An Example Of Shenanigans

The spread on the WYE/ PFE arbitrage trade narrowed by 10% today and 15% in the past two days. This is a trade that many hedge funds are long. I don't think this strong move during the last two days of the quarter is a coincidence. I happen to also be very long this trade.

Mark Em Up

I make my money on inefficiencies in the market. If it were not for all the nonsense that went on it would be that much more difficult for me to make money. That said, watching all the shenanigans that go on (like markups) still infuriates me. I am calling it a day. Have a good night.

Is This For Real Or Is It Fantasy

With the month end games still being played, the rest of the day will be a wild card. We should find out what the real level of the market is next week when everyone returns from vacation. Thursday has the potential to be an especially volatile day, with both the Employment Report and holiday thinned volume . It is also possible things will slow to a crawl as people leave for the weekend. I have plenty of dry powder to take advantage of any opportunities if they present themselves.

Covered SPY Short

I covered my SPY short from yesterday. I am holding onto the SPY puts I purchased, where I am now sitting on a nice gain. Given how cheap options are there is little reason to hold short positions. I am happy to pay for the defined risk that options afford me.

Wading In

I am slowly adding to my shorts by Purchasing August SPY Puts.

Rally or Retest

Good Morning. The market still has room to rally through the end of the week as we are still in the midst of the seasonally strong period and the market is not yet maximum overbought. However, it would not be surprising if the market turned down beforehand. The sentiment and oversold extremes of last week have been fully worked off. The recent rally off the lows has been lethargic, which likely means that the past weeks rally has been a reprieve and not the beginning of a new leg up.

I have started a short position on the SPY but want to leave room for a rally through the end of the week. As such, I will be slowly scaling in to the position over the course of the week.

Articles Of Interest

  • Apparently Barack Obama has made this News Yorker article mandatory reading for his staff.
  • Jeff Saut makes a case for Japan as a way to play emerging markets strength. It makes sense that Japan will perform well over the coming years as they are already 20 years into their bear market. I know that there are many arguments against them but after a twenty year bear market would you expect anything else? A lot of value investors like Japan as well, especially the small cap arena.
  • The Marc Faber video.
  • Doug Kass predicts trouble ahead.
  • Have a good night

One Man Army

  • Sometimes the month end shenanigans end a few days before the end of the month. I suppose they don't want to be too obvious.
  • I'm not sure why they would be scared. When's the last time the SEC went after anybody for manipulating a stock price upward?
  • After today the market is no longer oversold but will not be maximum overbought until the end of the week.
  • Sentiment is finally in the right place to make me feel comfortable about being short again.
  • Did Madoff do it alone? With all the fake trade tickets and statements he had to create, how did he ever have time to use all his vacation homes and yachts?
  • The man sat on the boards of charities so he could steal their money. How does a man lose his soul like that?

Marc Faber Bullish or Bearish

One has to sit up and take notice when astute investor Marc Faber turns bullish as many media reports are suggesting he is. However, what Faber said is that he does not believe that the S&P 500 will see new lows because if the market starts tanking the government will print more money and intervene.

My current positioning is not at odds with Faber's opinion. In order for the government to intervene the market will need to start tanking first, at which point I might decide to cover my shorts. I am not as sure as he is that the government will intervene so quickly this time around after the heavy criticism they have been receiving. Anyhow, I believe this is an issue to start thinking about once the market is lower and not at the current juncture.

Extreme Call Buying

We are seeing extreme call buying. This is somewhat surprising given that the market is well off its peak from a few weeks ago. I believe that short positions from this level will be rewarded in the fullness of time. However, given that this has been the best quarter in over a decade month end is a huge wild card.

Horrible Timing

My first step in on the short side exhibited some horrible timing as the market zooms forward. I was planning on waiting an hour before deciding whether to start venturing in on the short side. However, when I saw heavy call buying and the market down I decided to initiate a position.

I forgot that there was a Russell rebalancing on Friday and that the opening action was likely just an adjustment. I should have remembered that and did not think things through. Luckily, I have only taken a small step in and have plenty of ammo to deploy at higher prices. I consider myself more patient than most when it comes to the stock market but it is a constant battle.

Tiptoeing In On the Short Side

  • Were this not the end of quarter I would be very short right now. I will likely be scaling into short positions over the course of the week.
  • Money managers had a very good quarter and I don't want to underestimate their will to protect it.
  • That said, wouldn't it surprise everyone if we turned down this week?
  • On that note, I decided to take my first step in on the short side. I am short SPY. About 1/3 the position I would ultimately like to have.

Weely Strategy - Showtime For The Bulls

The coming week is extremely important for the bulls and could determine if we see a retest of the lows this Summer. In the past three months every time the bears managed to push the market back a little, the bulls had the market at new highs shortly thereafter. Coming into last week the market was oversold and we were entering the seasonally strong part of the month. While the bulls managed a late week bounce, the market ended the week roughly where it started. The rebound was anemic compared to previous bounces, hinting at a change of character.

The window is still open for the bulls to prove themselves in the coming week. The entire week is seasonally strong and the market is not yet overbought. The holiday thinned volume should allow the bulls to push the market higher in a relatively easy fashion. If the bulls can't push the market higher this week I believe it will be lights out and the market will be heading for the lows sooner rather than later.

No Stress

I spent the last half hour debating myself whether to start initiating short positions. I believe the market is shortable now, despite the end of the month (where money managers use other people's money to mark up stocks).

I have decided to hold off on shorting for now. I am enjoying being stress free with little stock market exposure too much. Have a great weekend.

An Options Extreme

I am seeing one extreme in the options complex today. On the CBOE, the index calls traded are exceeding the index puts traded. This has been a very good signal that a down leg is coming. I'm not sure if this is a result of the Russell rebalancing but I definitely would not want to be long.

Other Put/Call ratios are not showing any exuberance so I am not yet willing to go short. During a seasonally strong period with an oversold market I have higher requirements for going short.

Identifying Market Tops and Bottoms

Market bottoms are a lot easier for me to identify than market tops. During a market bottom sentiment is usually very one sided, with most being bearish. The market is generally oversold and fear and panic prevail. Then suddenly the market turns and never looks back. The turn often happens on bad news or during an event that everyone is fearful of.

Market tops are a lot trickier. Extreme bullish sentiment can last a lot longer than extreme bearish sentiment. It is a lot harder to point back to the moment the market turned as it is usually uneventful. Generally, the market chops is way down, unlike a bottom which is usually a straight line up.

