trader's market commentary

It’s consensus, stupid

Consensus is the point when most market participants, particularly of those institutional ones reaches a relative similar opinion about a company, a sector or economy, on FA side, and TA helps with its technical assistance.

When consensus is reached, the capitulation point in price can not be too far away.

I still remember the excited and flush faces of friends when market bid up $100 higher intra day just to get a share of YHOO, at a time when the whole world is afraid of missing the internet train.

Needless to say, all the money in market participants’ pocket had been pretty much exhausted at that point to pay for the hourly inflated internet train ticket.

The most recent one is the goldilocks US economy coming out of the last summer correction, and the major indexes’ spectacular steady and non-stop rise since mid of July, 2006, until Feb 27, 2007.

It’s always hard to TA an exact time point when a market consensus is reached.

Nevertheless, on Jan 3, 2007, Briefings.com had the following piece published:

The Outlook for 2007, 010307 (subtitle added)

GDP growth
“Our forecast is that real GDP growth will be near 2% in the first quarter, but will then slowly increase back towards the long-term trend of 3.1% as the year progresses. “
“Consumer spending will remain steady due to the strong labor market, and business investment trends will pick up as the year proceeds. The housing sector will even rebound late in 2007.”

Earnings
“For 2007, we are forecasting that profit growth will drift towards its long-term trend of about 7%”

Inflation
“Core inflation looks set to track near 2% to 2 1/4% in 2007.”

Fed
“The economy is on a reasonably solid footing, and if the Fed needs to lower rates in 2007 to get growth back towards long-term trends, they will.”

Goldilocks
“The economy and earnings growth have returned near their long-term trends. Inflation and interest rates, fortunately, have remained below longer-term trends.”

The corresponding capitulation price point:

On Feb 20, 2007
Dow closed at historical high, with intra day high of 11,795.

S&P500: intra day high of 1460, 90 points short of the historical high of about 1550 on Mar 24, 2000;

Nasdaq: intra day high of 2531, about 2500 points away from its historical high of about 5078 on Mar 24, 2000, but still a all time high since 2001

The most recent “stagnation” consensus

Let’s just change a few words from phrasing goldilocks consensus, without getting into numbers:

“The economy and earnings growth will be below their long-term trends. Inflation and interest rates, unfortunately, will be above longer-term trends.” For how long? as long as subprime goes, 2007 and 2008.

The subprime and its suddenly gained fame in financial market reminded me of “Phantom of Opera”:

The phantom usually comes out at night only with a mask, and he told the girl who always wanted to see his true face, “close your eyes and use your imagination”.

I would guess market has imagined all possible worst faces about stagnation around Mar 14, 2007:

Dow: intra day low of 11939

S&P500: intra day low of 1363

Nasdaq: intraday low of 2331

Now, about one month later, the indexes, particularly S&P500, have pretty much recouped all the losses since then.

Is market now going away from stagnation consensus?

Given all the excitement about CCP200 and world decoupling from US, I still don’t think anybody can bail out US financial market except US economy itself.

Now I remember a book about Premier Zhou, “Too heavy to call him father”.

In addition to my jargon list of CCP200, PA, etc, I also label bond market as “I”, since it is probably more institutional, informational, more accurate on interest and inflation and therefore growth rate, and Fed being “F”, federal judge, and stock market being “E”.

We all know stock market better, more earning oriented, employment , Joe or growth oriented, and of course, more emotional than informational.

As far and much as “I” and “F” can see, growth is going to be sub-par, until subprime goes away; And inflation is still stubborn.

Against this backdrop, will stock indexes continue its current impressively bullish formation and challenge the record high on Feb 20, 2007? “we are not far away from there, we can see the red star atop of Kremlin”.

German soldiers finally retreated.

Guess is still a guess, at its best. Let’s see the face of market when the mask is off.
marketreflections.com
 
Rally into summer?

Stock market extended its rally, with strong international tailwind, M&A, and everything else. I double even if a bad CPI tomorrow could stop bulls.

