Manic Depression

  • You have got to love Wall Street. Earlier in the week they hated stocks when prices were 15% lower. Now they love em'.
  • Typical Bear Market rallies last three to six weeks. While there will certainly be pullbacks I believe it is way too early to try and fight this.
  • I sold covered calls on my QQQQ position earlier in the week. That means as we go higher I become less long as a function of the options. (if you don't understand that just know that I am becoming less long as prices go higher)
  • Did everyone forget that the world is ending?
  • The S&P 500 is back to being fairly valued.

Not So Fast

Please don't mistake my opening piece for me being bearish right now. It is part of my effort to focus my blog more towards the bigger picture. I actually still have some long positions, albeit substantially less than when the QQQQ was 15% lower earlier in the week. There are several factors that are arguing for this rally to continue.
  • The transition time in between this going from a financial crisis to an economic crisis is the perfect time for a rally. In addition, earnings season is almost over so we should be spared from company specific bad news as well.
  • It seems that the vicious cycle of lower prices leading to liquidations has lost momentum.
  • The market is still deeply oversold on all but the shortest time frames.
  • Hedge funds are no longer bragging about alpha but how much cash they are holding.
  • My largest fear remains Wells Fargo coming to market with their 20 billion dollar offering, which they reiterated that they will do yesterday.
  • The largest upside surprise would be the financial crisis easing so that the Budweiser and BCE deals could close. This would put a tremendous amount of cash in the hands of investors that will need to be reinvested.

Economic Crisis

Good Morning. The news is starting to shift away from the financial crisis and towards the economic crisis. It is possible that the financial crisis is now mostly behind us. Debt prices are pricing in a very severe outcome and the government seems to have drawn a line and is backstopping almost every market. The greatest risk is that US government borrowing costs soar. If that happens all bets are off.

The primary risk now is from a slowing economy. Layoffs are still accelerating and the full effect will not be felt in the economy for a few more months. Consumers are now being pinched by less jobs and tighter access to credit as even credit card companies are tightening now. In addition, global growth and a stronger dollar will become a drag on the export sector which held up well thus far. Earnings and economic activity will slow down more sharply than analysts and economists are currently projecting.

The economic slowdown does not preclude a sharp rally now. The sharpest rallies occur in Bear Markets. However, I do believe that at some point the slow economy will become an obstacle to this rally.

Calm Waters

Investors are encouraged by the fact that the market is becoming less volatile. If the market were able to hold up a few more days it would probably mean the vicious cycle of lower prices leading to more liquidations has played itself out for now. This could lead to investors clamoring in to make sure they are on board for the rebound.

I understand why investors feel safer now than when the market was 15% lower earlier this week. I could see how buying here could work out very well. However, personally I would rather accept some volatility and buy in 15% cheaper. Buying an asset at a low price is the ultimate margin of safety in my book.

Scale In, Scale Out

  • I am using higher prices to my advantage by slowly selling out of my positions . The risk is that the market goes straight up leaving me with no exposure. However, the risk I am more concerned with is not losing money.
  • I suspect that the higher we go the more people will be pressured to get in. Investors will not be happy if their money managers participated in the downside and not the upside.
  • I have no strong feelings about the market here and I have the positions to prove it.
  • I believe that time is a very important component of the market that most ignore. Everyone is focused on price. The longer Bear Markets lasted about two and a half years, while the shorter ones were around a year. I count July 2007 as the beginning of this Bear Market and believe that since we had one of the largest bubbles in history this Bear Market should be on the long side. That means that this Bear Market can last another year.
  • Even if the market is going lower it will probably not do so in a straight line. We can see vicious rallies.


I sold my shares of Annaly Capital Management (Symbol: NLY) , which I bought a week ago at greater than 15% lower levels.

Fair Value

Good Morning. Many readers have told me that they are more interested in the longer term. Usually, I am as well but I am trying to make lemonade when Mr. Market gives me lemons. That means trading by buying when their is fear and selling when there is hope. I will continue to do so until I believe this Bear Market is over.

The basis of my longer term analysis starts with a fair value estimate for the S&P 500. I subscribe to the Jeremy Grantham valuation method using the average historical P/E and the average historical profit margin. Jeremy Grantham explains the method in more detail in his quarterly letter. This method yields a fair value for the S&P 500 of 975 plus or minus 25.

At fair value a long term investor can expect the historical return of 8% per year from the stock market. Generally, at fair value an investor should be buying. However, after asset price bubbles have burst the market has always overshot to the downside. If history is a guide a low for the S&P 500 will be in the 600-800 area. That would yield a historic buying opportunity.

Wild Trading

There was some wild trading today. Ever since the FOMC announcement prices have been flying all over the place. I have done nothing today as I have no strong feeling about the market right here. I am moderately long. The biggest sin on Wall Street is missing a rally. Cash levels at hedge funds are enormous. If we start going higher performance anxiety might cause investors to pile in. At the same time I made enough sales yesterday so that if we go lower I will have room to buy. Have a good night.

Quick Note

I mentioned earlier that we were not seeing call buying. This has now changed as it seems people are becoming more optimistic. I am not considering adding to my positions here.

Hold, Hold, Hold

  • For the record I believe this rally will hold and not fizzle out as quickly as previous rallies have. That said, as a function of discipline I made some sales late in the day yesterday and sold some covered calls.
  • We are not seeing excessive call buying and despite the lower market, breadth is positive. This bodes well for us not falling apart today.
  • Do I believe we have seen the ultimate Bear Market lows? I am not ruling it out but that is not how I am currently positioned. I am still more in a trading mindset than a buy and hold mindset.
  • It would be very refreshing to have a quiet day.
  • I would appreciate any feedback on how to improve the site keeping in mind that I don't want this to become a recommendation site. Rather an intelligent exchange of thoughts and ideas that helps readers make better investment and trading decisions.

The Morning After

Good Morning. We wake to find the futures pointing to a flattish open. It would be nice to see a quiet day today as we digest our gains from yesterday.
  • Why did we rally 10%? Whenever things get as gloomy as they were I have found it pays to be more constructive. If people are already pricing in a depression than signs of a severe recession are a good thing.
  • How long will this rally last? My best guess is at least three to six weeks if history is a guide.
  • What can cut this rally short? Wells Fargo coming to the market with their 20 billion dollar share issuance.
  • Our problems originated in the credit market and the credit market should offer clues as to how we are progressing.
  • 3-month LIBOR is dropping for a 13th consecutive day. There was 60 billion in issuance yesterday in the money markets. The longer term funding markets have not yet shown a large improvement.


  • I sold covered calls against my core QQQQ position.
  • The market teaches everyone a lesson and once they learn it the market goes the other way. Today, the lesson that got reversed was to sell rallies.
  • Is this the bottom? I don't know, but every journey needs to start somewhere.
  • The yen was down 4% today. Maybe the carry trade has been unwound?
  • If you like the Capital Observer tell a friend.
  • Its the end of the world as we know it and I feel fine. Have a Good night.

Sold The Extra QQQQ

I sold the QQQQ I added into the morning mess. I am holding on to my core position.

Pants Down

  • There has been steady put buying all day long despite the higher market. This is something we have not seen in a long time.
  • How the mighty have fallen? It is hard to believe that Goldman Sachs approached Citigroup for a merger.
  • If we are able to steadily climb for the remainder of the day I believe we could see some fireworks at the close. I think the bears might be caught with their pants down.
  • Does anyone believe this rally will last?
  • Isn't it positive that hedge funds are at their highest cash position ever? Do you think that hedge fund investors will be happy if the market rebounds and they are not participating ?
  • Win, lose or draw I am selling the QQQQ I bought into the morning gloom at the end of the day. I am holding on to my core position.
  • The market meltdown yesterday started with commodities melting into the 2:30 close. Keep an eye on that.

Rumor Du Jour

The subject of today's rumors, Goldman Sachs, is starting to claw its way back. Rumor has it that they were short Volkswagen. Even if they did lose some money I doubt it was enough to warrant ten percent of their market cap getting chopped off. I view Goldman's rebound as good news for the market.

