Widgets Day Trade Nation

Wed. July 7th, 2010

   While I don’t agree with Doug Kass’ call that the bottom is in for the year, I do think the bottom is probably in for the next month or so.  Probably until sometime in September, right before the November elections, at which time the crooks on Wall st. and the Republicans will most likely try and do anything and everything in their power to crater the market, in an effort to re-take the House and Senate (I think the most likely will be successful in taking back the House, but not the Senate.)

   In other news, NLST is taking off today, with news of a DELL qualification for their Netvault modules.  The first of what I expect to be many upcoming catalysts for the stock.  Congratulations to anyone who took my advice and bought in around 2.30 - you’re now up almost 17%.

Black Tuesday?

   I think not.  Nothing’s changed over the weekend.  Except that everyone and their Aunt Myrtle has been going on and on about Apocalypse DOW coming any second now - every blog, every newspaper, every online magazine, every chat room - everybody.  All.  Weekend.  Long.  Acting like Robert Precther is hiding under their bed, waiting till they fall asleep to eat their souls.  The thing is is when there’s that much fear in the air, you know it’s time to go long.  It ain’t ever that easy, unless 100 years of fundamental market dynamics have completely and utterly changed for good.  (Which maybe it has.  I doubt it.  But maybe it has.)  I’m thinking somewhere along the lines of the rally we had from November 21st, 2008 to January 1st, 2009.  Only on a smaller scale.  But one thing I do know is that, unless some big bank failed over the weekend, there ain’t gonna be no Black Tuesday.

   I say we drop to around 990 on the S&P tomorrow in pre-market, just enough of a drop to get all the panic-sellers to do just that - panic sell - and then rally from there.  The ISM Non-Mfg number comes out at 10 o’clock.  If it comes in above or even anywhere near consensus, between the market being ridiculously oversold and the stink of fear in the air, I believe that’d be enough to send us up to test 1040.  Unless some macro-economic catastrophe makes its presence known between now and the bell.

   I posted earlier on stocktwits, when we were trading flat @ ES 1015, that if the market gapped down to some absurd level in the morning, I was going long.  I’m still sticking to that play.  Call it a feeling.  Call it degenerate gambling.  Call it whatever you want.  But we’re not gonna get that crash everyone is waiting on until every bear out there has had his face ripped clean off one last time.  Then down we go.

Addendum - So I was 1/2 right; the market went vertical today, in direct contrast to all the chicken-littles screaming about an imminent collapse all weekend long.  The isg-Non mfg # came in a tiny bit above the low end of consensus (although well below the avg consensus - 53.8 as opposed to 55.)  But, regardless, we went up today.  I was thinking, though, that we’d get a drop in the morning to buy into.  The drop came last night, directly prior to me posting the above piece.  From that moment on they took a play right out of last year’s play-book and started gobbling up futures at whatever price all night long, leading to this morning’s gap up, forcing shorts to cover.

You’d have to be an idiot to buy into this rally, though.  All this is is an opportunity to get short again, as I did @ S&P 1042, for the .0002 seconds it reached it.  More later, as we see how this close works out.

Netlist, Inc. (NLST)

   Anyone who’s been following me on twitter for a while knows I’m very keen on NLST.  I made a ton of money on their stock back in November, when they first introduced their new cloud computing memory module - Hypercloud - and I’ve made quite a bit trading in and out since then, too, going both long and short.  But, in all that time, I’ve never held a position in the stock, either way, for longer than a week, tops.  Now, however, after buying in on Friday, I believe I may end up holding it for more than just a swing trade.  This time, after being lucky enough to catch it near the bottom, I’m going long NLST, as there are far too many potential catalysts for the company to risk not holding it from here on out.  There stands the chance that, even if the market as a whole nosedives in the coming months, as it probably will, NLST could still go up.  If anyone was following STEC last year during the worst of 2008-2009’s bear market, you’ll remember that it was 1 of maybe 3 or 4 stocks on either the NYSE or the NASDAQ that actually went up from January through March 6th, when the S&P hit 666 as its low (so far) and then, after that, when the market made it’s incredible, historic leap, STEC continued to keep going up… and up… and up.  It is my firm belief that NLST has the potential to end up being this year’s STEC.