Market FA consensus of “stagnation” has not changed

Goldilocks at the beginning of the year:
“The economy and earnings growth have returned near their long-term trends. Inflation and interest rates, fortunately, have remained below longer-term trends.” (briefings.com)

Stagnation now:
GDP growth for 2007 is going to be sub-par: Q1 1.5%, Q2 0% and Q3 2.5%,
Earnings: Q1 between 3-4%, Q2 and Q3 5% or lower
Real economic growth may not return to the long-term trend of 3% until late this year or even 2008. There is a very real risk that earnings growth in the third quarter will go negative. That would impact long-term expectations for profit trends, which are worrisome in any case.

Inflation: PCE is likely back up to the cyclical peak of 2.4%.

Fed and rate: Expectations now are for stable Fed policy for the foreseeable future, possibly through year-end.
Accordingly, Briefings.com is now “close to lowering our market view to Neutral from Moderately Bullish.”

Stagnation consensus has not changed, but where is the upper limit for stocks after capitulation on downside on Mar 14, 2007?

TA wise, stock market could be now exploring upper limit.
As said in my previous post, the capitulation point of “stagnation” for stock market was very likely on Mar 14, 2007, and I had talked several times about that the current correction’s bottom had been possibly reached in my earlier posts.

Now, stocks are looking upward, looking for and testing the upper limit, after reaching its lower limit on Mar 14, 2007.

Similarly in bond market, Instead of a steepened yield curve, reflecting “lower growth and higher inflation and future uncertainty”, the curve has flattened in the past several days,
Bonds: RSI of 10-year notes on April 13 fell to 27.4, on a scale of 0 to 100, with readings below 30 indicate the note oversold and likely to rise, while readings above 70 indicate it is ``overbought'' and prices will likely fall.

The strong bullish international tailwind also helps

European economy and market have been impressively stronger than expected.
The spread between US 10Y bond and that of German narrowed to 53 basis points on April 13, from 109 points a year ago.
This adds pressure to USD but bullish tailwinds for US stock market.

Enjoy the rallies before summer comes

Whatever is behind the stock rally, technical, emotional, forward looking, etc, enjoy it until it stops, likely sometimes in the summer. The following is from Briefings.com:

“There is a lot of wisdom in old adages. One of the most well-known in the stock market is "sell in May and go away."
The fact is that over the past fifty years, the entire gain in the S&P 500 index has occurred in the months of November-April. The six months of May through October have produced no net gain. There is no easy explanation for this trend, but there is also little reason to fight it.

This pattern has been clearly evident the past three years.
In 2004 the S&P dipped in late April and was no higher in mid-October than on May 1. In 2005, the S&P started declining in early March and by mid-October was still lower than eight months previous. Last year, the market rallied through April, then declined steadily through mid-July. At that point, Fed Chairman Bernanke testified before Congress and indicated that the rate hike cycle was over. That important fundamental factor allowed the summer doldrums to be cut short.

This year, there may be no saving fundamental - such as a rate cut. There is a very good chance that the summer doldrums set in as in recent years. The fundamentals certainly warrant the market taking a breather.”
Marketreflections.com
 
Goldilocks back, correction over

“Street smart” is ahead of “mind of market” this time:
Core CPI: 0.1% vs. expected 0.7%;
New home starts 1.518M vs. 1.5M
Industrial production: -0.2% vs. expected -0.1%
Capacity utilization (a key gauge of inflation): 81.4% vs. 81.8%

Inflation may be topped out, and growth may be bottomed out, is that what stock market has been telling us recently?

So, somehow, stock market priced in the worst possible imagination of growth risk and inflation risk in the middle of March, 2007.

Passing and recovering from that capitulation point, stock market somehow figured out that “stagnation” may be nothing but an imagination, a “phantom of opera”, who can be only seen when and if you “close your eyes and use your imagination”.

When market participants opened their eyes again, they see things may not be as bad as they imagined. I think that very likely the market is now moving away from stagnation consensus, and back towards goldilocks consensus on FA side. In that sense, the correction is over.

I started some positions in TSL and SOLF today, and let’s see how US stock market rally leadership is going to be contracted out to CCP200, at least partially.
marketreflections.com
 
The Phantom of the CCP200 Solar

I would advise anyone to see “The phantom of the opera”,
which is now the longest running Broadway show in history, and the most lucrative entertainment enterprise of all time.

But it would probably be a bad IPO, with all the revenue and profit curve already flattened out, no room for imagination left.

“Close you eyes and use your imagination”, Eric, the phantom of the opera, told Christine whom he admires. Eric, being physically deformed, always wears a mask.