Day Trading

I am taking a trading long in the QQQQ in addition to my core long. We are seeing heavy put buying, rumors and fear mongering. Despite all that the QQQQ is still positive. I will exit this trade by the end of the day win, lose or draw.

International Breakfast

Good Morning. We wake up to find the futures appreciably higher led by overseas markets. Could this be the rally that sticks or will it fizzle out like the many that preceded it.
  • LIBOR continues to drop. Hopefully this improvement can spread to other parts of the market.
  • For the past year there was always a lot of hoopla before Federal Reserve rate cuts. Now no one seems to care.
  • I heard a report from a Prime Broker that yesterday's late day selling was shorting and hedging because of fear of what overseas markets might do.
  • The best time to invest is when you don't want to. Yesterday's close was the gloomiest I have felt.
  • I am staying long and optimistic that I will be rewarded.

New Depths

The market is sinking to new depths. I am sticking to my game plan and will add if we test the 770-800 area on the S&P 500, which seems increasingly likely. I don't believe the economy will be healthy anytime soon or that corporate profits will be robust. However, one buys a stock for all the future earnings of a company, not just next years. The best buying opportunities have always been when the headlines and market action were at their worst. I believe that buying at these levels or below will eventually be rewarded. Have a good night.

Slow and Steady

  • After all the false starts by the market it seems that no one trusts this advance. That is all the more reason to like it. Once everyone embraces a rally it is over.
  • When everyone was bullish every $1 decline in crude oil was heralded as stimulus to the economy. Now that it is down by over 50% and will act as a huge stimulus package we barely hear a peep.
  • Today's two step forward one step back advance is different from the other rallies we have seen.
  • Anecdotally, I heard a lot of bears talking with bravado and cockiness this weekend. That gave me a lot of confidence that being long was the higher probability trade.
  • I am sitting tight and not selling anything.

Same Old Story

  • It seems like the same old story today. Overseas markets down and fear of hedge fund delevaraging. Eventually, this same old story will lose its effect.
  • The ISE is showing more call buying than I prefer to see but I am willing to overlook it. Often, at turning points there is call buying as sentiment turns. In addition, all other sentiment indicators are showing rampant pessimism.
  • While I believe the S&P will outperform if we rally, I am long the QQQQ because I believe it will be more resilient if we go down.
  • In the past every government bailout was greeted with fanfare. However, today's commercial paper program was largely ignored.
  • Credit markets have manged to hang in the past week after the previous weeks improvement.
  • For years everyone ignored Buffet's warning about overvaluation and now they ignore him about undervaluation. People don't learn. That is why studying market history is so important.

Overseas Angst

Good Morning. We wake up to find our futures following overseas markets lower, albeit to a much smaller degree. Once again the Yen is strengthening as the carry trade continues to get unwound. My best guess as to what is happening is that European and emerging markets hedge funds are behind their US counterparts in reducing risks. I would not be surprised if we were able to shake off their declines today.
  • Anecdotally, it seems people have become substantially more bearish in the past week. I view that positively.
  • We are starting to hear wild downside price targets. Dow 5000, Dow 3000. Remember a few months ago when everyone was calling for $200 oil?
  • In the meantime the people who predicted this would happen are turning bullish including Doug Kass, Barry Ritholtz, Jeremy Grantham, John Hussman and Warren Buffett.
  • I am considering adding to my positions before we reach the S&P 770-800 zone.

Weekly Strategy

"Its the end of the World as we know it and I feel fine"
The S&P 500 is now priced for long term returns of 10% based on normalized earnings. These are the best valuations offered to long term investors in close to two decades. This does not mean that the market will not go lower. There have been times in history where the market was as much as 30% cheaper than today's levels. However, those type of valuations did not last a long time.

In the short term there are encouraging signs as well. We had a historic washout, sentiment is at an extreme and the market is at historic oversold levels. In addition the bottom callers who were out in full force a week ago seemed to have crawled back into their bunkers.

We are now only 10% away from the 2002-2003 lows of the S&P 500 in the 770-800 area. This should serve as formidable support if the market continues to melt. At that level I would be willing to go to a fully invested position. Even if we break through that area I believe those losses would be temporary. However, I don't believe we will reach S&P 770-800 this year. There is a good chance we have already seen the 2008 lows. To all the depression and end of the world talk I say bring it on. I am a buyer.

On The Road Again

Apologies for the delays in posts but I am on the road today. I traded around my positions by adding a little into the morning gloom and selling a little into the lunchtime pop. All in all my risk profile is the same as when I went home last night. I am long but with room to add if we do get to the S&P 770-800 area.

Markets tend to overshoot on the upside and downside. Right now I believe we are overshooting on the downside. Knowing where this will stop is impossible but I believe that the risk/reward equation favors owning some stocks here. Selling when everyone is panicking is rarely rewarded. Have a great weekend.

Nasdaq 5000

Here we are more than eight years after the Nasdaq hit 5000 and the S&P first climbed over 1500. The Nasdaq is down about 70% while the S&P 500 is down over 40%. During that time period corporate earnings have grown considerably. The S&P now trades at a price that implies greater than 10% long run returns. Yet, people could not get enough of stocks back then and can not sell fast enough down here. Sure there are logical sounding reason why we should go lower but there were also logical sounding reasons when the Nasdaq was at 5000 why this was a new era.

This does not mean anything in the short term and I am not deluding myself by thinking we can't go lower. I think in the short term we could go a lot lower. However, I believe stocks are now an excellent long term buy for the first time since I have started investing. I just wanted to add some long term perspective as we watch this short term panic.

Lock Limit Down

Good Morning. We wake to find the S&P futures lock limit down. I had a bad feeling when I was powering up my computer but was no less shocked at the site. My best guess is that hedge funds are unwinding. There were a few clues to this yesterday. The Russell 2000 was down about 3% yesterday while the large cap indices were up. Small caps are widely owned by hedge funds. In addition, one of the swap spreads was inverted, signaling some arbitrage gone awry. The unwinding of the carry trade is not helping either. Mix it all together and we have hedge fund hell.

I am planning on hanging on to my positions and I have a lot of room to add. I am currently debating whether to add on a scale down or to wait for S&P 770-800 which is the area of the 2003 low. At the rate we are going it might not be that much of a wait.

Closing Observations

  • Apple and Amazon have held up well since lowering their outlook. This is an important step. Expectations are now low.
  • Amgen is up big on a nice quarter. It is important that good news is greeted positively as well.
  • I like that the QQQQ broke to a new low and bounced back. That probably got rid of a lot of the renters. There will be less sellers if we go up now.
  • Heavy put buying and a higher market. There is nothing I like to see more when I am long.
  • I never watch CNBC but was curious as to what people were saying so I turned it on for a few hours today. Besides getting a headache, I learned that no one thought it was a good idea to be buying now. Clowns.
  • I am going home long. Good night.

Here We Go Again

  • Commodities and the Euro are holding in today. I view that as a positive as these are proxies for the unwind that has been going on.
  • Today they are buying puts. On Monday when the market was 10% higher they were buying calls. Logic?
  • The QQQQ keeps testing the 29.50 area. Every time a level gets tested it becomes more likely that the level will break.
  • Do we need the support levels to break to get a better washout? I don't know but I have enough dry powder to buy if that happens.
  • Can you feel the hopelessness out there? These are the precise times I like to buy. Of course that does not mean I will be successful. However, it definitely is a better time to buy than on Monday when the market was much higher and everyone was hopeful that the bottom was in.

Been Buying All Morning

I have been buying into the market for the better part of this morning. In addition to QQQQ I bought NLY and sold puts on eBay. I much prefer to buy into the market when there is widespread negativity like today than on days like Monday when bottom fishing seems like the new hot sport.

Back In

I bough back my QQQQ into this opening dip.

Is It Over

Good Morning. The main reason I exited my positions on Monday was that I felt too many people were trying to call a bottom. I believe that problem has been alleviated in the past two days. My issue with the market right now is that I am scared of the Wells Fargo secondary offering. The last thing this market needs right now is another 20 billion in supply. I will likely do some buying today but will not be aggressive until the Wells Fargo offering is behind us.
  • I am much more comfortable buying now that Amazon lowered their forecast. I know that the economy is horrible but my main fear is that it is not yet priced into the market. This should go a long way in bringing expectations in line with reality.
  • I believe the Amazon news is good for eBay. People were saying that eBay's guidance was an eBay issue. This means it is an industry issue and when the economy comes back eBay's business will come back.
  • What was the cause of the vicious rally in the final minutes of trading yesterday? S&P 880 was a big technical level and the market reached it. While I don't believe in technical levels I pay attention because others do and it often becomes a self fulfilling prophecy.
  • It seems that betting that the market is going down has become too easy a bet. The market rarely makes it that easy.

Amazon Earnings

Amazon has lowered their outlook considerably and the stock is down big in after hours. It continues to surprise me that people are surprised that business is slow. Amazon has excellent visibility into the economy as they receive real time sales data on a daily basis. Business is bad. When everyone accepts that fact stocks will be a buy. Have a good night.

Know Yourself

One of the keys to investing is to know yourself. Over the years, I have always performed my worst after my best trades. After cashing out on a winning investment, I would waste no time in finding a new investment and almost always lose money. I just needed more action and I paid for it. By contrast, I was always at my best after large losses. I would be very careful, sometimes taking months to find the perfect investment. These investments worked out every time.

Recently, I have been able to avoid this trap. After I make money, I try to replicate my behavior after a large loss. I become very careful in reinvesting my winnings. It might sound simple but it took me years of making the same mistake before I even tried to look for a solution.

For the majority of this year I have been completely out of the market. In the past this would have been impossible. I probably would have wiped out in this type of market a few years back. Instead I am doing well. For me, patience is the most important aspect in trading and investing.

Midday Observations

  • I was thinking of starting to scale in to some QQQQ but I stopped myself for two reasons:
  1. I am scared of Amazon's earnings. Momentum stocks (AMZN, RIMM, GOOG) are benefiting today from Apple. That could easily turn around if Amazon disappoints.
  2. I don't want to be long the day Wells Fargo comes to market with 20 billion in stock. I wish they would just get it out of the way.
  • The record lows on the euro are not a positive. In the past few years the Euro and the stock market have tended to go in the same direction.
  • I want Amazon to miss earnings. Why? I want to be able to buy the QQQQ knowing that expectations are not too high.
  • By far the most profitable trade this year has been sitting on my hands when in doubt. I will have a column out about that soon.
  • Are we setting up for a late day rally or a meltdown?

Mixed Signals

  • There are mixed signals coming from the options market with heavy call buying at the ISE and heavy put buying at the CBOE.
  • That means sitting on my hands.
  • The VIX has popped higher. That is a good signal as it probably dropped too quickly. That complacency is being taken out of the market.
  • On the Apple conference call analysts sounded like lovestruck teenagers when they were talking to Steve Jobs
  • I am still looking to buy, just being cautious about it.
  • Who buys Apple up $10 after the carnage we have witnessed recently? Have we forgotten everything?

Reverse Psychology

Good Morning. We wake up to find the futures and overseas markets lower. I came into the week trying to give the market the benefit of the doubt. We came off a large panic and generally after such an event the market puts in a four to six week rally, regardless if we have seen the ultimate bottom.

Despite that dynamic, I was a little weary because it seems that too many investors turned bullish and there was heavy call buying. It was not the bullishness that bothered me but the combination of bullishness and the inability of the market to rally. I was willing to write it off to option expiration. However, on Monday we had heavy call buying, widespread bullishness and a weak rally. That was enough for me and I sold out of my positions.

Going forward I will continue to operate with caution as survival is my main goal.
  • So Apple's guidance was weaker than anyone expected but the stock is up 12%. Is that because they are like the boy who cried wolf and nobody believes the guidance? Or are expectations now low enough? Or is it because Steve Jobs is confirmed living? There are so many psychological dynamics in Apple that thinking about it makes my head hurt.
  • I believe Amazon's results will be more indicative of the economic environment. Why? Amazon sells directly to consumers so they are a better indication of what's happening now. Apple has a supply chain. Any weakness at the retail level would take time to work its way up the chain.
  • Do the people following Warren Buffet's advice have the patience of Warren Buffett?
  • On Monday, I switched from bullish to neutral on a dime. It took me many years to be able to do that as humans are not hard wired to easily admit they were wrong. It was even harder to do because I publicly stated my bullishness on this blog. It was hard despite the fact that I had made money trading from the long side in the past two weeks. How do I publicly state I am no longer bullish, when I made a vehement argument in favor of the market a week earlier? That is why making money in the market is so hard. Many of the things one must do goes against every human instinct.

Negative Outlook

While many are disappointed by Apple's forecast I believe this is a necessary step in finding a bottom. Estimates are too high for corporate earnings and expectations need to be brought down. Apple is the most followed company and this should send a signal to the market. I believe this will go a long way to bringing expectations down to earth. I will probably start wading back in to some positions tomorrow. Have a good night.

Flight From Safety

  • The call buying continues today as investors are now in the buy the dip mentality. I would be much more constructive if we would see a shakeout but the market rarely gives me what I want.
  • It seems like we are seeing a flight from safety as Gold takes another pounding today.
  • That is probably the reason technology underperformed yesterday. It has held up relatively well recently so investors were probably hiding there. As investors become more brave they are venturing out to other parts of the market.
  • I still prefer to hide in technology. Why? The Oracle and Microsoft buyback. Noise coming out of Google that they will soon announce a buyback. That is in stark contrast to the many S&P companies that will need to raise capital in the near future.
  • Why don't I own American Express if I think its cheap? Like I said yesterday, I'm scared they will raise capital and they are dependent on the capital markets.

Earnings Reaction

There were many cautionary notes from analysts in the last week on American Express. These are the same analysts that loved them at $60 and hate them at $23. This despite the fact that their most important asset, their brand name, is still in tact.

Earnings beat estimates handily although the quality of the beat was somewhat low. American Express was cautious on its outlook, but given the economic environment who could have expected anything else? One would have thought that with the amount of negativity surrounding the name the stock would be able to pop on the not the end of the World news. Meanwhile the stock hovers between gains and losses. INTC and EBAY had similar reactions to decent earnings and a restrained outlook.

If the market is to go higher this dynamic needs to change. Nobody is going to be giving a rosy outlook. I am shocked that investors still expect it.

A New Dawn

Good Morning. I liquidated the last of my positions into the closing bell yesterday as I wanted to take a fresh look at the market. I have discussed ad nauseam the bull case for the market. However, in the past few days some things have been bothering me. Namely, it seems that everyone is calling a bottom and there has been heavy call buying for two days straight now. I have never seen a good bottom where everyone was calling it and everyone had time to buy so many calls so close to the bottom. That said, this has not been a normal decline and there certainly is a lot of sidelined money to fuel a rally. I am leaning towards jumping back into the market but am keeping an open mind.
  • Oracle announced a 6 billion dollar buyback. A major positive.
  • At some point Wells Fargo will be coming to market with their 20 billion dollar offering. That certainly will not be good for the market.
  • At some point this cycle I believe Apple will disappoint investors. I'm just not sure if its today. That said, the stock is not priced for much growth but that might not stop "investors" from selling it.
  • Even though there are a lot of bottom callers they happen to be the smarter people.
  • The credit markets continue to improve.
  • Economic conditions in the real world are still deteriorating rapidly. Small business owners I speak to have never seen anything like this. Small business owners saw this downturn before large corporations so I assume they will see the turn up first as well.


It looks like I got faked out of the market today. I was concerned that there was too much call buying this morning and Friday and that the rally was feeble. The action was probably expiration related. I'm not going to cry over spilled milk and will try to figure out where we go from here. Have a good night.

Clear Head

I sold the remainder of my positions into this late day rally. I want to reevaluate this market with a clear head. That means holding no positions. This does not make me bearish. I have done very well the past few weeks buying into panic and selling into strength. I want to regroup as this is not following the script of other Bear Market rallies. In addition, I have no insight on Apple's earnings, so why be long the QQQQ ahead of the earnings.

Relative Calm

  • After weeks of the Nasdaq outperforming the S&P, the S&P is finally showing some outperformance. It makes sense that the S&P should outperform on the upside if we rally as it went down a lot more.
  • That said the size of the decline in Google and Research in Motion are a bit unusual. Google is now up only 3% since it beat earnings. What would have happened had it missed?
  • That would not give me the warm fuzzies if I were long Apple into earnings.
  • One thing that needs to happen if we are going to see a sustainable rally is that stocks have to rally on bad news. The news out there is not good. If stocks rally on bad news it means the bad news is already priced in.

Flip Flop

While I desperately wanted to give the market the benefit of the doubt I significantly lowered my exposure to stocks this morning. On Friday, I was willing to overlook the heavy call buying and optimism because of options expiration. But the evidence simply does not support my thesis that the market is going up.

Optimism is not the problem. After a long decline optimism and some call buying is actually a good thing. It signifies a turn in sentiment. What bothers me is the inability of the market to put on a good rally despite the optimism and call buying.

I believe we are close to a bottom as many intermediate term indicators are at extremes that are typically seen at bottoms. However, I am waiting for everything to line up.

Tree Trimming

The call buying from Friday continues. I could not ignore it anymore. I trimmed some of my positions into the higher open.

Earnings Week

Good Morning. We wake up to find European markets and the futures higher. This week ushers in the heart of earnings season. Apple and American Express report after the bell. Apple is probably the most important report this week and will have largest impact on the psyche of investors. I come into the week long. I sold calls against my exposure when I waded into the market in the past two weeks. The calls all expired. I will likely trade more aggressively around my positions rather than sell calls again. Expiration is five weeks away and I prefer not to sell calls for such long periods of time. Trading around my positions more aggressively means selling some of my stock into rallies and adding into declines.
  • Its hard to see how in the long run American Express is not worth more than the $23 it trades for. They probably got too aggressive in extending credit but that problem has been corrected as they significantly tightened credit. Even if they never make another penny from lending money the fee business must be worth over $30. I am seriously considering going long but am scared that they will raise capital. I also don't like that they are beholdent to the debt markets.
  • Apples earnings scares me a bit. The iPod is a significant drag on growth and with a slower economy it will be harder for other parts of the company to make up for that growth. While I believe the whole beat the number game is ludicrous I pay attention because unfortunately others do.
  • Is it me or has sentiment improved a lot in the last week? Improving sentiment is a necessary ingredient for a market turn but as a contrarian I can't help but be bothered a little bit by it.

Weekly Strategy

"Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities"

-Warren E. Buffett in his New York Times Op-Ed Article
Warren Buffett lays it on the line and says in no uncertain terms that he believes stocks are a buy. He readily admits that he might be early in his call as he is not a market timer.

Stocks trade somewhere between 12 and 13 times normalized earnings. This implies a longer term return on stocks of over 8% per year for the long term investor. These are the best valuation levels offered to investors in close to two decades.

There certainly is room for stocks to go down if we reach valuation levels that were reached in the 70's or The Great Depression. In those time periods stocks traded for as little as seven or eight times normalized earnings. While unlikely, this would imply an S&P 500 level of 600 or below.

I am encouraged to see that I am on the same page as Warren Buffett with regards to the longer term value of stocks. However, it would be unacceptable to me to incurr the type of losses that a worst case scenario would imply even if those losses were temporary. If my pockets were as deep as Warren Buffet's I would not be sweating the short term either. Unfortunately, that is not the case.

The vicious cycle of forced selling and panic seem to have been broken with the market ending the week up. The market's problems began with credit so it might prove useful to pay attention for the turn in the credit market. The market for the shortest term debt improved greatly this week. It will be important to see if that spreads to other parts of the debt market. Seasonality has turned positive and the market is deeply oversold. I am inclined to give stocks the benefit of the doubt here but will remain vigilant as the normal rules have not seemed to matter recently.

Expiration Exasperation

Apologies for the lack of posts today but I was having Verizon FIOS installed and my regular internet was down all day.
  • While Warren Buffet is a great investor he is not known for his market timing. Please keep that in mind if your time frames are short.
  • Remember when Warren Buffet avoided publicity.
  • On the positive side the market ended the week higher for the first time in what seems like forever.
  • The credit market was a little bit better this week as well. While we are far from normal every move has to start somewhere.
  • On the negative side we had a nasty reversal today after the market was up over 10% from yesterday morning.
  • There was too much call buying today on the ISE. The market was unable to go up despite all the call buying. I will not make too much of it as expiration probably had something to do with it. I would rather not have to make excuses for the market though.
  • I am still constructive and will take a fresh look Monday.
  • Have a great weekend.

This Is Significant

I pooh poohed the idea of buying stocks because of Warren Buffet's investments in Goldman Sachs and General Electric. I said he was getting loan shark type rates with an equity kicker that were not available to anyone else. However, now Warren Buffet is buying common stocks, which is significant. From his op-ed piece in the New York Times:

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Healthy Skepticism

Good Morning. To my surprise we wake up to find the futures sharply lower after Google's solid earnings report. I am still of the belief that the bottom is in and will give the market the benefit of the doubt. I will chalk up the lower futures to healthy skepticism.
  • In testing the lows yesterday there were numerous positive divergences. Among them were much fewer new 52 week lows in individual stocks and a higher low on the oversold indicators.
  • LIBOR spreads are lower again today. This will mark the first weekly drop since July.
  • Did I mention lower oil will act as a tax cut on the consumer and businesses?
  • I never thought the day would come where I would be pointing out the positives while the rest of Wall Street is hiding in a bunker. I have been called "Doom and Gloom" in the past.
  • It has been all over the news that the largest hedge funds have raised large sums of cash. Could we be past the hedge fund liquidations even if there are more withdrawals?

Thawing Credit Markets

It seems that Central Banks actions are finally starting to have the intended results on credit markets. From the Wall Street Journal:
"The cost of borrowing three-month U.S. dollar funds in the interbank market continued to edge lower Thursday as government measures aimed at stabilizing the global financial system eased pressures in money markets amid growing fears of a global economic recession.

Analysts at BNP Paribas said the Libor fixings were lower "despite a perception of increased stress in financial markets."

"That seems encouraging," they added, "but must be tempered by the fact that rate expectations are also falling." They noted BOR/OIS spreads, a gauge of stress in money markets, widened.

According to data from the British Bankers' Association, three-month U.S. dollar Libor dropped to 4.5025% from Wednesday's fixing of 4.55%, while the one-month rate fell to 4.2775% from 4.35875%.

The overnight rate tumbled to 1.9375% from Wednesday's 2.14375%, edging closer to the Federal Reserve's Fed funds target rate of 1.5%."

Looking Good

The market action was healthy today. There was put buying for most of the day. That shows that market players distrust the rally. That is a positive, as once everyone embraces a rally it is over. The news from Google after the bell should help boost the market tomorrow morning. That combined with option expiration could give the market a nice lift. Have a good night.

Midday Observations

  • The put buying has kept up throughout the day and the VIX hit a new high. Despite that the market is holding up. This bodes well for the rest of the day.
  • That is ofcourse if we can get past the late day selling.
  • If we do rally we will have people saying we had a successful retest.
  • The news is always best at the top and worst at the bottom. The news these days certainly qualifies as the worst I have seen.
  • Do you see oil lower again? A tax cut.
  • Option expirations have tended to be positive events recently. Coincidentally, Hank and the gang have made positive announcements right around expiration. Tomorrow is options expiration.

Call Buying

At the opening there was heavy call buying on the ISE. That was the clue that the first rally would fail. We are now seeing more put buying as we test the lows. Let's hope that it holds.

Things That Concern Me

While I am bullish for a trade here, I constantly analyze both the bull and the bear case. These are the things that worry me:
  • Typically when the market has had a large fall like the one we experienced recently, companies have announced large buybacks. That has not happened this time around.
  • While most sentiment surveys show record bearishness, put buying has not been as high as at prior lows.
  • While talk of a bottom is down considerably from two weeks ago, I would be more comfortable if there was even less.
  • Don't look now but ten year rates are moving up. We don't need higher rates.
  • Finally, to state the obvious: We have never experienced anything like this. The largest debt bubble in history is being unwound.


