Thats All Folks

What strikes me is that despite the rumors that the "bad bank" plan is dead, the banks did not get killed. Most are still significantly higher than where they were before the plan was announced. Once again the market jumped around a lot this week but at the end did not do much. Have a great weekend.

Short Career As An Arb

A few days ago I put on the Pfizer-Wyeth merger arbitrage trade. I took it off for a very modest gain. While I still believe the deal spread is way too wide, there are too many opprtunities in this market to have my money tied up there.

Sold Microsoft Puts

I used this dip to sell a bunch of Microsoft FEB 16 Puts (a bullish play on Microsoft via options). This is not a bullish call on the market but reflects my willingness to own Microsoft at that level. Microsoft would need to decline nearly 10% in the next 3 weeks before I would start losing money on this trade. If I were bullish on the market I would just buy the stock at current levels.


According to CNBC, the Obama Administration has called an audible on its "bad bank" plan . The market was rebounding but this news took the legs out of the market anew. On Wednesday investors were stampeding into the market on the "bad bank" plan and now they are stampeding out. It was a good idea to sell when they were stampeding in, does that make it a good idea to buy now? My antennae have been perking up today as there seems to be a little too much high fiving by the bears. Unfortunately, the indicators I follow are not yet lining up for a sustained rally.

Both Sides

There are some positives in today's ugly market. Two days ago everybody was hopeful about the "bad bank" plan while today all the talk has been gloomy. Most rallies in the past year have started when the gloom was thick. The call buying has calmed down but we are not yet seeing extreme put buying.

Many of the financial stocks such as Goldman Sachs, JPMorgan Chase and Wells Fargo are actually up on the day. The bank stocks have been leading the market for the past few months so this is a positive. While I am not buying into this market yet we are moving in the right direction and I would not be surprised if we rallied.

Monkeys Pushing Buttons

It is always amusing to me watching people freak out about the latest economic number. I would rather buy or sell stocks based on astrology signs than the GDP report:
  1. The GDP report is backward looking. We know how the economy did in the 4th quarter and it wasn't pretty.
  2. These government reports are often inaccurate and subject to numerous revisions.
These reports are the business media's way of trying to make investing seem exciting. They are not interested in trying to help investors make money, they are interested in ratings. Creating excitement around these reports equals better ratings. Financial TV is junk food for your brain.

The Last Great Company

Good Morning. What recession-depression? Someone forget to tell Amazon about the recession as sales grew by 18%. They are the last of the great companies still trading at a premium of over thirty times earnings. Kudos to Amazon.
  • The law of diminishing returns seems to work for bailout packages. This "bad bank" rally took a day to erase.
  • There are improvements in the market. Fewer stocks are making new 52 week lows. There also seems to be more differentiation between good and bad companies.
  • That said, I still believe the market will make new lows sometime this year.
  • Despite yesterday's ugliness I am still in wait and see mode. I am patiently waiting for the Bulls or the Bears to push this market too far in one direction.
  • In early January the market became maximum overbought. It used almost every last day of that reading to go down. Since the market became maximum oversold it has not made much headway. There are still a few days for the market to right itself but time is running out.

Handle With Care

I continue to approach this market with great care and am waiting for a better a setup to arrive. Preservation of capital should always be an investors primary goal. If an investor starts out with $100 and has a 50% down year he is left with $50. In order to get back to even the investor must make 100% the following year. Losses are a lot harder to recuperate and gains are easier to lose. I have a meeting for the remainder of the day. I will be back tomorrow bright and early.

The Return Of Call Buying

  • The Market has bounced off its early morning low as investors are once again buying calls. As long as this remains the case I am not interested in the long side of this market
  • How does Dryships plan to sell 500 million dollars worth of stock when the entire market cap of Dryships is 400 million dollars?
  • Why is it such a great thing that Wells Fargo is keeping its dividend? Shouldn't they first be 100% sure that they will be able to make it through this credit crisis? Shouldn't taxpayers get their TARP money back before banks give dividends to shareholders?
  • The stimulus plan is stuffed with pork. It is a politicians dream and a taxpayers nightmare. All in the name of helping Americans. Thanks.

No Longer Oversold

The image below is the 10 day moving average of the NYSE advance decline line. I put an X to mark last weeks oversold reading. As you can see we are no longer oversold, but not yet overbought. This makes predicting the near term market direction difficult. The best setups are when the Bulls or the Bears push this indicator too far in one direction.

Dryships Issuing 500 Million Dollars In New Shares

Momentum favorite, Dryships (symbol: DRYS) announced that it will raise 500 million dollars by issuing new shares. This is in response to their lending banks notifying them that they were in violation of some loan covenants. New shares being issued are a headwind for the stock market. While 500 million dollars is a drop in the bucket, if more companies begin to issue new shares this will make a sustained advance less likely.


Good Morning. The market is no longer oversold and we are starting to see signs that this rally is getting long in the tooth. As a result, I have taken profits on the majority of my long positions. However, I am not yet comfortable shorting this market because the market will not be maximum overbought until next week and we are heading into the seasonally strong turn of the month.
  • Starbucks announced the closing of an additional 300 stores. With even the strongest retailers closing stores, commercial real estate vacancies will continue to skyrocket and more loans will go into default. Smaller banks managed to avoid the subprime and CDO crisis but are neck deep in commercial real estate lending.
  • The Nasdaq has continued to outperform the broader market. Qualcomm's earnings miss will put the Nasdaq to the test today.
  • Even pharmaceutical companies' revenues have been light this earnings season. People are cutting back on everything. This recession is different from previous ones.
  • If the banks were willing to lend again, would that change anything?

Its Not Easy

  • Another reason why I chose not to short the market today was the trade just seemed too obvious. I have learned over the years that if a trade seems too easy, RUN.
  • If the market continues to rally, Wednesday (a week from today) would be a good time to consider some short sales. The market will be overbought and the seasonally strong period will be over.
  • The overbought indicators I look at take both time and price into consideration. For years I focused solely on prices before I realized the importance of time.
  • Why does focusing on time work? It takes the market going up a certain amount of time before it sucks everyone in. And vice versa.
  • Treasuries got smoked on the FOMC announcement. It appears that some traders were expecting to hear more details on the Federal Reserve buying Treasuries.
  • Have a good night.

Not So Fast

With the S&P 500 up 22 points I was considering taking a short position. Then I stopped myself for a number of reasons.
  1. The market has until next week before it is maximum overbought. Waiting patiently for extremes has paid off.
  2. While the option indicators are showing that traders are over enthusiastic, anecdotally it doesn't seem that way to me.
  3. The Federal Reserve might pull a rabbit out of its hat. If so, "insiders" probably already know that and I am trading with an informational disadvantage.
  4. The banks are on fire.

Everyone Loves A Bailout

Readers might be wondering why I get annoyed with all these bailouts. After all, doesn't everyone want the market to go up and the economy to do better? My view of life is that there is no such thing as a free lunch. Everything has a cost, whether it is hidden or obvious. Trillion dollar bailouts need to be paid for. If we fund it with debt, it will need to be paid at some point by the taxpayers through higher taxes. If we print the money than the value of our money goes down and the value of our paycheck goes down. All that to bailout some imbeciles who spend a million dollars furnishing an office.

Recently, I furnished my office as well. I went to a warehouse and bought new furniture that was slightly damaged. It couldn't be sold as new so I received a 75% discount. I figured that eventually I would put a scratch on my furniture anyway, so buying it with a scratch was not a big deal. What did the government give me for being frugal and doing the right thing? Hint: It rhymes with stick.

Taking My Own Advice

I have taken profits on the remainder of my Microsoft position. I still believe it is an incredible long term buy but I am growing increasingly uncomfortable with this market.

Buyer Beware

There is once again heavy call buying. This raises the odds of a sell the news reaction. I would not consider any purchases at these levels.

Old Bag Of Tricks

  • The Resolution Trust was the "bad bank" formed to bail out the Savings & Loans in the early nineties.The S&L Bailout was also one of the first bailouts that led us down the road of moral hazard and a debt bubble. Why does the government believe that the same policies that got us into this mess will get us out?
  • I noted yesterday that the banks were suspiciously strong. Do you believe that it is a coincidence that the "bad bank" plan is being unveiled today?
  • If some people are trading with the equivalent of "inside information" doesn't that mean that those of us who are not "insiders" need to be especially careful?
  • The way I have been protecting myself is to wait until the market reaches an extreme before trading.

Celebrate Good Times

Good Morning. Our problems are solved. The Obama administration is creating a bad bank that will buy toxic assets from the good banks of our country. It will be interesting to see if they buy John Thain's office furniture from Bank of America. This is well worth the taxpayer money being spent as these banks will undoubtedly spend it wisely.

Last week, when the market was maximum oversold, I sold some Puts on selected stocks that I would be happy to own. Since then, the market has worked off its oversold condition and I am sitting on a decent profit. I have no intention of buying into this rally today and am considering selling some of my positions into it.

The market has room to rally as it will not be maximum overbought until next week at the earliest (but it is no longer oversold either). This bad bank plan will suck some people over to the Bull side of the market. Additionally, a bunch of technical levels will be surpassed. As usual, people will get bullish when the market is already up. In my opinion, it is too late to buy but too early to sell.

Self Proclaimed Experts

The self proclaimed "experts" that go on CNBC seem to have an opinion on everything. Stocks, bonds, currencies and the effect of the latest economic number on all of that. Most of the time I don't know much that the market doesn't already know. There are times where months pass and I do not execute a single trade because I have no edge. I just observe patiently until something becomes very obvious to me. All that matters is that I am correct when I finally execute a trade.

Right now this market is too tough to call, as it does not seem to me that the Bulls or Bears have over reached. Therefore I continue to focus on individual situations rather than the market as a whole. Have a good night.

All Bark, No Bite

The market has been jumping around wildly for the past week and a half, but at the end has gone nowhere. I am hearing strong arguments from both the Bulls and the Bears on the market direction. I don't have a strong feeling either way and am keeping an open mind.
  • The banks led the market down and are now showing strength. Ignoring the banks has been a big mistake.
  • Every time we have seen this type of call activity on the CBOE, the market has nosedived shortly after.
  • There are rumors of a huge stimulus package coming any day now.
  • How could the enormous job cuts not lead to even weaker economic activity?
  • Wanna flip a coin?

Disciplined Sales

I have booked some gains in Microsoft. I am keeping more than 2/3 of the position. Just staying disciplined and trying to use price to my advantage.

Early Take

  • Amgen, a stock I follow closely, is down on lower than expected revenues. While the stock is cheap at these levels, in the mid 40's it becomes a no brainer. In this market I am willing to wait for the no brainer.
  • The banks are holding in positive ground while the market has gone flat. The banks have been leading the market. Additionally, breadth is still positive even though the market is flat.
  • On the ISE call buying is subdued but on the CBOE call buying is running rampant.
  • I am doing nothing for now and letting my positions run.

You're Fired

Good Morning. The debate rages on if we are in a recession or depression. I like to call it the recession-depression. Unfortunately, that does not tell us where this market is going. The pace of layoffs has picked up in recent weeks. Will this restore corporate profitability or will this lead to a vicious spiral? The intermediate term outlook lies in the answer to that question.

In the shorter term, the market remains oversold and we are approaching the seasonally strong turn of the month. On the sentiment front, the call buying of the past few days is starting to worry me. I have some modest profits in my Microsoft and Annaly positions (via short Puts). If the call buying persists I will likely book some gains just in case.
  • The Wall Street Journal echoed my sentiments from yesterday on the Wyeth Pfizer deal. The reason a 12% merger spread is available is because the large brokers and hedge funds that would normally arbitrage this deal are hobbled.
  • For years arbitrageurs were picking up dimes in front of bulldozers. Now that real money is available with little downside nobody wants it.
  • Everyone is talking about the importance of the 790-800 level on the S&P 500. Do we need a false breakdown below that level to shake out the renters?

Which Way The Wind Blows

There continues to be way too much call buying, signaling that traders are overly bullish. However, it seems to me that everyone I speak to is bearish. It seems like Nouriel Roubini has become a nationial icon and guessing how many trillions banks will lose is the new pastime. Put all those cross currents together and I am one confused Capital Observer. As such I continue to trade individual situations rather than the market as a whole. Have a good night.

Trading Range

  • The trade for the past few days has been to buy weakness and sell strength. This works as long as we are stuck in a trading range.
  • Will traders be caught leaning the wrong way when we finally break out of this trading range? That's how it usually happens, but I'm having a hard time figuring out which way folks are leaning.
  • Wyeth is only $5 above where it traded for most of January. They will receive a $3 a share break up fee if Pfizer doesn't close the deal. By my calculation the downside is $3-$4 while the upside is $5. This means that the market is putting a less than 50% chance on this deal closing.
  • I believe the reason this deal is trading where it is that arbs have been so devastated that there is simply not enough money out there to arbitrage this deal.
  • Some readers have asked what an arbitrage is? Apon closing of the Pfizer-Wyeth deal each share of Wyeth will be exchanged for $33 in cash plus .985 shares of Pfizer stock. The value of that currently is $48.65. Wyeth can be bough for $43.35. There is $5.30 profit to be made if the deal closes. If the deal does not close for some reason Wyeth will likely go down. How much it would go down is debatable.

Too Much Call Buying

Once again there is way too much call buying for my liking. I am doing little for now.

Size Matters

  • I put on the Wyeth arbitrage trade. There is a 10% spread available and I can't see a reason why the deal would not go through. Additionally, the breakup fee is 4.5 billion dollars so I don't believe Wyeth would go down that much even if the deal were broken.
  • I believe it pays to stick with large cap companies with solid balance sheets. They have underperformed for years, but the Wyeth takeover may mark a turning point.
  • It appears that the Dow Chemical/Rohm and Haas deal is running into some problems. This is a negative for the market, but is offset by the Wyeth deal.
  • Smurfit Stone, the cardboard maker, filed for bankruptcy defaulting on 5.6 billion dollars in debt.

Big Deal

It appears that Pfizer will be repatriating its money from overseas in order to help pay for the Wyeth takeover. Many large US multinational companies have billions of dollars stuck overseas. They are loathe to bring the money back into the US because in order to do so they would need to pay US taxes, despite having already paid foreign taxes on those profits.

Pfizer must believe that Wyeth is so cheap that it pays to pay a premium for the company and pay the additional taxes. It will be interesting to see if other multinationals follow suit. If so, it would be very bullish for the markets in that more cash would flow into the market and would show that valuations are just too cheap.

Weekly Strategy- Abridged version

As I look at the stock market on an individual stock basis, I am seeing more bargains with every week that passes. Stocks with single digit price to earnings ratios seem to be everywhere. Even stocks with the best franchises and strongest balance sheets sell at these lowly valuations. However, when I look at the history of Bear Markets it seems as if the stock market as a whole has a long way to go before reaching valuation levels of previous Bear Market lows.

In the shorter term, the market remains oversold. In addition, we are approaching the turn of the month which is a seasonally strong time for the market. I am having a hard time wrapping my arms around sentiment. Anecdotally, it seems to me as if everyone is bearish and calling for a retest of the Novemeber lows. However, call buying was pretty heavy late last week, which tells a completely different story.

If it were not obvious by my commentary, I have mixed emotions about this market on both a short and long term basis. As such, I am focusing my concentration on individual situations and not on the market as whole.

When Genius Fails

The list of financial icons that have fallen victim to this Bear Market grows by the day. Warren Buffet thrived during the seventies bear market but was shown to be a mere mortal during the current one. Add Tishman Speyer and Blackrock to the list of victims. From Bloomberg:

Tishman Speyer Properties LP and BlackRock Realty, owner of Manhattan’s largest apartment complex, are relying on a reserve fund to pay debt on the property and have only six months of money left before it runs out, Fitch Ratings said in a report.

The fund for the Stuyvesant Town and Peter Cooper Village apartments has declined to $127.7 million as of Jan. 15, from $400 million when it was established. Property cash flow is not expected to improve from 2008 based on the borrower’s restated budget for 2009, the ratings company said.


Tishman Speyer and BlackRock paid $5.4 billion for the properties in 2006 with plans to convert rent-regulated units to market rates. A $3 billion loan to finance the acquisition was bundled with commercial mortgages and sold as bonds. Fitch, Standard & Poor’s and Moody’s Investors Service began to downgrade the commercial mortgage bonds in September because the owners were unable to convert as many units as planned.

China Takes The High Road

Earlier in the week Timothy Geithner called China a currency manipulator. There were fears that this could escalate, with China selling US treasuries. It appears that China has taken the high road and will not retaliate. China did take a jab at the US and suggest that the US should look inward for the source of their problems instead of trying to blame China. From the AP:

A top official at China's central bank has dismissed U.S. Treasury Secretary-designate Timothy Geithner's comment that President Barack Obama believes Beijing is "manipulating" its currency, state media said Saturday.

Su Ning, a deputy governor of China's central bank, was cited as saying by the official Xinhua News Agency that the remarks were "not in line with the facts."

"We thought in the face of the financial crisis, there would be a spirit of self-criticism beneficial to finding ways of resolving the issue and overcoming the crisis," Su said, adding that it was imperative to avoid any excuses to encourage trade protectionism.

Last Look

It appears that all the call buying has caught up with the market as the S&P 500 once again turns negative. I am taking my positions home with me for the weekend. That is not a market call but reflects my willingness to own these individual names. I am not sure what next week will bring but I'm pretty sure it will be exciting. Have a great weekend. Thank you for reading.

