Toro's Running of the Bulls Market Blog

Pulling Back

I continue to hedge down my positions and am now primarily in cash, with some long exposure remaining.  Over the next few days, if the market plays out the way I think it will, I will get net flat or perhaps even short.  If I am wrong, then I will reverse my positions and become more aggressive.  I have not sold any of my stocks bar one, and expect to add to positions on a downdraft. 

This is just a trade, and I might change my mind tomorrow.  I do not believe this is the beginning of a new leg down to lower lows.  To hit lower lows, another cataclysmic event must occur, probably even bigger than what has already happened, an event I believe is unlikely.  (There is one thing that worries me immensely, which I will address over the next few days.)  I think the economy is repairing itself, and economic growth will surprise to the upside in the not too distant future.

But we have come far, fast, and the risk that the market takes a breather and retraces some of the gains is high, in my opinion.

Witty Cartoons

We are full-fledged members of the Tom Toles cheerleading squad.

How Corporations are Going Green

From The Onion

Paring Back

I sold out all my leveraged ETFs today.  This rally has come quite far, and though I think there is more upside to come, I think the probability of a pullback is high. 

I was very long, and I am still long but I now have a pile of cash I intend to put to work if the market goes down.  If we really begin to roll over, I'll get flat or perhaps net short.  But if the market appears to be going higher, I'll buy back in.

For now, as a trade, I am cautious.

Bidding Wars Emerging for Foreclosed Homes

It is still too early to call a bottom in housing.  However, it is not too early to begin looking for an end to the collapse in housing prices. 

And we are seeing evidence that the end is not far off.  As the Wall Street Journal notes this morning, bidding wars are emerging for foreclosed properties.

Falling home prices are starting to ignite bidding wars in a few parts of the U.S. as first-time buyers compete with investors for the same foreclosed properties.

In most of the nation, the supply of unsold homes continues to swamp demand. Home prices in many markets continue to fall, and foreclosures, which slowed in late 2008 as mortgage companies delayed taking action against delinquent borrowers, are picking up again.

But real-estate brokers say multiple offers on certain homes have recently become more common in parts of California and Arizona and the Washington, D.C., and Minneapolis-St. Paul metropolitan areas.

Tamby Leonard of Santa Ana, Calif., southeast of Los Angeles, says she has been outbid four times since January when trying to buy a home for her family of five. The more appealing bank-owned homes in her price range, around $300,000, tend to be sold quickly to investors who can pay cash. The market for homes in the Santa Ana area in that price range is "blazing hot," says Ed Mixon of Altera Real Estate, Ms. Leonard's agent.

On Wednesday, the Federal Housing Finance Agency reported that home prices nationwide rose a seasonally adjusted 0.7% in February from January, led by gains on the West Coast. When compared with a year earlier, however, home prices were down 6.5%. ...

January saw a 1% rise in home prices.  This is the first time since 2007 when home prices have risen two months in a row.  Not something to get all giddy over of course, but a slight improvement nonetheless.

The Wall Street Journal's quarterly survey of 28 major metro areas shows that there is still a glut of homes available in most markets. But the glut has shrunk, and some areas are running into shortages of moderately priced homes in middle-class neighborhoods. ...

Across the nation, there is still a tug of war between bullish and bearish forces. On the bullish side, falling prices and the lowest mortgage rates since the 1950s have made homes far more affordable, luring shoppers like Ms. Leonard, who has been renting for years. Adding to the attraction, the U.S. government is offering tax credits for certain people who buy homes before Dec. 1. The credit -- equal to 10% of the purchase price, up to a maximum of $8,000 -- is available to buyers who haven't owned any other primary residence in the U.S. during the three years before the date of purchase.

On the bearish side, rising unemployment has knocked many people out of the housing market and made those who still have jobs skittish. Even those with secure jobs who want to buy can't always get loans on attractive terms because of today's tightened credit standards.

