7/16/08 (No More Shorts! CPI, The Bottom?)

Traders,

A funny thought crossed my mine in conversation with a friend yesterday, we had talked about the top in the market (housing, stock, etc) when the last guy in the food chain (the teenager working at the local coffee shop) is giving you a Tip. It happened to me in San Francisco back in 2005 when in a coffee a shop the employee was studying for the Real Estate brokers exam and then proceeded to give me a Real Estate Investment tip – I knew that was the top (just like the JP Morgan story when the shoe shine boy gave him a stock tip – he went in and sold all his stocks before the crash – realizing the shoe shine boy is at the bottom of the food chain – who is left after him). Anyway – I have heard the last couple days, brokers and financial advisors talking about getting out of equities! What – you mean the “long and wrong” strategy isn’t working anymore? Sorry to be so harsh – but come on.

Just like the shoe shine boy and coffee shop employee giving stock and real estate tips at the top – the broker and financial advisor (after this recent drop) suggesting getting out of positions is probably the short-term bottom. Of course this is all just speculation on my part – but at there is SOME truth to market perception. If you take that to be true – today is a day to get long! Kind of funny – the shoe shine boy / broker indicator!

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Putting the Breaks ON!

While I have been accused (even pigeonholed into) being a market fundamentalist, and I am to a certain extent, the wave of MORE regulation is coming. I would argue that some of it is NOT for the better. We need regulation to provide transparency, security, and the rules for trading – however it is a fine line between government manipulation and regulation stifling business and trade vs. regulation to provide security, risk management, and transparency.

When the market goes down, everyone freaks out as if it should never happen, people believe something must be WRONG with the market – it’s not working – it needs more regulation – we need to keep it from going down!

When that happens manipulation occurs – we STOP short selling, we DROP stocks from indices that aren’t performing well and replace them with the latest darlings, we HALT trading, we forbid this or that. Anything to keep the market from falling – as if the system is broken. But I would argue it is NOT broken it is doing exactly what it should be doing – meeting supply and demand.
By my definition there are three different markets:

1. The OPEN MARKET – this is the stock market, options, futures, currencies, etc. This works very well, sure there are a couple of issues – but it is allowed to move freely (for the most part) based on supply and demand. Regulation for the most part works - it offers rules for conducting business, transparency, and security of trading.

2. The OTC MARKET – this is where the credit crisis arise. The OTC market is foggy at best and it is strictly private between two institutions. The transparency, rules, and security of conducting business is pretty much based on the credit worthiness of each of the two parties. The problem in the OTC market is the incredible leverage that has been created. This area needs better transparency.

3. The GSE MARKET – these are the Congress mandated Private/Government run companies like Freddie Mac and Fannie Mae. They get a free pass and don’t always have to follow the rules. The Congress has given them an open check book and the interesting thing is that they more than any other company you would think are OVER regulated and watched – however (proof again) the government cannot run a business. While the private companies have to meet regulation, the GSE’s don’t.

Well now we are seeing the first waves of regulation to prevent the market from going down (I just think it is a band-aid and not letting the market move).

The REGULATORS have announced that you can no longer short Freddie and Fannie, furthermore they have listed several other banks that you will not be able to short.
They are also thinking about imposing the uptick rule again.

People don’t realize it is NOT the stock price that determines if a company fails, it’s their fundamentals. If you had a company with huge margins, no debt, and money in the bank – if all the shorts drove the stock down to a $1 – it doesn’t mean that the company is going to fail. They are fine – the stock price is just perception. Bear Stearns didn’t fail because the stock price went down – they failed because of the fundamentals of the business. Freddie and Fannie are failing (not because of lower stock prices) they are failing because of their failed debt to balance sheets.

Regulations to keep people from shorting a stock is NOT going to save the company from failing! Stock price does not equate to fundamentals of a company. If the fundamentals are solid and the shorts drive the stock to $1 – then THAT is a perfect stock to BUY!!! Let the shorts drive it down – the company has to exist on its own merits.

These are the stupid regulations to keep the market from going down, they do NOTHING for creating transparency, security, or the ability to conduct business – they curtail the market from doing what it SHOULD. They SHOULD be focusing on getting their own GSE’s in order and also focus on getting the OTC market more transparent.

Now the SEC is on the warpath to look for those “BEARS” that were talking bad about the market – oh dear me!

