Weekly Strategy

"No one makes money in a bear market, not even the bears"
-Old stock market saying by unknown
The market just had its largest one week advance since 1974 and there were only three and a half trading days in the week. The sharpest rallies occur in the context of a Bear Market and the rally we just had certainly fits the mold. Bear market rallies can exceed 30% in size and can last as long as three months. Few Bears can survive such an assault. No one who has been involved in markets the past few months needs an explanation of what can happen to Bulls in Bear Markets.

There are two occasions in a Bear Market when one can be profitable without taking unacceptable risk. Buying when the market is deeply oversold and pessimism is extreme and shorting when the market is overbought and investors are optimistic. The consequences of being wrong anywhere in between the extremes can lead to unacceptable losses. The key is to be patient and wait for the extremes even if it means staying on the sidelines for months at a time.

At present, the odds favor a continuation of the current rally as the rally is only a week old. However, the market is no longer deeply oversold and sentiment has improved somewhat so the protection that is required to take an aggressive stance is no longer in place. In addition, there are some conflicting forces at the current moment. Seasonality is positive through Tuesday, while the market is also short term overbought arguing for a pullback.

In the current context, it is best to stay out of the way for all except the most risk seeking individuals. For my part, I have very small exposure (mostly debt related) but for the most part am squarely on the sidelines.

Irrational Treasury Exuberance

  • The action that continues to catch my eye is in the Treasuries. The ten year bond is now yielding 2.937%. They call it a flight to safety. Seems more like running into a burning building to me.
  • There is a tug of war going on between oil and equities on one side and Treasuries on the other. It is highly unusual for equities to bottom and bond yields to continue to sink.
  • Are the same people who were long CDO's, subprime debt and overpriced stocks the ones who are driving up Treasury prices?
  • Have a great weekend.

Black Friday Observations

  • Chesapeake Energy may sell as much as 1.7 billion dollars in new shares, as they are too leveraged. There are many companies in their position. If enough companies come forward to sell new shares this will put an end to this rally.
  • Markets will close early today and after the first hour, trading will probably slow to a crawl.
  • Bear market rallies typically last at least three to six weeks. This one is less than a week old.
  • The market has seasonality on its side until Wednesday, when it becomes more neutral.
  • What a difference a week makes. The crowd went from scared of losing everything to scared of missing a rally.
  • The government can make money cheap but it can't force people to borrow and lend.
  • Is more debt the solution to our problem?

Fiscally Conservative

Good Morning. While I don't like to affiliate myself with a political party, I would label myself fiscally conservative. I believe that fiscal irresponsibility on the part of our government and our citizens are the reason we are in such dire straits. The idea of a liberal president coming in should make me shudder. However, on two occasions Barack Obama has pleasantly surprised me.

During the presidential race both John McCain and Hillary Clinton supported the idea of a gas tax holiday. While lower gas prices would probably win popular support, it was the opposite of what needed to be done. Cheaper oil would only allow us to continue our bad habits of overusing oil, instead of getting to the heart of the problem. We would just push the problem a little further down the road with worse consequences. Barack Obama was willing to oppose a gas tax holiday even though it was not popular.

On Wednesday, Barack Obama appointed Paul Volcker as his chief economic advisor. Paul Volcker was one of the people who warned about our current problems before most knew there was a problem. Paul Volcker is fiercely independent and is not a yes man. If Barack Obama wants to do things that are fiscally irresponsible Paul Volcker will not give him cover. There is no easy way out of our current situation. Regardless, we are in for a few tough years before things get better. However, knowing that the president has advisors that are willing to make hard, unpopular decisions is comforting. I am withholding judgement on Barack Obama for now.

What A Difference A Week Makes

  • This week its the shorts turn on the receiving end of a one way market. Those double short ETFs are a two way street. The SKF (double short financials) got halved from Friday.
  • Oil has joined equities on the upside. Bonds yields are still hitting new lows though. One would expect that to change if this rally is to continue.
  • The Treasury will begin buying GSE debt next week. That might be a catalyst for a sell off in treasuries as they will need to borrow to support that buying.
  • Do you think we need to send a thank you card to the Plunge Protection Team for this holiday gift?
  • Have a Happy Thanksgiving. Forget about the markets and concentrate on the important stuff.

Top Ticker

  • It looks like my previous post helped mark the top for the long bond. It has now given up most of its gains for the day. It seems like someone decided to do an asset allocation out of bonds and into stocks, judging by the action.
  • BCE is a Canadian stock and as a result Canadian stocks are getting beaten up today. Canada has some solid companies and in my opinion is a much healthier country than the US. I will be searching for bargains over there in the next couple of weeks.
  • If someone wanted us to have a Happy Thanksgiving, it would not take a lot of buying on a thin day like today.
  • The higher the market goes, the greater the pressure there is for managers to get in.
  • Does anyone believe we could rally?

Holy Ten Year Bond

The ten year bond is about to trade with a two handle. That is something I never thought I would see. Yesterday, we decided to take the path of the Japanese, which is to buy debt. Instead of debt destruction we want to solve the problem with more debt. This is known as qualitative easing and led to a long period of deflation in Japan. I suspect the parallel is the reason the ten year note is about to trade under 3%. However, the Japanese have always run a surplus and were not dependent on foreigners to finance the qualitative easing. I don't believe things will play out here as they have played out there. I want to short the long bond but am uncertain of the timing. I will look into when the next offering of longer term bonds is scheduled.

BCE Deal Broke

The BCE deal broke. It was a 42 billion dollar cash takeover. This is a surprise and a negative for the equity markets.

Turkey Day

Good Morning. It will be a slow day as people head out early to start the holiday. That will mean illiquid trading. I will be manning the post on the outside chance there is an opportunity to profit from the illiquidity.
  • 30 year conforming mortgages are now available for close to 5%. Yesterday's actions by the government were the first to have positive real world ramifications.
  • Cisco is shutting down for five days in order to conserve cash. I don't remember that happening in the last recession. Times are tough.
  • Didn't Japan throw good money at bad banks and end up with deflation anyway? It is important to remember that the Japanese did so with their own money. They did not run a deficit like we do.
  • Oil is close to its lows while bonds are close to their highs. I would expect that to change if this rally is going to continue.

Must See TV

Follow this link to see an excellent interview with Jeremy Grantham. I share his views that the markets are undervalued and are a good long term investment. However, they are likely to go lower next year before recovering.

The Blame Game

  • The fact that we bent but did not break today is a victory for the bulls.
  • I am playing much tighter. Other than selling some calls on my NLY position yesterday, I have not done a thing this week.
  • I want to short the long bond via TBT. I just dont see how long rates can stay so low with the amount of deficit spending that will be happening. My issue with the trade is that it seems too easy.
  • When people make money its because they are smart. When they lose money its because the system is corrupt.
  • Every group of people (Wall Street, corporate CEO's, politicians and the general public) has to bear part of the blame for the current destruction. Without all groups participation, the formation of massive bubbles would not have been possible.
  • Have a good night.

Shameful Bailout

  • The Citigroup bailout yesterday was shameful. The taxpayers get all the downside of 300 billion dollars in garbage in return for some stock options that are close to worthless. Socialism at its worst.
  • The government announcements are aimed at turning around psychology in the country before the holidays. Do they have another bunny in their hat to ensure a happy Thanksgiving?
  • Today's correction should come as no surprise after a 17% pop in the S&P. The year end rally is in tact as long as we hold within a few percent of these levels.
  • Is the day of reckoning for all these bailouts close or years away?
  • The biggest positive is that few believe this rally could last.