I believe the cause of the difference between bottoms and tops is human behavior. During a bottom, often the market is cascading lower and people are selling in panic. Once the market turns the panic recedes and the market shoots up as the sellers disappear. However, it is a lot rarer for people to buy in panic. It is actually mentally difficult to buy on a day when the market is up a lot, while it is difficult not to sell on a big down day.

Even though tops are harder to identify, identifying one can be very profitable. Because market tops are a process, there are a lot of sell offs followed by rallies. This allows one to cover shorts and reload at better prices. At a bottom if one sells his stock into a rally it is a lot trickier to buy it back cheaper as pullbacks are usually shallow.

The Next Crisis

The Federal Reserve and the Treasury are coming under heavy fire from Congress for their bailout efforts. If there is another crisis it is less likely that they will stick their necks out again. I am not predicting another crisis but if there is one the market will likely need to stand on its own two feet and we will not be able to rely on a government bailout. I believe that would be the healthiest outcome for the market but not the outcome that short term oriented Wall Street will be happy with.

On Hold

  • We are seeing put buying today. I will not be putting out any shorts as long as that remains the case.
  • The momentum names are mostly shrugging off bad news with AAPL, RIMM, BIDU and GOOG all higher. The banks are holding up as well.
  • All in all this argues for a continuation of the end of month rally.
  • This week saw the first outflows from mutual funds after 13 weeks of inflows. The virtuous cycle of higher markets leading to more inflows appears to be over for now.

To Wait Or Not To Wait

Good Morning. After not being heard from for the past week, the green shooters are coming out of their bunkers shouting, "I told you so". They even marched Jeremy " Never Seen a Market He Didn't Like" Siegel onto CNBC yesterday. I believe the bulls getting loud again is a precursor to the next move down in the markets.

I was planning on waiting until July before rebuilding my short positions. The market remains oversold and we are in a seasonally strong period. However, I am willing to veer from that plan if I see the bulls extending themselves too much today.

Last night Potash warned. This is a big hit to the momentum crowd as last week RIMM spit the bit. It will be interesting to see if they continue the markups in the momentum names or cut and run. In addition, there is a large Russell rebalancing today, which adds another wild card to the equation. It is a low volume Summer Friday right before quarter end so anything could happen.

Maybe Something, Maybe Nothing

I have been seeing this story about a Saudi Arabian company defaulting on debt. At first I thought it was nothing but the numbers seem to keep growing. This might explain some of the recent lethargy in financial stocks. From Bloomberg:
Ahmad Hamad Algosaibi & Brothers Co., the Saudi family holding company whose Bahraini bank has defaulted, owes 34.6 billion Saudi riyals ($9.2 billion) to more than 100 banks, two people familiar with the situation said.
Additionally, after the bell UBS warned and announced an equity offering and Potash warned. The futures don't seem to be reacting much to the news but it does not strike me as positive.

Let The Games Begin

The quarter end window dressing that I have been expecting has finally arrived. I was planning on waiting until the seasonally strong period ends before moving back into my short positions. However,the market is quite extended and I will consider taking a starter short position tomorrow if the rally goes any further. Have a good night.

Mixed Picture

  • The fact that the market was able to rally on bad news is a good thing. However, it would have been nice to see some fear and/or panic first.
  • The financial sector is ugly today. There are no two ways about it.
  • Did the window dressers step in a little early this morning to do some damage control?
  • What happens if some institutions break ranks and decide to hit the eject button before quarter end? Isn't that the smart thing to do?
  • Is anyone short this market?
  • I will be heading out to meetings and return later this afternoon.

A Bet Against Change

As readers know I am expecting a retest of the lows some time this Summer/Fall. Recently, I have been spending some time trying to build a list of stocks I would like to purchase if and when that retest occurs. Surprisingly, a lot of the cheaper stocks I have come across have been in the health care sector. In tough times health care usually trades at a premium.

The bear case against health care stocks is that Barack Obama is going to destroy the margins in health care with his reforms as he currently has popular support to do what he pleases. I believe that might be coming to an end shortly. Barack Obama convinced the nation that he was going to bring about change. However, in the first five months of his presidency it has been business as usual. There was nothing groundbreaking in his stimulus package. It was the same pork barrel spending and some tax cuts. He is taking much the same tact that the Bush Administration did in dealing with the financial crisis.

At the end of the day Barack Obama is not that different than any other politician and it is a matter of time before the American people realize that a good speech can only improve the economy so much. I believe Barack Obama's popularity will be waning in the coming months and that health care reform will be greatly watered down. Health care stocks are currently pricing in quite a bit of reform and if the market declines they are likely to price in even more. I have long been debating whether to buy health care stocks and am increasingly feeling comfortable owning the sector.

Buy Now, Pay Later

Good Morning. I continue to see a firm market through the turn of the month but trouble thereafter. The inability of the market to mount a solid rally despite everything being in place is a sign of underlying weakness. At the same time the market does not seem ready to down. During the post FOMC market drop market breadth stayed positive.

This morning we are seeing another attempt higher. Yesterday, the financial sector was lethargic all day despite the early rally attempt. That was the clue that the rally would fizzle. Look to the financial sector again today for clues as to the sustainability of this morning's move.

Smoke Some More Green Shoots And You'll See It

In a CNBC interview today Warren Buffet said he is not seeing green shoots in Berkshire Hathaway's 70 businesses. Last week a General Electric official said he was not seeing any green shoots in the conglomerate's businesses. Its amazing that these guys have eyes and ears in every industry and they can't see the green shoots that are so easy to see from analysts' Wall Street offices.

Odds Favor An Up Market Today

According to Jason Goepfert of, when the advance/decline line is +1500 or better at 2:00 PM on FOMC days, the market goes up an average of 1.2% to the close. At 1:40 the Advance/Decline line is +1900 so it looks like this signal will be on. I will not be playing it but if we get that type of ramp into the close I might start shorting.

Too Early To Short

  • With the turn of the month coming I believe it is too early to short. We have removed some of the excessive pessimism that had built up and some of the oversold condition.
  • While I believe the odds favor a higher market over the next few days I am not interested in longs. I believe that the upside is limited while the downside potential of this market is large.
  • What am I doing? Research on stocks to buy if we get a retest of the lows.
  • What is more disturbing? That the Federal Reserve is lobbying for more power after bringing the world to its knees or that the National Association of Realtors are lobbying for looser appraisals? Or that financial companies are lobbying to continue business as usual?
  • Has anything changed?

