The market reminds me of a tug-o-war - all is fine if the final tug completes a steady battle and one team finally loses after being gradually pulled past the midpoint. But all is not fine if the losing team finally gives up and the team pulling the hardest at the moment goes flying backward holding onto an empty rope. Who wins? Both sides are still on their turf. But in the end, the team that did not give up is the winner. I fear that constantly yanking one way and then defending against a yank in the other direction the next day is leading up to this tug-o-war trick. The market is at a point of extreme fatigue and if this most recent rally fails, I expect that the bulls will let go of the rope. There are a few things that would cause the bears to concede as well, but that would surprise me.  Despite all the bullish hype about valuations and oversold technical conditions, there is a persistent buyer’s strike.    There have been few times I have seen the technicals this weak and exposed.  If the bulls don’t defend their turf right now, it has the potential to get ugly fast.

The extremity of the Citi yield on Abu Dhabi’s investment is intriguing and especially, its differential over typical preferred stocks. Let’s say you are a foreign investor who is concerned about the depreciation of the US dollar. Quite a few real ones are out there so you won’t be alone and I suspect there might be a few residents of the UAE in that crowd. As I keep saying, we are in a death spiral regarding foreign capital and petrodollars. It shouldn’t really be a shocker that countries may desire to unpeg their currencies or avoid investing in US assets for fear that the declining dollar will reduce their value.  But if I was one of them and I feared a further 35% decline in the US dollar, I’d try to negotiate an inflated yield on my next investment.  So if 7.15% was a market yield based upon expectations of a stable dollar - what yield would you demand today to compensate you for your expectation of a 3 or 4 year depreciation of the dollar by another 35%?

A lot of definitions are useless. Defining a piece of crap as a piece of crap doesn’t make it smell any better. Defining a correction as a 10% reduction off the previous high is useless and doesn’t make it feel less painful. Maybe some people were impressed that the July-August-September market corrected 10% and then bounced. Okay - excuse me but what do you do with that? Do you hold all the way down and then start buying the index the moment it hits 10% believing that the worst is over? Not me. In fact, I have no idea how to use this information. If the decline is 8%, I have no expectation that is almost sufficient. 10% is not a magic number. And while we are at it, let’s discuss the definition of a bear market - commonly recognized by a price decline of 20% from a recent high in an index over a 12-month period. So what? Does it help you to avoid losing money when they define that your loss is now roughly worth two consecutive 10% corrections?

I look at each stock on its own merits. When the chart looks toppy and the technicals crumble, I change my signal to down. When the fundamentals are saying the stock is fully, highly or over valued, I change my signal to down. I have no bias as to what percentage a stock had to go up before I was impressed it went up. Up is Up. Down is Down. I would never say …”that stock just declined 10% off its record high, let me buy bunches of it” - just as I would never say..”that stock just appreciated 10% from its bottom so I need to sell it.” I hope you would never say or do something that stupid either. Movements in stocks are much too complicated to rely on basic percentages.

For some reason however, people are willing to buy into that idiotic concept about the market as a whole, as defined by an index. And what is so amazing about all this is that market indices are much more complex than individual stocks. In this world of too much program trading, of too much quant modeling and synchronicity, of too much media coverage, of too much hedge fund capital, of too much indexing and index ETF trading, of too much manufactured market technical analysis and of too much other bullshit, we are subject to defining our investing and trading with definitions.

It seems to make it easier for people or at least comforting to be able to give something a name. Psychologically - most people are FINITe and as a result, they love (you guessed it) deFINITions. It’s much tougher to keep our minds open to the undefinable - the vague concepts like space and time - without knowing where we are and how long until we get to wherever. Defining a 10% loss as a correction is not helpful. Defining a 20% loss as a bear market is not helpful.  For the very same reason, I didn’t define the point of my most recent bearish bias on 10/22/07 as the beginning of a correction.  At best, it was a guess about a direction towards a place I cannot define and over an indefinite concept of time.   I have a good sense of direction, the rest I leave up to the market to determine.

You might want to look at the Fed’s Commercial Paper data again. Click here.

Note that the last time I posted a spiking yield spread chart the data was “corrected” shortly thereafter.

SO BUYER BEWARE!

Here’s what the chart through November 26, 2007 looks like now. I like to post it here just in case they “correct” it later.

