We saw some window dressing in the last hour yesterday and we’re seeing some more today.  Volume’s light so pushing around stocks isn’t too difficult for those traders still on the floor.  For those of you who’ve heard of window dressing but don’t know what it is, it’s basically making a portfolio look better for the end of the quarter by a fund manager.  Here’s the way it works.  Mutual funds send out their holdings typically in their semi-annual and annual reports.  When these reports go out, do you think they want their investors to know they own General Motors, AIG, Fannie Mae, etc.?  So, what happens is the last few days of the quarter, the fund manager will sell off his losers and buy some winners.  The result is the companies that have been doing well lately get pushed up even higher.  Add that to a low volume day and you get exaggerated moves.

I think when the volume returns next week we could see a reasonably good rally based on the upbeat feeling of “change”  (A.K.A. Obama) coming whether it means anything or not.  As always, I’ll be monitoring that rally to see if it has legs.  If it doesn’t, we’ll have to get more defensive.  If it does, I’ll be adding some long positions.  We’re at a fork in the road where the stock market has been making lower highs and higher lows.  So, you’re getting this wedge as they call it.  We’ll break out one way or the other.  We’ll see next week.

Have a great new year.

Now that the market is basically moving sideways (at least for now), it gives us an opportunity to own specific ETFs and companies.  Because while the market moves sideways, there are plenty of companies running up right now.  Or, they should be running up based on their business and fundamentals.

One company that may be the perfect stock for this environment is FTI Consulting (FCN).  This is a company that provides forensic and litigation consulting all over the world.  They consult companies to help them through financial difficulties, maybe mergers & acquisitions.  I think there are going to be a lot of companies that are forced to merge due to the environment.  So, this company consults in that capacity.  Also, they help companies prevent “situations” from arising.  This is a $2.2 billion company that’s been cut in half with the market.  Their earnings are expected to grow about 19% per year over the next 5 years.  But, it’s not necessarily a company that really sticks out from a fundamental standpoint.  It’s a company that is a story stock I call it.  We look at the macro environment around us and then filter down from there what companies make sense.  I’ve written about a refinancing boom that will help companies like Fidelity National Financial (FNF).  We’ve talked about the dollar weakening helping metals like gold & silver.  But, we also have corporate scandal, forced mergers & acquisitions, & companies restructuring.  They need consulting.  That’s where FTI Consulting (FCN) comes into play.  Now, I don’t own them.  I’m still doing the research but I want you to do the research with me.  Post your comments what you find.  Is there a reason the stock hasn’t rallied while the rest of the market has?  I’m still doing my homework.  I just stumbled across this stock yesterday so I’ve just started looking at it from a fundamental & technical standpoint.

I’ve told you several times it doesn’t matter where you get your investment ideas from.  What matters is what you do from there?  You don’t run out and buy something just because I say it’s good or someone on television or on radio.  Heck, it doesn’t matter if your favorite uncle at a Christmas party gives you a “stock tip”.  There’s nothing wrong with that.  But, buying a security strictly based on something someone else says is wrong. So, do your homework.  But, this could turn out to be a longer term investment over the next couple of years as more and more companies will need their services.

You may say to yourself, well Karl surely has done the research on this one.  I can trust him.  Pretend I’m your drunk uncle at the Christmas party that just gave you a stock tip.  Proceed with caution.

Disclaimer: I don’t own the stock mentioned above at this time but as always may purchase it any time without notice.  This is not a recommendation to buy or sell this stock or any security mentioned in this article.

I haven’t posted this in a while but below is a picture of the crazy investor indicator.  As you can imagine with the markets calming down, we are seeing the fear in the markets go away as well.  The way I measure fear and confidence allows me to get a gauge on the market.  Right now, we’re seeing the highest level of confidence since September.  Now, I woulnd’t say we’re seeing outright confidence.  I’d say we just saw the panic and fear go away.  So, we’re somewhere in the middle.  Which is how I see the stock market.  Not too hot, not too cold.  Unlike goldilocks, not just right though.

Remember that in a bear market, the overconfident people are wrong.  I believe we’re still in a bear market and when this indicator gets to the bottom showing investors are way too complacent, then we might have to take really defensive positions.  For now, we’ll keep our strategy of shorting the overall market while going long individual companies and sectors that are performing well.

