Excerpt from the WELLINGTON LETTER, late April, 2008.

Our April 7 issue was headlined: A DECOMPRESSION RALLY. Our view was that the Bear Stearns fiasco in March had compressed stock valuations, produced massive selling and short selling, and now it was time to snap back towards more normal conditions. That would mean short covering, some new investment buying, and a “sigh of relief” that the financial system did not melt down. The authorities, together with Wall Street, are now pulling all the levers to get the stock market going. So far, the response has been less than stellar. A stock market surge of course would be the ultimate sign of easing. In our CHARTIST’S VIEW section, we discuss the potential of such a rally. More...

A DECOMPRESSION RALLY  

Excerpt from the WELLINGTON LETTER, April 7, 2008.

Washington has finally woken up and realizes that there is a crisis. That will produce action, which will for a time produce a sigh of relief and the perception that all is well.

There are now plenty of bills in Congress to bail out the financial system. An equivalent of the RTC (Resolution Trust), which was used in the 1980s to resolve the Savings & Loan crisis, is being considered. It would buy all the confetti (credit instruments), which has become unsalable. That would restore confidence and possibly get the markets to function again. In other words, between the Fed and the Congress, they are now going to throw everything but the kitchen sink at the credit crisis. That is bound to have a positive effect for a little while. The only question is what will they do for an encore when eventually the credit crisis is not resolved? More...

ASLEEP AT THE WHEEL

RECOGNITION!    Excerpt from the WELLINGTON LETTER, February 18, 2008.

RECOGNITION SPREADS AS LIQUIDITY CONTRACTS SHARPLY                                               In just the last several weeks, we see the bulls starting to stutter when they come on TV. The retail numbers just released are awful. The consumer’s wallets are empty. The bulls admit that the economy is “slowing” but they can’t admit that the recession has started. They say: “But the global economy is strong.”                                                                         

BEWARE! THE SHORT TO INTERMEDIATE TERM    After hitting an almost panic low in January, helped by the debacle with the rogue trader in France, the stock market has had a bounce and is now in “no-man’s land.” Watch the Feb. 1 high on the upside, and the Feb. 11 low on the downside for breakouts, to give clues as to the next important move. I believe we could see the downside breakout soon..More...

Bear Market Confirmed! Excerpt from WELLINGTON LETTER, January 7, 2008.

WALL STREET: MORE LOSSES                                                                                                     So, where do the markets go from here? I think it’s very simple: we have an economy in recession, although it’s not yet recognized. It usually takes one year after the onset of a recession for most economists and analysts to see it. We have the consumer padlocking his wallet. The rest, namely corporate sales and profits, naturally follows—downward. And that means the ludicrous forecasts of double-digit profit growth by Wall Street firms will turn out to be just another siren song to lure unsuspecting investors to buy stocks, which the big trading operations want to sell short. More...

THE FED JUST DOESN'T GET IT! Excerpt from WELLINGTON LETTER, Dec. 14, 07

On Dec. 11, the Fed had its much-awaited meeting. For several weeks we had to suffer all the pundits on TV guessing what the Fed would do. Finally, the wait was over, and it was a bombshell: the Fed cut the Fed Funds rate and the discount rate a measly 25 points. It was a huge disappointment. For us it was an absolutely shocking confirmation of our suspicions of the entire year. At minimum, the Fed should have cut the discount rate by 50 points to get it more in line with the Fed funds. The Fed had the chance to calm the financial markets, and even get them working again to some extend. But they totally blew it. What incompetence! More...

THEY DO RING A BELL ,although a little late!  Excerpt from the WELLINGTON LETTER, Dec. 5, 07 issue.                                                                                                                

It is often said that they don’t ring a bell on Wall Street when it’s time to sell. Well, actually they do, but you have to listen closely. On Nov. 27, the bell rang. Goldman Sachs downgraded 17 major stock sectors. Never have we seen such a massive downgrade by a firm on one day. Instead of focusing on the sectors and whether GS is right or wrong, we should focus on the message: Wall Street is now done selling their own huge portfolios, and they are nicely positioned to profit from a bear market. In mid-July we declared a bull market top had been made, and just before the plunge, headlined the issue “Bear Market.”  More...

“DON’T GET TRAPPED!” Excerpt from the WELLINGTON LETTER, Oct. 30, 07  

The bulls are now giving excuses and reasons why there can’t be a recession. They say that the housing sector is only a small part of the economy, and therefore, cannot produce a recession. Do you remember early this year, when we warned that the subprime mortgage market would produce a crash later this year? At the time, all the Wall Street guys told you that the subprime was very small and couldn’t possibly adversely affect the financial markets. But reality is starting to sink in. They are obfuscating the seriousness of the situation, so you have to read between the lines.  More.....

TOP OF THE RALLY! Excerpt from the WELLINGTON LETTER, Oct. 15, 07 

With the Wellington Letter of October 15, we once again caught the exact top. Look at the headline, and then look at the charts. The U.S. stock market looks very vulnerable right now. Sentiment is too optimistic, and earnings for the S&P 500 for Q3 are actually negative. No Earnings! Earlier this year, double-digit earnings growth had been expected. Will stock prices decline to reflect the new reality? They usually do. Now Wall Street talks about the great earnings in the 4^th quarter. I say, forget it! Yes, there will be some stocks that will do very well. But the earnings of many stocks will continue to decline. What is there to propel stocks upward, except hopes of a continued strong economy and rising earnings? We just don’t believe that can happen. More.....

THE FED: SPECULATING ON THE NEXT MOVE  from the WELLINGTON LETTER, Oct. 15, 07

There are still economists who either urge the Fed to hike interest rates now, or at least believe the Fed will do so because of inflation worries. Well, under the current, precarious situation in the financial markets, there is absolutely NO WAY the Fed will raise rates. As we all know, liquidity and availability of money are the key to the major trend of the markets. Both are subject to confidence. So what do the latest Fed charts tell us? The money going into institutional money market funds has soared about $250 billion since the end of July. That’s huge. Many analysts interpret this as bullish. But it actually shows that the smart money realizes that the markets are too dangerous right now. So it goes into MMF’s.  More.....

BEAR MARKET! Excerpt from the WELLINGTON LETTER, Aug. 6, 07

STOCK MARKET: Denial & Complacency When the markets tumbled on Thursday, July 26, the White House wanted to roll out its big, economic guns the next day to calm investors' fears. Late in the day, CNBC announced that the White House had requested time on CNBC for Friday for its four top economic guys. The list included the Secretary of the Treasury, the head of the OMB, chief economic advisor, and the Secretary of Commerce. Rarely have four such prominent White House people been assembled on national TV on such short notice. That tells us that things are getting precarious. And rarely has a group of such high-powered individuals said so little of value. Treasury Secretary Henry M. Paulson, Jr. said: What we are seeing is risk being re-priced. That’s healthy. It’s a market adjustment. The market crashes of 1987 and 2000 were also market “adjustments.” But the latter wiped out an incredible $9 trillion of investor wealth.  More.....

THE FINANCIAL STORM IS STARTING

Today’s market plunge, with the DJI losing 226 points, is validating our warnings of the past several months. In our SMARTE TRADER service, we said that the latest upmove is manipulated. The gains in some of the widely watched, major indices, controlled by a few stocks, was masking the subsurface selling of the majority of stocks since the beginning of June. Only technical analysis can tell you that.                                       

In our SMARTE TRADER of July 23 we observed:

Volume was lighter than on Friday's decline, which is another negative. As you know, a decline on big volume, followed by a rise on lower volume, suggests that the rise is just a technical bounce. More negative is that the number of declining stocks outnumbered advancers. And that on a day when the DJI was up over 100 points intraday. This smacks of a rally that can't last.More.....

A CRACK THAT WILL TURN INTO A CREVASSE

 from WELLINGTON LETTER, July 3, 2007                                                            

On June 20, serious problems appeared in the derivatives geared to sub-prime mortgages. Remember, earlier this year the sub-prime mess was declared a “non-event” by so many analysts, including the head of the Federal Reserve, Ben Bernanke. 

