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Just Repair, Not Replacement

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Back on Friday, March 6, with the Dow closing at the subterranean 6,626.94, I struggled over the temptation to move some funds over to equities. But by Saturday morning had decided against it, solely to keep the discipline of maintaining at least a 6-month investment horizon. I verbally warned against feeling like we might have missed a great opportunity since although I pointed to 7500-8000 as my expectation for near-term direction to the Dow, I gave it at most 3 weeks of steam. And although that measure of gain would be nice to have for a 3-week investment, I didn’t care to indulge in the sleepless nights that would come from edging toward being a day trader.

As the market bubbled up through March, I reiterated my belief that we were only seeing a temporary bounce, sharpening my feelings that we might be in for a bloody spring as we wade into the thick of the first quarter’s earning reports. And held onto my belief of 8000 as the current ceiling for the Dow.

And then held to that belief of an 8000 ceiling even as we punched a few holes through it, very similar to the brief taps made in the 13000 ceiling I set last year this time. Just a few small holes in the ceiling, that’s all: repair only, not replacement with any higher ceiling. We’re still not scraping together enough sustained buying power (read: pensions and other long-term institutional investors) to hold and extend it further upward. From here, up remains a hard fight, while down will increasingly look too easy.

I do like some of the longer term signs I’ve been seeing, though. So take it back on down to the basement, and – as noted in my previous post in this category – I might be interested in re-entry into equities as early as Memorial Day. But will be quite content to remain on the sidelines through then.

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Written by macheide

20 April 2009 at 3:27 pm

Posted in calls & puts

Bloody Spring

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I know I’m a bit of a crank to leverage pension policies so heavily into my own personal investment outlook and strategy. Even so, that’s never failed me, not once. I pulled out of the market completely just before Black Monday 1987 and stood back that very morning laughing about what was about to happen, simply because I didn’t want to be buying across the aisle from what then was one of the largest pension fund sales in history. And the few individual stock purchases I’ve made during my life all made very heavy earnings from short-term knowledge of the pension plans of the companies (none of them clients, of course – I do steer very clear of using any insider information for my personal investing). I can’t even begin to count all the times I’ve watched new cash head to the market from pension plans anxious about accounting rules, riding the buying up in my own 401(k) equity investments. Then this past year, I had no interest in being among those having to balance out all the selling that pension investment reallocation strategies had been necessitating, so I’ve been happy to have not lost a dime in the market during its recent meltdown.

So let’s point out yet another potential pension influence: those 2009 pension cost figures about to be revealed in the first quarter financial statements about to be issued by companies with calendar fiscal years. One speculation pegs the increased pension cost at a level that would pretty much wipe out 2009 earnings for pension sponsors (those that don’t sponsor pensions being untouched by the higher pension costs, of course, so only suffering earnings erosion from the general economic malaise). My own personal estimate looks for a pension cost increase of only half that speculation, but even that more favorable expectation would hit corporate earnings like a sucker punch . . . . delivered by a wrecking ball!!

And much the same way as earnings estimates in early 2007 and early 2008 failed to anticipate pension cost decreases those two years, so too even the most dire earnings estimates making the rounds on the street these days have not yet taken those significantly higher pension costs into account.

Aside from several obscure pension forecasters whose word has not yet been recognized, so far the only indication of this wrecking ball has come in the form of some early warnings from du Pont and one or two other companies, but with none of those early warnings having yet put the dent that will have to be made in earnings projections. By the end of April, the naked truth will be hitting hard. And I believe we’ll see blood flowing through the ditches. And be hitting that basement floor like we were thrown down at it.

But even if many of the pension plans that have survived this ugly decade close their doors or freeze their benefits, the market meltdown of the past two quarters has hit an important wall: either more pension funds follow the lead of GM and others into permanent reallocation; or else pension plans take a temporary reprieve from their investment policies (not unlike how the stock markets have granted grace periods on otherwise applicable delisting requirements) . . . or we’re about to see an acceleration of the leveling out and turnaround in pension fund equity investment that I had originally anticipated coming in the final quarter of 2009 or early 2010.

