NEW YORK (
fills his blog on
every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:
- how one technical call lost a lot of people a lot of money;
- why Ben Bernanke is out of ammo; and
- a calm, cold analysis of what could happen to Caterpillar shares.
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, where you can see all the blogs, including Jim Cramer's -- and reader comments -- in real time.
The 200-Day Rally
Posted at 6:31 p.m. EDT on Friday, June 8
Pathetic that what made you the most money this week is exactly what might have cost you most of your year for the last three weeks.
Some people aren't going to like this, but what I think was the worst call in a long time was anyone who said, point blank, that the 200-day moving average is all that matters and when it is taken out then you are going to have a big decline.
If you remember last week every trader and his brother talked about this concept. We had a guest on
who said that this was it, that you had to sell because of it and he is a highly respected trader. He gave his prognosis after speaking to tons of other traders and the groupthink is totally odious.
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I think when we look back at this week we have to remember exactly how irrelevant the charts are at some very big moments.
In fact, I am calling this the 200-day rally because it was probably precipitated by all of these know-nothing shorts who bet against the market and then were forced to cover because they heard about the secret deal.
It was a week that I wish we had more exposure on (notice I use the traditional term, "exposure," not "risk"), but that's exactly what would have wrecked us for the last five weeks.
There was lots of scrambling these last few days and, once again, it defied a lot of patterns. Nothing in the book said we should have had another good day today.
After a week like this, frankly, we should just throw the book away or at least the chart book, because the main thing you needed to know to trade positively this week was that many people shorted off the 200-day claptrap and then Spain got
that a deal became necessary.
Big Ben's Out of Bullets
Posted at 10:50 a.m. EDT on Thursday, June 7
What did we expect? Did we expect Ben Bernanke to say, "We are cutting rates to minus 1% and forcing every man, woman and child to take a loan?"
There is a reason why Ben Bernanke can't do anything. He's done everything. The bond market has done the rest.
I continue to be perturbed by the idea that the stock market is at the beck and call of Bernanke.
China and Europe are in charge. The Bernank's simply being as helpful as he can. The "diminishing returns" comment isn't totally on point. I mean, think about it, there's no return at all for Fed actions. The bond-market buyers are more powerful.
We need people to want to take loans, and we need banks to loan. He's done as much as he can to make that happen.
Now is time to focus on
One other point, though; I have to hand it to the guy, he totally gets the financial cliff, he totally understands that Spain and Italy are the issues, he gets that Angela Merkel has to give.
They just don't work for him.
Bottom Fishers Heed This Analysis
Posted at 10:47 a.m. EDT on Tuesday, June 5
How much is an estimate cut worth? That's what the stock market is wrestling with right now. How much will a stock like
be hurt if the trends keep up that everyone sees around the globe?
Caterpillar's a perfect model of what can go wrong, so it's nice to address the downside on a positive day. First, the earth moving and generator company is a worldwide powerhouse with sales on every continent and a big share taker because of reliability and superior technology.
Now, Caterpillar traded at $116 back in February. It is at $83 now. That's a staggering, almost-30% decline. Caterpillar's been a hideous stock to own and is emblematic of almost all industrials here.
Does it deserve that haircut? Let's consider what happened to CAT in the 2008-2009 Great Recession. Caterpillar earned $5.66 a share in 2008. The very next year it earned $2.19 a share. That's a staggering cut in earnings of roughly 60%.
Given that stocks should forecast earnings, how did CAT do during that period? How about a decline to $22 from $84, about a 75% retracement.
So, if you believe that a collapse in Europe, which seems more imminent by the day, will crush credit and kill many big construction projects that need Caterpillar tractors and engines, you ain't seen nothing yet. Caterpillar's headed to $29 from its high of $116.
At that price you would have a 6% yielder, certainly accidentally high, but CAT has boosted its dividend. But wait a second. If CAT's doing that badly, the dividend will be sliced and sliced big.
So, now let's think about the owner of CAT shares. It is reasonable to presume that the owner might be fearing exactly what happened in 2008-2009.
Now, let's look at it another way. Rather than calculate the loss in stock price relative to 2008-2009, let's look at the earnings decline analogue. Right now analysts estimate that CAT is going to earn $9.74 a share. You give CAT the same earnings per share crushing you got in 2008-2009 and you have earnings bottoming at $4. What's the appropriate multiple for a company that could earn $4? Right now it's about 9x future estimates. That puts the stock at $36.
Still nothing to write home about.
So, you can see how these sellers might think they are getting ahead of a gigantic decline.
Here's the issue, though. The price-to-earnings ratio would not contract like that, it would most likely expand as people recognize that CAT could be in a trough earnings phase. In those cases, P/Es go up, not down. You could see an expansion say, to roughly 16x to 17x earnings, as I have seen P/Es almost double in these situations. That puts the stock at roughly, say, $70 in earnings based on the $4 figure.
Not coincidentally, that's exactly where it traded to in the bottom of 2011, as stock traders figured on exactly that kind of earnings decline. At that price it does yield 4%, where other industrials have held.
I think that we are in worse shape that in 2011 because tons of Caterpillar machines are sold into the slowing Chinese and Latin American market and the U.S. market still hasn't picked up. Ultimately with that analysis, you can see the stock drop another $20. And that is why traders are selling. Too bearish? No, unfortunately, if Europe collapses that's very realistic. So, bottom fishers be careful. You still might not be near