Sell in May or Go Away?

Interesting take on the "sell in May and go away" mantra in the morph366 blog.

If last year is to be taken as analogue, sell in May indeed - or even better, sell now to be on the safe side. 

There's no doubt this 880-ish resistance on the S&P 500 is proving quite difficult to break but as long as we're above the 20 and 50-day moving averages (as can be seen on the chart above), the intermediate-term trend is up. To be sure, the falling 200-day moving average, currently at 965,  is looming, reminding us the long-term trend is still down but trying to pick a top has always been a dicey and self-destructive occupation. 

So, to answer this post's nonsensical title, I would neither sell in May nor go away but I would definitely stay away from that sell button until proven wrong by the charts.

Non-Nationalization as a Way to Increase Control

The Interfluidity blog is making an original but persuasive point today:

Ironically, there might be less scope for political control if banks were in formal, least-cost-resolution receivership. A bank that has already failed cannot fail. 

That's one more advantage to not nationalizing the banking system. As long as a bank is not formally nationalized and no matter how many times the government says it has no intention or desire to nationalize it, the implicit threat is there and can be used to pressure management.

Sorry About That

It's been an unwritten rule of this blog to avoid controversial political subjects unrelated to the markets and the economy. But there are exceptions to every rule I guess. 

I'll be brief. On the subject of torture, I'm amazed that one aspect has not been discussed much. Torture, since the dawn of humanity (or inhumanity I should say), has been used as punishment and deterrent (to the tortured and to others) first, as a means of obtaining information a distant second. Any discussion involving the use of "enhanced interrogation techniques" by the US should take into account the general mood of vengeance and retribution that pervaded the country after 9/11. I am wondering if the discussion under way lately about the value of torture as a way of extracting vital information (the ticking-bomb argument) is not obscuring the fact that using torture for vengeance, punishment, humiliation etc... is not only universally illegal (in the US, the 8th Amendment bans "cruel and unusual punishment") but also unacceptable to most people.

That's it, I'm done. Had to say it. Sorry about that.

Icelandic for Depression

I read in a newspaper (yes, paper) today that the Icelandic stock market lost 94% in 2008. It also said that, in Iceland, car sales for Q1 2009 were down 92% year-to-year, the krona had lost half its value and foreign travel was down 40%. The article's conclusion was that, as bad as these numbers were, the only way they could go was down.

Now that's what I would call a DEPRESSION. It even puts the Great Depression to shame. By the way, I believe the word is "kreppa". 

Brooks on the Georgetown Speech

I don't often quote conservative pundits on this blog but today's column by New York Times' resident conservative David Brooks is quite interesting and quite right (no pun intended) - by the way, a more accurate description of Mr. Brooks' political hue these days would actually be "Obama conservative". His understanding of the President's speech at Georgetown last week is that:

[Obama's] view was clear. The market is dynamic and important, but it makes people reckless, parochial and dangerously shortsighted. The market needs adult supervision — a leadership class made up of people who appreciate the market but who also have committed themselves to public service, and who therefore take the long view and are more conscious of the public good. 

Brooks sees political as well as economic and practical advantages to such a rationale. He even seems to agree with it but is deeply worried about the government's potential fiscal irresponsibility. He goes on to conclude that:

This is not a matter of economics only, but credibility. Obama understands that this is primarily an authority crisis. A system Americans have trusted — the market — has failed in important ways. He has found a theme and bids to reassert authority. But he will seem like an impostor and a manipulator if he imposes responsibility on everybody but himself.

While reading the President's speech itself, I came across this enlightening answer to (and rebuke of) Paul Krugman and the nationalization clique:

So let me be clear: The reason we have not taken this step [nationalization] has nothing to do with any ideological or political judgment we've made about government involvement in banks. It's certainly not because of any concern we have for the management and shareholders whose actions helped to cause this mess.

Rather, it's because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it's more likely to undermine than create confidence.

Governments should practice the same principle as doctors: First, do no harm. So rest assured, we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. 

Which is my thinking exactly.

Moment of Truth for TLT?

Everybody knows a bull market lives above the 200-day moving average. One can debate the value of such a piece of technical analysis conventional wisdom but not the fact that TLT, the long-term Treasury bond ETF, has been comfortably above its 200-day MA for quite some time. Until the past few weeks, that is. As the chart above clearly shows (blue line - click to enlarge), TLT is now getting dangerously close to the widely-followed moving average and is one bad day away from closing under it (TLT closed at 101.7 on Friday and its 200-day simple moving average is currently at 101.03). Should that "crossunder" happen, would it mean the bull market in the long T-bond is officially over?

It could, especially if the stock market keeps going up and the worries about the economy keep disintegrating.

Then again, the financial crisis was not just a bad dream we've awoken from and quite a few reliable analysts are calling for at least a pause in the stock market's advance. The Fed could also announce it will be buying even more Treasuries than it already is. I'm sure Bernanke's watching the long interest rate very closely and won't let it go much higher without trying something. So TLT could rebound at some point in the near future and the long bond bullish run may not be over after all. 

Keep an eye on that 200-day moving average. 

(Disclosure: Long TLT)

What Deleveraging?

The financial world is supposedly engaged in a massive deleveraging campaign. Right? 

Then why is it that every week it seems new ultra-leveraged financial products are being spawned? Latest and most prominent lately are the new Direxion Triple Bull and Bear Treasury ETFs:

TYD:   10-Year Treasury Bull 3x Shares

TMF:  30-Year Treasury Bull 3x Shares

TYO:  10-Year Treasury Bear 3x Shares

TMV: 30-Year Treasury Bear 3x Shares 

The Bank of England on the Financial Crisis

Remarkable paper from the Bank of England. Crystal clear, sober yet witty. I would kill for this brand of British dry humor! Excerpt:

"With hindsight, this Golden Decade and its aftermath has all the hallmarks of, in

Charles Kindleberger’s words, Manias, Panics and Crashes. Enthusiasm about return

gave way to hubris and a collective blind eye was turned to the resulting risk. This

was a latter-day version of the Hans Christian Andersen fairy-tale, “The Emperor’s

New Clothes”. In a classic collective delusion, the Emperor’s new clothes, you will

recall, were admired by all. Conferences like this one became catwalks for banks and

the authorities alike, parading their new garments through the streets in all their

finery. Risk modelling became high fashion for the pointy-heads, haute-couture for

the anoraks.

The past two years have rather changed all that. The sub-prime market has played the

role of the child in the fairytale, naively but honestly shifting everyone’s perceptions

about how threadbare the financial system had become. The madness of crowds, as

Charles Mackay so vividly put it, became visible to all. The resulting unravelling of

the Golden Decade has been little short of remarkable."