Early Observations

  • It seems that the government is taking a shock and awe strategy to turn this malaise around.
  • Despite the pullback in the Nasdaq, breadth is positive.
  • Google and BIDU are up big. These two stocks led the market down.
  • The higher we go, the more pressure there is on money managers who are measured versus a benchmark to participate in this rally. Therein lies the irony of Wall Street. Buy high, sell low.
  • The biggest mystery to me is why treasuries are making new highs on the same day the government announces they are going to throw more money at the problem. This means yet more borrowing. It defies logic.

Things That Make You Say Hmmmm

Annaly Capital Management was up by over 13% yesterday. It seemed a little odd as the stock market was up by a lot less. Is it a coincidence that today we find out that the Treasury is going to be purchasing GSE debt? The same debt that Annaly holds. I am not complaining as I am a shareholder.

On a side note, purchasing GSE debt is a no brainer for the Treasury. They are already guaranteeing the debt. So why not recieve the higher yield if they are responsible for the losses anyway?


Good Morning. After one of the quickest 15% runs I have ever seen, it would not be surprising to see a pullback or consolidation. Looking at the market when it consolidates should give clues as to the sustainability of the rally.
  • Share buybacks are down 90% from a year ago. At the peak share buybacks were over 500 billion a year. (TrimTabs)
  • A major difference between now and 2003 was that companies were buying back stock more aggressively at the 2003 lows. In addition, we had a developing real estate and credit bubble to buoy the economy.
  • The valuations today are substantially better than they were at the 2003 lows.
  • Investors have withdrawn 240 billion dollars from mutual funds this year. (TrimTabs)
  • Do I think we have seen the ultimate bottom? No, but I make that statement with a very low level of confidence.

Geithner Reality

Yesterday, I opined that the market rallied because it was sold out, not because of Timothy Geithner. Andrew Ross Sorkin from the New York Times has an article questioning how great a choice Timothy Geithner is for Treasury Secretary. From the New York Times:

“We have only two things to say about Tim Geithner, who we do not know: A.I.G. and Lehman Brothers,” said Christopher Whalen of Institutional Risk Analytics. “Throw in the Bear Stearns/Maiden Lane fiasco for good measure,” he said.

“All of these ‘rescues’ are a disaster for the taxpayer, for the financial markets and also for the Federal Reserve System as an organization. Geithner, in our view, deserves retirement, not promotion.”

... Behind the scenes, Mr. Geithner was the point person for weeks of sleep-deprived Bailout Weekends. It was Mr. Geithner, not Mr. Paulson, for example, who put together the original rescue plan for the American International Group.

And, of course, Mr. Geithner also oversaw and regulated an entire industry whose decline has delivered a further blow to an already weakened American economy. Under his watch, some of the biggest institutions that were the responsibility of the New York Fed — Bear Stearns, Lehman Brothers, Merrill Lynch and most recently, Citigroup — faltered.

Market Cuts Both Ways

It seems like the market is now going up in the same manner it went down. A straight line. S&P 850 should act as resistance but it could be that the market wants to squeeze the shorts in this low volume holiday shortened week. Isn't it amazing how everyone likes to buy the market higher and sell lower? Have a good night.

Worst Case Scenario

I always like to think about what can go wrong. As long as the government is willing to bailout companies like Citigroup it is hard to see how we can have a Great Depression type meltdown. In this type of environment the only way we could have a meltdown of that scale is if the US government starts to have borrowing troubles. Right now the dollar is strong and borrowing is easy. However, with every bailout the borrowing needs of the US government become greater. There is a limit to how much the US government can borrow. The only question is will we get there?

In all likelihood this will not happen but it is a minor possibility worth considering.

Nothing New

  • I would say the Obama speech had nothing new and earth shattering. However, psychology and perception are what matter right now.
  • I would argue that Timothy Geithner's appointment on Friday was not the real reason for the rally. He was involved in every ill fated bail out to this point as head of the NY Fed. The market was just ready to rally and his appointment was the excuse. Either that or the powers that be got word of the Citigroup bailout ahead of time.
  • There seems to be a little too much call buying today, although this is the day after expiration so we might not be getting a clean read.
  • Will we get a pullback? Or will we go up in the same manner we went down?
  • Markets that go in a straight line don't fit my trading style.

Obama Drama

  • I sold January 12.50 covered calls on my NLY position. Including next month's dividend the stock would need to go close to $9 before I would start to see a loss in the position. Now that I have some breathing room on that position I am exploring adding to my longs.
  • The area I am looking to add in is e-commerce.
  • The leaders in search and content have changed over the years. Remember Lycos, Excite, AOL and Yahoo.
  • The leaders in e-commerce have stayed remarkably steady. Amazon and eBay are still the leaders in shopping. In travel Expedia, Travelocity, Priceline and Orbitz lead. That is remarkably similar to what one would have seen at the beginning of the decade.
  • Expedia trades at 4 times its peak earnings power and less than six times next years projections.
  • We are seeing call buying today. That is not necessarily a negative. Often at turning points there is heavy call buying. It shows the change of mood. That said, I would rather wait for it to subside.

Rising From The Dead

Good Morning. We wake to find the futures almost 10% higher than where they were with just one hour left in the trading day Friday. The most vicious rallies occur in Bear Markets, when they are least expected. On Friday, someone told me there was no chance the market would close the day up. Here we are with one of the quickest 10% moves I have ever seen. Will this fizzle out like past rallies or is this the big year end rally we have been waiting for?
  • There are no large planned capital raises, like Wells Fargo a few weeks back.
  • It does not seem like the government is going to let a big bank go under and there is not that far for banks to fall if they are not going to fail.
  • We are oversold and had capitulation, although that could be said a week ago as well.
  • It was not easy to buy in to the market Friday and the futures are making it hard to buy in again today. That is a positive as once everyone is on board for a rally, the rally is over.
  • US stocks are still 20% undervalued.
  • The economy is in the toilet, but everyone already knows that. Obama brings hope that it could change and no one can disprove that.

Weekly Strategy

As I predicted in last week's strategy the Inbev-Budweiser deal closed. However, that was about the only thing I got right. Except for a sharp rally at the end of the day Tuesday, the deal closing did not have much of an effect on the market. That rally was caused by a six billion dollar buy program. In normal times, a six billion dollar buy program would be good enough to fuel the market for a week, but times are anything but normal.

I laid down a large wager on the market because of the closing and crapped out. Given the same information again, I would make the same bet. This is a game of probabilities and I believe I made the higher probability trade. For sure, there were mistakes made. I started becoming more aggressive on the market a week before the deal closing, rather than patient as I had been up until that point. There was no need to anticipate the deal closing so far in advance as people were not looking to it as a catalyst. In doing so, I ignored some warning signs about how weak the market really was.

After taking a decent sized hit I am taking a step back, as I don't want to be playing on tilt. Trying to make it back in one shot is the natural instinct after a loss and is a disasterous idea. While I see the potential for one of the sharpest rallies in history, I will only be involved in a small way. I will have more on the market prospects in my morning piece.

Weekend Warrior

Today's close is very important. If we close strong there will be bottom talk, while if we close weak there will be Black Monday type talk. Unfortunately, this is the way the game works. People want to sell lower and buy higher. Pure emotion is driving this market. For my part, I had enough punishment earlier in the week so I am sitting this one out. I picked up some Annaly Capital Management(symbol:NLY). It is a mortgage REIT that holds Fannie Mae and Freddie Mac debt. It is currently trading 15% below book value. Even in a depression buying debt with an implied government guarantee at a discount seems like a hard way to lose money. Have a great weekend.

Anxiety Attack

In the past week I realized why they call it a depression. It seems that the World is crumbling, everyone is on edge and people just want to give up. However, taking a step back and looking at the bigger picture, life will go on. Babies will be born, children will play, teenagers will fall in love and the cycle will begin again. These will be tough times and it will take time to work through this but it will pass.

Last night, I started looking at some of the high flier stocks like Apple and Google. Excluding cash these stocks now trade at ten times earnings. The Microsofts, Ciscos and Intels of the World trade at single digit price to earnings. While they can certainly go lower it is hard for me to see how truly long term holders of these stocks get hurt.

The sad time should have been during the late nineties when people were throwing their life savings at stocks trading at forty times earnings or worse. Or people mortgaging their life in order to buy a property where their only chance of making money was a greater fool buying from them. There are bargains out there and bargains developing that will plant the seeds for real wealth. Not the type that requires a bubble to realize. Don't lose hope.

I Have Seen Everything

It looks like the 2003 low was good for a feeble rally. We are now revisiting that level. If we break it there will be no more support levels to speak of. Maybe that will bring capitulation. Nothing seems to matter anymore as we make new records every day. This too shall pass. Have a good night.

Dying to Buy

I promised myself to take the day off but I am literally dying to buy right here.

Level Alert

We are now probing the 2003 Bear Market lows on the S&P 500. One would expect to see some buying at these levels.

Cut Off

I stopped myself out of my trading longs yesterday. No matter how strong the case for a trading rally, survival is the ultimate goal. While I have been doing well trading for the past year by buying when fear and panic were pervasive, this seems to no longer be working. Going forward, I will be more focused on the longer term and less focused on the wiggles. This means buying companies with valuations I could live with, even if we are in a depression.

Broken Record

Good Morning. I have never seen such a level of negativity and fear persist for so long. The case for a strong counter trend rally seems to grow every day and yet the damage grows. I believe the reasons are twofold. There is a vicious cycle where liquidations keep leading to more liquidations. As long as these liquidations persist it will be hard for the market to make any headway.

The second reason is that people are shooting against this market at a furious pace. There is heavy put buying and the double short ETFs have made it disturbingly easy to bet against the market. The QID, is the two times leveraged short ETF for the Nasdaq 100. The dollar volume traded yesterday was $4.384 billion (based on closing price). The QLD is the two times leveraged long ETF for the Nasdaq 100. The dollar volume was only $842 million (based on closing price). Clearly the action is in the two times leveraged short ETF. I can do this exercise for most of the two times leveraged ETFs in other sectors and find the same result.

It is impossible to know when the liquidations will stop. However, when they do I believe the tremendous short base will act as rocket fuel.

Open Season On Financials

When Hank Paulson went to Congress and said he was done using TARP money and that the Obama administration will have the rest hedge funds took that as open season on financial stocks. Possible solutions are Obama appointing a Treasury Secretary with credibility, a short selling ban or an uptick rule. Either tha or financials reaching the some sort of support through this free fall.

Holy ISE

I am going to be out of the office for the next few hours but wanted to point out the continued put buying at the ISE. I have never seen such sustained put buying in a market that was not crashing. I don't know if the market can withstand it but if we do somehow manage to start climbing higher I suspect it will greatly help the advance.

Artificial Nothing

Many are saying that the S&P rebalancing artificially took the market higher yesterday. It is logical that we are pulling back a bit as some were caught by surprise by the flood of buy orders (although I don't understand why). However, the buying at the close was the realest type of buying. Those shares will never get sold. They were added to the S&P. I would argue that the selling yesterday was artificial as much of it was shorting and put buying by hedge funds. By definition those transactions must be reversed at some point.

The End Of The Road

Good Morning. While the market was up yesterday, I was expecting a lot more from the closing of the Budweiser deal. A 6 billion dollar rebalancing at the close dragged the market up. It seems that most of the fire power was used to clean up the heavy liquidation that took place earlier in the day.

Other than the mandatory buying by the indexers it seems that little of the Budweiser money has been put to work. How do I know that? Did you see what 6 billion dollars did at the close? If the money was put to work we would know it. At a minimum this extra cash will be used to meet redemptions so that other stocks do not have to get sold. At best it will be put to work in the days and weeks ahead to help fuel a year end rally.

All is not lost though. Much of the selling yesterday was put buying and shorting. If the market can manage some upside those sellers will turn buyers. The market is now maximum oversold on a short term basis. This is getting interesting.

Follow The Leader

The cause for the heavy selling yesterday was fear over commercial mortgage bonds. While the herd has finally caught on to the problem the man who saw it coming, John Paulson, is actually buying mortgage backed securities. John Paulson's hedge fund was up over 600% last year from making bets against mortgage backed securities and shorting financial stocks. He has covered the majority of his financial shorts and is now buying mortgage backed securities. There will be more defaults but what the herd does not understand is that at some price the defaults are priced in. From Bloomberg:

Money manager John Paulson has started buying beaten-up mortgage bonds as hedge funds stumbled for a fifth straight month.

Paulson, 52, is purchasing debt backed by home loans after generating sixfold returns last year with help from bets against subprime mortgages, investors in his funds said. Paulson's Advantage Plus fund rose 29 percent this year through October, while the Eurekahedge Hedge Fund Index, which tracks more than 2,000 funds that invest globally, dropped about 12 percent.

Stared Into The Abyss

I stared into the abyss today. While I almost lost my lunch I came out on the other side. I would hate to think what today would have looked like if the Budweiser deal did not close. I was starting to think I was crazy because I was the only one looking at the deal as a catalyst. I expected that 6 billion to buy would have given us a little more upside, but I guess liquidations are still running heavy. I sold a little into this after hours ramp to show some discipline.

There was very heavy put buying today. If the late day turn around can improve sentiment and the market can start going up all the puts that were bought today will serve as fuel for the upside. In addition, I think some Bears might be caught with their hands in the honey jar. Good night.

CNBC Confirmed BUD Rebalancing

CNBC's Bob Pisani is confirming that there will be a big buy program at the close due to the closing of the Budweiser deal. Lets hope that it is not already priced into the market.


I am speechless as I watch the market melt away with my money. The selling is insatiable.

So Far, So Good

We are seeing heavy put buying on the ISE. Despite that the market is hanging in. That is something we have not seen in a long time. The put buying has always come on down days. It seems no one trusts this market and it is up regardless.

Budweiser Deal Closed

The Budweiser deal is now closed. I have gotten longer in the pre market. I am now longer than I have been my entire career.

Mea Culpa

Good Morning. For the time being, I have been very wrong in the past week and a half calling for a year end rally. My theory is based on the dire sentiment and the closing of the Budweiser deal. I failed to anticipate the extent that individual investors would liquidate mutual fund holdings. We seem to be in a vicious cycle where lower prices lead to yet more liquidations.

Few are looking at the Budweiser deal as a market catalyst so the effect is unlikely to be felt until the closing. While I knew this all along, I believed that sentiment was bleak enough to contain the downside. This has not been the case.

While I have been wrong so far, I am sticking to my guns and staying long. The deal will likely close this week. This might be able to break the vicious cycle. In addition, at the end of the day today the market will be short term oversold and is still long term oversold.

Groundhog Day

Every day above ground is a good one. That's about the only way to put a good face on what looks to be another brutal morning. Anothe piece of good news is that the Budweiser deal looks like it is getting closer to closing. From Bloomberg:

InBev NV, the world's largest brewer, will start borrowing $54.8 billion from lenders this week to pay for its purchase of Anheuser-Busch Cos., according to two bankers involved in the deal.

