Some current and former Goldman Sachs (GS) employees have a vexing problem right now - a Senate subcommittee panel. I tuned in yesterday and watched the investment bankers squirm and, for a moment, felt sorry for them, then remembered they are all multi-millionaires and get paid to take the heat. They were pretty cool customers, and I don't blame them. A slip of the lip and they could end up in stir somewhere down the road, especially when the SEC gets their mitts on them. One thing I got out of the grilling was that Goldman Sachs (GS) is probably not the only bank at fault, and there is plenty of blame to go around for other institutions too big to fail. These bankers will surely get cut down to size in other bare-knuckle brawls as the fraud unfolds. I also thought they should have put the senators on trial because the Senate is at fault also for repealing acts like Glass-Steagall and passing legislation that would allow people with no visible means of support to purchase homes.
The market sold off yesterday with a confluence of news in addition to the Goldman Sachs (GS) sideshow. Most notably is the ongoing story that some of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) may default on their bonds. The main focus right now is on Greece, but Portugal may be the next to go causing a cascading of bad debts across Europe. I'd tell you that this will cause the correction I've been looking for, but my short theory has been shot full of holes so far. This market has got it going on, and although the shorts had a good day yesterday, it's been eight straight weeks up for the DOW and doesn't look like it is anywhere near winded. Although the DOW, NASDAQ and S&P 500 have had enormous gains since the lows of March 9th, 2009, it is the Russel 2,000 that has moved the highest on a percentage basis, more than doubling in 14 months, going from the low of 343 to reaching 741 last Friday.
I've got some skin in the game with the Russell 2,000 because I'm invested in the Direxion Small Cap Bear 3X Shares (TZA) which is leverages 300% to the downside of the Russell 2,000. If you have been following this blog, you are well aware my initial investment is down almost half since October of 2009. As foolish as it sounds, I'm still long this ETF because I firmly believe that we are in for more than a correction and the Direxion Small Cap Bear 3X Shares (TZA) will give me tongue wagging returns. This is because small cap stocks have a high beta and when the market goes up, you make a lot of money if you are long and lose a lot if you are short. The converse is true to the downside. When I say that I am long a short position, what I mean is that I am holding that stock or inverse ETF until I feel it is fully valued. Hopefully that will take longer than 12 months to take advantage of long-term capital gains. I lick my chops every time I look at the historical prices of the Direxion Small Cap Bear 3X Shares (TZA). At the market low on March 9th of 2009, the ETF was priced at $113.50. On April 23rd of this year, just a few days ago, it closed at $5.41. If we do get a double dip in the market, I can get close to a ten bagger if the market goes down in small increments.
The reason I need for the market to go down in smaller increments as opposed to crashing like we did in October of 1987 is because the ETF is priced on a daily basis and at roughly $5.50 a share, the Direxion Small Cap Bear 3X Shares (TZA) would only go up 100% to around $11/share if the Russell 2,000 would crater 33% in one day. A grinding correction, like the grinding rise we are currently experiencing, will give you a bigger bang for your buck. It's just plain old arithmetic. In the meantime while I'm waiting for the market to tank, I'll thank the SEC for putting Goldman Sachs (GS) in the spotlight. In the long run, this can't be good for stocks.
Wednesday, April 28, 2010
Sunday, April 18, 2010
Pandora's Box
It's not quite time to strike up the band if you are short the market, but Friday's SEC charges against Goldman Sachs (GS) for fraud may have put the brakes on the market's rapid rise the last two months, if not last year, especially if you take into consideration the cockroach theory. For those not initiated with the cockroach theory, our friends at Investopedia will give us a quick definition: "A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that there are many more that remain hidden.". Goldman Sachs (GS) is probably not the only bad actor in the drama that has been unfolding since 2008. The SEC may very well have their sights set on other ne're-do-wells in the investment banking community which only causes more distrust and angst on Main Street. Retail investors reluctantly coming back into the market was a big reason the pundits thought the market could ratchet up another leg. That is now a dubious proposition. The genie is out of the bottle.
There is that famous line by Gordon Gekko played by Michael Douglas in the movie Wall Street that goes something like: "If you want a friend, get a dog.". It's too bad we have to stereotype investment bankers this way, but a few bad apples at white shoe firms like Goldman Sachs (GS) have done a lot of damage to the IRA's, 401(K)'s and pension plans of many middle class Americans. No matter how well-heeled these bankers are, they should be held accountable for the damage they've done. Just when the market is going gangbusters and people are recouping their losses, the SEC has a score to settle and this is going to take us back to square one. At least that's how I see it. It may not happen overnight. It may very well take a few more months of treading water, but this market is going down. I don't want to rain on anybody's parade or sound like a Dutch Uncle, I'm just examining the facts and, fundamentally, the market is extremely overvalued. It just needed an excuse to correct and this may be the catalyst I've been looking for.