The Two Step

  • At the beginning of January everyone was looking for a rally with the inauguration marking the top. Once again the market stumped everyone and it looks like the inauguration was instead a bottom.
  • I also thought that we would rally into the inauguration. Luckily, the indicators I follow did not agree with me and kept me out of harms way.
  • I wish there were a little less call buying today.
  • If the S&P 500 rallies through 850 people will be calling this a succesful retest.
  • What do I think? I am keeping an open mind.
  • I believe the majority of companies will need to reset expectations this year as estimates are way too high. The reason I am comfortable owning Microsoft is because I believe they have already done so.

Pointing Out Some Negatives

I mentioned the positives this morning after the ugly opening. Now that we have bounced a little I want to point out that there is more call buying than I like to see, especially for a down day and treasuries are down again. This is where China would retaliate if it were too.

Stock Pickers Market

The financial stocks have been leading the market so I believe it is important to pay close attention to this sector. While Bank of America and Citigroup are close to their lows from earlier this week JP Morgan, Goldman Sachs and Morgan Stanley are well above their lows. There is starting to be differentiation among good and bad stocks. This is a positive for the market.

Additionally, while the S&P is testing its lows from earlier this week the financial indices are still a few percent above their lows. It has been a while since the financial sector outperformed and is a good sign. If Treasury secretary Geithner were not picking a fight with the Chinese I might actually be adding to my longs today.

Where Are We Going

The market rally off the November lows has been disappointing. Given the size of the drop since August one would have expected more, even if it were just a Bear Market rally. I believe this market will make new lows in the next few months. However, in a market where a years worth of movement can happen in a week it has not been enough to get the longer term picture right unless one has an extremely high threshold for pain.

In the here and now the market remains short term oversold. If the market is going to rally this is the time when it should do it. Instead of taking direct market exposure I have sold puts on individual stocks that I believe are trading cheap. This gives me some breathing room in case I am early. Addittionally, I believe these stocks will outperform the market and am comfortable owning them in the worst case scenario.
  • Did Geithner really have to pick a fight with China his first day on the job?
  • If Geithner can't comprehend that we need China to fund our deficits, is he the man for the one of the toughest jobs ever?
  • Do you think anyone has ever been as happy as Hank Paulson to lose his job?
  • Technology critic, Walt Mossberg gave Windows 7 a glowing review. This is the first time there is any hype surrounding a Microsoft product since Windows 98. While Windows 7 is just Vista with the bugs fixed, marketing is everything.

Private Equity Wealth Destruction

Julian Robertson has an enviable track record as a hedge fund manager. Even after his blowup, an investor with Julian Robertson would have made approximately 100 times on his money between 1980 and the closing of the fund in 2000. However, Julian Robertson lost more money for investors than he made. The reason is that when he blew up he lost 42% of the funds money. Most of the funds investors came in during the last two years so they never got the benefit of his gains but suffered the losses.

I believe that investors in private equity will have a similar experience. The track record of many private equity firms are excellent and anyone who invested in private equity for a long time will have benefitted. However, it was only in the past few years that money really started to flood in to private equity. The losses will be enormous and private equity might destroy more wealth than it ever created.

From Bloomberg:

Harvard University didn’t sell most of the $1.5 billion of stakes in private-equity funds it put on the market last year because offers were too low, said three people familiar with the matter.

The university’s $28.8 billion endowment, the richest in higher education, rejected deals as sellers, including schools and pension funds, flooded the market and pushed down prices, said the people, who asked not to be identified because the bidding is private. The Cambridge, Massachusetts, university remains interested in unloading the private-equity investments.

Biting The Hand That Feeds You

Timothy Geithner came out today attacking China as a currency manipulator. How does Geithner expect to fund his bailouts and stimulus packages without China buying dollars. This was probably the reason for Treasury weakness today. Hopefully, China takes the high road and this does not escalate. From Bloomberg:

Timothy Geithner’s warning that President Barack Obama believes China is “manipulating” its currency may trigger renewed tensions between two of the world’s three biggest economies.

Geithner, Obama’s nominee for Treasury secretary, also told senators the administration will press China to “adopt a more aggressive stimulus package” to boost its domestic economy. The remarks on manipulation were a shift from President George W. Bush’s team, which stopped short of using the term in criticizing China’s exchange-rate management.

Be Careful What You Wish For

I was looking for an entry point on Microsoft and I got my wish today. Most people don't have much good to say about Microsoft and they might even be right. However, I have not heard one argument against Microsoft that takes the stock price into consideration. Excluding cash, I am buying into the stock at eight times depressed earnings. There is a lot of bad news factored into Microsoft at eight times earnings, especially when the broader market is trading at fifteen times optimistic estimates.

In my experience one can only buy into a company on the cheap when the news is bad and everyone hates the stock. It is not easy to do so and may require some pain before a profit is seen. However, that is what one gets paid to do in the market. Buying in when the news is great and everyone is bullish on a stock is a lot easier but is not profitable in the long run. So while I might be drinking a nice stiff drink tonight, I believe I will be drinking some champagne in the future. Have a good night.
  • Please note the action in Treasuries. Yields have been skyrocketing. All the bailouts and stimulus packages are contingent on rates staying low.

Short A Slew of Microsoft Puts

I am now short a whole slew of Microsoft February 17 Puts. While I am not bullish on this market as a whole I am starting to see some individual bargains. I am getting long via the selling of Puts so that I have some room for error and because I believe the market will eventually trade lower.

Microsoft Conference Call

Steve Ballmer said that he is not treating this downturn as a normal recession where business will bounce back soon. He believes this represents a new economy with less leverage. I am happy that he is not trying to sell the second half recovery story and cutting costs now.

Bought A Starter Position In Microsoft

I am using the weakness in Microsoft to build a starter position as it trades close to its 52 week low. I have an order open to sell a slew of puts but the volatility is getting drained out of the options because earnings are now in the rearview mirror.

Microsoft Missed

Microsoft missed earnings estimates by two cents. They announced 2.2 billion dollars of cost cuts for this year. Had these cost cuts been in place they would have made the number, meaning estimates are still achieveable. This is not a disaster and I will be looking to buy the stock, most probably through the selling of Puts.

Some Tidbits

  • Regional banks are blowing up all over the place this morning. I am not sure how much of this is already priced into the market.
  • I have been digging a little deeper into Apple's earnings. The entire beat came from margins, taxes and iPods. All the while the iPhone and Macs missed estimates. This is significant in that the Mac and the iPhone are supposed to be the growth engine for the company and they are starting to lag. While this should be expected in a recession/depression and Apple is not expensive by any measure, I would not get too carried away with "Apple beat the number". The quality of the beat was quite low but to be expected in this type of environment.
  • The fact that Mac sales missed estimates does not augur well for Microsoft. The areas that helped Apple beat estimates like lower component prices and higher iPod sales don't apply to Microsoft, unless you believe the Zune is coming back from the dead (if it ever were alive).
  • I welcome a Microsoft shortfall as I believe it would allow me to buy in on the cheap.

Oversold Market

Good Morning. The market is now short term oversold and has a window in which to rally lasting about two weeks. This also coincides with the turn of the month, which is usually the strongest part of the month. This does not mean that the market must go up, but that the market now has the wind at its back. A strong market uses its entire window to rally, while a weak one will waste that time or even go down. I am withholding judgement on the market for now.

I got somewhat long yesterday, but have plenty of room to add if the situation calls for it. I will be spending the majority of the day reading through conference calls and earnings reports.
  • While Apple beat the earnings number, they guided well below expectations. Sentiment was so negative going into the report that any positives would do. A year ago, when everyone expected the world from Apple this would have killed the stock. That is why I prefer to buy beaten down, cheap stocks where expectations are low.
  • Geithner said that the stimulus package will be ready within weeks. Will the announcement of that stimulus package mark the next high for this market?
  • I still expect the S&P 500 to hit new lows some time in the first quarter. That doesn't mean its straight down.
  • With IBM and Apple coming in better than expected are investors expectations now too high for the rest of earnings season?

Apple Scores

While I have been talking about a low happening today for a while now, the ferociousness of this rally caught me by surprise. I was expecting a bit more of a selloff so I did not get as long as I was planning to. I did manage to do some buying. In hindsight the banks being down 20% yesterday after falling for 2 weeks straight was pretty climactic.

I did not look at the numbers from Apple but judging by the stock's reaction they were good. Anyone who shorted Apple on Steve Jobs health issues is now sucking wind. Have a good night.

Ready For The Show

  • How long could you live without a computer or Internet? How bad would your finances need to get before you gave that up?
  • If Apple disappoints this evening I think it would create a great entry point into Apple or Microsoft stock. The stocks are ridiculously cheap, unless you believe that business will completely fall off a cliff. If you believe business will fall off a cliff please refer back to the first bullet point.
  • Highly acquisitive, tech conglomerate IBM raised earnings expectaions for 2009 with most of the improvement coming from tax rates, margins and buybacks (ie. not from top line growth). They said they expect the second half of the year to be stronger than the first as the economy improves. Reading between the lines, that means that business is not great right now.
  • IBM has many government contracts. Could the Obabma stimulus plan be the strength they are forecasting for the second half of the year?
  • It looks like Wal Mart's stock price got outsourced to China.
  • Is it weird that I'm so excited for Apple's earnings even though I don't own a share of their stock?

