July 13, 2007

Why is the Dow up even after the CDO blowup? Here's some ideas, add yours

First and foremost, stocks prices do not equal house prices. Why trolls don't get this I'll never understand - the two are mutually exclusive. iPhone prices don't equal home prices either, FYI.

Here's a few reasons I see for stocks going up recently:

1) Investors frantically getting out of depreciating dollars and into stocks. One share of IBM going up while dollar is tanking means it takes more dollars to buy that one share of IBM, so IBM shareholders may feel "richer" when indeed they may be poorer. And meanwhile I paid $18.00 for 12 chicken wings here in London the other day... Get it?

2) Bond investors, especially mortgage-backed CDOs and US treasuries, selling their bonds and moving funds into stocks

3) Overleveraged hedge funds, on the verge of blowing up and shutting down, rushing into stocks short term, trying to get the sheeple excited before they get the F out of Dodge

4) Venture cap money is sloshing around in a big way buying up public companies. Buy-outs and rumors of buy-outs driving stocks higher and higher

5) Dead real estate money still looking for a place to go and stocks are a natural

6) Classic flight to safety after the CDO S&P Bear Stearns news with the multinational mega-caps leading the way

7) Hank Paulson and the PPT working overtime

Yes, this will all end and end badly. But enjoy the ride until it does. One BIG fallacy is the view of most that they can ride the wave and get out at the first sign of trouble. What happens when everyone wants to get out at the exact same time? Anyone remember September 12th? Anyone remember Black Friday? Anyone alive in 1929?

My COP, EWJ, EWZ, EWG and my miners are doing fine, I covered my homebuilders last week (pigs get fat hogs get slaughtered, gotta love 100% - 200% gains), I enjoy 5.5% to 6% CD's and savings, and I'm short IndyMac, Countrywide and Retail Holders today. And I wish I had picked up gold at $640, was waiting for my $630 target that never came.

With oil coming up on $80 again, CDOs and hedge funds blowing up, consumer confidence plummeting, housing prices in freefall, and wars and rumors of war all over the place, it feels dangerous out there.

How 'bout you? Where's your money? Are you on offense or defense? And do you understand how the dollar collapse affects you?


jafo said...

With the dollar weaker than ever, non-US investors (Euros, Pounds) are buying US stocks, which look cheaper than ever.

Anonymous said...

simply technical reasons (fibo)

Anonymous said...

F500, flush with cash, have no better way to increase stock value than to do stock buy-backs.

They may be unable to increase revenues, but they are sitting on piles of cash from tax breaks and need to do something w/ the cash and passify stock holders.

Rordogma said...

I'm focusing my time/resources on eliminating all debts.

I placed some play-money in the market by shorting CFC...it'll make the ride more interesting.

I've got a small pile of gold waiting for me in Australia(bought at $425/oz).

Renting happily and cheaply.

Refusing to take out a mortgage in this hostile climate.

Staying flexible, having fun, and KEEPING IT REAL!

Got enough cash on hand to get the F-out of town if need be.

Got a stash of iodine pills for when Bush drops a dirty bomb stamped "Made in Iran" and declares himself dictator.

otto von bismarck said...

"Why is the Dow up even after the CDO blowup? Here's some ideas, add yours"

Here's the view of a Thrift Savings Plan (TSP) advisory service:

The June/July battle between the bulls and the bears in the TSP stock funds has now been settled--at least for the while. Thursday's near 300-point rally in the Dow knifed decisively through the recent trading range leaving little doubt as to who won the tug-of-war between the professionals and the public.

The media "explanation" for Thursday's rally was that earnings had come in a little better than anticipated--but that's a pretty feeble reason for explaining a 300-point rally in the Dow. The underlying fact is, as we referenced earlier, that this market has been torn between the psychologies of two opposing camps of investors.

On the one side were the professional traders and hedge fund managers who had been steadily increasing net short stock and derivative positions since mid May. The rising short interest ratio and increasing put volume has attested to that.

Those professionals were stubbornly fixated on the decreasing quality of the sub-prime mortgage market and its likely pejorative impact on the larger economy. The problem was that the majority of professionals are rarely right when they share a commonly held market view--in this case short-term bearish. The outcome? They lost. What we saw as a result on Thursday was a classic short squeeze.

The pros have also been wrong in anticipating that the C Fund would begin outperforming the S (small cap) Fund, and that simply hasn't happened (at least as yet). However, that spread favoring the TSP S Fund over the C Fund may finally be nearing maturity--especially if the market makes a top.

On the bull side of the argument perhaps the most significant and fundamental underlying factor supporting the current and future upside potential of this market is the unprecedented stash of international cash and liquidity--much of it sitting patiently on the sidelines waiting for a chance to enter world equity markets. Those funds have been feeding stock markets around the world for many months and have essentially come from the very wealthiest of the world's investors. Those turgid packets of liquidity are actually increasing in size and flexibility and are likely to provide an even more dramatic impetus to US and international equities markets in the months to come.

The majority of the public had been generally bullish--though not overwhelmingly so--about the general direction of this market. However, the public so far has not really participated in this market rally--most preferring to watch this bull market from the sidelines for now. Many investors still retain nightmares of the often 50% reduction in retirement account values from the tech bust of 2000-2003. In fact that early 2000 market high was only recently exceeded by the broad market averages this week having taken four and a half years to finally recover from those painful losses. No wonder the public has been wary of this market rally.

Public reluctance to become overly exuberant about this market uptrend has actually reinforced the market's general health. The failure of the average investor to return to this market means there is currently none of the typical froth and spiking so characteristic of a market top. In fact the progress of this bull market has so far been smooth and technically well supported on dips.

Earnings behind the stocks in the TSP C Fund are also now realistically priced at a multiple of about 17--historically right about on the long-term average for the broad market's P/E ratio. Even at these levels there is room for TSP stock fund prices to match, or perhaps even exceed, the anticipated growth in earnings throughout the year without the markets getting overheated on the way up.

On the downside the upward pressure on stock prices from the short squeeze of the hedge fund positions is about spent. Three hundred points is a big bunch for a one-day move. The margin calls going out tonight to the market pros may carry the markets a little higher, but once the squeeze is over prices will begin to correct and settle back a bit. Then there's always the specter of rising rates and the continuing challenge from the smashed sub-prime mortgage market and the pending collapse of the "carry trade" to contend with along with the continuing unstable global geopolitical situation.

However, when all the fundamentals and technicals are summed up, our net projection is that this market still has farther to go on the upside before the long anticipated 10% correction sets in (we haven't had one in over 1600 days). This bull market is likely going higher over the intermediate term, but it may be getting just a little long-in-the-tooth now. In fact this bull market now ranks as the fifth longest in market history--amazing when you figure that it has spent all that time just making up those 50% losses during the tech-bust.

In line with a full batch of green arrows now prominently displayed in the TSP stock funds and a bullish market environment DMT indicator (flipped back to the upside after a short down arrow in May) we are now increasing TSP stock fund allocations marginally. While the TSP funds will eventually pause to catch a fresh breath, the only bearish indicator remaining is the RUTTR which is still stubbornly stuck in the red.

The TSP international I Fund continues its hegemony over the other funds, and that trend is likely to continue. At least for now the relative strength of the small cap S Fund over the C Fund should prevail until the market finally finds a top.

Prices generally are likely to settle back a bit after some follow-through strength following the final exhaustion of the short squeeze, but we are adopting a little more optimistic stance on this market for the balance of the year. We expect the TSP stock funds to be supported as the public gradually continues to join this market by buying back in on market dips.

Anonymous said...

CRAMER to Keith:
You're 100% wrong about subprimes blowing up the market:


Bux Fox was a wimp said...

After about 5 years of massive gains in the real estate markets, those sitting on piles of cash are going to have to put it somewhere.
The real estate market is now flatlining to tanking in most markets. All that excess cash is being slammed into the equities markets right now.

keith said...

Glad I could help. Like shooting fish in a barrell...

Note for the wise - buying puts and calls should be your fun money only - like playing craps in Vegas

Now the big question is will IndyMac or Countrywide be forced to come clean soon?






HOV PUT NOV 22.5 (HOVWX) 400 2,546.97 932.99 1,613.98
HRB PUT JUL 25 (HRBSE) 400 1,666.98 732.99 933.99
KBH PUT JUL 45 (KBHSI) 400 2,506.97 1,532.99 973.98
WCI PUT SEP 20 (WCIUD) 900 3,763.20 1,366.74 2,396.46

keith said...

Great point about the short squeeze by the way, might explain the covering the past 48 hours

Sixpercenter said...

Trade deficit money coming right back.

Anonymous said...

Mostly gold since the US dollar is losing altitude fast and I don't expect Helicopter Ben to rescue it.

KaliExPat said...

It's obvious to anyone with a brain that it's the PPP (Plunge Protection Team) and the institutional investors.

In there desperation to prolong the inevitability of the party coming to an end, the PPP especially is throwing money into the markets trying to hide the economic truth in 21st amerika; The Emperor has no clothes on!

Right after Dumya & the New World Order took over in 2001 the FED created secretive banks in the Caribean for this very purpose...total manipulation of the markets by the PPP.

P.S. This is a well known and researched fact within hard-core investing circles...

Frank@NeverColdCall.com said...

First and foremost, stocks prices do not equal house prices. Why trolls don't get this I'll never understand

Agreed, my biggest pet peeve on this board are the trolls who say there's no housing crash because the Dow is up!

That's just as stupid as assuming that desperate homedebtors' asking prices represent actual values. It's all about SALE prices, not asking, duh.

KMackie said...

Why has the stock market kept going up, despite CDO risks?

1) Mass greed/denial, often seen near/at market tops

2) Hedge fund leverage

3) Recycled trade deficit money (already mentioned above, but IMHO the biggest factor)

4) Recycled oil money ("petro dollars")

5) Weak dollar temporarily masking weak earnings

6) Rising wedge technical formation (S&P 500), the most dangerous yet seductive technical chart configuration (i.e. market goes up with ever increasing intensity, until it collapses back upon itself)

Anonymous said...

Defense except Oil

Mark in San Diego said...

Essentially, poor people don't matter. . .(flame me, but in an economic sense, not social). . .sub-prime is concentrated in the lower 1/3 of the economy, and those people don't participate in the stock market. . .actually, only about the top 10% really have significant stock holdings. . .so if the top say 20% are doing well, then the stock market is doing well. . .we have a two-tier economy, and as long as investment bankers in NYC and venture capital firms on Sand Hill Rd. are investing, then we just take the China and oil money and recycle it into the stock market.

Now Keith is going to take issue with this, but Jim Cramer has a point - if all 500 Billion subprime defaulted, the system could likely handle it. . . remember, GE alone has revenue of 165 Billion a year - just one company. . .that isn't to say that Phoenix shitboxes will sell for half-off, because they will - but that may not really be connected to the stock market.

Anonymous said...

PRUDENT BEAR GLOBAL INCOME/SAFE HARBOR FUND (PSAFX):Norwegian Kronas,Swiss Francs,Singapore Dollars,German Bundes Notes(Euros),Central Fund of Canada, UBS Gold Certificates,shares of Newmont Mining,Randgold,etc.

PERMANENT PORFOLIO FUND (PRPFX}:US Gold Eagles, Canadian Maple Leafs, Gold Comex, Silver Comex, Govt. of Switzerland Confederate bonds, US Treasury Stripped Coupons,Chevron,BP,etc.



This is about as bullet proof as you can get!

keith said...

Mark - it all flows downhill

Subprime blew up, taking housing demand and prices down. That started the chain reaction taking Alt-A down, which will take demand down further (and listings up, price down)

That tumbles into jumbos and AAA mortgages, crimping demand and prices even further

Classic, straight out of Manias Panics and Crashes

But that's housing. Great unknown is what happens to US$ and worldwide stock markets when housing crashes like it is

Anonymous said...

24 year old college student with no debt. I have a majority of my stock in Candian oil stocks. PGH, PWI are some. I get foreign play plus commodity with a healthy dividend.

marinite2 said...


I'm surprised; you are in the UK so you should already know this. The DOW is crashing when viewed in Euros:


I miss the M3.

Tesla said...

This looks like a "speculative blowoff" that precedes the credit crunch.

g said...

Defensive. Mostly in ultrashort ETF's chosen carefully like SRS which should continue to make me money even if the Dow screams higher. Some Hussman, some metals, some foreign equity funds.

We all know the fundamentals suck....the last moves up attributed to stuff like short squeezes and share buybacks, not anything economically positive. But yet we go higher.

However I am finally seeing the sign I was waiting for - lots of bears capitulating and saying the market could go higher for some time.

SPECTRE of Deflation said...

They have more fleecing to do Keith. The regular Joe hasn't participated in this market because folks are still smarting from the market meltdown of 2000.

Lure them in with 14,000...15,000 on the INDU, and you can sell these poor suckers all your winners that are about to tank and become real turds.

Also, I have seen figures that indicate those folks that are in the market are in overseas markets or foreign ETFs, and who the Hell can blame them with the $ sitting at 80.39 against a basket of currencies.

It's also a damn good thing "core" inflation is so low because everything else is going through the roof. Nice job Heli-Ben.

Ingredient input prices – annual % change (estimates)

Milk: + 65.4%

Corn: + 39.7%

Barley: + 41.7%

Palm oil: + 24.9%

Soya oil: + 30.4%

Oats: + 20.7%

Wheat: + 24.2%

Soya beans: + 28.5%

Cocoa: + 23.6%

Tea: + 8.4%

All ingredients: + 14%

(Source: Lehman Brothers)

Shakster said...

After reading the posts,I would conclude that The middle class ,and lower classes would do well to stay out of the Stock markets.They are blind as to what the intentions of the big players are,as are all of us too.Nobody really seems to know.
If you paid your home off early instead of handing it over (401k),I think you would be better off.

Anonymous said...

Keith your US centric subprime mindset is blinding you to broader global view. The real bagholders (Asian central banks etc.) are diversifying away from AAA rated papers and finding stocks better proposition than money losing AAAs. No one can say for sure how long the DOW rally may continue. But not riding the trend will be regrettable.

Shakster said...

I keep reading that "money" is just coming full circle,back to Wall street.This would be ok if money were just going from one place to another(Loser to winner).We still have the money in the system to be reinvested etc.
Thats the big problem now.There was no money in the first place.These investments had phony valuations,some were completely worthless.No money can come back to anyone.
In order to get things square with investors,someone will have to come up with the money.Right?WTF?
I love a good mystery,and fiery crash scenes are a must.

decaffeinated said...

If you have extra cash, the oil patch looks to be a slam dunk right now. I've held COP (conoco) and CVX (chevron) for quite some time and in the past month they've simply exploded. COP is up sharply because the company announced a huge buyback ($15 billion), but CVX is just floating up and up and up.

I think that a lot of folks recently tumbled to the fact that India and China's pent-up demand for oil probably exceeds what the world can produce.

T. Boone Pickens says that oil will hit $80 per barrel on or before next May. I contend that companies in the oil patch can virtually print money. On the flip side, consumer retail will not tolerate a steep gas price hike (say, to $4/gallon).

CVX has PE of 11.4, COP's PE is 9.56 ! Damn.

Anonymous said...


In my IB IRA and spec accounts. I'm 10% cash (CAD). Guys, this move is gonna be huge.

MrCool said...

Keith, congrats on your puts, looks like you made some nice profit off the backs of the homies.

What do you think, is there still an opportunity on the short side for some of these turkeys? I'm wary of wading in, but I can easily see another leg down once the short squeeze and bogus takeover rumors (Buffett, yeah right) subside.

SPECTRE of Deflation said...

Keith, now I know they are desperate and ballsy at the same time.

From Bloomberg:

U.S. Urges China to Buy Mortgage-Backed Securities (Update2)

By Josephine Lau

July 13 (Bloomberg) -- The Bush administration is urging China's central bank to buy more government-backed mortgage bonds in an effort to sustain financing for U.S. home loans.

U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a corporation under HUD that guarantees $417 billion in federally insured, fixed-rate mortgages.

``It's not a matter of whether they're going to do more business in mortgage-backed securities,'' Jackson told reporters in Beijing. ``It's who they're going to do business with.''

HUD aims to tap China's $1.33 trillion of foreign-currency reserves, the world's largest, after surging defaults on subprime mortgages caused the near-collapse last month of two hedge funds run by Bear Stearns Cos.

Moody's Investors Service on July 10 cut its ratings on $5.2 billion of bonds backed by subprime mortgages, which are loans taken by borrowers with poor or limited credit histories. Standard & Poor's yesterday downgraded $6.39 billion of such bonds. Fitch Ratings said it may lower ratings on $7.1 billion.

Ginnie Mae is ``in a better position than most'' to offer mortgage products because, unlike Fannie Mae and Freddie Mac, it provides the full backing of the U.S. government, Jackson said. Mortgage securities offer China's central bank better returns than U.S. Treasury bonds at the same level of credit risk, he said. China held $414 billion in U.S. Treasuries as of April, according to data compiled by Bloomberg.

Jackson met with central bank Governor Zhou Xiaochuan and Minister of Construction Wang Guangtao in the nation's capital this week. Central bank spokesman Li Chao couldn't be reached for comment.

Commercial Banks

China has approved the creation of a new agency that will manage about $200 billion of its foreign exchange reserves, as the government seeks to boost returns from its holdings.

The nation held $107.5 billion in U.S. mortgage-backed securities as of June 2006, up from $3 billion three years earlier, according to HUD's Web site. The figures include securities offered by Ginnie Mae, Fannie Mae and Freddie Mac, HUD said, without detailing the holdings in each agency.

``China's bought some mortgage-backed securities from us, but not in great numbers,'' Jackson said, without providing a target for future purchases.

HUD also plans to approach Chinese commercial banks such as China Construction Bank Corp. and ask them to buy government- backed mortgage securities, Jackson said.

The housing department wants to sign a memorandum of understanding with construction minister Wang when he visits the U.S. in August, Jackson said without elaborating. The two nations face similar challenges in providing affordable housing to average citizens, he said.

lendingmaestro said...

I liked all your reasons except the declining dollar explanation. It doesn't matter if you own US stocks or hold US dollars. In order for a foreign investor to buy US stocks, he/she must first convert their currency to dollars. Since you are now holding US stocks bought with US dollars, you want the dollar to STRENGTHEN. This way once you sell your investment and get US dollars you can repurchase more of your nation's currency.

Anonymous said...

Stocks are a basket that catches newly printed federal reserve money. Bernanke and cohorts are desperately trying to give free money to the public by buying stocks and long bonds -in order to bail out housing.

deepcgi said...

"No one knows who owns all that bad paper...and two-thirds of that is overseas"

Now that he puts it that way...Why did we see such huge, world-wide fluctuations in the stock market recently in light of relatively minor increases in consumer spending month-to-month? Shouldn't all of those little people be irrelevant?

Cramer's faith in the derivatives market to absorb all of this carnage is like religious fanaticism.

People can still count, Jim! Even overseas! Of course, someone knows who owns all of that paper! Their enemies probably know.

God help us if the Nick Leeson's of the world have derivatives at work on huge chunks of this "bad paper".

And God help us if as much of that $500 Billion is as concentrated in California as we all fear it is.

deepcgi said...

If the housing market continues to tank but the stock market doesn't follow accordingly, at some point, people who still have money (i.e. large corporations, governments, banks, the very rich) will have to buy up pieces of failed, liquidated real estate in order to stem the tide of wider market devastation.

The trouble is, when this real estate is at its cheapest, it will still be a poor investment. To make such an investment would run contrary to sensible short term practice to be sure.

Real estate is a ladder. How do you remove the bottom rung and still climb the wall?

Anonymous said...

Watch out for the sucker rally!!! Money managers and traders know the price of a derivative collapse. These guys know how to pump and dump really well.

Go short and be prepared for a major decline in indexes. The key is margin calls for hedge funds which may begin within weeks depending on how quickly the credit downgrades happen.

Margin Calls Anonymous said...

Margine debt.

NEW YORK | Investors are borrowing at a record pace to sink into the stock market, and the trend is raising concerns on Wall Street about what might happen if a major correction occurs.

The amount of margin debt, which is how brokers define this kind of borrowing, hit a record $285.6 billion in January on the New York Stock Exchange. Such a robust appetite, amid a backdrop of complacent market conditions, could leave investors badly exposed if major indexes are snagged by a market decline. Some could find themselves forced to sell stock or other assets to meet what's known as a margin call -- when a broker in effect calls in the loan.

Bulls and bears can continue to debate the direction the markets will take in 2007. But, one fact remains: The last time margin debt hit this level was at the height of the dot-com boom in March 2000, just ahead of a two-year decline.

Anonymous said...

wait until all those piles of money from real estate and stock gains over the past 20 years finds their way to gold.

it's going to be unbelievable.

i just pray the contrarian in me can hold on long enough as the herd takes this far beyond all our imaginations.

Anonymous said...

I think the point you make about the inflation in the dollar causing people to leave this assets for stocks isn't quite true.

The plunging exchange rates do defiinitely mean that if you are a foreign investor, you have dollars and one day plan on converting them back to the pound, for example, you're getting hosed. But for the average american who doesn't exchange money how does the exchange rate affect them?

I don't see the prices of imported goods increasing at all, do you?

There are a lot of deflationary forces out there as well too. Especially housing, and credit which is more difficult to obtain now. And the whole argument about the Fed and M3 is off too. We have a fractional reserve banking system, the measure of M3 isn't direct because of this.

I think it's a complicated subject, and for some reason people here just assume everyone is out to screw them over and the Fed is working for wallstreet. Why? I'm no fan of Bernanke, but what does he have to do with wallstreet, he was an academic his whole career.

Inflation is complicated, probably too complicated for a site like this.

Anonymous said...

Here is a good article explaining what I am trying to say about the reporting of M3.


Anonymous said...

You all realize the SEC has proposed new rules for short sales? The new rules eliminate the need for an "uptick" before a stock can be shorted, and the minimum share prices are also waived. After a 90 day comment period, the rules take effect in September...

kilgore said...

I think the main story here is that there is still a profoundly irresponsible amount of liquidity around the world and it has to go somewhere. Interest rates are still below what I believe is the real inflation rate and as long as that persists, the stock market will be fine.

I'm also starting to wonder about housing prices and how far they will actually fall. I've been believing they were grossly overvalued since 2001, but now I'm starting to think that the housing market is just pricing in the reality that the real purchasing power of the dollar has fallen by 40-50% over the past 5 years and that as long as interest rates stay within 100 bp of where they are today that the market probably isn't going to tank horribly.

who knows?

Anonymous said...

"I don't see the prices of imported goods increasing at all, do you?"

Dude, you are either extremely short-sighted or guessing.

Imported stuff has gone up big time.
And as the $ tanks, will keep going.

Anonymous said...

wait until all those piles of money from real estate and stock gains over the past 20 years finds their way to gold.

it's going to be unbelieveable.

............as the herd takes this far beyond all our imaginations!

Care to expound on or clarify ?

Anonymous said...

"Inflation is complicated, probably too complicated for a site like this."


When the supply of "money" goes up faster than the supply of actual goods and services available for purchase, prices rise. How complicated is that? Doh.

Anonymous said...

"I don't see the prices of imported goods increasing at all, do you?"


Huh?? Do you buy food? How about energy? Or are you talking about the crap at WalMart that the Chinese are dumping on the US in order to (finish) destoying our industrial base?