I Can Hear You Now

I sold my Verizon position. I bought it as a hedge about 2 weeks ago because I was scared the market would break out. It was the only cheap stock I could find. I ended up making money on my shorts and my hedge. Sometimes its better to be lucky than smart. The stock is still cheap compared to the rest of the market.

Waiting For A Month End Rally

Good Morning. It is undeniable that the market has recently had a change of character. For the past three months the market would get on the verge of being oversold and then rally violently. However, recently the market can barely rally even when it becomes oversold. The higher the market rose the more money it would suck off the sidelines. It appears as if that process is over.

I believe a lot of investors are like deer in the headlights at the current moment. They once again returned to the stock market that burned them. Now that the euphoria has worn off they are getting a strange feeling of dejavu. I believe that if the market breaks lower we will see mass puking.

I believe a move lower is likely but will need to be put on hold until next month. The oversold condition, recent pessimism and quarter end window dressing should result in a month end rally.

Snails Pace

The fact that the bulls have a lot in their favor (oversold market, quarter end, financials up) and are not able to do much with the market speaks volumes. This is the polar opposite of how the market behaved at the March lows. I am going to tuck that little bit of information in the back of my head and try to remember it if we finally get a month end rally. I am largely in cash and ready to sell them higher or buy them lower. Have a good night.

Slow Summer Day

Slow Summer trading is here without the Summer weather. We are finally seeing some fear in the market with some put buying today. The market held on its test lower, the financials are strong and we are approaching quarter end. The investment bankers are holding back the supply with few secondaries announced so far this week. I believe the odds are in favor of the longs for the remainder of the week.

Early Action Encouraging

  • The early action is encouraging with breadth positive, financial stocks higher and some put buying.
  • I would prefer if we did not have a gap up opening as down moves rarely end with gap up openings.
  • Momentum tech names are taking it on the chin led by Apple.

Broken Secondaries

Good Morning. There have been some disturbing developments in market action during the past few days. Many of the larger secondary offerings have broken below their deal prices, even though they were in many cases offered at steep discounts to market prices. I suspect that many reactive type managers used those deals in order to lower their cash balances and get reinvested quickly. A further deterioration in prices could lead to a cascade lower in many of these stocks.

The market has now given back most of its gains for the past two months in the span of little over a week. Market internals have deteriorated and investors are not showing levels of fear typically associated with a bottom. The evidence leads me to believe that we have not yet seen an end to this correction and that it may have a while to go.

In the very short term the market outlook is not as bleak. The market is becoming oversold just as we are hitting month end and the market should see a relief rally in the coming days. A relief rally that I will be looking to sell into.

This morning we are seeing the dollar weaker and commodity prices higher. The correction began in the commodity sector and a bounce might start there as well. While the market might be better off with another down day in order to achieve a better oversold reading, it looks like the market will attempt a bounce this morning.

Patiently Waiting.

There continues to be damage inflicted on the financial sector, while we are not seeing high levels of fear typically associated with a bottom. However, the market is beginning to get oversold and quarter end is nearing. I believe there will be a better entry point later in the week for short positions. If not, I am ready to buy if the S&P 500 cracks 800. For the time being I am patiently waiting for opportunities with a lot of dry powder. Have a good night.


I decided to cover my SPY short from my long VZ/short SPY trade. I am going to let the long VZ position ride. Why? The 10% move up in the VIX today could be construed as fear. Although, the Put Call Ratio leaves much to be desired.

Warning: Smoking Green Shoots Can Lead To Massive Hangover

  • I am still in the long VZ/short SPY pair trade, which is working even better than I hoped for. My instinct was to take profits on the trade. However, I am seeing little in the way of fear so I am sticking with the trade.
  • We should see the true tone of the tape this afternoon. Options expiration lingering effect should be wearing off.
  • I would not rule out the possibility of a month end markup. It just might start from lower levels in the second half of the week.
  • It would be nice to see some fear first or else its hard to imagine a rally with much oomph.
  • The 200 Day moving average did not prove to be much in the way of support. Where are all the people who pounded the table on the breakout now?
  • It is rare when a technical indicator that everyone is watching works.
  • While the market is now trading where it was almost two months ago, my suspicion is that most people are not doing as well. Why? The defensive stocks have rallied while the names everyone was touting are floundering.

WYE/PFE Arbitrage

I have added yet again to the PFE/WYE arbitrage trade even though the spread keeps getting tighter. I believe it is the lowest risk way to make money in the current environment.

Month End Markups

Good Morning. I believe that the market is heading for a retest of the March lows. After a 40% bounce the market is not cheap and market participants are back in the pool. While the economy is no longer falling at terminal velocity, it is still headed in the wrong direction. Investors have mistaken a higher stock market for a healthy economy. Some might say that the market is speaking. To paraphrase Warren Buffett, in my entire life the market never said a word to me.

Navigating around month end as a bear will be tricky. It is also quarter end and the powers that be want to put a good face on their quarterly numbers. Month ends have been consistently stronger recently. However, it seems that many have picked up on that trend. Generally, once everyone picks up on something it stops working.

As it stands, I am largely in cash with little in the way of directional bets. I am hoping for a month end markup to short into but am not sure we are going to get one.

Stalking August Puts

The Citigroup conversion will happen at the end of July. I believe this will be market negative for two reasons.
  1. The issuance of over $30 billion in stock.
  2. The likely depressing effect it will have on Citigroup's stock price. I believe Citigroup is a psychologically important stock to retail investors.
For that reason, I am looking to buy August Puts on the S&P 500 if we get a month end markup. I want to make sure I capture that event and the July Puts will expire before the Citi conversion. Options are already trading at their cheapest since Lehman Brothers blew up and a run up next week would make them even cheaper. Have a great weekend.

Positions Expiring

With options expiration a lot of my positions will be disappearing. I sold covered calls on my treasury position and that position will be taken away from me. I am short some NLY Puts and SPY calls that will expire worthless. Once all is said and done I will be largely in cash. I am hoping for a month end mark up to get short into.

Robert Prechter On Bloomberg

Uber Bear Robert Prechter was on Bloomberg this morning. He correctly called the bottom in March. I don't follow his work but here is the link.

No Longer Selling Options

The VIX is continuing its recent implosion. For the past few months I have been a seller of options, selling both naked calls and puts. We are nearing the point where I would be a buyer. While Summers are usually a quiet period in markets, I see the potential for outsized volatility.