In English? Like I predicted verbally three weeks ago and reiterated in writing earlier this week, I see the current “rally” as only a temporary bounce. So then when I refer to blood in the ditches and being thrown at the basement floor, I believe we still have a real chance of seeing the Dow cross below 6k before Memorial Day. But whereas earlier this year I anticipated steering clear of equity investment until late 2009, if not until 2010, I might now be making my turn as early as Memorial Day. Especially if the bottom has dropped out between now and then. And although I do look beyond pension policy – to the global economy and to technical factors and to a host of other influences – like so many times before, pensions will play a major role in my decision if I do move then: the worst of the info on pension cost increases will have been fully factored in by then; but we might then be seeing some serious money come to the demand side of the markets in the form of pension investment rebalancing back up to some higher equity mix. Meaning we might then see the market leap off a bloody spring and head straight up.

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Written by macheide

25 March 2009 at 3:15 pm

Posted in calls & puts

Just a Bounce

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That dead cat’s even jumped a little, yes. But without much more than hedge fund money buying into it, it’s still nothing more than a bounce.

Yes, I came very very close to sending 10% across to equities two weeks ago. But I’m not into making 3-week moves. And another week is all I give this, even with today’s latest edition of rules from Treasury.

Today’s 497-point hop in the Dow wins Kelly a steak dinner, but I don’t expect Nat will have to wait more than another two weeks to pick up her Olive Garden outing from a comparable drop. Burn out the little bit of outside money that might be foolish enough to venture back in, and we’ll be back to the basement.

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Written by macheide

23 March 2009 at 6:09 pm

Posted in calls & puts

Basement Door

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We’re finally standing at the basement door.

Throughout our giddy ride down an elevator in near freefall, I’ve frequently looked out the window, not yet seeing the street through the fog, at best only speculating how far down I thought the ground floor might be. But yesterday’s thud sounds, looks and feels a lot like the hard concrete of street level.

I do still believe we’ll be giving the basement a lengthy visit, perhaps even take a mattress down there for want of a better place to sleep off our drunk.

And once we get down there and poke around a bit, it wouldn’t surprise me all that much if we were to find it to be like a building with a basement parking garage . . . that goes down into basement level two . . . and basement level three . . . and maybe even a dungeon below. Except if we spend too much time below the basement we can see from here, we’re going to come out of it looking like strange deep-sea creatures.

Meanwhile, I’m still hanging on tight to my wallet and my belt. Any bounce we imagine any time this spring still doesn’t have enough momentum to levitate, the elevator cable’s still snapped, and our legs are too damn tired to climb any stairs.

Yeah, at this level, we could easily have a short-term visit back up to the second or third floor, like what we saw last December, and that could so easily turn a month’s return of 15% or more given how far down we are. But I’m not into one-month horizons; and within the next three months, we’ll be well down the basement stairs. Yes, I believe we can see the floor of basement level one from here; but I don’t think we’ll be seeing the ceiling of the fourth floor or higher anytime before Labor Day; and I’m still of the opinion that I could sit tight the rest of 2009 without regret.

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Written by macheide

3 March 2009 at 7:42 am

Posted in calls & puts

Still No Consistent Buying

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Yesterday afternoon, Bloomberg radio spoke with an analyst who was shrugging off the day’s 200+ Dow gain as little more than temporary short covering. None of it “new money,” he claimed. What’s needed for a real turnaround, he observed, was significant new money, day after day after day, through good news and bad.

That’s the first time in the past year that I’ve come across anyone else pointing to the absence of persistent buying in the equity markets. There being no end to the commentators Bloomberg usually parades around chirping about how underpriced and “oversold” the market supposedly is.

No matter how beautiful the women are, they won’t find suitors if all the men have been killed at war.

