Most of the participants that missed the lows in early March are now looking for those winning lottery tickets that may have been neglected by careless traders. The only problem is the observant players have already made their money and have locked in their gains. The “easy money” is over.

Seasonally, we are in a bearish period, although if the bulls want to kick off a sustained, secular bull market, they have to exert a great deal of firepower to extend this rally into August. If this happens, then we’ll be in the early stages of a secular bull. With continued weakness in the US Dollar, I remain bullish on oil and gold, and neutral on bonds.

During the course of this rally, technology, retail, housing, and cyclicals all led the way up. These sectors have now broken their relative strength uptrends, which had remained intact since those March lows. The groups holding onto their relative strength uptrends, albeit with very little breathing room, are: financials, agriculture, chemicals, oil drillers, and emerging markets. I continue to favor emerging/frontier markets as well. Global stock markets have become more correlated over the past decade. Generally when the S&P 500 has risen in a secular bull market, it tends to underperform the global equity complex.

The 10-day moving average of the put/call ratio is still moving up (which is bearish for the market). But here is the chart of the daily ratio, which shows how high Friday’s reading was in comparison to the last few months.

Aside from the macro backdrop that may or may not be causing a pending market correction, there are several trades popping up on my proprietary models on both sides of the market. So there are NO excuses to be purely directional when you’re proclaimed to be a market neutral Long/Short trader.

On the macro front, I’m generally in-line with the coordinated re-inflation of global economies via the debasing of their respective currencies. Therefore, I’m bullish long-term on things like Oil, definitely Gold, Dry and Wet Bulk Carrier fleets, Railway stocks, and Silver (perhaps more than Gold). But I’m not bullish on base metals that go into manufacturing, such as copper, aluminum, steel, etc… There’s WAY TOO MUCH production capacity or acquisition debt added at or near the top of the credit bubble, and the adjustment, although already taking place, is going to be a painful one and has a ways to go. If you want to be truly market neutral here, you would be long the producers, oil futures, gold futures, and silver futures, while short the Steel producers, copper, and base metal producers in general.

SHORT TRADES

ADI: Has moved way above all of its major averages on consistently declining volume: negative divergence #1. Money Flow turned down on Friday’s new high: negative divergence #2. Momentum Oscillator failed to make a new high relative to the new high made in early December ahead of this consolidation: negative divergence #3. The Secondary Trendline is around $34 while the 10-period daily EMA is at $31. So there are actually two ways to play this: If there is a fall in the market early in the week, pick up a small lot near the $31 level and use the 10-period as your stop. The other way is to short the stock as it approaches the $34 level.

ATHR: This telco play is directly on its all-time highs, which haven’t been broken since November after a series of six tests. This is the seventh (lucky number perhaps)? The only odd thing about my model on this is that it shows money flow collapsing while the stock has been rising for the past several sessions. That could be a false signal due to holiday trading, but it’s worth keeping in mind. On the other hand, all momentum indicators have turned up sharply. I never buy stocks after they’ve rallied several sessions, so a pullback to $30 should be followed by one more attempt at a new high at least. I don’t think we’ll see a break above $35 on this move, so there’s no rush, and if the stock does break above $35, I’d be a seller, legging into my short position and not a buyer, with the intention of covering my short position at or near $35. $30-$31 is a great entry on this stock.

CRM: Although I rarely suggest stepping in front-of a runaway train (i.e. bull market), Salesforce.com appears ready for an extremely short term pullback, ideal for the daytrader. The prior breakout high was 67.72, which directly coincides with the 10d-EMA. But remember, this stock is in a bull market, so when it’s time to close out that short, consider reversing and going long instead of just patting yourself on the back. The actual trade here is on the long side, but the MACD, Doji, and declining volume create three powerful negative divergences.

LONG TRADES

AMZN: Going into the Christmas season, Amazon’s channel checks were bringing back some unbelievable results. In other words, their sales went through the roof. Now we won’t know the extent of the returns they’ll face, but historically, Amazon has been one of those stocks that doesn’t react to the “item returns” line item in their following quarter. The 10p-EMA just crossed the 24p-EMA on Wed. Don’t let the declining volume on Friday fool you, with what appears to the “technician” as a Doji. This is classic chart painting for those that follow technical analysis like it’s their dogma. Friday was a ghost town on Wall Street, so one could have pretty much done whatever they wanted in terms of end-of-day chart painting. That’s why I don’t put too much weight into Technical Analysis as a valid tool in understanding market theory, especially when it comes to the markets’ micro-structure. If anything, it must be used within a much larger plethora of quantitative tools. With regards to Amazon, the stock spent the past 2 months consolidating the move from $92 to $125. Above $140 it’s a potential buy, using the 10p-EMA as your stop.