In eBay's conference call last night they announced that 2.9 billion of their cash is overseas. In order to bring it into the US they would need to pay over 30% in taxes. They earned the cash overseas and already paid foreign taxes on it. Microsoft and Pfizer each have over 20 billion dollars overseas. The list goes on and on. If these companies were allowed to repatriate this money at a reasonable rate it would probably flow into the US markets through stock buybacks, acquisitions and investments. That is exactly what we need.

The law does not make sense. Why should a company be taxed twice? Unfortunately, any law allowing companies to repatriate funds would be viewed as a tax cut on corporations, which is a big no no in this political environment. While I understand that the chances of this passing are close to zero, this would go a long way in stabilizing markets.

Motion Sickness

Good Morning. I did not have the foresight to see this latest crash coming. Fortunately, I was disciplined and sold a lot of my inventory into the ramp on Monday. This is not the first time my discipline has saved me. Unfortunately, I did not sell enough and am still somewhat long.

However, at this point I am not planning on selling and may even add to my longs. All the points I made in my Weekly Strategy are still valid. The euphoria from Monday has worn off and the mood is once again dour. That sets us up for a possible recovery.
  • This will take years to sort out and I don't believe we have seen the low for this Bear Market. However, I do believe we have seen a short term low.
  • At this point low oil prices will act like a tax cut on consumers and businesses.
  • Bernanke has found religion and announced that the Fed may be more proactive in stopping asset price bubbles. Somehow I don't think there will be any asset price bubbles for a very long time.
  • eBay is down pre-market on lowered forward guidance. We are in big trouble if investors are expecting forward guidance to hold up.
  • The number of Bulls in the Investor's Intelligence survey has fallen to 22%

The Capital Observer Will Return Thursday

The Capital Observer Will Return Thursday

Bulls Turn

  • Please remember that this week is options expiration. That tends to exacerbate the market's moves. Not that the market wasn't moving fine on its own before this week.
  • Its amazing how many people want to buy now. Where was everybody Friday afternoon when the market was over 15% lower?
  • Anyone who stayed short until now deserves what they are getting today. Bulls make money, bears make money but pigs get slaughtered.
  • Am I upset that I sold part of my stock too early? A long time ago I would have been but I learned to enjoy what I have.
  • While it will not be straight up Bear Market rallies usually last at least three weeks and up to three months.
  • I will be out for the next 2 days. Have a great night. I will be back Thursday.

The Snowball

I finished reading the 900 page Warren Buffett book, The Snowball, this weekend. I was very excited to read it because Warren Buffett gave the author full access to himself and his friends for the author to write this book. While I found a lot of the information useful it was not an easy read. If you have to know everything about Warren Buffet , like I do, then read it. If you are looking for an enjoyable book you might be better off with the phonebook.

Reverse Groundhog Day

  • The market is going up today in the same furious manner it went down. That's usually what happens once the rubber band starts going the other way.
  • I am still in buy the dip mode. I just thought an almost 14% rally since Friday afternoon in the QQQQ warranted some profit taking.
  • It was really weird being the table pounding bull. Its not a role I'm very used to.
  • I must admit that I was scared over the weekend. The thing I took most solace in was Hank Paulson's G-7 speech. In the speech he said that he would use all the powers of the President's Working Group (aka Plunge Protection Team) to stabilize the markets. While I disagree with most of what he does, it was nice to know he was on my side.
  • There are some stocks that are still priced for the end of the World. I am going to start doing some fundamental work. No rest for the weary.

Sold QQQQ From Friday

I sold the QQQQ I bought on Friday. I am still long, just more moderately.

Opening Observations

I tried to sell the QQQQ I bought on Friday at the open but the market dropped too quickly. That said, if I had succeeded I would be buying it back now. There is heavy put buying this morning as people are distrustful of this rally. That is an important ingredient to a good rally. Once everyone embraces a rally it is over. Still very long.

Guaranteed Or Your Money Back

Good Morning. We wake up to find the futures much higher on the back of all sorts of guarantees given by central banks around the World. This seems to have broken the panic that has gripped markets. Normally, after a deep fall the market rallies for at least three to six weeks. That assumes that we are done falling. That said, I will probably sell the shares I picked up on Friday as they are trading 10% higher than where I bought them. I will be holding on to my other positions.
  • Will all this hocus pocus from central banks work? That is a question I will look at when sentiment is positive again. For now it is the perception that matters.
  • Why am I selling if I think markets will go higher? DISCIPLINE.
  • Please note that I wrote the Weekly Strategy before the market popped by over 5%.
  • If you like the Capital Observer please tell a friend.
  • The envelope icon below each article can be used to email an article to a friend.

Weekly Strategy

"Be fearful when others are greedy, and greedy when others are fearful"
-Warren Buffett
A year ago valuations did not matter as the LBO craze ruled the land. Investor's feared that private equity firms, sovereign wealth funds and oligarchs were buying up all the available supply of stock. Everybody feared missing out on the party.

Fast forward to a year later and once again valuations don't matter and fear reigns supreme. Only this time everyone is scared of a financial meltdown and apparently no price can compensate investors for holding stocks.

I have been cautious on the market all year, including the past few weeks (as chronicled in this blog). As investors were given new hope with every bailout package, short selling ban and government intervention I remained skeptical. This past week as investors began hitting the panic button I became constructive. I believe that the market is setting up for a powerful rally as time and again the market shows that the best time to buy stocks is when nobody wants to:
  • The VIX aka the fear index is at an all time high. The VIX has surpassed its high from the Russian Crisis, Long Term Capital, September 11 and the Internet bust. Powerful rallies emerged after each of these events.
  • There have been many forced liquidations in the past few weeks among hedge funds and CEO's of corporations. Forced liquidations tend to mark lows.
  • The stock market is as oversold as it ever has been no matter which oversold indicator is looked at.
  • Sentiment surveys are showing extreme bearishness seen at other major turning points.
  • Everyone is well versed on the problems we are facing. However, what everyone knows is not worth knowing.
  • Valuations are reasonable. I can't remember another time when so many stocks traded for a single digit price to earnings ratio.
  • Investor cash is at record levels. Hedge fund exposure is at record lows.
  • The government announced this weekend it is going to inject equity into financial corporations.
  • Its always darkest before dawn.
  • The news is always worst at the bottom and best at the top.

The Soviet Model

The EU countries have agreed to back all bank debt issued between now and the end of 2009. While this might open a Pandora's box of moral hazard issues, that will be a problem for a later date. In the short run I believe markets will applaud this. From Bloomberg:
"European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under, trying to stop the financial hemorrhage and stave off a recession.

At a summit chaired by French President Nicolas Sarkozy, leaders of the 15 countries using the euro offered their most detailed battle plan yet for bandaging the crippled credit markets and halting panic among investors.

``We need concrete measures, we need unity, which is what we achieved today,'' Sarkozy told a press conference at the Elysee Palace in Paris. ``None of our countries acting alone could end this crisis stop.''

As they improvised a response to the banking calamity that started on Wall Street, Europe's leaders sought to go beyond pledges made by the Group of Seven and to deflect criticism that they are taking scattershot country-by-country steps without a credible joint strategy.

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any ``systemically'' critical banks in distress.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said."

Dream The Imposible Dream

I am signing off for the day. I might sell a drop of what I bought earlier at the market close. I will be going home very long regardless. Have a great weekend.

So Far, So Good

Thus far the collapse that has been happening at around 2:30 has not happened yet. The longer we go without collapsing, the greater the pressure on shorts will be to cover. We still have 3:30 though.

Hit Me

I more than doubled the size of my QQQQ position today. Enough said. This time I did not sell any covered calls.

One Of These Days

  • One of these days a rally is going to stick and when it does it will be a barn burner.
  • Doesn't it seem like such an easy trade that the market will go down at the end of the day? Since when does the market do what everyone thinks its going to do?
  • This is purely speculation but it seems like people are starting to short the market instead of trying to catch a bottom. The shorts will act like rocket fuel when the market finally does turn.
  • A man can still dream, can't he?

I Repeat

I repeat myself. I am a buyer of this mess. I believe when the rally does arrive I will be rewarded for my purchases.

