Low Maintenance Portfolio - 2 (Market Reading 9/27/11)

Last Friday before close, I raised the question: "where the money go?"

something fishy. gold and silver crashed, but where the money go? not in bond not in equity. i want to follow the smart money, but i first need to find them.
a conspiracy interpretation, they r waiting for the meetings this weekend. with the money escaped from metal market, i will say it could easily push spx up for 100-120 points to like 1240-1260. of course the measurement will be similar if heading down.

Now is time to look back. With the extreme bearish sentiment in the market, where the bulls have become bears,where my favorite trader since yesterday is calling the collapse of the World with GS ruling, the set up for a huge squeeze is here. as I expected, the move up this morning was brutal, and killed many of the new “smart” shorts.
Technically since SPX hit 1195 level, which is just inch shy to my minimum target of 1198-1200 , the rebound can be considered satisfied. I think the brutal part is gone. It may move up a little bit or just correct at current level. It will be a small possibility case that SPX to challenge 1240-1260 maximum target.
How is the portfolio going? As I discussed in Low-Maintenance-Portfolio-1, I am using the approach introduced by Marc Faber, detailed in his book “The Ivy Portfolio”. Here is the recap of my allocation:

• I exited both US and emerging market equity on 7/28 (see part 1), 
• I exited long Gold position on 8/23 when I sent out the "Dear Mr Bond" letter. 
• I am still holding 20% DBC (commodity) and 20% IEF (7-10 years). 
• I added back GC (gold) Monday around 1630 to play a rebound. If the crisis goes on, Gold should not stay below 1730.
• I did day trading on ES (equity), but decide not to add to my long term portfolio for this month, even with my short term bullish view above

Interestingly, I found a CNBC interview with Marc Faber on 9/26/2011 3:00 EDT. Pay attention to the time stamp. Since he is in Hongkong now, the interview is before the Monday market open.



If you are really impatient, fast wind to 1:17. Marc said he expected a short term rebound of Equity this week, but he is not going to buy, since he is expecting a drift lower toward last year low of 1010. He would be happy to buy equity below 1100. He also said Gold is very oversold. He plans to buy in the next 2 days. Stupid CNBC put down:

Marc Faber, author of the Gloom, Boom and Doom Report, tells CNBC that he thinks gold could fall to $1,100 an ounce 

Marc doesn't think the market is down because of Greece, which is an insignificant player of the world economy. It is just the symptom of the problem.  He also hit China on slow down, possible aftermath of infrastructure expasion, etc.

WOW. All spot on. Now we are talking! Do you see how close our views are? Now you understand why I recommend him as my only recommendation? (For the record, not one of my recommendation, but my only one.)

I will surely follow up in the coming month.

Words after 9/21/2011 FED - (1)

I discussed my expectation of FED's 9/21/2011 meeting HERE. They didn't do much except the widely expected Yield Curve Twist approach. You know, Ben is a famous "meet-expectation" guy. Market got disappointed on the underwhelming reaction. A sell-off was followed, which made last week one of the worst in recent months. Before I jump onto the analysis of the twist, let’s start with the reality check (outline).

1.       Recovery from the Abyss: This is the most severe economic upheaval since the great depression 1929, with Epicenter in the severe housing downturn. The unprecedented damage spread to largest asset/credit class:

• Highest employment loss percentage since 1940s
• Deleveraging on a global scale
• Collapse of some of the largest financial institutions in the world
• Unprecedented government intervention in an attempt to provide stability

2.       U.S. Banking Industry Stabilized but Still Fragile ….

• a)      Credit metrics appear to have peaked but remain an industry burden
• Credit loss cycle may have a second leg
• b)      Capital has been raised to stabilize balance sheets
• Incomplete at regional and community level
• 90% of TARP has been repaid but 491 banks still hold TARP ¹
• c)       Bank loan demand in place but sluggish
• Lack of “shadow banking” industry may spawn re-intermediation
• d)      392 banks have been closed by 865 remains on the FDIC’s problem list

(Source: FDIC September 2011)