Sold Annaly Puts

The market has come back in. I sold the Annaly Capital Management February 13 Puts for 80 cents (This is a bullish play on Annaly). If the stock gets sold to me I will own it at a 10% discount to book value. I am very gingerly wading my way in to the market.

Second Guessing

  • Did yesterday's ugly close combined with the proximity to today's maximum oversold condition warrant putting on some exposure late yesterday? Probably, but hindsight is 20/20.
  • That said, I am not going to compound my error by chasing the market higher. There should be a pullback at some point today where I will reconsider.
  • Are some of the asset managers getting too cheap? They are being painted with the broad brush of the financial stocks but have no exposure to the bad loans. They are generally fee based businesses. Northern Trust demonstrated this today.
  • Archie Mcallister, an excellent stock picker, was pushing Franklin Resources in Barrons. They are another excellent asset manager selling at a low multiple.
  • Why are GE and Wal Mart down?
  • Does anyone else find it ironic that the Royal Bank of Scotland failed because of subprime loans in America?

You Can't Always Get What You Want

Good Morning. I was hoping to be able to buy into an ugly down opening this morning. Instead, we have the futures gapping higher on the lack of any disasters and IBM's better than expected earnings. I prefer when the market bottoms on bad news. That way, you know that everything is already priced in. Are expectations too high now that IBM beat earnings? Unfortunately, reality is that we are gapping higher. Chances are that we will have a test lower at some point during the morning. I will reassess at that point.
  • Microsft sold their position in Comcast. That gives them close to three billion dollars more in cash. I was bullish on Microsoft before I heard this news.
  • It will likely not matter as Microsoft is already ridculously cheap and investors choose to ignore it. In 2000 investors paid 80 times earning for Microsoft. Now they wont pay 8 times.
  • Does it worry anyone else that IBM's earnings have GE like consistency?
  • Apple is being investigated by the SEC for disclosures regarding the health of Steve Jobs. They missed Madoff but they will get Jobs, just like they got Martha Stewart.
  • Can we just leave the poor man alone? He is dying from cancer and all the money in the World is not going to help him. He does not need this circus on top of it.

Getting Antsy

When the market starts going down like this, it is a struggle for me to stop myself from buying. Especially, because I am starting to see individual stocks reach bargain levels like Microsoft and Apple. However, the put call ratios on both the ISE and CBOE are urging caution. I will respect them for now as it has not paid to buy this market unless everything has lined up. The market will be maximum oversold at the end of the day tomorrow. If we are down again I will likely be going shopping. Have a good night.

Sentiment In The Wrong Place

  • There is very little put buying for a day that the S&P 500 is down over 3%. It seems that too many people are looking to catch a bottom.
  • Apple reports earnings tomorrow. On the last quarter's conference call I believe Steve Jobs was too quick to dismiss the economic weakness and estimates might be too high. Steve Jobs said:
    "Well, there’s a lot of prudence in there but it’s also October and October has
    always been a little bit of a foggy month for us."
    It seems to me that it wasn't just the month of October and weakness probably carried through the quarter.
  • That said, Apple is one good whack away from me taking a long hard look at the long side. Earnings might be the catalyst.

Obama Bounce

  • It is possible that we will get an Obama bounce some time during the inauguration, although I am not playing it.
  • If we sell off into the end of the day today and again tomorrow morning, I will likely do some buying.
  • Why buy if I believe the market will eventually go lower?
  1. The market rarely goes anywhere in a straight line.
  2. The market will be maximum short term oversold tomorrow.
  3. Just because the market is going lower that doesn't mean that every stock will go lower.
  4. I prefer to buy when when stocks are on sale.


  • The British pound is down 7% from yesterday as one of the largets banks in the World, Royal Bank of Scotland, essentially failed. I have never seen a developed country's currency move like that.
  • Is that a tremor to a coming earthquake?
  • Financial stocks are getting pounded again. No pun intended.
  • Put that all together and thats enough to keep me in my bunker for now.

Inauguration Day

Good Morning. The US economy was built on a model where borrowing helped spur ever growing consumption. The savings rate was close to 10% in the early nineties and even higher in the early eighties. As time passed the savings rate eventually became negative and now hovers at around 2%. As Americans saved less they spent more and borrowed more. A lot of the growth from the past two decades were a result of this dynamic.

In the past year we reached a tipping point where the debt burden became too heavy. This process is now running in reverse. The imbalances that this has caused have been building for the past few decades. A new president will not be able to undue what has happened no matter who he is. Time will heal all wounds. It will take time to work our way out of this mess.
  • The morning after expiration has not been kind to the stock market. By afternoon, the expiration influences should wear off.
  • Oil is once again getting pummeled showing that the deflationary forces are still in control.
  • Our country has come a long way in electing a black president. Don't mistake a social achievement for a financial one.
  • I would love to see the S&P 500 go to 800. I have a shopping list ready.
  • Earnings season starts in earnest this week. Everybody knows that earnings will be bad. The reaction to the news will tell us how much is priced in.

Dollar Crisis

Between all the stimulus packages and bailouts the government will easily run a trillion dollar deficit. It is taken for granted that this will be easy to fund. However, it seems that foreign investors are starting to grow weary.

From Forbes, "China Not A Limitless Sponge For U.S. Debt"
In the past few years, the ballooning of China's foreign-exchange reserves seemed a given, the yin to the yang of rising U.S. debt. But growth of the country's forex reserves slowed last year for the first time in nearly a decade, leading many to wonder if Beijing will slow its Treasury purchases as the U.S. government seeks to ramp up debt issuance to fund stimulus spending.
From Bloomberg, "‘Time to Sell’ Treasuries, Biggest Korean Fund Says"

A rally that sent U.S. Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said.

U.S. government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok, who oversees $160 billion as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14 percent last year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as investors sought the relative safety of debt.

“It’s time to sell U.S. Treasuries,” said Kim, who took over as head of investments at the start of the year. “The stimulus plan may cause inflation. The U.S. will raise the benchmark interest rate.”

From Bloomberg, "Jim Rogers Says Worried About Dollar, Favors China"

Jim Rogers, chairman of Singapore- based Rogers Holdings, said investors should be “worried” about the U.S. dollar, and recommended selling government bonds and buying raw materials, China stocks and the yen.

“If I were you, I would be worried about the U.S. dollar,” said Rogers, 66, in a speech at the Asia Financial Forum in Hong Kong today. “The Americans are printing U.S. dollars. The Americans are going to do whatever they can to revive their economy, even if it means destroying the U.S. dollar.”

Weekly Strategy

"The current rally will peter out sometime in the first quarter. It's the Obama hope rally. Obama is dangerous for the market in the sense that expectations that he can change the world are too high. He is a charismatic person, but a charismatic person with no track record. Eventually the market will grow disappointed that he can't change things as quickly and to the degree people hope.

The market will have a setback after this rally ends, with the next rally starting sometime in the second quarter. It will be more powerful and a bit more sustainable because some of the economic numbers will show positive momentum, and it will start from a new low. But you can't buy and hold equities for the long term. Investors will turn away from equities. They are fed up with negative returns over 10 years. In that period, as I said earlier today, risk was high and perceived risk was low. Now risk will be low, due in part to support from the world's central banks. But investors will perceive risk as high, and price financial assets accordingly."

-Felix Zulauf in Barrons

Legendary investor, Felix Zulauf, is already being proven correct. This interview occured two weeks ago when the S&P 500 was close to its 2009 high. I agree that the "Obama Hope" rally will end sometime in the first quarter, if it did not end already. The World will not change overnight because a new president is sworn in. Eventually, reality will set in and the issues that brought us to this point will need to be dealt with.

The market will be maximum short term oversold at the end of the day Wednesday. If the market continues to rally until Wednesday, the oversold reading will be weak and it will make for a tough call. However, if the market goes down Tuesday and Wednesday, the market will be deeply oversold and a rally should ensue that would take us through the end of January.

Currently, I have a lot of dry powder that I am waiting to deploy if the market comes in early in the week. The market rarely does what I want it to but having a game plan does not hurt. While I believe the market will eventually go a lot lower, I am seeing individual stocks with compelling valuations. I believe these stocks have limited downside and will eventually show investors large gains. That is where I will be looking to deploy my money.

Some Day Is Here

  • The market was actually 1.5% lower at one point today. The bailout news is starting to lose its effect.
  • The market is closed Monday for the Martin Luther King Jr. holiday. I have been saying that the market will be maximum oversold by the end of the day Tuesday. I did not realize Monday was a holiday, so make that Wednesday.
  • A further market decline early next week would set up a favorable entry point.
  • A rally early next week into the Obama inaugaration would make for a very tough call.
  • There was very heavy call buying all through late December. Today those lottery tickets are probably being torn up.
  • Have a great weekend.

