and for whom shorting is an appropriate strategy, Apple, to me, is a compelling candidate.
I wrote an article not too long ago about Apple and about the loss of Steve Jobs specifically. My contention is that he was the driving force behind the innovation at Apple, and without his direction, leadership, creativity and all-around genius, I do not feel that Apple will be able to continue to innovate at the same level of quality and output as before. There are a lot of highly talented people at Apple, but my feeling is that without the glue that was Steve Jobs there, day to day, to hold this team of diverse, highly talented and skilled individuals together, the team will disperse, with members leaving for other, possibly more lucrative, fulfilling, opportunities. Even though under some valuation metrics Apple is still "cheap," the reality is that the stock has rallied from a low of $310 a share 6 months ago to the current $450, or by 45%.
Shorting is not for everyone, but for those who can handle the risk, and for whom shorting is an appropriate strategy, Apple, to me, is a compelling candidate.
Monday, January 23, 2012
Thursday, January 19, 2012
Why is Jim Cramer on television?
Readers may recall that last month, I wrote a blog post slamming Cramer and others who are consistently (dead) wrong about their calls on the market. Last month, Cramer, on CNBC, stated that the banks, especially Bank of America, should not be owned because one of them might have to file bankruptcy. He strongly hinted that B of A could be the one to do so. Since that time, B of A has rallied over 40%. They just reported much improved numbers today. In fact, the financials as a whole have rallied significantly in the past month or so. Moral to the story: As I wrote previously, one could likely make a lot of money just doing the exact opposite of what people like Cramer advise. This certainly proved to be accurate regarding the financials, and has been consistently true over the long-term. Cramer tried to manage money and failed miserably in the past, which is why he is on TV talking about it instead of actually doing it. Do yourselves a favor and do not listen to this fool. He will lose you money.
Wednesday, January 18, 2012
IMF looking for up to $600 billion to bail-out Europe - Guess who they are asking
We have our own problems in the U.S. to deal with. Our national debt, which has had its limit raised twice in the past year, is pushing $15 trillion and rising very quickly, with no top in sight. We simply cannot foot the bill for Europe, or for anyone else for that matter. We can't pay our own bills. This situation would be like someone who is deep in debt borrowing even more on a credit card, so they can loan someone else money to pay their bills. We just don't have the capacity to borrow another $600 billion to help Europe, period.
As I have written many times, the IMF and World Bank are really just fronts for distributing U.S. funds to other countries. They can muddy the waters surrounding the process, adding a hundred steps in between the U.S. providing the funds to the IMF, and the IMF then distributing (our) funds to these other countries, but at the end of the day, we are paying the bill. We just can't do it anymore.
We knew this was coming. As soon as countries across Europe began having financial problems, I knew (and I wrote) that the IMF would be asked to help (read the U.S.), even though these same European countries know all too well that we are having massive financial problems here at home. In the past, our economy was strong enough, and our outstanding debt manageable enough, that we could help. This is simply no longer the case. We are tapped-out. We are coming dangerously close to not being able to access foreign capital sources to sell our bonds (borrow more money). If we don't get this situation under control soon, we are going to blow up. If we can't sell bonds, we can't service our debt, and therefore we would be forced to default. It is closer to our reality than most think.
Apparently our government has told the IMF that we cannot help and that Europe must foot the bill for their own problems. We all need to watch vigilantly to make sure that behind the scenes, Congress does not vote to provide this funding. This would not be the first time that they have tried to sweep aid under the rug, hiding it from the public. These are precarious times. We cannot afford to be complacent,
As I have written many times, the IMF and World Bank are really just fronts for distributing U.S. funds to other countries. They can muddy the waters surrounding the process, adding a hundred steps in between the U.S. providing the funds to the IMF, and the IMF then distributing (our) funds to these other countries, but at the end of the day, we are paying the bill. We just can't do it anymore.
We knew this was coming. As soon as countries across Europe began having financial problems, I knew (and I wrote) that the IMF would be asked to help (read the U.S.), even though these same European countries know all too well that we are having massive financial problems here at home. In the past, our economy was strong enough, and our outstanding debt manageable enough, that we could help. This is simply no longer the case. We are tapped-out. We are coming dangerously close to not being able to access foreign capital sources to sell our bonds (borrow more money). If we don't get this situation under control soon, we are going to blow up. If we can't sell bonds, we can't service our debt, and therefore we would be forced to default. It is closer to our reality than most think.
Apparently our government has told the IMF that we cannot help and that Europe must foot the bill for their own problems. We all need to watch vigilantly to make sure that behind the scenes, Congress does not vote to provide this funding. This would not be the first time that they have tried to sweep aid under the rug, hiding it from the public. These are precarious times. We cannot afford to be complacent,
Monday, January 16, 2012
Thursday, January 12, 2012
OWS MIA
What happened to the Occupy Wall Street Movement?? Isn't it obvious? The weather got a little cold and they went into hibernation for the winter, spending the holidays with mommy and daddy. This underscores the point that I have been making about OWS since its inception, which is that they have no organization, no real leadership, no real point, and are completely ignorant of what is really going on in the economy. This "movement," if we can even call it that, is comprised almost exclusively with a bunch of college students living off of their parent's dime, skipping the classes their parents are paying for, to go out and show their asses. They are weak, ignorant of the facts, and completely misguided. I guess we can blame the parents for not teaching their children a little about the world and the economy, so maybe they deserve to have kids like these. In any event, I am pleased to see them fade quickly from the public sphere. It will be laughable if they re-emerge after the weather warms a bit.
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