Tulips a few hundred years ago, biotech stocks of the early 1990s, tech stocks of the late 1990s, housing in the early 2000s, commodities in 2008.  These were all bubbles that eventually burst.  But, what makes a bubble?  Is it just prices rising a lot?  No.  I think bubbles all have some similar characteristics:

1. Prices rise dramatically
2. Prices continue to rise longer than anyone thinks
3. There’s a rational reason for the price rise
4. Everyone explains why it’s different this time
5. Greed takes over and the price move up accelerates
6. Prices eventually come crashing down

So, does the recent rise in treasury prices have any of these characteristics?  I’d say it has all of them except for number 6 (at least for now). 

Remember the dot com boom in the late 1990s?  Everyone was saying that tech stocks could keep going up because technology was changing at such a rapid rate that the stocks justified huge multiples.  They were right about the technology.  Everything we thought the internet would be has come true.  But, the demand for the stocks eventually slowed down.  At the same time, the supply was increasing of those stocks.  That was a combination of a ton of IPOs and companies issuing a lot of stock in the form of options, etc.  How about housing?  Surely that would go up forever.  We had more people moving to the country than leaving and everybody would need a house.  And when you add in low interest rates, how could prices come down?  They did.  Commodities.  The world’s industrializing and the need for commodities won’t slow down.  It did.  Commodities just since July 1st have fallen 55%.  Now, I’m on record as saying that I think we’ll have another several year run for commodities.  But, it was still a bubble.  Which brings us to treasuries.

Everyone knows that the economy started to weaken and rates started coming down.  But, when the economy fell off a cliff in October, the panic we saw caused everyone to bail out of anything that wasn’t a treasury.  That caused rates to fall.  Then the government got involved.  They started buying a ton of treasuries to drive down rates even further which would in turn cause us to refinance and use our capital in a more productive way.  Since then, we’ve seen rates actually go negative on short-term treasuries.  But, it’s not just short-term treasuries, long-term rates are at multi-generational lows.  The ten-year treasury is around 2% today and looks as if it’s going to 0% at this rate.  You can see the picture below, which is the iShares Barclays 20+ Year Treasury Bond Fund ETF (TLT).  Just since November, the price of long-term treasuries has risen over 30%!  Bonds, 30% in 2 months?

I’ll agree that rates should be falling.  But, look at that picture above.  I don’t care what you’re trading.  Whenever you see a picture like this as a trader, you sell it.  Or at least, you don’t buy it.  Now, bubbles can last for a while.  Sometimes several years.  The Fed has already told us they are going to leave interest rates very low for a long time.  But, can they buy enough treasuries to to keep rates at 2% on 10-year treasuries forever?  I don’t think so.  I’ve been short treasuries and long other bonds for some time.  The short hasn’t worked yet but I’m real close to averaging down into my short.  The key is to continue to buy other types of bonds in addition.  It’s a pairs trade.  You can short treasuries a few ways.  You can physically go out and short treasuries.  You can buy an ETF that shorts treasuries or you can buy a mutual fund that shorts treasuries.  But, remember, this isn’t a trade.  It’s a longer term macro play.

Number 6 hans’t happened yet, but I’m betting it will.

It feels like we’re running out of gas over the past few trading days.  Some will say it’s just lackluster volume due to the end of the year and the holidays.  Some will say we’re headed straight back down and we couldn’t get enough umpf to continue the rally.  I say we’ve had a nice rally since November 21st and we’re working off being overbought by just moving sideways.  Remember what happened the last two times we rallied over 15%?  We almost immediately had selloffs that took us to new lows.  This time all the oscillators I watch are resetting without the averages really going down.  They’re drifting down but we’re still not seeing the overwhelming selling that caused us to go to new lows last month.  So, that’s constructive.  I talk about these oscillators quite a bit and the reason is because markets don’t move in any one direction too far without at least pausing.  I watch a lot of oscillators that go from bottom to top and back again.  It’s like a pendulum.  Sometimes overbought markets stay overbought and oversold markets stay oversold.  But, generally, prices move with the oscillators.  So, when we get overbought, the oscillator goes down along with stock prices.  This time, it appears the oscillators are falling at a faster rate than the prices.  

Do you remember the bull market in the 1990s?  We’d go up 10% on the averages, then the oscillators would go to the bottom but prices would just move sideways, then we go up to another level.  I think the market could do that in the first quarter of 2009.  I want to make myself clear that I still don’t believe we’re in a new bull market, I don’t know if the economy will bottom in 6 months.  But, I’m talking about a trading rally that can take us into the spring perhaps.  But, as always, we’ll see.

Bonds

I’ve been discussing high yield bonds on the radio in the past few days.  We’ve seen a huge run in LQD which is the ETF for investment grade bonds.  I took profits on this last week and established a position in HYG with the proceeds.  HYG is the ETF that tracks high yield bonds.  In the last week, it’s been on a tear.  I think it has more upside plus a huge dividend.  You might wait for a small pullback but buying the dips might be in order here.