What really pisses me off is the double standard. In my career I have listened to many conference calls, heard many CEOs and CFOs, listened to analyst and brokers talked up stocks, you know it was blowing smoke, they continue to do that through these times “The worst is behind us!”, “No more write-downs!”, “Our financials are solid!”, etc. I have even heard them hinted at take-over rumors or touting new products. They are allowed to talk up stocks, make recommendations, and use marketing manipulation to the UPSIDE – as LONG AS IT IS BULLISH.

However, God Forbid someone like David Enihorn who did the math and called out Lehman’s CFO as either an idiot or liar because the math didn’t make sense and then TELL people that the math is bad and he shorts or recommends shorting the stock.

Just like they wanted to blame Speculators for oil prices going up (ignoring the math of supply and demand) they now want to blame short-sellers for the failure of Freddie and Fannie – give me a F’n break!

It’s funny – they want a free market – but only if it goes up!

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Inflation on the rise!!! The most in 26 years!

Yesterday we had the PPI (how companies are dealing with inflation) now we have the CPI (Consumer Price Index) which is how WE the consumers are affected by inflation. Well – it blasted beyond expectations (as expected) to 1.1%, but the “Core” (minus food and energy) was only up .3%. I am ALREADY hearing the analyst start saying inflation is not that bad – just look at the “Core”. Can’t these people get it through their head the “CORE” doesn’t mean anything if we HAVE to pay for Gas, Energy bills, and Food!

They continue to ignore the Headline inflation number and as the FED continues to use the “Core” as THE YARDSTICK for measuring inflationary pressures – well we will never see interest rates go up – or they will go further down. It’s like he is living in a bubble – maybe these analyst and the Fed don’t drive, pay their energy bills, or eat anymore?

The EURO broke $1.60 yesterday against the dollar – the dollar continue to grow weak, inflation is on the rise, and they rates remain low. We will NOT see the dollar strength return until rates go up.

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Futures Pre-Market

The futures are getting a good pop in the morning – don’t know what it was. Maybe they read my Market Preview about the brokers wanting to sell and thus this is the bottom! They are front running the cash so expect the Arb traders to short the futures and buy the basket if the spread remains. That should give the market a good pop to the upside.

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Support / Resistance

Well the RUT is still above the 650 mark and the brokers and financial advisors are wanting to get out of equities – could that be the short-term bottom? I don’t know – but I find it rather funny.

INDU 11000 (we are just below it and the futures vs. fair value are looking week. We did see some strength mid day – so I think we could get our head up above the 11k line again.)

NDX 1800 (We are just below that too – but I think we could see it get above that line.)

SPX 1200 – 1250 (I think that we could get back to 1250 – maybe not today – but before this market sells off more.)

RUT 650 (Oh that 650 level – we still in the broadest market have NOT broken through those lows. This clearly shows the PANIC has NOT happened – YET.)


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Conclusion

Don’t get me wrong – I think we need regulation to conduct business – it’s when that regulation turns into manipulation and when the government gets IN the market as a participator rather than just a regulator that more and larger problems arise. Yeah – things are bad and there are issues that need to be reviewed – but it is NOT the government’s job to justify and bailout failed business models.

Every Politician wants to blame everyone but themselves for this mess. They are now on the witch hunt for short sellers – as if THAT is what cause the collapse of Bear, Indymac, Freddie, and Fannie. Just like for months they said that oil was all speculators (that story has faded because they must of taken an ECON 101 class and learned about supply and demand – additionally someone must of pointed out to them that OIL FUTURES expire INTO OIL.) - The SEC has now BLOCKED shorting certain stocks – WHY? To protect them from going down?

I agree that market manipulation occurs – those people need to be punished. But the credit problem is the OTC leveraged market, the Credit Ratings, and the GSE – not the OPEN market. The OPEN market is just doing what it is suppose to – for people to meet and trade. The market going down is NOT bad – it just is reflecting the economic landscape.

So – for fun (don’t take this seriously) – I am calling a RALLY based off of 3 Financial Advisors, 2 Brokers, and several friends, all of which have capitulated and said to get out of equities! Just like the Shoe Shine boy at the top – these guys are starting to get out at the bottom!

Be that as it may – this market has LOTS to work through! The economic landscape has not changed and these new regulation to keep the market from going down is NOT going to solve the problems.