"Chain of Demand" Equation For Stocks Has Broken, Market Undergoing Significant Change...

In a normal market we should've had a major countertrend rally by now. All the ingredients are there: there is a significant amount of shorts in stocks across almost every sector, bearish sentiment lies at extremes, and there is definitely capital on the sidelines. There were many days over the last couple of weeks where in a normal market we would've and should've reversed hard. However, the market has changed.  What makes this market abnormal now, is the significant decline in the number of real buyers and the significant decline in buying power behind these buyers. Tons of hedge funds have fallen by the wayside and closed up shop, and those who've managed to survive are left managing much less capital. Mutual funds are being depleted by the average American pulling out cash for 2 major reasons: declining or no income and mistrust of Wall Street. Investment banks no longer exist, all are now commercial banks so they can no longer take on the same amount of risk and therefore must pare back exposure to equity markets.

The confluence of these factors is allowing shorts to essentially lean on the markets and stocks overall because they've undoubtedly recognized that longs are literally "short stacked." We've seen attempted rallies fail over and over and thats because there is no longer enough capital behind bidders to sustain large and long rallies. You need a "chain of buyers" to have long sustained "frothy" rallies....smart money + hedge funds come in first, followed by momentum traders and short covering, followed by the average joe. This equation (which I call the "The Chain of Demand") has literally disintegrated over the past several months in that the first jolt of buying pressure caused by smart money/hedge fund entry has weakened due to lower capital reserves, and the second phase of the equation, specifically the short covering aspect has been weakened due to the recognition that the first phase of the equation is weak. Meaning shorts have recognized that the institutional buying power is "short stacked" so there is now much less fear to cover because they know the smart money doesn't have enough buying power to drive and sustain long rallies. Lastly, the lack of "dumb money" or average joe money is nonexistent now as they've pulled out of the market all together. This means that the market can no longer create any frothy valuations anymore, that was the responsibility of dumb money. And again, the shorts recognize and are aware of the inability of the market to create "froth" so the fear to cover is again diminished.

Moreover, the anti-capitalist economic policy being driven by the Obama administration is adding even further disincentive for sidelined money to enter the market. What gives anyone incentive to enter the market and take on unneeded risk when the Obama administration is in the process of killing capitalism, and putting further pressure on an already weak economy through unneeded tax hikes? Believe what you will, but I'm telling you the last 2000 points of this downleg has been 100% as a result of Obama's economic policy, and the lack of buyers will continue to present itself until Obama recognizes the error of his ways. He needs to implement a policy of incentives in order to bring market participants back to the market again and take on risk. Until this happens there is no real reason to enter the market other than "stocks are cheap," and this statement lacks conviction because of the uncertainty over the cumulative long term effects of Obama's economic policy (primarily how his policy will effect overall consumer demand and corporate earnings) which ultimately leads to uncertainty over how long this downturn will truly last.

In my opinion it will take many, many years for this equation to resurrect itself again if at all. People across the entire economic spectrum are fed up with the market all together, and are in the process of saving capital rather than allocating it to high-risk investments and outright consumption of goods and services. We need to get used to and accept the fact that the market has changed and adjust ourselves to the reality of shorter rallies or a long drawn out rangebound market. For those who follow me on thelion.com, you will remember that I actually talked about this in September of last year...

http://www.thelion.com/bin/forum.cgi?tf=wall_street_pit&msg=1426681&cmd=read

From: Ry5577 (Rep: 600) Date: 09/29/2008 18:50

Forum: Wall Street Pit - Msg #1426681 No Thread (Rec: 2)
Another thing to think about is that we need to be aware of the fact that we are in market changing times here....we're losing a lot of the biggest players in the market....big sharks that were responsible for big runs in stocks and a lot of manipulation....Lehman + Bear Stearns gone, and the biggest fish in the sea Goldman is even getting slapped around....many many hedge funds will likely go under....the market will definitely begin to change in character here......maybe we might begin to see less momentum runs, maybe the big end of year runs will wane, maybe the market just lulls for a long period of time as the equities begin to be viewed as a more risky asset class....not 100% sure how the equity markets character will evolve since we've never really seen the big players get shot down like this, but im 100% certain that it will change...the market is an ever-changing entity and this is a significant turning point in its evolilution i think...something to watch out for over the next several months.

Obama Officially A Full-Blown Imbecile, Anarchy Coming To US...

Has anyone caught a glimpse of the economics book Barack Obama's reading? I'd love to get a look at the section that says when you're on the verge of an economic collapse it's a good idea to raise taxes. Or the part about, hey when the equity markets are literally cratering, people's retirements are getting wiped out, and the bid side of every Level 2 quote looks like a god damn deserted ghost town, it's an absolute genius idea to raise capital gains taxes so people just keel over and puke every time they even think of buying stocks! I hear in section 3 it proposes a tax on finding a job.

Let me tell you something you can kiss recession good bye, we're going into a full blown depression, and you can thank President Obama for that. The only thing he's done since getting into office is wave and smile everyday like he's god damn Miss America, raise the debt load on the American tax payer, and implement an ass backwards anti-growth economic policy. Best thing to do now, get yourself a .357, 5 cans of tuna, and take cover because as time goes on and people continue to lose their jobs along with their life savings, people will get desperate. You don't think people are already preparing for outright anarchy? Do yourself a favor and google "gun sales." Guns are flying off the shelves. And don't gimme this crap about, oh its because Obama is anti-gun and everyone is fearful that he's gonna outlaw certain high powered firearms. No way, its because its a well known fact that when GDP declines, crime goes up...and in this case GDP has gone right down the damn toilet and its not even done yet....in fact it's threatening to come back up and flood the entire living room with the remnants of a late night cockroach and fungus infested bean burrito. Ya i'll say it, we're in a damn shitstorm and this moron won't even give us an umbrella! We're in a damn sinking Titanic, and this dipshit just popped a hole in the getaway dinghy!! Can we get some trash bags at least you idiot! We're dyin here!!

And for those who refuse to get angry now, at a time when our country is literally going down the toilet, then I ask you, when will you get angry?? People are losing everything, their homes, their jobs, their life savings, everything! We have a right to be angry now, especially when the invisible hand which is being financed by our hard-earned money and is supposed to be there to foster economic growth and maintain order is off in the back room jerking off till no tomorrow!! I ask you, if not now then when??

Elimination of Capital Gains Tax For One Year Would Put Bottom In Markets, Bottom Economy...

You want the market to bottom, eliminate capital gains taxes for 1 year, and watch the market fly. Right now there is absolutely ZERO incentive to take on the risk of owning stocks! Valuations, fundamentals, no one cares! The demand side of the supply/demand equation with respect to equities has been hacked 75% which means we can not see equities rally more than 10-20% or for more than a few days. There is simply not enough money out there to produce any sustainable long term rallies! Notice how we've rallied for a couple days multiple times, only to wipe out all those gains and more in one single day! That is the problem, there is no money on the demand side willing to truly take a long term commitment to owning stocks. Is there money out there, yes, but right now it feels much safer in a risk free environment. Give that money some sort of incentive to take risk again, and you will see money flood this market!

Moreover, for those that think the government simply can not afford to slash capital gains taxes at this time, think again. The effect of slashing capital gains on government revenue would be minimal in my opinion, as no one is making any money right now in stocks as it is, taking 20% of 0 = 0!! However, if you slash capital gains, sure the government collects no revenue on the gains but equity prices will rise, Funds, Hedgies, Banks and most importantly AMERICANS will make money and get to keep it for one year. This money will trickle throughout the economy and produce increased sales whereby the government can collect tax revenue! GDP will increase, Americans will feel wealthier, retirement accounts will rise, and Banks may even make enough money to start loaning again! Second of all, as equity prices rise, companies with "high" debt loads will have the opportunity to do secondaries again at reasonable prices! Sure the credit markets are frozen and currently irrepairable, but the equity markets can be repaired and are a major source of capital to every company out there. However, again there is simply no one willing to take on the huge # of shares companies need to sell to raise sufficient capital at this time, and that is because of deflated stock prices! Raise those stock prices, and the amount of shares needed to be offered to raise the same amount of capital decreases!

Is this the ultimate solution to fix all our problems? Probably not, but its as good as any other solution being presented right now!!

Commercial Real Estate Market Yet To Fully Implode, Unemployment To Reach 12-15%...

Don't forget guys, the commercial real estate market has yet to fully implode....businesses across the country are now on their last legs after trying to fight for dear life and weather the slowdown in consumer spending...the next downleg in the economy will be attributed to large and small businesses across the country (and likely the world) beginning to throw in the towel and close up shop. I'd reckon to say that 50-60% of small businesses across the country will be closing down in the next 12 months, large businesses will begin closing up maybe 30% of their slow growth stores, and many chains will close down all together (as we've already seen). The significance of a commercial real estate crash outside of enormous supply of retail space hitting the market and putting severe pressure on commercial real estate prices, is that more people will be out of jobs as large businesses close up shop and lay off employees, and self-employed small business owners will lose their income streams, resulting in additional pressure on consumer spending. Unemployment has yet to top out by any means in my opinion...I believe we are likely to see unemployment reach 12-15% by the end of 2009 resulting in US GDP declines in the 5-7% range. Im telling you guys its all about jobs, there will be no bottom in the market until the trajectory and velocity of unemployment begins to show signs of slowing down which I don't believe is here yet. Financial markets are still in the process of eliminating high risk taking leveraged entities, and those who are not highly leveraged are still in the process of adjusting to low and still declining consumer demand. This is not a process that happens overnight especially after many many years of easy credit where almost all market participants were under the impression that they could easily service high debt loads. This is clearly the dawn of a new era where an entire country is now learning and adjusting to the consequences of mass-scale leverage. We are in the midst of a painful detoxification process where those addicted to the act of unbiased consumption are now forced to learn the significance of living within the scope of their means. It will without doubt be a painful and lengthy process....

Bank of America, Citigroup To Become Nationalized, Mark Short Term Bottom In Markets...

Bank of America and Citigroup stock prices are clearly saying that the private sector refuses to support these 2 institutions which means that the public sector must support them all on their own if they want these 2 institutions to survive...which means both will likely be forced into some sort of nationalization once the Treasury wakes up to the reality that there are no other options. However, the fact that the Treasury continues to take some delayed route by throwing additional money to plug up holes that will likely still blow up in the future, will make the Treasury look incompetent and narrow-minded as they were unable or simply refused to accept the current reality, thereby costing taxpayers more money for absolutely no reason. This is where the lack of confidence in markets is coming, the Treasurys absolute inability to accept reality...like a pathetic loser unwilling to accept a loss and move on. Believe me the consequences of this type of action are far greater than simply accepting a "smaller" loss....they're simply trying to move toward some solution that probably has a 5% chance of creating a 50% loss rather than accepting a 75% loss now...the only problem is that the cost of moving toward that 5% chance of creating that "smaller" loss is so great that it makes absolutely no sense to even venture towards it. The only person who attempts to quantify such a venture is a man who refuses to accept that he has the capacity to make mistakes.

Rather than continue to throw money at banks in an effort to delay the inevitable, the government needs to nationalize both Bank of America and Citigroup as soon as possible. The government needs to wake up to the reality that the private sector refuses or is simply unable to support these 2 institutions. Notice how even with continuous insider buying of bank stocks (which are in my opinion being fully financed by the US government as an attempt to create an image of confidence), the stock prices continue to languish. This is because the market has already somewhat accepted the possibility of nationalization of these 2 banks (based on depressed stock prices). In fact I'll go out on a limb here and say that when Bank of America and Citigroup do in fact become nationalized, the market will actually rally creating a SHORT TERM bottom in markets equal to a 1000-1500 point short covering rally.

Stem Cell Stocks Set To Become Next Major Bubble...

As you can see, the blog has been dormant over the past several months as the market has taken out and shot every single sector (along with hedge funds, i-banks, and overpayed CEOs) across the board. There has literally been nothing to play for more than a day or two, and no real ideas to present as the short term nature of trades has forced us all into daytrader mentality. But alas after a long 3 months of scalping in and out of stocks a sector has presented itself with the potential for a massive long term move: stem cells. This technology is obviously highly controversial and many probably don't believe in it all together, but I urge you to put all that aside. Whether or not you believe in it is irrelevant, as the move in the stocks will happen regardless. We're just taking the opportunity to buy an asset now, in the belief that in the future people will be willing to pay much higher prices for it.

OK so lets get straight to the trade. At this point in the game we believe we are in inning 1 of a multiyear bull market which will develop into a bubble for stem cell stocks. We are at the point where stem cell stocks are severely underowned by wall street which means that there is still massive buying to come not only from wall street but from the general public. GERN, the most advanced of the publicly traded stem cell companies, has a mere 26% of the float owned by institutions, STEM viewed as the #2 player, a mere 7%. Now the way this will play out is that GERN will lead the pack higher in terms of market caps. GERNs market cap was roughly $400M as of the close today and STEMs around $175M....a roughly 2.5:1 ratio between the two. Now as GERNs market cap appreciates, STEMs will appreciate by a relative amount. So when GERN reaches the $1B market cap level, we should see STEM at roughly $400M...at the $2B level, STEM at $800M. We're using these ratios because this is how the market has valued them prior to any hype based on the value of their potential and technology alone. Now as the sector heats up, we will absolutely see significant moves in the small cap stem cell stocks. Watch stocks like ASTM, ATHX, and a tiny company ACTC.pk. We rarely if ever play over the counter stocks, but this pink sheet ACTC has grabbed our attention as back in April of 2008, the FDA invited only 3 companies to testify about ways to safely test embryonic stem cell products in patients and ACTC was one of them. Alongside them were two heavy hitters, GERN and Novocell (which is not publicly traded). In addition to being respected by the FDA, they have published in several major biomedical publications that they have the only technology that can produce stem cell lines of all types without the destruction of the embryo. This is sure to attract major attention as stem cell momentum picks up. The company currently has a mere $10M market cap, and we believe this has the potential to reach $250M...yes 25 X its current value. So the way we are playing this potential bull market is by using GERN as our proxy, and taking a position in STEM as our core stem cell stock, and a speculative position in ACTC.pk as our potential small cap multibagger. We are early enough in this bull market where market leaders are still cheap enough to buy in large quantities so we should take the opportunity to build large positions in these names. As the momentum builds however, we will surely swing trade the other small caps.

Good luck, and remember this post at the end of 2009.

Time To Buy Natural Gas As Short Position May Be Ready To Unwind...

We've begun buying UNG here in the $29-30 range as we believe it is likely that the sizeable short position in natural gas will begin to unwind very soon. Natural gas has just filled a significant gap at $6.50 dating back to September 2007, and the commodity has been completely left for dead after hedge funds were violently liquidated out of their early-mid 2008 momentum trade. After 3 months of heavy liquidation, and a precipitous move to the downside it is likely that liquidation and margin call selling are now complete and what we have left is a significant short position ready to cover. The risk/reward profile is excellent at these levels with about 3 points downside to +10 points upside. Moreover, keep in mind that due to the recent decline in natural gas prices, major producers like Chesapeake Energy (CHK) have pared back major natural gas projects which should lead to a decline in future natural gas supply estimates which should be marginally bullish for natural gas prices in the future. Lastly, we are also entering the winter season where demand for natural gas tends to perk up due to home heating. Are we expecting natural gas prices to spike back to the $13 level overnight? No, but we like the ingredients here for a nice 30% short squeeze to the $8-9 level which should put UNG at around $40.

Government To Halt Equity Markets, Slash Capital Gains Taxes In An Attempt To Stem Slide In US Equities...

Just as we predicted last month in our September 15th post entitled "Equity Market Being Used As Source Of Funds By Financial Institutions," equity prices have fallen dramatically over the past several weeks as the largest financial institutions across the globe rushed to liquidate their largest positions to meet margin calls, satisfy redemptions, and stave off ultimate failure. Next stage of the meltdown? Watch for a global halt of all equity markets (including all US markets) as all markets are now trading on absolute fear, and watch for the government to propose a MAJOR cut in capital gains taxes in an attempt to stem the slide in equities. This tax cut proposal will likely be THE rally-inducing event the market has been waiting for as the potential return on equities now becomes perceived as significantly higher than that of treasury bonds now producing yields near all time lows. Remember this is an election year and there are a confluence of very strong forces battling it out within the financial system right now....Republicans have wanted to slash capital gains taxes for a very long time now, and with a meltdown in financial markets they now have the excuse they've been looking for and the ability to sell the idea to opposing Democrats.

Mortgage-Backed Securities: Wall Street Attempts To Create An Entity With No Consequences...

Banks can't stop lending forever, thats how they make money....they take your money, pay you an interest rate on it, then lend it out at higher rates....they can not axe out the latter part of the equation indefinitely if they wish to remain in business over the long run....right now banks are just waiting out the storm just as we are to see which institutions are going to survive so they know which counterparties they can do business with confidently.....risk aversion is extremely high across the entire landscape of our financial ecosystem right now....no one wants to take on any risk whatsoever.....equities known as the best asset class to own over the long run are viewed as extremely risky, real estate is still working off excesses and prices have yet to find an official bottom, and treasury bonds the least risky asset of all are paying out yields at multi-decade lows.....however the aggregate effect of extreme risk aversion will prove to be a good thing over the long run, as over this period of time where the financial system is adjusting from one of very high risk tolerance to one of very low risk tolerance, those parties who have based their models on taking on high amounts of risk will inevitably cease to exist as risk-taking counterparties pull capital at very high velocities.....those models predicated on demand for risky assets will fall by the wayside while those models less reliant on the returns of high risk assets will be just fine......its funny how easily we forget that risky assets paying high yields do carry RISK....did wall street just completely forget about the idea of risk when investing in subprime mortgages....say it with me "SUB-PRIME".....NOT PRIME......NOT HIGH QUALITY....LOW QUALITY.....HIGH YIELD......HIGH RISK! these wall street bankers were not idiots....theyve been playing this game for decades knowing that anytime you have anything that pays a higher than average yield on an investment it means without doubt that you are taking on additional risk.....that is why you are being paid a higher than average return....to ASSUME THAT RISK! so first mistake made by wall street....taking on higher risk assets without some sort of hedge or idea that these risky assets might in fact prove to be risky assets and lead to higher than average losses.....where was this in the game plan? i cant find it anywhere....its like going into battle without any plan for possible missteps, miscalculations or even outright losing.....now mistake #2, and this is even bigger than mistake #1, LEVERAGING HIGH RISK ASSETS....how on earth can global institutions rationalize leveraging assets which payout high yields and are known to carry higher than average risk without any sort of assumption that this plan (now carrying even higher risk due to leverage!) may in fact not work as planned?? seriously i cant figure it out.....the only explanation i can think of is the idea of herd or mob mentality.....institutions looked around and saw every institution across the globe taking on these high yield high risk assets and said to themselves, look we know theres risk here, but first of all we cant just sit around while our competitors pull in higher than average returns....we'll look like losers....we need to compete.....second of all, if these assets dont work out, and all of our competitors are holding them as well, well lets face it the whole system cant come crumbling down.....can it? no....we hope not.....no way the Fed will save.....they have to they no choice.....this was the backstop!......this is the idea of mob mentality.....you no longer become a single individual but rather one small part of something much larger which allows individuals to take on actions without risk of individual failure knowing that in the end any sort of consequence will be divided out between a host of individuals possibly equating to consequences less than that of the consequence of a single individual action.....and moreover that if the entity accumulates enough individual participation to become larger in size and in power than that of the overseer of the system then there becomes the possibility that the entity can not be stopped and/or that there remains no FATHOMABLE OR REALISTIC consequence to any action carried out by the entity.....ie TOO BIG TO FAIL. we've heard this idea over and over over the past several months....too big to fail.....what does that mean? it means that when an entity becomes large enough (so large that it becomes necessary for the survival of an entity even greater than itself), then the overseer of the system shifts from dealing out consequences to any negative action carried out by the entity, to one of trying to preserve the entity for fear of causing the destruction of the entity even larger than itself .....the overseer is forced into a position where the dealing out of consequences creates even larger consequences not only for the overseer but for the larger entity that the overseer hopes to preserve....this is what wall street knew and hoped for by taking on these risky loans and leveraging them....that in the end it would become large enough that no possible consequence could present itself without creating even larger consequences for the entity even larger than itself ie the entire ecosystem....this is the driving force behind the creation of large powerful entities...that when they are created, if they are able to breach a certain threshold of power and size within an ecosystem and work their way into all aspects of the ecosystems daily functions, then they can not be dealt any sort of consequence without creating much larger consequences for the entire ecosystem and are hence free to carry out riskier than normal actions because of the lack of any realistic consequences....it becomes an entity, while possibly negative for the ecosystem, is also necessary for the survival of the ecosystem...and therefore all entities are forced into a position of submission and are forced into believing that they need the entity for absolute survival.

Equity Market Being Used As Source Of Funds By Financial Institutions...

The stock market is being used as a source of funds right now which is not good....the largest players in the equity market have major major capital issues right now....AIG needs $80 Billion just to survive, that is a HUGE number (Goldmans entire market cap is $53B...they basically need a Goldman and a half) and they are just one major player....sure, institutions and market participants across the financial spectrum have used the equity market as a source of funds for a long time but never have the largest institutions in the financial ecosystem been under this much pressure to raise capital...and never have they experienced the need to raise capital for the ultimate sake of survival...that need to raise capital to meet margin calls in order to survive was usually (for the most part) limited to us the small guy...the market could easily weather that kind of selling pressure as long as the big guys were in there buying our stock on the cheap as we forcibly liquidated our holdings...now the shoe's on the other foot with large institutions joining us aggressively on the ask, which puts us in uncharted waters....liquidation of this magnitude leads to extremely rapid declines in asset prices especially those assets widely held by many large institutions....this rapid deterioration in stock prices ultimately leads to the point where stocks are no longer viewed as representing ownership in fundamentally sound companies but rather as a mere source of funds...a way to raise cash....you sell stock you get cash, thats what institutions need cash.....this is when panic begins to set in, it gets scary and stock markets crash, its when people become fearful of owning stocks as an asset class because of rapidly declining asset prices. after todays action you can tell real fear is developing in the market and people are really JUST starting to get a bit nervous about owning stocks....you're starting to see stocks that were worth $60-70/share go to zero....and these arent just any stocks, they were the biggest balls in the market....people are starting to think about what they own and what its really worth if panic sets in....i mean is it that far fetched to see AAPL selling in the 90s....the big boys could sell that stock off another 40 points down to $100 and funds would still be getting out with a profit...thats how you have to think right now....think about how much fund ownership your stocks have and know that those funds are having major problems and need cash.

Gold To Replicate Oils Parabolic Move, 30-Year Treasury Yields To Soar...

With multiple bank failures looming and the US government doing nothing but take on bad debt and assets onto their balance sheet we are looking for new lows in the US dollar as the fundamental backdrop of the US financial system continues to worsen by the day. Inflationary pressures continue to mount with Oil and food hovering near their all-time highs, and the US continues to be hardest hit with respect to inflation due to the high cost of imports based on the declining purchasing power of the dollar. Note that while Europe for example has to pay the same $145 for a barrel of Oil that we do, their currency has also appreciated almost 20% since last year thereby mitigating some of their inflationary pressure. Furthermore, with the US posting its sixth straight month of job losses in June, and the employment picture getting seemingly worse by the day, you can expect the unemployment rate to start ticking up toward 6% by year end. Take into consideration that these looming bank failures will definitely lead to large job losses in financial services in addition to layoffs recently announced within the energy-sensitive transportation sector i.e. airlines and car companies like GM. 

In essence, what is happening is that the US government is taking on very large amounts of debt at the same time that their revenue base (i.e. tax collection) is declining due to higher unemployment and high inflation which curbs consumer spending on discretionary items and hence produces slower growth for US corporations and therefore less corporate tax generation. Think of the US as a large company with debt levels climbing significantly and revenue and profit declining. What usually happens in a situation like this? Well lenders usually begin to become much less willing to lend capital at prevailing rates, and at the same time the debt-laden institution is more likely to want to raise additional capital to maintain sufficient debt to equity ratios (and/or bailout failing financial institutions). The rising debt levels coupled with declining income lead to the perception of a higher probability of default (even if slightly) and the higher probability gets priced into borrowing costs in the form of higher rates needing to be paid to lenders. What will happen is that demand for newly issued treasuries will begin to wane and large current holders of bonds (ie China and Japan) will likely be more inclined to reduce their holdings of US debt as risk levels associated with these bonds rise in conjunction with the fact that the value of these bonds continue to decline due to the devaluation of the dollar.  You can see how a situation like this turns into a rather vicious circle, with weak fundamentals affecting dollar values and dollar values causing a negative change in behavior which in turn puts pressure on fundamentals.  High inflation coupled with slow growth, rising unemployment, a weak currency, and rising debt levels is likely the worst situation an economy can be in which is why monetary policy is seen as so critical in maintaing all-important price stability. When inflation begins to soar, and central banks begin to lose credibility in containing inflation expectations it is very difficult to work an economy back to stable ground without severe consequences. Hence, we are expecting the yield on the 30-Year Treasury Bond to go much higher than the 4.44% it currently sits at as the risk associated with holding US debt increases and the expectation of prolonged high inflation begins to take form. Note that while the Fed has full control over rates at the short end of the yield curve (ie Fed Funds Rate), the Fed has zero control over yields at the long end which are completely set by open market forces.

Now looking at the trades, Gold has several things going for it on a fundamental as well as technical basis. First off, we are in a financial storm predicated on worries over the soundness of financial institutions and the inherent value of the US dollar. This is the perfect backdrop for gold, as global investors tend to run to the yellow metal as the ultimate safe haven in times of uncertainty within the financial system. Secondly, inflation expectations remain high and the dollar continues to weaken.   Thirdly, central bank diversification out of US bonds is likely to benefit gold as central banks tend to increase their gold holdings in times of uncertainty and environments where risk aversion is prevalent.  Fourthly, the recent double bottom at 85 on the GLD chart looks eerily similar to the double bottom at 80 we spotted on the USO chart back in March which ultimately presaged Oils parabolic move from the 80s to 140s. Take a close look at the USO chart below, paying particular attention to the mid March 2008 to early April 2008 double bottom at 80. Now stretch it out over a couple months rather than one month, and notice how closely it resembles the mid April to mid June double bottom at 85 on the GLD chart. They are almost perfect replicas and we believe we are at the same exact stage of the Gold breakout with respect to Oil....just beginning a major move to the upside. Moreover, with Oil nearly doubling over the past year and significant percentage gains made, it is likely that hedge funds and large institutions are now in search of the next asset class which may have greater potential for larger percentage gains down the road. This will likely lead them to Gold, as the asset class is similar and it keeps them highly hedged against inflation.  Hence, with fundamentals as well as technicals in place we believe that Gold has potential to become the new Oil going into year end, and are looking for a very strong double top breakout over 100 in the GLD very soon. In this kind of environment, with inflation expectations running high as well as multiple looming bank failures there really is no limit to how high Gold can go. Would it surprise me to see $1500-2000/oz by year end? No. Based on these assumptions, we have been buying the September 100 GLD calls here and will likely sit on these until Gold breaks out over $1000. Also note that large institutions have been taking extremely large positions in these calls over the past few sessions, with over 60,000 calls being bought yesterday and over 110,000 in open interest. Second of all, we have also been buying the September 90 puts on the TLT which is iShares Lehman 20+ Year Treasury Bond ETF. It essentially tracks bond prices at the long end of the yield curve, and since we are bearish on bonds going forward we'd like to have some exposure to the downside move.

REPOST: Global Darwinian Forces May Produce Major Exogenous Event Blindsiding US Economy...

We wrote this article back on April 5th, and think it is extremely relevant to our current global situation, all comments welcome:


By all economic measures, the United States is clearly in a state of marked weakness. Economic growth is at or near zero, unemployment is rising, the banking system is in critical condition, housing prices continue to decline, the US consumer is up to its ears in debt, the dollar continues to make new lows versus every major currency, inflation shows no signs of abating, and the Fed is running around like a headless chicken literally doing everything it can to prevent the entire system from collapsing. This is not a subjective assessment, it is our grave reality. So what now? Where do we go from here?

Well the obvious answer would be to fix everything that appears to be broken, clean up inefficient systems, attempt to reinvigorate the economy, and ultimately rebuild confidence in the US financial system over time. However, what I fear most is that in this time of distress we may no longer have the luxury of time. I believe it is possible that one of the many emerging superpowers may make a play for global dominance in the near future. Yes, I know this is a bold statement, but let me explain. Over the past several decades the United States has clearly been the world's superpower. It has been the steam engine driving the global economy as continuous wealth creation here has driven demand for foreign goods thereby creating wealth and GDP growth overseas. We are clearly the largest consuming nation in the world, and most of our foreign counterparties have done everything they can to see that growth here continues as incremental gains in US GDP inevitably trickle down to their own economies. However, it appears now that the global economy has approached the point where our significance in the global growth equation has diminished. It appears as if our emerging market counterparties have grown to a level where collectively they are able to maintain global growth without the neccessity of US demand. Where is the evidence of this? The commodities market. We have virtually every major commodity (Gold, Oil, Coal, Grains, Corn) at or near nominal highs, with many now approaching their inflation-adjusted highs. What is most notable however is that these commodities are making this move with the United States literally on the brink of recession! How is this possible? How is it possible that Oil is near $110 per barrel with such weak US demand? How is it possible with the US near recession that global Oil demand is still greater than global Oil supply with Oil being pumped at maximum capacity? It is because of decoupling. The world no longer relies on the US as the primary engine of global growth anymore. This position has been taken over by the likes of China, India, and Brazil. While the US has been toiling with credit crises, a housing slump, and increasing debt loads, the emerging economies have grown into such a dominant state of hypergrowth that their only challenge is to make sure that growth does not get so excessive that it becomes unsustainable, and moreover that inflation remains contained. This dominant position, I'm afraid, may produce some sort of climactic consequence for the United States. Let me explain.

We as mere individuals, will never understand the desire to become a global superpower. This desire is something reserved for continents, nations, and unions as it is impossible for us as mere individuals to achieve such status. However, even though we may not have the capacity to understand this desire, we know that it exists. We know that every single day every sovereign nation is actively working or has the innate desire to become the strongest entity in the world. Why does this happen? What is the driving force behind this phenomenon? Well in my opinion it is driven by the underlying principle that the world lacks enough supply of natural resources to prolong the existence of every single nation over the long run. Over time, as the world begins to approach levels where natural resources are being fiercely competed over because of inadequate supplies and/or unusually high global demand at the margin, the strongest nations will attempt to force weaker nations into further weakness in the hope that this action may curtail overall demand and allow the strongest nations to accumulate necessary supplies at cheaper prices. It is Darwinism at its purest, and it is ultimately driven by the idea that while economic harmony may exist when the strongest parties are satisfied with the distribution of goods and resources, extreme competitive behavior will arise when those parties become dissatisfied with the allocation of resources, especially those resources necessary for independent survival. It is very much akin to the behavior of animals living in a jungle free from the so-called orders of society. When all animals including the strongest are fed and all so-called entities appear satisfied, harmony may exist because there is no need for competition as supplies of resources are adequate enough to meet the demands of all entities. However, if/when the strongest entities become dissatisfied with their levels of consumption, we will likely see an extreme uptick in competitive behavior as the idea of the natural order for satisfaction dictates that the strongest must be first to be completely satisfied. If/when this natural order appears to be imbalanced in that the strongest are not receiving adequate supplies, the strongest entities will likely seek to not only eliminate those entities which they believe will restore natural balance, but they will specifically seek to eliminate those who they believe will be easiest to eliminate (i.e. those entities who appear weakest). Make sense? Ok so what resource are we speaking of specifically when we speak of resources necessary for survival? We are speaking of crude Oil. Every single other commodity is secondary to crude oil in terms of necessity for survival. Gold, corn, wheat, coal, even steel are all secondary commodities. We don't need corn or even grain to survive, and coal and other fossil fuels are simply alternatives to the most important fossil fuel of all, crude oil. Without crude oil, factories would come to a stand still, refineries would be unable to produce gasoline, airplanes would be grounded, heating oil would be unable to be produced, and ultimately unemployment would skyrocket as productive inputs are unable to function and means of transportation become idle. It is the reason why there is literally no limit to how high the price of oil can go over the long run. Its significance as the world's primary energy source produces wars, wreaks havoc within the economic supply chain, and has the capacity to bring entire nations to its knees.

Clean Energy Fuels (CLNE): Betting On Pickens...

We are buying CLNE here in the $12-12.50 range as T. Boone Pickens embarks on a self-funded $60M campaign entitled "The Pickens Plan" touting the merits of natural gas and wind power as a solution to America's addiction to foreign oil. CLNE which produces natural gas fueling stations across the country continues to be one of Boone's largest holdings as he owns ~30% of the company. The stock trades at ~2.5 x next year estimated $215M in sales, and about 40 x next years estimated .30 in EPS. The float is only 24% owned by institutions at this point, and we expect any interest by funds in taking new positions or adding to positions should have significant effects on the stock as the float sits at a mere 21M shares. We are initiating a position here, and putting this one in our long term portfolio alongside APWR, QTWW, and ROYL.

In addition definitely take a few minutes to watch Boone's blackboard presentation...you gotta hand it to the guy, he's pretty much the only man out there taking real action against our mounting energy problems.

US Economy At Major Turning Point, Intervention Needed Now...

Paulson + Bernanke & Co. have been awfully quiet while we sit here at this critical juncture in the economy and markets, and they really need to step in and do something now if they plan on averting a major economic meltdown. This malaise we currently sit in is at a major pivot point in my opinion. Once Oil breaks above $150 and the DOW breaks down into the 10,000 range it's over, as confidence will have been completely shot and any sort of intervention will have minimal impact. Whether its forex intervention, raising interest rates, and/or raising margin requirements it needs to be done now. Say what you want, but a combination or dollar intervention + raising margin requirements should take some wind out of the sails of Oil and a host of other commodities. Yes I know, Oil is a supply/demand story but breaking the momentum might buy some time for the reality of a global slowdown to set in. Second of all, we are nearing the start of the all important China Olympics which have been an important contributor to demand for energy as China gears up to showcase its country to the entire world. After the culmination of the Olympics or likely before that (as the mkt is forward looking) we should see commodity prices start to come down as the market begins to price in slower economic growth out of China. The rebuilding efforts due to the devastating earthquake in China is sort of a wild card, but the way I see it, it ends up being a zero sum contributor as the increase in government spending to rebuild the country will likely get cancelled out by a decrease in consumer demand due to the necessity of millions of people needing to rebuild their lives first and foremost. Thirdly, the slowdown which appears to be picking up steam overseas in europe is likely a net positive for the US as the relative weakness associated with the dollar and the US economy dissipates a bit as market participants begin to realize that the US is not much worse off than our european counterparts, and may in fact be closer to the end of their malaise than those just beginning to slowdown. We are in such a complex economic environment with Oil + food making all time nominal highs, inflation fears accelerating, slowdowns picking up overseas, the continued perceptions of stress within the banking system, and housing prices continuing to decline that something needs to happen now at least as an effort to quell the momentum to the downside. Traditional, untraditional, it doesn't matter, time is really against us at this point as every day that goes by things seem to get a bit worse. What the puppet masters behind the curtain are doing right now is beyond me, but i have a feeling they're working on something....just doesnt make sense that theyre just waiting for this thing to play out as they know what the end result is if nothing is done.

Multilateral US Dollar Intervention Likely On The Horizon...

With the Fed's credibility waning, market technicals broken, commodities on the verge of major breakouts, and the US Dollar within striking distance of new lows we believe we are now in the red zone for an aggressive move by the US government to intervene in the foreign exchange market and stem the slide in the US dollar. The dollar slide has undoubtedly been the culprit for much of the markets malaise, as its relentless decline has put significant upside pressure on commodities pushing oil and gasoline to all time highs. With the Fed unable to adjust monetary policy favoring a strong dollar (i.e. higher rates) for fear of adding further strains on an already cash-strapped consumer, we are looking for the US government to step in and use the untraditional measure of intervention within the foreign exchange market in an attempt to not only break the back of a raging bull market in commodities, but more importantly regain global confidence in the greenback and the US financial system.  We are looking for the US government to step in multilaterally, joining hands with their european counterparts as europeans also view the soaring euro as an unwelcome hinderance to domestic growth due to the fact that it makes their goods more expensive to foreign buyers and thereby makes them less competitive in the global marketplace.  We are looking for possible intervention this sunday night or next week, and as such have taken a long position in the July 115 DIA calls here at $1.76 as the DOW is now firmly in oversold territory, and either way a bounce is very likely next week.

Brazilian Stocks Set To Rally...

We've just loaded the July 70 PBR calls @ $1.80 as well as the July 95 EWZ calls @ $1.75 here as we believe the pullback in Brazil shares is complete and are now looking for strong fund reaccumulation as the stocks look great on a technical as well as valuation basis. Technically the Brazilian Bovespa has just completed a perfect 50% retracement of its move from the January lows at 54,000 to the May highs of 74,000 and is now prepared to bounce off the 64,000 level on the charts. The index also has strong support from the 200 day SMA which lies at 62,996. In addition, PBR has just completed a triple bottom at $65 bouncing perfectly off the 50 day EMA. We expect the stock to close above 70 today or tomorrow, with very little resistance form 70 to the previous high of $77.50 set in mid-May. EWZ has also completed a 50% retracement of its March to May move from 72.50 to 102.50 @ 87.50 and has bounced off the 100 day EMA here @ 87.86 and is now set to bounce strongly. Brazil continues to be one of the strongest economies in the world estimated to grow at ~5% this year and we believe funds are preparing to reaccumulate shares here strongly going into Q3.

Royale Energy (ROYL) Strikes Oil, Stock Set To Go Parabolic...

As we've mentioned many times over the past several weeks, we have been aggressive buyers of ROYL on every dip, and with the company putting out an operational update minutes ago we couldn't be more excited about the prospects of the company, and feel very strongly that the stock is setting up for a parabolic move to the upside here a la PDO as in addition to extremely bullish findings of natural gas in their Uintah Basin acreage, they have also discovered what might possibly be a huge pool of oil.

Here are some excerpts specifically regarding the addition of oil to Royale's growing asset base:

"In addition, the Company believes the shallow Castlegate formation that is part of the Mesa Verde group of sands is shown on the logs to be present in two of the Company’s wells and covers a large area. This formation has shown both natural gas in the most updip location, as well as tar in the structurally lower position. If productive, this zone could result in production of both natural gas and oil from an area of almost three miles of structural dip."

"In California’s San Joaquin Basin, Kern County, Royale intends to drill an additional penetration of the Monterey oil shale. After analyzing the results of its last completion (Weber 27x-27) the Company will follow completion procedures that were developed in its latest test that resulted in the Monterey formation free flowing to the surface without pumping. Royale believes this to be extremely significant considering all of the Company’s previous perforations of the Monterey shale never achieved this. In addition, the oil cut has increased substantially over previous tests."

We did not expect these new oil finds and view this as an extremely bullish finding as we expect them to use a parallel strategy to their natural gas production of selling the Oil on a completely unhedged basis. In addition, the CEO stated that Royale has returned back to profitability this quarter and are looking for continued profitability for the foreseeable future, which is also excellent news. We are upping our initial target from the $15-20 range to $20-25 based on our belief that Royale's current $80M market cap does not accurately reflect the company's growing asset base and 100% unhedged natural gas production. As such we continue to hold ROYL as our top pick in the energy space.

Quantum Fuel Systems (QTWW) A $10 Stock In The Making As Fisker's Hybrid Sports Car Set To Go Mainstream...

We have been accumulating a very large position in QTWW here in the $2s as we believe Fisker Automotive's first hybrid premium sports car named the Karma is set to be a huge success in 2009 and beyond. The Karma, which is powered by Quantum's "Q-Drive" hybrid engine, is the first of a set of premium sports cars designed by world-renowned Henrik Fisker who is also credited with designing some of the most beautiful cars on the road including Aston Martins as well as BMWs. The Karma which is set to go on sale in North America in late 2009 and Europe in 2010, boasts a mind-numbing 100 mpg fully-electric engine capable of launching you from 0-60 mph in 5.8 seconds and a top speed of 125mph. The pent up demand for a premium hybrid sports vehicle of this caliber is extremely significant in our opinion, and the launch of the Karma will without doubt force other premium car makers to produce hybrid sports cars as well, as consumers worldwide are finally exposed to the reality of what was previously thought of as impossible...a fairly priced hybrid sports car with power equivalent to that of its gas-guzzling counterparts.

Moreover, don't think for a second that Quantum has its entire fortunes banking on the success of this one vehicle. The company is also producing the engine for the hydrogen-fueled Toyota Prius as well as GM's upcoming fuel cell hybrid known as the Equinox. Tack on Quantum's 25% interest in German solar company Asola, which just announced a $17M solar contract, as well as plans to triple plant capacity due to increasing demand for photovoltaic systems in Europe, and Quantum is without doubt extremely well positioned to meet the increasing demand for alternative energy products over the next several years.

As a sign of Quantum's recent success in the marketplace and hopefully an indication of things to come look no further than Q3 2008s whopping 209% year over year revenue increase, going from $2.3M in Q3 2007 to $7.1M in Q3 2008. The company attributes the surge in revenue to increased hydrogen-based hybrid and fuel cell hybrid vehicle product sales and higher development revenue programs. While the company has yet to turn profitable it is absolutely moving in the right direction trimming its operating losses by 53% from $3.0M in Q3 2007 to $1.6M in Q3 2008. With an expected continuation of ramping revenue due to increasing demand for hybrid vehicles, we expect profitability is simply a matter of time. While the stock has come well off its lows of under $1, we believe institutions are accumulating shares here (indicated on the chart by a recent surge in volume over the the past 2 months) in preparation for a massive launch of a host of Quantum powered hybrid vehicles in 2009 and expect a strong continuation of the uptrend in shares throughout the year. As Quantum's expertise in the hybrid engine business continues to gain traction spurred by the success of the Fisker Karma as well as Asola's booming solar business, we expect revenues to ramp significantly over time, taking QTWW back to a respectable market cap of ~$750M and shares back to their January 2004 highs of $10. We continue to be strong buyers of QTWW shares here in the $2s and are looking to add on any dips that may present themselves.

Sell Half PDO FPP Shares, Let The Rest Ride As Oil Set To Make New Highs...

We have taken half of our positions off PDO and FPP at $29.50 and $7 respectively and are letting the rest of our shares ride. While we believe both stocks are headed higher on fresh highs in crude Oil, we must be prudent in taking some profits off the table after a 58% run in PDO shares from our $18.60-$18.70 entry and a 38% run in FPP shares from our $5.02-$5.07 entry taken 2 weeks ago (see our June 5th blog post). With the July contract in crude expiring this friday we expect Oil to be highly attracted to the $140 level as hedge funds clearly continue to be net long Oil and have an interest in closing Oil strong into expiration. As such we continue to hold half our PDO and FPP positions as well as 100% of our ROYL position as we believe energy prices will continue to be elevated with pressure to the upside. Natural gas continues to be our favorite sector in the market right now as we believe the $15-17 level in spot prices is inevitable, and we therefore continue to be huge holders of ROYL as the company remains completely unhedged and continues to increase natural gas production.

Royale Energy (ROYL) Preparing For High Volume Breakout To New Highs...

We have added to our ROYL position here at $9.26 as the stock looks prepped for a high volume breakout to the upside today or tomorrow. Note that ROYL is flagging exactly as it did in the $5s just before it broke out to the $11s. We are looking for a similar breakout here to new highs +$11.30 shortly. Note that nat gas prices are showing remarkable relative strength versus crude, with nat gas continuing to make new highs even in the face of any short term weakness in crude.

SatCon (SATC) In Bed With Energy Conversion Devices' (ENER) Solar Arm...

We just got off the phone with the good people at SatCon as we noticed a press release from a few years back putting them in direct relation with Energy Conversion Devices' booming solar arm United Solar Ovonic (see PR below). They indeed confirmed that Uni-Solar still remains one of their customers. This is pretty significant news as growth in Uni-Solar's business is what triggered the recent breakout in ENER shares back in May. Apparently as stated in the aforementioned PR, SatCon provides the converters for Uni-Solar's photovoltaic systems. Moreover, we also asked SatCon if they foresaw profitability this year and they replied "we are expecting it," which is also tremendous news.


Here are quotes from ENER's last quarterly report:

"Total consolidated revenues for the quarter were $70 million, up 24 percent from second quarter revenues of $56.4 million, and 155 percent higher than third quarter fiscal 2007 revenues of $27.4 million. Solar product sales were $64.9 million, a 31 percent sequential increase and a 193 percent increase over the prior-year quarter.

Gross margin on product sales in the solar business was 30.7 percent in the third quarter, compared with 19.2 percent in the second quarter. The gross margin improvement was driven by better factory utilization and yield, and favorable customer/product mix.

Mark Morelli, ECD's president and chief executive officer, commented, "I'm pleased to report that we've reached profitability, and we've done so through sustainable changes to our business. This is a key milestone in our company's history, and a testament to the commitment and hard work of our colleagues."

