On the Sidelines - Living as a Cash Hording Loser

I can not find any compelling reason to get into the stock market right now. The U.S. economic outlook for 2008 is for slowing growth and all the technical market indicators (Wishing Wealth, Stockbee Market Monitor, IBD Big Picture) are bearish. Additionally, the market just seems very sickly to me: the majority of breakouts are failing and only defensive and political stocks are rallying. Things are so volatile right now and the Fed intervention wild-card makes things worse. I am not a big fan of the Federal Reserve. Personally, I think we should not have one and the markets should be allowed to work themselves out.

Unfortunately, we do have a Federal Reserve and I believe it is composed of a very smart group of people who will doing everything they can to fix any liquidity issues the market has. If the TAF doesn't have the intended effect, they WILL try something else ... until they find something that does work. In addition, there is strong global growth and U.S. government spending that will most likely prop up the U.S. economy and keep it out of a full-blown recession. Going long isn't working right now and the shorts are likely to get burned by the Fed.

It is just too tough to call right now...

A Recession Forecast - The Yen and Credit Spreads

According to Fischer Investments and their analysis of credit spreads, there currently is not and never was a credit crunch. Exhibit 2, from the Fischer Investment's 2007 Stock Market Outlook, shows credit spreads had only increased about 1% by the end of the third quarter.This indicates that there has been only a small increase in the premium corporations are paying to borrow money - thus according to Fischer Investments, reflects ample liquidity and no real credit squeeze.


Another interesting analysis on the Yen-carry trade is shown in Exhibit 6. This chart shows no significant increase in the value of the Yen. As long as the Yen stays cheap, outside investors will continue to borrow in Yen and buy securities in the U.S. and other global markets.

Epic Stock Strategy

I have been working on a stock-picking strategy based on a hybrid approach of the strategies outlined by Pradeep Bonde, Louis Navallier, William O'Neill and Ken Fischer. The basic idea is to screen for stocks with the best ranking in terms of quarterly earnings growth, yearly earnings growth, yearly sales growth, return on investment, and profit margins. Once a list of stocks is generated from this screen, the next step is to monitor each of the stocks for a price breakout defined as a 4%+ move on volume that is up 50% from the 10-week average and greater than the volume from the previous trading day. Additionally, the breakout scan should only identify stocks which have not already broken out in the past month or so. This is achieved by eliminating stocks which have price appreciations greater than 10% over the past 10 or 20 day periods.

The idea is to create a strategy that is easily and mechanically implemented, picks the best of the best based on fundamentals, and then buys them on breakouts after a consolidation period. The strategy is executed by buying the stocks on breakout and only holding as long as they remain in the best of the best list and do no drop more than 7-8% from the buy point. This strategy can be implemented with the IBD custom screen wizard and Telechart. The steps are as follows:

1) Screen for stocks in the IBD custom screen wizard using the following criteria:

Sales + Profit Margins + ROE (SMR) Rating: A
% Change in Latest Quarter's EPS vs. Same Quarter Prior Year: > or= to 50
Annual % EPS Growth Rate of Last 3 Years: > or= to 25
Average EPS % Change for the Last 2 Quarters: > or= to 50
Annual % Sales Growth Rate of Last 3 Years: > or= to 25
ROE (Latest Fiscal Year Reported): > or= to 25

2) Once you have a list of 50 or so stocks, you then scan daily in Telechart using the following criteria:

( 100 * (C - C1) / C1) >= 4 AND V >= (AVGV50*1.5) AND V > V1 AND (100 * (C1 - C22) / C22) <= 10 AND (100 * (C1 - C11) / C11)<= 10

3) Buy the stocks that conform to the criteria in 1 and 2 above and set an 8% trailing stop loss order or sell once they no longer conform to the criteria in number 1.

I still need to work on the sell rules for this strategy. With the strategy implemented as it is currently defined, a dip of over 8% during an otherwise epic price appreciation causes a sell order and you may miss out on a much larger run. Other rules to look at are slices through the 10-week moving average or significant drops on heavy volume.

Origins of the Subprime Mess

This mid-west-white-trash treatise on the origins of the subprime mess is well worth the read. It reminds me of the woman who thought her ARM would reset to an interest rate inline with the interest rates currently being offered for new mortgages.

Here is an excerpt:

"When I opened the mail on November 1, everthing started to go downhill. For some reason my house payment had gone up by $700 per month! There was no way I was going to squeeze that onto my plastic. I thought that maybe it was some sort of fat-crazy-chick revenge thing from Linda, so when I called First Coralville to complain I asked to talk to her supervisor. "No, it's not a mistake," says the guy. "You have an adjustable rate mortgage, and it adjusted."

"Ex-squeeze-me?"

"Adjustable rate mortgage, A-R-M," he says. "After the first 6 months, it adjusts up to the prevailing interest rate. You should have realized that, because it's all there in your contract."

Who am I, fucking Oliver Wendell Smallprint? I thought ARM meant "always ready money." I told the dude there's no way I could pay."

Recession Ahead?

This is a tough one. Its seems that most people/indicators are on one side of the fence or the other:

- Alan Greenspan, the founder of opacity, seems to think we are headed for a recession. He says our current chances for a recession are at 50%, up from 30% a year ago.
- The Economic Cycle Research Institute says it's leading U.S. index's annualized growth rate fell to -3.8% in the week ended Dec. 7, the lowest in 5 years. Still not in the typical recession range of -5% or -6%, but close.
- Merril Lynch rates a chance of recession over the next 12 months at 100% based on their analysis of the yield curve and corporate spreads. This correctly forecast the 2001 and 1990-91 recessions.

Big Day Yesterday

Both the stock market and the ocean had a big day yesterday. The surf was huge in SoCal, clocking some 10-15 foot waves in Ventura. The major market indexes were all up almost 2% for the day. The NASDAQ logged a follow-through day, trailing the IBD's call by four days. The IBD called a market follow through last week when the IBD 100 and 85/85 indexes logged their own follow through days. I don't like the fact that they seem to have changed their rules, but I can't argue with the results ... we appear to be in a rally. The majority of the stocks I track have bullish MACD daily crossovers and are bouncing hard off their 10-week averages after making sound bases over the past several weeks.

The market now has a 1/4 point rate cut fully priced in and a 1/2 point cut partially priced in. But recent economic indicators, including todays reports of U.S. ADP employment, U.S. non-farm productivity, and U.S. factory 0rders all show optimism toward the U.S. economy. This along with the fact that there are real inflationary concerns as shown by both the PCE and CPI, I don't think a rate cut guaranteed.

We are no doubt in a rally, but just like the swell that came in yesterday, the fun will not be around for long. I am out of QID today but not putting much money in any long positions either.