It’s true that this is a very small part of the entire mortgage sector. But that’s not the problem. The serious problem is the many forms of mortgage derivatives, leveraged to 10 to 1 or higher, that are in the portfolios of hedge funds and other investors. With that much leverage, a 10% decline in value wipes out 100% of the investor’s.                                The large Wall Street firms, such as Bear Stearns, Goldman, etc., have made a lot of money packaging mortgages into CDO’s, MBS, RMBS, CLO’s, etc., etc. The entire alphabet soup of pooled mortgages and debt is experiencing problems. More.....

HOW High is High Enough?

Excerpt from Bert Dohmen’s WELLINGTON LETTER, Early June, 2007 

The bulls have had their way for some time. And they have been right. The current bullish arguments are:

1. The current Price to Earnings ratio on the S&P 500, based on forward earnings, is 16.3 times. History shows that when the Fed eases up, earnings yield on the S&P should be approximately the same as the yield of a 10-year note. The problem: the Fed will not ease up, and possibly its next move will be to raise rates.               

2. History also shows that the P/E on the S&P plus inflation expectations should fall into a range of 18 to 22 (for a fairly valued market). Expectations are for forward earnings on the S&P 500 at year-end to be $104. Therefore, 18 x 104 = 1955. The bulls say that this is the target for the S&P 500 by year-end. Wow! That’s 30% up from here. Call me a doubter! More.....

GO WITH THE FLOW!

Excerpt from Bert Dohmen’s WELLINGTON LETTER, May 30, 2007

The stock market is breaking several records, but not all are that desirable. One new record is margin debt. It has just exceeded the record high set at the market peak in the year 2000. This means that ever more debt is supporting stock purchases. However, expanding margin debt is bullish, as it shows more money flowing into the market. It becomes a bearish factor when fundamentals no longer support the stock prices. Although the Dow Jones Industrials Index has made a new, all-time high, the S&P 500 hasn’t managed to do so. The latter is now literally trying to chew it’s way through the supply of stocks being offered at that level. The NASDAQ Composite continues to be the underperformer. It is now around 2560, about half of where it was in early  2000.  

The DJI has had a record run. It’s the longest period in stock market history, and that’s 200 years, without a 10% correction. Everyone agrees that the market is being propelled by huge liquidity. But actually, it’s credit, and the difference between the two is huge. Liquidity usually means real money. But credit can disappear overnight. Nevertheless, a powerful upmove is the best confirmation of a bull market. More.....

A WORLD-WIDE BOOM! CAN IT CONTINUE?

Excerpt from Bert Dohmen’s WELLINGTON LETTER, April 27, 2007                                     

In our last issue we wrote about the potential of a “perfect financial storm” developing, either late this year, or next year. But we also said although it would be productive to keep that in mind later this year, but that it was too early now to be bearish.               In our issue of March 6 we wrote:We believe that the bulls will look right on the market for a while. In fact, I was buying very early this morning. But when everything looks great this summer, we should not forget this last episode, and the message it brings.                     In our April 4 issues we wrote:  Although the probability is high that many stock market indices have made their highs for the year, others will probably make new highs this summer or earlier. But at the latest by late summer, we will want to be ready. So far, this scenario seems to be on track. More.....

THE MAKINGS OF A PERFECT FINANCIAL STORM

The following is our longer term view. It is not intended to reflect on the near term economic or investment environment.
In our issue of December, we warned of a number of major problems coming home to roost in 2007, for the stock market and the economy. Addressing some of the topics, we wrote:
Trillions of investment dollars are looking to achieve superior returns. The way to get them is to ignore risk. The world has never seen such a complete lack of fear regarding risk.
Every week we see public companies getting bought for tens of billions of dollars by private equity firms. Most of the money is borrowed. Obviously, the lenders assume that they will someday be repaid. But when you see how these private equity firms load up the acquired company with debt, in order to make huge capital distributions to themselves, it seems they just leave the carcasses. More.....