United Solar Ovonic produced 21.6 MWs in the third quarter and 47.4 MWs for the first nine months of the fiscal year. The company confirmed its plans to expand and add 120MWs of additional nameplate capacity to its existing Greenville facilities. ECD will be able to internally fund this expansion through available funds and cash flow from operations. This previously announced expansion will increase the company's nameplate capacity to approximately 300MWs by the end of fiscal year 2010."




PR linking ENER with SATC:

United Solar Ovonic LLC — Uni-Solar — Selects SatCon Power Converters for Their Large Photovoltaic Power Generation Systems
Business Wire, Nov 24, 2003

CAMBRIDGE, Mass.--(BUSINESS WIRE)--Nov. 24, 2003

SatCon Technology Corporation(R) (Nasdaq NM:SATC), a manufacturer of electronic power control systems, today announced that Uni-Solar, the leading manufacturer of thin film photovoltaic solar panels and provider of commercial PV roof system solutions, has selected the SatCon PowerGate(TM) Power Converter System for integration into its photovoltaic power generation systems for installations greater than 50-kilowatts. The converters are designed for use with solar power systems to generate electrical power in office buildings, small factories, hotels and similar facilities. SatCon's Power Converter Systems convert electricity from photovoltaic cells into standard usable electricity.

An International Energy Agency (IEA) report on "Trends in Photovoltaic Applications", a Survey report of selected IEA countries between 1992 and 2002, reported that annual module (photovoltaic systems) production rose by over 50% in 2002 to 482 Megawatts. At an estimated average installed cost of $7.00 per watt, the annual production rate represents some $3.5 billion dollars in sales globally. Roughly 60% of that market represents module costs, which include the cost of power converters. Power Converters typically account for about 15% of the hardware cost of a system. The report also stated that the photovoltaic market has grown at a rate of roughly 35% per year over the past few years. The report Clean Energy Trends 2003, published by Clean Edge Research, estimates that solar photovoltaics (PV) (including modules, system components, and installation) will grow from a $3.5 billion global industry in 2002 to more than $27.5 billion by 2012.

"Using the SatCon PowerGate(TM) Power Converter System gives us higher efficiency and lower standby mode losses enabling Uni-Solar's photovoltaic systems to deliver more net energy," said Allan Gregg, United Solar Ovonic's (Uni-Solar) director of system engineering and marketing. "Furthermore, the PowerGate(TM) converter has integrated all components required for grid connection, allowing us to reduce our electrical installation cost by as much as 75%. The introduction of SatCon's large converters is timely since we are seeing the majority of market growth in large power installations."

"We believe there is a growing market for technology that makes solar energy practical for industrial applications," said David Eisenhaure, SatCon's president and chief executive officer. "With our next-generation technology, we are well positioned to capitalize on the opportunities presented by the solar photovoltaics market. We believe that the market potential for our 100kW photovoltaic power conditioning system will be significant, and we are pleased that Uni-solar has adopted our power converters for use in its photovoltaic power generation systems."

SatCon (SATC) In Bed With Google...

It appears SatCon is also in bed with Google:

SatCon was key in Google's solar farm

Published: June 27, 2007 at 2:36 PM

BOSTON, June 27 (UPI) -- Boston's SatCon Technology Corp. had a hand in the recent installation of one of the world's largest solar arrays.

The solar farm at Google's corporate headquarters in Mountain View, Calif., was in part due to Boston-based SatCon Technology's PowerGate inverters.

SatCon is a developer of power management and system architecture solutions for the alternative energy and distributed power markets.

The company's PowerGate commercial grade inverters were an integral part of the recent installation at Google's Mountain View campus. Google officials say the new 1.6 megawatt system is the largest commercial photovoltaic system in the United States.

Sharp Corp. provided 9,212 208-watt modules for the project, which was designed and installed by EI Solutions. SatCon's PowerGate high-efficiency inverters are a critical component of the system, converting the sun's energy produced by the photovoltaic panels into alternating current electricity that is used to power the facility.

Officials estimate Google's new solar array could prevent as much as 3,637,627 pounds per year of harmful greenhouse gases annually. Over the next 30 years, the carbon dioxide reduction will be equivalent to eliminating more than 128 million car driving miles.

SatCon's trademarked PowerGate inverters are designed for use with alternative energy power systems to generate distributed electrical power. Distributed, alternative energy power generation is a growing trend toward the production of clean, reliable power at the point of use. Alternative energy systems can alleviate congestion on highly loaded utility electrical distribution networks and offer an alternative to power line extensions in remote areas.

© 2007 United Press International. All Rights Reserved.
This material may not be reproduced, redistributed, or manipulated in any form.

Buy SatCon Tech (SATC) As Stock Set For Major Breakout...

We are buying SATC here under $3.10 as we believe the stock is setting up for a major breakout above its May 2006 high at $3.30 taking it to its September 2003 high of $4.30 near term. If the stock can breach the $4.30 level the sky is the limit as there is no resistance in the area just above it. The company provides energy conversion technology to the alternative energy space and has shown extremely strong year over year revenue growth of 79% with growth across all major product lines. This stock reminds us of a baby Energy Conversion Devices (ENER) and with that stock making new highs today, we expect the market to sit up and take notice of SATCs similar business line leading to a strong move in the stock. Initial target $4.30, with upside to $10 should we breach the September highs.

Reinitiate Position In Royale Energy (ROYL) Here @ $7.40...

We believe the stock has bottomed here, and are looking for the next upleg to begin today or tomorrow. Natural gas prices remain firm with a strong bias to the upside. We also have a $4M round of financing out of the way, and we are now looking for news on new nat gas wells or the Uinta Basin to launch us to the upside.

Add To Boots & Coots International Well Control (WEL) As Stock Set To Go Parabolic...

We have added to our WEL position here in the $2.40s as we believe the stock is setting up to go parabolic in the near future. For those new to WEL please revisit our profile on the company in our April 17th blog post. The stock continues to have strong support at the 10 day EMA and up days continue to be traded on much higher volume than down days which signals institutions are accumulating shares. With Oil and natural gas prices now breaching their all time highs (as we predicted yesterday) the spotlight continues to shine on oil infrastructure plays and we believe Boot & Coots continues to be severely undervalued sporting a trailing P/E of 14, a forward P/E of 8 and a mere 1 X next years sales. Given the company's 25% expected EPS growth (analysts are expecting .24 in EPS for 2008 and .30 for 2009) and 15% revenue growth we expect the market to reward WEL with an eventual 15-20 forward P/E which would put the stock at $4.50-$6.00 per share. With technicals and fundamentals continuing to look solid, momentum in spot Oil and natural gas prices continuing to pick up, and risk of war with Iran continuing to loom in the background we are expecting the market to take notice of Boots & Coots' extreme undervaluation in the near future leading to a parabolic move in the stock triggered by a major double top breakout of the $2.99 high set in April 2007. We are setting a near term target of +$4 on the stock with an ultimate move to the $6 level over time.

MXC PDO FPP Preparing To Squeeze As Oil Headed To New Highs On Another Round of Dollar Selling...

Oil has now completed a 50% retracement of its move from the $110 breakout level to the recent high of $135. After testing the $122.50 retracement level we saw an explosive +$5 move up in crude today on the heels of another round of dollar selling pushing the Euro back above $1.56. This move was triggered after ECB president Jean Claude-Trichet stated that the European Central Bank was prepared to raise interest rates next month which would again put new pressure on the dollar as higher interest rates overseas tend to push up demand for euros as global investors seek to lock in higher rates. Furthermore, looking at the chart of the FXE which tracks the EUR/USD we can see that there is a near perfect double bottom at the $1.54 level, and today seems to be the beginning of the next leg up which we firmly believe will take the Euro back to the $1.60 level thereby pushing crude back to new highs above $135. Moreover, note the strength in MXC PDO and FPP on the charts, as crude oils +$10 move off its highs only brought new buyers in creating nice consolidation patterns in all 3. All 3 are trading above their 10 day EMAs and we view this as a sign of strong accumulation here at these levels, and we expect short squeezes to commence in the very near future as shorts have now found themselves trapped in these low float energy stocks. Another round of momentum brought on by new highs in crude oil have potential to push all 3 above their recent 52 week highs. As such we have taken positions in both PDO and FPP at $18.60-18.70 and $5.02-5.07 respectively. While we would have liked to play MXC as well, the liquidity is a bit too light for our liking.

Sell Half ROYL Position, Let The Rest Ride...

After an enormous high volume run up in ROYL shares we are taking half our position off the table here at 10.80-10.90 in afterhours from our $5.17 entry. We feel it is only prudent to protect some of our profits, as momentum has found its way here and we need to lock in some of our 100% gains and begin looking for greener pasture. Technicals are clearly overbought now with an RSI just under 90 so we would like to see a nice pullback to possibly reposition ourselves. We still believe the stock should be valued much higher in the $15-20 range, and as such we continue to hold half our position for higher prices.

Stay 100% Long Royale Energy (ROYL): Initial Target Upped to $15-20 Based on Value of Uintah Basin Property...

For new ROYL longs please revisit last week's Wednesday May 28th blog for a complete recap of our bullish position on Royale Energy. For longs that are in with us from last week, well we are sitting pretty here as the stock has made a very significant breakout today on the strongest volume since 2005. While we would normally take profits here after a quick +60% pop from our entry, we are recommending holding all shares and are upping our initial target from $10 to the $15-20 range. We are basing our target on the significant value of their Uintah Basin property in Utah which has not only been validated by Anadarko's estimates of as much as 9 trillion cubic feet of nat gas on their 225,000 acres just south of Royale's, but has also just recently been validated by Whiting Petroleum's (WLL) $365M all cash acquisition of 11,534 net acres in the Uintah Basin from Chicago Energy Associates.

Here is a link to the PR put out by WLL after the close on friday which may explain the breakout in ROYL today:

http://biz.yahoo.com/prnews/080530/laf054.html?.v=98

Based on Whiting's $365M acquisition price which translates to $31,645 per net acre, it puts a value of approximately $475M on Royale's 15,000 net acres which are adjacent to WLL's newly acquired property. Now maybe my math is off, and maybe there is less natural gas in Royale's acreage so let's be ultra conservative and discount the value of Royale's property by 50% to $237.5M. Even after today's significant breakout, Royale's current market cap sits at a mere $65M! Which means anyway you slice it, Royale is extremely undervalued here and leaves room for enormous upside. Hence, based on the possible value of Royale's property, we are upping our initial target to $15-20 thereby giving ROYL a more reasonable yet still undervalued market cap of $118M -158M. Now as we have said before we spoke to the company a week or so ago, and they informed us that we may actually be hearing of the amount of reserves found in their Uintah Basin property this month which they said would be "very exciting news." Once this news arrives it will definitely give us more color on how much to value the property. As of now however, we highly recommend staying completely long ROYL shares till at least $15 as the company sits squarely in the crosshairs of an ongoing bull market in natural gas.

Price Action In Financials Signals Trouble Looming On The Horizon...

