k_denninger's Comments

Is This the Start of a Bear Market?

Sun, 29 Jul 2007 17:20:13 -0400

I believe there is a significant chance we are about to see "down a lot."

The 200DMA, as mentioned, is a good marker.

Take a look at the Russell 2000. That would be the definition of "down a lot" starting, and when one major index rolls over like this, the others usually
Therefore, I believe it is prudent to take protective steps. But then again, I thought that was true a while ago. Now it appears that we may be facing exactly the scenario that I believed was coming.

Valuations are actually quite expensive, if you take out the radical underperformers since January. Remove the financials from the S&P and you'll find that the overall P/E is quite high. On the Nasdaq its even worse.

Reality is that there has been a big LBO "PUT" on the market for the last year or two. This is disappearing. Therefore, you must now go back and re-evaluate what is a rational valuation for the market without
When I do that, I find myself staring at a 20-30% downward adjustment from where we are now.

Homes vs. Offices

Thu, 05 Jul 2007 13:56:00 -0400
Yep.

In every housing-led downturn on record, commercial R/E lags. What happens is that the "deep pocket" landlords (so they claim) push and push and push. But they're really not deep pockets - they're levered to the gills - and they're pushing because they have to.

Unfortunately when you do that it hits a businesses P&L directly (higher rent goes right to the bottom line in the red way) and that ultimately causes margin - and then market multiple - contraction.&...

We know what comes next, right?

Why would anyone believe that the pattern will be different this time?

tickerforum.org

John Hussman: What Happens When No One Is Left to Hold the Bag?

Mon, 25 Jun 2007 09:20:36 -0400
P/Es when the "E" is based on one-time FX gains is fanciful at best.

When its based on inflated margins that historically are likely to regress to the mean, its even worse.

Rhetorical question: What purpose does a P/E ratio serve when the "E" is cooked?

I suspect the author knows the answer... as do I.....

Riding the Bull by Writing Puts on Large-Caps - Barron's

Sun, 17 Jun 2007 17:23:19 -0400
Quality stocks for which you overpaid, perhaps dramatically, if things don't go your way.

Somehow that doesn't sound so great.

Four Picks in a Retail Slowdown

Sun, 10 Jun 2007 14:02:01 -0400
I don't think any of the retailers are a good long play right now.

I agree with you on AMZN; the surge has been absolutely out-of-this-world and totally unsupportable based on growth estimates or fundamentals. I got burned on an option play on it a month back but am looking to go after it when the trend up breaks - and it may be in the process of doing so.

Another Perfect Storm Brewing: Government Underwritten Contingent Liabilities

Sat, 09 Jun 2007 17:21:56 -0400
The problem with property insurers is that they don't actually underwrite<... their policies - they just say "yes" or "no" without regard to the actual risk they're taking!

For example, no homeowner policy covers flood. You want flood, you buy it through the FEMA-administered program, even though a regular company handles the transaction.

During Andrew most structures that failed did not meet code. Many were built after codes were toughened but the builders did not actually meet the new codes anyway. The insurers didn't know this because they didn't bother to come out and look!

They also take no notice of loss history in a given storm profile.

For example, my home (on the coast) has been through two major hurricanes - Opal and Ivan. It took zero structural damage from either. These were solid Cat 3 hits. Yet I am offered no different rates than someone who lost their roof during either of these storms due to THAT house not being built as well.

When I buy auto insurance my actual crash history is taken into account in setting rates. How come the loss history of my specific
This sort of "zero-underwriting effort" problem is a big part of the mess and why it can't be fixed easily. To solve this you have to actually do the work, and nobody wants to.

Insurance is inherently about spreading the risk of unlikely
The practice of creating "pup companies" that are state (or even area!) specific so as to allow them to be cut off if they take a loss violates this precept and leads to states assuming the burden. While not all areas have hurricanes, they do have other hazards - we get few if any tornadoes here that do significant damage, as the tornadoes that form around here tend to be very weak (F0) and at worst rip up some trees and tear off shingles. Go inland a bit and you find F3-F5 tornadoes that level entire villages.

We don't have earthquakes - but California does, and the New Madrid fault (near St. Louis) historically HAS. The next one there is going to be ruinous.

In short, national companies should be forced to write nationally or not at all. Is it fair to spread the risk of a hurricane among those who are inland? Absolutely, just like it is fair to spread the risk of a TORNADO or EARTHQUAKE among those who do not live in areas particularly prone to those hazards.

