Tag Archives: financials

Unfinished business: Financials, REITs, small-caps.

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These three categories have only begun to really break down in this plunge. Let’s look at some charts. In a crash like this, you want to see deep new lows in all the vulnerable sectors before you can consider things complete.

Here are financials. These stocks are just revisiting July’s lows, yet to make a solid break to lower levels. XLF is our proxy:

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Next, REITs are finally breaking down, but they have a long ways to go, considering that an honest accounting of real estate prices would probably reveal that many of them have negative equity. IYR is a REIT-laden real estate ETF:

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For small-caps, we’ll switch to a 10-year shot of the Russell 2000 to show the magnitude of the bubble in crappy stocks since 2003. The Russell is making new 3-year lows, but like REITs, it has defied gravity since last year so there is a lot of air underneath these levels. (PEs on the Russell are infinite, by the way, just like the Dow.)

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May as well throw in an update on Wal-Mart for good measure. I shorted them a few weeks ago, not because they were horribly overvalued (they are, but less so than most junk out there), but because they have been boosted by a nifty-fifty “defensive stock” mania, and therefore the puts were dirt cheap. 2-year view:

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The fact that these laggards are just now breaking down, along with the lack of a meaningful bounce today, suggests to me that this plunge is not out of steam.

Short selling ban should not affect short ETFs

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My understanding is that these ETFs do not actually engage in plain-vanilla short selling, but use options, futures, forward contracts and swap agreements in order to perfectly track their respective indexes. The ProShares ETFs that I have been watching lately have been doing a good job of operating exactly as advertised, providing twice the inverse of the indexes on a daily basis. I expect them to continue to do so, and believe that their vital risks are still counterparty defaults and government meddling in the derivatives markets.

Page 7 of the ProShares prospectus (PDF) has a rundown of strategies employed by its short funds.

MarketWatch reports that ProShares ETFs have seen massive volume this week, especially SKF, the double short financial ETF, which benefited from earlier naked shorting restrictions.

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This is one heck of a rally. Dow futures are up 347 points on top of a 600 point rise from the intraday low yesterday afternoon. This is a gift for shorts using means other than plain short sales, since it sets us up for a spectacular failure, financials included.

Mainstream contrarianism crushed

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Markets move in whatever way induces the maximum pain on the maximum number of participants. Those players who mock “mainstream” opinion, if experiencing more success than the crowd, are bound to get overconfident and to see their ranks swell at just the wrong time. Then they themselves are the mainstream, and true contrarians are to be found on the other side of their trades.

Here are ten pillars of what I consider the “mainstream contrarian” movement that just ate a big slice of humble pie:

#1 The dollar is toast, and will keep falling until hyperinflation sets in.

#2 Gold and silver’s rise cannot be stopped until the US trade and budget deficits are brought under control and the debt is reduced–that is, never.

#3 Global oil production has peaked, so oil will continue ever upwards. Oh, and we’ll bomb Iran any day now.

#4 China and India’s growth will continue unabated, and with it, their demand for commodities at any price.

#5 Financial stocks will fall without bounces. Long live SKF!

#6 CPI vastly understates inflation. Just look at M3 or shadowstats.

#7 We are experiencing a return to 1970s style stagflation.

#8 US Treasury bonds are toast.

#9 Deflation cannot happen in a fiat money regime. Bernanke told us he wouldn’t allow it.

#10 When the depression comes and the dollar becomes worthless, the sheeple will awake to the truth about their government and demand their republic back, with Ron Paul as their leader and gold as money.

 

Here’s a tip for frustrated contrarians: Join the deflationists. We’re a super-exclusive club of curmudgeons and equal opportunity shorts. We are gold bugs, but just made some righteous dough shorting gold. We know that oil has peaked, but we shorted it anyway! We know China will rule us all, but we shorted commodities. We know the US is bankrupt, but we aren’t afraid to go long the 30-year.

In a few years, we’ll be pretty popular, but then I think most of us will have moved on, maybe to the hyperinflation camp. If recent history is any guide, the ones who make the most noise (ahem, Peter Schiff) will find it hardest to make the necessary corrections and self-contradictions before the next big pivot.

Happy days are here again!

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From a brief glance at Bloomberg today, I get the feeling that the bounce has about run its course. The talk is all about being “contrarian” by buying financials (um, wouldn’t that have been to buy them a month ago?), buying retail because the July sales report will probably be ugly, and to buy airlines (up 12% today) because oil is falling. The dollar is strong and even gold is down $33 to a six month low (about $820).

I am not surprised by the dollar’s bounce, and I’ve been calling for gold and oil to fall for some time now, but their decline is not a good sign. For oil to fall after total world production has peaked means that demand is drying up as the economy slows. For gold to fall signals that the credit inflation of recent years is over, and that cash is the new king (though it will be a short reign if Bernanke and Obama’s masters can help it). The strength in the dollar just reflects the weakness of Asia and the Eurozone and falling rates in their currencies.

Other signs that the end is neigh are the compressed VIX (near 20 again) and the ridiculous intra-day and intra-week volatility. Sustainable bullish moves are not this choppy, but bounces are, and particularly so near the top.

Time to batten down the hatches. This was just an eye of the storm, and the strongest winds are straight ahead: hundreds of bank failures and double digit unemployment within a year: