Wednesday, March 19, 2008

Indicator review time!

Three indicators which confirmed the intermediate term bottom.

1. The DOW transport didn't confirm the downside to the DOW industrials. It held it's Jan lows. This strength has to be respected.

2. The VIX was 20% above it's 10 day SMA, indicating an oversold market due for a bounce.

3. Philly SOX starting outperforming S&P 500, indicating a selling washout.

There are other well documentated indicators, like advisor equity exposure recommendtion, CBOE put/call ratio which were also at multi-year low levels.

Read the rest of this entry >>

Tuesday, March 18, 2008

Quotable quotes on market direction...

  • Steve Shobin, chief market strategist, AmeriCap Advisers: “We’ve had a lot of characteristics of a bottom: A watershed event in Bear Stearns, a crescendo of bad news, aggressive action on the part of the Fed, excesses in bearish sentiment and today a strengthening of the weakest link (financials). I think the window of opportunity is open for a couple of months.”

  • Kenneth Tower, chief market strategist, Covered Bridge Tactical: “I am optimistic that we’re near an important low and it may have been yesterday.”

  • Peter Boockvar, equity strategist, Miller Tabak: "The deleveraging process is nowhere near complete, and the housing industry continues to struggle. Stocks may be putting it all together for a strong rally today, but it should not be considered the beginning of a new bull market. This rally is more the lack of further bad rather than anything good. The bulls are way too premature if they think four-and-a-half months of a bear market are enough to correct the messes we were in.”

  • Tobias Levkovich, head of investment strategy, Citigroup: “One could argue that the credit bubble’s bursting and de-leveraging process could mean a bottoming out in the 1,165 area for the S&P 500 or 8.3% lower than the troughs seen thus far”

  • Random Roger: "Whatever comes of all of this I think it will take a while before it is all sorted out. The media will continue to ask if now is the time to buy but keep in mind that this bear market could last until April, 2009 and still be considered normal."

  • Mark Hulbert's "Double Nine-To-One" signal. "The next the 60-trading-day period produced a 22% return annualized."

EDIT : As Barry rightly points out in the comments section below, this was referenced in February and is probably no longer valid.

  • Quantifiable edge on Tuesday: "Looking out 2 weeks there appears to be a huge bullish edge. Thirteen of fifteen winners and an expected value of 3.6% over the period. Going out 90 days the average trade would have returned over 9%."

  • Traderfeed indicator review foresees bullish divergences: "All in all, we can see from the indicators that we're in a bear market mode; that we're testing the January lows; that weakness among financial stocks has been leading recent market weakness; but that there are early signs of waning new lows and waning downside momentum across the broad market."

  • Art Huprich's Technical Analysis : "The ongoing dialog is along the lines of “Is the stock market still confined to an overall down trend or has signs of a potential bottoming pattern developed?” While the bottoming pattern hasn’t been completed, I believe that “characteristics of a bottoming pattern have developed.”"

  • Richard Russell: "Since the stock market typically hits bottom around the middle of a recession, then working backwards Steve thinks that the stock market could hit bottom around April or May. But if this is fated to be BIG recession, say a sixteen month recession, then the stock market should hit bottom about nine months into the recession, which means a market bottom in the July to August 2008 period.”

  • Yutaka Yoshino (Nikko Citigroup): “In the five times the DJIA has undergone substantial corrections during economic slowdowns, real interest rates declined so far they became negative four times. In each of these cases, interest rates turned negative and stocks bottomed at roughly the same timebecause share prices have corrected substantially in advance of the next FOMC meeting, if another cut brings real interest rates to around zero, we believe this could be a powerful trigger for a rally.”

Read the rest of this entry >>

Why is Bear Stearns at 6?


In addition to its option to purchase Bear's headquarters building, J.P. Morgan has the option to purchase just under 20% of Bear Stearns's shares at a price of $2 each. That feature gives J.P. Morgan an ability to largely block a rival offer, says a person with knowledge of the contract.
The deal also is highly "locked up," meaning that J.P. Morgan cannot walk, even if there is a heavy deterioration in Bear's business or future prospects. Bear Stearns holders can, of course, vote the deal down. But the effect that would have on J.P. Morgan's ongoing managerial oversight and the Fed's guarantees is largely unknown.