We all know that Mother Nature can be a cruel mistress, and another wild card here to stop the levitation of the market is the volcano eruption in Iceland. Air travel over most of Europe has come to a standstill - no imports, no exports, at least by airplane for the foreseeable future. That can't be good for business. Our economic relationship with Europe is no shotgun wedding. The short squeeze that took place the last two months that goosed the price of stocks may well be over. The locomotive may very well have jumped the tracks and diverged from the predicted path of DOW 12,000 by early Summer as some pundits have projected. You don't feel like you've been had with the volcanic eruption like you do with the Goldman Sachs (GS) grift, but still, it could very well put the market in give back mode. We'll see what happens this week. There are still a lot of earnings to go through and the market is sound according to the technicians. It is fundamentally where the market is weak such as the high P/E ratio and low dividend yield that I've been writing about.
There is that famous line by Gordon Gekko played by Michael Douglas in the movie Wall Street that goes something like: "If you want a friend, get a dog.". It's too bad we have to stereotype investment bankers this way, but a few bad apples at white shoe firms like Goldman Sachs (GS) have done a lot of damage to the IRA's, 401(K)'s and pension plans of many middle class Americans. No matter how well-heeled these bankers are, they should be held accountable for the damage they've done. Just when the market is going gangbusters and people are recouping their losses, the SEC has a score to settle and this is going to take us back to square one. At least that's how I see it. It may not happen overnight. It may very well take a few more months of treading water, but this market is going down. I don't want to rain on anybody's parade or sound like a Dutch Uncle, I'm just examining the facts and, fundamentally, the market is extremely overvalued. It just needed an excuse to correct and this may be the catalyst I've been looking for.
We all know that Mother Nature can be a cruel mistress, and another wild card here to stop the levitation of the market is the volcano eruption in Iceland. Air travel over most of Europe has come to a standstill - no imports, no exports, at least by airplane for the foreseeable future. That can't be good for business. Our economic relationship with Europe is no shotgun wedding. The short squeeze that took place the last two months that goosed the price of stocks may well be over. The locomotive may very well have jumped the tracks and diverged from the predicted path of DOW 12,000 by early Summer as some pundits have projected. You don't feel like you've been had with the volcanic eruption like you do with the Goldman Sachs (GS) grift, but still, it could very well put the market in give back mode. We'll see what happens this week. There are still a lot of earnings to go through and the market is sound according to the technicians. It is fundamentally where the market is weak such as the high P/E ratio and low dividend yield that I've been writing about.
Friday, April 16, 2010
Down at the Heel
Weekly jobless claims were released yesterday morning and it wasn't a pretty picture. As summarized in the Carnegie Management Group Hotline Report: "Weekly jobless claims rose by 24,000 to 484,000, and higher than the consensus estimate 440,000. The four-week moving average climbed by 7,500 to 457,750. Jobless claims are reverting back to an upward trend. The unemployment rate of 9.7 percent will also revert back upward and back above 10 percent soon.". You need jobs to sustain a recovery because without jobs, people will stop buying things, especially discretionary items. Let's not forget that 70% of GDP is consumer spending. Now, you may be saying to yourself that retail sales were good for March and you'd be right. But don't forget that Easter came early this year and personal savings rates are decreasing at an alarming rate. According to the Bureau of Economic Analysis (a division of the Commerce Department), personal savings decreased from 3.4% in January to 3.1% in February. This is down from 5% in the second quarter of 2009 and 4% of the third and fourth quarters of that same year. People are taking from Peter to pay Paul.
We have a long way to go before we are out of the woods in regards to the employment rate. Check out this piece of information by Daniel Gross from an article entitled "America's Back! The Remarkable Tale of our Economic Turnaround" in the April 19th issue of Newsweek: "To recoup the 8.2 million jobs lost since December 2007, it'll take four years of growth at 170,000 jobs per month. And by definition, it's hard to identify the next transformative economic force - the next steam engine or interstate-highway system.". Granted, we do have growth in the clean energy or green tech sector, but it is more of an evolution than a revolution. The same holds true for mobile Internet technology, whether it be hardware, software, services or the build-out of the infrastructure. The iPad may be a thing of beauty, but it won't be the cause of massive hirings nationwide as some pundits claim. We have an economy that is being propped up by the government and once it exits the picture, there will be nothing to sustain the rebound of the stock market. We just don't have the jobs to support it. It's a sleight of hand, now you see it now you don't illusion that the economy is doing well. As soon as the little guy, or retail investor climbs back into the market to reap big gains, it's going to crash and burn. Those days are almost upon us.
We have a long way to go before we are out of the woods in regards to the employment rate. Check out this piece of information by Daniel Gross from an article entitled "America's Back! The Remarkable Tale of our Economic Turnaround" in the April 19th issue of Newsweek: "To recoup the 8.2 million jobs lost since December 2007, it'll take four years of growth at 170,000 jobs per month. And by definition, it's hard to identify the next transformative economic force - the next steam engine or interstate-highway system.". Granted, we do have growth in the clean energy or green tech sector, but it is more of an evolution than a revolution. The same holds true for mobile Internet technology, whether it be hardware, software, services or the build-out of the infrastructure. The iPad may be a thing of beauty, but it won't be the cause of massive hirings nationwide as some pundits claim. We have an economy that is being propped up by the government and once it exits the picture, there will be nothing to sustain the rebound of the stock market. We just don't have the jobs to support it. It's a sleight of hand, now you see it now you don't illusion that the economy is doing well. As soon as the little guy, or retail investor climbs back into the market to reap big gains, it's going to crash and burn. Those days are almost upon us.
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