To those who say "oh they'll just leave", are you now trying to tell me that Allstate and State Farm will just go out of business? This needs to be a national
That assumes anyone is actually interested in seeing the problem fixed.

What? Inflation?

Thu, 07 Jun 2007 12:00:39 -0400
Milk is nearly $4/gal here now. Almost a buck rise in the last month.

Beef (not ground, steak) is also up significantly, as is chicken, again, both in the last month. The culprit on all of these is corn prices which is being driven by the ethanol craze.

That Ethanol "mandate" is screwing you twice - your car goes fewer miles per gallon on ethanol-laced gas, raising your fuel costs, AND your grocery bill is going parabolic.

Say thanks to Washington for REAL inflation.

UN Report: The Dollar's Imminent Collapse is Being Caused by U.S. Debt

Wed, 06 Jun 2007 23:36:20 -0400
We do not need
We just refuse to go get it. That's all.

It is a choice; nothing more or less.

UN Report: The Dollar's Imminent Collapse is Being Caused by U.S. Debt

Tue, 05 Jun 2007 21:53:09 -0400
I believe we could see a break below 80 this year, as do they, and the low 70s is not beyond the realm of reason at all.

Insanity Reigns in Commercial Real Estate

Mon, 04 Jun 2007 00:24:17 -0400
I was playing the SRS (ultra-short) a bit ago but saw some technical indicators I didn't like and dumped the position. Good thing, as it has since sold off by 12% from where I exited! Aieee!

Anyway, I'll be back on that one, but not yet. The deal breaker, by the way, may well be the 10y bond yield. Watch that sucker - REAL interest rates are what will eventually kill the liquidity party, as all that debt that gets issued to fund the game has to go SOMEWHERE, and SOMEONE has to pay interest on the money.

The game is getting long in the tooth both here and in the general equity markets.

Check out market-ticker.denninge... if you'd like - another blog analyzing the broader markets on this stuff (mine)

GM's Balance Sheet: A Sign of Impending Doom

Mon, 04 Jun 2007 00:13:43 -0400
Ford looks like a good short play, other than being too cheap. But their just-in-the-money PUTs a week or so ago were selling in the front month with NO PREMIUM! Gee, that was nice - I jumped all over that one. A break below the $8.10 level on Ford (pretty much where all the MAs cluster right now) would be incredible, with the next real support in the $7.50 range and then at $7.

Below that the chasm yawns.... and their recent sales numbers have been nasty.

GM on a technical basis looks like dogmeat. They had their Death Cross, the stock has pretty much flatlined, it has taken several runs at getting over the MAs and yet has been unable to hold. Stochastics Friday suggest perhaps another run at the MA level, perhaps up as far as to the 100 and 200 (which are nearly at the same place), but that looks like an EXCELLENT short entry to me if it gets there and can't break it. Of course a big break downward would be a good entry too; you get below $29, which is very strong support and you've got a pretty clear path down into the ~$25 range.

There's nothing to like about the US Automakers when it comes to "the big picture". Labor is still out of control, health care costs are stratospheric and there's no sign that either of these issues can be dealt with. The companies bought off labor action with unsustainable and unaffordable concessions years ago and frankly I don't see how they can get out of the box now, other than Chap 11 the mess, repudiate the obligations and tell the UAW to go screw.

Is the Market Due for a Pullback?

Wed, 16 May 2007 08:27:37 -0400
One thing to pay attention to here is the pattern on the breakdown in 2000 and correlation - or not - here.

In 2000 the SPX peaked in early 1999. It then made a stab at those highs in September, failed, and we know what happened from there.

This time it is the Nasdaq and the Russell that are leading the turndown. The S&P is technically damaged although to a lesser degree while the Dow continues to try to push out of its wedge to the upside.

Something has to give; the S&P and OEX are not "along for the ride" here - the last few days this rally has been powered almost entirely on the backs of 30 stocks.

You tell me how that ends.....

Ben Bernanke's Fed Offers Investors False Reassurance

Thu, 10 May 2007 19:02:26 -0400
I agree entirely.

I've been following this on my blog at market-ticker.denninge... for quite some time.

The same-store sales picture is not unexpected. All you had to do is read the credit card issuer's financials during earnings season, then the credit report.