Sold Down Some Microsoft

I sold down some of the Microsoft position I bought for a number of reasons.
  • In this market you have to take gains before they disappear.
  • The S&P is up almost 40 points from its low yesterday
  • How many times can the market rally on bailouts? One day a rally will fail.

That said, I am hoping Microsoft comes back in so I can buy again. I am very comfortable with the stock

Bad Moon Rising

There has been improvement in LIBOR and credit markets that governments have been supporting. However, it seems that certain areas of the credit market are still deteriorating. From the FT:

After several weeks of stabilisation and even some improvement, there have been renewed falls this week in the value of securities linked to subprime mortgages, leveraged loans and commercial mortgages.The Markit ABX index for triple A rated securities backed by subprime loans has dropped 13 per cent in the past week. The Markit CMBX index for triple A rated securities backed by commercial mortgages was also down 14.5 per cent in the past week.
The LCDX index, a barometer of leveraged loans, was down 4.6 per cent in the past week, back to levels it traded at about a month ago. Many of the assets tracked by these indices are hard to value, and banks’ exposures are far from clear.

Welcome To The Stock Market

Good Morning. The market went down incessantly for over a week for seemingly no reason. Suddenly, yesterday we found out why the market was going down and the market reversed up. Why did that happen?

There are so many people involved in these bailouts. The list includes: The Bush administration, the Obama administation, The Federal Reserve, The Treasury, Bank of America, Merril Lynch. Word got out ahead of time and people knew and traded on the information. Yesterday, when the news came out to the public they figured they no longer had an edge and covered their shorts. Welcome to the stock market.
  • Intels earnings was not really news as they issued a warning a week ago. The stock is up nicely on this non event. This is a good sign that possibly a lot of bad news is already priced in.
  • I was happy to see that Bank of America will not be allowed to pay a dividend. There is no reason that any company taking taxpayer money should pay a dividend to shareholders.
  • Given the carnage in the financial stocks Goldman Sachs has been holding up extraordinarily well.
  • There will be option expiration related forces at work until late Monday morning.

Could Be Worse

  • The Nasdaq 100 continues to outperform the S&P. I continue to favor large cap tech because they carry little debt, have easy to understand balance sheets and good free cash flow.

  • I sold some Microsoft February 18 Puts naked for 1.09 this morning. I can live with Microsoft at 16.91 even in a depression. (If you don't know what this means than ignore it, it is a bullish play on MSFT through options)

  • We have been seeing heavy put buying all day.

  • The S&P broke through support at the 820 level this morning but the market did not seem to want to go down. All together it looks like the market wants to rally.

  • The put buying and refusal to go down are bullish. I would not make too much of it because expiration might be influencing the market.

I Just Don't See It

  • I was expecting the market to begin to rally in the next few days and test its highs from last week. I expected that the rally would eventually fail and the market would hit new lows. I still think we will rally in the next few days but it is doubtful that we will rally that far. The facts changed.
  • Look on the bright side. No more rumors about Steve Job's health.
  • Is it me or are these bad times bringing out the worst in people?
  • Once again there are rumors circulating about job cuts at Microsoft.
  • David Swensen called fund of funds a cancer. From the WSJ:
    Mr. Swensen: Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can't make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? There's also more fees on top of existing fees. And the best managers don't want fund-of-fund money because it is unreliable. You need to be in the top 10% of hedge funds to succeed. In a fund of funds, you will likely be excluded from the best managers. [Mr.] Madoff also relied enormously on these intermediaries. He wouldn't have had nearly as much resources were it not for fund of funds.
    Consultants make money by giving advice to as many people as possible. But you outperform by finding inefficiencies most of the market has not yet uncovered. So consultants ultimately end up doing a disservice to investors.

Stocks Don't Lie, People Do

Good Morning. For the past few weeks the banks have been leading the market lower. Bank of America's weakness was especially conspicuous. Now we know why. Bank of America is going to need more government aid. Now we know why Obama asked Bush to request more TARP money. Only last night did we find out what these stocks knew for weeks.

For a few weeks Apple's stock would go down on rumors of Steve Job's health but only rally slightly on the denials from Apple. While the public did not know the truth the stock did.

Insider trading has become a big problem in the past year. While it always existed, up until this past year inside information was limited in its scope. Rarely could a piece of inside information move the entire market. That dynamic has changed in the past year with every bank problem and bailout moving the entire market. The market seems to trade ahead of these announcements, meaning that many are finding out this information ahead of time. Christopher Cox, Chairman of the SEC, could not care less. It is up to the investor to be aware of this dynamic and be extra careful.

Full Of It

In a 60 minutes interview in October Ken Lewis, CEO of Bank of America, claimed that he took the TARP money because it was his patriotic duty but he really didn't need the money. From the Charlotte Observer:(my emphasis added)
Charlotte-based Bank of America will receive $25 billion of the $125 billion the government is providing nine major U.S. banks. The idea is to shore up these big banks and in turn free up money that can be lent to consumers, businesses and other financial institutions. Although the capital infusion comes with few strings attached, Lewis said his bank will use the money to make loans, noting this would boost the bank's bottom line. Bank of America has said it doesn't need the capital, but Lewis said the nine banks had to take the money as a group so as not to expose any institution that really needed the capital.

Apple Idiocy

Apple has been trading with Steve Jobs EKG reading for the past few weeks. I think it is idiotic that it does so. He has done an excellent job but he does not single handedly run the company. The stock is already down untold amounts on rumors of his ailing health. I would buy the stock but I am scared to own it because they sell high end products and we are in the middle of a severe recession. If it goes much lower I might just buy it anyway. Ex-cash they also trade at eight times earnings now and it won't go down on rumors of Steve Jobs health anymore. Valuations in the PC space are getting silly. Have a good night.

Patience Is A Virtue

  • The S&P is now down 12% from its highs last Tuesday. However, the market will not be maximum oversold until this coming Tuesday.
  • Given that this market has been prone to extremes, I don't want to spend too much of my cash before the market reaches maximum oversold.
  • Truth be told, I was probably too eager to trade after catching the top on the S&P 500 last Tuesday. I have not been as patient as I should have been on subsequent trades.
  • Trading is one of the most competitive businesses in the World with the smartest minds. There is a constant need to improve oneself.
  • Another positive I forgot to mention on Microsoft. Everyone in Microsoft's industry has already warned on earnings. Expectations are probably very low.
  • I still believe we are in a Bear Market that has a long way to go but I prefer to focus on that when the market is rallying and giving me an opportunity to sell. Not much has changed between now and a week ago except for the price of the S&P 500.

Why I like Microsoft

  • Microsoft trades at 8 times earnings excluding net cash. This is at a steep discount to the rest of the market despite their near monopoly position.
  • Free cash flow is greater than earnings. For most companies free cash flow is lower than earnings as companies are forced to reinvest much of their earnings into their business. Microsoft actually collects and keeps more cash than it earns.
  • Microsoft is able to buy back its own shares. I believe this puts a floor under the stock. Most other companies are not even in a position to consider a buyback. Some would even like to issue more stock.
  • Microsoft still has a virtual monopoly. Apple has a niche at the high end of the market but most people are not willing to pay up. Linux has been floated as a threat for over a decade. Linux with support is not much cheaper than Windows and is generally not worth the hassle for all but the biggest tech geeks (Please note: I am one of those geeks that ran Linux on my computer).
  • No matter how bad the economy gets people will need to replace computers. A computer is a necessity in this world, not a luxury. Yes, the replacement cycle will get longer but it will not disappear.
  • Microsoft can cut a lot of fat. Microsoft has a number of divisions that continue to bleed cash. Shutting some of them down could combat a further decrease in revenue.
  • Microsoft does not give out stock options. They give stock rewards which are fully deducted from earnings. Most tech companies still report pro forma results that exclude stock options. Often those options make up a good chunk of earnings.
  • Microsoft is no longer interested in buying Yahoo outright. Combining search makes sense as they are both spending tremendous amounts of money on search technology that is inferior to Google's. At a minimum they could get rid of the redundant costs. At best, maybe two heads will be better than one.
  • The Microsoft business division is making up more of their revenue. Aside from their Office domination they are low cost providers in networking and database technology.
  • Fred Hickey of the High Tech Strategist likes them. He is the best technology analyst out there and not prone to bullishness.

Repurchased Microsoft

I have been wanting to get back in to Microsoft but was scared that there was a premium in the stock due to the positive mention in Barrons this weekend. After the 5% drubbing today I am satisfied that the premium has been wiped out of the stock. I could see Microsoft holding up even if the rest of the market continues lower. It trades at less than eight times earnings excluding net cash.

Stopped out

I was stopped out of my long attempt in the SPY.

Retail Sales

  • I am amazed that anyone trades on the government retail sales data. Last week all the auto companies and retailers already reported December sales. I am not sure what value the government data provides. It is stale.
  • This week is options expiration so some of the activity we are seeing might be expiration related. On the ISE we saw the most call buying in years during December and this might be the markets way of punishing those call buyers for getting over excited.
  • For the most part I am unwilling to own individual stocks. We have not faced a period like this in decades and I am unsure how individual companies earnings will hold up. Once earnings are reported there is a chance that I would be willing to own individual companies.
  • Technology stocks continue to hold up best and RIMM is actually up on the day.
  • Where are all the Bulls from a few days ago?