ETF Distributions

Both the short ETFs I own, SDS & TWM, went ex-dividend today.  Many of the Proshares went ex-dividend today so the price of these ETFs fell dramatically.  You can relax though because the drop was roughly the equivalent of the distributions that will be paid on December 30th.  No need to worry.  It’s a wash.  But, there will be a gap in time where your ETF is worth less on paper than it’s really worth because they went ex-dividend today and pay on December 30th.

I mentioned yesterday that today was quadruple witching where 4 different investment vehicles expire on the same  day.  That doesn’t tell us the direction of the market but just that we’ll see some volatility.  And, after the volatility we’ve had this quarter, it doesn’t surprise me we’re getting a volatile quadruple witching day today.  Some things may not make sense today so don’t read too much into it.  You might be able to take advantage of some sell offs in some stocks you’ve been wanting.  But, for the most part, don’t pay too much attention to the move.  It’s only one day and doesn’t tell us anything constructive.  We’ll see what next week brings us. 

I’ve discussed Gilead Sciences (GILD) before on this blog and how it was outperforming the market for a lot of the fall.  It’s recently broke out and I think it has legs.  I like it because it’s a non-cyclical business in a recessionary environment and it has earnings that we know are fairly stable.  $48 was the old high and it’s now breaking out.  The next hurdle is the 200-day moving average at about $50.  If we get past that, I’d be looking for $56 as the new level.

Disclosure:  I own shares of Gilead Sciences (GILD).

This is a classic day where the numbers are worse than what actually happened.  The internals weren’t that bad considering a 200 point drop in the averages.  We had a lot of profit taking on everything that’s been working lately.  Global growth, if you will, was down today.  Some stocks pulled way back.  But, I think this is an opportunity to buy them, not sell them.  The dollar reversal is still in play and all the stocks that that benefit from it will continue to move higher.  Also, the metals will continue to do well.  The only caveat is gold is at a technical high where it could roll over.  It didn’t help when UBS came out today and said we could see gold at $300 per ounce.  Not sure about that one.  But, it could pull back more here.  This is why I have a position in silver which doesn’t have the same picture as gold.

Also adding to the volatility is quadruple witching, which is the expiration of options and futures tomorrow.  Tomorrow will probably be just as volatile.  But, as I said, the internals are still pretty good.  We’re going 3 steps forward for every 1 back.  That’s constructive.

Interest rates continued to move down today and even though we know why and we know they may be low for some time, there has to be a bubble brewing in Treasuries.  If you don’t have a short position on treasuries, I’d add one at these levels, at least as a hedge against your bonds.  Speaking of bonds, my position in LQD has been going straight up.  In fact, it’s moving so straight up, that I’m placing a stop beneath it.  LQD is the ETF that tracks a basket of investment grade bonds.  They’ve improved a lot in the last few weeks.  Also, look out for high yield (junk) bonds.  They are starting to move as well.  Money is moving back into riskier assets.  How can money be moving into riskier assets and still be going into basically riskless assets like Treasuries.  Because the government is buying the riskless ones and you and I are starting to buy the riskier ones.  That can go on for some time but eventually I think you’ll see long-term rates on Treasuries reverse. 

If you haven’t been buying in the past few weeks a few stocks as we’ve mentioned here, use days like today to acquire some (keyword, some).  There are more and more stocks looking technically better.  Just don’t go overboard.  Have a nice evening.

With long-term rates continuing to plummet, it’s causing another round of refinancing similar to the refinancing that went on in the early part of this decade.  I locked in a new 30-year mortgage for 4.875% today.  I personally know 7 people that have inquired or actually refinanced in the past 24 hours.  So, that got me thinking.  If you recall, I mentioned Mastercard (MA) a couple of weeks ago.  I liked them because they get paid by the swipe.  They don’t take on debt liability.  They just get paid for each transaction.  Well, with all the refinancing happening right now and over the next few months, I think Fidelity National Financial (FNF) will be the biggest beneficiary.  FNF provides services in the closing process.  It reminds me of Mastercard.  They don’t take on the debt, they get paid by the close so to speak.

This stock has had a big run from the bottom and it’s technically at a place it could roll over.  But, on this one, the fundamentals are so good, I believe the technicals are a secondary consideration.  There are lots of ways to play low rates.  I’ve been pounding the table on corporate bonds & agency bonds and those are working beautifully.  But, in the equity markets, you have to look at who has visibility.  That means we can see their profits in the future and they look really good.  In fact, many believe their estimates are way too low given the amount of refinancing activity we’re seeing.

