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

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.

Watch Northstar Neuroscience (NSTR) @ $1.48

After the company announced that its EVEREST study failed to confirm positive results of cortical stimulation therapy for stroke motor recovery, the stock was pummeled from +$8 to just over $1.  

Looking at its balance sheet though, shows the company has over $80M in cash and investments and ZERO debt, giving it a book value of just over $3.00.

The company will be providing an update on how it intends to move forward with the data, as cortical stimulation therapy has shown potential for treatment of depression and tinnitus.

Given such a strong balance sheet, and the continued belief that the therapy has some value, this looks like a very solid risk/reward play here at $1.48 with little downside risk and potential for a 100% gain on any news.

From the co. last press release on 1/22/08:

"On December 31, 2007, we had more than $80 million of cash and investments, which we believe is sufficient to pursue other applications of our cortical stimulation therapy and further investigate EVEREST results.  We are encouraged by the additional evidence of a strong safety profile of cortical stimulation demonstrated in the EVEREST trial.  Based on clinical results achieved to date in other feasibility studies, we continue to believe that cortical stimulation holds potential for the treatment of depression and tinnitus.  These disorders involve different patient populations and distinctly different brain targets than our stroke motor recovery indication.  In the coming weeks we intend to provide more detail about our plans going forward."

Bloodiest Of Days Coming...

have a feeling we may see the bloodiest of days on the nasdaq, dow, and s&p very soon.  todays action following the FEDs 50bp cut in both the fed funds and discount rate gave us a huge tell that there are NO buyers in the market, just a few shorts covering, and the short covering was nothing to write home about.  at this point after several failed bounces, increasing concerns over bond insurers, and the market realization that FED monetary policy isn't the silver bullet to cure our problems we are possibly nearing a day where everyone just wants out of the market all together....in other words true capitulation. there is simply no reason to put a bid under the market right now. why? because there are no other buyers out there.  we saw it today. the risk associated with holding stocks overnight far outweighs any possible reward.  hence no bids in stocks, increased short selling, and increased liquidation of long positions. with regard to long positions, it is still going to take some time to unwind those long positions as funds across the globe were buying US stocks on dips just a few months ago...hence it will take some time for global funds to adjust risk levels appropriately in line with weak or negative US growth.

therefore, watch for the VIX to take out that ~37 high on a -600-800 point DOW, -125-150 NAZ tank sometime in the next few weeks.