BCS: As I said before, I’m not a huge fan of Technical Analysis, but that doesn’t mean I’m not going to make myself an expert at it. It’s just another tool in my arsenal. Barclays bank, if it hits $15, will have corrected 40% since its’ October highs. Remember, this is the ADR so it’s thin. Not a daytrading stock at all! I think $15 is a low-risk entry point, perhaps risking $0.70 to make about $3 to $5.

BRCM: Something tells me this stock wants to test $35-$36. For a long position, use the 10d-EMA, leg into your long position, and leg out as it approaches the whole number.

CEO: Something of an anomaly in China, with a P/E of 16 and an EPS $9.57 per share, their 5-year growth rate is phenomenal but their most recent numbers aren’t all that great, but which oil producer didn’t suffer this past year? The anomalies lie in their TTM growth rate of almost 56% while their debt to cover ratio is 2.6 with their peer group being closer to 1.26! I wish American companies were run as tight as CNOOC. Their costs of revenues have shrunk while their income has stayed relatively flat in spite of the dramatic collapse in oil prices. As a long-term position, I would start building a line around the 155-157 level and hold it until at least $200. However, during that time, you should always trade around your core position to lock in Alpha. Here are some ratios for CEO:

CP: Watch the $55 level. Having closed $.25 below it, I’m fairly certain it will bust through $55 in order to clear out the stops resting there, then will fall back down below to nail the ensuing protective stops established on the prior buy through $55. Nonetheless, the stock is in a powerful long-term uptrend which will prevail for the foreseeable future, if not the next several years. For short-term traders, the $55 level will provide for rapid trading on both sides, for the long-term swing/position trader, wait to see what happens. These stocks don’t move like tech stocks, although last year a few did. I actually look at this stock, and the sector, as a growth sector. So for them to have low double digit P/E’s and paying out dividends makes this a solid play, especially with the macro backdrop I mentioned. Lastly, as the Great Sage of Omaha likes to say: “Does it generate cash that ends up in their bank accounts? If it does, I’d like to take a look at the stock”.

CSX: Another railroad breaking into new 52-wk highs. Everything looks good here except the fact that the market broke above the 52-wk high on the day after Christmas, which means a lot of stops were just cleared out and the next step is likely down before ultimately resuming its uptrend. So if you’re a daytrader, feel free to trade the short side and then reverse. All you others out there, keep an eye here and go long when you see the whites of their eyes.

CYOU: Remember this Chinese stock went public May of this year. Once the majority of lock-ups expired, insiders cashed out, as expected. Now, 28-30 has become a major accumulation zone and the stock appears ready to break out. Yes we were on Christmas schedule last week, but the Chinese are communists. First upside target is $40

DRE: Duke Realty bottomed around $12 in March and after regressing back to the $10 level where it should have been if there weren’t a liquidity crisis, the stock seems to be poised for an extended up move. All my models have triggered on this one, which is rare and actually makes me a tad more cautious rather than feeling like I should go all-in. However, the stock has had 7 green sticks in a row, so be patient and buy it on a test or break below $12 and keep legging into the trade until $11.

EQIX: This is the trend followers dream stock. Every single metric is growing at an impressive pace, and the company is throwing off cash by the truck-load, and almost all of it is being plowed right back into the business. Obviously, the stock has the benefit of every single moving average below it, with the most consistent being the 10d-EMA (as always). Since $100 is a whole number which has yet to be tested following the recent break above that level, I’d like to buy it around $100, legging into my position as always.

ESLR: Another potential high flier when it gets wings is Evergreen Solar. The chart below shows a very sensitive and potentially explosive move. However, although I put the odds in the favor of an upside breakout, there is a chance there will be a quick spike down to shake out all the weak hands, so be careful and watch.

<

I’m watching the 70.50 level like a hawk in Oil, as are several prominent hedgies I dialogue with on a daily basis. Right now, until Crude breaks above $71, I really like the spread of Short Crude vs Long Nat. Gas. I would lift the short side on a sustained break above $71 in Crude and get long and strong the entire energy complex, including equities.

