Watch VIX Today

I think VIX will cross 30 today and on a bit of panic will set a new market low. This low will be in the same range as the market low on July 15 at around SP500 (1180-1200) and will set up a reasonable period of market recovery. This is a continuation of the bottoming process that started back in March, with the Bear Stearns takeover by JPM. Because of the severity of the financial crisis, and its continuing ripple effects around the world, this bottoming can take a long time.

If we remember back to the 2000-2003 market decline at the end of the Tech boom, there was ripple after ripple that unwound separate excesses, from the Teleom sector, to the Internet sector, to the Large Cap growth sector, to Enron and Tyco. One after the other of these segments came apart until all the previous excess was exhausted.

This is what we are seeing again. It started with the riskiest of the mortgage companies (those specializing in sub-prime) and has continued through home builders, banks, insurance companies and then spread overseas causing export declines in Asian and European economies, leading them to recession and market declines (check out China, FXI, which has declined by 70% from its peak last year). Now, the energy, metals and commodities sectors, which were overheated, are getting taken down because of the reversal of the Yen and Euro carry trades against the US dollar (with the strengthening dollar). The Hedgies are dumping their commodity positions and some of those hedge funds will crash.

But, we are getting closer to the end of the chaos. It is hard to think about any other sectors that were run way up that have not already come down. So, the bottom will likely hold (1200) and we will rebound once again. Eventually, I am saying after the election uncertainty is eased in November), the market will rebound and continue working its way higher. The Fed is now in a position to drop interest rates (with spreads stabilizing with the GSE rescue) and the Euro in trouble with recession in Europe. That should signal the turnaround. Expect the Fed to drop by at least 0.25% by year end.

Intel Showing the Way Up

It has been a few days since I have posted my market moves. Thought I would update you today, April 16.

The market opened strong this morning based on the decent Intel quarterly report after the close last night. Tech is a market lynchpin. There has been a school of thought that Tech can't do well if Financials are hurting, since the banking industry is a heavy consumer of computing, software and data storage. But the Intel quarter disproves that theory.

At the same time, the banks continue to do what is necessary to reposition themselves for a less ebullient economy. I think most market participants are coming to the conclusion that the worst is past, though it may take quite a while for bank growth to get back to where it was in 2006. But a more conservative banking industry is okay by most participants.

Also, more educated observers, including Jack Welch, ex-CEO of GE, this morning. are talking about the great benefits to profits of reversing the mark-to-market of the bank assets. It is likely they have mostly been over-discounted. Those assets will be a source of profits for years to come. Expect savvy bank execs to use those assets to "beat the estimate" for the next several years, which will drive P/Es up on banks.

Here are my moves today: bought more Daylight Energy (DAYYF) for my IRA account, added to FXI, the China index, added to DOW Chemical (DOW).

I am still sitting on my AEM (Agnico Eagle) gold mining shorts. Today it is at $75, so I am in the red on this. But I have more than the same number of AEM May Puts shorted at $65 which just about covers my losses on the stock shorts. I will continue paying for the stock shorts with the close month put shorts, basically averaging up my cost. I am using the AEM shorts to protect my several precious metal mutual fund positions, since this commodity bubble will likely correct significantly as soon as the market believes the bottom is in for the stock market, and that the Fed will start raising rates as the economy begins to improve.

When it does correct, history shows that commodities correct very quickly and aggressively since so much hot money is chasing such a little base of equity.

As for the price of oil: I am just glad I am loaded up on energy stocks, which eases the pain at the pump. The Canroys are finally starting to move. The can go a long way from here in playing catch up to their USA equals. If oil and gas prices hold, I think $40 on PWE is a good possibility in the next 2-3 months and $25 on PGH.

Hope you have a great day in the market.

DOW 12000 Looks Like the Target

Today brings an even worse market. But it is really thin (very low volume on all the majore index ETFs like SPY or DIA), so just means all the potential buyers are taking the day off. Market closes at 1pm EST today, I think.

Based on the big sell-off in Asia last night and the weak USA market today, I think this downward direction could continue a while, until someone announces how they plan to stablize the financial markets (the Fed? a consortium of global central banks?) The whole world's financial system is exposed to our credit markets. The European, Asian and oil exporter countries have been big buyers of the credit that is now so junky (CDOs, subprime securities, etc). China has been an especially big player. So, the whole world has a stake in how this turns out and the global markets will move accordingly.

I am thinking that 12,000 target on the DOW is looking like a pretty sure bet now. We will see if the market holds there. In the meantime, I am definitely overweight what I had planned for this occassion (too many financials...it is killing me). So, you can have the right idea, and still have poor execution. I will try to learn from this and figure out where I went wrong (mostly, I got myself exposed to high yield that I thought was safe (like Citi), but wasn't. High yield = financials).

None of this market trouble changes my thinking on the the weak dollar - strong hard asset story (oil, gold, mining, metals). That should be a theme for many years. By extension, the Asian economies and currencies will be strong for many years, since that is where the growth is. This means good things for EWY, EWT, EWH (Hong Kong), FXI (China), IFN (India) and even Japan (EWJ) which saw a big strengthening of the yen the last couple days. Japan is the financier and infrastructure engineer for China. I predict that Japan and China will eventually become very friendly to each other, like the British and Americans (they share culture, language, religion, some foods).

So, I will wait a while, but pull the trigger on these type trades once the dust settles. I will use the funds from some of my money in BEARX, which is a bear market mutual fund (wish there was a tradeable ETF for it, but there isn't). David Tice is the manager. He is a famous goldbug and long term bear. Everything he has written about the dollar and our economy over the past 10 years is coming to pass. You can see his site at: www.prudentbear.com. It can get a little scary. He is a real pessimist on the dollar.