Ready For Action

  • Interesting that some of the momentum names are coming back today but RIMM still can't catch a bid.
  • Receivables jumped which might make a suspicious person think that RIMM has stuffed the channel a bit.
  • I am of the belief that what is bad for RIMM is bad for Apple. A price war helps no one.
  • I am now more willing to take short positions again as the excess pessimism from the past few days seems to have disappeared today.

Expiration Related

Good Morning. A lot of what is occurring in the market is expiration related. S&P futures contracts expire before the open. I would not read too much into anything that occurs today.

I remain bearish in the medium term and am looking for an entry point to initiate short positions. After bragging about how much cash they were holding a few months ago, market participants were furiously putting that cash back to work in the past few months. I believe that process is largely over. After a 40% run stocks are no longer cheap and the economy remains challenged to say the least.

Change The Channel

"Our retail (channel) checks and conversations with the supply chain throughout the quarter suggest continued robust sell-through of RIMM devices"
- Goldman Sachs analyst Simona Jankowski
The Goldman Sachs analyst upped her price target on RIMM and called it her favorite pick when the stock was $83 a week ago. Tonight they reported weak subscriber adds, which she referred to as "sell-through". That leads to the question, what channel did she check? CNBC?

Momentum Fading

There are more problems for the momentum crowd tonight. Earlier in the week it was the ag and commodity stocks that fell apart and tonight RIMM disappointed. The ending is always the same but memories are short. The major averages don't show the extent of the damage as defensive stocks have had a strong run and are buoying the averages.

Expiration Influences

Quadruple witching option expiration is likely heavily influencing the market at present. It will be extremely difficult to get a good read on this market until late Monday. I have little in the way of directional bets on at the present. Have a good night.

Shorted Some SPY

I shorted some SPY as the S&P 500 approaches 920 again. I am doing this strictly as a hedge to my long Verizon position. This is not a directional bet.

Interest Rates An Issue Again

Interest rates are becoming an issue again. The ten year note is trading at 3.85%, which means mortgage rates are once again approaching 6%. I believe higher rates would be a death blow for an already hobbled economy.

I sold covered calls expiring tomorrow on my long treasury position. It looks like it will come down to the wire to see if I am keeping the position.

End Of Quarter Rally?

I strongly believe the S&P 500 will be below 800 some time in the next few months. I can't decide whether to wait for quarter end to pass before reshorting this market or to short it in the next few days if we get a bounce. Does everyone think the end of month will be strong and is it priced in already? What do the readers think?

Surprisingly Good

  • The financials are leading the market today, which is exactly what the doctor ordered.
  • There is some put buying today.
  • We are knocking against resistance at 920.
  • I was planning to put out shorts at 920 on the S&P 500 but given my first two bullet points I am holding off for now.

RIMM Earnings

Research in Motion (RIMM) is reporting earnings tonight. Recently, Apple lowered the price of the iPhone to $99 and the new Palm Pre has launched. As a response Verizon has been offering buy one get one free Blackberries plus $50-$70 off.

It is understandable that they want to respond to these strong offerings. However, I have a hard time understanding the buy one get one free. Why does anyone need an extra cell phone? Could it be that RIMM has too much inventory?

RIMM is very good at pushing inventory issues off into the future so they might be able to report a decent quarter. However, some time in the next few quarters I believe they will need to recognize this issue.

Real Journalism

Here is an example of some real journalism.


Good Morning. The thud in the bank stocks yesterday gave me a sense of dejavu to every other steep drop in the market we have seen in the past year and a half. If the bulls are going to attempt a rally they need to stop the bleeding in the banks. I will be looking for clues in that sector.

Another item that is not working in the bulls favor is equity issuance. During previous periods of correction in the past few months, the bankers would stop announcing secondary offerings when the market stumbled. That allowed the market to recover. However, this week we have seen steady announcements of secondaries despite the sharply lower market.

The market is set to open lower this morning. That is actually good news for the bulls as downtrends rarely end with gap up openings.

The Big and Small Of It

In the bigger picture I see little to like about this market. The market is not cheap and we are in one of the most uncertain financial periods ever. Companies are issuing stock on a daily basis while dividend yields are low. The best I can say is that the economy is deteriorating at a slower pace but I just don't see green shoots.

In the shorter term I am less bearish as we are finally seeing some fear return to the market, with heavy put buying today. Additionally, many extended momentum names have come in hard during the past week, while money has rotated into the more defensive sectors that are more reasonably priced. Additionally, the market is now somewhat oversold on a short term basis. Have a good night.

Watching and Waiting

This market is rallying without the help of the financial sector, with defensive stocks taking the lead. I view that as a distinct negative. The positive side is that we are finally seeing some put buying and the extended momentum stocks are no longer extended. I will consider putting out shorts again if the S&P 500 approaches 920. That former level of support will now be resistance.

Stuck In The Middle

While I covered a large portion of my short positions, I am not interested in buying this market. A few hours of put buying after three months of rampant speculation does not make it a buy. However, the combination of a 55 point S&P 500 drop from last Thursday plus some fear in the market make me more neutral in the short term. I would likely use a relief rally to rebuild my short positions.

Covering Shorts

I covered a large part of my short position. We are seeing very heavy put buying.

End of Month Theory

A friend of mine proposed a theory that I wanted to share with readers. An article in the Wall Street Journal highlighted that actively managed mutual funds were beating the S&P 500 by close to 5% this year. As we approach quarter end mutual funds might want to lock in those gains by making themselves look more like the S&P 500. Beating the S&P 500 by 5% makes for great marketing material.

Mutual funds are positioned for a cyclical recovery. A repositioning would mean a move into more defensive names as quarter end approaches.

Rush To Judgement

Good Morning. In my closing post yesterday I wrote that market participants were not fearful, making it unlikely that we were close to an end to the recent down draft. I would like to correct myself. At the end of the day yesterday we finally saw some fear in market participants. There was finally some put buying and strong selling at the close. That is a move in the right direction but not yet enough for a sustainable rally.

This morning we received data on weekly mortgage applications. They have fallen yet further as higher rates are having a negative effect on housing. I believe that 4% on the ten year note is the line in the sand, where rates begin to cripple the economy. The good news is that I believe treasuries have put in a low that should last at least a few weeks.

The Correction's Health

The best thing the bulls have going for them is that the market is now oversold. However, we did not have a good washout and I am seeing little fear, so an oversold rally would probably be a good shorting opportunity for the bears. The bulls are treating this as if it is a healthy correction. However, during a healthy correction people are usually scared, not calling it a healthy correction. Have a good night.

