Market Commentary

Michael Lewis recently wrote an article appearing in Conde Nast’s Portfolio.com titled The End which details the root cause of the credit crisis and the ensuing collapse of Wall Street firms like Morgan Stanley and Merrill Lynch. It is a must read by all. When I shorted financials starting in April of ’07, I did not realize how bad things really were, I just knew that whatever the investment banks were doing was not sustainable. I had no idea how the mortgage/CDO market became so enormous and so out of whack. This article does a remarkable job of explaining how such a massive dislocation happened and why. You can read The End of Wall Street’s Boom by clicking on the link.

Why there is no real solution for the housing market…

There is no quick fix for the housing market for two reasons. First, the investment/speculative demand created over the past decade for homes and mortgage notes caused a massive oversupply of homes which has resulted in their being simply more homes than there are people to live in them. Second, since homes are an extremely durable good, it will be several decades if not generations before the excess supply is worked off.

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

I’ll start this post with a multiple choice question. The government will bail out GM and the other Big 3 for which of the following reasons?

It is official; the S&P 500 closed in bear market territory today, over 20% off its bull market high of 1562.15 set on October 9, 2007. The five year long bull market is finally in the books. The S&P 500 is the last of the major indexes to enter bear market territory as the NASDAQ and Russell 2000 hit this pivotal level in March and the DJIA fell into bear territory earlier this month. Here is the run-down on the previous bull market…

What I find amazing is that the bull market lasted exactly 5 years to the day. The bull market began on Oct. 9, 2002 and ended on the exact same day in 2007. (What I find even more amazing is that nobody has pointed this out yet!) Back in October, I was convinced that the market couldn’t possibly peak on the fifth year anniversary of its beginning, but the significant punishment taken by the financial stocks convinced me to stick with my strategy and thankfully I did as my clients have profited nicely ever since. With the bear market official, several questions will now become common banter among financial pundits. What’s next for the market? When will the bear market end? How much further do we have to go?

PART I: INTRODUCTION

There are lies, damn lies and then there are statistics!

- Mark Twain -

Have you noticed that what you pay at the pump or the check-out counter seems to have little correlation with government inflation figures? Does it seem that prices for daily necessities are going up at a rate far greater than 4%/year? Well, the following will attempt to explain why your experience is far different than what the government is telling us. Over the past 20 plus years, the government has made several “adjustments” to the primary measurement of inflation known as the Consumer Price Index (CPI). In this article, I will explain what those adjustments are and why they have resulted in the significant understatement of the CPI. If I were a lawyer (which I’m not) and if I were prosecuting the government, the first steps I would need to take is to establish that the government and more specifically the Bureau of Labor Statistics (BLS) has both the means and motive to manipulate inflation statistics.

Several significant events happened today which I think are worth noting. Oil Prices Hit New Record High Oil hit a new high of $98.62 before closing at $96.70. USO, the Crude Oil ETF, is up over 45% for the year. While this development is bothersome, it was to be expected as there has been an unprecedented draw in inventories over the last 13 months. Since the beginning of October ’06, energy inventories are down 7.5%.

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements . The following news item regarding NovaStar Financial Inc., ticker symbol NFI, was released by the Associated Press today.

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements

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If you would like to see the video, Click here to watch. This morning, another CNBC commentator blamed part of the market’s problems on some Quant funds that have gone south which has led to people liquidating their shares. I’d argue it is quite the opposite - the market is going south which is resulting in Quant fund underperformance. Due to the irrational nature of the market, Quant funds should be expected to perform poorly. This was a theme that I started to watch in August of last year. If you would like to take a look at my post from August ’06, simply click here. My take on Quant Fund performance (or lack there of it) is merely another indicator that we are in the initial stages of a bear market. Two things take place at market tops that handicap Quant strategies.

1. Market Breadth deteriorates meaning the majority of stocks decline while a few large names hold up the cap-weighted indexes.
2. Investors are irrational during inflection points.

Hedge Fund/Investment Bank/Subprime/Leverage Meltdown For quite some time, I’ve warned about the following risks in the market: 1. Hedge Fund Scandal 2. Housing Bubble and Subprime Fallout 3. Investment Banking Accounting 4. Leverage in the Market

Wow, what a day for the market. All the major indexes erased yesterday's losses! It was a "red-letter day" for the Dow achieving it's best one day advance of 2007. But from a technical standpoint, the market continued to weaken. Over the past two days, more stocks have declined than advanced. About an equal number of stocks hit new lows today and yesterday then hit new highs even though the markets are only points off their 52-week highs.