The Dollar is beginning to weaken across all currencies rather than isolated instances, as was the case throughout the summer, when the Greenback showed strength against many majors. However, it now appears the floor for the US Dollar is being tested and probes are underway to see where the Federal Reserve will likely begin to increase its open market activities along with the US Treasury. It’s too early for a “strong” dollar in this economic bounce. Too many talking heads came out and said the worst is behind us. Which of course means that it’s not.

Keep an eye on Copper. China opened its mouth at the start of summer and swallowed this base metal like a wild boar, which threw off a lot of macro models because Copper is, of course, watched as a leading indicator of economic recovery. However, being that China was behaving like the gluttonous behemoth that it is, it could have just been a strategic build-up of reserves, or a hedge gone bad that needed to be covered. With China, we never know these days. Capitalism being so new to them, they’re like an over-grown kid on a high school football team that’s never played the sport but the coach puts him in there because he’s so big. Clumsy and stupid at times, ultimately very bad at playing their cards close to the chest and equally bad at not giving out the wrong signals and then chasing their own tale ex-poste.

I know many of you are Prop. Traders, whether equities or swaps or paper, or whatever. It doesn’t matter. The forum is to exchange ideas and share trades and various perspectives from highly qualified and advanced traders around the world (including myself, of course).  It goes without saying that if your LinkedIn Profile indicates you are a recruiter, or unrelated to content of the group, your request to join will sadly but most assuredly be declined.

With that being said, I invite you to join Discretionary Proprietary Traders Worldwide

prop trading, proprietary trading, prop traders, prop, T3 Live, First New York, FNY, Millenium Partners, SMB Capital, discretionary trading, traders, trader, trading seats, Hold Brothers, Hold, Avatar, Avatar Securities, Scott Redler, T3 Partners, T3 Partners LLC, Sean Hendelman, Marc Sperling, Laz, Sperls, Red Dog, RBC, RBC Capital, RBC Professional Traders Group, high volatility, high frequency, high frequency/high volatility, global macro, incremental capital, dimension, cash equities, stock trading, leveraged trading, scottrade, ameritrade, Valez Capital, Pristine, chart patterns, technical analysis, protrade,

And those taking credit on for “sending a signal” to sell Oil around early June?  One day before an upside explosion that is about to go parabolic. Well, ask yourself who it was giving the signal, and whether or not that “analyst” should even be passing judgment on macro data sets.  We all know daytraders sell a monster bull market at the first sign of weakness. Then quickly realizing their error, they jump back on the train like a monkey chasing a banana boat. No different than the sell-side analysts fresh out of school and green as a cricket.

Moving on…

Nasdaq breaking out on rising volume. All momentum and breadth indicators confirm this is real. Big cap tech has been leading the way, so don’t be surprised to see the generals outperform.

S&P 500 could break away from here, but experience tells me there may be at least one, perhaps two, head fakes designed to drive daytraders and weak-handed swing traders absolutely batty.

Commodity stocks possibly near a short-term top though. Only caveat here is the greenback. There has been a monster dollar rally which began in the early morning hours of Wed. June 4th. After a temporary pause mid-day Thursday, the Greenback exploded again in overseas markets. For us equity bulls, we want to see continued weakness in the Yen/Dollar cross, and strength in the Euro/Dollar cross. If the dollar can just stabilize, equities will rally as a group. If the dollar collapse resumes, we’ll see commodity stocks go into overdrive as the short interest is most definitely building up because of the speed of the rally. Watch big-cap tech run and you’ll be disappointed you don’t own a chunk of this group.

Focus on the following sectors:

• Building materials
• Casinos
• Coal
• Footwear
• Internet commerce & services
• Specialty semiconductors and equipment manufacturers.

All of a sudden, showing strength for the past several weeks and clamoring to exit the TARP and government meddling has resulted in a mandatory stock sale by these same banks. So JPM, AXP and any bank wishing to exit the TARP, must prepare to dilute their current shareholders. That dilution is rather severe, but the devil’s in the details.

The ownership of the nation’s most important companies is being quasi-socialized, by transferring ownership to the “public” via the hands of the institutions, those same banks handling the government’s massive new injection of liquidity. The institutional buyers will include a larger and larger chunk of pension dollars. These pension funds, like CALPERS, are buying these share distributions hand over fist, along with many nationally strategic banks and corporations. They’ve figured out the only way to ensure continuity in the nation’s retirement support system: to become direct shareholders. Voila, you’ve got socialization right before your very eyes.