Down To The Wire

  • The bulls have turned the tape around too many times in the last hour to count them out.
  • 920 is now resistance on the S&P 500. I would expect any rally attempt to run into trouble there.
  • The market is now down for the month of June.
  • A lot of longs I have been hearing from know the economy is horrible and that stocks are not cheap but think the market is going higher for various reasons. Those people don't sound like the strongest hands to me. How far down do we need to go before they start puking it up?
  • My short exposure is through short SPY calls (90 strike and above) expiring this Friday. If we melt into expiration Friday, I will move to the sidelines. If the market gets marked up at the end of the month I will short again. If we go under 800 on the S&P 500 I will be a buyer.

Dust In The Wind

920 on the S&P 500, the level that bulls heralded as proof of a new bull market, is now dust in the wind. While I don't trade on technical analysis, I monitor it because others trade on it. The bears will need to keep the S&P 500 below 920 for the remainder of the day if they want to trigger another round of sell orders. My understanding is that many technical folk wait for closing prices. The good news for the bulls is that the call buyers have disappeared and that Goldman Sachs, RIMM and Apple are still positive.

Can't Get It Up

  • The bulls have the advantage with breadth positive, the dollar lower, oil higher and the momentum names higher. The ball is in the bull's court today.
  • If the bulls can't get the market going with so much in their favor, what will it take to get the market up?
  • If they can't get it up, will they take it down?
  • Bonds are once again trading higher. I sold covered calls on my treasury position yesterday. If we end the week at current levels I will be out of the trade.
  • If I thought bonds were a good long term value I would stick with the trade, as I believe they are going higher in the coming weeks.

Put Them Back Out

I am using the strength this morning to add to my shorts. The call buyers are back.

Buyers Show Up

Good Morning. It appears the buyers are showing up this morning as the market is testing the lower end of its range. I expected a bounce off the 820 level, as support generally holds the first time it is tested. As such I covered some of my shorts yesterday. I will be looking to put them back out today as the market bounces.

Investors have been conditioned to buy every dip. Yesterday, we witnessed heavy call buying as we tested support. It is quite unusual to see heavy call buying on a large down day. The fact that the market could not muster a rally despite that call buying leads me to believe that the market is weak.

Bulls Losing Ground

While the bulls did not give up 920 on the S&P 500 today, their performance was rather weak. There was heavy call buying and they were not able to lift the market. My best guess is that 920 will give way some time this week. However, there has not been much consistency recently in the markets day to day movements. Have a good night.

Call Buying Frenzy

We are seeing heavy call buying and the market is barely able to rally. If I were a bull I would be very afraid. If we get a bounce I believe it could be sold. I will look to put out the shorts I took in earlier.

Survey Says ...

It seems that all the consensus trades have now turned.
  • Given recent sentiment surveys it is hard to argue that the consensus is for a higher stock market. The stock market is now falling.
  • There is a consensus that the US is printing money and that treasuries and the dollar are no good. The dollar and treasuries are rallying.
  • For the same reason, many are long commodities. Those are now falling.
A lot of trades are working against the consensus right now. If these trades get worse we could see a rush to the exits. Given that everyone is on one side of these trades it could get ugly, regardless if they are correct in the long term. The bears need to get through support before this scenario could play out, which will not be easy.

Market Testing Super Support

The market is currently testing important support at the 920 level on the S&P 500. This is the bottom of the recent range and the location of the 200 day moving average, which spurred many to bullishness. This is what I am seeing.
  • We are not seeing call buying, but nor are we seeing put buying. I f I were a bull I would want to see heavy put buying on a big down day such as today.
  • Breadth is nasty, with 9 stocks declining for every advancing stock and energy stocks are leading the way down.
  • The best thing the bulls have going for them is that everyone is focused on this level and it is a logical place to cover some shorts or do some buying. The first test of an important level usually holds.
  • If 920 does not hold it could get ugly as there is not a lot of liquidity in this market.

Sold Covered Calls On Bond Position

I took profits on my bond trade by selling covered calls expiring this Friday.

Attacking Support

I covered a few shorts in SPY as the S&P 500 approached 920. I suspect that level will hold the first time it is tested. I remain short though.

Reversal Of Fortunes

Good Morning. Last week we saw a subtle shift in what was working. While the indices did not do much, defensive sectors such as utilities, staples and health care began to outperform the cyclical sectors such as technology. In addition, the bond and the dollar, which have been beaten in tandem for the past few months stabilized. This morning that trend is continuing, with the dollar stronger and bonds higher in overseas markets. Could these subtle shifts augur a reversal of fortune for the stock market?

I will likely take profits on a portion of my bond trade today if we see another strong day. While I believe that bonds have put in a bottom that should last for at least a few weeks, I don't like bonds as a longer term investment and don't want to risk getting stuck with them.

Any Reason To Party

The market is rallying on news Ahmadinejad has lost the election. Its hard for me to recall when the market sold off on fears of Ahmadinejad or to figure out how that helps our economy, but I just obviously don't get. Have a great weekend.

Financial Tug Of war

  • The strongest sectors today are utilities and health care. Unfortunately, Verizon's strength is fading and not keeping up with the strength of the rest of the utilities. Technology and energy are the weakest sectors.
  • The good news is that once again the bulls are not giving any ground to the bears and that the financials are holding. The bad news is that the street is overweight the weaker sectors and underweight the stronger ones.
  • The financials are flat today. Whoever takes that sector will likely win today's battle.
  • Its hard not to get spun around by this market. One minute it looks like the bulls have it and the next the bears.
  • Truth be told. I felt strongly this morning the market was going to be ugly today and I was wrong as can be.

A Few Things That Stick Out

  • Verizon has already traded 12 million shares today. The daily average is 17 million shares. If they could close the day strong this will be a breakout from the recent range on very heavy volume. I suspect the biggest obstacle will be broader market weakness.
  • We are seeing extreme call buying even as the market is lower. Everybody has learned that dips are meant to be bought. I suspect this is a lesson that will soon be unlearned. I am extremely bearish.
  • While bonds and the dollar are strong, oil is down but still hanging in. It makes sense that oil should put in a top if bonds are putting in a bottom. It seems the oil bulls will not go down without a fight.