NTES was the phantom of the CCP200 internet, up to late 2005, when it topped out and never fully recovered. With imagination gone, I don’t know how long it will take NTES to go back to 25.

Chfriend03, one of the pan pals at NTES’s chat room in Yahoo, a brilliant Chinese Professor in LA area, made a fortune of about at least $20M or more in NTES and UHAL. Chfiend03 had mind power, he somehow figured out numerical boundaries of imagination power of market for NTES in 2002. He has since then became a phantom, where are you now?

Power of imagination is powerful, but limited in duration and fixation, and it loves phantom only, but noting real.
When Eric finally takes off his mask , Christine left.

Just off IPO at the end of 2006, I would think CCP200 Solar (I have positions), with their masks still on, will have many Christine type admirers for a while.

Market today: volumes continue to pick up in very likely another follow-through day, as market participants going away from phantom of stagnation, who dropped off the mask today, at least partially. If this is a positive FA change powered rally, why shorting it?
marketreflections.com
 
TSL & SOLF: its growth, stupid

Some readers complain that I don’t recommend stocks, playing macros only, although acknowledging my “correction pick” of CAF, FXI, etc.

Since yesterday, I started talking about stocks such as TSL, with US market’s most recent correction behind us.

Growth story is forever the “day dream” of the stock market, and inflation always the nightmare of bond market.

Therefore, growth is a must to me when picking stocks, not dividend.

Now, let’s look at TSL and SOLF of CCP200 juniors, in comparison to the number 1 of IBD100, all energy-related.





solf pe 166 peg 3.608696
rev($M) earnings
2005 21.02 0.14
2006 80.48 282.87% 0.44 214.29%
2007 275.7 242.57% 0.79 79.55%
2008 1.15 45.57%





tsl pe 68.6 peg 0.589744
rev($M) earnings
2005 0.41 0.15
2006 27.28 6553.66% 1.25 733.33%
2007 114.5 319.72% 1.65 32.00%
2008 270.08 135.88% 3.58 116.97%




btj pe 29 peg 1
rev($M) earnings
2005 18 0.3
2006 32.59 81.06% 0.86 186.67%
2007 46.83 43.69% 1.61 87.21%
2008 58.67 25.28% 2.09 29.81%



Needless to say, TSL is worth 116, if market is paying BTL 29 now, peg wise.

FA is just part of the story, IA is the other half, IA being imagination analysis.

Dreaming points about TSL, domestic and int’l market, green Europe, Gore of US, energy, power, CCP200 junior , etc, When TSL is going to be on Cramer Mad Money Show?

I hope somebody benefited from my yesterday’s “phantom of CCP200 Solar”.

Please be noted that I usually have positions when recommending stocks.

marketreflections.com
 
Short squeeze not over, rally has room to go

The market is playing the script of the last summer: correction started with “stagnation worry”, and the market slowly but steadily recovers from and passes the capitulation point on downside, moves on and eventually creates new record high, with Nasdaq dragging behind.

I guess a lot of institutions like hedge funds this time bought Gross/Steven’s macro play and still sitting on the huge short positions on US equities. They never paid and believed “goldilocks macro”, at least this time around. Some of them probably got hit twice, last time as well. Line can only be connected at three points, with last one as confirmation?

The reality is here but hard to believe for bears: while the rest of the decoupled world is boarding on the “growth train” and moving forward, as the recent G7 and IMF have declared, how bad US is going to “stagnate”? Remember what I have said in my posts about politicians are “smarter” than traders? If G7 leaders believe world economy is going to continue growing at the strongest pace of past 30 years, it may not be just politics talks.

Somehow, I think, the market has moved away from “stagnation consensus”, and is perhaps checking out “goldilocks consensus” now, particularly with inflation nightmare gone for now in bond market.

I would not short this market and would try to cover whenever possible.

As to Nasdaq’s lagging, that’s nothing but basically a reflection of lack of “growth stories” of US economy.

Nasdaq’s glory day will return, some day, perhaps with “break-out” in life science related industries. I still think that might be the next “big thing” which could happen only here in US, nowhere else. When that happens, I imagine Nasdaq to establish buy point above 5000 level.

