Rebel Traders – Analysis Without The Hype

Earnings losses season is picking up steam and the growing trend is the announcement of more job cuts.

The markets closed in the red after a crazy short week.  Next week the big drug makers report earnings and potential market moving economic data will help make next week interesting again.  The XLF (Financial ETF) was unable to break 28.00, closing at 27.20.  Noticed that even Microsoft (MSFT) couldn’t hold that spike up on earnings and closed down 0.93% on the day.

New York City Comptroller is suing 26 financial firms that underwrote Countrywide (CFC) stock and bonds.  Also suing more CFC officers and global accounting firms.  Citigroup (C), JP Morgan (JPM),  Goldman Sachs (GS), KPMG accounting and Grant Thornton are among those named in the class action suit.

Treasury Secretary Paulson says the stimulus package may help create 500,000 jobs this year and that checks may be mailed 2 months after legislation is enacted.  Tax rebate checks are going to help create 500,000 jobs?  Someone want to explain that to me?

Caterpillar’s CEO says he expects to see record results again in 2008 and sees top line sales to be above $50B in 2010.  He expects his company’s softer markets to bottom in 2008 and that any U.S. recession will be short-lived.  Wait a minute!  Isn’t this the same guy that was wailing away last quarter that the U.S. was looking at economic conditions not seen since the Great Depression?  Guess he finally got the memo to knock off all that negative talk.

There will be more commentary and charts later and over the weekend. 

The news on the financial front is bad.  Period.  It doesn’t matter how many times some analyst, CEO, Fed Chairman, or the President says the economy is robust or the “subprime” problem is contained, the news is bad.  From all of the research I’ve been able to do on the financial debacle, I could write a proper horror novel.  For anyone who thinks the financial problems have already been priced in the market, here are a few observations:

Corporate profits are going down.  Prices companies pay for materials are increasing (same for individuals) and their margins are shrinking.  We’ve written before about all of those share buy-backs being an ominous sign.  The reason is this:  A company has 2 million shares and earns .10 per share in year one, then buys back 1 million shares.  In year two the company reports they earned .12 per share.  Did they have a good year?  No.  They actually earned less, but in year two they just don’t have as many shares.  Yes, I made this simplistic, but keep it in mind the next time you simply scan the headlines of an earnings report.  Be sure to dig a little deeper, see if you can find their year-over-year revenues and profit margins.  And right now, expect any company to project a rosy outlook for their sector, unless it is a sector that feels it needs an interest rate cut to survive.  Then you will be hearing wailing and gnashing of teeth.  But, that’s OK, you say, because at least they aren’t involved in this credit crunch thing, right? Do you know how many companies are actually involved in financing activities?  Would you be surprised to learn that Caterpillar (CAT) and Deere (DE) and Pitney Bowes (PBI) derive 12% of their earnings from financing activities? And what about all those store credit cards?  No big deal because people are paying their debt?  Think again.

Loan repayments are defaulting at an increasing rate, and it’s not just subprime, but all loan types.  Construction and industrial (commercial) loans, credit card loans and personal  loans defaults are on the rise.  Why is this happening?  All of this credit was a house of cards.  The following scenario starts with the fact that housing was overbuilt and overpriced. And the more complicated financial schemes and relaxing of financial rules to continue expanding credit are not accounted for, but only makes it worse. 

Bank A loans Fred $1,000, with interest, for a house. The hope of Fred being able to repay, is the risk that Bank A is taking, and if Fred can’t repay it, Bank A will take the house.  Joe finds he needs $2,000 to buy a house.  So, he goes to Bank B and borrows the money, with the same deal as Fred.  Bank A and Bank B sell those mortgages to Bank C, thereby ridding themselves of the risk if Fred or Joe can’t pay the loans.  Bank C doesn’t really want the risk, even though it is making money from the servicing of those loans and collecting the interest.  So, Bank C bundles those loans, calls them an investment vehicle and sells them to Investor A and Bank D.  Why does Investor A and Bank D buy this debt?  Because it’s value should go up as home prices appreciate.  Bank D wants to use it as collateral to borrow money and Investor A expects to make a nice return, since real estate only goes up.  Until it doesn’t.