While most of us have been mesmerized by the price action in commodities, emerging markets and energy related plays over the past several weeks, it appears the financials have been making a rather stealthy yet alarming move to the downside. Looking at the 6 month chart of the XLF we notice that somehow we've managed to make our way back toward the lows set in March, and it appears that Lehman (LEH) has been looking ominously weaker than any other financial. Notably, David Einhorn of Greenlight Capital has been publicly parading the analysis behind his Lehman short position saying they are extremely undercapitalized and have essentially hidden $6.5 billion of CDOs on their balance sheet. Furthermore, credit default swaps on Lehman debt have begun rising dramatically over the past several weeks, going from 130 last month to just under 250 now. Merril debt has also spiked to 196. Taking into account these observations, a put position on the XLF as well as LEH seems like a good bet as something is definitely brewing within the financials yet again. If another round of credit woes surface the Fed may need to remain sidelined a bit longer than expected or we may actually begin to hear expectations of further rate cuts which would add further fuel to the commodity move. Would remain long Oil and Natural Gas, short XLF and LEH, short USD/EUR, and short the DIA here.

Buy Royale Energy (ROYL) As Natural Gas Prepares To Super Spike...

Watch for natural gas (currently at $11.90 per Mcf) to take out its December 2005 high of $15 in the next couple months in my opinion. As crude oil continues to gain traction and continues to make new highs it only puts added pressure on the price of natural gas as natural gas is widely known as the cleanest, most efficient energy source viable of replacing crude oil in the future. While natural gas is already being accumulated by large institutions preparing to play the energy of the future (notice the strong support at the 20 day EMA), the momentum crowd has yet to begin piling into the commodity as crude oil continues to maintain its luster as life of the commodity party. Sometime in the next couple of months, however, I believe natural gas prices will begin picking up in velocity and begin outpacing moves in crude oil. I expect natural gas prices to breach their December 2005 high and hit the $15-17 level and possibly higher. Now in terms of plays, to get the most bang for our buck an optimal play would be a small cap low float unhedged natural gas producer. This brought me to Royale Energy (ROYL). The company currently trades at $5.17 per share, has a mere $41M market cap, a 4.65M share float, is completely unhedged, and has been ramping natural gas production by putting new natural gas wells online. Not only that, they currently own 15,000 net acres in Utah's Uintah Basin where very large players such as Anadarko Petroleum are reporting that they have discovered enormous natural gas reserves. Anadarko which owns 225,000 acres in the Uintah Basin is estimating as much as 9 trillion cubic feet of potential reserves in the area just south of Royale's acreage. Royale has already begun exploring their acreage in the Uintah Basin as of late last year and has already successfully struck natural gas. This is an excerpt from last year's October press release:

"San Diego, November 27, 2007 – Royale Energy, Inc. (NASDAQ: ROYL)- Royale announces a new gas discovery and the successful completion and fracture stimulation of the V Canyon 20-1 well in the Uintah Basin.

On October 30th the completion rig was moved from the Ten Mile Canyon 22-1 well, to begin completion operations of the V Canyon 20-1. The well encountered multiple potentially productive zones including the Mesa Verde, the Sego, the Castlegate, the Mancos shale, the Dakota, the Brushy Basin, the Entrada and the Wingate. Out of a total of 60 feet of potentially productive Entrada, Royale selected the best 20 feet in the middle of the zone for perforation. This 20 foot section flowed gas naturally at an initial rate of 1.3 MMcf (million cubic feet) of gas per day and stabilized at 882 Mcf per day. Royale then decided to further stimulate by performing a fracture stimulation (“frac”) of this zone which increased the production capacity of the zone, resulting in an initial rate of 1.8 MMcf per day and stabilized flow rate of 1.04 MMcf of gas per day with higher tubing pressure. The well is currently being prepared for production and connection to the pipeline that runs
immediately north of the well."

Last week I spoke to the company, and they informed me that we may be hearing about the reserves found in the Uintah Basin in this upcoming month which they said would be "very exciting news." This news has potential to double the stock alone, and with additional wells coming online, as well as natural gas prices continuing to move higher, I expect Royale's share price trend to continue much higher, with eventual natural gas momentum taking this parabolically higher. The technicals look amazing as well as the stock is forming a bullish pennant after a high volume breakout from the $3 level, and is now finding strong support at the 10 day EMA. The stock is a buy here in the $5s with an initial target of +$10.

Get Long Boots & Coots International Well Control (WEL) @ $1.95 For Significant Growth In 2008...

I remember trading WEL for .30 back in 2003 when Saddam Hussein was on his way out of power and threatening to torch all his Oil wells. Back then Boots & Coots was a balance sheet disaster...tons of debt, hardly any cash, and paltry revenue mostly coming from their emergency Well Control business. However, things have changed remarkably at the Houston based company over the past few years. With the addition of several new business lines focused on servicing and maintaining onshore and offshore oil and gas rigs, revenue has grown significantly going from $29.5M in 2005, to $97M in 2006, to $105M in 2007. This dramatic growth is not only expected to continue this year but it is expected to ramp up a staggering 40% to $147M! In 2009 analysts are anticipating even further top line growth to $175M! Not bad for a company with a current market cap of $148M. Looking at earnings the story gets even better with EPS expected to more than double from 2007's .11 to .23 per share in 2008. This estimate may even appear to be somewhat conservative as last quarter the company guided for .02 and came it a whopping .08. However, assuming the company will earn the .23 analysts are estimating this year we are looking at a trailing P/E of a mere 8! And with analysts estimating .29 for 2009 the forward P/E shrinks even further to 6! Given the company's 40% revenue and 100% EPS growth projections we believe the market will begin accurately valuing the company very soon especially in light of the market's current focus on large cap Oil services names as well as the dramatic rise in spot Oil prices. We don't think it's far fetched for the market to reward WEL with a decent 20 times forward earnings multiple or $6/share given the company's growth figures. With Boots & Coots' worldwide presence (they do business in North America, South America, Africa, and the Middle East) we believe they are in a prime position to take advantage of the increased interest in maintaining highly valuable onshore and offshore oil and gas rigs. We recommend getting long shares here under $2 ahead of earnings after the close on May 5th as we expect another blowout quarter and expect the market to begin taking notice of Boots & Coots' significant growth trajectory.

Get Short Intuitive Surgical (ISRG) @ $355 For Possible Double Top...

With ISRG now approaching its December 2007 high at $359.59, we like the risk/reward on a short position here at $355. On the charts we're looking for the possibility of a near perfect double top (see chart below) with a good 50 points downside as the 50% retracement of the move off the March lows at $255 to the April highs $359 gets us to $307. We will cover on any close above $360 as this would produce a vicious double top breakout on the charts. Hence, our risk is 5 points and our reward is ~50...we'll take it.

Oil: Next Stop $115-117, Euro To $1.61-1.62...

With Oil forming a perfect double bottom at $100 on the charts, and now taking out our previous high of ~$111 it is setting up for a ferocious double top breakout here which should take it to the $115-117 level. The commodity continues to look like a raging bull, bouncing off all expected support levels, and continuing to bust through major resistance levels one after another. We reiterate that funds from around the globe are finding it absolutely necessary to get long the commodity as an inflation hedge. The fundamental backdrop remains firmly intact with the dollar continuing to make new lows and we expect the euro to clear its $1.59 high shortly and head to the $1.61-1.62 level near term. This move should add further fuel to the commodity move. Remain long Oil, long Euro, short Equities near term.

Part 1: Global Darwinian Forces May Produce Major Exogenous Event Blindsiding US Economy...

By all economic measures, the United States is clearly in a state of marked weakness. Economic growth is at or near zero, unemployment is rising, the banking system is in critical condition, housing prices continue to decline, the US consumer is up to its ears in debt, the dollar continues to make new lows versus every major currency, inflation shows no signs of abating, and the Fed is running around like a headless chicken literally doing everything it can to prevent the entire system from collapsing. This is not a subjective assessment, it is our grave reality. So what now? Where do we go from here?

Well the obvious answer would be to fix everything that appears to be broken, clean up inefficient systems, attempt to reinvigorate the economy, and ultimately rebuild confidence in the US financial system over time. However, what I fear most is that in this time of distress we may no longer have the luxury of time. I believe it is possible that one of the many emerging superpowers may make a play for global dominance in the near future. Yes, I know this is a bold statement, but let me explain. Over the past several decades the United States has clearly been the world's superpower. It has been the steam engine driving the global economy as continuous wealth creation here has driven demand for foreign goods thereby creating wealth and GDP growth overseas. We are clearly the largest consuming nation in the world, and most of our foreign counterparties have done everything they can to see that growth here continues as incremental gains in US GDP inevitably trickle down to their own economies. However, it appears now that the global economy has approached the point where our significance in the global growth equation has diminished. It appears as if our emerging market counterparties have grown to a level where collectively they are able to maintain global growth without the neccessity of US demand. Where is the evidence of this? The commodities market. We have virtually every major commodity (Gold, Oil, Coal, Grains, Corn) at or near nominal highs, with many now approaching their inflation-adjusted highs. What is most notable however is that these commodities are making this move with the United States literally on the brink of recession! How is this possible? How is it possible that Oil is near $110 per barrel with such weak US demand? How is it possible with the US near recession that global Oil demand is still greater than global Oil supply with Oil being pumped at maximum capacity? It is because of decoupling. The world no longer relies on the US as the primary engine of global growth anymore. This position has been taken over by the likes of China, India, and Brazil. While the US has been toiling with credit crises, a housing slump, and increasing debt loads, the emerging economies have grown into such a dominant state of hypergrowth that their only challenge is to make sure that growth does not get so excessive that it becomes unsustainable, and moreover that inflation remains contained. This dominant position, I'm afraid, may produce some sort of climactic consequence for the United States. Let me explain.

We as mere individuals, will never understand the desire to become a global superpower. This desire is something reserved for continents, nations, and unions as it is impossible for us as mere individuals to achieve such status. However, even though we may not have the capacity to understand this desire, we know that it exists. We know that every single day every sovereign nation is actively working or has the innate desire to become the strongest entity in the world. Why does this happen? What is the driving force behind this phenomenon? Well in my opinion it is driven by the underlying principle that the world lacks enough supply of natural resources to prolong the existence of every single nation over the long run. Over time, as the world begins to approach levels where natural resources are being fiercely competed over because of inadequate supplies and/or unusually high global demand at the margin, the strongest nations will attempt to force weaker nations into further weakness in the hope that this action may curtail overall demand and allow the strongest nations to accumulate necessary supplies at cheaper prices. It is Darwinism at its purest, and it is ultimately driven by the idea that while economic harmony may exist when the strongest parties are satisfied with the distribution of goods and resources, extreme competitive behavior will arise when those parties become dissatisfied with the allocation of resources, especially those resources necessary for independent survival. It is very much akin to the behavior of animals living in a jungle free from the so-called orders of society. When all animals including the strongest are fed and all so-called entities appear satisfied, harmony may exist because there is no need for competition as supplies of resources are adequate enough to meet the demands of all entities. However, if/when the strongest entities become dissatisfied with their levels of consumption, we will likely see an extreme uptick in competitive behavior as the idea of the natural order for satisfaction dictates that the strongest must be first to be completely satisfied. If/when this natural order appears to be imbalanced in that the strongest are not receiving adequate supplies, the strongest entities will likely seek to not only eliminate those entities which they believe will restore natural balance, but they will specifically seek to eliminate those who they believe will be easiest to eliminate (i.e. those entities who appear weakest). Make sense? Ok so what resource are we speaking of specifically when we speak of resources necessary for survival? We are speaking of crude Oil. Every single other commodity is secondary to crude oil in terms of necessity for survival. Gold, corn, wheat, coal, even steel are all secondary commodities. We don't need corn or even grain to survive, and coal and other fossil fuels are simply alternatives to the most important fossil fuel of all, crude oil. Without crude oil, factories would come to a stand still, refineries would be unable to produce gasoline, airplanes would be grounded, heating oil would be unable to be produced, and ultimately unemployment would skyrocket as productive inputs are unable to function and means of transportation become idle. It is the reason why there is literally no limit to how high the price of oil can go over the long run. Its significance as the world's primary energy source produces wars, wreaks havoc within the economic supply chain, and has the capacity to bring entire nations to its knees.

