Market Discussion

[David Randolph]

I sold all my holdings today. Just don't feel right with the markets.  I'd rather buy back alittle higher if the dust settles and everything turns out okay.  My only holding now is QID.
I believe this credit issue is bigger since its only keeps getting worse by the week.

Good Luck fellow members!

Hi mbaugh, I hope you were able to buy back some of your holdings. If not, don't worry, these mistakes happen as you go through a very hard learning process.

I'm glad I was able to hold most of my holdings throughout the correction process ... in fact, the most damaging mistakes I made this year were selling stocks which had very attractive fundamentals and stories, just because "I wasn't feeling right" about them.

I believe it is clear now, as one looks to the chart below and what happened today, that the long term bull market is intact and the S&P 500 is set to trade at new all time highs before 2007 ends.

The World isn't the same anymore ... North American consumption isn't as important as it once was, because the other 6 billion people in the World are learning with the 300 million Americans how to do business and grow their economies. The emergence of new and huge sources of growth and consumption (which were incipient just a few years ago) is the central theme of the current bull market in stocks, which I believe may even be a bigger one than the 1982-2000 bull market.

Peter Lynch says in his book, "One Up on Wall Street", that most people can't make money in stocks because they're always getting scared out of them. They can't sustain the long term focus, because the majority doesn't know why he's holding the stocks he owns. Another study says that if one loses the three or four strong upside days in a year he will probably lose most of the advance ... so I've been learning how to sit tight and hold stocks for as long as I believe their specific fundamental story, not trying to time the market, but just holding them with strong hands.

Currently the Main Portfolio is up about 17% in 2007. The jury is still out if I'm going to make the 30% long term objective or not. But if I can't make it, the cause will be my selling of very attractive stocks, like SILC, JASO, ASTI and others. I still believe one or two rockets which are currently in a sleeping mode, like CIMT, PFSW or GSB will provide a hand to the Main by year's end.

It was a good day, there's more tomorrow, thank you for your support and I ask you to never hesitate to make questions, especially strategic questions or related to the individual holding's fundamentals. Thank you.

[berloga]

You've demonstrated good stubborness. With 15 possible position we can afford to wait on a couple untold-story stocks like CIMT or GSB for quite a while until they finally wake up.

I made similar mistakes this year as well by letting go off SILC, JASO and a couple more. My wife on the other hand, kept all her holdings since July and is at about the same point compared to where it all started. I am down about 6% from July. But lately I haven't let go of any of my 3SOF holdings and they are working well. I bought JASO at $35 a while back. I should have gotten into ASTI as you recommended - look at this beauty today - up 30%!!

Could you take a look please and comment (ASTI)?
Keep up the good work, Cesar!

[kslifka]

I should have gotten into ASTI as you recommended - look at this beauty today - up 30%!!

Could you take a look please and comment (ASTI)?
Keep up the good work, Cesar!

I've done this twice in the past two weeks.  I bought CTDC due to technicals in early September only to sell it when it hit the 200dma two days later.  The next day(after I had sold)...at one point it jumped up 100%

ASTI...I bought due to technicals last week.  Unfortunately due to a margin call.  I ended up selling ASTI for a small profit a couple of days later.  Today it's up over 30%.  I guess I should have sold one of my other loser stocks instead.

I don't own...but as soon as I get funds I will buy HOKU.  HOKU looks poised to make a big move soon.  Hopefully I will have funds in my account before it breaks.

[stocky]

Congrats David on 301%  Will look forward to your adding new positions.

[mbaugh]

Congrats David! Job Well Done!  No I did not buy back any of the holdings, I did a couple of quick daytrades and made some good dough.  I still have a bad feeling and decided I'm gonna just watch for a week or so before I jump in again.  The markets in my opinion needs a correction and since the Fed exceeded expectations on the rate cut, that generally means things are worse than they seem.  Anyways, I hope I'm wrong and the market keeps setting new all time highs.  Good Luck.

[David Randolph]

Congrats David! Job Well Done!  No I did not buy back any of the holdings, I did a couple of quick daytrades and made some good dough.  I still have a bad feeling and decided I'm gonna just watch for a week or so before I jump in again.  The markets in my opinion needs a correction and since the Fed exceeded expectations on the rate cut, that generally means things are worse than they seem.  Anyways, I hope I'm wrong and the market keeps setting new all time highs.  Good Luck.