Until then, Nasdaq will be and better be solidly “basing” for a while. Meanwhile, let’s look for growth from CCP200, particularly junior ones.

Marketreflections.com
 
TSL, SOLF, and Nasdaq 5000

First on today’s market:
Major indexes except for Nasdaq continued marching forward, with Dow Industrial breaking record high and Dow Transport following closely behind on a much stronger volume, making those “Dow Theory” believers happy.

Watching those smart, ahead-of- curve, bears-turned bulls (Citadel and its alike, I guess) stepping on the shoulders of those unlucky and captivated bears (short-coverers), climbing the wall of worries, I thought of the scenes of CCP movies, when the solders climbed on each other’s shoulders (very often those captivated from KMT side, I would guess) in breaking the resistance line on top of them, typically seen when they launched an attack on a citadel.

The following is from My post on 031407, “Tiemei’s Uncle”

“Just like market tops out when bulls start eating bulls, market probably will bottom out this time as well, when bears start eating bears. When bears start buying, it may be the time for a reversal. In that sense, bear may be the uncle leading us out of the correction.”

Second on the industry of clean and green energy and PBW, its small-cap growth ETF

“The small-cap growth exchange traded fund tracks the performance of the WilderHill Clean Energy Index, which focuses on clean and renewable energy providers. Founded by former environmental technology researcher Robert Wilder, the two-year-old fund comprises 43 stocks with a total average market cap of $1.2 billion. It's the largest of its kind.” (IBD)

“the fund's Earnings Per Share jumped 74% last year from $12.86 in 2005 to $22.38 in 2006”(IBD)

Chartwise, PBW has climbed out of the cup into which it fell since Feb 27, 2007, and is working on the handle now.

With world economy on a growth train and increasing demand for energy, concerns over the availability of natural resources and environment, and a coming back stock market, PBW’s breakout may be near.

Lastly, CCP200 juniors’ manufacturing edge and US mind base

Although clean and green energy is some kind of “high tech” with its silicon stuff, it is probably more of manufacturing play than a pure “high tech” play.

As such, I would say CCP200 juniors in these field such as TSL and SOLF may well have some kind of competitive advantages, like that of China in general as world’s manufacturing base.

While China is becoming world’s manufacturing base, the “mind base” is still largely here in US. Mind power doesn’t just fly from education, R&D, “high tech district”, import of world class scientists, senor party membership, etc.

Mind power comes very often from mind powers, from a free, liberal, fearless and nurturing humanitarian environment. Extremely speaking, freedom may be a wasted assets for most of us ordinary folks, but it is a prerequisite and it has to be everywhere, like air and water, to bring about minds of Bill Gates and his alike.

That would be a real challenge to CCP, or its next generation.

In that sense, I think we can still see Nasdaq break out above 5000, in our life time. You just have to do it.

Marketreflections.com
 
Red paper bear from china: not so scary

Nevertheless, it gapped down major stock indexes, who then realized that CCP bear is a paper one, just like that of US tiger. The indexes have since then been running iterations of “cups with or without a handle” , along a slowly sloping upward line, still bullish as of noon.

I never question CCP’s ability to handle anything such as GDP, CPI, three representations, ballistic missile, Olympic, etc.

The real challenge to future CCP generations is how to allow enough standard deviations for its otherwise highly “normalized” population, which has currently almost no standard deviations allowed on either side of CCP center.

Without enough standard deviations allowed, there will be no imagination. Just like today’s TSL and SOLF, you have got to allow them fly, with heads either up or down, and that is ok.

For bonds, you almost have to be a “party member” to get into the “elite” trading game, where volume matters, not imagination. How far you can imagine beyond Uncle Fed’s GDP and CPI estimates for 2007?

CCP is smart, no doubt. It allows many junior and non CCP 200 to play in the economic sectors out of CCP200’s interest, giving some vitality to its economy. Politically, it starts to have some non-CCP or people with secret CCP membership card to hold minister level positions in government.

In the sphere of minds, CCP is still struggling. I am sure CCP understands that they really cannot manufacture “Bill Gate” type of people, the way they produce “HU” style secretary-general, starting the process from CCP’s National Youth Committee.

Freedom is really expensive to rulers of any nation, including US. It is a challenge to their IQ and EQ.