Part 2: The Consequence Of Weakness...coming soon

Get Short Mkt Here @ DOW 12650...

After a nice rally off the March 10th lows, the risk/reward profile of the equity market is now favoring a short position.  Many stocks have had very nice runs here fueled by short covering, and we believe equity prices have gotten a bit ahead of themselves, with the so-called early-cycle recovery names now trading in near-term overbought territories.  Financials continue to be lackluster, with value investors still finding a dearth of reasons to get heavily long.  On a technical basis we also have major resistance here at ~12700, with a double top being produced in early and late February (see chart below).  If the DOW can not close above 12,800 we expect this near term rally to retrace at least 50% to ~12,200.  Of course if further negative news surfaces within the financials (whether it is here or overseas) it is possible we might retest the lows, however I believe it is much more likely that our next low will be higher than our previous lows at around 11,900-12,000.

Bear Deal Forces Market To Significantly Reassess Market Caps of All Financials...

With Bear being taken under by JP Morgan for a truly embarrassing $2/share, the market will move to rethink valuations in every single financial stock.  The deal exposes the significant downside risk in every financial institution as the consequence of a run on the bank is brought to reality.  With risk/reward profiles for financials now significantly out of whack (downside risk for most of them now is probably 50%-100% with upside being 20% in the most optimistic scenario) the market will move to dump these stocks very hard as institutions are literally unable to quantify a long position and must remove any semblance of a financial off their books if they hope to maintain any clients.  There is simply no reason to own any financial right now.  The only question that remains is whose next? Is it Lehman, is it Citi, or maybe even WaMu? All seem like good candidates, with technicals and short interest dictating significant probabilities of much more downside.

Big US Bank In Trouble...

While we as traders will always be on the outside of this Wall Street banking crisis, we can nevertheless extract enormous amounts of information simply by observing trading patterns.  It is just as highly skilled poker players extract all the information they need simply by reading how their opponents bet and react to bets.  Notice today that the market supposedly rallied on an S&P report that we were nearing an end to large write-downs, yet the XLF still closed red. If the worst was really behind us we would have surely seen the large banks rally hard off the depressed levels they currently trade at.  Even Tuesday's Fed-induced rally failed to move the large banks in any significant manner.  Something indeed appears very fishy in the financials... 

Watch For Additional Fed Intervention By Friday...

While the Fed's intervention yesterday was no surprise to us (see monday's blog), we are looking for additional intervention by friday as the USD appears to be on the verge of collapse. Watch for Fed to step in yet again and slash both the Fed Funds and Discount Rate by 50 bp by friday at the latest as an attempt to stem a global equity market meltdown provoked by an outright crash in the greenback. This however will do nothing more than evoke an even greater state of panic. As outlined in our monday blog, we expected any equity market rally provoked by Fed intervention to be short-lived and as such took it as an opportunity to add aggressively to short positions. It appears the final act of our Feb. 29th blog prediction is here.

Watch For Possible Inter-Meeting Rate Cut Tomorrow...

With Fed Funds futures continuing to price in 100% probability of 75bp cut by March 18th, we are now in the red zone for a possible inter-meeting move.  Tomorrow looks like it might be the day as both S&P 500 and DJIA are at or near possible double bottoms on the charts.  Fed may seek to restore a bit of confidence in the market technically by moving tomorrow morning ahead of the open or intraday to reverse any marked sell-off in order to defend the January lows.  However, as outlined in our Feb. 29th blog I am looking for any rally to be short-lived and would take any bounce as an opportunity to add to short positions as a morning rally will likely fade by the close, and an intraday move will likely be a one-day wonder.  As such, we continue to hold our Feb. 26th short position from DOW 12,700 as technicals continue to deteriorate and commodities continue to push higher adding to inflation fears.  Moreover, our Oil long position taken on Feb. 10th continues to work precisely as expected with our $107-110 target being hit today.  We continue to hold the position as funds from across the globe continue to accumulate finding it necessary to be heavily long the commodity as an inflation hedge.  Note that we are approaching the end of Q1 here so the commodity move is getting a bit of "gas" (pun intended) with funds doing some expected window dressing adding to Oil and Commodity positions.  In addition, look for continued weakness in tech and financials as funds unload these Q1 losers from their portfolios.  I also expect mutual fund redemptions to intensify over the next few weeks as mom and pop throw in the towel on equities all together.  This will put additional pressure on tech specifically as fund managers liquidate their largest 2007 overweight position (tech) to raise cash.  

Moreover, on a bit of a doom and gloom note (I know that I've been rather doom and gloomish as of late but this sentiment has indeed been valid observing market action) the negative news flow not only continues to present itself within the banking sector but it has begun to intensify. Just today Fitch put out a warning that US Banks' home equity loans are worsening fast and there continue to be murmurs of additional write-downs and credit downgrades with regard to the major banks. We are also beginning to hear louder rumblings that commercial real estate may be the next sector to fall which would wreak additional havoc in terms of write-downs on an already worsening situation. Furthermore, Bernanke and a host of very notable speculators (Wilbur Ross today) are now convinced that a number of banks will indeed fail this year. What I'm getting at is, with confidence in the entire banking system now in question, is it possible that the foundations of the stock market will come into question shortly thereafter? I mean what exactly are we holding here? Pieces of paper that say we own a share of some company? Where's my money exactly? I mean if people begin to lose faith in the institutions that supposedly house and provide direct access to our own cold-hard cash and savings, what makes you think that in a state of panic people won't begin to question the soundness of brokerage firms and mutual funds and this entire risky thing we call the stock market? Is it that far fetched? I don't think so.

Oil Gets Green Light To Test $110....

With OPEC holding production levels steady and the EIA reporting a surprise 3.1M barrel drop in crude inventories this morning, we now have the green light to test and likely take out the $110 level in crude. Our Oil thesis outlined in our Feb. 10th blog appears precisely on point with Oil now a stones throw away from our $107-110 target. Continue to hold all long positions in Oil and Metals as the fundamental backdrop of the entire commodity sector remains firmly in tact. With regard to the equity markets, please note that structural weakness in financials and tech are now being masked by strength in energy and commodity related plays.  However, begin taking profits in large cap Oil and Agro stocks as I expect a decoupling of these stocks from their underlying commodities over time....we're seeing a bit of that today in the Oil sector with XOM and VLO in the red even with Oil up $5.  In general I continue to be much more comfortable being short equities rather than long.

Mastercard (MA): A Disaster Waiting To Happen...

Well I don't need to reiterate where I stand on this stock (just revisit our Feb. 5th and 7th blog posts for our thesis).  Our short from $210 is working nicely and I continue to hold the position as the stock continues to make lower lows. What I'd like to note is that observing the trading action as of late, the stock looks set to gap down huge soon.  I believe hedge funds are now comfortably short the stock, and what I'm looking for now is a negative headline of some sorts.  Something to the effect of "Mastercard shares gap down on report of increased credit card defaults."  The gap down is coming, I can feel it...i'm looking for a -15-20 point day on heavy volume soon. 

Also take note of increased insider selling past few months:

http://finance.yahoo.com/q/it?s=MA

Watch For US Dollar Collapse To Send Equity Markets Free Falling, Commodities Parabolic...

Fed Funds futures now pricing in 100% probability of 75bp cut by March 18th FOMC meeting, and whopping 75% probability of 100bp cut.  Watch for inter-meeting rate cut to send US Dollar plummeting, equities free falling, and commodities parabolic.  Any pop in equities will be short-lived and should be shorted.  Will be one of the biggest mistakes in Fed history as Fed clearly fully focused on challenges within banking sector with blatant disregard to soaring inflationary pressures.  Note US Dollar Index closing at all time lows, and all commodities at or near all time nominal highs.  Bloodiest Of Days scenario + runaway inflation on its way....

Get Short Mkt Before The Close Today As Oil Set To Spike...

Watch for Oil spike tomorrow as traders on the long side will likely hold positions regardless of build or drawdown in crude inventories. A drawdown will only add fuel to the fire leading to ferocious short covering and further momentum buying, and a build will do nothing more than provide a very shallow intraday dip for sidelined longs to add to/initiate positions. Watch for any dip to be met with strong bids, pushing spot prices well into green by close.

We are well beyond waiting for weekly inventory data to validate supply/demand imbalances at this point, and are now trading on pure technicals with a solid fundamental backdrop of rising inflation (just take a look at todays 1% PPI reading + USD making all time lows vs. euro + all time highs in wheat prices + Gold on the verge of clearing $1000/ounce). Our next near term target in Oil is now $105 which I expect to hit this week, and our $107-110 target (as outlined in our Feb. 10th blog) is right around the corner. Also note that gasoline prices are now rising in tandem with crude prices adding further pressure to an already cash strapped consumer. Here in southern california gas prices are approaching $4.00/gallon!

Watch for equity market to begin taking +$100 Oil very seriously now as uptrend in all commodities continues to gain steam adding further validation to ultimate US stagflation scenario.

Oil Looks Set to Squeeze Past $100...

I've been watching oil intently now for the past couple months, waiting for the price of the black gold to break down and validate theories of a severe recession. Yet through builds in crude supplies, a meltdown in global markets, bears pounding the table on a US recession, and declines in GDP growth forecasts for China, crude has held up extremely well bouncing off the $86 level multiple times. At this point we have to believe that there are an enormous amount of frustrated shorts trapped in oil. I mean they've thrown everything but the kitchen sink at the commodity, and it refuses to break down technically. So what happens next? Well a short squeeze. Sidelined longs like myself have waited for signals of strength to get long the commodity and play the much more valid thesis of rising inflation. Gold has been on a tear on the heels of this thesis alone (busting through $900 and setting up for a test of $1000), and there's no reason why oil shouldn't join the party now after flexing its technical muscles. All the signs of rising inflation are firmly in place with the US dollar continuing to weaken, the yield curve continuing to steepen, and the Fed signaling that inflation fighting has taken a clear back seat to stimulating a lethargic economy. Couple a backdrop of rising inflation, strong technicals, and a hefty short position, with a dose of rising geopolitical tension in Nigeria and Venezuela and it appears we are setting up for a solid squeeze here. Watch for slight resistance at the $96 and $100 levels...but once $100 falls, watch for the squeeze to pick up in intensity sending oil to $107-110 quick.

Initiate Short Position In Urban Outfitters (URBN) @ $30.50...

After posting strong Q4 numbers Thursday, Urban Outfitters has made a nice little move above $30. Yet, the 11% rise in same store sales in Q4 is of course attributable to the Christmas shopping rush. My thesis continues to be that after Christmas, retail sales will experience a rather marked drop off as consumers significantly pare back spending specifically on discretionary items. Well everything Urban Outfitters sells is discretionary...shoes, jackets, shirts, pants...its a bunch of stuff we already have a closet full of, and really dont need.