3.       Regulatory Reform and Pace of Economic Recovery Remain Big Variables ….

•       Significant economic hurdles ahead

a.       Structural problems remain: Leverage and unemployment

b.      Housing unresponsive

c.       Inflation taking root

d.      Significant long-term interest rate risk

•          Regulatory reform just beginning to unfold

a.       Increase in required capital levels and renewed emphasis on common stock as dominant form of capital

b.      Reduced fee income and rising regulatory and compliance costs disadvantage those without sufficient scale

4.       Summary of FDIC’s Quarterly Banking Profile (2Q11)

Industry posted net income of $28.8 billion, eighth consecutive quarter of year-over-year improvement. Wait, you think I am an angle delivering great news? The ugly truth is:

• Lower loan loss provisions were principal source of increase; net operating revenues declined for the second consecutive quarter (cooking the book)
• Half of all institutions reported declines in non-interest income, while non-interest expenses were 6.1% higher than a year ago (spend more, make less. Sounds familiar.)
• Average ROA was 0.85% for all institutions, 0.57% for community banks (I can do better than that)
• 15% of insured institutions reported a loss for the quarter (My tax money will go there soon)
• Non-current loans declined for 5th straight quarter to $320 billion (they are not lending)

“Problem List” saw first decline since 2006, now 865 institutions with total assets of $372 billion

Source: FDIC

Now comes with the Recession/Recovery question: Slow Climb Out or Double Dip?

I believe the Key Elements of Recovery is still Job growth. Only if people get a fairly paid job and don’t worry about next month’s paycheck, they will become consumers again. At this moment, they are still looking to de-lever, which will curtail spending. Only if people have job, they will think of housing. 

But it is still not enough for the housing market. I spoke with a fellow from FDIC last week. He told me he covers south east region. Atlanta, GA, for example, has 20 years worth of house inventory. This is the reality. Do you think it will go away or recover on its own? When I was in school studying Macro Economics, it said in the Great Depression, farmers pour milk into the sea because they cannot find a way to sell them and they cannot afford the storage costs. Now what? It’s not milk, but houses. Demolish them? Low interest rate will help the builders haunting around for a little bit longer, but they are not anywhere near recover. Ben of the FED, Tim of Treasury, Whitehouse (no name), whoever, whatever, they need to provide a basket of “creative” solutions to housing debacle. 

Update on AAPL

On July 18, I made a post AppleMania. At that time I projected a 3 wave movement, up to 390, pull back to 350 then rally to 420.

Today AAPL finally reach my target at 420. AAPL is bulletproof for sure. Broad market down 5% while AAPL is up about 30%. It is now the largest public company listed on US market.
All 3 parts of my projection realized pretty well. This appears to be my best so far. Other than patting my back and saying good job, I want to update my view.

I think it has 2 scenarios, either go up to 445 or go down to retest the triangle break out. Personally I am more leaning toward a correction that will be due soon. Today I started to utilize covered calls to manage my position. I will hold it a little bit longer. Rumor says iPhone 5 will be delivered on 10/15. I will determine whether to hold or not based on the length of the line waiting outside the Apple store.

Words before 9/21 FED

Call me Evil because I am. There is no QE3 on Jackson Hole, and market rumored about a new FED activity on 9/21 FED meeting. Where we are? Do we need a new QE? Will there be a new dose? I will provide a detailed report later. Let me quickly jump to conclusions for now.

1. The US economy is in terrible shape.
2. We need some kind of cure but a QE limited in capital market (as we had, twice) will not help.
3. Will we get anything good tomorrow? NO. You think the Euro zone crisis started last night? You think Greece started to struggle recently? You think Italy is recently added to PIIGS? If your answers to all above are Yes, then I have to say you are screwed. Why existing issues got amplified recently? Because our friends from DC and NYC need us, general public, to switch gear. A resolution is due but they don’t have anything yet. What to do now? Somebody just find some more creative ways, such as pressing the Euro crisis button. By burning euro down will not do anything good to our economy, except to increase the value of US dollar on comparative basis. Are we in bad shape? Yes we are. But the rest of the world is even worse. On comparison we are still OK. We are forcing those surplus nations (actually I mean China) to keep on buying Treasury products. Gold and precise metal market is not big enough for them, and oil will tank on the rise of $$$. Where can they go?
I don’t think we will get any easing tomorrow simply because we are already in one. They will keep those wording to maintain the imagination / expectation as topping/dressing. Nothing more. If you ask me, it is all preset deals, it is all conspiracy.