In addition, the supply of bank-owned homes is expected to grow over the next few months because many mortgage companies have ended moratoriums during which they refrained from proceeding with foreclosures. ...

Foreclosures, though far above normal levels in most of the country, are heavily concentrated in a few states, including California, Arizona, Nevada, Florida and Michigan. In areas with large numbers of bank-owned homes, buyers are mainly concentrating on those properties. That leaves ordinary homes languishing as owners generally refuse to slash prices enough to compete with banks. ...

One positive trend is affordability. A family earning the national median pretax income of $52,800 a year needs to spend 25% of that income to buy a median-priced home, down from 44% in mid-2006, according to John Burns, a real-estate consultant in Irvine, Calif. For the Los Angeles metro area, that ratio has dropped to 45% from 102%. In Phoenix, it is down to 19% from 46%.

Critics will contend that the sales merely represent banks blowing out their inventories and the sales do not represent underlying health of the economy.

That misses the point.  Before the economy can really start to improve, banks have to get rid of their inventory.  Clearing out their inventory allows banks to free up capital which then can be used to lend to more profitable endeavors.  The process also facilitates price discovery where home prices clear.  Such activities are building blocks for the eventual recovery.

Corrugated Box Shipments Up in April - Packaging Corp of America

On its conference call yesterday, the Chairman and CEO of Packaging Corp stated that orders for corrugated boxes have risen substantially thus far in April.

Our domestic containerboard shipments were down 18 thousand tons and export shipments were down 19 thousand tons compared to the first quarter of 2008. Our pure corrugated product shipments were down about 50 thousand tons or 12.6% and with one less work day this quarter, down 11.2% on a per work day basis compared to last year’s first quarter.  ...

More importantly, April has started out much stronger for us with corrugated products bookings for the first ten days up almost 15% over March, and about equal with April, 2008 [emphasis added]. Shipments for the first ten days are up about 6.5% over March and are down less than 6% compared to last April. And usually billings will catch up with bookings over the course of the month, so starting up with billings up – excuse me, bookings up 15% is very, very positive for us. And this is really the first big pickup in demand that we’ve seen since September [emphasis added] and hopefully it will continue.

Corrugated boxes are used to ship goods.  The demand for corrugated boxes is a leading indicator of the economy.  There are a lot of people fighting this rally, and there are many dismissing or even mocking the idea that green shoots are springing up in the economy, but I think the economy is slowly repairing itself.

The playbook from which I am operating is that the economy is close to a bottom and is re-calibrating at a lower level.  Inventories are low, and we will see a sharper than expected build in inventories some time over the next few quarters, leading to GDP growth that will surprise on the upside. 

Many will come out of the woodwork to proclaim the recession over. And technically, they may be correct.  However, there are still deep problems in the economy. After the inventory build, there will be a period of disappointing growth, and the economy may slip back into recession thereafter.

I believe that this current market rally is a reflection of what is unfolding in the economy.  We are overbought in the near-term and are due for a pullback, but we could go a lot higher than many expect.  After the rally, I think the market will fall substantially but I believe will not hit a new low.

The purpose of the market is to mess with the most people most of the time.  At extremes, it will move hard against the way the market is leaning.  And right now, the market is leaning hard against this rally.

I have never been in an environment where the Zeitgeist of the market was so overwhelmingly lopsided, including the insane Tech Bubble of the late 1990s.  At the extremes, the crowd is always wrong. I see no reason to think why it will be any different this time.

Market Action, April 21 2009 - Stocks Rising on Bad News

The S&P 500 rose 17 points today, closing at 850, retracing about half the decline from yesterday.

Volume picked up, with the NYSE Composite trading 7.2 billion shares compared to Monday’s 6.85 billion shares.  Volume has averaged about 6.7 billion shares since the beginning of February.

Breadth was 5:1 to the upside.  Yesterday, breadth was 27:1 on the downside as the button-pushers did their thing. 

We continue to be in an upward sloping trading channel.  The indices touched on the lower band this morning and immediately bounced.  Nothing has changed over the past few trading days.

The VIX closed at 37, recouping 40% of the rise yesterday.  It is in a downward sloping channel.  The rise in the index yesterday did not change that.

There is something different about this rally.  Stocks are going up on bad news.  Today, Caterpillar and AK Steel were both up off lousy earnings. 

This has been going on for awhile.  Last week, Ingersoll-Rand pre-announced a bad quarter and went up.  Likewise, REITs that have been able to float stock – such as Kimco, whose offering last week was oversubscribed and closed up a point and a half on the day of the issuance – have bounced hard off the news.

Have you seen Apple and Google lately?  Both look like they have put in a definitive bottom.

I am of the opinion that this is a bear market rally.  But who does not believe that?  Virtually everyone whom I speak with and almost every article I read doubts this rally.  Even I do. 

The rally could go on for awhile, though I remain open-minded that we may be topping.  We are very overbought, and I am watching closely to see evidence that the market is rolling over so I can dump my ETFs. 

However, the skepticism so many people have regarding the sustainability of this rally makes me think we could go significantly higher.

1970s Redux

Yesterday, we noted a few parallels with the bear market of the 1970s, which bottomed in December 1974.  Today, Michael Milken makes the same analogy.

Thirty-five years ago business publications were writing that major money-center banks would fail, and quoted investors who said, "I'll never own a stock again!" Meanwhile, some state and local governments as well as utilities seemed on the brink of collapse. Corporate debt often sold for pennies on the dollar while profitable, growing companies were starved for capital.

If that all sounds familiar today, it's worth remembering that 1974 was also a turning point. With financial institutions weakened by the recession, public and private markets began displacing banks as the source of most corporate financing. Bonds rallied strongly in 1975-76, providing underpinning for the stock market, which rose 75%. Some high-yield funds achieved unleveraged, two-year rates of return approaching 100%. ...

This cyclical process today appears to be where it was in early 1975, when balance sheets began to improve and corporations with strong capital structures started acquiring others. In a single recent week, Roche raised more than $40 billion in the public markets to help finance its merger with Genentech. Other companies such as Altria, HCA, Staples and Dole Foods, have used bond proceeds to pay off short-term bank debt, strengthening their balance sheets and helping restore bank liquidity. These new corporate bond issues have provided investors with positive returns this year even as other asset groups declined.

And the junk bond king makes a statement that makes many an investment banker who proposed companies lever up their balance sheets look like idiots.

Without stock buybacks, many such companies would have little debt and would have greater flexibility during this period of increased credit constraints. In other words, their current financial problems are self-imposed. Instead of entering the recession with adequate liquidity and less debt with long maturities, they had the wrong capital structure for the time.

Finally, on real estate.

The current recession started in real estate, just as in 1974. Back then, many real-estate investment trusts lost as much as 90% of their value in less than a year because they were too highly leveraged and too dependent on commercial paper at a time when interest rates were doubling. This time around it was a combination of excessive leverage in real-estate-related financial instruments, a serious lowering of underwriting standards, and ratings that bore little relationship to reality. The experience of both periods highlights two fallacies that seem to recur in 20-year cycles: that any loan to real estate is a good loan, and that property values always rise. Fact: Over the past 120 years, home prices have declined about 40% of the time.

To note, the Dow Jones US Real Estate index had fallen 78% top to bottom before this rebound.  Yet I cannot find a single other person who is not bearish on commercial real estate, while being short REITs is surely the most lopsided trade on Wall Street today.

Roubini World Victory Tour Market Low

Maoxian has a great graph of Nouriel Roubini's world victory tour perhaps marking the bottom of the market.

Add that to our list of anecdotal events marking the bottom.

Great stuff.

Let's All Feel Bad for Wall Street

Because life is so rough for them.  Via EconompicData.