Thursday, January 7, 2010

Shorting In the Evening

We've been reading some headlines today about Spain's "resilient housing market".  As we've postulated before, much of the European Union is going to be in serious trouble due (in part) to its ultra-centralized monetary planning structure.

Especially effected are and will be the PIGS (look it up). 

Greece has already experienced a hammer blow with its sovereign debt downgraded.  The stock market there has taken a hit right along with its government debt.

Spain has a good chance of taking a bullet in the near future - especially in regards to its housing market.  Compared to most other European countries, it's just-under-10% decline has been breezy.  However, these numbers are reflective only of closed transactions and NOT reflective of the fact that most banks are still hoarding all the mortgage paper (and therefore properties) on their balance sheets.  Not marking them down, or selling them.  They are pulling the old wait-for-asset-prices-to-rebound so they can get a better price.

Well, since credit is only marginally less day than the Sahara these days, the odds of such a "natural rebound" are slim to none.  Furthermore, many Spanish banks holding this paper are looking like attractive short opportunities - once the cat is out of the bag the declines should be as fast or faster than 2008's.

Here is our short-candidate:

Banco Santander (STD on the NYSE)

Overlooking the fact that its stock symbol is certainly not the most pleasant-though-inducing one on the NYSE, there are some factors pointing to overvaluatoin and fast-waning momentum on the upside.

Here's the chart, first and foremost:

Some other neat facts:

Roughly 1.5x book value on assets that are highly over-inflated (even taking a median home market decline for all of Europe puts the assets of this bank at 15% lower in market prices.) - we suspect their assets to be far less valued than this.

Dividend payout is a whopping 95% of income!   Who needs cash conservation, right?

Current interest coverage -0.66 (yes, negative ), meaning that their cash inflows from operations (not including taxes etc) are not only not enough to cover interest payments, but the must borrow two thirds of their earnings to pay of current creditors.

Not exactly a financially healthy situation.

Given this company's not-too-prudent financial choices of late and the fact they are hoarding bad assets which will only continue to get worse - forcing write-downs - we are happy to plant the Short Sell flag on this Spanish bank.

It's tough to pick a downside target as of now, however the bank is actually in worse shape financially than it was in 2008.  I would say even to move to a semblance of fair book value one could expect a 50% share price loss.  Considering the March low was under $4.00 and this stock's trading over $17.00 right now, we could see a more dramatic move than that.

Either way we are shorting this stock at 50% margin and thus every dollar gained is $1.50 (minus feess).  We'll keep you posted on the trade as it progresses.  We plan on shorting at the open tomorrow unless their is a strong dumb-gap down, which case we will wait for a fill and attempt a short-entry at today's close or just above it.

Cheers, folks!


Tuesday, January 5, 2010

Gold and Dow on Track So Far...

We posted the following chart in our last article:

So far, the Dow has indeed made a small move higher, followed by a shallow correction.  Here is the updated chart, following roughly our projected timing:

Another final push in the Dow should mark the top of this bear-market rally's strength.  Once the next major leg down in the market resumes, expect it to be strong and swift as all of the positive sentiment built since March 2009 quickly unwinds and becomes negative.

As per gold, the downtrend correction could take it as high as $1180 before a resumption of the major downtrend should eventually carry gold to around the $650/oz mark.  Silver should also continue its downtrend within the next several trading days.  The rapid near-$.40 spike intraday today could have marked the top for this correction.  The major trend is down and we suggest trading with the trend - treat corrections as opportunities for entry points.  We are not short any silver but are excited for the market low to accumulate the metal on the cheap and pick up some top producers at depressed price levels.  We will keep you posted on our top pics as their price becomes attractive.

Gold's recent price action is a reversal of a 14-month uptrend:

Silver is exhibiting similar price action, with the compellingly-bearish non-confirmation of a higher-high on the recent price action relative to gold.  Silver's high for the decade still stands at just under the $21.50 peg, its most recent high at just under $19.50.

The Bottom Line:

  • The USD should finish its correction at our near the 77.00 level and resume its predominant uptrend
  • Silver should finish its correction around the $18.00 - $18.50 mark and resume its predominant downtrend
  • Gold should correct to $1,150 at most and resume its predominant downtrend
  • The Dow should make its final high for this bear market rally sometime in January.  We are anticipating another upward surge on a final wave of renewed optimism before a resumption of the long-term bear market.  The secondary US markets should follow the Dow down to new lows for the bear market.
The trading potential here is fantastic, being at the forefront of major trends in almost every asset in North America.  One must have nerves of steel to trade against the predominant optimism out there these days - but to possess those nerves and discipline can produce the utmost profits.  Remember trade WITH the trend that has been established and look for corrections as a means of re-evaluating and possibly adding to positions, or making a later entry.

Look for exhaustive signals (similar to recent USD and Gold sentiments) to indicate an expiring trend, and get out while the getting is good.

Have a fantastic 2010, and may you be rewarded all that you deserve.

Derek Blain.