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Hans Wagner
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Hans retired from his business career at 55 and pursued his passion to help others achieve financial independence. A graduate of the US Air Force Academy with an MBA majoring in Finance from the University of Colorado, Hans continued to invest throughout his career in the US Air Force, Bank of... More
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  • Monthly Market Trends - May 2010
    This is a monthly chart for the S&P 500 showing 20 years of performance. Since this index is the one used by professional traders, it is important to understand how it is performing. This chart is also excellent at defining the longer term trends for the market.
    The bull market of the last five years broke down when the S&P 500 turned down through the 24-month exponential moving average. The bear market began when the index fell through the 24-month exponential moving average. Also, the RSI tested the 50 level, another important indicator of bear markets (if the RSI remains below 50 then we are in a bear market) and turned back down. The MACD crossing down through zero is another sign of the transition from bear market to bull market. Finally, the Slow Stochastic fell through 80 as another sign of the beginning of the bear market.
    A stock market bottom forms when each of these indicators reverses and crosses through their signal lines. When the Slow Stochastic rises through the 20 level we have one signal of a stock market bottom. The MACD climbing through its 9-month moving average is another. The RSI above 50 is another signal to follow for an end to a bear market. Finally, when the price crosses up through the 24-month moving average, we have another signal of end of the bear market.
    In early May 2010, the market pulled back as it tests the breakout through the 24-month exponential moving average.
    The RSI is above 50 a sign of an up trend, though it is close to the 50 level. The MACD is trending up. Monitor how it handles the  level to get an idea of the strength of this move. The Slow Stochastic is trending up as it pushes through the 50 level, a potential resistance area.
    From a monthly chart perspective the rally remains in tact as the 24-month EMA is still acting as support and the indicators have not turned negative.
    For now, I intend to invest as though we are in a more normal market that will see rallies and then pull backs. The rally of the last 12 months came as a rebound from an oversold condition as investors feared the worse. Going forward, we will experience market rallies and pull backs as the economy struggles to expand. The overall trend will be sideways in a range of 900 on the low and 1,250 at the high.
    You can click on the link below to see a current version of this chart.
    S&P 500 monthly chart for 20 years
    The four-year weekly S&P 500 trend chart shows that the market continues to rise, with the rising trend and especially the 50-week moving average providing support.  The next resistance level is the 1,250 area or the 200-week moving average.
    The rising trend that has been support since the rally started in March continues to hold indicating the market rally will continue. Monitor any retest to see if it holds. If it does the rally will resume. If support fails look for a pull back to the 50-week moving average.
    RSI is above 50, a sign of an up trend. The MACD has reached a high point where it turned down through the 9-week moving average. giving a sell sign. The Slow Stochastic fell through 80, a sell sign.
    The weekly chart pattern indicates the S&P 500 continues to trend up, though the indicators at high point it indicate we should see a pull back soon.
    Monitor support of the rising trend. If it holds, it is a good buying opportunity. Otherwise wait for the 50-week moving average to act as support.
    You can click on the link below to see a current version of this chart.
    S&P 500 Weekly chart 5 years
    On the daily chart of the S&P, the index broke through support of the rising trend, the 50-day moving average and the 1,150 level. The 150-day and the 200-day moving averages are holding as support.
    RSI is below 50 indicating a down trend. The MACD turned down through the 9-day moving average, giving a sell sign. The Slow Stochastic fell through 80 giving a sell sign, though it might turn up at the zero level.
    The daily chart of the S&P 500 is telling us the market is turning down after having fallen through the rising trend. Monitor whether the market can regain and hold the 1,150 area. the 50-day moving average will supply some resistance.
    I am expecting the market to trade in a range for 2010 with the highs in the 1,250 area and lows in the 900 level.
    Selecting the right sectors and stock picking will become more important to your success. Look to buy on dips in the market to important support levels. Then add down side protection at interim high points using trailing stops and protective put options to help improve the overall return. Covered calls options will also work well when the market is not rising as rapidly as the last nine months.
    S&P 500 daily chart 1 year
    Given this analysis of the S&P 500 trend line charts, it is important to position your portfolio for a market that is more likely to trend in a range with cyclical rallies and pull backs.
    The charts of the S&P 500 trend lines provide a good way for investors to align their portfolios with the overall market trends. Picking the right sectors and stocks will become even more important. Look to buy on dips in the price of the S&P 500 trend charts on the next pull back.
    Be sure to use proper capital management techniques including trailing stops, protective put, covered call options and position sizing. When the pull back ends, look to add to long positions with stocks and ETFs from the sectors that are likely to outperform the overall market. Keep in mind, Warren Buffett's first rule of investing is to not lose money. Be patient waiting for good entry points.