But it’s not really some ignorant version of Canadian or French socialism. This is capitalist socialism, not socialist capitalism. Huge difference. And it’s Jumbo size, in the true American spirit. This young nation of 235 years was able to follow Keynesian demands to offset a depression in terms of output. When a country with a growing economy like China slips, or has to burp from indigestion, the entire planet will feel the shock. Whether that was an intentional tap on the breaks via controlled devaluing of the Yuan is beside the point. Although that’s exactly what it was, there’s another issue. The financial crisis triggered by China’s Great Burp of 2008 resulted in the American Recovery and Reinvestment Act of 2009. And TARP, and PIPP, etc…

In the States, the capital structure of those banks handling this influx of funds is ballooning to unimaginable heights. This is a mandatory inflation of their balance sheets. This is the Fed and the Treasury forcing the new supply of dollars onto their hands to buy the shares of the companies now about to have an equity offering.

The Federal Reserve is now the largest bank with a balance sheet that went from $6 Billion to $1.3 trillion in about 6 months. For their governments, including the UK, France, Canada and now Venezuela, Bolivia, perhaps soon Ecuador, China (obviously), own the actual companies, or portions thereof. And therein you have it ladies and gentlemen: This is American Capitalism adapting to compete with Chinese Capitalism, where the state’s role not only yields the companies an advantage, but also provides the government with national security. For China, that security is in the form of owning sources of raw materials. For the United States, and Western Capitalism, security comes via the almighty US Dollar (for now). And funny how all major global commodities are priced in US Dollars. When there was a massive dollar shortage last year, it was resolved via bi-lateral lending facilities with the G-20 Central Banks and the Federal Reserve.  National security through state supported champions of global commerce. The need to cross borders, currencies, regulatory frameworks, governmental oversight, etc…, is another matter.

This full scale conversion to Chinese Capitalism around the globe is both the cause and effect of the Financial Crisis of 2008. But everywhere you look, on the tags, it says “Made in The United States”.

SPX screaming buy on long-term monthly. 930 is the breakout which started the rally in late ’02/early ’03. It was never tested. This is the first test after the market made a new all-time high in October ’07. Market “COULD” rally 30% from here.

China announced massive stimulus, pushing global market sentiment higher. Chinese stocks are deeply oversold, more than any other country, so the risk/reward here should be enormously skewed. Chinese have a pattern of using financial instruments like stocks to stimulate economy.  Last week, metal & mining stocks started to rally early, before broader market caught up. The reason at the time was a mystery. Sunday’s stimulus in China was the reason. The Chinese are also notorious for trading ahead of the news. Dry Shipping sector also benefit, along with producers of the items being shipped. Will this affect entire B.R.I.C. group or just China?  Combine this with the massive and unprecedented cuts in interest rates across Europe and Australia, the global economy is being flooded with liquidity. At some point, that liquidity will have start circulating.

A moment of reckoning for many hedge funds may come at the end of this month, when their exposure to credit default swaps must be “marked to market” to reflect the increased obligations at the end of the third quarter.

Olivant, the investment group run by former Abbey boss Luqman Arnold, revealed last week that its 2.8% stake in UBS was held through an account at Lehman in London which the firm’s administrators are refusing to release.

Oct. 3 (Bloomberg) — Maverick Capital Ltd., Greenlight Capital LLC and The Children’s Investment Fund Management LLP fell more than 12 percent in September as stock hedge funds posted record monthly losses and braced for client defections. Lee Ainslie‘s Maverick Capital declined 19.5 percent and Greenlight Capital, run by David Einhorn, was down 12.8 percent, according to investors in the New York-based funds. Children’s Investment, overseen by Chris Hohn in London, fell 15 percent, based on a preliminary estimate.

Stock hedge funds fell an average of 8.6 percent in September, the biggest one-month loss since Hedge Fund Research Inc. began collecting data in 1990. While that was better than the 12 percent decline by the MSCI World Index, a benchmark for global stocks, industry analysts expect investors to increase their requests to pull money from funds. The poor performance of certain hedge funds will have repercussions in the allocation processes, and it may lead to substantial shifts between hedge-funds strategies and between hedge funds.”

Other managers with above-average losses for the month included Stephen Mandel, whose main Lone Cypress fund in
Greenwich, Connecticut, fell 14.7 percent. New York-based Third Point LLC, run by Daniel Loeb, dropped 11 percent. Officials for the hedge funds declined to comment or didn’t return calls.