I know, the market is not entirely about the massive permanent outflow of pension money. But with that huge shift so drastically tilting the plane the past two years (only partially counter-balanced in 2007 by Chinese money), the weaknesses created by the credit crisis could do nothing but drag the market to historic lows.

Nine months ago, with the Dow in the high 12s, I marked 13k as the ceiling for the remainder of 2008. Then consistently throughout the months since, I have never yet seen a floor (although last September, with the Dow then still over 10k, I did point down to the 5s), but have only seen the ceilings drop again and again and again.

For now, I’ll stick with this loner Bloomberg managed to dig up, against all the unsubstantiated wishful thinking for a rally. As low as stock prices might look on an unthinking chart, the price doesn’t matter when the market has no buyer who is there day in and day out. So yes, I’m still looking for us to visit the 6s and even the 5s before we’re finished with this meltdown.

Appendum – And just now I heard a numbskull on Bloomberg blame today’s retrenchment (Dow currently losing over half the ground it gained yesterday) on “profit-taking.” Profit-taking??? OK, I know that’s the standard way of saying, “We don’t really know why it’s going down today.” But in this instance, it’s just plain idiotic. The only people in this market with any so-called profits to take are either day traders who bought in just yesterday morning and are already cashing in, or long-term investors who bought over a decade ago and are finally giving up. And if that’s the alleged “profit-taking” that is moving this market today, then we’re in even worse shape than everyone already fears. Seriously, where does Bloomberg manage to find these jokers?
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Written by macheide

25 February 2009 at 10:10 am

Posted in calls & puts

Still Not Yet Turning Up

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For several months now, business media has been flooded with prognosticators whose main argument for calling a market bottom and advising equity purchase amounts to little beyond the simplistic observation that a bull market has generally preceded emergence of the economy from a recession. Blindly, “If you wait until the recession is over, it’s too late to buy stocks at their cheapest, so buy now.”

Without showing the slightest inclination to understand why a bull market precedes emergence from a recession. That whereas the economy is like watching the bow of a huge vessel, the market watches the props and tiller, which set the direction long before the boat actually reflects a change.

So yes, the market quite likely will behave as it usually has, and move up before we’re out of this mess. But don’t expect it to do so when we’re still laying off over 25k more employees day after day after day, when we’re still cutting back on new equipment expenditures, when we’re closing down businesses left and right. Level out, and maybe the market won’t even wait for reversal of those trends before it moves back up. But as long as those indicators continue to plummet, don’t look for the market to find any steam to lift it out of the valley.

Besides, I still don’t see any major buying power standing ready to do anything more than a day or two of ass-covering. Until pension plans and other major institutions return to regular buying day after day after day regardless of market direction, there is nothing out there to support a bull market. They still don’t get it: much of that supposed “cash on the sidelines” is money that has left the market permanently, no looking back, no return.

So yes, we’re still 0% invested in equities, and still looking for lower markets as we move through the winter. I have distant hopes of maybe edging a toe back into stocks perhaps as early as the last month or two of this year, but I don’t think I’d be missing much of any bull market if we just hold our powder until 2010.

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Written by macheide

4 February 2009 at 5:59 pm

Posted in calls & puts

No BS

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No, as memorable as 2008 was, don’t remember it as a so-called “BS event.” Unless you recognize the only smidgen of validity in BS thinking to be in the admission of ignorance, and count yourself among the fools.

And 2009? We still haven’t touched the bottom yet. We’ve been bouncing around in this current range only because we got here too fast, so are waiting for gravity to catch up with where we dug ourselves down to, then will sink further. Yes, we’ve now discounted that Bush recession into the market, perhaps even as deep and as long as the top edges of what we have yet to see. So yes, stock prices are cheap, even taking into account all the companies that won’t survive 2009. But as Borders is finding out, it doesn’t matter how far down you discount your product if you don’t have customers walking through the door.