When the housing prices drop, the collateral supporting the price of those loans drops as well.  Investor A wants to sell these loans now and take his cash out of the market.  But, the problem is that suddenly everyone figures out that housing is in a slump and doesn’t want to pay Investor A’s or Bank D’s asking price.  So they have two choices.  Hang on to the loans (debt) and wait/hope that real estate prices go back up, or sell at a loss. 

Ok, that’s the simple version of what’s going on.  Banks are losing money, broker/banks are losing money, other’s involved in finance are losing money.  And they are all pinning their hopes on real estate values rising.   

Bloomberg article on U.S. Profits  

Forbes Magazine article on corporate financing

Article on mortgage meltdown, not just sub prime

The UAUA and CAT shorts worked beautifully. The charts told us to go short and they do not lie.

I am holding my shorts overnight. If you on the other hand want to take your profits here I would understand. I will hold mine and see what the morning brings. If there is any sign of a pop tomorrow in the morning then I will pull up my shorts and cover my behind.

The ultra short on the Russell MidCap is also doing well. I will hold that overnight also.

Some good profits for the Rebeltrader portfolio today.

P.s.: please remember to vote for my charts on stockcharts.com , and vote once every day .. Many thanks!!

Chuck

John Deere (DE) reported their earnings and they beat on the quarter EPS but forward guidance was mixed. We may see Caterpillar (CAT) trade up in sympathy but there is significant resistance at $78.00 and at $79.00

Another short trade idea. Wind River Systems (WIND) is a mess of a stock. There is very light pre market trading (so far) on WIND taking it up to resistance $9.60. See chart for my short trade idea plan. WIND is trading up on speculation that the company is up for sale, and that IBM may be interested. But rumors in this type of market could give us a nice pop to take advantage of. If the price moves up to resistance and can’t get through then then people are not buying the rumor of a buyout and still want to sell it down. Will be a battle between those who beleive and those who don’t beleive.

The selling is increasing on more volume. There is not much escaping this sell off.

Current swing trades EXLS,LAYN,NVEC,APKT hit the stop point and I am out of the trade and have my capital protected.

This is why we use money management. To protect our money. That is always you’re first job in getting into the stock market. Protect your money first and above anything else. The making money part comes after only you practice money management.

So while the market continues to sell down I have my money nice and safe in cash while the others keep losing theirs. Always practice safe market trading by knowing where the exit is at all times. The “Buy and hold” investors never have an exit. They only have a ‘hope’. And you can’t make money on a “hope”. Once you rely on hope you have already lost in the stock market jungle.

This sell off has us now reaching deeper than we have been since this whole mess started. If the S&P closes at a new 45 day low (since this market pullback began) then we are seeing signs of the market getting still weaker and we have to be prepared for even bigger downward moves.

I’m watching CAT for a short position. CAT appears to have lost investor confidence and it on the verge of a significant trend change. I will short CAT on a move below $76.00

The futures are down in the US markets this morning. And most of that in my view is on the bad news from Google last night(we also have options expiration today so that adds extra volatility). We also have Caterpillar (CAT) adding to the negative view this morning as they reported earnings this morning and they missed expectations by a fairly large margin.

I think Google sent their shareholders a wake up call. People have been buying up Google thinking they were infallible. But last night Google revealed that they are not so perfect as everyone (including analysts) have been touting. Google has been damaged and it will be a while before it trades back at the levels it was at. I see Apple doing the same thing. Everyone thinks Apple is perfect and they can never do any wrong. But one day Apple will have their own wake up call. It may come next week as Apple will release their earnings.

Earlier I had to sell BVF on news of a FDA letter telling the company that they were not going to approve one of their drugs. BVF has settled at support around $21.50 and already I am seeing some buying come back in as speculators are speculating that BVF will resolve the FDA issue and the drug will eventually be approved. But as swing traders we don’t want to wait for something that may never happen. We take our money out and move on. BVF was a loss but that is why we divide our capital up into pieces and only expose one piece to a trade. The goal is to always protect the total capital. A loss in one piece is made up in the gains of the other pieces. It’s all about having more winners than losers.

RebelTrader swing trade Western Digital (WDC) is trading up in pre market on upgrades and good earnings from SeaGate last night.