Disclaimer:  I own shares of Fidelity National Financial (FNF).

The Fed lowered their target rate today to a range instead of a stated rate.  The range will be 0-.25%  As I said on my show this morning, any movement down wouldn’t be a big shock, it would be the statement that went along with it.  Well, the Fed said in their statement today they would keep rates low for a long time.  In addition, they will continue to buy agency bonds keeping long-dated rates lower.  This will help refinancing and hopefully new & existing home purchases.  Remember, home prices falling is what really started all of this.  The market responded well with a 90% upside volume day and a 300+ point gain for the Dow.  The volume wasn’t heavy but heavier than yesterday.

We all know cash has been king for most of 2008.  Especially since July 1 when commodities peaked and the dollar bottomed.  But, the Fed is making it very difficult for all of us to hold cash.  Yielding 0% but purchasing power going up has been ok.  Remember, I wrote about that just last week.  But, with the dollar falling fast now, earning 0% and losing purchasing power, that’s a different game.  So, maybe cash isn’t king anymore.  There certainly isn’t a green light to buy stocks.  But, closing above the 50-day moving average is a positive.  We’ve had the weak pullback over the last few days and that was a positive.  But, maybe the most positive thing stocks have going for them right now is the simple question, “where do I put my money?”  “I’m getting nothing and the dollar’s weakening, I need to buy something.”  Everything competes for your dollars and my dollars.  Sometimes holding them makes sense and sometimes getting rid of them makes sense.  We always want the best deal.  Earning nothing while prices of other things are going up isn’t the best deal.  Maybe it’s depressed stocks or depressed land.  Maybe it’s global growth. 

I think we could see a few days rally for the dollar and maybe a quick reversal, but this trend of weaker dollar and a move back into global growth including metals could be a longer-term trade.  I’ve been buying some global growth stocks lately.  I’ve kept my shorts on the overall market and will sell them on another major selloff or I will gradually reduce them as the market improves in stages.  But, it’s important to be diversified right now.  You have to continue having exposure to bonds especially after the Fed’s statement today.  But, nibbling on stocks  has made sense lately as well.  Just don’t overdue it.  The market’s improving in stages and our portfolio should be doing the same.

Not a bad day.

The stock market finished down today but it held its own.  For a while, it looked as if the market would get worse and worse.  But, the volume was very light and it looked more like everyone was in a wait and see attitude.  There’s definitely not the active selling we saw in October & November.  When I see days like today that a few weeks ago would have fallen apart at the close, I have to be a little more bullish.  The market has shaken off bad news pretty well and when it has the chance to plummet, it rallies back.  If you notice, the rally at the close was on pretty heavy volume.  We saw a nice move off the November 21st low and now we’re seeing a weak pullback.  Remember a couple of weeks ago I said I’d be looking for a weak pullback and then another round of buying.  If we get that on heavier volume and break through the 50-day moving average, I believe the rally will extend for a few weeks at least.  

The decline in the U.S. dollar that I wrote about last week continued today as commodities rose.  With the U.S. dollar being the lowest yielding currency and the Euro being the highest yielding currency, you’re seeing more selling of the dollar, more buying of other currencies, and metals starting to perk up.  Gold & silver both rose.  I’d like to see them get a little more traction but this move may be for real.  And trust me, the U.S. is happy about the dollar weakening.  It’s how we’ve been growing over the past few years and will continue to grow going forward.  Now nobody including me wants to see a pathetic plummeting dollar.  But, a relatively weak dollar I can live with.  It is getting money going back into global growth.  Remember, at this stage in the game, the Fed is worried about deflation, not inflation.  So, what they want most right now is reflation in stocks, homes, commodities, businesses, etc.

The reason I’m slightly more bullish (just slightly) is because we’re seeing the bad news and bad numbers start to at least slow down.  They are still bad and will be for several more months.  But, the rate at which some of these things are falling is better.  Don’t get me wrong, my allocation to stocks is still very small.  But, I’m picking certain stocks in certain areas to invest in.  As the market proves itself to me a little, I buy a little.  We’re re-kindling our relationship you could say.  The dollar reversing could be just a short-term move, but if it’s not, you’ll see more upside in commodities, metals, etc.  Because of that, I’ve been buying securities levered to a falling dollar.  It’s somewhat of a hedge where I get some exposure there but if the dollar starts strengthening tomorrow I’m not hurt overall.