Duh. The home ATM machine is closed, so now we're charging up the credit cards.

That ends badly - very badly - when the consumer bangs up against his credit limit and can't refi it into the house any more!

Strong Earnings Season (So Far) Has Pushed Markets Higher

Sun, 06 May 2007 12:36:22 -0400
Its rather clever to have a market that has had its "G" cut by half, doubling the PEG ratio, but it still goes up.

Howzat? Well, earnings were growing 16% last year. Now they're growing 8%. If you believe in efficient markets, the indices should be declining<... not advancing.

The problem here is that our wonderful government schools teach people only to read headlines - not the actual data. For example, the jobs number this Friday. Looked somewhat-good, right? Wrong. The household survey showed we lost

Executive Options Abuses Say Short Sell Yahoo

Sat, 05 May 2007 20:37:00 -0400
Just buy some PUTs and forget about it.

If you're wrong, you lose a bit, but you don't get crushed by this sort of blatent BS that happened this last week.

Services Sector Up, Should Slip Later

Sat, 05 May 2007 20:28:24 -0400
Everyone wants to argue that big earnings for companies like Mastercard (MA) are good.

Uh..... wait a second. They make money from transaction volume.

Now look at the issuing banks. All are posting much higher interest income.

Hmmmm... let's see..... we have no more "Home ATM", so now we're loading the plastic - at considerably higher interest rates. What happens when you burn the numbers off and hit your limit - and how far away IS that for the Consumer?

I argue we're already seeing it - April number warnings from some retailers, and I bet the pace of those for May will only increase.

Time to pay attention!

PIMCO: We're in the Middle of Housing Downturn

Thu, 03 May 2007 22:44:18 -0400
As noted, the bottom quintile don't own homes.

Oops.

What Would Create a Repeat of 1973?

Fri, 20 Apr 2007 20:00:16 -0400
To Malkiel - don't drink the KoolAid man. You're listening to CNBC too much.

Read the DATA
The DATA says that the consumer is overheated, the home building sector is dead, and inflation is very much alive. Coke Products from $2.50/12 pack last summer to $3.83 - at Walmart - same store, same product, same price? Hmmmm..... 3% inflation eh? Not what my grocery bill says.

Oh, you want ex-food? What - you don't eat? That's what I thought.

When everyone's a bull, be careful. If you want to try to scalp the blow-off top go ahead, but please - buy some protection. IF it gets bad, its too late - kinda like trying to buy insurance on your house when there's a hurricane warning up.

Subprime Borrowers Causing Upside Surprise: What's Happening Here?

Fri, 20 Apr 2007 19:54:26 -0400
Oops - sorry, that's all screwed up with the links!

Let's try it again... top level blog at and the Countrywide specific hit at

Subprime Borrowers Causing Upside Surprise: What's Happening Here?

Fri, 20 Apr 2007 19:52:49 -0400
Spot on.

Covered in depth - including Countrywide and others, at

This is one of my speciality areas right now. Home prices absolutely are overheated and so is the consumer. Proof? How about all that record interest income reported by all the card issuers? Makes stockholders real happy. What's it make YOU if you're the one who charged up your credit card because you can't refi again and your HELOC is maxed out after the third Plasma TV?

Hmmmm.....

Subprime Fallout: Good For Countrywide, Bad For Choicepoint, Bankrate

Mon, 09 Apr 2007 15:51:33 -0400
Countrywide has 90% of their business in prime?

Nonsense. From their own 10K and 10Qs, a huge percentage of their originations were in fact ALT-A.

What's worse, SAMUELS, THEIR OWN CFO, said in sworn testimony on the hill just a couple of weeks ago that fully sixty percent of their customers over the last two years could not have qualified if they were forced to do so under the fully-indexed rate.

Countrywide is not a big Subprime Lender (although they ARE listed as an unsecured creditor in NEWC's bankruptcy filing) BUT they are a HUGE ALT-A lender.

AHM, who is also a large ALT-A lender, just warned. Both they and M&T have said they cannot sell their ALT-A loans into the market for more than the cost of origination.

How does Countrywide avoid this? I don't see how they can. They've admitted that half or more of their customers of the last couple of years could not qualify under PRUDENT
Will they go under? Probably not. But their current stock price certainly appears to be "wishful thinking" to me in light of their public, under-oath statements.