   First off, though, let me be clear - I never pump stocks.  I despise pumpers.  I despise them more than I despise bashers.  At least with bashers you’re fully aware they have a clear agenda, and what that agenda is - they want the stock to go down.  Period.  With pumpers?  You never know what, exactly, their angle really is.  More often than not they’re trying to get you to buy the stock while they’re dumping their shares en masse.  Or they could simply be delusional and truly believe that whatever joke of a company they’ve found is the next INTL or MSFT.  Either way, pumping a stock is unseemly and generally ends up giving the company a bad name.  It could be the most reputable company in the world.  But if you have a proliferation of mindless, relentless pumpers pumping the stock all over various message boards and twitter and facebook or what have you, the company in question ends up coming off like a SPNG or a CTIC - a worthless, fraud-ridden shell company who’s sole strategy and source of revenue is to print billions of shares to dump - at any price - on an easily duped group of greedy traders who think they’ve found a winning lottery ticket.

   So, with that in mind, I wish to take this opportunity to explicitly stipulate that I am not, in any way, trying to “pump” NLST.  I am simply providing my reasons for buying the stock and holding it.  It is true that NLST has, in the past, given investors reason to wonder whether they are a legitimate, technologically innovative company, or just another example of management running a mass, share-printing, personal-ATM disguised as a company.  There were a couple of incidents where certain board members were exercising (dumping) shares they granted themselves as options, while at the same time providing excessively positive forward guidance that they later ended up being forced to restate.  They were also the subject of a class-action shareholder lawsuit stemming from their IPO in 2007 that was later settled out of court.  But, I am pleased to be able to say, it seems now that those days are far behind them.  If you’d like to do some D.D. on the company, as I strongly suggest you do, Timothy Sykes produced an excellent report on NLST last year; a detailed history of their seemingly shady past, back when he and his followers were shorting the stock after the huge run it had.  They have long since covered, though, and now I believe Sykes is of the mind, as well, that those days are over, and that NLST does, in fact, stand the chance of being in a position to snatch up a significant percentage of the market share for memory modules, as long as they don’t repeat any of their prior mistakes.  (I should also take the time to give Sykes major props for calling the low with scary precision @ $1.80-$2.  A low which has, so far, held.)

   When the market crashed to 1006 on the S&P on Thursday, NLST concurrently hit a low of $2.02 for the day and quickly bounced off of it.  The next day, on Friday, I carefully watched the stock trade and couldn’t help but notice that, even though the market itself was extremely volatile (with a particularly underwear-soiling drop occurring at one point during the first half of the trading day) NLST held steady throughout it all around the $2.12 level.  Steady as a rock.  

   Later, around 2:30, after compulsively, obsessively focusing on it for hours - I finally decided to buy in @ $2.14/2.15.  I ended up with 15K shares.  I tweeted my buy on stocktwits (although, at the time, I had just bought 10K; I bought another 5K right afterwards) accompanied by a warning that it, “looks like it’s gonna run.”  Directly following my tweet, about 5 minutes later, the stock did, in fact, begin a run which ultimately brought it up 12.8% from when I first posted my tweet.  Which is a pretty nice return in an hour and a half’s time.  

   And so but anyway, regarding where I think it goes from here - in terms of the potential catalysts; there are several - there’s a patent infringement lawsuit going on right now between GOOG and NLST, and a counter-suit, NLST vs GOOG, in which NLST alleges that GOOG stole the framework from them for a memory module that it’s currently using in one of its newest platforms, Caffeine.  Several other companies were on the receiving end of a lawsuit from NLST, as well, including Metaram and Texas Instruments, both of whom ended up settling (but not before NLST began to have the term “patent troll" thrown about in regards to it.)  Claim Construction hearings were held in Nov. of last year, and NLST prevailed on every single issue.  Trial is now set for Nov. of this year.  But if GOOG ends up settling before then, though, as a lot of traders are speculating they ultimately will (GOOG got rid of the trial lawyers they had hired for the case and switched over to a firm that specializes in settlements - talk about telegraphing your intentions,) the stock will, literally, go vertical.  It’ll mean a significant amount of cash thrown at them as part of any settlement, as well as giving GOOG no choice but to actually have to pay NLST for the use of the memory modules they’ve already indicated they need for their newest platform.  Then there’s the OEM qualifications; one after another, I expect to hear from INTL, HPQ, DELL et al that NLST’s Hypercloud has been qualified to work with their systems.  What that’ll translate into in terms of potential revenue is anyone’s guess (NLST provided an estimate for FY 2011 of around $211M, which, from their current levels, is something on the order of a 700-1000% YOY increase.  Which would be enough to give them a market cap many multiples higher than currently stands.)  I’m expecting the same type of PR’s from NLST that caused STEC to go bananas during the worst of it last year - OEM qualifications.  The real catalyst, though, for NLST, will be 2nd and 3rd qtr earnings, when we get to hear for the first time how sales are working out for their Hypercloud and Netvault memory modules.  Their gross annual revenue for 2009 was somewhere in the vicinity of $24M.  There’s a chance that they could be looking at a 300% YOY increase in revenue for the 2nd qtr. alone, depending on how many OEM’s have started placing orders for the products (bear in mind that INTC and DELL are already customers.)  And that would be just the beginning.  This is a growth story if ever there was one.  Cloud Computing is the wave of the future for tech, and what NLST has done is produce a faster, more energy efficient and cheaper product with significantly larger capacity than their closest competitor (which happens to be CSCO, who may also end up being a potential revenue stream for NSLT.)  Their principle customers are DELL, FLX and ARW, who each accounted for 37%, 31% and 16%, respectively, of net sales for the period ending April 30th, 2010.  The sales to DELL are primarily channeled through Foxconn, China’s largest manufacturer of electronics, including AAPL’s iphone.

   This is not to say that the stock couldn’t go down from its current levels.  But I am of the mind that a bottom has been reached.  It, so far, double-bottomed @ 1.81 during the May 6th flash crash and again on June 9th.  Since then, though, the one time it hit $2, on Friday, it bounced right off it and there were virtually no sellers whatsoever.  Which is why, I imagine, the stock seemed to enjoy such a healthy bounce once volume started coming in.  Institutional investors bought 4.5M shares priced @ 3.85 back in March during an offering they did.  But I am convinced that the underwriters of the offering, Needham, turned around and promptly shorted the stock for their client(s), in order to guarantee a profit.  I also believe that they have long since covered, and the stock has bottomed and will continue to go up from here on out.  When/if there is any kind of positive PR issued by the company (which, I should point out, are generally few and far between, as they are not the kind of company - thank God - that releases a PR anytime an occurrence that can be spun positively occurs, in a tawdry effort to try and boost the stock price) the stock is going to explode upwards - quickly and violently.  It still has a reasonably low public float of around 11M shares, a majority of which are already held by institutional investors; Renaissance and Susquachana being the largest @ 1.4M shares each.  (One guy who’s research I trust puts the number at around 5M shares available to retail investors.)  A float low enough that the price can increase dramatically with minimal volume.  There are also 1.5M shares short, currently.  Any time there’s a pop on the stock, it’s usually followed by an immediate sell off, so I think a lot of traders still think it’s a gimmie.  It’s also a trade that has clearly become crowded, and we all know what happens to crowded trades; they work until they don’t anymore.  The short interest, in my view, is a good thing, as it’s often times the rocket fuel required to send a stock skyward.  

   They put together a manufacturing plant in China last year, so their costs are as low as any company that outsources their labor to cheaper parts of the world.  I suppose it’s worth mentioning their clean balance sheet - they have about $20M in cash on hand, no debt whatsoever, a $3M revolving credit line that they haven’t had the need to tap at all yet, a fairly low burn-rate of about $2.4M a qtr. (mainly for R&D,) and a new product that’s a total and complete game-changer for them.  It’s worth the trouble to go over their latest SEC filings, and everything you need to know is conveniently located in their latest 10-Q.  Where they’re at now is, at the rate they’re spending, even if they somehow weren’t able to sell a single module, they have enough cash to get through the next 6-8 qtrs. without having to even think about doing another shelf.  I believe they have somewhere in the range of 3M shares left over from the last offering, which counts towards their total authorized shares.  But I can’t see them doing another offering until the share price is well above where it trades now.  However - be warned - they probably will drop them on the market at the next convenient opportunity.  (If I were them, I would.)  But, this time, I don’t see it adversely effecting the price.  It’ll probably be one of those cases where, when they announce it, the stock will do a head-fake drop, and then go up past where it was before they announced it.  I’ve let moves like that scare me into selling a co.’s stock before.  But I won’t let it happen this time.

   So I plan on holding on to my shares of NLST for the foreseeable future.  And, until/unless conditions change for the company, I intend to be a buyer on any pullbacks in the following weeks/months.  If you intend to buy based on my recommendation, please be advised that this is a highly speculative play, and, as with virtually any stock, nothing is guaranteed - it could turn out to all be one big scam and it may be that the company really has nothing to offer.  But, anyway, here are some levels to look out for….

   Last time it ran, on news that British tech co. Viglen had chosen NLST’s Hypercloud for one of its new HPC applications, it ran out of gas @ $3.20, which, prior to its latest pullback, acted as support, and is now resistance.  The stock offering was priced at $3.85, so I could see it having a tough time getting past that.  Prior to the offering, it held the $4.50-6 range pretty comfortably for several months, which is where I expect it to settle the next time it has any substantially positive news.  One research firm slapped a $15 price-target on it, within the next 12 months.  That would be great.  But it bears noting that a number of executives with the company have millions of options all of which are exercisable at $7, so that’s where I expect major resistance, given that both the board and management has a history of dumping shares at any meaningful chance.  Be that as it may, though, I’ve given it a serious amount of thought, and I believe that, if everything goes well for them and all their good intentions translate into a significant increase in revenue, the stock could very well be trading at $10-12 a share by the time or right after they report 4th qtr. earnings.  Here’s hoping…

   In conclusion, let me state that, as far as value investing goes, and as much as I try to adhere to Buffett’s example, this is the only company I’ve found in the past 6 months of obsessive research that I believe has the potential to go from being a good little company to a great mid-sized one.  It’s also not beyond the realm of possibility that they could end up getting bought out - GOOG could buy the whole company for what they spend on lunch for their employees in a month.  Or CSCO could end up buying them out, too, just as easily, in an effort to simply get them out of the way.  So there’s that to consider, as well.  

   Whatever you do, though - if you do end up buying - as with any stock, you gotta stay nimble and be ready to take profits and exit at a moment’s notice.  But let me sum it all up by saying that, at some point in the next several months, NLST is gonna be trading a lot higher than where it is now.  

   This I guarantee.

Goldline & Me…

   So I was listening to Glenn Beck the other day, out of boredom as much as anything.  The guy, clearly, is a fraud.  I am convinced he’s only in it for the money, and is, at all times, condescending to his half-witted audience; only they’re far too stupid to know it. I had heard that a lot of his sponsors were leaving him in droves, beginning right after he made the crack about Obama having a, "Deep-seated hatred of white people."  And rightly so.  Goldline is one of the few that are left.  They’ve stuck with him this far, I suppose they’ll stick with him as long as he’ll have them.  Besides, when you think about it, his audience is the perfect target demographic for the company - old, easily frightened, slow-witted dupes.  I wanted to get a better understanding of what their angle was, so I called them posing as an old retired man looking to “diversify, like Mr. Beck said I should, on the T.V."  The sales woman who was assigned to handle my call was more than happy to accommodate me….

   She, without hesitation, strongly suggested I liquidate my entire portfolio, immediately (which, as I told her, consisted of money in a mutual fund, some stocks I relied on for the dividends, an IRA, some 10 yr. T-bills, etc. etc. - a standard retiree fixed income portfolio.)   She was relentless.  What was it she thought I should put all of my money into, you ask?  Why, gold coins, of course.  ”Investment grade” gold coins.  The same ones Glenn Beck holds up on his show when shilling for the company, nightly.  The coins, of course, weigh exactly one troy ounce.  And an ounce of gold, as those who follow these things would know, closed on Friday at a price of $1,210.40 an ounce for August 4th delivery.  How much does an ounce of their gold fetch, you might wonder, as did I?  $2320.00, cash U.S.  Ouch.

   To sum up: the Goldline saleswoman strongly suggested I liquidate my entire portfolio and put every single penny of my money into gold that’s being sold by them at nearly double the going-rate.

   I asked her how she could justify selling gold for twice the spot-price.  Her answer was, simply, that the coins are rare.  I asked her if I would be able to sell the coins for more or at least the same price I paid for them.  This is where the legal-ese kicked in - she said that the price of gold was volatile, and that Goldline could not guarantee a re-sale value of or greater than the price they were charging.  But she also launched into this whole sermon about the coming economic apocalypse that was sure to make the dollar worthless, and at the rate gold was appreciating, I should have no problem making money on the acquisition.  All I could think of was some easily frightened and easily duped poor old person who wouldn’t have the wherewithal of putting two and two together to know that they were being ripped off.  I mean, if they’re watching Glenn Beck in the first place, you know they’re not the sharpest knife in the drawer.

   But Beck.  What kind of a conscienceless piece of shit is Beck that he would promote these bastards?  Relentlessly promote these bastards?  How could anyone take this clown seriously?  Day after day, night after night, he tries to talk his listeners and viewers into buying gold at twice the spot-price, telling them that it’s a wise investment.  

   What a guy.  What a real American.

Naked Shorting by Underwiters in Stock Offerings…

   You ever wonder what “over allotment” in a stock offering referred to?  When an underwriter agrees to purchase X amount of shares over the number of shares allotted in an offering?  Well, now you don’t need to wonder anymore - it means the underwriters themselves were shorting the stock for their own institutional investors who bought the stock through the brokerage.  In layman’s terms, let’s say Ben Dover & Take It Securities are selling 20M shares of XYZ company for $2 a share, and they want to be able guarantee a profit for whoever was stupid enough to pony up $10M for stock in the company - they can only 100% guarantee a profit if they short they stock.  So if XYZ announces the offering, and the stock begins to sink, and the co. soon release a PR saying that the underwriters have exercised their right to purchase the over-allotment, you can pretty much rest assured they shorted the stock.  They do this by selling more than the 20M shares offered - plus the over-allotment (and then some, usually) thus creating a naked short position.  Once the stock has gone down enough, they cover in the open market.

   The following is language I found in a prospectus for an offering by URRE, a uranium processing company who just got finished selling 25M shares @ .42.  In the prospectus, the co. is legally obligated to spell out exactly how the underwriters could/would create a short position, ostensibly for “price stabilization” (although that’s one of the more ironic uses of the word stabilization that I’ve ever heard.)  The language is standard for these prospectuses.  But, in the case of this particular one, I found it interesting that they went into such great detail as to exactly how the short position can be both created and covered.  It’s a must read for anyone who’s in a stock that just did an offering.  If they announce it and the shares begin to sink way below where the offering was announced - get out.  Because, generally, it means it’s about to go a lot lower, due to the fact that that’s the only way the underwriters can guarantee a profit for their clients.

"Over-allotment involves sales by the underwriter of shares in excess of the number of shares the underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriter is not greater than the number of shares that it may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriter may close out any covered short position by either exercising its over-allotment option and/or purchasing shares in the open market."

"Syndicate covering transactions involve purchases of shares of the Common Stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through the over-allotment option. If the underwriter sells more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering."


A Cliff From Which to Fall Off Of…

   My thoughts are this - Friday’s jobs report will most likely show that unemployment has fallen to somewhere in the 9.5-9.7% range, based on Congress (completely unconscionable Republicans, to be more exact) denying any extension of unemployment benefits last week, thus there will be more people leaving the workforce, and, in a paradox, actually bringing down the unemployment level.  I’m hoping and praying that the market gets pumped leading up to the report.  There is a chance, however slight, that the S&P goes up to around it’s 200 DMA, which currently stands @ 1112.  Again, a very slight chance.  If this somehow manages to happen prior to Friday, consider it a gift - I, personally, will be shorting everything in sight if it does.  Because , ultimately, this week is going to end down.  

   There are just far too many indicators showing that the US economy is heading back into a double dip recession (if we ever came out of it in the first place, which I highly doubt) to go into on this blog.  Rosenberg just did us all a favor and provided a summary detailing “13 Signs that the U.S. Economy Has Hit a Brick Wall.”  It’s worth a glance for those with rose colored glasses on.  All that aside, you still have the abhorrent fact that the Republicans in D.C. will stop at nothing and do everything in their power to make sure that the economy gets no lift whatsoever between now and November, and may in fact go out of their way to help crater it, in an effort to pick up as many seats as possible come election day, all at the expense of the poor, the elderly and the jobless.  (They just recently tried their little black-hearts out to put a stop to a $1B aid package to jobless mortgage holders to help them avoid foreclosure - you know, what the original $700B was supposed to be for, before we handed it over to GS and their crooked cabal of thieves.)

   And so but anyway, that’s what I’ll be looking for - for the market to form a cliff from which to dive off of leading up to Friday’s sure-to-be-horrific jobs report, no matter what the actual number comes in at.  Bear in mind that, along with final revisions coming in for 1st qtr. GDP last week under analyst consensus, there is now officially no way for the banks to “grow their way out of this mess,” as has been told to us for well over a year now is what needs to happen in order for the economy, and the market, to improve.  The jig is up, folks.  It’s just a matter of time.  This week may, in fact, present the last, best shorting opportunity for the next several years.

Friday June 25th, 2010

   The market hit 1066 on the S&P today, only to get the obligatory 3:30 robo-buying spree going into the close.  A couple of hours have passed since the close, and now the futures are slowly creeping up.  If I had to guess (and that’s all I can do, really) I’d say we’re gonna be looking at one of those overnight power-pump jobs courtesy of the Fed Primary Dealers using your tax dollars.  On what the press will attribute the market going up tomorrow, I haven’t the foggiest idea.  FINREG seems to be getting passed around as a possible candidate for a rally.  As good an excuse as any, I suppose (on account of it being completely declawed and ultimately toothless in the final draft.)  But I think it’s just a matter of the market being A) oversold, and B) the crooks on Wall st. aren’t quite done unwinding their positions yet, and need a few more days in the high 1000’s to sell the rest of their shares before they get back around to bringing this market to its knees.

   In short (no pun intended) the market’s looking for an excuse to go up for a few days, in order to try and convince some more suckers to buy the shares that the crooks are selling in droves (plus they need someone to sell short to, at the same time.)  So I think that between the Russell re-balancing tomorrow, and the fact that we’ve seen nothing but red for a solid week now, we’re probably looking at a few days up.  Maybe flirting with S&P 1100, yet again.  All I know is that you couldn’t get me - at gunpoint - to sell the 5K of $TZA I’m holding from $6.36, because, eventually, this bitch is coming down.  The global ponzi scheme that is the stock market is nearing a close.  The jig is up (please feel free to insert any cliches I might’ve missed that are relative to the end being nigh.)

   Can anyone think of a single piece of positive economic data that’s come out in the past month?  ’Cause I sure as shit can’t.  Someone on CNBC tried to spin today’s job #’s as a positive, saying that continuing claims were down 45K to 457K.  But what he failed to mention, as luck would have it, is that Congress put the brakes on extending unemployment benefits last week.  So you have a shitload of people who can no longer get unemployment.  Of course the number’s gonna go down.

   And then you have the fact that just about every company that’s reported earnings in the last month have been virtually telegraphing to the market that 2nd and 3rd qtr earnings are going to be abysmal.  And, from what I learned, market rallies are generally predicated on companies making money.  If they’re going to be making less money, you don’t need to be Stephen Hawking to know that share prices are gonna go down.

   There’s just too many indications for why the market’s heading for a big, big crash that it would be a waste of time to list them all.  If you think we’re headed higher?  You need to read the news a little more carefully.

   So in conclusion; rally for a day or two, then we continue our downward spiral into the abyss that’s sure to give new meaning to the term, “S&P 500.”  I believe 2011 and onwards are going to make people absolutely pine for the post-LEH BK days of 2008/early 2009.

   Plan accordingly.

Addendum - Well, I woke up this morning to the futures being down a significant amount; apparently around 5:50 in the morning, ES hit 1066 (which translates into about 1070 on the S&P.)  I’m glad I was wrong.  But I hope no one took a long position in AH based on my post.  They’re climbing back up, slowly but surely.  But I’m pretty sure this is it - absolute confirmation that we’re heading back down.  There are so many indicators to back up my prediction.  But re-posting a link from @edwardnh will save me a whole lot of time and trouble.  In this piece, the writer lists every single economic indicator that helps support the conclusion that the economy is softening.  The market has been telling you this every single day for the past week.  But here it is in black and white.

   We’re going to, at the very least, re-test the 1040 level on the S&P.  The majority of talking heads on CNBC, including traders on the floor of the NYSE, seems to think it’ll hold and we’ll quickly go up from there.  I just don’t see that happening.  I mean, the head and shoulders on the S&P couldn’t be more obvious, for one.  Secondly, there’s nothing in any data to support prices rising from here on out.  We may still go up from here today, based on the Russell re-balancing and oversold conditions.  But, ultimately, the market is heading a whole hell of a lot lower form here.

Addendum Part II - I was correct in my call in every way except for the pumping of the futures overnight.  The buying opportunity came about an hour and a half after the open.  Despite “final” qtr. 1 GDP numbers that came in below consensus, despite the passing of a FINREG bill (albeit an ultimately toothless one), despite a whole plethora of economic data that seemed to go from bad to worse all week long, we went up today.  It was written in the cards.  We didn’t, however, close above 1080 on the S&P, which is as bearish a sign as any.  I still think that we go up for the next few days, potentially for the next few weeks.  There’s a nice, big obvious head and shoulders forming on the XLF (the banking index) with the right shoulder right around the 50 DMA @ 15.20.  There’s absolutely no chance of any rally unless and until the XLF gets back above its 200 DMA, at 14.92 as of this writing.  I’m of the mind that we get back above the 50 on Monday or Tuesday, and the S&P correspondingly flirt with 1100, and that is where the real selling should kick in again.

   You have to understand that the Crooks on Wall st. are not quite done unwinding their positions.  So we’re range-bound until they are.  Once that happens, though - we’re heading down in a big, ugly way.  There exists the possibility that we take out last year’s low of 666 on the S&P sometime in early 2011.  But, make no mistake, the market is out of gas, the Fed is out of bullets, and the jobless are now out of unemployment benefits, thanks to the Republicans in Congress who are cynically trying to derail any further progress in the economy so that they can use that to flush as many Democrats out of office as possible.  So - yeah - call me crazy, but I believe a coordinated effort by both Wall st. and the Republicans in the House and Senate will do everything they can to crash the market leading up to the elections in November.  Once they re-take the house, we can expect a seriously grid-locked government for the next 2 years.  

   If anyone remembers Bernake’s 60 Minutes interview from a few months ago, he was asked what he feared the most, and he replied, “A loss of political capital.”  Meaning he was afraid that Congress was going to stop letting him do what is necessary to help boost the economy.  And that, my friends, is coming soon to a theatre near you.  As exemplified by the Republicans forming a united front last week and threatening a filibuster of a bill that would have provided aid to the poor, the elderly and the jobless (including an extension of unemployment benefits.)  It’s gonna get bad, people.

   But, in the meantime, the market’s going up for the next few days.  Bet on it.

   P.S.  I suppose I should add that I did in fact sell my TZA and EDZ today (and, no, it wasn’t at gunpoint.)  I went long 20K shares of NLST for the Russell rebalancing, and it’s worked out great so far - up 15% from my buy-in price yesterday at the close.  I’d also like to add that today marked a milestone in my trading career - it’s been 15 straight days without posting a loss.  A record for me.  I’m up $28,400 for the month of June, and I’m aiming for $35K in total for the month (I have 3 more trading days to make that additional $7K.  The odds are long that I’ll make it.  But I can try.

Wed. June 16th, 2010

   And so we’re in the middle of an upward-correction within a greater downward correction.  A relief rally?  I don’t know what to call it.  A “the crooks on Wall st. who sold all those bear puts are going to make sure they expire worthless-rally?”  (That would be my guess.)  Whatever it is, it’s going to take us up to around the 1150 level on the S&P before people start selling in earnest.  Then the technicians can say we have a big, obvious head and shoulders forming, with the neckline around 1050 and 1150 forming the right shoulder.  And so but this low volume melt up will probably continue atleast throughout the week, I believe.  That’s my call.  My crystal ball only goes so far as Friday.

   I’m currently listening to FDX come in with their 1st qtr earnings, which are below analysts estimates.  They don’t offer any guidance - never have - but it doesn’t sound good.  And between them and BBY, I can’t think of a better barometer for the greater economy as a whole; if those two aren’t doing well, no one is.  

Those Who Can/Can Not Remember The Past - Are Doomed

   It can be argued, quite convincingly, that the great bull run since 1982 has been nothing but a succession of bubbles; equities, commodities, real estate, tech, gold, etc.  The bear market that started in 1929 didn’t really end until 1982.  If you look at charts for the DOW from 1929 until 1982, it looks like one long, flat line (in all actuality it went from about 250 to 850, which, in inflation-adjusted terms, was basically flat.)  What has happened since October, 2007 is that all the bubbles, at once, popped, and it was made abundantly clear, to paraphrase Buffet, that everyone was swimming naked, once the tide went out.  The reset button has been pressed.  But the world, as of now, is continuing to pretend it hasn’t.  How much longer this farce can continue is anyone’s guess.  In my estimation, not much longer.  

   A good example of how the market works contrary to reality is the short position that Bill Ackman took on MBIA in 2003, while at the same time releasing a detailed report on exactly what the charade that was their “earnings” consisted of.  For his troubles, he was ruthlessly investigated by not only the N.Y. Attorney General, but the SEC, as well.  And all the while the stock just went up and up, with the CDS spreads tightening and tightening.  What the problem was was that the market didn’t want Ackman to be right (or, another way of putting it, the market couldn’t afford for him to be right.)  It took over 5 years for his short position to pay off, and just as long for the market to realize that not only was he right, but that he was really just scratching the surface of the ponzi scheme that made up the global bond market, and the triple A-rated insurance that made it all possible.  

   My point is (have faith, there is one) is that the market could, in theory, continue to go up from here - there are more than a few analysts calling for the S&P to end the year anywhere from 1210 to as high as 1350 - in spite of the fact that it’s glaringly obvious that the whole she-bang is about to come crashing down.  Everyone with half a brain knew in the summer of ‘07 that the sub-prime mortgage mess was going to bring it all crashing down (the bond market began to fall to pieces six months earlier; spreads began to widen in February) and yet the market still went up to a dizzying 14K on the DOW as late as October, before it began a descent that didn’t really end until March 6th, 2009 (and I guess we’ll soon find out if that was, in fact, an end; or just an intermission.)  Total U.S. debt just hit $13T.  $2.1T bought us one incredible bear market rally.  But the GDP:U.S Debt ratio will hit parity in a little under a year, at this point.  Roughly $14.4T.  That, I believe, will signal the end.  Whether we get one more meaningful sucker’s rally from here remains to be seen (we most likely will, ala Nov. 21st, ‘08 - Jan. 2nd, ‘09.)  But it is as clear as daylight now that the game is over; it’s just that a few of the big boys aren’t done cashing in their chips yet.

   The current P/E (ttm) ratio for the S&P is 19.32.  Historically, it averages out to about 15.  In 1929 it was 32 - by 1932 it went to 6.  Conversely, in 1999/2000, it was a jaw-dropping 44 - by March, ‘09 it went to 15.  Meaning, it was priced just about right.  Yes, earnings have gone up substantially since then.  But, for the most part, those earnings were brought to you by a lot of factors, not a single one of which consisted of meaningful or sustainable growth.  Earnings will suffer over the next year, which means that, history aside, the P/E for the S&P will have to go down, to align with reality.  And I’m not even allowing for the certainty of a rate raise, which will occur within the next 12 months as sure as I’m sitting here writing this.

    The entire GDP of every country on Earth added up all together comes to roughly $65T - while the (unregulated) derivative market totals about $635T.  Which means that, if even a fraction of these bets were to go bad (and most of them already have, or are in the process of) the entire planet is bankrupt.  It’s as simple as that.  There is clearly no solution other than for the world to default and start over.  In what form?  I don’t know.  But capitalism - or what it has evolved into - has been proven to be predicated on a faulty model.

   By mid-2011 the S&P will be well on its way to breaking the low of March 6th, 2009.

Nowhere Near the Lows

As of this writing, Mon. May 31st, the S&P closed on Friday at 1098.  Barely below the 200 DMA and only 5% below the 50 DMA.  Whether it’s a severe bull market correction or a bona fide bear market we’re in the midst of, historically, the bottom will not appear until the index hits 13% below the 50 and 24% below the 200.  So, in keeping with my thesis, we’re looking at a bottom of around 900/950.  From a macro-perspective, all the fundamentals are in place for the market to keep going lower, even without the glaring, neon-lit warning sign that came in the form of the DOW having its worst May since 1940.

   A lot of technicians are looking for a set up for a head-and-shoulders formation, at which we are currently around the neckline, with the right shoulder possibly setting up to bring us to the 1140 range, and which would, at the same time, possibly lure in a few more suckers to sell to, as we head up there.  As I’ve stated before, for us to be able to convincingly state that the bull run was still in play, we would have needed to close for the month above the 200 DMA of the S&P - 1103 - that didn’t happen, and now, as every possible indicator is screaming out, it would appear that the path of least resistance is downward.

   So I’ll be looking to see if we get an oversold rally, bringing us up to the 1140 level, to form this right shoulder.  That’s where I’d short the ever-loving shit out of everything in sight.  (Except, of course, the gigantic position I just took up in NLST this past week around $2 - I think, no matter what, that thing is poised to run a LOT higher, and you couldn’t get me to sell with a gun pointed to my head.  Although this is not a recommendation.)

   The two major headlines I saw over the weekend were A) Bernanke hinting at a rate hike during a pre-recorded speech he gave at a conference in Seoul, and B) The shocking, shocking news that a real estate bubble in China had finally burst; the spread on dollar-backed bonds backed by real estate widened by a fairly impressive 209 basis points during the month of May, relative to treasuries.  This followed a 12.8% jump in real estate prices in April - YOY - in China.  These two bits of news are enough to put any global recovery in neutral, if not reverse, for the time being.

   I just see all signs point to down.  I keep looking for someone somewhere to counter my argument; to prove me wrong; to offer up a compelling argument backing up the other side of the trade… and there just ain’t one out there.   So far, overnight, the e-mini futures for the S&P have dropped 20 pts.  The bulk of the drop occurred after it was announced that China - the “engine of global economic growth” - has not been growing as much as was thought.  The Purchasing Managers’ Index fell to 53.9 in April, edging lower than the general consensus of 54.5.  The MSCI World Index has so far fallen 9.9% in May - the biggest monthly decline since February of last year (and we all know what happened after that.)  Again: all signs point to down.

   As if all that weren’t enough, it was announced yesterday that Hedge Funds posted their biggest monthly loss since the Lehman aftershock.  I believe 6.9% was the average number.  Even Paulson lost money last month.  What I believe that’s gonna do is cause the last holdouts, the last ones hanging onto the ballon, are about to let go and go short.  Part of me thought for sure that we’d get a pump up to the 1140 level, which would constitute the right shoulder of an impending Head & Shoulders.  But, as the futures would indicate, unless there’s another shocking turnaround at the open, I doubt we’ll get anywhere near that.

   As the saying goes, "You take the stairs up/and the elevator down…. "