Nightmare On Wall Street

  • I have rarely seen it pay off to sell into this type of panic. I know this time could be different but I'm not betting that way.
  • I will not post my intra day trades for the time being because we get a days movement in 1 minute. By the time I post something it is stale.
  • That said I am a buyer into panic, not a seller.
  • It is nice to see that some stocks are up today. It is a market of individual stocks. As they bottom one by one, the averages will bottom as well.
  • For the majority of the week I was cool as ice. This morning I felt a pang of fear. That is probably a good contrary indicator.
  • I don't think the news matters right now. Once people are done panicking and the margin calls are done the market will go up. Not a second before.


I got stopped out of the QQQQ I added a few minutes ago. Tiny profit. This pullback was to be expected after the big rally off the opening. The question is will it hold.

Added to QQQQ

Unfortunately, I was on the road for the open. However, I added to my QQQQ into this second dip at 30.6

Black Hole

Good Morning. The S&P futures are down another 30 points. We are now down over 20% for this week alone. I was clearly wrong in my bullish stance. However, I am not going to compound my mistake by selling into a crash. My only saving grace was that I was favoring the Nasdaq 100 (QQQQ). The QQQQ was down by less than 3% yesterday, and I sold covered calls that further softened the blow for me. Other than that all I can say is ouch.
  • Including the drop in the S&P futures this morning the S&P now trades at 12 times normalized earnings. That is at the low end historically but it has traded as low as 7 or 8 times during the 70's and the depression.
  • Isn't it amazing how when the S&P was almost twice as high people were clamoring to get in but now that its half price people can't sell fast enough.
  • Last week Alan Greenspan said he thought the crisis was coming to an end. In hindsight, wasn't that the ultimate sell signal?
  • We have now rivaled the 87' crash, just in slow motion.
  • The market bounced hard after the crash,hopefully we will do that as well.

Capital Observer Will Return Friday

The Capital Observer Will Return Friday

Thats All Folks

  • I continue to be bullish for a trade here. A year ago I was told I was crazy for being short and now I am being told I am crazy for being long.
  • While it would have been nice to see a stronger close, it is good to see the downside stampede has stopped.
  • The Nasdaq 100 (QQQQ) is finally starting to show outperformance versus the S&P 500 (SPY). I believe this will be a continuing theme throughout the coming months.
  • While I believe we will see a retest on the S&P 500 at some point, I believe we might have seen the lows of the year for the QQQQ.
  • I am taking my long positions home with me.
  • I will return on Friday. Have a good night.

Midday Observations

  • It is usually considered a plus for the market when the banks are up. I can't help but think that it might be better if the banks stay down, while the rest of the market rises. That will mean no capital raises from banks.
  • It is 11:20 and the QQQQ is still up. I'll take what I can get.
  • eBay, Apple and RIMM trade very nicely. A sign that the sellers might be exhausted?
  • Why are banks still giving out dividends if they need to be bailed out? Neither the politicians or the CEO's are stepping up on this issue. Have we learned anything?
  • When I was less experienced I would have been very long in this situation. The difference is that now I am guaranteed to stay in the game no matter what. That said, I am still long here.


While I believe we have seen the bottom I sold AAPL for a quick $4 gain. Just being disciplined. Believe it or not I am up this week even though I have been trading strictly from the long side.

Up The Creek., Without Paddle

The hopelessness can be felt in the market as the futures are down despite the rate cut. I bought some AAPL at 86.4 in the pre market.

I Wanna Be The Minority

This morning Investor's Intelligence announced that Bulls fell to 25% and Bears are at 53% in their survey. Extreme readings like this are usually good contrary indicators.

Snip, Snip

Many central banks have cut rates in unison this morning. Could this be the spark? From Bloomberg:

"The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an emergency coordinated bid to ease the economic effects of the financial crisis.

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point.

``The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,'' according to a joint statement by the central banks. ``Some easing of global monetary conditions is therefore warranted.''"

Thank You Sir, May I Have Another

Good Morning. As we awake for our daily spanking the S&P futures are down 18 points. While there are no sure things in life, there are high probability trades. I believe that purchases at these levels in beaten down, cheap, technology stocks will be rewarded when the market stages its next rally. High fliers Google and Apple both trade well below 15 times next year's earnings (ex cash) and those are the expensive stocks in the Nasdaq 100. The only stock I can find that still trades richly in the entire Nasdaq 100 is Amazon.
  • I would stay away from financial stocks like the plague. Its not that they can't rally. Its that if they do, financial companies will be lining up to issue more stock.
  • Do you really believe that Citigroup doesn't want to raise capital?
  • We have had three of the craziest days in my memory "after" they banned short selling.
  • The S&P is now fairly valued for the first time since the early 90's. Unfortunately bear markets don't tend to stop at fair value.
  • Nothing comes easy in life. Buying now is not easy.

No Loving For Bank Of America

Bank of America had trouble finding buyer's for its share sale. It sold 10 billion of shares shares at $22. It closed yesterday over $32. It seems that banks will have a much harder time raising capital going forward. From the Wall Street Journal:
"Bank of America Corp. struggled to find buyers for a $10 billion stock offering Tuesday, showing how skittish investors are about pumping capital into financial institutions amid the chaos swirling through the global economy and markets.

The Charlotte, N.C., bank announced the common-stock offering shortly after the closing bell Monday, and many analysts expected the deal to be priced by the time Bank of America shares opened for regular trading Tuesday. When that didn't happen, "that probably did scare people," said Jeffery Harte, a banking analyst at Sandler O'Neill & Partners LP in Chicago.

Bank of America issued a statement after the market closed saying it sold 455 million shares priced at $22, below Tuesday's close. The $10 billion offering includes an option for underwriters to purchase an additional 68.25 million shares, for a total of $11.22 billion. Nancy Bush, an analyst at NAB Research LLC in Annandale, N.J., said Bank of America had trouble finding enough investors willing to buy shares at the price the bank was seeking.

"They were trying to price at $28, and everybody just laughed at them," she said. The standoff helped fuel a 26% plunge by Bank of America shares, which fell to $23.77, down $8.45, in New York Stock Exchange trading."

At A Loss For Words

The market is now down over 10% this week alone and its Tuesday. The good news is that the market can't go down at this pace for a lot longer as there will be no more market pretty soon if that happens. I have never traded through anything like this.

While I believe purchases at these levels in cheap technology stocks will be rewarded when the elusive Bear Market rally arrives, I am staying in a somewhat defensive position as my ultimate goal is to live to play another day. I have some longs, but have sold calls against all my exposure that expire at the end of next week. No matter what it will not kill me. There will be better days but there is a tough road ahead before we get there. Have a good night.

Endless Journey

  • As the market tested yesterday's lows I slightly added to my long positions. I am nowhere close to as long as I was yesterday at these levels.
  • The Bank of America pricing of its secondary offering is supposed to happen after the close of trading today.
  • Yesterday eBay warned. Revenues will be at the low end of their estimate but earnings are as expected. I was impressed that a company dependent on consumer spending was able to meet its goals.
  • The market does not seem equally impressed.
  • For the time being fundamentals don't matter. Its who owns what and do they have to sell.


  • Ken Lewis, CEO of Bank of America has been bragging for the past year at investor conferences about how he steered clear of the credit crisis. Nice job.
  • The Bank of America offering was supposed to be done this morning. As of now I have not seen a pricing. Could it be that the capital raising window has shut?
  • In the short term it is good news for the market if companies can no longer flood the market with new shares. Longer term, companies need more capital.
  • I believe at some point the Nasdaq (QQQQ) will start outperforming the S&P names (SPY). While technology is not immune to a recession, tech companies have more cash and are less capital intensive businesses. Thus far there have been no capital raises in the technology stocks.
  • At some point, shouldn't Apple and Google consider share buybacks? Apple is sitting on $25 a share in cash, while Google is sitting on over $40.
  • Bank of America slashed its dividend in half. I don't understand why companies that are paying such a dear price for capital are giving out dividends. Aren't we past spending money to keep up appearances?
  • I think the market does well today but am staying positioned conservatively.

Sold Covered Calls on QQQQ

I used the early pop to sell covered calls against my QQQQ position. I would describe my positioning as moderately long.

