Today, Bob Nardelli, CEO of Chrysler, announced he would leave the company after Chrysler completed its bankruptcy.  Now, you may sayit’s not his fault the company went under.  It’s been a really tough economy and he inherited a tough situation.  That’s true but if the economy in 4 years is worse than it is today, will people say well President Obama inherited a bad situation?  No, he’ll be on the hook.  Nardelli is on the hook. 

Nardelli’s track record isn’t that great after this latest catastrophe.  Before taking over as CEO of Chrysler, Nardelli was the CEO of Home Depot.  He took over at Home Depot in December, 2000.  During his tenure, Nardelli practically ran the company into the ground and left that company in January 2007 (see stock performance).  But, he didn’t leave Home Depot empty handed.  He walked away with $210 million, seven times more than the employees were to get that gave good customer service.  I’m not sure if you’ve been in a Home Depot lately but I’m sure they haven’t paid any money out with their horrible service.

How much will Nardelli get for this latest venture?  I doubt he’ll get the golden parachute he got last time.  He’s on quite a roll though isn’t he.  I sure hope he doesn’t take over for Steve Jobs at Apple@#$%>?

Yesterday in my blog, I discussed rates on 10-year treasuries rising above 3%.  The Fed didn’t make a change on rates today as expected and basically said what I believe they would.  The economy is still contracting but at a slower pace.  Markets didn’t really react to it at first but have firmed up since.  But, we are seeing a move out of treasuries and into equities.  As I stated yesterday, short treasuries is a nice trade (and investment).  TBT will get you short treasuries.  Below is a picture of TLT (long treasuries).  You can see it broke down right after the decision came out.  I’ve attached an intraday chart.

Somebody wrote me yesterday about buying puts on TLT noticing a lot of put volume.  They are paying off today.

[youtube=http://www.youtube.com/watch?v=NuA2jBzx_1o]

[youtube=http://www.youtube.com/watch?v=W-gQmxT0CxA]

Interest rates on 10-year treasuries went above 3% today on a day where the equity markets were flat.  We’re now back above where we were when the Fed announced they were going to buy everything in sight to get rates down.  That day (March 18th), interest rates went to 2.5% from 3%.  In one day!  That’s been reversed and either we’re going higher or the Fed will have to make another announcement they will be buying more treasuries and mortgage bonds.   You can see the fall in rates and the reversal from the picture below.

It’s really fascinating to watch the Fed trying to push rates down and the market that’s pushing them up.  Where’s fair value?  2%, 4%?  It’s hard to say.  Instead of predicting that, the easiest thing to do is simply trade the trend.  Right now, the trend is up.  Rates appear to be going higher.  This is despite unemployment rising, a flu that could scare the economy to an even slower pace, a negative GDP (reported tomorrow morning), and a savings rate going up every month.  Rates should be falling.  I think this is what happens when bubbles are created.  Treasuries are a bubble.  Maybe they should be going up and rates down due to the economy but because they were so overbought over the past few months, they are now being liquidated and profits are being taken.  The iShares Barclays 20- Year Treasury Bond (TLT) went up over 30% in just two months late in 2008.  That’s a huge move in any bond.  Since the peak in late December, TLT is now down 18% and looks to go lower.  You can short TLT or you can buy TBT which gets you short treasuries (betting on higher rates).  Or you can use DXKSX, which I own.  The next level appears to be 3.3% on the upside and then maybe even 4% which may be a stretch given all the economic headwinds.

Bubbles burst and there’s nothing to stop it.  The tech bubble of the late 1990s burst in early 2000.  Even though it was logical to think those stocks would continue to rise, they didn’t.  There was simply nobody left to buy.  The technology was fine.  We all use it today.  Great companies.  But, there was too much supply (remember all the IPOs) and not enough demand.  That will be the case with treasuries, even with the Fed and other governments still buying them.

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Baidu, China’s most popular search engine company, reported earnings after the bell tonight and beat the estimates by $.10 per share.  This shouldn’t have been a big shock given the fact that alot of the big tech companies have been doing the same lately.  BIDU’s revenues rose 42% year over year.  In addition, they are estimating their revenues are going to be higher than originally anticipated going forward.  After hours, the stock is up $11 adding on to the $7 it made during the regular trading session.  This company currently has a 30 P/E but they are growing extremely fast.  Just as Google’s growth rate is watched, so is Baidu’s.  As soon as these copanies become too big to grow this fast, the stock will suffer.  But, for now, Baidu keeps on rolling.