Banks will lend the money after Inbev got approval from antitrust regulators in the U.S. and China, where the companies have units. The underwriters are selling the debt to a wider group of lenders, said the bankers, who declined to be identified before the transaction is completed.

The Bright Side

Apologies for the lack of posts but there was not much to say today. Maybe we have been down so long that its starting to look like up, but I am satisfied with today's outcome. The market looked like it was going to fall apart this morning but managed to keep itself together. In addition, the bottom callers seemed to disappear today. Unfortunately, the sellers that show up at 3:30 like clock work did not (I suspect this is mutual fund selling).

I am in a waiting game until we get a closing date for the Budweiser deal. If the market can keep itself together on its own I believe that the Budweiser deal closing will take it higher. Have a good night.

More Mutual Fund Outflows

While I expected a pullback after we rallied into the election, the extent of last week's weakness took me by surprise. This goes a long way in explaining it, from CNN:

Investors pulled $31.8 billion out of equity-based mutual funds during the week ended Nov. 12, compared with an inflow of $2.2 billion the prior week, according to TrimTabs Investment Research.

Before last week, equity-based mutual funds had not seen net inflows since the week ended July 23.

This week, investors took $21.3 billion out of funds that invest primarily in United States-based stocks, after putting in a total of $2.3 billion last week.

I guess hedge funds and the November 15 deadline were not the main reason for stocks decline last week. It seems that individual investors are the culprit. If there is going to be more downside individual investors are the group with stocks to sell. Hedge funds are at record low exposure.


Good Morning. As I await my daily beat down I have been thinking about how much perception has changed. Two years ago "investors" were willing to buy subprime mortgages for a thin spread over treasuries. Even if the subprime crisis would not have happened they stood to make very little money. Today investors clamor for the safety of cash equivalents yielding less than 1% while shunning high quality bonds yielding 10%.

The attitude of the media has changed as well. For as long as I can remember insider buying was cited as a positive for the stock market. Even critics argued that it was neutral. This morning I read a Bloomberg article that claimed insider buying was now a negative. It seems to me that perception is at a polar opposite of where it was before this Bear Market.
  • Too many people were calling Thursday a bottom. Normally, that would have been enough to keep me out of the market. However, the potential closing of the Budweiser deal made me look past the markets flaws. Thus far the change of strategy has been a disaster.
  • I plan on going to a maximum long stance as we approach the closing of the Budweiser deal. I would be surprised if we rallied less than 20% in the ensuing weeks.
  • Barack Obama said that for now deficits don't matter. At the same time "investors" flock to the safety of government bonds.
  • $50 is an important area for oil prices. It is where the largest correction during oil's bull run was halted. This area should provide a bounce at a minimum.

Hedge Funds Jumping Ship

A large part of the decline in the market the past few months has been from hedge funds jumping ship. A Bloomberg article shows the extent to which managers reduced their holdings. What is even more astounding is that these numbers don't include October and November. From Bloomberg:
Hedge-fund manager David Tepper entered the third quarter with $3.1 billion of U.S. stocks and exited with $648 million ...

Atticus Capital LP, based in New York, disclosed that its holdings declined to $510 million from $8.1 billion ...

At Tudor Investment Corp., the Greenwich, Connecticut, hedge-fund group founded by Paul Tudor Jones, 13F holdings fell to $453 million from $5.7...

SAC Capital Advisors LLC of Stamford, Connecticut, said its holdings were $7.7 billion as of Sept. 30, down from $14.4 billion at June 30. ...

Louis Bacon's Moore Capital Management LLC said the value of its 13F securities fell 69 percent to $1.4 billion, while at Jana Partners LLC, a firm overseen by Barry Rosenstein that makes activist investments, they fell to $2.1 billion from $5.9 billion. Both firms are based in New York.

Jeffrey Vinik, who once ran the Fidelity Magellan Fund, disclosed that his Boston-based Vinik Asset Management LP held $1.8 billion at Sept. 30, down from $11.8 billion at June 30.

Weekly Strategy

"All the mechanics are in place, we are heading for funding next week," a spokesman for InBev's arranging banks said.
... CNBC, the business news channel, reported that the deal would close next week."
-from Reuters article on Inbev, Budweiser deal closing
It is looking increasingly likely that the Inbev takeover of Budweiser will close this week. The 52 billion dollar cash takeover is the largest cash takeover in US history. 52 billion dollars in cash will be placed in the accounts of holders of Budweiser stock (possibly more because one billion dollars of Budweiser shares are sold short).

Some of the cash will automatically be reinvested in other US companies by indexers. In 2004, the amount of the S&P owned by indexers was over 11%. Since then, with the proliferation of ETFs and indexing the amount has probably grown. I estimate there will be at least 6 billion dollars to buy of US stocks by index funds alone the day of the closing. There is probably multiples of that owned by funds who use the S&P as a benchmark.

TrimTabs, a company that tracks stock market liquidity, estimates that about half of a deals value comes into the market the week of the closing. That would amount to a 26 billion dollar inflow. Twenty six billion dollars into a depressed market would be a huge shot in the arm.

Many people have sold stock in the past few months because the market was going down and it was just too painful. By the same token a rising market will start to suck people back in. It seems counter intuitive but I have seen it happen time and time again.

There is other evidence pointing to a bottom.
  • The market has seen panic selling and gloom, which are typically seen close to market bottoms.
  • Hedge funds are net long by only 20%, the lowest reading in history. Hedge fund exposure has been a good contrary indicator.
  • We had a positive divergence last week with a new low for the S&P 500, but fewer individual stocks making new lows. This is also typically seen at market bottoms.
  • The week before Thanksgiving has been up in twelve of the past fourteen years.
  • The market will be maximum short term oversold by Tuesday and is still long term oversold.
  • A seemingly positive G-20 meeting with more stimulus pledged by many of the countries.
In the very short term I could see one more move down as there are some aspects that are troubling. We had a nasty reversal Friday despite little put buying and a few more people are calling a bottom than I am comfortable with. However, if the Budweiser deal closes this week I expect a tremendous up week.

Must Read Article

This article by Michael Lewis from Portfolio.com is a must read.

Back In

The Budweiser deal is closing next week. I am back in.

Some Negative Datapoints

The bears do have some ammo this morning as well:
  • In the week ended Wednesday the Spyder ETF (SPY) actually saw inflows of 2.57 billion dollars. One would have thought that given the horrible week speculators would have been dumping stocks. Most other data points were not showing this type of optimism but just thought I would put it out there.
  • Nokia warned again. This should not be surprising.
  • LIBOR was actually up slightly ending a greater than four week streak of down days. This is npt alarming but worth watching.
  • It would be better if less people were declaring yesterday the bottom.

Will We Hold

Good Morning. Overseas markets and the futures are muted this morning as investors are cautious about chasing this rally. Having been burned too many times investors are more skeptical, which is probably a good thing. While this rally appears no more impressive than rallies past it does have some things going for it that other rallies did not.
  • The 52 billion dollar Budweiser deal closing is looking like it is very close. Yesterday, Budweiser was up on unusually high volume. A 52 billion dollar injection is something other rallies did not have.
  • There are no large secondary offerings scheduled. I believe the last rally was stopped dead in its tracks by the Wells Fargo offering. That led to a downside pile on by reactive investors.
  • Expectations are more in line with the grim reality, which means bad news will have a harder time spooking people.
  • I committed a cardinal sin of investing this week by over extending myself. While the loss is manageable, the painful part is that things are pretty much playing out as I thought they would. I just gave myself too little room for error. I became a victim of my own success and forgot the reason that I have been doing well was patience and discipline. I am going back to basics which means playing much tighter.