In addition to the clothes being on the expensive side,  so is the stock. When compared to others in its peer group, we can see that URBN has begun approaching rather lofty valuation levels. URBN now trades at almost 3.5 times its $1.4B in sales where Abercrombie and Fitch trades at 1.8, Guess at 2.1, and American Eagle a mere 1.5. Looking at its P/E, the stock looks even more overvalued, with Urban Outfitters now trading at a whopping 35 times earnings, while Abercrombie, Guess, and American Eagle trade at a more reasonable 16, 20, and 12, respectively. While a couple analysts have upgraded the stock recently on expected gross margin expansion, i'm just not buying it. We're in the midst of a recession, whether it be mild or severe has yet to be seen, but under either scenario I continue to believe it will have a significant effect on retailers, specifically mid-to high end retailers such as Urban Outfitters.

Moreover, looking at URBNs chart, we can see that the stock is approaching rather heavy resistance at the $32-33 level...its previous high set back in late 2005. In this kind of market environment I highly doubt URBN will have an easy time breaking through these long term resistance levels.




Therefore, from the $30.50 level we're looking at upside of $2.50 with downside of at least $5-7. With that kind of risk/reward, I'll take the short position no problem with a stop at $33.

Mastercard Thesis Validated Today...

Continue to hold all MA short positions, and revisit Tuesday's "Short Mastercard @ 210" blog for a recap of our thesis....


Growth In Consumer Credit Fell In December To Slowest Pace In 8 Months

By Associated Press
2/7/2008 2:47 PM

WASHINGTON -- Consumers increased their borrowing in December at the slowest pace in eight months, additional evidence that economic activity was slowing significantly at the end of last year. For all of 2007, consumer credit rose at the fastest clip in three years.

The Federal Reserve reported Thursday that consumer borrowing rose at an annual rate of 2.1 percent in December, a sharp slowdown from an 8.2 percent jump in November. It was the weakest showing since credit had increased just 1.6 percent in April.

The gain was about half of what economists had been expecting. They had forecast that total credit would rise by $8 billion and instead it increased by $4.5 billion to $2.52 trillion.

The report on consumer borrowing was the latest evidence that economic activity was slowing at the end of last year as households were struggling with a prolonged slump in housing and a severe credit squeeze which has prompted banks to tighten their lending standards.

For all of 2007, consumer credit increased 5.5 percent, up from an increase of 4.5 percent in 2006. The 2007 performance was the best showing since a similar 5.5 percent rise in 2004.

Analysts attributed much of the growth in credit in 2007 to households moving to put more of their purchases on their credit cards as banks tightened up on their lending standards for home equity loans in response to the widening crisis in mortgage borrowing.

Consumer credit, as measured by the Federal Reserve, does not include any debt secured by real estate such as mortgages or home equity loans.

The December report showed that revolving credit, the category that includes credit cards, rose at an annual rate of 2.7 percent in December, a significant slowdown from a 13.7 percent jump in November.

Borrowing in the category that includes auto loans posted a 1.8 percent rise in December, down from 4.9 percent increase in November.

Philly Fed Pres Plosser Says "Damn The Torpedoes" Isn't Good Policy...

Finally a man with some sanity!  While speaking to a business group in Alabama this morning, noted inflation hawk and president of the Philly Fed, Charles Plosser, sounded the alarm that "there are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible." He warned that this "damn the torpedoes, full speed ahead" type of policy "risks undermining our ability to achieve economic growth over the long run," and "cannot solve the bad debt problems in the mortgage market. It cannot reprice the risks of securities backed by subprime loans. It cannot solve the problems faced by those financial firms at risk of being given lower ratings by rating agencies."

The most noted take away from his remarks, however, were in regard to inflation and the Fed's ability to maintain credibility. Plosser noted that "so far inflation expectations have not changed very much. But they bear watching because there are some signs that they too are edging higher. These may be early-warning signs of a weakening of our credibility, and we must be very careful to avoid that." Well those remarks sent the market heading south quickly as any insinuation of taking away our beloved rate cuts completely freaks the market out...especially when you couple those hawkish remarks with words like "weakening of our credibility."

While the market may believe it simply wants rates cut as fast as possible, I continue to believe (as Im sure you'll recall from yesterdays blog) that the Fed's number 1 priority right now should be regaining credibility. The Fed can cut rates all it wants, but if it loses credibility, Americans will eventually find themselves jobless, yet paying $5/ gallon for milk and a gallon of gas. Its called stagflation, and it very much may be a reality in the next few years if the Fed doesn't do its job correctly. We must recall that the purpose of the Federal Reserve is not simply to appease financial markets, but rather to maintain price stability throughout the economy over the long run. Hence, this is why the Fed is almost always intensely focused on inflation expectations, as once they get out of hand it must drastically adjust monetary policy for fear of allowing its most dreaded enemy to arise....hyperinflation. Once this takes hold it is extremely difficult to work an economy back to stable ground without severe consequences.

While Plosser's hawkish remarks may have been in response to yesterdays call by Merrill that the Fed may be gearing up for yet another inter-meeting rate cut, they did little to dampen expectations of future rate cuts, with Fed Funds futures continuing to price in a high probability of a 50bp rate cut at the next Fed meeting in March, and still pricing in a 1/3 probability of an inter-meeting rate cut.

Either way it is good to see that there is some semblance of sanity within the Fed...we may have some hope of getting out of this alive after all.

Bloodiest Of Days Scenario Now Within 7 Trading Days....

I believe my "Bloodiest Of Days" scenario outlined in my January 30th blog is now within 7 trading days of coming to fruition.  Technicals have continued to deteriorate, rallies are extremely pathetic and sold into almost immediately, there is no leadership anywhere, and we continue to make lower highs on all the indices.  As such I believe we are very much setting up to take out the January lows on this next downleg. Again, I reiterate there are no buyers in the market, and the hedge funds are putting extreme pressure on high beta techs and anything assuming high growth in their models...this is in addition to very heavy fund liquidation from funds around the globe.  I am initially looking for 11,100 -11.300 as a new near term low on the DOW, and am looking for the Nasdaq to test 2000.  However, once we take out the January lows which I believe will happen on extremely high volume, I believe we may possibly reach an ultimate bottom in the market, and it may be safe to begin taking long term positions in high quality growth stocks (I am working on a post outlining a few picks and will post it shortly). Anyway, we will revisit this thesis once the lows are taken out.  Again, as outlined in my January 30th blog, I am looking for a DOW plunge of 600-800 points and Nasdaq plunge of 125-150 in the next 7 trading days. In the meantime, continue to stay short the market or sidelined.

Good luck all.

Nostradamus

Bernanke To Recession, "When I Shoot, You Go Down!!"

"The ISM composite non-manufacturing index data came in well below even the most pessimistic expectations, Merrill Lynch economist Sheryl King said, increasing the likelihood that the Federal Reserve will cut key interest rates before the Mar. 18 Federal Open Market Committee meeting."


Here we go again....didn't we just get a 125 bp cut in Fed Funds over the past 2 weeks?? Isn't anyone aware of the fact that this has been one of the fastest declines in Fed Funds in the history of the Fed! Let me tell you what will happen if we do indeed get yet another inter-meeting rate cut....the market will crater and crater bad (unless we crater bad before that which is highly probable). Wait wait wait, hold on a second, I thought the market loved rate cuts!? Yes, they do, but only when the market believes that 1) The rate cuts are actually doing something to stabilize the economy, and 2) That the Fed has the situation under control. Yet, if the Fed decides to cut between meetings yet again, it signals several things to the market:

1) It signals that the Fed is in panic mode.
2) It signals that the economy is in much worse shape than we think.
3) It signals that the Fed does not have time to wait 9-12 months for a rate cut to work its way through the the economy.
4) It signals that the Fed has finally acknowledged that it is way behind the curve in cutting rates.
5) It signals that it could care less about the value of the US dollar.
6) It signals that it could care less about inflation.

It further points to the fact that the Fed is actually slowly running out of bullets to cure this ailing economy. You see, the Fed only has so much cutting power...it cant cut rates below zero! So the more the Fed cuts, the less ammo it actually has left. And once the market realizes that these finite number of cuts are doing nothing to cure the credit crisis, or to get people spending again, the financial markets will begin to panic.

Yet what I will say, in all fairness to Bernanke, is that he is in fact dealing with a confluence of very negative economic headwinds. The current economic environment is extremely severe with regard to strains on the US economy. We have a major credit crisis ongoing, plummeting US dollar, unstable housing market, consumer debt loads climbing, limited access to credit markets, increasing layoffs, unstable global financial markets, high probability of a US recession, declining GDP projections for emerging markets, declining consumer confidence, and rising inflation. Yet, to say that the answer to all these problems is a series of Fed rate cuts is just ridiculous...what the Fed needs to do more than anything right now is to regain credibility, appear calm, and at least make it look like it has the whole situation under control. Once we lose that we're screwed.

I can't help but wonder if Bernanke isn't starting to feel like the Asian guy trying to kill Bullet Tooth Tony in Snatch lol.....Recession = Bullet Tooth Tony, and Bernanke = the Asian Guy lol :)

Short Mastercard (MA) @ $210...

Mastercard has been on a great run over the past several months, and much of it has indeed been warranted based on the idea that during tough economic times, cash strapped consumers do in fact turn to plastic to finance much of their discretionary as well as non-discretionary items.  And this is exactly what we have seen.... Mastercard's earnings have been stellar over the past several quarters on the heels of increased consumer transactions using plastic.  Yet this rapid pace of increased credit transactions can not go on forever.  Why? Because consumers have limited credit lines to finance items. Everyone has a credit limit, and with the increased rate of transactions we can safely say that over time consumers are getting closer and closer to their credit limits. We are also noting that we are in a slowing economy, and in a slowing economy, consumers are less likely to have the ability to pay down debt rapidly. Therefore, increased transactions will likely result in increased debt loads as consumers are less likely to service their debt obligations immediately. Moreover, we can say that the velocity of the move to approach their credit lines is very much a function of the pace of overall transactions. In other words, the more I use my Mastercard, the faster I get to my credit limit. Hence with an increase in the rate of overall transactions we can postulate a theory that consumers are getting closer and closer to approaching their credit limits, and therefore we may in fact begin to see the pace of consumer transactions decline.  For you mathematicians out there, note that we are simply looking at the second derivative of consumer transactions.  We are not saying that consumer transactions using plastic will decline, we are simply saying that the RATE of the increase in transactions using credit will begin to decline.  This is the trend that I believe will begin to surface over the next few months.  We will begin to see signs that consumers are getting tapped out in terms of using their credit lines to finance the purchase of goods.  This will indeed take a toll on Mastercards earnings, and once the market is fully aware of this, I believe we will see a rapid selloff in the stock.  It will be similar to the reaction we saw in Google....as institutions begin to realize that Mastercard's rate of growth is declining we will see a contraction in P/E, as well as a decrease in analyst earnings expectations which will result in a much lower stock price.

Also, taking a look at Mastercards institutional ownership we can see that the float is 85% owned by institutions which means that most of the moves in MAs stock will be dictated by institutional adjustments.  Since insitutions are much smarter than the average joe, I believe that they are beginning to expect this trend and are in the process of slowly scaling out of MA here using the volume surge produced by last Thursdays earnings beat. We can see this on the 5 day chart as the stock has failed to close over the 220 level on multiple occasions now. The inability of the stock to breach $220 has also produced a possible double top at $220 on the 6 month chart.  Given these observations, as well as my overall bearishness on the market, I believe MAs risk/reward profile warrants a bet to the short side here at $210....and we will make the 200 day MA at $163 our first target.