    Disclosure: No positions
    May 12 12:47 PM | Link | Comment!
  • 2010, Year of Sovereign Risk
    2010 will be known as the year of Sovereign risk as 2008 became know as the year of the housing bubble. In many ways, the credit crisis swirling around Europe is similar to the mortgage meltdown. Taking on debt that you cannot pay for later seems to become epidemic. Borrowing to pay for current consumption creates a false sense of wealth. At some point, you have to pay it back. Or those holding the debt have to forgive part of all of what you owe, If they do, they face financial ruin. There is no easy answer.
    As we are seeing in real time, Greece and other European countries ran large deficits to pay for current consumption. Now someone has to pay for their excesses. Those holding the debt, primarily European banks and governments, want to be paid back. Citizens in Germany who have been careful with their money do not want to be saddled with covering the debts of Greece. The European banks cannot afford to write off the debt as they are recovering from the affects of the U.S. mortgage meltdown.
    Since European banks are at the center of this turmoil, many large investors, fearing the affects of the credit crisis, are moving their money to safer investments in other countries such as the U.S. As money flows out of Europe, the banks see the outflow of money causing their capital structure to deteriorate. Should one bank fail it will have a cascading affect on others, not unlike the sequence of the subprime defaults that began with HSBC’s Household Finance disclosure of mortgage losses in February 2007. The losses grew and expanded to other firms, eventually leading to the collapse of investment banking houses Lehman Brothers and Bear Stearns.
    The global trade and the banking system connects everyone. It is easy for money to move from one investment to another as capital flows from one country to others seeking higher returns, with lower risk. For example, the benchmark ten-year Treasury rate fell from 3.85 two weeks ago to 3.43 percent as investors sought the safety of U.S. Treasuries. This outflow of money negatively affects the European banks as they lose deposits.
    Following Bernanke’s Model
    To stem the fallout from the Greek credit crisis, finance ministers from the 16 European Union accepted the need to provide more than €100 billion ($146 billion) over the next three years. Leaders hope these funds (€80 billion from the EU and €30 billion from the International Monetary Fund) will replace the commercial borrowing in the financial markets between now and 2012. Their goal is to buy Greece time to bring its deficit under control through drastic cuts in public spending. Greek authorities committed to cuts in public spending and higher taxes amounting to 13 percent of the countries GDP over the next four years. To accomplish this, the Greek government is cutting public sector salaries, raising the retirement age for women and imposing new taxes.
    Essentially, the Europeans are following the Federal Reserve Chairman Bernanke, model he used to avoid the collapse of the U.S. banking system from the subprime mortgage crisis. Bernanke, a student of the 1930’s depression, identified that liquidating debt was the reason the world fell into the prolonged depression during the 1930’s. By transferring private debt to public accounts, he avoided the massive contraction of the U.S. economy that would have occurred had banks and individuals written off the debt similar to the depression.
    However, these bailout programs transferred the bad debt from the failing institutions to governments. The idea was to place the bad debt on the public’s books, giving everyone time to work out a better solution. In another form of financial engineering, the government thought they could undo the fallout of the bad debt stemming from the housing bubble. Rather than recognizing the losses quickly and placing the assets into stronger hands, the government transferred the excessive leverage to government books.
    With the Federal Reserve keeping short-term rates near zero, it is facilitating the transfer of debt from weak organizations to the government. For example, German Chancellor Merkel has stated that if the IMG-led austerity program for Greece succeeds, the package of rescue loans will make a profit for German taxpayers, since Germany can borrow money cheaply and lend it to Greece at rates of around 5 percent. Sounds great in theory. What if it does not work? What if there is too much debt to take on?
    Beyond Greece
    Many European countries are larger than Greece with growing debt problems. Portugal’s public debt will rise to 91 percent of Gross Domestic Product by 2011, up from 77 percent last year, according to the European Commission. Greece’s debt will increase to 135 percent of GDP in 2011 up from 113 percent last year. Spain’s percent of public debt will increase to 74 percent of GDP up from 54 percent.
    The treat to European banks is real, just as they are recovering from their role in the subprime mortgage fallout. Many of these banks remain undercapitalized, meaning they can ill afford another credit crisis. Banks in Portugal, Spain, Italy, Ireland and the U.K. are at risk, according to a recent Moody’s report.
    This threatens U.S. banks as they have important financial relationships with most of these banks. Remember, we are all connected. A failure of a European bank started the break down of the financial system in 1929.
    The capital structure of U.S. banks is stronger thanks to the new programs recently instituted. This may help to cover some of these losses should they broaden beyond Greece.
