The Next Chapter : Earnings
Posted On Sunday, April 5, 2009 at at 2:34 PM by Finance FanaticI have spoke to many bear traders the past few days who have been telling me their war stories of trading this past week. If positioned on the short side, this week is one that you would like to be forgotten. Even in the little positions I took on the short side, I noticed the frustrating week. If it were not for my Apple options that I purchased back in November and had written off two months ago, due to poor performance, this week would have stung a lot more. The fact of the matter is, playing leveraged ETFs can be very risky when they trade against you, which is why I have always traded them with caution.
It is not my intent of this site to beat every "bull" bone out of you, but to inform you of my personal thoughts of the market, and some future consequences we could definitely see as a result of decisions our country is making now. I am not a "lifetime bear" trader, meaning I am not always on the short side. I trade the sides I find opportunity on. With that being said, I see a lot more reasons and opportunities for this market to go down than to go up, which is why I currently mostly choose to trade on the short side.Although I haven't been too active for March, I have accomplished my goal. This was to preserve my capital and protect it against what I felt was going to be a pretty strong bull rally. In fact, I've done better than I expected. I made some very strong profits longing financials earlier on and even made some on the short side. I am currently down on my latest small short position, but overall March has been profitable for me. I attribute this month's success to my caution of pulling the trigger. Trust me, FAZ at $30 and SRS at $60 was so so tempting to me, but as I responded to those on chat during these prices, I still wanted to wait longer until things settled. When that time is, I can't exactly say.
The first part of the March rally was just retracing an oversold market. Technically, it was expected to retrace back toward the 8000 level. Lately, we have seen the rally move to a government stimulated rally. These are harder to track. As for now, the government is wanting to show the world that they are active and will do whatever it takes to turn the economy around. The problem is, many are overlooking what some of those consequences are. I go into more of my feelings of the consequences of the latest government action in today's podcast (subscribe here). To sum things up, in the past we have seen what the combination of increasing a deficit mixed with more currency printing can do, and the result has been very destructive.
As expected, the unemployment number came in dismal on Friday, which was "in line with expectations", with a nonfarm payroll report of -663,000, boosting the national unemployment rate from 8.1% to 8.5%. This term "in line with expectations" can very dangerous, as many try to water down the true meaning of the economic data being reported. In fact, many are already trying to water down the upcoming earnings season, saying "we already know these should be pretty bad numbers, so there should be no surprise, hence there should not be much selling." Well, even though we may see that trend at first, eventually data catches up. So although we ended the day up Friday and it may seem to some that economic data no longer influences the market, I respond by saying time will tell.
Then there is the argument that unemployment is backward looking data and that we should pay attention to more "forward looking" data. Well, also reported Friday was hours for the Average Workweek. This data is considered more "forward looking", especially for unemployment as the theory is that most businesses cut hours before laying off employees. Well, this data showed a very small decrease from 33.3 to 33.2 for March. Even with the small amount, a decrease usually indicates that indeed unemployment has not bottomed and that we can expect continuing layoffs. This should be no surprise, even in the midst of the trillions of dollars being spent by the government, as most of those dollars are going to the purchasing of bad assets from banks and not to the actual consumer. In fact much of the bailouts is eating into consumer income, since it is tax payers that will eventually have to front the bill. Until we see money get put into consumer's pockets, most likely we will continue to see the contraction and deterioration of most small businesses.
With this, I still remain cautious in positioning myself more strongly on the short side, for obvious reasons. I'd like to see the market response from the first round of earnings as well as the upcoming uptick rule meeting and GS earnings. Like I've said before, I can afford to give up some initial gains on the short side by trying not to guess when this rally turns around and guess wrong. I do feel, technically, we are overbought, but I believe investor sentiment is on the more positive side due to recent announcements and positive media.
I believe the next woe to plague the economy will be the destruction of government bonds. There are so many indicators showing that there are many problems heading to government bonds. Despite the recent massive buying of government bonds from the Fed and rate cuts, the price of long-term bonds have already gone down 19 points in just 2 months. From its recent low to recent high, the yield level on the 10-year Treasury note has soared 47% and at the end of 2007, Default Insurance on the US Treasury was only $700 per $1 million in 10-year notes. In February of 2009, it was almost $10,000 or 14 times the 2007 price! This shows the public concern of the Treasury, especially after recent announcements of their spending trillions to buy up toxic debt. It would be one thing if after spending these trillions, the government had something to show for it. However, at this point, we are over $11 trillion in debt, and we have nothing to show for it. We risk slowly becoming a "toxic government."
The timing of this bond destruction is unknown to me as of now, but I am steering very clear of long term bond purchases. You can trade short term bonds (13-week T-bills) using a variety of different ways. These are the only bonds I would consider buying at this point as I believe yields will soar through the roof and the last thing I want to do is be stuck with long term bonds. When that time comes, watch gold. It should also soar.
So, there is still plenty of bad news out there, it just doesn't seem like it because of the monopoly of media with hedge fund managers. The only good news I've extracted from the latest government moves is that hopefully bank's balance sheets will look a lot less scary on paper and maybe break a bit of the ice off of the frozen lending. However, as of now, I am not too optimistic. So, I will continue cautiously waiting for the right opportunity. I will keep eyeballing option trading too, as prices should go down due to the decreasing VIX. Zecco.com has some of the best option trading prices around. On that note, we'll see you on chat tomorrow. Happy Trading.
PS- If you haven't already, check out khronostock.com, they have some great technical analysis charts and articles. Good stuff.