And pension plans still won’t be lining up to buy stocks, even at these cheap prices. I know, demand for equities also comes from 401(k) plans and mutual funds and hedge funds and all; in fact, the market’s dysfunctional tantrum this past autumn can largely be blamed on those other potential buyers finally getting with the program. But with the collapse of what had been a decades-long reliable source of buying in the form of defined benefit pension plan cash, the market will continue to bump around in the dark lost, with no major buyer stepping up to lead us out of the dark.

So we won’t break out back to a five-digit Dow anytime soon. Rather, before spring break, we’ll be making stocks even cheaper by testing those November 2008 lows, and still no major buyer will come forward, not just yet. By Labor Day perhaps, the largest wave of pension fund selling will have subsided (although smaller pension funds will still be catching up with delayed me-too sales); and even without a reversal that would switch over to major pension fund buying programs, the mere decrease in selling pressure should whiplash through the markets enough to stir others back over to the buying side. Depending on how bad things have been through the first half of this year.

So we ourselves might return to the market by mid- to late summer. But not yet: we’re not yet in “Buy Soon” mode. For now, it doesn’t matter how cheap the market has priced itself when there aren’t yet any major buyers willing to commit.

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Written by macheide

7 January 2009 at 5:17 pm

Posted in calls & puts

There IS A Floor Down There

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About two months ago, back before the Dow had even broken below 10k, in conversation with Kelly I pointed to the 5k range as being where I expected to start seeing a floor finally coming into view. A week or two later on one of the market TV programs, I heard the same range predicted by one solitary analyst, explained using much of the same thinking that had gone into my own off-the-cuff call. Almost all other analysts have hidden behind the curtains when the market has been dropping, then ventured back out to hope we’ve already seen the bottom when the market has taken a breather after getting ahead of itself. Since that one 5k call over a month ago, I’ve not heard anyone else setting any market target that low.

But I’ve sharpened my own amateur’s pencil enough to feel comfortable doing so. I think the high 5k range to be our most likely cellar floor, and I’m expecting to see that target holding us through late summer into early autumn next year. If panic over reaching sub-8k then sub-7k ranges seize investors, accelerating the decline and driving it deeper faster, then I expect the bounce to be sharp at first, although that then should level back out as we come back into current ranges, with 10k not again likely until 2010 at the earliest. If the market has already taken enough laxatives to clean out its tubes, so that it drops more lazily into early 2009 and never actually manages to make it below 6k, then I won’t be looking for recovery to be as fast or as sharp.

I’m pricing a deep recession lasting at 30-36 months into my projections, with extraordinary failures stretching from corporations to state governments and countries, together with bailouts and other government intervention that will make TARP look like a pup tent. Give us trouble beyond that or permit the government to keep shoveling uncertainty into the markets, and the lower 5k region or even sub-5k is not outside the realm of the possible. So if our freefall elevator gets down to the first floor and I see more than one basement below us, don’t be surprised to see me revise my numbers downward another floor or two. But I currently see nothing giving me any hope that the market won’t at least stick its head into the cellar I’m seeing down there.

Meanwhile, I’ll let the Warren Buffett’s of the world get their army boots through the elevator door early, while we’re still in freefall. Although I don’t think it’s time to turn into a sell-low investor, neither do I yet see opportunity for any major buying. For now, we remain 0% invested in equities, as we have been all this year.

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Written by macheide

20 November 2008 at 6:13 pm

Posted in calls & puts

Nothingness of 5%

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This morning Bloomsberg TV chatted with a guest who ventured to say we’ve seen the market bottom. Freefall during mid-October scared off all those who had been calling the market bottom at a Dow of 12k, then at 11k, then at 10k, then maybe at 8k. But end October with something the whole rest of the month didn’t give us – two good up days – and stretch that a few more days over to Election Day, and those bottom-callers start braying again. What got me laughing about this one was what he was calling for now that we’ve seen the bottom: a 5-10% rally! Did he come to his interview this morning without watching yesterday’s market? Hey there mister stock person, the Dow dropped more than 5% yesterday alone. So you’re telling me we might be lucky enough to see stocks regain what they lost yesterday?!? Ooooo, let’s throw a “rally” party! Or better yet, let’s hold off until the market drops another 5% today so he can get us back to this morning with the low side or make it all the way back to yesterday morning the high side of what he calls a rally. Sheesh, where do they dig these people up from?