If At First You Don't Succeed

With the futures down big this morning I have repurchased the SPY.

Murphy's Law

  • It looks like the market took out my stop and is now rallying. It could be worse. I could be married to this woman.
  • The fact that the financial stocks were able to rally back after a sizable down opening is a plus. They have been leading the market lower and the reversal is notable.
  • Why am I being so cautious? Because I still believe that any rally is in the context of a bigger Bear Market. The downside to being wrong is enormous.
  • Sentiment has corrected from its extreme at the beginning of the year. That is a plus for the market.
  • While it seemed like a slow day, volume did pick up a little today. The real pickup should be when earnings season begins.
  • Have a good night.

SPY Position Update

I am currently sitting on a small gain in my SPY trade. I am headed out for a meeting so I will not be able to monitor my position for the next few hours. I raised my Stop Loss to a few pennies above my buy price. This ensures that I don't lose money on the trade and possibly participate in some upside. Murphy's Law will probably ensure that my stop gets taken out and then the S&P rallies.

Bernanke Has Nerve

A Bloomberg headline reads, "Bernanke Says Stimulus May Be Inadequate, Signals Asset Buying, Guarantees. " Bernie Madoff has turned the attention away from the chief culprits of our disaster but have no worries, I am on the case. Here is a laundry list of what is wrong with Bernanke's misguided efforts.
  1. First and foremost Ben Bernanke does not have the authority to guarantee assets. This is a democracy and he was never given such authority.
  2. Ben Bernanke is part of the problem. He was the chief advocate of easy money and 1% interest rates in 2003. His dropping money from helicopters speech earned him the nickname "Helicopter Ben". As chief of the Federal Reserve he allowed lending standards to reach lows never seen before.
  3. Too much debt is what got us into this mess. Bernanke's concoctions are all aimed at increasing debt with the side effect of distorting markets. Other than some very short term stimulus into the economy I don't understand how more debt solves the problem. It actually exacerbates the problem and makes the eventual resolution messier.
  4. Allowing bad actors to fail assures they will not be around in the next cycle to make more bad loans. Good actors are rewarded by not having to compete against banks making uneconomic loans. Under Bernanke failure is not an option.
  5. Bernanke did not see the current crisis coming. Up until a few months ago he said it was contained. Why anyone believes he has the foresight to be able to get us out of this crisis is beyond me. It is a shame he is not leaving with the rest of the Bush economic team next week.

Bought the S&P

The financial stocks which were very weak this morning are actually up for the day. I bought a very small amount of SPY with the S&P at 870. I have very little conviction in this position and am operating with a tight stop.

Market Forces

The trade deficit for November came in at 40 billion dollars after averaging 60 billion dollars a month since 2005. Most of the reduction was due to the price of oil. The only reason the imbalance was able to get so large was because the Treasury and the Federal Reserve have been fighting the natural forces of the market for years. Easy money had us consuming beyond our means but somehow market forces always win out at the end. This could have been achieved earlier and with a lot less pain if our leaders were true believers in free markets.

Relief Rally

Good Morning. The futures are once again pointing lower but the market is deeply oversold on a very short term basis. I would be surprised if we did not see a relief rally starting at some point today. The oversold indicator I prefer to follow will not be oversold until next week but I am tempted to just hold my nose and buy today.
  • Gold is due for some upside relief after the selloff of the past few days. However, the contrarian in me feels uncomfortable owning gold because it seems to be the only asset where there is unanimous agreement that it is a buy.
  • If the government is printing money does it matter that there is unanimous bullishness on gold?
  • The financial stocks are lower in the pre-market. Thus far the market has not been able to shake off the weaker financial stocks.
  • Speaking of a contrarian indicator the headline this morning is "Losses Have Further To Run". How do they know?

Jean-Marie Eveilard versus Martin Whitman

Jean-Marie Eveilard sees a subdued outlook for US stocks while Martin Whitman calls this a once in a lifetime opportunity. Both agree that Asia is a great opportunity.

Are You Ready For Some Earnings

  • Why am I still tempted to get long? Note to self: Erring on the side of caution and not trading unless everything lines up has been my best trade all year.
  • According to Trim Tabs, flows into US mutual funds in the week ended Wednesday was 5.8 billion dollars. That helps partially explain the strength of the Santa Claus Rally.
  • With stocks, gold, oil and commodities down it seems that deflation is beating inflation today.
  • Did Obama ask Bush to request the TARP money because he knows something is wrong?
  • With Citigroup and Bank of America down over 10%, I am getting a feeling of dejavu to November. Except with lighter volume and slower action.
  • Earnings season is my Playoffs. Sad but true.

It Could Be Worse

  • An article in today's Wall Street Journal on retail bankruptcies mentions GE as one of the largest lenders to retailers.
  • The next time your wife gets moody, remember that you could be married to this woman. From the New York Times:
    One mother in TriBeCa, who is married, at least for now, to a Wall Street executive, put it rather bluntly: “My job was to run the household and the children’s lives,” she said. “His job is to provide us with a nice lifestyle.” But his bonus has disappeared, and his annual pay has dropped to $150,000 from $800,000 a year. “Let me just say this,” she said, “I’m still doing my job.”
  • Health care was supposed to be resistant to a recession but in the past few days medical device makers like Hologic, Hansen Medical and Intuitive Surgical have reported slowdowns.
  • The weak financial stocks and the the strength in the Yen versus the Euro might be telling us that something is amiss.
  • I am getting closer to pulling the trigger on some long exposure for a trade. But the fetal position seems much more comfortable for now.

Microsoft Mentioned Positively In Barrons

Microsoft was mentioned positively this weekend in Barrons by Fred Hickey, editor of the High Tech Strategist. He is the best technology analyst out there. The stock is currently holding up much better than the market. I am tempted to buy it as a way of gaining some long exposure to the market but am unsure of how much of the strength is because of the mention and will be fleeting. I am probably going to wait until tomorrow before I trade the stock.

Earnings Season

Good Morning. Earnings season begins this week with companies reporting their 4th quarter results. I believe this is significant because the 4th quarter was the first quarter where we were in a deep recession. It will be important to see how companies performed in this environment because I envision us bumping along the bottom for some time. Once I have seen how earnings held up it will make it much easier for me to invest in individual companies .
  • I spent some time shopping this weekend. The number of stores shut down or going out of business was eye popping. Some stores were selling off the fixtures.
  • Oil is much lower on news that Russia has resumed shipments of natural gas to Europe.
  • S&P 888 is a technical level I have been hearing a lot about. It is the 50 day moving average. I have found that when everyone is talking about a technical level it rarely works.

Weekly Strategy

"The recency effect, in psychology, is a cognitive bias that results from disproportionate salience of recent stimuli or observations. People tend to recall items that were at the end on a list rather than items that were in the middle on a list. For example, if a driver sees an equal total number of red cars as blue cars during a long journey, but there happens to be a glut of red cars at the end of the journey, he or she is likely to conclude that there were more red cars than blue cars throughout the drive."


The recency effect (or recency bias) goes a long way in explaining why Wall Street strategists claim the stock market is so cheap. In 1993 the S&P 500 first traded above 20 times earnings and peaked in 1999 at 42 times earnings. Ever since then the P/E of the S&P 500 has been coming down. When looking at valuations within this context the market does seem very cheap. However, when looking at a broader view of history the market does not seem as cheap. Prior to the late nineties bubble period the S&P 500 rarely traded above 20 times earnings. Further, previous Bear Markets ended with the S&P 500 at 11 times earnings on average.

The recency effect also helps to explain why investors were so bullish last week. The market had been going higher for the past month and so they concluded that the market would continue higher. As human beings we are hard wired to be subject to certain biases. The key is to recognize the effect it has on our decisions. I am certain that when the ultimate Bear Market bottom arrives, few will want to invest because all their investment experiences in recent memory will have been negative.

Focusing on the market at hand, I continue to believe that we are experiencing a Bear Market rally. The market had become maximum overbought on Tuesday and sentiment had become extreme. Since then the S&P 500 has declined by 6% from the top. This has gone a long way in bringing sentiment back to a lower level. However, the market remains overbought.

It appears that this Bear Market rally is in a corrective phase but is not yet over. The reason is that the overbought reading of the past week was extreme. Extreme overbought readings don't usually end rallies. I am not certain why extreme overbought readings have bullish medium term implications but I suspect that it is because if a market can get so overbought it means the market has underlying strength. In addition, we are seeing some positive divergences. The S&P 500 closed Friday at 890. The last time the S&P 500 closed at 890 was December 30. On December 30 the NYSE saw 31 stocks at new 52 week lows while on Friday the NYSE saw only 7 new lows. On December 30 the Nasdaq closed at 1550 while on Friday the Nasdaq closed at 1571. Nasdaq outperformance is another positive divergence.

