TRID and General Comments

As part of the ongoing clean out of the prior management team, the TRID President is gone. This is a good thing and a great buy opportunity.

With FWLT and IMA I waited because I thought the rush to sell would be followed by something of either a dead-cat bounce or a return.

Meanwhile, today's weakness should come as no surprise, although I do wonder about the softness of oil service stocks when oil is $100+ a barrel.

Remember: this week was a false rally. Sell into weakness. I am spending all day Saturday getting together my list of puts and making changes.

TRID and General Comments

As part of the ongoing clean out of the prior management team, the TRID President is gone. This is a good thing and a great buy opportunity.

With FWLT and IMA I waited because I thought the rush to sell would be followed by something of either a dead-cat bounce or a return.

Meanwhile, today's weakness should come as no surprise, although I do wonder about the softness of oil service stocks when oil is $100+ a barrel.

Remember: this week was a false rally. Sell into weakness. I am spending all day Saturday getting together my list of puts and making changes.

Quick check in

Oil - jitteriness about oil supplies in US. Ignore it, although it does offer some buy opportunities. I am thinking that there is some sector rotation away from oil - eithe rwe follow or stick to our guns
Agriculture - starting to get bubblicious.

ATW - nice consolidation
CF - They are getting hit due to a fire.
IO - getting ready to pull the trigger
MICC - liking the consolidation
MVL - Cooler heads are returning
NOV - not seeing the movement I want to see
PCP - this is too weird to see this so cheap
TRID - Thanks for the run-up. Not sure why the calls haven't moved despite a hefty move.
VIP - not liking this middling along
WFR - Again, too much stagnation

FWLT and IMA - Sell or not

I still don't understand how FWLT missed earnings expectations. I'm still digging. It could be a good signal - business is trong, available expertise is tight, and deadlines were not met. Or it could be bad.

IMA - This is now in panic mode. Instead of a major gain we are now in loss territory. I think there will be some recovery in 1 quarter, so we will exit but not while folks are panicking.

Now, that being said - neither of these two would have affected us if we had STOP loss limits in place. So shame on me for not re-instating them

STOPs will be announced for all stocks today.

Sell into the fake rally

* Lowe's profits - down

* Home Depot profits - down
* CBS profits - down
* Nordstrom's profits - down
* Foreclosures soar 57%
* Oil is $100
* Inflation excluding oil/food is at 4.3%
* Housing sales continue to drop (albeit 'only' 0.4% last month)


But the market is up. In fact, volumes are strengthening.

I looked back at trading volume in the Dow. During periods of great volatility, especially during selloffs, volumes are high.


In August, the market plunged 6% before recovering
In November, the market plunged 7% before recovering
In January, the market plunged 12% before partially recovering



During these selloff months, 4B+ days become the rule: 43% of all trading days in August were 4B shares or greater, 75% in November and a whopping 81% in January.
In essence, money creeps in but it runs away.



What about February? Only high volume trading days. Sounds like we are still in sell-off country.

This is a fake rally - don't buy it. Excitement comes from things not being awful at insurers MBIA and Ambac. The patient has no limbs, but isn't entirely dead. Yet. Perhaps the bad news is out and we can recover.


There are at least 2 reasons why things will get dramatically worse: the 2nd phase of mortgage re-sets and oil
Recall the wonderful Credit Suisse ARM calendar for re-sets
Month 16 is March, 2008, when we see the next big wave of re-sets.

We are just seeing the results of the first wave. The 7 month lag between re-set and foreclosure activity is partly due to the process itself and partly due to lenders' unpreparedness. They didn't have the staff or mindset to deal. And many were more focused on staying alive.

For the 2nd wave, however, lenders will move faster. Already they are raising the risk premiums for mortgages. While the Feds have cut interest rates from 5.25% to 3%, the market has decided to raise the cost of borrowing, ignoring 2.25% in rate cuts.

In essence, the market knows that there is no government handout or rescue. The Bush plans and other solutions are meaningless. As I warned before, the risk premium has returned with a vengeance. And if the cost of borrowing is bad for the homeowner, it is getting bad for the consumer and for businesses.

So another refinancing bubble has fizzled out. And with it, the last hope of overstretched homeowners. On top of that, we have the second half of the first re-set wave.

That means more homes on the market and tighter lending. The consumer economy is getting choked.

Meanwhile, we have oil. The average person drives 1000 a month, or about 50 gallons of gas. So $40 a month or so of extra costs. In and of itself, no problem.
But for business, this is calamitous.
SHIPPING COSTS We operate today based on a just-in-time economy where products are shipped overnight or from long distances. Think Fedex planes and trucks. Oil hits them right where it counts. Now every product has to raise prices to reflect shipping costs. (Makes KSU look very attractive - they can ship via railroad from the West Coast to Kansas.)
MANUFACTURING COSTS Whether made here or in China, plastics cost more money. And so does the energy required to make things.

We would have seen this inflationary impact sooner, except that companies absorbed the costs. At a time of falling margins, they can no longer do so. They have begun passing the costs along and that's why inflation is so high.

I expect some workarounds to emerge. More leveraging of railroads (so a 5 day package becomes 7 days). But this is how we get stagflation - inflation runs higher and the economy is slowing.

That is the real economic background and why you should be selling into this rally. The housing debacle hsa eclipsed this bigger reality. In 1 or 2 quarters, the truth will be obvious an dthe market will crash really hard.