To this stock market, 5% ain’t no rally. At most it would be what they call a “dead cat bounce.” Except we still haven’t yet seen a floor hard enough to get that darn cat to go splat, much less bounce.

We’re still 0% invested in equities. And expecting to remain so through at least the end of this year.

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Written by macheide

6 November 2008 at 10:39 pm

Posted in calls & puts

On Calling a Bottom

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By Election Day, I think we’ll be happy if 12k would serve as reasonable target to climb back up to.

aftermath (5/20, after the Dow closed at 12828.68)

Well, here we finally are, just around the corner from Election Day. And yes, we would be happy, indeed quite surprised, if we could realistically set a 12k Dow as any reasonable target to climb back up to. At the time, just before Memorial Day, nobody else I was reading in the business press or watching on the business TV channels was breathing a word about the market even dipping into the 11s, much less far enough so to consider 12k a “happy” target to reach for.

I’ll tentatively set my expectation for the market within the next 18 months to steer downward toward 10k.

aftermath (5/27, after the Dow closed at 12548.35)

The biz press & TV were still talking like the Dow’s loitering in the 12s was but a temporary lull, with some prognosticators pointing up to 15k and even beyond. I had already given up on expecting to see 13k again, and felt that we were headed lower, far far lower. I anticipated seeing sub-10k levels by early 2009, but gave my prediction an 18-month horizon just to be on the safe side of the intermediate term of my expectations.

I expect us to be between 10k and 11k by September.

aftermath (7/24, after the Dow closed at 11349.28)

Technicians were scurrying around with their charts, all pointing to perceived bottoms, at that time none of them calling for numbers below 11k. I had already started talking about how long I thought it might take to find the sub-10k floor I still did not see anywhere near. I felt the market would continue drifting slowly down down down, but verbally did sketch out how equities might drop like a rock if and when other selling – such as that from hedge funds or 401(k) plans – might join the on-going pension plan selling in some sort of panic.

Before we reach the end of 2008, I expect the Dow to dip below 10k.

aftermath (9/4, after the Dow closed at 11188.23)

As close to the precipice as we stood at Labor Day, at that point there still were no TV or newspaper analysts daring to point further down. Whereas I couldn’t see anything that would give us any sustained climb, and only pointed vaguely at the next four months just to hedge my bets. I didn’t believe it would take very long to drop below 10k. Just, outside of the panic I’d briefly sketched out mid-summer, I didn’t expect it to fall quite so dramatically.

So then, where do we go from here?

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Written by macheide

28 October 2008 at 6:18 pm

Posted in calls & puts

Are We There Yet?

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Like children who start asking that question within the first hour of a long, long journey, similarly clueless are too many stock market analysts puzzling over their “oversold” charts and technical indicators and blackbox models, calling a new “bottom” as each floor flashes past this drop down the elevator shaft, at 12, at 11, at 10, 9, 8 . . .

As margin sales, hedge fund sales, capitulation sales, and every other seller jump on the firesale bandwagon, the sheer volume of this avalanche has now obviously far surpassed the momentum that pension plan reallocations gave to that subprime mortgage crisis slide at the top of this cliff.

But just the same, if leadership in the market is to come from any one sector of investors, pension plans may show us the floor, same as they shoved us over that high edge. Mega-investors like CALPERS might have to fight off critics from all sides once the damage to public employee retirement systems sees the light. But by and large, public funds had not been joining private pension plans’ rush to the exit; and if they keep existing investment policies intact, they’ll even begin pushing new money into equities over the coming year, since the stock market crash leaves them below their target equity allocations.