Relationships that have held for decades have failed recently, so I am hesitant to rely on patterns that have worked in the past. If I do decide to try to catch more of this Bear Market rally it will be in very small size. In the next few weeks I expect to see another rally attempt. However, I expect the rally to ultimately fail and see fresh lows.

Down For Ther Year

It is a clear disappointment that the market was not able to rally today despite the better than feared unemployment number. I still believe the odds favor a continuation of this Bear Market rally after the current overbought reading is worked off. I am just not sure I want to play it given that I believe the downside potential is far greater than the upside potential. Have a great weekend.

Not Easy

Apologies for the lag in posts but I just finished a morning meeting that turned into an afternoon meeting.
  • It seems the late day buying yesterday afternoon were people looking to buy ahead of the bad news jobs report. You know trading has become tough when you have to fade the faders.
  • Am I picking up pennies in front of a bulldozer by trying to catch these Bear Market rallies?
  • On that note I took a few pennies gain on my Microsoft position and will reassess over the weekend.
  • Cisco was down based on comments they made at a presentation this morning. Cisco has been releasing a steady stream of bad news the past few weeks and the stock has shrugged it off and gone higher. Is this a change in character?

Jobs Hype

The jobs numbers are not a good forward indicator of the economy. They tell you what has already happened. In addition, they are revised a number of times in the following months, usually by large amounts. It is difficult for me to understand why investors put so much stock in the report. Maybe its because CNBC hypes up the jobs report like its Super Bowl Sunday.

Companies are announcing layoffs on a daily basis that will show up in future employment reports. This report does not change the fact that the economic outlook is deteriorating. If investors get too excited about this report I will likely flatten out into the weekend.

How Bad Will The Jobs Report Be

Good Morning. The jobs report is widely anticipated to be awful. When bad news is widely expected it rarely has an effect on the stock market once reported. On the contrary, there tends to be a buy the news effect.
  • Yesterday was an excellent example of how important expectations are. Retailers whose same store sales were down over 20% and well below expectations ended the day with minor losses. Wal Mart, the Wall Street darling, had positive same store sales but missed estimates slightly and was down 8%. The reason is that everyone was bracing for bad news from the rest of the retailers but not from Wal Mart.
  • While sentiment is on the high side, I don't believe investor's portfolios reflect their newfound bullishness. After the huge liquidations, there has not been enough time for large investors to rebuild positions.
  • How confident am I of that statement? Not very, judging by my small position size.
  • After Intel, Dell and Lenovo warned, is there anyone who will be surprised when Microsoft warns?

Slowing Down

The action in the market picked up at the beginning of the year but seems to be slowing down today. It seems that nobody wants to take too big a stand given the possible earnings warnings overnight and the employment number tomorrow. I am not too worried about the employment number since nobody is expecting anything good.

I am headed out to a meeting and will take my small Microsoft position with me. The fundamentals remain awful but that is always the case during Bear Market rallies. Have a good night.

Some Items Of Note

  • One of my concerns about this market was that it seemed everyone was bullish. Yesterday and thus far today we have seen heavy put buying, partly alleviating my concern.
  • The dollar is extremely weak today. The disaster scenario is a run on the dollar. While it is an extremely unlikely event, it is worth monitoring.
  • Wal Mart might be due for a technical bounce after its beating today but the stock is still not cheap. It trades at 15 times 2009 estimates, which are now in danger. Its not terribly expensive either.
  • Tomorrow morning brings the employment report. How big of a number would it take to surprise people?

Bought Microsoft

Microsoft has traded stubbornly higher despite the lower market. The shares are dirt cheap and given the Intel warning I believe expectations are low. I have bought a very small amount in accordance with my views this Bear Market rally has more to go.

The Grinch Stole Christmas

Retail sales are hitting the tape and they are not pretty. Among some of the eye popping headlines:
  • Abercrombie & Fitch December same store sales down 24%
  • Williams Sonoma 8 week sales down 24%
  • Wal Mart misses and warns
  • American Eagle December sales down 17%
  • Gap same store sales down 14%
The list goes on. I am not sure where expectations are but this does not seem positive to me.

Positive Technically, Negative Fundamentally

Good Morning. If I were blind to the fundamentals and strictly viewed the market through a technical lens, I would say that this Bear Market rally is not over yet. The market reached an extreme overbought condition two days ago. In the short run that means we will probably have to digest recent gains by going down or sideways. However, extreme readings have positive medium term implications, which means we will probably retest the highs from earlier this week some time in the coming weeks.

Unfortunately, I am not blind to the fundamentals and they continue to erode. Relationships that have held for decades are breaking down and once in a lifetime events occur regularly. While I am mindful of the positive technical setup, I am also weary of the current environment. This means sitting on my hands until things become clearer.

No More

The main reason the US has been able to borrow so much and keep interest rates low at the same time is that foreign central banks purchase our bonds. China is the largest holder of US Treasuries in the World. It appears that their appetite might be waning. From the New York Times:
China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.

The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.

On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.

Air Pocket

The market has given back the vast majority of its gains for 2009. I was expecting a pullback given that the end of the seasonally strong period coincided with the market being maximum overbought. However, it gets a little trickier now. In the past year when the market has reached this point (maximum overbought) it has completely fallen apart. However, there are some signs that this rally may be more durable. Namely, the improved breadth of the market. If this rally is indeed different than the damage from here should be limited.

While I believe that we are experiencing a Bear Market rally, I think that it could potentially go further. The most troubling aspect of this rally is that it seems that everyone is bullish. It is hard to find anyone that is bearish. In addition, the fundamentals continue to deteriorate. At this point I am agnostic as to the near term direction of the market. Have a good night.

Fetal Position

After taking a nice trade on the S&P 500 I am back in the fetal position. Given the giant science experiment called quantitative easing, I am continuing to take an extra cautious approach. While I am pretty sure this money printing experiment will end in tears, I am less sure about what will happen between now and then.
  • It is impressive that AAPL and MSFT are only down a couple of percent even though the Intel news is certainly bad for them. The stocks are cheap and it is possible that the bad news is already priced in.
  • Bloomberg reported that stock buybacks were down more than 50% year over year for 2008. However, buybacks for technology companies were actually flat. That is why I continue to prefer technology over S&P 500 names. They carry little debt and generate solid free cash.
  • Retailers report same store sales tomorrow. The only question is how ugly they will be.
  • Bloomberg is reporting that a government bond auction in Germany failed today. What if that happens here? How will we fund all our bailouts and stimulus plans?

Taking A Profit

I covered my short of the S&P 500. While this decline probably has further to go I am happy to take my profits and run.

Gloomy Morning

Good Morning. I come into the day with a small short position in the S&P 500. I will be pretty quick to cover my short if the market decline deepens as I expect the market to retest its highs from yesterday in the coming weeks.
  • Lyondell Chemical declared bankruptcy yesterday defaulting on 19 billion dollars in debt. This is probably the tip of the iceberg in bankruptcies from LBOs gone bad.
  • The new Investors Intelligence survey has Bulls at 41.8% and Bears at 34.1%. While sentiment has clearly turned positive, I am not sure that there has been enough time for investors to build enough positions to match their newfound bullishness.
  • Alcoa announced more job cuts and ADP is predicting 693,000 job losses this month. Eventually bad news will matter.
  • It appears that Manhattan apartment prices are not immune do the downturn. From the Wall Street Journal:
    But the average prices of units that are under contract but haven't yet closed declined 20% since August 2008, a rapid reversal, according to Miller Samuel Real Estate Appraisers ...

Lots of Questions

  • Let me get this straight. People are bullish because the government is going to borrow another 750 billion dollars and spend it? That is the solution to what is ailing us?
  • Is the solution to a debt bubble more debt? Sounds similar to a college cure for a hangover.
  • I know now is not the right time to take our medicine, but doesn't it get harder the further we let this go?
  • I am following the 14 billion dollar Dow Chemical - Rohm and Haas deal very closely. A closing would have short-term positive market implications while a break of the deal would be a negative. The lenders and Dow Chemical should be fighting tooth and nail to get out of the deal.
  • Isn't it ironic that Lyondell-Basell, another ill fated chemical takeover, is considering bankruptcy just as the Dow-Rohm deal is set to close? Do you think the irony is lost on the management of Dow?
  • When will bad news matter again?

A Primer On Sentiment

The theory behind using sentiment as a market timing tool is that once everyone is bullish and in the market, there is no one left to buy. Hence, the market has nowhere to go but down. The reverse works for when everyone is bearish.

Currently, it is increasingly clear that investors are bullish. Whether looking at the media, option indicators or surveys it seems that the consensus is that we are going up. However, this might not mean that the current rally is over. In the past few months there have been numerous liquidations, as investors sold stocks in panic. It is hard to believe that in the past month investors have had enough time to rebuild all their positions. That may take some time and coincides with the idea that this rally will last longer.