Defensive Doesn’t Work

Funds in all investment categories fell 6.9 percent in September, according to Hedge Fund Research’s Global Hedge Fund Index. That’s the worst month for the $1.9 trillion industry since August 1998, when the Russian debt default triggered the collapse of Long-Term Capital Management LP.

Key Problems:

• LIBOR bid only, no offer.
• Commercial paper market shut down, little trading and no issuance.
• Corporations have no access to long or short term credit markets — hence they face massive rollover problems.
• Brokers are increasingly not dealing with each other.
• Even the inter-bank market is ceasing up

The Treasury Tarp plan is an irrelevance if we are at a major funding crisis.

We are indeed at the cardiac arrest stage and at risk of the mother of all bank and non-bank runs as:

-The run on the shadow banking system is accelerating as: even the surviving major broker dealers (Morgan Stanley and Goldman Sachs) are under severe pressure Morgan losing over a third of its hedge funds clients); the run on hedge funds is accelerating via massive redemptions and a roll-off of their overnight repo lines; the money market funds are experiencing further withdrawals in spite of government blanket guarantee.

-A silent run on the commercial banks is underway. In Q2 of 2008 the FDIC reported $4462bn insured domestic deposits out of $7036bn total domestic deposits; thus, only 63% of domestic deposits are insured. Thus $ 2574bn of deposits were not insured. Given the risk that many banks – small, regional and national – may go bust (as even large ones such as WaMu and Wachovia went recently bust) there is now a silent run on parts of the banking system. Deposit insurance formally covers only deposits up to $100000. Thus any individual, small or large business and/or foreign investor or financial institution with more than $100000 in a FDIC insured bank is now legitimately concerned about the safety of its deposits. Even if as likely the deposit insurance limit will be temporarily raised to $250000 by Congress there will still be a whopping $1.9 trillion of uninsured deposits (or 73% of total deposits); thus, a huge mass of uninsured deposits will remain at risk as even small businesses have usually more than $250K of cash while medium sized and large firms as well as any domestic and foreign financial institution or investor with exposure to US banks has average exposure in the millions of dollars. Particularly at risk are the cross border mostly short term interbank lines of US banks with their foreign counterparties that are estimated to be close to $800 billion.

-A run on the short term liabilities of the corporate sector is also underway as the commercial paper market has effectively shut down with little trading and no issuance or rollover of such debt while corporations have no access to long or short term credit markets and they are therefore facing massive rollover problems (over $500 billion of rollover of maturing debts in the next 12 months). Indeed, the market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 (and down over $200 billion in the last three weeks). Especially banks and insurers were unable to find buyers for the short-term debt: financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent in the last week; but now even non-financial corporations are also experiencing a severe roll-off in the CP market. Discount rates for investment-grade non-financial commercial paper spiked to 599bp for 60 day maturities. More companies are borrowing against or tapping their revolving credit lines. This is largely due to the dislocation caused in the money markets by the failure of Lehman and the subsequent withdrawals from money market funds, which are some of the biggest providers of liquidity in the short term funding/commercial paper. Even the largest corporations are at severe stress: ATT last week was forced to rely on overnight funding for its treasury operations, as lenders were unwilling to provide more long term financing due to fears in money market funds over investor redemption. The CEO said “It’s loosened up a bit, but it’s day-to-day right now. I mean literally it’s day-to-day in terms of what our access to the capital markets looks like,’’ Things are much worse for non-investment grade corporations and for small and medium sized businesses. As reported today by Bloomberg: Almost 100 U.S. corporate treasurers gathered for an emergency conference call yesterday to warn each other that banks are using any excuse to charge
more to renew lines of credit.

-The money markets and interbank markets have shut down as – despite the Senate passing the bail-out bill - yesterday USD Overnight Libor was still at 268bp after reaching an all-time high of 6.88%; the USD 3m Libor-OIS spread widened to record 270 basis points; EUR 3m LIBOR-OIS spread is at record 130bp; the TED spread is at record 360bps (TED was 11bps one month ago); Money and credit markets are dysfunctional also in emerging markets ; and agency bond spreads are also at highs again.