In fact, the blood on the Street might dampen private pension funds’ own rush from equities, depending on how each pension fund perceives its asset reallocation strategy. If a pension fund has been steering toward a particular dollar amount for its bond portfolio, such as might be the case if the fund is aiming toward an asset matching philosophy as compared with retiree liabilities, then there may still be miles to go before we sleep. Conversely, if a pension fund had expressed its new asset allocation in terms of a revised lower target percentage of total assets to be held in equity investments, then the October 2008 crash has helped achieve that goal simply by lowering all pension funds’ equity allocations via lower stock values. For that matter, even that first strategy – steering toward an asset matching philosophy – might see some slowing of private pension equity sales in the coming months, by virtue of lower retiree liability amounts, as reameasured on the basis of higher corporate bond rates.

Against the tidal wave of equity sales from all other sources, any pension fund re-entry on the buyers’ side of stock exchange floors at first may sound like a whisper too easily drowned out by the flood of screams from lacerated portfolios. But in much the same way as the past year’s pension equity sales have ignored external forces, selling no matter what the market or economy or anything else did, similarly stubborn will be any pension fund buying, once it kicks in. Emotionless. Uninfluenced by herd mentality, independent of whatever government policy is dangled for market bait, shrugging at even the economic indicators. Simply following whatever the pension plan’s investment policy calls for, come what may.

Frankly, I still don’t think we’re there yet, at the floor. And at the rate we’ve been falling, we’re bound to dig a hole a mile deep below the floor once we do hit bottom. All the same, institutional investors will be on hand to make solid purchases once we do get there. So although I myself continue to hold our own personal equity allocation quite nicely at the 0% it’s seved me well at for the past year, I’m starting to like how low the numbers on this free-fall elevator have been getting. Not very long now. Soon, soon.

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Written by macheide

10 October 2008 at 2:04 pm

Posted in calls & puts

Stretching To That 7th Inning

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Almost a year ago, only months after the sub-prime mortgage mess broke surface, I scorned the many analysts brought onto business TV and into business press for seeing the early bank write-offs as bringing us to the “7th inning” of the credit crisis, for thinking we had turned the corner.

“We won’t even come close to the 7th inning of all of this until we’ve heard from the municipal bond side of credit, until we see some states and cities and local governments turning belly up,” I predicted back then. And have reiterated since then, through last week when I wondered aloud how many multiples of the bank bailout price tag would be needed once public entities began lining up for their own share of “rescue” bounty.

Add foreign governments to that expectation. When banks start writing off or trying to renegotiate the severe overhang of bad government debt, that will be when we might finally see the full extent this global shakedown might have to go before we turn any corners.

So now maybe we can finally call this our 6th inning, with even that being an inning where it seems that nothing the Fed or Treasury Department can pitch seems able to get that final out. And if this past week has seemed an ugly streak of at-bats, it ain’t nothing compared to how that 7th inning is going to go down once all the municipalities top to bottom have stepped up to the plate. And the way this is shaping up, we’ll likely stretch this into extra innings.

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Written by macheide

8 October 2008 at 11:47 am

Posted in calls & puts

Anorexic Equities

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And I still look for a Dow below 10k before the end of 2008. – aftermath (10/2)

Only five days ago, as most market analysts looked for enactment of bailout legislation to reverse the precipitous drop that the previous Monday’s rejection of the bill by the House had been blamed for causing, as many market analysts decided that we had seen that elusive market floor, as absolutely none of those analysts were mentioning 4-digit Dow levels, only five days ago I reiterated my own conviction that we were headed below 10,000 for the Dow. Yet I do admit that even the pessimist in me did not expect to see that emerge so quickly, so dramatically.

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Written by macheide

7 October 2008 at 3:52 pm

Posted in calls & puts

Tiddly Up Tiddly Down

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Those Magnificent Men In Their Flying Machines.
They Go Up, Tiddly, Up, Up.
They Go Down, Tiddly, Down, Down.