Keep The Change

Good Morning. I would usually say after a day like yesterday that we have seen a bottom and the market should rally for a few weeks. However, Bank of America came out after the bell and announced a 10 billion dollar stock sale. The idea of a capitulation bottom is that there are no more sellers. However, if companies continue to bring stock to market in the manner they have recently, there are unlimited sellers. I am not saying we can't rally but this does not help. I am still long QQQQ and short EBAY Puts (equates to a bullish position on EBAY).
  • The 10 billion dollar Bank of America offering is small compared to the size of the capitulation we saw yesterday. I am more worried about the trend.
  • Remember the good old days when companies would buy back stock after a market crash, instead of selling it.
  • How many times can Steve Jobs die? Why does anyone listen to those rumors?
  • Do you think it is a coincidence that we had 2 days with the Dow down 700 after they got rid of short sellers?
  • I specifically bought QQQQ because it does not contain the type of companies that have been raising capital.
  • Here's to a calmer day.

Bank Of America Drops Bomb

I sold down a lot of my QQQQ in after hours. Bank of America announced the sale of 10 billion in new shares. This market will stay on the floor if every day another company tries to raise 10 billion. From Bloomberg:

" Bank of America Corp., the bank that bought Countrywide Financial Corp., halved its dividend and plans to sell $10 billion in common shares after third-quarter profit fell 68 percent. The stock declined in late trading.

Profit dropped to $1.18 billion, or 15 cents a share, in the quarter ended Sept. 30, from $3.7 billion, or 82 cents, in the same period last year, the Charlotte, North Carolina-based company said in a statement.

``These are the most difficult times for financial institutions that I have experienced in my 39 years in banking,'' Chief Executive Officer Kenneth Lewis said in the statement. ``It is prudent to raise capital to very substantial levels in this uncertain environment.''"

Crazy Day

  • Apologies for the terse posts today but I cant remember the last time I traded so much.
  • I sold off a good part of my inventory at the end of the day but I am still long.
  • If it seemed crazy that I was able to keep buying with the market cratering, know that it does not come naturally. The first few times I saw panic like this, I was one of the people panicking.
  • Don't feel bad if you missed it this time or even sold out at a bad time. Think of it as tuition. There will be a next time.
  • Good night.

Sold A Little More

Sold AAPL and COP. I am still long a lot of QQQQ and short EBAY Puts. It tuned out to be an excellent day. I am still very long.

Selling A Little Into Rally

I am being disciplined and selling a little stock which I bought at lower levels into this rally. Still very long.

S&P At Fair Value

I have been bearish for over a year. Why am I buying today?

  • This is the first time since this Bear Market began that there are no bottom callers. Only pukers.
  • Every time the VIX has been at these levels it has been a good time to buy.
  • I have found over the years that the hardest time to buy is usually the best time.
  • A lot of stocks are cheap and the S&P is fairly valued for the first time in over a decade.


I added to my positions as we dipped to the lows of the day.


I have been eyeing eBay for a while. However, I was worried about a warning as the weaker consumer was sure to effect them. Today, they warned and it was not as bad as I thought it would be. I shorted the 17.50 October Puts. If I end up owning eBay at $16.30 I am happy and if I don't I am happy as well.


  • This is a historic day as the VIX hit 56. That is as high as I remember it going. People are panicking and I am happy to relieve them of their pain, I mean stock.
  • The market bounced a little in the past 20 minutes. I was buying the whole way down. As such I took a little bit off into the bounce but am still very long.
  • How long am I? Fully invested, but I am willing to use margin when the time is right. So I still have room to get longer.
  • I have rarely seen the market reward people for panicking. That does not mean the reward will be today, but even if we go lower I believe we will retrace today's move.
  • Right now people don't care what they are selling or what it's worth. There must be babies in that bathwater.

Continuing to Add To QQQQ

I continue to add to my QQQQ position.

Bought some AAPL

I bought some AAPL @92.2.

Added to QQQQ

I have used the ugly open to add to QQQQ. Bought some COP @ 61.1.

Bought Some QQQQ

I have started a position in the QQQQ. I am a buyer on a scale down.

The End Of the World Is On Hold

Good Morning. We wake up to find the S&P futures 25 points below fair value. This is the type of action you typically see close to a bottom. People just want out and they don't care what price they get. In my experience, the market usually regains the panic part of the decline pretty quickly. The only question is do I use a scale in approach to buy or do I try to pick a spot?
  • Be fearful when others are greedy, and greedy when others are fearful. Do you think others are greedy or fearful right now?
  • How many times have you heard the words depression and crash in the last week? Those are not typically words heard at market tops.
  • While I am fairly certain we are in the latter part of this move lower, the damage can be deep and fast in the final stage.
  • Good luck.

Weekly Strategy

In the last Weekly Strategy I outlined why I believed that the market was not cheap. This week I will look at what is fair value for this market. In recent years net profit margins have been at record levels. I believe this was a result of excess leverage and a bubble economy. In addition, price to earnings (P/E) ratios were above historic norms as a result of the same factors.

In a capitalist system high profit margins can’t last forever. High profit margins bring competition. More competition lowers profit margins. Assuming net profit margins return to their historical norm of 6%-6.5% and P/E’s revert to their pre-bubble norm of 14 to 15 times, fair value on the S&P is approximately S&P 1,000.

At S&P 1000, a long term investor can expect to earn 8% over the long term. However, it is rare that a bear market stops at fair value. The market tends to overshoot both on the upside and downside. Bear markets tend to end with below average valuations. I believe the most likely outcome is the S&P bottoming at approximately 800. That is where the last bear market bottomed and that would put the S&P PE at roughly 11 times normalized earnings.

While I don't believe this Bear Market is over, the market rarely goes anywhere in a straight line. Bear Market’s can have vicious rallies. I believe we are fast approaching an opportunity to make money on a Bear Market rally. The market made a new low after the rescue package was passed. Skittish investors no longer have an event to pin their hopes on. I believe that this week we will see less bottom fishing and more puking, leaving the market with only strong hands. That could set up a powerful rally.

My greatest fear in playing a rally is that companies will continue to issue new shares at a furious pace. Even though the market was close to a 52 week low, Goldman Sachs, GE, Capital One, JP Morgan, Ford and Wells Fargo sold or announced plans to sell new shares. In addition, I believe that there was an artificial bid in financial stocks the past few weeks as a result of the no short list. I fear that there might be a large air pocket in financial stocks once shorts are done covering. Since the financial stocks and all the companies issuing shares are in the S&P, I will try to avoid these two possible potholes by going long the QQQQ or cash rich companies that do not need to raise capital.

Start Selling The News, I'm Leaving Today

  • Hidden in the bill, that is not a bailout but a rescue package, is the right for Ben Bernanke to pay interest on reserves. This literally allows him to print money. I kid you not.
  • I should have known that the news would get sold initially. I did not hear one person saying they were shorting going in to the bill. I knew a lot of people buying because the bill will get passed. What now?
  • Once again the market shows us that what everyone knows is not worth knowing.
  • I would say we end the day down but I believe in the boogey man. Hank Paulson and the Plunge Protection Team that is.
  • I listened to these Senators patting themselves on the back for spending all our money. I hope they know more about whatever it is they know about than they do about economics.
  • I'm going to be on the road for the rest of the day. Have a great weekend.

Buy Now, Pay Later

  • On the Wells Fargo conference call the CEO said they would issue 20 billion in shares some time in the 4th quarter. That could be good for the market in the short term as we get the benefit of the merger now while Wells Fargo issues stock at a later date.
  • Wells Fargo is pretty close to a 52 week high. If I were them I would sell stock pronto. Get while the getting is good. I believe the timing of this offering will define how far this rally can run.
  • There certainly was enough negativity yesterday to get a rally. I would have rather seen capitulation but the market rarely gives you what you want.
  • While patience certainly costs me opportunities, it is the only reason I am still in the game.
  • Do we really need so many banks? Would it be so bad if we let capitalism run its course and destroy some unproductive capacity? Are we throwing good money after bad?
  • A lot of momentum stocks got hit very badly yesterday, so margin calls are another unknown.
  • Did you ever think you would be watching so much CSPAN?