Was That The Bottom

  • There was panic and put buying which are usually seen at bottoms.
  • We flushed out a lot of renters who had stop losses below S&P 840. A market without many renters is a positive.
  • Things were as gloomy as I have seen them which also happens at bottoms.
  • If the market can hold up until the Budweiser money starts coming into the market I think today might have marked a major low.
  • Am I upset? Would you believe me if I said no?
  • Have a good night.

Cutting And Running

I changed my mind and decided to cut and run. As soon as we bounced the call buying started and it does not even seem to be helping. I want to see genuine panic or US anti trust approval for the Budweiser deal before I go back in. If I miss the rally and sold close to the bottom so be it. Everyone has to be the fool sometimes.

I'm Going Down With The Ship

  • I have decided to fight this one out to the end. If we do get the whoosh down I will be a buyer.
  • The sooner we get the test of S&P 840 out of the way, the better.
  • We had three days in a row with the CBOE Equity Put Call ratio above .9. Going back through the year I could not find an occurrence of four in a row and only one of three in a row. A rally soon followed the occurrence of three in a row. We had an occurrence of 4 out of 5 days around the Bear Stearns low.
  • Cramer confidently declares "Sell The Nazz Rally".
  • I scheduled a doctors appointment for 9:15 so I will not be able to post for a few hours.
  • Good Luck.

The Recession Depression

Good Morning. As the word depression pops up on a regular basis in the media and in conversation we are getting closer to the point where our economic woes are reflected in stock prices. We have come a long way in the past sixteen months. People went from counting their paper gains on real estate and stocks to just wanting to survive.

In the past decade stocks, debt and real estate had gone to heights that were previously thought impossible. Today we find ourselves on the other side of that overshooting to the downside. The 52 week low of the S&P 500 is a mere 10 points away and we are almost certain to test that low today. If we break through it could get ugly. In my experience that ugliness would make an amazing buying opportunity.

Earlier this week I was worried that I did not have enough exposure for a year end rally. I rectified that and this morning I find myself sweating exposure. I did not think we would come down this hard, this fast and I miscalculated dearly. I am not in a position to be able to add as aggressively as I would like if we do get that whoosh down. On the contrary, I am at risk of puking it up. I find myself between a rock and a hard place.

I have been able to navigate the past sixteen months with a great deal of success. I was short for a good part of the decline and more recently I have been successful at catching the Bear Market rallies. I find myself at the most difficult decision point I have had to face in years. I could cut bait now and while the loss will sting I will still be in a good position, only giving back a few weeks of gains. On the other hand I believe deep down that if I tough this out that my current position will show me an excellent profit. Even if it first shows me pain. Stay tuned. My deadline is approaching rapidly.


The persistence of this down move leaves me speechless. There is no reason to own stocks. They act horrible. However, that is exactly what keeps me hanging on. I feel a sleepless night coming on. Have a good night.

What A Way To Make A Living

  • Originally, the reaction to every bailout plan was a massive rally, which ultimately failed. Now the knee jerk reaction is to say it won't work.
  • I truly believe in the expression, "no pain, no gain". Right now the pain trade is to buy. It seems utterly hopeless.
  • The market is now more than 10% undervalued when normalizing P/Es and profit margins. While the market has been as much as 40% undervalued in the past, in the long term the odds are now with the longs.
  • Budweiser is now trading up on the day and the volume is starting to pick up.
  • Why do I have a feeling that the same people that are selling today will end up buying at much higher levels?

Glutton For Punishment

I have added to my QQQQ position as the market takes its daily spanking.

Better Late Than Never

The FDIC and Federal Reserve have put out a joint statement that among other things urges banks to look at their dividend policy. While this is only a suggestion at this point, it is a good first step. Is it possible that these bank CEO's earn tens of million a year and can't understand that it is silly to pay a dividend when their cost of capital is so high?
"In particular, in setting dividend levels, a banking organization should consider its ongoing earnings capacity, the adequacy of its loan loss allowance, and the overall effect that a dividend payout would have on its cost of funding, its capital position, and, consequently, its ability to serve the expected needs of creditworthy borrowers,. Banking organizations should not maintain a level of cash dividends that is inconsistent with the organization’s capital position, that could weaken the organization’s overall financial health, or that could impair its ability to meet the needs of creditworthy borrowers. Supervisors will continue to review the dividend policies of individual banking organizations and will take action when dividend policies are found to be inconsistent with sound capital and lending policies."

Biding Time

Good Morning. The market is set for a quiet open. While a rally now would be nice I will be happy if we could make it to the Budweiser deal closing without the market falling apart. We certainly have the ingredients for a rally with the market down hard and everyone negative but that has not seemed to matter yet.
  • Las Vegas Sands did a secondary offering yesterday and CB Richard Ellis filed for one. It is no longer just the financial corporations issuing stock. The overleveraged corporations have joined them.
  • If we get a rally off of the Budweiser deal closing I believe that secondary offerings will ultimately end the rally. However, that is an issue for later.
  • Why do so many over leveraged companies still pay a dividend? Why are we allowing companies that are accepting tax payer help to pay a dividend?
  • Looking at eBay, Amazon and Google over the past few days makes me think someone is liquidating internet stocks.
  • SAC Capital has been laying off staff. It is possible that some of the turmoil in the past week is related portfolio liquidations. I heard that up to 40% of their staff has been laid off.

That's All Folks

I am calling it a day early as it has been exhausting. I am still constructive for a trade here as there is still too much doom and gloom talk. I will take my remaining trading longs as well as my core longs home with me. Have a good night.


I think this market may have one more rally in it today. That first rally was greeted with put buying. I tried to buy back Google at 308 but was too slow. I am sticking with the remainder of my trading longs.

The Easy Trade Is Over

That 3% rally was the easy trade. Generally when the market gets so gloomy and put buying is heavy we get a relief rally. That was it. I still believe we will go higher but as a matter of discipline I have sold out of half my trading longs.

Sold Google

Sold Google for close to a $14 gain.

Took Some Profits

I sold some of the QQQQ I bought this morning. Still have a lot of trading longs though. Discipline.

Ingredients For A Rally

  • Goldman Sachs is inching back towards the flat line. It has led us down, maybe it can show us the way up.
  • I am officially nervous. I can't remember a really good trade where I wasn't.

More Negativity

  • The put buying has been at extremes today but the market is not offering so much as a bounce thus far. I have found that the market rarely rewards those who pile in at the same time.
  • Buying puts with the market down 13% in the past 4 days and volatility sky high seems like a tough way to make a living.
  • I don't know if I will make money on this trade but I will not look back as I believe the risk reward scenario is in my favor.
  • Am I the only one who believes in this market?
  • To be fair I will mention that Budweiser is down today. Nothing alarming though.

Added Google

Google is down 10% in the past two days. I have bought some for a trade. I believe we will see a turnaround in the market today and I have acted accordingly.