The only reason I can see is if BSC shareholders vote against it, which is unlikely given the fed backing and the high-profile of the deal. Even if JP Morgan doubles it’s equity offer, it’s still $4 / share. And I personally feel that is the best case shot.

The deal is a done deal in my opinion. The current stock price is yet another example of market irrationality and inefficiency.

Read the rest of this entry >>

Thursday, March 13, 2008

Dollar falls below 100 yen for first time since 1995: Confirmation of market bottom?

Just read the Marketwatch headline about Yen rising above 100 for the first time since 1995. Is this a confirmation of the market bottom? Here's what the blogosphere is saying about it.

  • Hulbert confirms that the bottom is in with the latest contrarian analysis update. The great Richard Russell is buying again. Buy! Buy! Buy!
  • Jeffrey Saut chimes in(March 10th article: “Monkey See, Monkey Do”) with Lowry's research regarding the significance of a 90% up day after a series of 90% down days in a bear market: a bull counterswing rally lasting at least two months.
  • Chris Perruna talks about the importance of a follow through day to confirm the 90% up day. Note that follow through days as defined by IBD have very poor statistical significance.
  • Michael Kahn defends his earlier bearish outlook based on detoriating fundamentals (trading volume, A/D line, and VIX ) but diplomatically recognizes the importance of waning downside momentum, and the solid upside move on Tuesday. The Market still not out of the woods.
  • Goldman strategists comment about selling the Fed relief rally. I presume the strategists have the big picture right, but aren't great market timers. Probably why this could be a two month long counter rally and within an entrenched bear market, and not a 'resumption' of a new upward bias.

Important thoughts to shape your Thursday..

Read the rest of this entry >>

Sunday, March 9, 2008

Mixed sentiment picture : Why we'll take out the Jan lows.

There’s been a lot of discussion about the impending ‘retest’ of the January lows. Whether we’ll get a double bottom and the lows would hold. Or if we’ll go right through it.

  • Larry McMillan actually points out that the ratio has rolled over to a sell signal.

    The equity-only put-call ratios rolled over to sell signals -- a condition we warned about in last week's newsletter. The actual rollover to sell signals came after last Friday's broad market decline. This is unusual for these intermediate-term indicators to reverse course so high on their charts, but they were correct to do so. Now, one must wait for new buy signals to set up, and that won't be easy. About the only positive thing that one might say about these ratios is that they are high on their charts, and as such, qualify as being "oversold." However, as we've often said, "oversold does not mean buy. Some of the worse declines come when the market is oversold."

  • Ronald Daino argues that because of momentum, we’ll go through the lows.

Hmm.. so how do you make sense of this?

Two reasons why I think we could take out the Jan lows:

  • Vix is in a decided intermediate term uptrend. Even though we are close to the Jan lows and actually at a multi-year low on a weekly closing basis, the Vix is still well off it’s previous reaction high of the Jan lows. (First figure)

  • This whole credit cycle deleveraging has resulted in the unwinding of the carry-trade.
    The favorite currency for that is of course the Japanese yen. A yen rally has nicely coincided with market sell-offs. Notice the yen has already taken out the Jan highs, suggesting further weakness in the equity markets. (Second figure)

  • The only caveat I might add is the fact that the yen rally could look exagerrated because of the dollar weakness, and probably the EURO JPY pair is a more accurate reflection of the current carry-trade deleveraging sentiment. In fact, it shows that the Jan lows are still intact.

Take your pick!

Read the rest of this entry >>

Thursday, March 6, 2008


While this may not be the answer to Life, the Universe and Everything, it comes close.

Written by some famous people, this article basically nails it. If you were looking for ONE article, which discusses and summarizes the current credit crisis/ subprime mess, this is it:


Curiouser and curiouser..

Read the rest of this entry >>

Process: Intel’s competitive advantage.

If there is one reason why Intel cannot be matched by any other chip powerhouse, it’s because of their fabs and process prowess. They are at least a technology node ahead of the competitors. This difference will start becoming more significant as digital chips transition to smaller geometries.

Right now, it may look like Intel is mostly focused on PC /laptop microprocessor chips. That would be a dangerous fallacy. Intel has entered SoC space in a big big way. That’s how you cram multiple cores into a chip. That’s how you integrate Wimax. Bluetooth, GPS, RF might seem like separate markets. But with more integration and convergence of feature sets on a single die, Intel would be increasingly targeting those markets.