Some deals are good for both parties in the transaction. Others are one-sided or short-sighted. That’s my opinion on the CitiDhabi deal. It looks great for Abu Dhabi but then again, that’s what I said about Bank of America’s investment in Countrywide before CFC lost another 50%. To be honest, the Citi deal concerns me and as I wrote last night, this is not a negotiation from strength and neither does it solve the weakness or create strength. Maybe Citi management (whoever that is at the moment) feels they needed to do this deal but I find the terms to be absurd. Supposedly they were trying to guarantee the dividend would not be cut to make sure they wouldn’t have to go back on their word. If you are a common shareholder, maybe you’d now prefer to have a dividend cut. I know I would. Paying Abu Dhabi 11% when common shares were already yielding 7% is a bit nutty. Paying Abu Dhabi the equity equivalent yield of junk bond debt is a bit nutty. Paying Abu Dhabi more than Citi charges their best credit card customers is a bit nutty. Paying Abu Dhabi about 50% more than what Countrywide paid BAC is nutty. Paying Abu Dhabi about 400 bps more than an average preferred stock is nutty. Paying Abu Dhabi 700 bps over its 3-year CD yield is nutty. Furthermore, the dilution to existing shareholders is going to be substantial. What it says to me is that Citi was not confident that it could build its capital base through operations for the next year or so to provide enough cash to meet the regulatory ratios and pay the common dividends that Abu Dhabi is going to fund. Think about that when you hear how the worst is behind us. This transaction is more about the worst in front of us or they never would have done this. So now that Citi’s Tier 1 is sitting at 7.9% how long will that last? What happens if and when this crisis gets worse and it falls back down to a Tier 1 in the 6% range? Is Abu Dhabi going to fund that too or will Citi have to find a new sugar oil daddy? I suspect those terms will likely be as bad or worse for existing shareholders as the current one is. This looks like a good deal for Abu Dhabi. Good for them.

As you know, I am a free trader. I have ripped into protectionism over and over. I have no problems with foreigners investing in the US regardless of the asset class (debt, real estate, stocks, currencies, etc.) In fact, I worry that the foreign capital will stop coming before we can reduce our budget and trade deficits and slow our consumption. As for Abu Dhabi’s Sovereign Wealth Fund buying into Citi to resolve some of its capital crisis, I am all for it. However, it sure isn’t a sign of strength for C and I look forward to hearing what the protectionist politicians have to say.

Please take a look at the Commercial Paper Maturity Distribution data. For ABCP as well as total CP, check out the change from November 16th to November 23rd in the one-month maturity and then analyze the amounts coming due in less than one week. Rollover problems? You decide.

I write because I like to write. You’d think that the negative tone of the markets would be giving me lots of inspiration to shoot my mouth off about all the dangerous stuff that I’ve been talking about for the past year. Instead, I am not motivated at all. I am tired of it. I don’t find it enjoyable to keep repeating myself all the time and I’ve heard from more than a few family, friends, site visitors et al that my commentary is too depressing. It is what it is - remember I write for me and no one pays me for a single word. Right now, I am not enjoying writing. I spend a lot of time trying to debunk the myths and spin and general crap that is put out by people making a lot of money being journalists or economists pretending to be journalists or investors talking their book. But I doubt anyone really needs to hear me say one more time about the credit crisis or the troubled consumer or the declining dollar or the likelihood of market declines. I am comfortable with all the old stuff I’ve written here so feel free to just reread whatever topic you want from the archives. Besides enough of the big mouths are finally talking about some of the meaningful topics they’ve chosen to ignore or deny until now that I am just going to let them ramble on. I’ll still point out things of interest but there probably won’t be a lot of explanations attached.  So until I get motivated to write again…which may be a day or a week or who knows how long, I’ll be spending my time with analysis and research and figuring out where I am heading. See ya later…

Thanksgiving week is one of my least favorite weeks of the year to do analysis at HEDGEfolios along with the 4th of July and Christmas holidays that fall in the middle of the week. I rely heavily on liquidity and comparability of trading patterns. This week consists of two days as far as I am concerned - Monday and Tuesday. By definition, I only have 40% of the info I typically use and that is not good. The Wednesday before Thanksgiving is usually not very relevant to me given the number of people getting an early start on the holiday. As for the half day of trading that we experienced today, I try my best to ignore it. The massive volatility in either direction on holiday volume provides a lot of noise in technical analysis. So while the full day of Wednesday and its big decline had more volume validation than today’s reversal rally, they largely neutralize each other in my book. My tactic on weeks like this is to go with the bias I had before the week started and make as few signal changes as possible. As I do the analytical work this weekend, I try to focus on convincing breakdowns and breakouts and avoid guessing at minor changes based upon faulty and incomplete data.

Please look at the H.4.1 report which showed Discount Window borrowings averaged $434 million last week, an $89 million decrease since the 11/14/07 report. It’s interesting that the minuscule ending balance of $11 million was the same as last week and the average was so high during the week.  If that pattern continues again in the next report, I’ll put out a theory why that might be the case.  But until then, I’ll just assume it was a coincidence.