Signs Of A Bottom and More QQQQ

It seems that no one is bullish anymore. Doom and gloom pervade the market and the media. While this does not guarantee a bottom it is the type of sentiment seen at bottoms.
  • The following quote is from a Chinese investor in response to the Chinese government's 500 billion dollar stimulus package, via Bloomberg:
    “There had been many measures before and the market continued to fall.”
    This was certainly not the attitude of Chinese investors at the top when the market was 3 times as high. The whole way down Chinese investors were begging their government to do something. Now that the Chinese government has responded with a 500 billion dollar stimulus package, investors have learned the value of skepticism?
  • Follow this link to a graph from SentimentTrader.com via Minyanville. It shows dollar volume of pink sheet stocks as a percent of Nasdaq dollar volume. The level is lower than those seen in the 2003 low. There is little speculation in the market right now.
  • I have added to my QQQQ yet again as the QQQQ took a plunge at the open

Overseas Blues

Good Morning. Our futures are following overseas markets lower. I started trading more aggressively yesterday, as I believe the Budweiser deal closing will give me an out if I am wrong about the short term direction of the market. The Budweiser shareholder vote is this Friday and the deal can close at any time after that point. My short term longs are based on the extreme negativity we have been seeing in the market recently. I plan to continue to add to longs if the negativity becomes more extreme.
  • I am much more comfortable buying stocks that are in a position to buy back their own stock. This way if the stock price gets out of hand there is a marginal buyer.
  • Starbucks has an excellent brand that helps them sell a $5 drink that costs pennies to make. The stock is probably nearing a value level even though many people are cutting back on luxuries. However, cash flow in the next year will be used to shut down under performing stores and pay down short term debt. At the end Starbucks will be leaner with no debt. However, it will take a year before they will be in a position to buy back stock.
  • If I had a dollar for every Armageddon scenario I am hearing I would still be in bed.
  • Was the time to think about what can go wrong when the market was 70% higher?
  • Debt markets are in far better shape than they were in October.

The Road Home

  • Budweiser is now trading at 66.40. It seems increasingly likely that the deal will close.
  • I am going home with a decent size trading long in the QQQQ, in addition to my core position.
  • As we get closer to the Budweiser deal closing I will become more aggressive on the buy side of the market.
  • The best times to buy are also the hardest times to buy
  • The reason I threw the towel in on eBay was because they used the last of their cash in the US to buy Bill Me Later. Maybe it will turn out to be a brilliant deal in the long term but in the short term they have no cash to buy back stock.
  • I was in Circuit City a few weeks back to buy a computer monitor and nothing was in stock. It all makes sense now.
  • Have a good night.

Added to QQQQ

I have added further to my QQQQ position. The gloom is thick.

Threw In The Towel on eBay

While I believe eBay is grossly undervalued I have thrown in the towel. I took a small loss as luckily I was short puts. None the less it is painful as the market is up from the time I sold the puts and a put sale on nearly any other stock would have netted me a profit.

Trading Market

  • The only way to make money has been to buy extremes in pessimism and sell any hint of optimism. Hence my purchase of the QQQQ.
  • The steady decline in Goldman Sachs is the most worrying element today. For years criticism that Goldman Sachs was a giant hedge fund fell on deaf ears.
  • As a trader I was always amazed at how Goldman Sachs trading consistently showed profits. It just seemed completely unlike my trading experiences that one never has a bad period. Apparently they were picking up nickels in front of steamroller and leveraging it up 30:1.
  • Despite my protestations internet stocks continue to trade like death.

Trading Position In QQQQ

I bought a trading position in QQQQ. We are seeing put buying and pessimism again.

Chinese Stimulus

Good Morning. The Chinese are trying to put the full body massage on the market, with a 500 billion dollar stimulus package. In the meantime, the futures like it.
  • In telling people that I thought we would get a year end rally, I mostly received polite nods. If everyone agreed with me I would be worried.
  • Over the weekend I was considering buying some stock for a trade as sentiment has gotten too gloomy again. Given the higher futures I will not be doing any buying today. Chasing stocks has not been a profitable trade recently.
  • The market will be short term overbought by the end of the day tomorrow.
  • Seeing people trade around Obama's speech on Friday was the height of stupidity. I am thankful that there are people like that trading against me.
  • Barron's bulled some internet stocks this weekend. Monster Worldwide and Interactive Corp.. While I have not looked at those stocks specifically, internet stocks seem to be trading at very reasonable valuations. At 1000 times earnings everyone loves them and at 6 times they hate them.

Weekly Strategy

For the better part of the past sixteen months the market has been on the wrong side of liquidity events. It seems that every time there has been an uptick in the market another financial corporation would issue new stock. This new supply of stock has hurt prices in the stock market, as increased supply hurts prices in any market. There has also been supply from hedge fund and mutual fund liquidations. At the same time the demand side has also been negatively affected. Corporations have slowed down share buybacks and leveraged buyouts are rare.

In the next few weeks there is an increasing probability that we will see a respite from this liquidity nightmare. One of the largest positive liquidity events in history is looking increasingly likely. Inbev is getting set to close its fifty two billion dollar cash buyout of Budweiser. Once this deal closes there will be fifty two billion dollars in need of a new home. With investors already holding record cash balances it is likely that much of that money will find its way into the stock market. In a depressed market fifty two billion dollars can go a long way.

Due to the performance chasing nature of Wall Street a rally started by the Budweiser deal could probably suck more money off the sidelines as investors chase performance. I am confident that if the Budweiser deal closes we will see a large year end rally. While the rally will probably lead to more share issuance and insider selling that is an issue to be dealt with at a later date.

At the present moment I am only moderately long. While I believe a year end rally will occur it can happen off of lower levels as the closing of the Budweiser deal is at least a few weeks away. Few are looking at this event as a catalyst so I am in no rush to get in so far ahead of it. When it becomes all but certain that this deal is closing I will become more aggressive, even if we rally modestly before then. I will be looking to purchase the large cap ETFs such as SPY and QQQQ as Budweiser is a large cap stock.

Clowns To The Left Of Me, Jokers To The Right

I sold the QQQQ I added at the end of the day yesterday. I believe this rally will probably hold through the end of the day but I will not be at a computer for the remainder of the day. The prudent course of action is to flatten out a bit. I am once again only moderately long. I am going to spend much of the weekend figuring out how I want to play a possible year end rally off of the possible closing of the Budweiser deal. Have a great weekend.

Priced In

  • The unemployment numbers were awful and the market is still higher. That is why it rarely pays to bet on an outcome that the consensus is predicting.
  • The opening reading on the ISE is showing heavy put buying again today. The fact that the market is higher in the face of that is positive.
  • CSCO is now back to where it was before its "awful" earnings report. A clue that maybe the market is already pricing in a pretty bad scenario.
  • Someone who knows a lot more than me about arbitrage told me that the market might be pricing in as much as an 85% probability of the Bud deal closing.
  • I will be out of the office for the majority of the day.

Gloomy Jobs Report Expected

Good Morning. I find it hard to understand why there is so much weight on this jobs report. Aside from the government's inflation and employment numbers being questionable, the margin of error makes the number statistically insignificant. I find today's jobs report especially useless as everyone knows the employment situation is horrendous. What new light will this shed? I don't know anyone looking at this as a positive catalyst so maybe we will get a buy the news reaction, as there will be no surprised people to sell when the number comes out.
  • The reason I purchased QQQQ in the late afternoon was not the jobs report. It was the extreme put trading on the CBOE, to levels rarely seen. While those numbers can be distorted by some big trades its hard to make a case that people are overly optimistic.
  • Yesterday, I spoke about the closing of the Budweiser deal as a catalyst for a year end rally. I am waiting for more clarity on the situation before I actually commit money based on this idea. This event is on few people's radar as a market catalyst, so I believe there is little harm in waiting.
  • The Wells Fargo offering is now behind us. I believe the market would need to go a lot higher before we need to worry about more secondary offerings. The capital raising window is now shut.
  • GE is now trying to get money from the government under the TARP program. I suspect the reason is they did a lot of deals that only made sense if they could be funded at ultra low interest rates.