Grandpa Knows Best

My wife's grandfather gives me the same advice every time I see him. Buy utilities. I think Grandpa is on to something. I believe the Treasury market put in an important multi month low this week. Utilities have bond like characteristics, so they often trade with the bond market. For instance, Verizon yields 6.5%. I am expecting a retest of the lows this Summer. If that occurs it is unlikely that utilities will make much progress. However, they should outperform the market regardless.

Its Grandpas birthday! He is 89 years and strong. Happy Birthday Grandpa!
Happy Birthday to my friend since childhood, the Shukman!

Winds Of Change

Good Morning. For the first time in a long time treasuries are rising strongly this morning as oil is down over $1. The Japanese Finance Minister called US debt "unshakable". If I owned more treasuries than I could ever hope to sell I would say the same thing. This seems to be a response to the rhetoric that has recently been coming out of commodity producing countries.

I was starting to think that the rally was going to last through the end of the quarter as money managers mark up their portfolios. But as evidence mounts at how extreme sentiment has become and after yesterday's shaky trading, I am starting to have doubts that the bulls can hold up the market for that much longer. I believe the downside potential of this market is a lot larger than most believe.

Even if a rally does continue into the end of the month, it might not be in the same stocks that have been rallying as of late. With an improving bond market and possibly lower oil prices look for underperforming sectors to start to look relatively better. Utilities, airlines, homebuilders and consumer stocks would do better in such an environment.

A Question For The Bulls

How does one look at the chart I just posted and stay bullish?

Interesting Chart

More evidence of extreme bullish sentiment. Ratio of assets in leveraged bull funds/ leveraged bear funds is at an all time record.

No Gas In The Tank

Once again the market is unable to rally well or fall apart. The battle continues. Have a good night.

Bought Verizon Yesterday

I bought some Verizon yesterday. The stock is reasonably priced and has not participated in the rally of the past three months. The stock yields 6.5% and I see little downside even if the market goes lower. If there is a last gasp rally, maybe it will finally be taken higher.

Premature Celebration

The bulls might have expended too much energy after the bond auction and not saved enough fire power to carry the market to the close. If the buyers don't show up at the close again today, it feels like like it could catch traders leaning the wrong way.

Bond Short Squeeze

The yield on the ten year note currently sits at 3.92%. Buyers of yesterday's "disastrous" auction are sitting on a 7 basis point gain as the bonds sold for 3.99%. Negative sentiment on bonds is extreme and if the auction today is anything but a disaster I believe we could see a nice rally. Once this auction passes there are no more "events" on the horizon.

China Stockpiling Bearish For Commodities

There has been enough statistical and anecdotal evidence recently to conclude that China is stockpiling commodities. The knee jerk reaction is to think that is bullish and run out and buy commodities. It is true that in the short term it is bullish for commodity prices, however the longer term implications are not quite as bullish.

Part of the healing process of a recession is that consumers and companies are able to heal their balance sheet through lower costs. However, these higher costs are exactly what consumers and businesses don't need. Consumers and businesses will retrench further and real demand for the commodities will drop. At the same time during recessions, commodity producers cut back and lower capacity which leads to shortages once the economy heals itself. With the China buying it is unlikely that we will see as much of a pullback in capacity.

By definition, stockpiling eventually must end. At that point commodities will once again be priced based on supply and demand. At that point I believe commodity bulls will find themselves in a similar situation to the one they were in last year.

Dejavu Decoupling

Good Morning. The current juncture is eerily reminiscent of a period earlier last year when a decoupling argument was being made. The US consumer is being squeezed by higher commodity prices and higher interest rates. At the same time hedge funds are driving up commodities and sectors that focus on exports, while sectors that focus on the US consumer have been underperforming. Can the rest of the World thrive while the US continues to suffer? That is the bet being made in the markets. It ended ugly last year and I suspect the result will be the same this year.

I believe the market will see a larger dip than anyone expects in the coming months. At the same time I keep reminding myself of the phrase "markets can remain irrational longer than you can remain solvent". With the end of quarter approaching it is possible that the fundamentals are ignored for a while longer.

Happy Right Here

The market has kept with the recent script today. Rallies were sold and dips were bought. All the while interest rates and oil prices went higher. The screws are tightening on the consumer, while market participants are whistling past the graveyard. Have a good night.

Don't Trust The Russians

The Russians pushed US Treasuries lower earlier today by announcing that they were looking to swap out of US Treasuries. I would give that statement a thought before following their trade advice and selling US Treasuries. If they were really looking to dump their Treasuries, why would they announce it first? They are guaranteed to get a worse price if they announce that they are selling. Are they stupid?

Russia is a huge commodity producer. It is in their interest to push the dollar lower, which would push commodities higher. They have an agenda.

Bonds Rally A Bit

Bonds have rallied back to where they were before the auction, although they are still getting clobbered. However, the stock market is not rallying back to pre-auction levels.

Bought Some TLT

Rates on the ten year note are within spitting distance of 4% and mortgage rates are headed above 6%. I believe there is little chance of the market sustaining a rally if rates go any higher. I added to my small Treasury long as I believe it makes a good pair trade with my SPY short.

More Of The Same

  • We are seeing more of the same today, as stocks can not sustain a rally or sell off.
  • With the high beta stocks, financials and breadth all pointing lower, it seems like the bears have the advantage today. Lets see if they can do something with it.
  • It appears as if Citigroup is standing in the way of a "when issued" market. I can think of two reasons for this:
  1. They don't want the price to go too low for fear they wont get adequate participation in the exchange offer
  2. They want to do a secondary.
  • Verizon responded to the $99 iPhone with buy one get one free on all Blackberries. I guess that's also a positive.

Doug Kass' CNBC Appearance

I am on the same page as Doug Kass. His appearance this morning on CNBC is on the mark.

Citigroup Exchange Offer Announced

The Citigroup exchange offer has been formally announced. It is expected to close on July 24. This will result in the issuance of $58 billion in equity. At current market prices Citigroup will have a market cap of $80 billion even though the shares trade at only $3.50.

I believe that the share issuance will have a negative effect on the stock price and the market once they are issued. $25 billion is going to the government and will likely not be sold anytime soon, but the other $33 billion is fair game.

While the issuance will not occur for another month, there is the chance of a "when issued" market that would bring forward some of the effect of the dilution. A when issued market can begin as early as next week. However, Citigroup has been rumored to object to a "when issued" market, for reasons I can't imagine.