Hi mbaugh

I'm not selling anything, that would be a sin and anti-patriotic (just kidding ), but I do feel that the market will end today's session on the negative column. Of course, I can be wrong and there isn't much value in this information ...

It's just that the market opened with a gap up, after a very, very strong day, and instead of pulling back to close the gap after the open, it went even higher. This short term action tells me the public woke up today and thought "I need to buy in a hurry", but the public keeps getting shaken out.

So, maybe there will be a pullback to $150 - $151 on the SPY, I don't think we'll go to new all time highs in a straight line.

(no one should buy or sell based on this information, not if he's a long term investor as I am).

[setravis]

How the herd got fleeced on Wall Street,
Investors hit by big "volatility stick" 

First let me say that I've never yet seen a significant stock market pullback or correction (like the one we've just seen) that didn't end with an overblown financial scare story.
Near the bottom of the last major pullback in late February/early March the media was pounding the drums of a housing collapse and a sub-prime mortgage meltdown. We were told by the press that this crisis would soon spill over into all major sectors of the economy and that financial markets would melt, including a crash in the stock market.

Did the stock market crash? Did the economy falter and the unemployment rate skyrocket? Did the housing market collapse even worse than it already had? The answer to each of these questions of course is "No!" What happened instead is that the stock market as measured by the S&P 500 found a strong level of support and took off from there to make an all-time high, traveling almost 200 points in the process.

This is how the media operate (on fear) and they make their money by telling people what they want to hear, which is always in line with the latest crisis of the hour.

There are a couple of things I've learned about the mainstream financial press over the years as it relates to the stock market. One is that you can always count on the press to spread fear and panic after a major market decline. There is currently no shortage of negatives the media can direct our attention to in order to get us worried: the oil price, the "credit crunch," the sub-prime meltdown and housing recession, the weak dollar, etc.

Too many investors have been under the media's spell as these investors have been too scared to take advantage of the two great buying opportunities the market has presented them with this year. The first one was in March and the other in August. This really isn't at all surprising given that most mainstream investors are under the control of the media, psychologically speaking (see Lonny Kocina's book, Media Hypnosis, for a more in-depth discussion of this concept of media mind control). As Don Hays puts it, "The news is the camouflage that drives the herd crazy."

Volatility is also used as a weapon against mainstream investors. It can be used, for instance, to clear small investors out of the way so that big money traders can scoop up shares at bargain prices. Most small investors simply can't afford a prolonged exposure to market volatility and are often forced to sell out to the big money traders, who in turn are more than happy to relieve the small traders of their shares at cheap prices.

From a psychological standpoint, volatility has been shown to increase anxiety and paranoia in most investors. It makes them more likely to let go of a potentially profitable long position at the slightest hint of weakness. Ironically, this helps bolster the stock market's support since an increase in worry has been shown to strengthen the market's "Wall of Worry." It comes as no surprise then that the recent market bottom was been accompanied by a huge increase in bearish sentiment, worry and volatility. It's as if investors have been collectively hit by a big "volatility stick" and are afraid to go anywhere near the stock market.

To underscore the point I've been trying to make that the most important role of market volatility, let's discuss the correlations between volatility increases and insider buying of stocks during market panics. Other than the obvious benefits that increased volatility confers to insider traders in making short term capital gains, it can also be used as a weapon to scare away the small investors from participating in a market uptrend as we've looked at here. Additional proof of this is the comparison that can be made between the Gambill Oscillator, which measures insider buying, and the Volatility Index.

The Gambill Oscillator tracks corporate insider activity in the Russell 3000 stocks. Along with the VXO, the Gambill Oscillator is showing the highest level of insider buying since the March 2003 bear market low. Since 2002 when this indicator was first created, whenever the oscillator went above 25% (which it did in the latest correction), the stock market was up over 10% in the coming six months and up 22% over the next year. The Gambill Oscillator hit a high reading of 75% during the broad market decline.

Another point worth making is that since 1990, whenever the Volatility Index has been between 30 and 40, as it was during the recent correction, the stock market has been up by an average of nearly 11% over the next six months. Moreover, the market's gains over the following 12 months has been an average 16.2%. This compares with average "normal" market returns of 4.8% and 10.2%, respectively, over the 6-month and 12-month time frames.

Bolstering this bullish stock market outlook based on the insider sales data is a recent report by a respected financial newspaper. According to the Financial Times, total insider buying in the U.S. stock market reached $252 million in August, the highest level since 2003. This compares to a seasonal average of $186 million. At the same time, insider sales have dropped sharply from a four-year monthly average of $4 billion to $2.9 billion.

