1984

From BBC news

A Chinese teacher has been detained for posting images on the internet of schools that collapsed in the Sichuan earthquake, a rights group has said.

Human Rights in China said Liu Shaokun had been ordered to serve a year of "re-education through labour".

Mr Liu was detained for "disseminating rumours and destroying social order", the group said.

Communist and pseudo-Communist countries (China and Russia respectively) have gained a lot from the capitalist system, but refuse to give up their old ways. Many years ago, in my days as a rebellious youth, I used to think that a benevolent dictatorship was what would do India a ton of good but I am now convinced that nothing can be more putrid and worthy of contempt.

Why bring this up in an investment forum? To highlight the fact that when things get testy, especially with regard to international agreements and natural resources, the future holds quite a bit of tumult. BRIC may have worked out well so far but I urge caution when dealing with the commies.

The false bottom and other predictions for the future

Making predictions is a fool's game. But a rational fool can make some guesses as to where things can go based on the current data in hand. So with that, I shall present what I think is the likely course of US housing prices, and with that, the stock market.

Housing is the central theme with the current market dislocation. That's because it is the only instrument where such massive amounts of leverage can be had (the entire market is worth about 20 trillion dollars of which half is still to be paid off and held as mortgage investments of various forms). Now, let me present a graph of futures contracts for housing prices. I will not try to rationalize or counter this (since it's just a current futures graph) of this but it does seem to match with my current thinking that I shall explain below.

It will get worse before it gets better. At present, the belief is that later this year the fed will start raising interest rates. I think the $ is presently responding to this, and stands at a critical juncture.


This nascent strength in the $ is what has been hemorrhaging commodities recently and most of them are currently at strong support levels. I do think though that we have one more leg down in the $, when the conviction steps in that the fed will not raise interest rates (leading to one more leg up in the commodities). See the action from late last year to earlier this year. My thinking is that we should see another break down to about the 67 level by October or so. This will mark the top for commodities and the bottom for equities, and the big one coming 6 months later, the false bottom for housing.

(to be continued....below are just notes for my reference)

The actions by the government and the fed, treasury will definitely help with the stabilization of the housing market. Why 6 months? New president, new hope. But more ARM resets leading to final bottom in early 2010. Then flat prices for a year or two. Next real estate bull will reach its peak in 2018 or so!

The reason a bounce will be violent

I can't predict when it will happen, but I do think that when it does, it will be stunning, sharp and solid. Prior to that, there will be basing action, testing of support and retracing to prior lows. An important factor is that the lows are tested on low volume and hold. I think a close for multiple days above 1280 will be the harbinger of things to come (note that I'm not saying this is THE bottom for the bear market. We have a long long way to fall in the 1 yr timeframe. This is a forecast in the range of 2 weeks to 2 months timeframe). Now, the reason why I think equities will move up nicely are

• The usual ones: A negativity bubble, massive short interest, news media screaming armageddon, investment forums crowded with doomsdayers
  
• Long only mutual funds: This is the way most funds are positioned, especially of course the index funds which draw a constant stream of investment money.
  
• Takeovers of US corporations, buying of US property by foreign entities (throw in some ideas of takeover targets)
  
• Sentiment shift due to the olympic games and a positive reaction to the potential US election outcome
• Fed and treasury guarentees, bailouts, establishment of a highly liquid covered bond market
  

OMG

What a nutty market! Long commodities, short financials has been turned on its head in the last week! If it gets insane, I think ^BKX (banking index) > 75 will be very very difficult. Looks like India China are getting back into the game. But I still think fertilizer, agri, metals and resource stocks are going to get back into the action soon. And the financials trade should be done with BKX 75, XLF 24.

2% more

I'd give the indices about 2% more until this bear market rally exhausts or tries to atleast test the downtrend. 11800 on the DOW, 1305 on the S&P and 726 on the Russell. Other levels to watch are 33 for Wells Fargo, 22.2 for XLF (financials spider). Well, oil has seen that mighty fall and if buying doesn't pick up now, we could soon see 100 but I very much doubt that will happen before November.

Horrorshow

What a scary trading day today has been. I have been up following the markets since I saw the asian markets taking yday. Is the carnage over? I swear I have no idea! There are strong support areas in the dow close but still almost 500 points below current levels. See the oil drop? But it's still being supported by the dollar drop and we are entering the hurricane season. When those are gone, then what?

Till now, it's mostly been a financials led story. The consumer recession has not even started yet! That will be the real tale, which should happen sometime next year. I keep trying to tell myself to take a longer term perspective but it's very difficult to do with trader fingers. Hope this info helps some of you stable minds out there.

A month later

Been a while since I last posted. This post is specifically dedicated to the person who encouraged me to continue posting in spite of the poor blog comment activity :)

The central issue confronting capital markets right now is the financials. I have tried bottom picking these and been burnt but at some point you have to wonder how low they can go. Sure FNM and FRE may not be the best of breed but believe me, IBN and HDB are not in the same boat as these.

And then there's oil. It's a scare trade right now. The only thing i can see is some near term weakness followed by another run up and then a collapse later in the year. Bubbles are meant to burst and don't believe anyone who tells you oil is not a bubble. Sure it's a supply demand problem more than speculation, but the supply is getting destroyed and more so, longer term perceptions are changing which will afftect the future curve of the oil price. So when oil again gets into backwardation (future price lower than near term price), there will be tremendous incentive for companies to dump oil. Other factors to consider

• Congress acting against speculators
• Iran/US reaching a deal on their nukes, Israel/Syria coming to a peace treaty, Nigerian rebels getting more oil profit share causing them to halt attacks
• Demand destruction
• $ appreciation

On the flip side, we have exactly opposites of the above and

• Hurricanes
• More fields going offline for other reasons

That's all for now folks. Now, please comment. Ask questions, post ideas, make this interactive instead of a monologue.