Herd Heading Off The Cliff

Interest rates and commodity prices are soaring again this morning. Interest rates and oil prices have both roughly doubled, while the economy is only contracting at a slower pace. It is hard for me to envision a recovery with interest rates and commodities continuing to rise.

I believe the reason for the current rally was that investors were caught grossly under invested when a rally had started. Since then, the chase has been on. All sorts of explanations are made why the market is worth 40% more now than it was three months ago, but all I see is a giant herd. This morning, the Investor's Intelligence survey is out and Bulls are now at 47.7%, while bears are at 23.3%. These are heights not seen since close to the peak of the last bull market. I view risk as extremelt high and am contemplating expanding my short positions this morning.'s Take On The VIX Dive

I found it strange that the VIX was down over 5% today and the market was up only slightly. I emailed Jason Goepfert of to ask him if this had any relevance to forward returns. He posted the following response on his blog.
The VIX was cliff-diving today, despite the small gains in stocks.

This is highly unusual. Over the past decade, on days the VIX dropped 5% or more, the S&P 500 rallied +1.6% on average.

There have been 6 days since October 2007 when the VIX was down 5% or more but the S&P 500 was up less than +0.5%. Over the next week, the S&P was negative every time, averaging -3.6%. The most the S&P was able to rally during the weeks averaged +1.2% while the average drawdown (worst loss) was -5.7%.

So that's pretty scary, but it also seems pretty specific to our current market. Prior to October 2007, this kind of setup had very little, if any, edge either way, which makes the recent instances more of an outlier than anything.
Have a good night.

Random Thoughts

  • The longer rates and oil prices stay high, the higher the probability that a recovery does not occur.
  • Mortgage originations have fallen off a cliff. What does that mean for Wells Fargo and Bank of America ? What will happen to all those people they hired?
  • Is anyone expecting anything but a run up at the end of the day today?
  • We are clearly consolidating for a move out of the current range. Will the first move be a fake out to suck everyone to wrong side of the market?
  • Wells Fargo is not one of the banks that will be able to repay TARP. Does that mean another capital raise is forthcoming?

The Egregious Capital Raise Of The Day

CBL is a REIT that mostly owns strip malls in the Southeast and Midwest. Strip malls are the most overbuilt type of property and are experiencing skyrocketing vacancy rates. In the real world they could be bought for cap rates north of 10%. The stock yields a paltry 6%, while rents and vacancies are headed in the wrong direction. The company sports less than a $500 million market cap and has over $6 billion in debt. They are proposing to issue nearly $400 million in new shares, close to doubling the shares outstanding. The company likely has a negative net worth in the real world. But in the stock market anybody can raise equity.

Mixed Picture

  • Blackrock trades for approximately 25 times earnings and Bank of America owns an $8 billion stake in the company. Why is Bank of America selling its own shares at 5 times "normalized" earning and holding on to Blackrock at 25 times?
  • The financial sector is not performing as well today even though it was announced that banks could repay TARP. Buy the rumor, sell the news?
  • The market leading high beta stocks, AAPL and RIMM, are very weak today
  • Breadth is flat on the NYSE and positive on the Nasdaq.
  • All in all a mixed picture again.

Commodity ETFs

Oil is approaching $70 and is about 50% off it highs from last year. The USO, an ETF that is supposed to track oil, hit a high of above $117 when oil was hitting its highs. Had USO tracked oil properly, one would expect to see the USO at about $55 today. Instead, the USO sits at $38. It has underperformed the commodity by about 35%.

Looking at the performance of UNG, the ETF that is supposed to track natural gas, the tracking error is even larger over the past few years. A few months ago natural gas was under $3 for a brief period of time. I am certain that some time in the next five years natural gas will spike to over $10, whether it be because of shortages or hurricanes, implying that the price of natural gas will likely eventually triple. However, I took a pass at owning UNG because there is no guarantee that the ETF will be any higher when that occurs.

Price War

Good Morning. Often during a strong bull run investors are willing to throw all logic out the window. Yesterday, Apple was widely heralded for reducing the price of an iPhone to $99. That virtually guarantees a price war between the smart phone makers. After all, if one could buy an iPhone for $99 why should anyone pay more for anything else. The price of smart phones are headed to free. Many blackberries are already available for free. I have yet to see an industry where a price war was a good thing. Yet, both Research in Motion and Apple rallied after news of Apple's price reduction.

This is one of many anomalies that investors are willing to ignore for the time being. Weak retail sales, rising oil prices and rising interest rates to name a few more. It is little wonder we had so many bubbles in the past decade, as nobody worries as long as the stock market is rising.

Mortgage Rates at 5 3/4%

After today's run up in rates, the rate on a 30 year mortgage is 5 3/4%. This virtually shuts down refinance activity and we are close to the psychologically important 6% mark. A contact has told me that this is already starting to have an effect on the purchase market and that a rate above the 6% mark would seriously slow things down.

In the short run this does not matter. We are at the tail end of a very strong move in equities. It is at these times that logic is thrown out the window. The turnaround today virtually guarantees that the bulls will be gunning for the bears tomorrow, regardless of where the rates are.

Financials Lead The Way Higher

The financials are still the best compass for this market. They did not want to go down this morning and were the clue that the weakness would not last. Mortgage rates and oil prices have once again crept higher today. For today that does not matter. This was another frustrating session for the bears, even though it does not appear that way in the box score. Have a good night.

Take The Keys

Sunstone Hotels, a hotel REIT, handed the keys to the San Diego W Hotel back to the bank. The hotel REIT has enough money to pay its mortgage but simply does not believe the property is worth the amount of the mortgage. Since the loan is non recourse they have the option of walking away from the property.

While the subprime crisis has hit the banks hard the the Alt-A, Option ARM and Commercial Mortgage crisis have not yet hit. Theses loans were not taken out by subprime borrowers and effect higher end homes and properties. The reason the crisis has not yet hit is that it takes years before many of these loans adjust. They should start adjusting en masse starting in 2010. In the case of commercial mortgages, reserve funds were set up that are currently being depleted.

Many of these borrowers will simply do the same thing with their homes and properties. Hand the keys back to the bank, even if they could afford to pay the mortgage. There is no longer the stigma of defaulting on one's mortgage. It is seen by many as a shrewd decision. The banks are not out of the woods yet.