So we are now facing:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds restrained only by a blanket government guarantee; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for
corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly
scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains
shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

So what needs to be done?
Even several hundreds of billion dollars in emergency liquidity support to the financial system by the Fed and other central banks in the last week alone have not been enough to stop the seizure of liquidity in interbank markets and the shut down of financing for the corporate sector as counter-party risk is now extreme (no one trusts any more in this crisis of confidence even the most reputable and trustworthy financial and corporate counter-parties).

Thus, emergency times where we are at risk of a systemic meltdown require emergency measures. These include the following six ideas, which are also the key points to be listening for as potential catalysts for sudden market surges to the upside:

-A temporary six-month blanket guarantee on all US deposits (not just those below $250k) combined with a rapid triage between insolvent banks that should be quickly closed and distressed but solvent – conditional on liquidity and capital injections – banks that should be rescued. To stop the silent run on the banking system you do need now such blanket guarantee on all (insured and uninsured) deposit regardless of their size. To minimize lender moral hazard from such action the blanket guarantee needs to be followed by a very rapid triage and shut-down of insolvent institutions to prevent such institutions from gambling for redemption, i.e. acquiring more deposits and making even more risky loans. To limit such moral hazard distortions one can also limit the extended guarantee only to current deposits: i.e. any new deposit above a $100k limit will not be insured.

- Extension of the emergency liquidity support of the Fed (both TSLF and PDCF) to a broader range of institutions in the shadow banking system, especially those directly providing credit to the corporate sector. The TSLF and PDCF are already available to some non banks (the broker dealers that are primary dealers of the Fed). But two of such broker dealers are gone (Bear and Lehman) and the other three are under stress. Goldman Sachs, Morgan Stanley, the other primary dealers and the banks that have access to the TSLF and PDCF (and discount window) have massively used these facilities in the last few weeks; but they are hoarding such liquidity and not re-lending it to other banks, to the thousands of the other members of the shadow banking system and to the corporate sector as they need such liquidity and don’t trust any counter-party. Thus the transmission mechanism of credit policy (the non-traditional Fed liquidity lines) is completely shut down now.

- Some members of the shadow banking system will not receive such liquidity support of the Fed (hedge funds and private equity funds) as – fairly or unfairly – there is no political sympathy for such institutions. This means that the demise of hundreds – and possibly thousands – of hedge funds will occur as redemptions and roll off of overnight repo financing for leveraged investments will cause a massive liquidity – and thus solvency – crisis for such institutions. If hundreds of smaller hedge funds collapse the systemic consequences would be limited (even if in the aggregate hedge funds provide significant financing to the corporate sector). If larger and systemically important hedge funds were at risk of failing the Fed will have to engineer a massive private sector bail-in of such hedge funds (a larger scale rescue a la LTCM) where the prime brokers of such funds are forced to maintain repo exposure to such funds rather than be allowed to shut off such exposure. This is a radical suggestion but the alternative of a Fed liquidity bailout of systemically important hedge fund is not politically feasible given the little sympathy that such funds enjoy in Congress. The refinancing crisis of private equity firms and their LBOs is a longer fuse run as covenant-lite clause and PIK toggles will postpone such financing crisis but make the harder the fall as zombie corporations that postpone restructuring will have a bigger collapse once the financing crisis eventually occurs. But since many of these LBOs should have never occurred in the first place any financing crisis for such buy-outs should be dealt with in bankruptcy court; no public funds should be used to rescue such LBOs and the reckless private equity firms that designed such schemes.

- Direct lending to the business sector from the Fed via extension of the PDCF and TSLF to the non financial corporate sector. This could include Fed purchases of commercial paper from corporations and other forms of financing of the short term liabilities of the Administration to small businesses secured in appropriate ways. Given the collapse of the corporate CP market and the banking system reluctance to provide loans to the corporate sector (credits lines are being shut down) the only alternative to the Fed becoming directly the biggest emergency bank for the corporate sector would be to force the banking system to maintain its exposure to the corporate sector, possibly in exchange for further Fed provision of liquidity to the banking system. The former option may be better than the latter to deal with the looming illiquidity of the corporate sector.