    Debt and Deficits Do Matter
    A weaker Europe negatively affects the strength of the global recovery. Approximately, 20 percent of the U.S. trade is with Europe. If Europe finds its economy contracting, it will slow the U.S. economic recovery. The Greek credit crisis shows that debt and deficits do matter. Taking on too much debt that you cannot repay leads to a crisis. The only way out is to curtail spending across the board so the debt can be paid off and/or the capital of the banks that wrote off the loans are restored. It is a long and painful process.
    By the way, according to the Congressional Budge Office (CBO) the public debt to GDP ratio for the United States was 40 percent in 2008, rising to 90 percent by 2020. According to economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhard of the University of Maryland, countries with debt-to-GDP ratio “above 90 percent, median growth rates fall by 1 percent, and average growth falls considerably more”.


    Disclosure: No positions
    May 11 10:50 AM | Link | Comment!
  • Are there more Cockroaches in the Kitchen
    If you have you ever seen a cockroach in the kitchen, you know there are more that what you see. The same concept applies to improper financial activity by companies. When you find one bad action, you will more than likely find others. The Securities Exchange Commission (SEC) is suing Goldman Sachs for failure to disclose “vital information” regarding a synthetic collateralized debt obligation, named Abacus 2007-ACI. The SEC accuses Goldman of creating the sub-prime residential mortgage-backed securities portfolio and then selling it to investors, knowing that the security was filled with mortgages that were likely to fail causing the value of the package to fall. The SEC press release and complaint make for some interesting reading.
    John Paulson, a hedge fund investor made billions shorting the CDO market including an estimated $1 billion from this transaction. Paulson is not related to former Treasury Secretary Paulson. According to the filing, Paulson’s firm paid $15 million to pick the securities that became part of the portfolio. Paulson’s firm created a short position against the CDOs. Paulson’s firm said they did not the market the ABACUS product. Neither Paulson nor his firm was charged.
     A Goldman vice president, Fabrice Tourre was charged with fraud. The SEC indicated he was the prime person responsible for creating and marketing this product.
    At a minimum, Goldman faces a lengthy period of bad publicity, as Washington will paint them as the primary example of what is wrong with Wall Street and the U.S. financial system. Will there be more lawsuits? Most likely, as many large and well-heeled investors lost a lot of money. This is one big cockroach.
    This leads me to where are the other cockroaches. ProPublica is a journalism website that is reasonably good at identifying and disclosing interesting events that affect all of us. On April 9, 2010 they published an interesting article on “The Magnetar Trade.” The Magnetar Trade set up the riskiest portion of the CDOs into portfolios. Once in place, the funds placed bets that part of the deals would fail, generating huge profits for themselves. Like the Paulson & Co trade, they sought to make substantial profits from the deterioration of the underlying housing market and the sub-prime mortgages. While there is nothing illegal on the part of the hedge funds in making these bets, this trade displays the high risk deals of the some of these hedge funds. To be fair to the hedge funds, had the housing market continued to climb, they would have lost big time on their short bets.
    In addition, as described in the ProPublica article, the major banks were part of many of these Magnetar type deals including Merrill Lunch, Citigroup, JP Morgan Chase and UBS. According to ProPublica, at least nine banks participated in creating these portfolios. The article claims that the marketing materials and prospectuses did not disclose to investors the role Magnetar played in creating the CDO portfolios. After reading one the 260 page prospectuses there is no specific mention of Magnetar. There were many statements of the risk “qualified investors” were assuming. The problem with disclosure is someone can always find a case where someone should have mentioned the risk. It is this lack of disclosure on the part of the banks that opens the door for the lawsuits even when the products are sold to sophisticated investors. This is where the cockroaches are hiding. By the way, for those wondering a Magnetar is a neutron star that decays rapidly and possess the strongest magnetic power in the universe. An interesting analogy.
    Goldman and the other banks will be subject to a number of lawsuits from investors who lost billions of dollars on these deals. The banks will face bad PR along with expensive litigation to defend themselves. Along the way, there will be calls for disgorgement and payback of the losses investors incurred. Finding and disposing of all the cockroaches will take years. The negative affect on the banks will be significant including more pressure to add new regulations on their activities. Not many people will step up to defend the banks as this builds over time.
    For investors this raises the question, if and when should I venture into the field and buy the banks. Dick Bove, a noted bank analyst came out late Friday to say he would buy Goldman Sachs. Given their situation, that is a bold recommendation. I still like the fact that Citigroup has an exceptionally strong presence in the emerging markets that will drive its growth for several years. However, the fallout from the sales of CDO portfolios that were not disclosed fully is a risk we need to understand. On the positive side, the government owns a significant minority of Citi and they will tread carefully even as they are selling their shares. Stay tuned for further updates on the banks and on Citi.


    Disclosure: No positions at this time
    Apr 20 10:40 AM | Link | Comment!
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