Those Magnificent Men In Their Flying Machines

Comedy, Wall Street style. With the sense of direction provided by Congress. Fueled by knee-jerk Administration impulses to lock in that connection to Main Street before it gets away.

Unblinking through the entire circus act, pension funds continue their permanant asset reallocation, dumping equities at that $100 billion annual rate. Pass the bailout bill in any form whatsoever. The pension funds continue to drain their equity investments at the same pace, no faster, no slower. Give up on the bailout legislation, and the pension plans will behave no differently. Give us a depression rivaling the Great One, or just dip into a long painful recession, or bounce off the bailout and surprise us with immediate recovery; none of the possible economic scenarios will influence the pension funds. Take the price of oil back up toward $150 or drop it to half that; it won’t matter. Give us the hyperinflation that the bailout package guarantees, or save us from that hell by freezing the economy up too severely to bear the weight of the prices that should accompany the valueless mess we’re making of the dollar; whatever comes, pension plans will remain focused on that reallocation goal. In the long run, all those and other market forces will influence other market players, yes, eventually enough so perhaps to even balance out the pension fund activity during brief spells over the coming year. But nothing – not the bailout bill’s life or death, not anything that the Administration or Congress or anyone else can or cannot do – will influence the decision that has already been made by pension fund managers, an investment reallocation decision that will continue to steadily bring money to Wall Street’s sell side for at least another year.

Warren Buffett gives us a brief reference point, kinda like a landmark to point at while the boat continues drifting downstream on the flood. Whereas pension funds are exiting equities at a rate of $100 billion over the course of a year, the Oracle of Omaha can still ante up $3 billion on a single day to snatch up some stock on the cheap (although it would be mildly interesting to know what he sold in order to come up with the funds for his purchase). OK, now let’s see him and others with his financial endurance and intelligence do that tomorrow, and the next day, and the next. Because pension funds will still be there selling, Buffett or no Buffett.

Bailout or no bailout, Obama or McCain, miracle salvation of the economy or quick collapse, I’m still not ready to send any of our own funds back into any equity purchases, not just yet. And I still look for a Dow below 10k before the end of 2008. Pension funds may be just one of many investors, but they’re a force sufficiently huge and strong to have set the current rip currents sweeping us to low tide.

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Written by macheide

2 October 2008 at 11:54 am

Posted in calls & puts

Drain Still Draining

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So while Ike cost us our power and Internet access and everything in between down here in Houston, the federal goverment was preoccupied with bailing out Wall Street.

And still, each and every day, on average $400 million lines up at the door to leave equities via pension plan investment reallocation strategies.

The government’s emergency fantastic departure from free market capital market does demonstrate in rather rash terms that yes, it is possible to temporarily encourage new money to come into the market at volumes sufficiently in excess of that $400 million daily drain, such that we have seen wild triple-digit jumps in the Dow, might even expect to see more of that to come for the next few days, maybe even ever so briefly longer. But the dramatic market jolt – almost more dramatic a destruction of sound economic principles as the terrorist acts of 9/11 were to true market value – likewise rather starkly demonstrates an important aspect of pension plans’ reallocation: how independent that strategy is on external events or factors. Let the market drop to historically undervalued levels, and the pension plans don’t switch to a buy-low strategy. Let some major financial firms go bankrupt, and the pension plans don’t accelerate their long-term reallocation moves. And likewise, push the federal government into a corner where it fights blindly with everything it has, and those pension plans don’t even blink. Tomorrow, if it’s an average day, pension plans will again be lined up to cash out about $400 million from the stock market, no matter how the federal government has tweaked its bailout plan over yet another wild roller coaster weekend, no matter what the stock market futures indicate, no matter how much money lines up for or against where pension plans are headed.