The stock is up from $100 this past winter to a price of $224.86 before reporting earnings today.  Is it too late to buy this one?  Below, I’ve put a picture of BIDU from the fall of 2006 until the present (weekly).  You can see that it reached about $425 back at the late 2007 peak.  Since then, it fell dramatically until it bottomed in late 2008 around $100.  I’ve drawn a simple trendline that puts the top of the downtrend line about $275.  That would be $40 more of upside from its current after hours price (another 17%).

Stockcharts.com

Another 17% doesn’t seem out of line especially when we look at the daily picture below.  You can see there really isn’t any reason it can’t get to $275 over the next few weeks. It may have a few pullbacks along the way especially if the stock market were to have a serious correction.  But, as long as the market holds up, BIDU should continue to outperform on a relative basis.  In this economy, investors are looking for companies that are growing fast despite the global recession.  BIDU is one of those companies.  

Stockcharts.com

With all of this said, look for a logical stop price for BIDU.  When we’re bragging to our friends on our great BIDU trade, it’s time to re-visit the sell strategy.  It’s volatility is about twice what the S&P 500 is so if we get a 10% pullback, look for at least a 20% pullback.  If that’s too volatile for you, develop the sell strategy right now.  It can be a moving average or a percentage below the current price.  But, keep in mind that BIDU is volatile so it will be easy to get stopped out.  

Technology has really impressed me this quarter and it is certainly helping keep the overall market propped up.  These companies are much leaner and meaner than they were in 2000 during the tech bubble.  As a sector, they have a lot of cash and with the recession, all companies have to utilitize technology to stay effeciient.  That is helping the sales and the earnings.

Disclosure:  I own Baidu for myself & clients.

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For a long time, I’ve owned Gilead Sciences (GILD).  I recently sold it but have continued to watch it.  It’s now back in the news because of the swine flu breakout.  In the pre-market, GILD is up about 5%.  Gilead is the maker of Tamiflu and with the swine flu spreading to the United States, some believe there will be an increase in Tamiflu sales.  Gilead is a great company and has been for a while.  I simply sold it because of some potential fundamental changes from the Obama administration that could hurt them in the future.  Since I sold GILD, the stock has been moving sideways.

As you can see from the chart above, GILD will open today at its 200-day moving average around $48.  That might be as high as it goes and I’d still keep this as a neutral.  Not a buy nor a sell.  I wouldn’t run out and buy this just yet based on this news.  But, let’s keep an eye on it over the next couple of days. 

Also, watch the retail drug stores as well.  They could benefit from the swine flu as well.  On the negative side, some are saying the overall economy could suffer because of the swine flu.  I think that’s putting the cart before the horse.  However, it’s news stories like this that can cause an overbought market to go down.

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Looking at the S&P 500 (SPY), some believe that we’re just about to head straight down.  Some believe we’re moving sideways and just pausing and will resume the rally in the next few days.  You can see from the chart below of the S&P 500 that we’re at the top of the downtrend since November and obviously traders are watching this level.  In addition, there has been a ton of volume (side bar) at this price.  So, there’s a lot of commitment.  People that bought in November or December are even after a wild ride.  Will they sell?  Still too early to tell but I have tight stops on almost all positions. 

I’m not strongly playing either direction right now.  I have build a lot of cash recently but still hold positions in a various stocks.  I just have an exit strategy for those positions.  With that said, I’m still looking at what’s outperforming and I keep coming back to the oil service stocks.  Oil has been volatile lately but basically been holding around the $50 level.  I think this is a time to look at the service stocks, not the commodity.  OIH, IEZ, & XES are the vehicles to get long the oil service stocks.  But, as with other trades, have an exit strategy.

Getting back to the S&P, there is what technicians call congestion right now.  That’s a tug of war or indecision on the part of investors.  It doesn’t tell you much but it lets you adjust your portfolio for the next move.  Stay in strong stocks and avoid weak ones.  This is not time to think long-term unless you hedge your long-term holdings at various times.

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Don’t look now, but the market just may be working off its overbought condition by moving sideways.  For the past 9 trading sessions, we are basically flat.  No gain, no loss.  Just a bunch of churning around.  That’s encouraging from the bullish side of things.  Working off its overbought condition means many of the oscillators go down to the bottom without prices of stocks/indices following them.