Late Day Observations

  • The CBOE is showing extreme levels of put trading. The ISE is showing put buying but not as extreme. Do you remember how bullish everyone was two days ago?
  • I don't think we will see recent highs in the very near term but think we could definitely tack on a few percent.
  • Is anyone expecting the jobs report to be anything but awful? Will we get a buy the news reaction?
  • Am I as long as the last time we were at these levels? Not even close.
  • Have a good night


This is my last piece of the day on Budweiser, as I don't want to seem obsessed. If the BUD deal breaks the potential downside is at least $50 in this liquidity starved market. The stock currently trades at $64.30. The deal is for $70. Factoring in the time value of money, this is a trade with $5 upside and $15 downside. That means that arbitrageurs are placing a 75% probability on this deal closing.

Arbs have been beaten mercilessly in the past year, to put it lightly. I would not call them an over optimistic bunch at this point. While arbitrageurs are placing a 75% probability of this deal closing, it doesn't seem to me like the market is placing a 75% probability of 52 billion coming into the market any time soon.

Buying QQQQ

I bought some QQQQ

Most Important Story of The Day

The most important story of the day is not Cisco or Wells Fargo. It should not be news to anyone that Wells Fargo is issuing stock or that tech spending is down. The most important story is Budweiser. Both Budweiser and Inbev reported earnings today. Based on their conference calls it appears the merger is on track to close this year and possibly as soon as the end of this month. More importantly, Budweiser's stock is up on a big down day so arbs believe this deal will close. I defer to them as I have no expertise in the area.

Budweiser agreed to be bought for 52 billion dollars in cash. I believe that if the deal closes the majority of this money will find its way into the stock market as investors are already holding record amounts of cash. In a depressed market that type of money can go a long way. In the very short term this probably does not make much of a difference but I believe this is the key to a year end rally. It is the most important stock in the world right now.

Waiting For The Easy Trade

  • We are seeing heavy put trading on the CBOE and the hope from two days ago has all but disappeared. I could see a rally off of these levels but I want to wait for the Bears to try to push things too far before I do some buying.
  • WFC was $35 yesterday morning. It is almost 20% lower as I type. Why anyone is so surprised they are issuing stock is beyond me. This might have been the most telegraphed issuance of all time.
  • While I was only marginally long, an almost 10% drop still does pinch a little. On the plus side I am much better off than the last time we were at these levels.
  • The only reason to buy stocks is if you believe the bad news is already priced in. The economy is miserable and most of my contacts tell me business is as bad as its ever been.
  • The news is always the worst at the bottom and best at the top.

The Road Ahead

  • Good Morning. Wells Fargo lowered the amount they are raising from 20 billion to 10 billion. The company line is that since they received 25 billion from the government they no longer need as much money. Is that the case or did they realize they could not raise 20 billion?
  • The good news is that there are no more large capital raises in the pipeline. I am sure that many companies would like to raise capital but they will probably have to wait until market conditions improve.
  • The 10 billion dollar capital raise is a clear negative in the short term for the market but is not the be all and end all. However, it might have broken the momentum and performance anxiety that was driving the market higher. Many are still under invested. However, there is now less of a catalyst to get them in.
  • I am going into today's session with an open mind and no strong opinions. I will take my cues from the market.
  • I don't believe that we have seen the lows for this Bear Market. That does not mean we can't have a year end rally first.
  • If the BCE and Budweiser deals close that will bring 90 billion dollars into the market. That's nine Wells Fargos. However, at best that is weeks away. At worst the deals break.

Surprise, Surprise

My suspicion that Wells Fargo was marketing a deal today was true. If you believe it was a coincidence that we were down hard today while the marketing was under way I know a guy in Nigeria that wants to give you five million dollars. From Bloomberg:
"Wells Fargo & Co., the biggest bank on the U.S. West Coast, plans a $10 billion offering of common stock after agreeing to buy Wachovia Corp. last month.

The San Francisco-based bank, which disclosed the offering today in a statement, previously announced plans to raise up to $20 billion to fund the purchase. That was before the Treasury said it was buying $25 billion of Wells Fargo's preferred shares as part of the government's plan to rescue the banking industry.

A slide presentation prepared for an investor teleconference said the new transaction ``stands on its own'' without the Treasury's assistance."

Wells Fargo Offering?

During the past year when financial corporations issued stock, the market would mysteriously take it on the chin the day before the deal was announced. I believe the reason is because before a deal announcement there is a marketing period, where bankers market the deal to large clients. Those clients then use the information to do what amounts to insider trading. However, with Christopher Cox at the head of the SEC this is fair game.

The drop today could be because Wells Fargo is marketing their offering. My disdain for politicians knows no party lines. Whatever might be said about Obama, at least he can't make a worse choice for the head of the SEC. Good riddance to Christopher Cox.

Dazed and Confused

  • I sold the QQQQ I bought into the morning dip for a tiny profit. I had buyer's remorse. This is a tough juncture as I struggle between the fact we are up 20% in a straight line and the fact that many remain under invested and can't afford to lag the indices. That brings be back to being somewhat long.
  • The call buying that I mentioned was absent yesterday is present today.
  • Why do I focus so much on the put call ratio? Most sentiment indicators measure what people are saying while this sentiment indicator measures what people are doing. On a minute to minute basis it is quirky but in the longer term it rarely lies. Please note that it is one of many factors I consider.
  • It is looking increasingly likely that the BCE and Budweiser deals will close in the next couple of months. The combined deals are worth over 90 billion dollars. Once those deals are closed there will be 90 billion dollars in search of a home.
  • I believe the Wells Fargo issuance is likely to happen sooner, possibly in the next week. I believe that would put a near term cap on this rally.

Make Up Your Mind

I bought back the shares of QQQQ I sold yesterday into this morning's dip. I still have covered calls against all my positions. I would describe my positioning as moderately long. I am concentrated in the QQQQ because I am worried about equity issuance in S&P names, while Nasdaq 100 companies continue to buy back stock.

Booby Prize

  • While I flattened out somewhat yesterday, I am still net long.
  • Call buying was subdued yesterday even though we had a large up day. A positive.
  • Were it not for the possibility of a Wells Fargo 20 billion dollar offering at any moment, I would probably buy back the stock I sold yesterday on a pullback today.
  • Where do I think this rally could go (short term) if Wells Fargo doesn't spoil the party? Apple has room to $115 before it hits resistance. With a 12% weighting in the QQQQ it is the stock that matters most. The QQQQ has resistance in the $35-$36 area.
  • Regardless of who would have won the election, the US is in for hard times. The good news is that hard times are part of the healing process.
  • The core of our problem is that we consume more than we produce. The huge drop in retail sales is not positive for the economy in the short term but is part of the healing process in the long term.

Equity Mutual Fund Flows and The Uncanny Timing of the Investing Masses

A reader sent in a White paper from Alpha Plus Advisors and fund manager Marvin Bolt titled, "Equity Mutual Fund Flows and The Uncanny Timing of the Investing Masses". It is reproduced here in its entirety for your benefit with the permission of Alpha Plus Advisors:


Tracking net cash flows into and out of the mutual fund industry offers useful insights into the psyche of the investing masses. Not surprisingly, the public has a tendency to be overcome by fear and greed at the most inopportune moments. Consequently, large outflows from equity funds tend to occur near long-term lows in the stock market. The purpose of this paper is to illustrate the relationship between mutual fund flows and market extremes to help investors improve their timing of allocations into and out of the US stock market.