It’s an open drain that will remain open for at least another year, perhaps longer, before pension plans have reached the lower equity allocation levels they now target. The federal government might open a faucet with a flood of funny money every weekend or so, at least to try to save a little face until Election Day; but that pension plan drain still remains open throughout and beyond, uninfluenced, unstopped, persistent as ever.

And as long as it does, even a change in environment as disruptive as the federal government’s bailout plan will not alter the underlying weakness in a market predisposed to selling. And I still count on seeing a 4-digit Dow before the end of this year, perhaps as soon as we start feeling that hangover from this past week’s government-subsidized beerfest.

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Written by macheide

21 September 2008 at 8:05 pm

Posted in calls & puts

Another Step Down

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[F]rankly, I don’t yet see that floor [of 12k for the Dow] holding past Labor Day. By Election Day, I think we’ll be happy if 12k would serve as reasonable target to climb back up to.

aftermath May 20

[I’m] still expecting that we’ll be calling it pure luck if we can reach as high as a ceiling of 12k by Labor Day.

aftermath June 10

Every now and then, I should read my own stuff a little more closely, maybe. Doesn’t really matter, since I don’t do this for a living, right? Whatever, all summer long I’ve been watching the market with Labor Day as my horizon and the anticipation that by then, we’d be happy to be able to claim 12k as a ceiling for the Dow. That is, that by the end of August, we’d be used to having upticks in the market reach ceilings below 12k. Looking back now, I realize that the first time I expressed that expectation, back in late May, I was giving the market until Election Day for such doldrums to be commonplace, and that I only contracted my original Labor Day floor and my Labor Day too-high-for-a-celing projections sometime over the Memorial Day stretch.

Either way, we’re there. So where to from here? I still don’t see anything in the economy, in sentiment, in the Fed or the Administration or in either campaign, or anywhere else that might promise to pony up enough sustained new money day after day after day to balance out the daily average $400 million committed toward coming out of the market via pension fund asset allocation shifts. Yes, perhaps many stocks are “undervalued” by conventional benchmarks, although I do think that conditions remain ripe for further devaluations. Whatever, stocks could be priced at half the current value or even less, and it wouldn’t matter as long as we have sellers lined up to dump stocks regardless of values, while nothing is pulling buyers into the market for more than a day or two between extended stretches of selling.

So I’m setting my new sights on 4-digit numbers: before we reach the end of 2008, I expect the Dow to dip below 10k.

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Written by macheide

4 September 2008 at 6:18 pm

Posted in calls & puts

Still Above Ground Level

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About a week ago, some analyst being interviewed on CNBC opined that the DJI is primed for leaping to 16k. Without qualifying whether or not that might happen sometime maybe 10 to 20 years from now. Responding to the interviewer’s disbelief by suggesting that it’s where the DJI belongs today (versus being in low 11k regions as it then was).

As silly as he sounds, he’s probably not doing anything much worse than updating his perspective since April, when there were others like him frequently on looking for a 15k-16k DJI at the same time I called the ceiling at 13k. And if he’s simply begrudging the disappearance of his dream market like a mirage, then he may be one of many who are hoping that last week’s fireworks after the recent dip below 11k marked the bottom of the bear.

Not. The most we saw earlier this month was the carpeting on maybe the fourth or fifth floor of a building of which we’ll be seeing the basement before this can all be called over. Last week’s optimism doesn’t surprise me – I’d seen June’s declines as being too fast, so I’d anticipated enough of an increase to keep a day trader happy for a spell. In my opinon, that only puts us back on track toward a Labor Day when a 12k ceiling would be a pleasant surprise, meaning I expect us to be between 10k and 11k by September.

Just one investor’s opinion. But since there’s not enough new money out there to come anywhere near squeezing a 16k DJI into existence by balancing out the net $400 million per market day automatically scheduled for permanent departure from equities, for now I’m keeping our personal equity allocation solidly at zero percent for the forseeable future. And get ready to go down another floor in the building.

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Written by macheide

24 July 2008 at 1:13 pm

Posted in calls & puts