Volatility can indeed be used as a "big stick" to hit small investors with and send them running for cover. But this stick has two edges and the end result of the recent volatility spike will be positive for stocks.

[berloga]

Applaud, setrvis! Very well put. Simple overviews like this help keep myself calm in the face of the great market volatility.

[babouk]

I have much to learn 

[setravis]

Congrats David! Job Well Done!  No I did not buy back any of the holdings, I did a couple of quick daytrades and made some good dough.  I still have a bad feeling and decided I'm gonna just watch for a week or so before I jump in again.  The markets in my opinion needs a correction and since the Fed exceeded expectations on the rate cut, that generally means things are worse than they seem.  Anyways, I hope I'm wrong and the market keeps setting new all time highs.  Good Luck.

Hi mbaugh

I'm not selling anything, that would be a sin and anti-patriotic (just kidding ), but I do feel that the market will end today's session on the negative column. Of course, I can be wrong and there isn't much value in this information ...

It's just that the market opened with a gap up, after a very, very strong day, and instead of pulling back to close the gap after the open, it went even higher. This short term action tells me the public woke up today and thought "I need to buy in a hurry", but the public keeps getting shaken out.

So, maybe there will be a pullback to $150 - $151 on the SPY, I don't think we'll go to new all time highs in a straight line.

(no one should buy or sell based on this information, not if he's a long term investor as I am).

Rate-Cut Rally Goes On.......

Stocks continued to march higher Wednesday, retaining their momentum after the Federal Reserve's surprise decision to cut the overnight fed funds rate by 50 basis points.

After rising more than 125 points earlier, the Dow Jones Industrial Average pared its gains but still closed ahead by 76.17 points, or 0.55%, at 13,815.56. The S&P 500 was up 9.25 points, or 0.61%, at 1529.03. The Nasdaq Composite rose 14.82 points, or 0.56%, to 2666.48.

The Dow has now jumped 7.6% since it last closed below the 13,000 level a month ago. The S&P 500 is only 25 points away from its record close, set on July 19.

Breadth was positive and volume was strong. On the New York Stock Exchange 3.73 billion shares changed hands. Volume on the Nasdaq reached 2.12 billion shares. Winners outpaced losers about 2 to 1.

Major averages in the U.S. had one of their best performances of the year on Tuesday after the Federal Open Market Committee, the Central Bank's policymaking arm, cut interest rates by 50 basis points. Most analysts had anticipated a cut of only 25 basis points. It was the first rate cut in more than four years.

By the end of the day, the Dow had rallied 335.97 points, or 2.51%, to 13,739.39. The S&P 500 climbed 43.13 points, or 2.92%, to 1519.78, and the Nasdaq gained 70 points, or 2.71%, to 2651.66.

" [Investors should] take yesterday's move as confirmation that the Fed is behind the bulls on the economy and the market 100%," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "This was a technical breakout and a fundamental and psychological lift."

Overseas markets followed U.S. averages higher. Overnight, Japan's Nikkei 225 surged 3.7%, and Hong Kong's Hang Seng rose 4%. In Europe, London's FTSE 100 and the Paris CAC 40 were up roughly 3%. Germany's Xetra Dax was up 2.3%.

While traders were still cheering the Fed's move, there was plenty to contend in the new session. The Labor Department said its consumer price index for August slipped 0.1%, compared with expectations for no change. As expected, the core index, which excludes food and energy and is a key measure of inflation, rose 0.2%.

Ian Shepherdson, chief economist with High Frequency Economics, said the CPI data are a sign that "the Fed's ease yesterday was not a gamble."

"The exact core month-over-month number was enough to nudge down the year-over-year rate to 2.1% from 2.2%," said Shepherdson. "We expect a dip below 2% early next year. Either way, core inflation has now been falling for nearly a year."

Meanwhile, investors also had to sort through data about the flailing housing market. The Census Bureau said that housing starts fell 2.6% in August, compared with a 6.9% drop in July. Building permits were down 5.9% last month, steeper than the 1.7% decline in July.

Additionally, the Mortgage Bankers Association said its weekly applications survey index rose last week to a reading of 673.2 from 657.4 the week before.

Broker earnings were again in focus. Morgan Stanley (MS:) posted a 17% decline in third-quarter earnings, and the results fell well short of the Thomson First Call average estimate. Shares of Morgan Stanley lost $1.48, or 2.2%, to $67.03.

