Bad Trading Strategies

Looking for driving forces in this summer's trade has been one of deciding whether to play off the 'bottom is in' strategy or rather on sideways rolling opportunities as they appear. Few think new lows are in the offing so those who love volatility explosion bets can play there.

Views of the world's economic future being saved by developing countries is getting some press, as in today's NYTimes article. China, India, and Brazil are apparently going to drag the rest to safety although there seems to be absolutely little evidence of it. Decoupling again is mentioned, but stopping the reemergence of bad trading strategies is impossible. Oil's recovery to $70 from $33 is provided as proof, but developing country demand rationale drove the price to over $140 with idiots guaranteeing $240. This type of thinking has every commodity trade strategy ultimately resting on the China's consumption of all things consumable. China, unfortunately for all of us, is a pending economic disaster. Totalitarian make-up artists can print economic data from a typewriter in Beijing and the decouplers and commodity folks would believe up is the only power. Unfortunely, when all the developed big dogs are not eating as much there are plenty of leftovers which have to be virtually given away.

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Inflating The Bull

The DJIA, SP500, and NQ100 remain in the confusing zone between price mechanics and value. They are related but can produce price patterns which may not match what various economic performance measures of the general economy. The rally from the March lows are a part of the mechanics of running out of panic selling and the natural betting on prices as a function of comparison shopping.

There is a vague uncomfortable feeling running through the markets which stem from a determination not be fooled again and the ability to identify a low risk opportunity with traction. The thought of enduring the break and missing the rally is almost to much to take, let alone watching the Fed and Treasury insure the wealth of the likes of Goldman and Morgan. The boomers know that this time they cannot simply apply rally lotion to these markets after the thundering losses suffered by investors across the board. The financial health of state and local governments have an appalling smell which can only be compared against a particularly unpleasant historical period. These real dilemmas make the notion of bull market anew difficult to inflate.

Squeezing The Bear

Markets as of this AM continue to squeeze the bear as selling remains light despite intraday sell programs. These are uncomfortable ranges for the most bearish of traders as their warnings for the' worst is yet to come' is being mowed over by cheering bullside perennials. The same technical weaknesses which led to the downside free fall of earlier this year have some of the same elements present in this rally. So for traders, it is alright to be bearish, but don't be stupid. The sell opportunities will be less prevelent, but available. This market, as pointed out in a recent post , as measured by the DJIA, is headed on the half way back trail (10,000), and parts of it may feel like it is going straight up. The jobs picture will be the overpowering force this week and in the months to come. Downdrafts will appear.

Data Reading

Determining just what we have here when reviewing the strength and weakness of the current stock index levels can lead to tricky conclusions. Is the worst over? Is this a new bull phase? New lows? The bulls and bears are raising proofs to convince themselves and everyone else.

Misreading market information, the pace of economic rise or decline is easily done. Making assumptions about today's data measures for housing, exports, and economic growth are difficult because of the magnitude of the price breaks. Foreclosure deals are getting as much attention as the flip em frenzy. An old pit adage is never buy the first rally, and foreclosure deals may fit there.

What will allow the markets to establish a long upward trend after such a large decline? China is once again being pointed to as the deliverer. Of coarse you then have to rely on a totalitarian economy pumping money to save itself and believing the economic data being generated by the Chinese government. Sounds as convincing as the AAA credit ratings of the sub-prime era.

Fixing Up

Putting the stock indexes on the upside track is a combination of public trust and a mountain of interventionist theories speculating what underlying share values may be able to support. The former remains unwilling to risk anything more than some of what is left, and the latter, financial engineers, are trying to determine how and what the post crash world order will trade. Arguments about the type of recovery, V, L, or W, all are based on the notion the markets have already bottomed. There are few who think substantial new lows are ahead. Given the headlines and analysis of the crash, the investigations and interventions, a smoke clearing vista of rebuilding has become wisdom.

These markets still remain fragile and the prices constructed so far off the lows show no particular strength. Extremely cheap price areas are usually rejected by rapid recovery rallies and the stop watch on this rally is getting close to losing in the qualifying time. While a middle of the pack recovery would suit everyone, a race down is still a possibility.

Trail Of Rally

After a decent gain last week, the indexes this week start with some rally fatigue. The weekly actions have remained supported by lack of selling and pricing from the money sloshing around from the various bailout strategies. Underlying internals remain soft and may lead to the ' eat like a bird, shit like an elephant' syndrome known to markets which chip higher weekly only to give a major portion of the entire rally back in a two or three day period. Remember, money rates essentially at zero reflect the real story about overall economic energy. That said, the indexes will still set up to recover half the losses from the 07 highs, which for the DJIA will be just over 10,000.

Buy This

Pricing continues to creep into the market as major market players apply investment dollars where sellers are few. The great bail out has provided more than enough currency for trading as historic price declines may have created buy and hold opportunities. Using the metrics for measuring value over the last 25 years this would be the case, but there may be new standard for understanding asset values which will only be born out over the next several years. Just in case, the rallies of this spring have had less punch to them when compared with the days of the bull. While there is no question the pros hope to sell these purchases higher to the same public dopes they did for years, the weary masses may let the greater fool theory be applied amongst the institutional and proprietary chumps this time.

In Bed With Fed

Markets trying to breakout of a trading range that has had the feel of a rally but simply more of a transactional spin to it. The big banks which used to be big brokerage are arbing the welfare elements from the G and those conditional opportunities that leverage brings in the forms of informational edges and transactional income. Both Goldman and JP Morgan, each having taken $10 billion and $25 billion respectively, are doing well as cousins of the Fed, their prowess as traders contingent of being wired directly to the inside and taxpayer cash.

Credit Value Adjustments

Spinning straw into gold has hit bank financial reporting. Earnings of the major banks reflected changes in income by use of Credit Value Adjustments. Believing any data from Citigroup or Goldman is much like the old Wood Allen joke. A man speaking to a doctor confesses, "Doc, my brother is crazy, he thinks he's a chicken. The doctor says " why don't you turn him in?" The man replies, "we would, but we need the eggs." Here is how Citigroup needed the eggs as reported by Eric Dash of the NYTimes;

"Citigroup posted its first profitable quarter in 18 months, in part because of unusually strong trading results. It also made progress in reducing expenses and improving its capital position.

But the long-struggling company also employed several common accounting tactics — gimmicks, critics call them — to increase its reported earnings.

One of the maneuvers, widely used since the financial crisis erupted last spring, involves the way Citigroup accounted for a decline in the value of its own debt, a move known as a credit value adjustment. The strategy added $2.7 billion to the company’s bottom line during the quarter, a figure that dwarfed Citigroup’s reported net income. Here is how it worked:

Citigroup’s debt has lost value in the bond market because of concerns about the company’s financial health. But under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to that decline because, in theory, it could buy back its debt cheaply in the open market. Citigroup did not actually do that, however." Full Article

The banks and the markets want to believe and with the stress tests coming up on May 4th, an all out effort is being made to spin the accounting.