Investors seem to be reacting favorably on good data and favorably on bad data.  Be careful in here nevertheless.  I still believe the path of least resistance will be to the downside over the short run so I’m keeping my equity exposure pretty low.  But, the longer we go without a substantial sell off, the more bullish I’ll become. 

Technology seems to be the one area this is coming out with some really good results.  Are they enough to carry the market?  I don’t think so but if the market simply moves sideways, owning technology makes sense as those names can continue to run.  Apple, Research in Motion, Amazon, & Google are leading the way.  After the bell, Apple came out with great earnings.  As usual though, they say next quarter may be tough.  Don’t be fooled.  They are simply lowering our expectations so they can surprise us to the upside next quarter.

Geithner

This morning on Fox Business, I was asked about Geithner and what I thought about all the information coming out of Washington.  One thing I found interesting was his comment that America must live within its means over the next few years.  That would be nice and I personally would love that because that’s the way I run my life.  Unfortunately, this country has lived beyond its means for so long along with most of the world that to get from point A to point B, it’s going to be a lot of pain.  A nation of spenders and borrowers that goes to a nation of savers means less growth not only here but around the world.  Less growth means less profits which means lower stock prices.  That’s a long-term phenomenon though.  We can easily rally to Dow 9000 or possibly 10000 over the next few months only to fall way back down after that. 

This situation of living within our means is basically what the “Great Deleveraging” is all about.  It’s selling assets to pay off debt.  It’s saving more of our paychecks.  It’s not buying as much and when we do, we pay cash.  Strange concepts I know.  But, that’s the new reality.  A world where you have to put a reasonable amount down on a mortgage.  A world where college kids don’t get credit cards with $10,000 limits.  Foreign concepts I know.

Some leverage is good and it definitely adds to growth but too much runs the risk of a global meltdown which is what we’re going through and have been since last fall.  So, Geithner is correct in what he’s saying about living within our means but it’s not a fun process.

I can’t believe I’m actually writing that but I’ve decided to open a twitter account so now you can follow me more often than just once per day through the blog.  I’ll continue to write the blog but twitter will enable me to write more often in smaller pieces with quicker thoughts using my mobile device on the road, etc.  You can follow me at www.twitter.com/karleggerss .  You can open a free account at www.twitter.com and then choose to follow me.  In addition, my tweets will be on my website at www.karleggerss.com on the right side of the page.

I know it seems strange to say there is too much confidence right now.  But, based on my indicator which measures fear and confidence, we are the highest levels of confidence since the summer of 2008.  How can there be confidence right now with all this bad news?  I think investors are somewhat numb to bad news and numb to bad data.  So, it’s not confidence, it’s simply the panic waring off.  In addition, several months have passed since this crisis first started.  At the end of the day, it doesn’t really matter why they are confident.  What matters is whether or not that translates into higher equity prices or lower equity prices. 

In a bear market, confident investors are wrong and should be sold to.  That means selling your holdings and/or going short the market.  There are always bear market rallies where there is a temporary respite in fear.  That’s normal.  You can see from the chart below that we are certainly seeing a lot of confidence right now.  The middle line is my indicator which goes from very scared (October 2008) to overconfident  (May 2008).  The lowest line is the S&P 500 since the summer of 2007.  I’ve circled four times where confidence has been really high.  They were all great times to exit stocks.  Unless you think this is a new bull market, this may be an excellent selling point. 

So, why am I not running out and shorting?  For a few reasons.  First, the first step is simply to protect my portfolio by either hedging or placing stop losses underneath them.  This will insure I’m protected if this was all just another bear market rally since March 9th.

Secondly, there is always a chance this is a new bull market.  As you know, I am not seeing any signs that that is the case.  But, it’s still a possibility.  If that’s the case, overconfident investors are correct.  The chart above shows just the past couple of years.  If I was to go back even further, you’d see that there have been a few times where just because investors are confident, that didn’t mean the market went down.  Quite the contrary.  It actually kept going up.  Overbought markets can continue to rise.    Therefore, we need to take the data above and use it in conjunction with tons of other data to determine the next course of action.

For the time being, I’m building some cash and waiting for a breakdown or a resumption of the rally.  Too early to tell but this is a red flag we need to pay attention to.

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