- Have a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks. While this policy rates may not directly resolve the insolvency issues in financial markets and in the corporate sector it may ease liquidity pressures and it would signal that global policy makers are serious about addressing together this most extreme liquidity and financial crisis. Also, some of the radical policy actions that have been suggested here for the US will most likely need to be undertaken also by European policy makers as the liquidity and credit crisis is now becoming global.
- Radically redesign the Treasury TARP rescue plan – possibly after its necessary approval today – to make it effective, efficient and fair. This implies that in addition to a more limited government purchase of toxic assets, you need: a) an emergency triage between insolvent and illiquid and under-capitalized but solvent banks should be made; b) a sharp reduction of the mortgage debt burden of the insolvent household sector; c) and a recapitalization of solvent banks to be done via public injection of preferred shares and matching contributions by current shareholders of the banks. Financial markets have already voted no to this plan (that is flawed in its current form) yesterday when after its passage in the Senate US and global equity markets plunged another 4% while money markets and credit markets seized up even further.

Bottom Line Conclusion:
This credit crisis is both a crisis of confidence and illiquidity and a crisis of credit and solvency. But while the insolvent institutions should go bust we have now reached a point where many financial institutions and now non financial firms may become insolvent because of pure illiquidity; and this would lead to an extremely severe economic contraction similar to an economic depression rather than a mild recession. At this point the US, the advanced economies (and now likely even some emerging market economies) will experience an ugly recession and an ugly financial and banking crisis regardless of what we do from now on. What radical policy action can only do is preventing what will now be an ugly and nasty two-year recession and financial crisis from turning into a systemic meltdown and a decade long economic depression.

Shipping stocks have entered a confirmed period of expanding margins due to a rapid tightening in available tanker capacity to get that ever more scarce crude to European and US markets. Excel Maritime (EXM), Ocean Freight (OCNF), Nordic American (NAT) and a few others are still attractively priced even though they’ve bounced more than 50% from their lows in February/March. These companies already pay a high yield and are structured so that those dividends expand as cash flow increases. Great medium term plays here.

If you’re long a basket of energy stocks and need some offsetting short exposure, stay with the refiners as their input costs are going to continue increasing. Speaking of energy, Ivanhoe (IVAN) looks ready for another surge to the upside, so long-term accumulation of this stock would suggest topping positions off here in the low $2 range.

ReneSola (SOL) is going parabolic. If you don’t know what that means, never mind.

Sunpower (SPWR) would be more reflective of current market fundamentals if it were trading closer to $110, at least with Oil above $120 and sustaining.

The pipeline of Nuclear Power Plants in development is so large, and this is such a long-long term play that one must have a long-term position in Uranium fuel production and sales. My favorite is USEC (USU). Google can provide you the background and additional color on Reuters. Sorry but why repeat what’s already been written? Besides, do you really care why I like what I like? Most of you seem to only be concerned about the “what” and in terms of the “why”, you’re more concerned with your golf handicap. Most important point is this, directly from USEC’s website: “The AC100 series will be the first centrifuges used to produce enriched uranium for sale when commercial operations begin, scheduled for late 2009”. Remember, long-term, as in let your heirs inherit a huge position you built up in 2008 for their benefit in 2088.

Let’s not forget the short side, for a well-balanced book would not be complete without this side of the equation.

More to come soon…

]]> http://investmentcapitalist.com/2008/05/ten_stocks_weekof_may12/feed/ 0 http://investmentcapitalist.com/2008/04/lch_znh_chinese_stocks/ http://investmentcapitalist.com/2008/04/lch_znh_chinese_stocks/#comments Tue, 22 Apr 2008 21:30:50 +0000 MarketWizard http://investmentcapitalist.com/?p=373 I’m becoming convinced that Chinese stocks are presenting an opportunity for swing traders. These particular stocks accomplish their moves in gaps. Here is China Life Insurance (LFC):

To see China Life trading in the $50 range after last year’s parabolic run, which began in many of these names last August, for the institutional long-term buyers, this is somewhat of a reprieve. The market is overly discounting China right now, a lot of bad p.r. around the Olympics, but the stimulus injection the Olympics will undoubtedly create will be felt this year and next.

At the very least, I think a more appropriate price for China Life is much closer to $75. Continued strength in the Yuan will have a positive effect on these names, so $85 could be forecast by some estimates. On the flip side, to attach a bearish pair to this long idea, one might consider Aluminum Co. of China (ACH). At $40, it remains overvalued and the same positive factors influencing China Life are acting as a headwind for China Aluminum. I see fair value for ACH close to $24.

China Southern is the country’s largest carrier, and their growth is mind boggling but not surprising. Look at these ratios:

Long term weekly chart of China Southern (ZNH):

My numbers suggest China Southern is worth closer to $50 based on their recent earnings release. Again, institutional long-term buyers are relieved about where prices are now compared to the runaway in early ’07.