In 1980, fewer than 6% of US households were investors in mutual funds. The industry achieved mass appeal among the public starting in the mid 1980s and by 1990 US mutual fund assets exceeded $1 trillion for the first time. As of today, nearly half of all families own shares in a stock, bond, or money market fund. Industry assets exceed $10 trillion in the US and $20 trillion worldwide. Figure.1 shows the net new cash flows into US equity mutual funds on a quarterly basis since 1986. The largest ever inflow occurred in the first quarter of 2000, when retail investors sent fund managers

over $130 billion of new capital. Unfortunately, the timing of the public could not have been worse as most US equity indices have yet to surpass the highs reached in 2000. Similarly, record outflows of over $70 billion occurred in the third quarter of 2002, at precisely the low of the 2000-2002 bear market. In fact, the timing of mutual fund investors as a group has been uncanny, but also quite unfortunate, as they have been consistently wrong.


A detailed history of the relationship between fund flows and stock prices is seen in Figure 2. The quarter ending in March of 1987 generated what was then a record inflow of almost $20 billion. Following the Crash of ‘87 in October, the fourth quarter saw record withdrawals from mutual funds, which also marked a low in the S&P 500 Index that has not been seen since. Afterwards, six consecutive quarters of equity fund redemptions, starting at the end of 1987, were matched by steadily rising stock prices, representing the proverbial “wall of worry” that the stock market often uses to climb to higher levels.

In 1990, with the onset of the first Gulf War and eventual recession, investors pulled money from equity funds. Once again the public was a net seller in the same quarter that produced a low in stock prices.

The first time investors failed to sell at the precise low followed the terrorist attacks of 9/11. Here, the outflows coincided with a short-term market bottom in the third quarter of 2001. The S&P 500 Index eventually declined to lower levels a year later. However, investors failed to buy at the bottom, and in fact set a new record for net redemptions of almost $72 billion in the third
quarter of 2002, just as the market bottomed.

Today, the world is experiencing another bout of extreme market turmoil. Based on the latest available data, mutual fund investors cashed out of US equity funds to the tune of over $60 billion during the third quarter of 2008. Furthermore, preliminary estimates indicate that
redemptions in the month of October, 2008 could exceed the present record of $52 billion set in July of 2002. It appears that panic selling by the investing public is poised to signal a bottom in equities yet again.

And The Winner Is ...

  • And the winner is ... the stock market. It seems like we have gone from all news is bad news to all news is good news in the span of a week. Its amazing what higher prices will do.
  • How far can performance anxiety take us? Further than you think. Is that reason enough to buy stocks here?
  • The market is now up 20% off the bottom without much of a correction. Even within a larger up move it would not be unusual to see a pullback.
  • I don't believe that higher taxes on the rich would be the disaster that it is being made out to be.
  • I fear that proposals to modify mortgages will encourage people who can afford to pay their mortgages to become delinquent in order to receive a modification.
  • I fear efforts to keep home prices artificially high. If houses become affordable the market will clear. Keeping houses unaffordable only lengthens the process.
  • Have a good night.

Flattened Out A Little Bit

I flattened out a little bit into the higher open. I will be at meetings for the next few hours.

The Claustrophobic Investor

Good Morning. The futures are up a couple of percent this morning. I am starting to feel uneasy being long as the bull camp seems like its getting crowded. Knowing that I am usually early I am not going to hit the eject button quite yet but I have my finger on the trigger.
  • The most convincing argument the Bulls have is time. The rally is only a week old. It would be highly unusual for a Bear Market rally to end after a week. In addition, it will take time to relieve the current oversold condition of the market.
  • It doesn't hurt that three month LIBOR is down for the seventeenth consecutive day as the credit crisis continues to ease.
  • There is a lot of cash on the sidelines. This has been a perennial Bull argument but I actually believe it to be true this time.
  • The strongest argument the Bears have (in the short term) is sentiment. Investors have been buying calls recently and it seems that Obama's victory has become a positive. There is now a chance of a sell the news reaction.
  • The economy is in the pits.

Volatility Implosion

  • The story of the day is the implosion in implied volatility, with the VIX down more than 10%. It seems market players are taking advantage of the expensive vols to sell options.
  • After five days without a major meltdown I believe it is safe to say that the vicious cycle of lower prices leading to liquidations is over for now.
  • I believe we could rally here but I don't see us starting a multi-year bull market from these levels.
  • While I am not playing the election, I will be looking to take advantage of the volatility surrounding the election tomorrow.
  • Have a good night.

Internet Bubble Bursted

I find the valuations that many Internet stocks are trading at ludicrous. Companies like eBay and Expedia trade at less than seven times 2008 earnings net of cash. These companies are free cash flow machines. They carry no inventory and require very little capital to run their businesses.

I love these businesses because they are so easy to understand. They basically have websites that act as a middleman. For every transaction they facilitate, they generate a fee. The business is simple and clean. It is very hard to compete with them as they have a loyal network of customers and sellers. The Internet is sufficiently mature that people have already developed habits, including where they shop.

I am not sure if the economy will recover in 2010 or 2015 but when it does I am confident that these stocks will trade at multiples of their current levels. I am not yet diving into these stocks but am slowly testing the waters. I am short some eBay puts and as of yet have no position in Expedia.

Short Term Pain, Long Term Gain?

  • The intermediate term indicators, such as the Oversold indicator I posted earlier, are arguing for a higher market. However, I would not be surprised to see a short term pullback as short term sentiment might have gotten a little too giddy. That said, I am not looking to play it as I focus on the bigger trend.
  • There is more call buying than I prefer to see.
  • This is a seasonally strong period of the year.
  • How am I playing the election? I'm not. It is too crowded a trade for me. I will look to take advantage of any over reactions after the fact.
  • Apple is up despite news of the negative channel checks on the iPhone from Friedman Billing Ramsey. A positive.


My preferred measure of overbought/oversold is arguing for a higher market. Generally when the line is rising from the bottom of the graph, the market rises. That is now the case.

Click Graph For larger Image

Weekly Strategy

Well I don't know why I came here tonight
I've got a feelin' that somethin' ain't right
I'm so scared in case I fall off my chair
And I'm wonderin' how I'll get down the stairs
Clowns to the left of me, jokers to the right
Here I am, stuck in the middle with you

-Stealer's Wheel

The easy trade in the stock market is now over. By the easy trade I mean buying when fear, hopelessness and gloom pervade the market. Except for a brief period of euphoria in May, times of heightened fear have been the only time it has been safe to buy stocks all year. A 15% rally since Tuesday have somewhat brightened the spirits of market players. At this point I can make a compelling case for both the Bull and Bear side.

The Bears would argue that every time hope has crept into the market in the past few weeks it has been a good time to sell. The economy is just starting to feel the effects of higher unemployment and the credit crunch. Once analysts and economists recognize this reality estimates will come down drastically. While the market may be fairly valued now, it has been overvalued for over fifteen years. If we fall to valuations of past post bubble periods stocks can have another 40% of downside.

The Bulls would remind the Bears that extrapolating from recent history can be very dangerous. The market teaches us all a lesson and once we all learn it, it switches it up. Typical Bear Market rallies last at least three to six weeks and this one is not even a week old. The market remains deeply oversold and can still rally substantially, even in the context of a Bear Market. There are record amounts of cash on the sidelines. If the market began to rise performance anxiety could take the market higher than anyone could imagine. Investor's would not be happy if their managers lost them money on the way down and did not participate in a rally. From a fundamental perspective the credit crisis that led us here is easing. The government is backstopping nearly every market. In addition, bonds now have value as the implied default rates are pricing in more than the worst case scenario.

I am leaning slightly towards the Bull camp but my positions are small. I am keeping an eye on the ten year note as the yield has crept up to close to 4%. The greatest risk, while small, is that the cost of funds for the government increases making further bailouts impossible.