Their fab prowess would enable them to crank out high volume, high yield, small geometry products, and squeeze the competition on margins. Just look at what they are doing to AMD. This is exactly what they did to Cirrus Logic in the late 80s when they integrated the graphics chip into their core. Integration is the bane of all feature specific fables vendors.

This quote from Eric Savitz's blog is noteworthy.

Speaking at a meeting with analysts in Santa Clara this afternoon, Intel’s (INTC) Bob Baker, SVP of the company’s technology and manufacturing group, said the company has begun preparing for a switch to 32 nm process technology, even as it ratchets up production at 45 nm. And the company is looking ahead to 22 nm production, and smaller. Meanwhile, he says the switch to 45 nm is “ramping on track.”(This clearly was the geekiest of the afternoon sessions.)

Baker notes that the move to 45 nm process technology from 65 nm has allowed for higher yields, more good dies per wafer and lower cost chips. With the Xeon server processor, he notes, the chip can generate 38% more performance at the same power. With 32 nm, the trend should continue.

You would expect that smaller geometries would result in lower yield, or at least a transition phase of ‘yield learning’. Instead, their 45nm node is cranking out higher yields than the 65 nm already, which is further proof of their process prowess, and serves to reduces their cost structure.

Intel’s competitive advantage lies in transitioning to lower geometries. A lot of their process knowledge is in house, proprietary, and cannot be off-shored to an Asian foundry. Moreover, at lower geometries, leakage power becomes a dominant component of the chip. By having an in house fab, they are in a better position to tweak parameters to reduce or mitigate standby power consumption. I know Intel has always been notorious for churning out massively pipelined, high frequency, high power chips. But that’s because they decided to do that from a high level architectural perspective. Now that Intel has realized the future wave of low power applications, the power consumption on their new processor cores will increasingly be the number to beat.

The fabless model has worked great for the past two decades. As long as the process could be replicated easily, the companies could offshore the more cyclical portion of the business abroad, and focus instead on the more value added design flow. This worked in digital design, as tweaking process parameters offered little in extra functionality. By aggressively following Moore’s law, digital chips lowered costs and added functionality dramatically over the past two decades.

The caveat is the huge sunk cost at every technology node. Intel has a high fixed cost, and essentially reduces it’s variable cost through process optimization, yield enhancement and smaller geometries. Fabless vendors do not have to worry about the fixed sunk cost component. Assuming Intel churns out enough chips at a lower variable cost, their total cost would be lower than a fables vendor. At least that’s been their do-or-die strategy.

The Asian foundries would need to significantly augment their R&D in order to successfully transition to lower geometries. TSMC has been the best equipped to do so. Because of the prohibitively expensive start up costs, you are looking at increasing collaboration amongst fabs and fables companies in terms of costs and resource sharing.

A few years back, Silicon-on-Insulator substrate looked like the substrate of choice for better performance. Intel plodded ahead without going the SOI route, and instead introduced features like strained silicon. AMD, on the other hand, is now stuck with integrating their SOI chips with ATI’s regular substrate chips. Advantage: Intel.

Expect them to outperform and dominate the marketplace for many more years to come. Intel is a very strong buy in the current uncertain environment. I know right now I do not have a way to quantify this edge into a number. At the very least, Intel has the size and the economies of scale. Given that, it should trade at a premium valuation and multiple to its peers and the market in general.

Read the rest of this entry >>

Tuesday, March 4, 2008

Saudis to end grain output?

Water, it seems is the 'ultimate' commodity play. Right now, all base metals, industrials and precious, agricultural commodities and oil have been in long bull markets. Water can be played through the ETF PHO (there are other choices, but I'll stick to this one) Water's hardly had a run..

Here's an interesting link:
Saudis to end grain output because of Water shortage

This is actually very scary at some level.

Read the rest of this entry >>

Monday, March 3, 2008

Warren Buffett.

Unbelievably great interview/chat with Warren Buffett.

Oh.. and in case you missed his annual letter, here's the link:

Every para is filled with wisdom, and it always amazes me how easy it is with

Very interesting!

Read the rest of this entry >>