The report came a day after Lehman Brothers (LEH:) posted a better-than-expected quarter. Later this week, Bear Stearns (BSC:) and Goldman Sachs (GS:) will report their quarterly results.

Elsewhere, foodmaker General Mills (GIS:) posted fiscal first-quarter results that increased 8% from a year ago, beating estimates by a penny. The stock rose 24 cents, or 0.4%, at $58.91.

Stubbornly high oil prices wasn't nagging traders. Crude earlier topped the $82-a-barrel level for the first time ever before pulling back. The October front-month contract finished up 42 cents at $81.93 a barrel.

Crude rallied after the Energy Department's weekly inventory report said crude stocks dropped by 3.8 million barrels last week. Gasoline stocks rose by 400,000 barrels, and distillates also increased.

U.S. Treasury bonds continued to slide. The 10-year note was down 14/32 in price, yielding 4.53%. The 30-year bond shed 1-2/32, raising the yield to 4.83%.

Among analysts'' actions, UBS cut its ratings for merger partners Sirius Satellite Radio (SIRI:) and XM Satellite Radio (XMSR:) to neutral from buy. Sirius declined 4.3% to close at $3.35, and XM slid 5.5% to $14.

[la-onda]

fyi:

Jason Goepfert of www.sentimentrader.com tells us that signals like yesterday (19th of Sept) —with 30 to 1 upside to downside volume presents one of the most leveraged risk-reward potential that you will ever find. Here's Jason's quote.
The last time we had a 25-to-1 up volume day was August 20, 1982, as equities were making their low before the huge bull market of the past 25 years. Since 1950, there have been a total of 7 days with such a skewed ratio.
The interesting thing is that in most cases (5 of the 7) stocks fell back in the very short-term, with a negative return the following day. But within five days, 6 of the 7 were positive, and that kind of return continued to build.
By three months later, all 7 were positive and the average return was +9.4%. The remarkable thing is that during those three months, on average the most that the S&P 500 dropped was -1.8% while the average maximum gain was +12.5%. That is one of the most lopsided risk/reward ratios over that time frame that we have seen in any study. For those curious, here are the dates: 12/27/50, 1/11/51, 10/23/57, 11/15/57, 11/1/78, 8/17/82 and 8/20/82.

[Kublakhan]

How did the $900,000,000 bet turn out?

$900M dollar bet.



http://www.moneymorning.com/2007/08/29/this-900-million-bet-has-global-traders-talking%e2%80%a6/

[BigSully1]

How did the $900,000,000 bet turn out?

$900M dollar bet.



http://www.moneymorning.com/2007/08/29/this-900-million-bet-has-global-traders-talking%e2%80%a6/

I don't know, I wasn't involved in it myself, and it didn't much affect my actions, but there were both winners and losers depending on which side played. Seems that one of the bullish scenarios laid out in the article played out.

[la-onda]

just FYI:

Investing
The Credit Crisis Could Be Just Beginning
By Jon D. Markman
Special to TheStreet.com
9/21/2007 6:40 AM EDT

Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying.

One of the world's leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice. I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?" Still too optimistic.

Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.

Ursa Major
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions. The cause: Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way.

He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.

Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors, hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.

"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."

The Liquidity Factory
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and to create collateral during an era of a flat interest rate curve.
Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out that these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlies derivative securities that are many, many times their size.
Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheets for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan.
The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers that are now accused of predatory lending practices.

Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the U.S., these managers leveraged up their bets by buying the CDOs with borrowed funds. So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.

In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.

Turning $1 Into $20
The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.

These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds. According to Das' figures, up to 53% of the $2.2 trillion of commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.

When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion. Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.

A Painful Unwinding
Here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because these instruments were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.
Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.

One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle.
In this context, banks' objective was to prevent customers from selling their derivates at a discount, because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers who are already thin on cash.

Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments that go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works. So the structured finance market is coming undone; not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says.

That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time.

While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as it did Wednesday, the evidence is not at all clear.
The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.

Lower rates will not help that. "At best," Das says, "they help smooth the transition."

link:
http://www.thestreet.com/_rms/s/the-credit-crisis-could-be-just-beginning/newsanalysis/investing/10380613.html

[David Randolph]

So, maybe there will be a pullback to $150 - $151 on the SPY, I don't think we'll go to new all time highs in a straight line.

We've had the pullback, time to move back up and challenge the all time high at $156.

The candlestick pattern will probably resemble a "Mat Hold" which is a bullish continuation pattern: