The Credit Crisis Financial Stocks Short Journal

As far as breakaway gaps go, the stop is supposed to be placed above the high of the bar prior to the gap. This would be about 1012 on ES. So the pattern has not failed, these latest news on jobless claims shows that the second derivative improvements might not became first derivatives improvements as fast as people think(Some are saying we will see payroll growth in the coming months), at least in the labour market
 
The Philly Fed with data received though August 18 shows inventories at +0.3 from -15, I'm growing more leery of this idea of some huge inventory build. We could see inventory drawdown stop then not move or only slighly go up. July data was a drawdown August is flat, for the NY area, both months inventories went down(A lot, and margins went down too, we are seeing manufaturing not interested in doing business)
Margins also contracted with priced paid at +10 but prices received at -1.5
 
What were some of my big mistakes in 2009?Here are some

-Not predicting that the Obama adm would choose the zombie bank route. In the report 'Geithner will own XLF' I stated that this was unlikely because of statements made by the government(Including members of congress stating nationalizations would have to occur). There was also widespread consensus among experts that it was an inferior path.
Yet they choose to stick to the zombie approach by: suspending MTM, accepting bank managements pre-tax earnings estimates be plugged in the stress test, using not so stressful assumptions in the stress test. As a result bank credit is going down and standards tightened. I should have realized they would not have the legal authority to do anything other than keep the zombies around(But now I'm getting my cash back with interest as the tight credit will make fed funds stay low for a long time)
 
-Shorting GS. Perhaps the bulls were on to something when they stated MS and GS would be better off because they dont own loans but mostly securities that were written down a lot. However my thesis was the goldman would not have the earnings power to sustain at high levels. The stress test suggested $1b in earnings till 2011, they might beat that. Perhaps the goldies low balled their pre-tax earnings to the government in order to be able to say 'see we beat estimates'
 
-Not taking profits more aggresively in Mar in my shorts. It was an extension of the first mistake. It seems likely the government would not go the zombie route, that meant massive dillution for bank stocks(either government dillution or forced private dillution). Yet they choose the zombie path. I choose to go long SPY against the shorts till the oversold condition was cleared. I did that but the zombification fueled a reflexive rally that became V shapped recovery hopes and it just kept going
 
-Not integrating TA enough and countertrading through put buying in late Mar and Apr. At around 810 in the ES. Simply a result of having come off a period of sizable gains this made me too confident. If I had sticked to a simple MA rule I probably could have decreased the losses, although I still would have lost some
 
Did I made a mistake by buying financial puts monday instead of buying the ES to break the 50MA?Well I'm not so sure, we did had a breakaway gap blowing through support, by the time it gets to the MA the VIX should be quite higher. At these levels put buyers are getting quite a deal in terms of payoff-risk ratio. We are just before the worst two months of the stock market and I have a hunch the market has priced this inventory bounce to perfection
In other words I dont even need to be right 25% and I will still cash in. If wrong I will just lose 2.5% of my networth, if correct by a lot, I can make multiples of that
 
There is one more reason to not wait. By being wrong I get an even better deal. If ES goes to 1100 and VIX to sub 20, that would take the market from quite overvalued to ridiculously overvalued so my R/R for put buying there would be massive
I truly only get hurt in a bubble scenario, but bubbles are the exception and rare
 
So the Philly Fed and the Empire state manufacturing report didnt show that inventory bounce that people are expecting at all. If we dont get that this Q that is quite possibly the catalyst that send this market in correction mode, possibly all the way down to 750-800. For the folks who think 'news wont matter' 'fundamentals dont mean squat'
I can show you this

econsurprises1.gif

http://www.hussmanfunds.com/rsi/econsurprises.htm

Note that the folks who say the stock market is not the economy are correct but the economy drive earnings and a big earnings miss in terms of the macro picture(which a lack of V recovery will cause) should lead to an adjustment in equities. In recoveries US corporate profit growth is usually 6x GDP growth(Source: Barron's)
 
The hawkish Fed member Bullard(and 2010 fomc voter) is saying 'I don't think markets have really digested what that means' the "extended period" term
http://www.reuters.com/article/ousiv/idUSTRE57K5LL20090822

They look at fed futures to see what are the market expectations(and not the 2y note). So there you go, a guy who will vote in 2010 and is quite hawkish thinks fed futures have value, Don Kohn also sounded dovish. It doesnt get any easier than that. fed futures are up 2bps right now even with equities up, at least they are showing some signs of rationality
 
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