The lack of freedom, as limited and wasteful as it could be, is even more expensive for a nation: Without “Bill Gates” types, there would be almost no Nasdaq; without Nasdaq, where US would be?

Back to the three slowly sloping upward lines, I would imagine that there would be quite a few bears trigged by CCP paper bear and jumped into a bear trap this morning. Will they get a chance to cover today?

Marketreflections.com
 
Rather being “topped out” than being “left out”.

Per Britisch Banker’s Association, total notional volume of the credit default swaps was at $0.18T in 1997, $0.586T 1998 $0.900T 2000 and $4.8T 2004, $8.2 trillion by 2006.

This is “financial revolution” according to bulls, and “abuse of credit/risk” for bears. For Fed, it helps it to stay on “no rate cut” bias, while cooking “goldilocks”.

Abuse of money is similar to abuse of power, such as Paul Wolfowitz's role in a promotion he arranged for his girlfriend.

How about Mr. Chen, the ex-CCP Shanghai boss?

So, “abuse” is kind of human nature thing, human being an imperialist or communist.

For more ordinary folks who have no political power to abuse, they sometimes buy and abuse “substance”.

For folks with more money, you can be a market maker and “promote” your buddies, if not girl friends.

For small traders like me, I often abuse keyboard, trading too much, knowing that “to be successful is to be bored”.

TA wise, mindset and behaviors of “abuse” is like an “upward or downward channel/train”. We think we are smart, we can ride it and jump off, just before it starts to reverse.

Any “channel/train” will reverse eventually per common sense, it’s just hard or impossible to time it. Very often, our greed and ego refuse advice of rationality. We all prefer to being “topped out” than being “left out”.

As to bulls in stock market, today they are likely to have another “record high”, and “high” often comes from substance abuse, according to bears.

Bulls may have started the abuse of substance, but far from being “drunk”, and bears still have to keep buying to cover.

Still, bears definitely deserve at least a brief “break”, no doubt. The question is always about when and how.

“One thing noticeably evident today, that has been absent over the last three sessions, are bullish market internals. Advancers outpace decliners on the NYSE by a nearly 5-to-1 margin while those on the Nasdaq hold a nearly 3-to-1 edge. Decliners have held a slight edge everyday this week except Monday.”(briefings.com)
 
How not to get left behind: follow the Financiers

Not banks or bond guys, they are bears by definition and sometime they look back-forward more than forward. Per WSJ, Asha Bangalore at Northern Trust thinks “trends in unemployment, core inflation, economic growth, and the factory sector are similar to the situation in 1995”. 1995? that’s was about 6 years prior to China’s joining of WTO.

By the way, I like the analysis of folks at Northern Trust, although very often they are more bearish than bullish.

And another analytical bear, one of Gross’s deputies at PIMCO, recently started talking about that the “"The Fed’s current obsession with the 1%-2% range is not a matter of econom¬ics, but of religion." Understandably, Gross’s huge bet on the front-end of yield curve is like sitting on a huge short positions on US equity index.

“Follow the Financiers” really means following the analytical stock market bulls, and one of them is Henry McVey of MS. McVey managed to escape the most recent correction when he moved into cash thinking the stock market was “two complacent” before Feb27, 2007, if I remember correctly.

Currently, McVey ‘s view is “ that as the US economy slows, international growth will be sufficiently robust that certain cyclical stocks can still do well. If Steve Roach is correct and the slowdown is worse than we expect and global growth also stumbles, we would be wrong to be overweight energy and capital goods. So this is an important question to debate.”

US bulls are betting that the rest of world economy is decoupling from US, and US economy would not stagnate too bad and too long behind.

If Northern Trust or bond guys are financially conservative, then some influential US financial media which are followed by many retail investors are strangely politically conservative. They call CCP “Chinese rulers”, and claim Shanghai Index “did not even exist not long ago”.

Partially because of their bias, some of my readers could not understand what is CCP or CCP200 (Shanghai Index).

Yes, CCP is Chinese Communist Party, “the Chinese rulers”, and please tell me, which sovereign government is not a ruler of its nation, more or less?

Brilliances as well as ignorance doesn’t seem to change very much weather times goes forward or backward.

Around about 1800. “French ruler” Napoleon already figured out that:


“Money has no motherland. Financiers are without patriotism or decency. Their sole object is gain."

Marketreflections.com
 
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