HOME EQUITY AT HISTORIC LOW...RATES ABOUT TO RISE ! Are we having fun yet?

(click on image to enlarge)

CHART AU COURANT: Above is the monthly bar chart of one of our national obsessions, Microsoft (MSFT). You can see the fantastic parabolic (also known as geometric) rise since the early 1990's, having come public in 1986, to it's all time high in late 1999 at 53 (after adjusting for splits). I'll use this as an example of wealth creation and retention. The yellow lines above and below the green bars are standard deviation bands. They revolve around the gold line in the middle of the bands, which is a 200 day moving average of price. 200 days is approximately the number of trading days in a year, and is very important to institutions, who often like stocks above the 200 day moving average, sell stocks when they fall below. The question arises about how far above or below the 200 day moving average is too far, and therefore suggestive of a change in direction. Notice the how rare it is to see the green bars break above or below the yellow bands. In fact, using this chart, if you bought MSFT whenever it was below the lower yellow band, and sold it every time it was above the upper yellow band, you would be a very, VERY happy and wealthy boychik. You would stayed away during its fall from grace (regardless of the news, analysts comments, personal feelings about the products, or insider tips from friends at the company) from above 48 in 1999 until its 2002 dip below 21, sold again in 2003 above 25, bought in 2004 under 22, sold later in 2004 above 26, bought again in 2006 under 22, sold in 2007 above 35, and be waiting now for the next dip below, likely under 24 (for a short period) in the coming months. Think of all the additional charity Bill and Melinda would have had to fund global everything. Also, look at that study below the bar graph, called stochastics (red and green inter-twined lines). Here, if you bought when the red stochastic line touched the dark red horizontal lower extreme line, and sold when above the upper extreme line, you would be very happy. Now, combine the two techniques and only buy with you get a double buy indicator, and sell when you get a double sell indicator...viola.

Now look at the blue lines I have drawn at the right side of the chart. I call those my "lines of halucination". They project where prices should go, based on history and my decision support models. Even though MSFT has been dead money since 2001, having traded in a range of 17-37, the double buy/sell indicator outlined above could have allowed you to avoid much of the loss and captured much of the available gain within that range. It's not perfect, but hey, do you have something better that only requires you to make a couple decisions per year? Bottom Line: any dip under the lower yellow band around 24 in the coming weeks/months will likely reward you with a move up into the 31-33 range in short order. If that move up breaks above what will be a falling upper yellow band, take your money off the table and wait for the next dip below the lower yellow band. This will likely happen several years in the future, around 2013 +/- 2 years, around 15 +/- 2 dollars. No matter what, if the green line around 13 is ever approached, back up the truck, and leave it alone for the rest of your life, as the move that will follow will eventually break above 53.
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MARKETS: The behavior of short term interest rate markets is starting to suggest that the Fed is done lowering rates for now, and may be posturing for some raises (in their controlled short term arena) after November (rarely does the Fed raise rates just before a Presidential Election), but they could do it prior if the situation required. They'll use the fear of inflation to justify any raises they do, but the real reason will be fear of foreign capital fleeing the US because of the relatively low yield on Treasuries. Inflation won't be the problem for at least the next 5-8 years. The problem will be deflation, which won't be acknowledged until near the end of it. What is deflation? Imagine your stock portfolio declining in value at the same time as your house declines in value, along with your collectables. Basically, due to "underwhelming" demand for everything, there is more supply of everything than the markets can absorb. Since nobody wants anything, mostly because with record unemployment they can't afford to buy anything but what is needed, prices decline to unimaginable levels.

According to the Federal Reserve, homeowner's equity across the nation fell to 46.2% in the first quarter of '08, the fifth quarter in a row below 50% equity, and is at the lowest level since the end of World War II. This is quite an accomplishment, considering we're the wealthiest nation on earth, where the streets are supposedly paved with gold (at least that is the global rumor that brings millions of people from around the world to America). Based on the value of the dollar, the gold has morphed into silver, perhaps pewter. Per the latest Beige Book report, there was a "noticable increase in late payments on consumer loans". NO KIDDING? Wonder why that is? It further showed that in some areas of the country, buyers are attracted to lower home prices. Again, NO KIDDING. We're all attracted to that. It's just that not many people can qualify for loans anymore, since we can no longer pay our other loans.

The DOW is getting close to the 12k (line in the sand) number, given in my last entry, quickly, having dropped over 1,000 points in the last month. Here's how the coming test of 12k should look: prices fall to 11,800 to 12,100 and attempt to bounce. The media celebrates the "holding" of 12k. Then the true test of the massive 12k area comes at 11,600, which is the low of the year. If a broad bounce can appear from there and quickly get prices back above 13k, the test will have been successful, and higher prices could levitate though the end of the year or early 2009. On the other hand, if 11,600 fails, big money will pull the rip cord and 9,600 to 10,300 will be seen within weeks. Catalysts, you may be asking? How about the final crude spike into the 150-190 zone, which may only last a day or two, but will surely blacken the mood on Wall Street. As I've said before, commodities often end their manias with "blow off" spikes, and crude is clearly in mania phase.

Speaking of commodities (gold, silver, euro, crude), in a historically unusual manner, the last several years have seen normally uncorrelated markets become correlated. Meaning, for most of the past hundred years, these commodities and stocks do not move in the same direction at the same time. However, for the last few years, stocks have risen along with gold, silver, crude, housing prices, and the Euro. Now, to pay the price of that anomaly, they are all falling in unison, as least so far. Eventually, they will return to their non-correlated relationships, and move in ways unrelated to each other. Until then, we can expect them to continue declining, more or less together (that is, once crude ends it's solo finale). Concerning gold, from the $1,030 peak earlier this year, it's a bit over sold short term down here at $870, but if $850 breaks, a test of $800 could be seen quickly before finding buyers. $600-$675 still remains the better longer term buying point, with $450 a possibility if a liquidity crisis unfolds at certain hedgies. This level around $450 is likely the buy of a lifetime. From my call of a Euro top a couple weeks ago near 1.58, it has fallen to 1.53, and is also short term over sold. If you have profits in your short from up there, take at least half off here at 1.53. Add this piece back around 1.56 or if 1.52 breaks. Take profit on half again at 1.5050. Then, again add it back short if 1.48 breaks, taking half off again near 1.44, and so on.

Popular stocks to lighten up on at current prices or higher are: CSCO above 25 (but buy near 18), EBAY above 30 (but buy near 20), AMZN above 80 (but buy near 50), COST above 70 (but buy near 53), INTC above 24 (but buy near 18), YHOO above 27 (touched 22 so far, but buy under 18), SNDK above 30 (touched 24 so far, but buy near 15), RIMM above 151 (but buy under 80), AAPL above 180 (touched 166 so far, but buy near 100), BA above 82 (touched 73 so far, but buy under 50...any close under 70 will activate a head/shoulder top, with 40 as the target), GOOG above 560 (cover here under 550 as a bounce to 625 will be a better exit or reshort level, but buy under 350), DELL above 23 (but buy under 15) to name a few.

Interesting stocks to add to gently (if you have to): GE from 30 could test 36, SBUX from 13-15 could test 23-25, GRMN from 40-42 as pointed out for weeks (touched 55 so far) could test 60-75, AMGN from 40 (touched 45 so far) could test 52-58, ABK from 2-3 could test 20+ if not in bankruptsy a year from now, WM from 5-10 could test 18-23 also if not in bankruptsy, BAC from 27-32 could test 42, C below 20 could test 40 in coming 12 months, and MSFT from 24-27 could test 31 by year end. More to follow in coming months as prices decline.

For what it's worth,

Ken