Bah Humbug

Wells Fargo (symbol:WFC) is buying Wachovia (symbol:WB) for $7 a share in stock. Wells will sell up to 20 billion in stock in order to facilitate the necessary writedowns. More Supply. However, there is an upside. Wachovia bonds and bonds of other banks should get a huge boost from this. This is possibly better news for the bond market than the bailout package. From Bloomberg:

"Wells Fargo & Co., the biggest U.S. bank on the West Coast, agreed to buy Wachovia Corp. for about $15.1 billion in stock, four days after Citigroup Inc. said it was buying part of the embattled North Carolina lender.

Wachovia shareholders will get 0.1991 shares of Wells Fargo common stock for each share they own. The deal values Charlotte- based Wachovia, led by Chief Executive Officer Robert K. Steel, at $7 a share, the companies said in a joint statement today. Wachovia traded at $6.48 before the official open on the New York Stock Exchange, up 66 percent from yesterday.

...Wells Fargo expects charges related to the acquisition of about $10 billion, and the company said it will issue as much as $20 billion of new securities, mostly common stock. Wells Fargo said it will acquire all of Wachovia's businesses, preferred equity and banking deposits."

As an aside, with all the share issuance in the financials and the majority of the short covering behind us, I think the group is becoming very vulnerable.

Waiting For Capitulation

Good Morning. We wake up to find the S&P Futures 13 points above fair value. It seems that the market keeps going to the verge of capitulation and then saves itself. Once again, this morning hope is alive and well. In life, hope is a good thing as it keeps humans going through hard times, however in the stock market hope stops us from making a good bottom.

A good bottom comes when the when the renters and weak holders of stock purge themselves of stock to relieve the pain. That leaves the strong holders and few potential sellers. A lack of capitulation does not preclude a rally but means a rally will probably be weak.

I am taking it as a given that the bailout bill will pass this time around. If the market hits a new low sometime after the bill is passed (probably not today), I believe we will see capitulation as people will not have something to pin their hopes on.

Ford Selling Stock

Car maker, Ford (symbol:F) is coming to the market with a stock sale of 500 million dollars. They will use the proceeds to buy back debt. This is a smart move by Ford as it allows them to reduce leverage and they could buy back debt for very low prices. However, this shows a continuing trend of corporations issuing stock, which will serve to dampen rallies. While 500 million will have a marginal effect on the market it is the trend that interests me. From the Wall Street Journal :
"Ford Motor Co. said Thursday it will sell up to $500 million worth of stock to buy back debt owed by its credit arm, building on a strategy that is designed to help shore up its bottom line.

In August, the struggling car maker said it would sell up to $500 million worth of shares and use the proceeds to retire debt. Spokesman Bill Collins said Ford was "well on its way" to selling the original amount. The new filing would allow Ford to sell another $500 million worth of stock."

Mr. Sunshine

  • I have been all doom and gloom today so I will point out that we are finally seeing some put buying on the ISE. This is a far cry from Monday when people were buying calls, at these same levels. This is an incremental positive.
  • Fear and panic are necessary at good Bear Market bottoms.
  • The news is always the best at the top and the worst at the bottom.
  • There were a bunch of downgrades today in technology stocks. Thanks for nothing.
  • Does this mean I am bullish? No, but I am starting to warm up to it.
  • What would I want to see to get long? I want to get rid of all the people who bought or are hanging on because of the bailout package. True capitulation.

Reveal Yourselves Plunge Protection Team

Representative and former presidential candidate Ron Paul blasts the bailout and demands that the President's Working Group (aka Plunge Protection Team) reveal what they have been up to. From CSPAN Junkie:

Scared Stiff

  • I really hope I am bottom ticking the market by saying this but I am scared. I don't know what scares me more, the mess we are in or the solution the government is proposing.
  • Why did I sell Annaly after saying I liked the stock? When I bought it on Monday I was expecting to be able to sell it when the stock market bounced. At the same time it was a stock I could live with if we didn't bounce. I believe GE cut short that bounce. When I realized that I could still get out with a small gain I did.
  • If I had to own a stock that would be the one, but I don't see a gun to my head.
  • After the bailout package, what stops the market from going down the next time?
  • Will cash be worth trash when all is said and done? Will everyone be a Turkish millionaire?
  • Wouldn't that reward all the irresponsible people that borrowed heavily to buy assets while punishing prudent savers?


  • Fiscal irresponsibility is what got us into this mess. Is adding over 100 billion in tax cuts to a 700 billion dollar bill going to get us out of this mess?
  • It looks like GE did not do as well as Goldman after the Buffett aided issuance. Generally, these type of gimicks tend to lose effectiveness each time they are used.
  • I believe this gimmick has run its course.
  • Still too much call buying for my liking. Shouldn't people be more scared given the news?
  • Anecdotally, I spoke to a lot of people the last few days and most believe we are close to a bottom and that stocks can't go down that much more. Not bullish.
  • As a matter of discipline, I sold half my NLY, which I bought at lower levels. Would be a buyer in that area again.

Annaly Capital Management

I have recently been purchasing Annaly Capital Management (symbol:NLY) as it has approached its book value at a little over $13. Annaly holds a leveraged portfolio of Fannie Mae and Freddie Mac debt. As of the last reporting period they were leveraged 7:1. Fannie Mae and Freddie Mac debt are backed by the US government. Annaly makes money off the difference in their funding costs and the yield of these securities or spreads as they are known. Spreads are historically wide, allowing Annaly to pay an 18% dividend this coming year according to JPMorgan's analyst estimate.

Annaly is holding shorter term securities so even if spreads widen between government and agency debt the damage should be minimal. If spreads widen enough to significantly hurt Annaly then there is nothing in this World that will be safe to hold other than gold, guns and butter.

My one fear was that the recently wide LIBOR spreads would have an effect on the funding costs of this spread trade. However, this morning I spoke to investor relations at Annaly and they told me that it has not effected them. Because Fannie and Freddie debt is acceptable as collateral at the Fed window banks are more than happy to lend at generous terms. In addition, much of their financing is longer term and locked in.

Teacher's Pet

It seems like everyone's gaga over JPMorgan Chase (symbol:JPM). They have the touch of gold and can do no wrong. Somehow the financial crisis side stepped them, despite them having the largest derivatives book in the World.

For sure they deserve kudos for not getting too deep in subprime lending and not having their own SIV. However, I can't help but question conventional wisdom. In this morning's Wall Street Journal it seems they will get hit from funding an SIV :

"In a sign of the repercussions of last month's demise of securities firm Lehman Brothers Holdings Inc., Sigma faced imminent liquidation Wednesday after a drop in the value of its investments, which included Lehman debt, forced it to default on its borrowing agreements.

The default will likely leave investors in some $6 billion of Sigma's own debt holding paper worth as little as 15 cents on the dollar, and allows banks that lent to Sigma to sell some $25 billion in collateral, consisting largely of bank-issued bonds.

If the banks sell, they could worsen the pain in credit markets, which have suffered in recent weeks on concerns that banks and funds will be unable to honor their obligations.

...On Monday, one of Sigma's lenders, J.P. Morgan Chase & Co., terminated its repo agreements, followed by HSBC Holdings PLC and Royal Bank of Scotland Group PLC, people familiar with the matter say. "

Supply and Demand

The easy trade is now over. Buying the market with the VIX at 48 is usually good for a pop, which we got. Normally, I would expect more but the news of the big GE issuance makes it hard for me to stay bullish.

GE's 12 billion dollar public offering is the reason I am not comfortable owning stocks. In the last two weeks GE, Goldman Sachs, JPMorgan Chase and Capitol One raised a combined 29 billion dollars. That is a tremendous amount of supply. If the best institutions in the country want to raise money, what do the lesser financial institutions want to do? I believe any rally will be capped by equity issuance.

I was stunned that investors responded positively to GE's issuance as the stock pared its losses on the announcement of the Buffett hard money loan and the 12 billion dollar offering. GE spent the better part of the last 3 years buying back shares in the mid 30's that they will now sell back in the low 20's. If that's the good news, then what's the bad news? Why are these companies that are paying double digit rates for capital still paying a dividend? That's the equivalent of taking out a subprime loan in order to go on vacation. Isn't that what got us into this mess?