NYSE Advace/ Decline 30 Day Moving Average

In the past year whenever the 30 Day moving average of the Advance/Decline line has become maximum overbought the market has fallen apart. Since 30 trading days ago was the market low the market will be maximum overbought at the end of the day today. There is no law saying that the market has to go down when it is maximum overbought but in the past year it has. In a Bull Market the market gets overbought and stays overbought.

Given the very high overbought reading there is a good chance that the market will need to retest this reading in the following weeks, making a complete collapse in the market unlikely before that retest. That means I will be pretty quick to cover my short position if we get a pullback. On the retest I would likely reinitiate my short and hold it for longer.

Creeping Into A Short

With the S&P 500 up 15, I started a very small short position. I did so by shorting the SSO, which is the Ultra Long S&P 500. Somehow these levered ETFs always seem to underperform the market. I figured that I might as well take advantage.

Slowly Selling Annaly Preferred

Annaly preferred stock has risen with the improvement in the debt markets. I accumulated the shares between $15 and $18.50. Now that it is above $20 I am very slowly scaling out. I still believe the slightly less than 10% dividend offers a decent return but the stock is very illiquid and I am selling when the market is giving me an opportunity to sell.

At A Crossroads

Good Morning. My move to a new office went as smooth as sandpaper but I am finally up and running again. The current juncture of the market is critical. We are reaching a point technically (I will posts charts later), where every rally in the past year has failed and a severe decline has begun.
  • While I could see this rally lasting through the majority of the first quarter I believe it will end in tears. However, timing is everything.
  • JNK, the junk bond ETF, trades at an 8% premium to NAV. People are now paying to take risk.
  • A major roadblock to this rally will be issuance of new stock by over leveraged companies. This is likely to happen once companies report earnings.
  • I am tempted to short this opening but am going to take a deep breath and watch for now. I will be report back after the open.

Moving Offices

I am moving offices today. I hope to be posting again by late afternoon if my computer is up and running.

Weekly Strategy

U.S. retail store traffic fell last week as steeper discounts failed to lure shoppers before and after Christmas, prompting a research firm to lower its forecasts and predict the worst holiday-shopping season it has seen. Holiday sales probably decreased 2.3 percent and traffic dropped 16 percent during November and December, ShopperTrak RCT Corp. estimated today.
-Bloomberg News

Manufacturing in the U.S. shrank in December at the fastest pace in almost three decades as the recession deepened and spread overseas. The Institute for Supply Management’s factory index fell to 32.4, below forecasts and the lowest level since 1980, from 36.2 the prior month, the Tempe, Arizona-based private group said today.
-Bloomberg News

Meanwhile, the number of people collecting benefits in the week ended Dec. 20 rose 140,000 to hit 4.51 million -- the loftiest level since December 1982. The four-week average of continuing claims also increased, growing by 103,750 to 4.42 million -- also the highest since December 1982.

The news on the economy over the past month is decidedly worse. At the same time the S&P has rallied by 25% off of its lows. One would think that the combination of higher prices and bad news would give investors pause. If only investors were rational. On the contrary, as stocks are becoming more expensive investors are getting more bullish.

A lot of cash was raised in the past few months so there is fuel for a further rally. Bear Market rallies usually go further than most believe possible. However, there are some cautionary signals beginning to emerge. The seasonally strong period will be over by Tuesday. Option ratios are showing call buying not seen in years and the market will be maximum long term overbought by Wednesday.

I have written at length about the fair value value of the S&P 500. However, I have not spent much time writing about where the S&P 500 has traded during previous secular Bear Markets. In the last Secular Bear Market the S&P 500 trade at a P/E of 7.3 in 1982. It took until 1986 for the S&P 500 to trade above 11 times earnings. The S&P 500 spent the entire time between 1974 and 1985 trading at under 12 times earnings. During the prior secular Bear Market, which started in 1929, the S&P 500 spent 9 years trading at less than 12 times earnings (although not consecutively).

2008 S&P 500 earnings are expected to be $49, while 2009 estimates are for $42. If the S&P 500 would trade at previous Bear Market valuations the S&P 500 could potentially drop by more than half. I don't believe we will see such extreme valuations during this Bear Market. My point is that analysts, who were surprised by this Bear Market and claim this market is cheap, have a very narrow view of history. They focus on the past two decades, where we had bubble after bubble.Taking a longer view, the surprise would be if this Bear Market were over.

Statistics and Lies

Please note that I am a big fan of Kopin Tan's "The Trader" column and Jason Goepfert of

From this weeks Barron's "The Trader" column:
And it's quite a cache of capital. The amount of money stashed in money-market mutual funds had surpassed that in stock mutual funds as of the end of November, according to the Investment Company Institute, a national association of investment companies. In contrast, money-market funds were just 48% of stock funds when 2008 began. "If all the money currently sitting in U.S. money-market funds left and went into buying shares of the Standard & Poor's 500 index, it would absorb 42%" of that benchmark's market value -- the highest in at least 25 years, says Jason Goepfert of
This paragraph is very misleading for a number of reasons. It starts off by saying that a year ago money market accounts were 48% the size of mutual funds while now money market accounts exceed 100% the size of mutual funds. The implication is that cash hoards have doubled. However, the majority of the difference is because the stock market has gone down. Not because the amount of money in money market accounts has gone up. Lets assume that mutual funds matched stock market performance and were down 40% this year (including fees) and that money market accounts earned some interest. Without adding a dollar to money market accounts, money market accounts would be worth over 80% of mutual funds. The growth in actual cash is probably less than 20%.

Another flaw in this argument is the starting point. The beginning of 2008 was the end of a five year Bull Market. At the end of a Bull market cash levels are probably too low. Comparing to a time period where cash levels are too low is misleading.

The article then goes on to say that the ratio of money market accounts to the S&P is the highest in at least 25 years. However, money market accounts did not gain widespread acceptance until the late nineties so taking the comparison back 25 years is useless. Additionally, it is possible that the amount of cash people hold is also tied to inflation. While the S&P ended November in the same place it was eleven years ago, inflation over the past eleven years was probably about 40%. Therefore, it is possible that cash levels are justifiably higher.

I don't disagree that there is a lot of cash on the sidelines and that if this rally continues it will likely be because sidelined money gets sucked in. However, the statistics presented sound more impressive than they really are and don't say much. A more useful study would have shown that the statistics presented are somehow correlated to future returns of the stock market. Unfortunately, money market accounts have probably not been popular for long enough to make the study statistically significant.

The Dark Side Beckons

  • As the market is getting more stretched, I am getting tempted to take a swipe on the short side. Sooner or later the fundamentals are going to get in the way of the party. I will likely wait until the seasonally strong period passes.
  • In hindsight, was there a way to see this rally coming? When I look back the most obvious signal that this rally was forthcoming was the large overbought reading we had a few weeks back. At the time I wrote the following:
    "The market currently has a positive technical setup. We had a major overbought reading a week ago. The short term implications of an overbought reading are negative. However, a very high overbought reading has positive medium term implications, especially when it comes after a large decline. I believe the reason for this is that after such a long decline the fact that the market can get so overbought shows that the selling pressure is gone."
  • The market played out according to the script. We had a pullback after the large overbought reading and we have re-rallied. Unfortunately I did not take my own advice. While there is no point of crying over spilled milk, I will take it as a lesson.
  • Have a great weekend.

Curb Your Enthusiasm

  • Why does the market trade like everyone is still on vacation?
  • Much of the action of the past few days has been tax related, portfolio rebalancing and mark ups. I expect the next couple of days to be similar, so I would not make too much of the action which ever way the market goes.
  • GMAC is giving out 0% financing to people with credit scores as low as 620. The head of GMAC commented that 620 is not subprime. Your hard earned tax dollars at work.
  • Investors enthusiasm continues with call buying again at an extreme.
  • One of the headwinds I envision for the market is that companies will issue more stock in order to delever if prices go higher. The good news is that prices need to go higher before that occurs.
  • The only way that this market is a bargain is if everything returns to normal. I don't believe in the tooth fairy and I don't believe that bailing everyone out makes everything normal.
  • The strange thing about the stock market is that the higher it goes the more bullish people get. With a lot of money on the sidelines, that is the bull case.
  • I will be moving today and Monday so posting will be sparse.

Fresh Start

Good Morning. When we look back at 2009 a year from now, in hindsight the outcome will seem obvious. However, in the here and now anything could happen. In my opinion this market is too cheap to short, but not cheap enough to buy given the structural issues the economy is facing. If I had to venture a guess I would say that the market will make fresh lows at some point in 2009, but I don't have the confidence to put my money where my mouth is. As a result, I will be looking more at individual situations than the market as a whole.
  • The seasonally strong "Santa Claus Rally" period lasts through Monday.
  • The market will be long term overbought by Wednesday and the put call ratios will likely roll over as well. These conditions should act as a headwind to the market.
  • Apple was not able to gain any traction while the market rallied hard to close out the year. Either Steve Jobs is really sick this time or the stock is very weak.
  • The biggest positive for this market is that credit rallied through the end of December.