Sell into the fake rally

* Lowe's profits - down

* Home Depot profits - down
* CBS profits - down
* Nordstrom's profits - down
* Foreclosures soar 57%
* Oil is $100
* Inflation excluding oil/food is at 4.3%
* Housing sales continue to drop (albeit 'only' 0.4% last month)


But the market is up. In fact, volumes are strengthening.

I looked back at trading volume in the Dow. During periods of great volatility, especially during selloffs, volumes are high.


In August, the market plunged 6% before recovering
In November, the market plunged 7% before recovering
In January, the market plunged 12% before partially recovering



During these selloff months, 4B+ days become the rule: 43% of all trading days in August were 4B shares or greater, 75% in November and a whopping 81% in January.
In essence, money creeps in but it runs away.



What about February? Only high volume trading days. Sounds like we are still in sell-off country.

This is a fake rally - don't buy it. Excitement comes from things not being awful at insurers MBIA and Ambac. The patient has no limbs, but isn't entirely dead. Yet. Perhaps the bad news is out and we can recover.


There are at least 2 reasons why things will get dramatically worse: the 2nd phase of mortgage re-sets and oil
Recall the wonderful Credit Suisse ARM calendar for re-sets
Month 16 is March, 2008, when we see the next big wave of re-sets.

We are just seeing the results of the first wave. The 7 month lag between re-set and foreclosure activity is partly due to the process itself and partly due to lenders' unpreparedness. They didn't have the staff or mindset to deal. And many were more focused on staying alive.

For the 2nd wave, however, lenders will move faster. Already they are raising the risk premiums for mortgages. While the Feds have cut interest rates from 5.25% to 3%, the market has decided to raise the cost of borrowing, ignoring 2.25% in rate cuts.

In essence, the market knows that there is no government handout or rescue. The Bush plans and other solutions are meaningless. As I warned before, the risk premium has returned with a vengeance. And if the cost of borrowing is bad for the homeowner, it is getting bad for the consumer and for businesses.

So another refinancing bubble has fizzled out. And with it, the last hope of overstretched homeowners. On top of that, we have the second half of the first re-set wave.

That means more homes on the market and tighter lending. The consumer economy is getting choked.

Meanwhile, we have oil. The average person drives 1000 a month, or about 50 gallons of gas. So $40 a month or so of extra costs. In and of itself, no problem.
But for business, this is calamitous.
SHIPPING COSTS We operate today based on a just-in-time economy where products are shipped overnight or from long distances. Think Fedex planes and trucks. Oil hits them right where it counts. Now every product has to raise prices to reflect shipping costs. (Makes KSU look very attractive - they can ship via railroad from the West Coast to Kansas.)
MANUFACTURING COSTS Whether made here or in China, plastics cost more money. And so does the energy required to make things.

We would have seen this inflationary impact sooner, except that companies absorbed the costs. At a time of falling margins, they can no longer do so. They have begun passing the costs along and that's why inflation is so high.

I expect some workarounds to emerge. More leveraging of railroads (so a 5 day package becomes 7 days). But this is how we get stagflation - inflation runs higher and the economy is slowing.

That is the real economic background and why you should be selling into this rally. The housing debacle hsa eclipsed this bigger reality. In 1 or 2 quarters, the truth will be obvious an dthe market will crash really hard.

FWLT Misses Big

FWLT Earnings were slammed
* Revenues were up 23% and edged expectations by $50M
* Earnings missed big. $0.54 versus expected $0.76. That's up 24% over last year.

Earnings were hit by a lost lawsuit ($8M) and a $5M reserve against another problem. But that doesn't explain everything.

The stock is down 9% in pre-trading. A lot depends on guidance

The Week Ahead

In the week ahead, we will continue to see more indications of a slowing economy.
The participants in the debt bubble (housing, construction, financial, retail) have already paid a hefty price, with more bad news to come. But now things are spreading.
* Car makers say this will be a bad year. Not challenging. Bad.
* Starbucks is firing 600 people.

So against the background of a slowdown, any news will cause just short-term ripples. You need to sell into strength. Buy more puts on up days.

In the week ahead, we will see:
* US home sales for January
* Consumer confidence
* PPI/CPI
* Durable goods orders
* Q4 GDP revision
* Consumer sentiment
* Consumer spending
Pretty much every indicator that could show weakness.

Also this week, earnings from a few heavy hitters. With very few exceptions, I would expect bad news for all of these companies.
HOUSING
Lowe’s
Home Depot
Freddie Mac

RETAIL
Nordstroms
Macy’s
Radioshack
Target
Dell
Kohls
Sears

OIL
ESV
Foster Wheeler (oil)
Noble

CORPORATE
Office Depot
Salesforce.com

OTHER
AIG (Insurance – but tied to consumer and corporate spending)
Washington Post (Advertising revenue from the housing drop should hurt them)

Lastly, it’s that time in the quarterly cycle when funds begin to move their money into stocks. That is, we are in month 2 of the 3 month quarter. Visibility to the quarter-end results is strong and funds are looking for those whispered numbers. Reassurance that all is well.
Signs include opinion articles or analyst upgrades or updates. “Hey, this stock is looking pretty cheap given the following….”

So we should see some moves up. Great time to short, but you have to go out a few months in expiration date to avoid the mini-moves. We are playing the bigger game – that things are still heading down.