The Tug of War

  • I have never seen so many technicians, as everyone seems to be talking about the S&P 500 breaking above the 200 Day moving average.
  • I have rarely seen a technical indicator that everyone was focusing on work. For most, it is just a rationalization in order to follow their primal urge to chase the herd.
  • Today's market has something for both bulls and bears. The positives are that the financial sector is actually slightly up on the day and oil prices are flattish.
  • The negatives are that market breadth is ugly, with 3 declining stocks for each advancer. The dollar is stronger and recent market leaders (GOOG, AAPL, RIMM and BIDU) are taking it on the chin.
  • The dips will be bought until they won't.

Trap Door Ahead

Good Morning. The economic number that surprised me the most last week was the dismal same store sales numbers from retailers. I believed that there was some pent up demand, as households put off purchases while the market was cascading lower. I assumed that the increased confidence would lead to a bounce in spending, albeit temporary. To the contrary, consumers pulled back even further in May, despite the rising stock market.

Oil prices and interest rates have been rising and are now both significantly higher than they were in May. These two headwinds are a further obstacle for an already strained consumer.

Nothing seems to phase the stock market as the market marches upward as relentlessly as it went down earlier in the year. I believe this to be a result of performance anxiety, as under invested managers chase the market up. It is better for money managers to fail conventionally (be wrong with everybody else), than to fail unconventionally (sit out a rally where everyone else is making money).

As is always the case, the fundamentals will matter again. It is only a question of when?

Bears Can't Seal The Deal

The bears had the bulls right where they wanted them today and were not able to seal the deal. The dip buyers are there on every pullback. For the time being momentum continues to trump logic.

According to penny stocks are trading their largest volume since May 2007. I believe this will end in tears. I just hope I'm still left standing at that point. Have a great weekend.

The Generals Are Turning

The financials, which stayed strong this morning when the market tried to turn south are now leading the market lower. This increases the chance that this move down will stick.

Some Speculation On My Part

I generally don't like to make statements with little proof of what I am saying, but I am going to go ahead and speculate about today's action anyway. The fact that we were able to reverse lower so easily at the open today tells me that the short base in the market is minimal. In a heavily shorted market, the market would have trended higher all day on today's jobs numbers.

However, the fact that we were able to reverse back up tells me that there are still a number of under invested people that are looking to get in on dips. This was the second dip we had this week that was quickly bought up. I believe these dip buyers are late comers and represent the last layer of demand for this market.

If this market is going to continue higher it will need to be a result of real buying, not short covering. With every dip that gets bought a layer of demand is taken away. Eventually, one of these dips will not get bought, once everyone is in. I believe we are very late in the game.

The Unstressful Test

In the stress test more adverse scenario the unemployment rate for Q2 2009 was 8.8%. The unemployment rate announced today was 9.4%. We are already exceeding the more adverse outcome of the stress test. Nothing matters when the market is going up, but so you know.

Boston Properties Increases Deal Size

Boston Properties upsized the deal by 50%, selling 15 million shares instead of the 10 million shares announced last night. The stock yields a little over 5% while interest rates are rising and office rents are in free fall. Buyer beware.

Friendly Reminder

This is just a friendly reminder that markets tend to top out on good news, not bad.

Last One In Is A Rotten Egg

"At the beginnings of economic recovery, commodities generally rise in price and yields generally have gone higher. But income, production, employment, and sales usually rise as well. What we've seen recently, however, are that these indicators are just less bad."
-Vince Farrell Jr. on

Good Morning. The equity, commodity and bond markets have run ahead of the economy and are threatening to derail the recovery before it even begins. As the quote above so eloquently explains it is normal to have run ups in yields and commodity prices during a recovery, but where is the recovery? Things have just become less bad.

The reason the market is continuing to run is simple. People were too heavily weighted in cash and there is a race to get that cash deployed. Of course once momentum builds it takes on a whole life of its own.

Looking back, I recognized that people were heavily weighted in cash and I wrote about it quite frequently months ago. However, I misjudged the situation in two ways. When I saw the level of equity offerings, I believed that it would go a long way in satiating the demand for stocks. There has been over $100 billion in new equity issued, an unprecedented sum, but it has proven no match for the cash on the sidelines. The second thing I missed was that market participants would suffer a case of amnesia so quickly. I did not believe we could return to such a state of exuberance so shortly after the carnage we witnessed in the past year. Stock market participants are infamous for being manic depressive.

At this point it seems to me that even the staunchest bears are throwing in the towel. Sentiment surveys are showing optimism not seen in years. Bears on the message board on this site have been saying they are buying because the market is going up. All the while the economy is in dire shape. I believe there is extreme danger at the current juncture. There will not be a bell rung when the last person has jumped in the pool but my sense is that we are getting close to that point.

Boston Properties To Issue Stock

Boston properties has a bunch of stopped construction projects in NYC. A few weeks ago I wrote an article questioning why they were not raising capital. Tonight they announced a secondary.

What Happened

Many bulls are pooh poohing the move up in interest rates of the past few weeks. The argument is that rates are still low on a historical basis. However, in the last cycle there were all sorts of creative lending schemes that are not available this time around. There are no more teaser rates. There are no more reserve funds on commercial real estate loans and pro forma income statements. Prices have not corrected enough to make houses and real estate affordable if interest rates go any higher. I repeat what I said this morning. Something has got to give. Have a good night.

More On Levered ETFs

Last week I felt treasuries were due for a bounce. Rather than go long TLT, which is the treasury ETF, I decided to short the TBT, which is the ultra short Treasury ETF. The reason I chose this round about way to go long treasuries was that it seems these Ultra ETFs always lose at the end. I figured I might as well take advantage of it.

Fast forward to today and my call on treasuries has thus far been wrong. Had I bought the TLT I would be down 50 cents on my purchase. However, as it stands I am actually up 50 cents on my short sale of TBT. I have made money because these products are so bad.


  • While my caution recently has been dead wrong, my account has not been doing so bad as a function of the fact that I have been nimble in my trading.
  • Normally, I would be very happy about that outcome. However, since I now have readers the experience is a little bittersweet. I apologize for the bad call.
  • The market looks good today. Financials are leading and breadth is strong.
  • Treasuries are being taken to the woodshed and rates are going to close at a new high for the move. Ditto for oil.
  • I still believe investors are pissing into the wind.
  • I am tempted to buy back the SPY Puts I sold yesterday, but I will restrain myself ahead of the "all important" Jobs Numbers.

Oil Prices And Interest Rates

Oil prices and interest rates are at a point where they are starting to have large negative effects on the economy. Mortgage applications have been falling on a weekly basis and higher interest rates will only accelerate this trend.

I paid over $2.60 a gallon for regular unleaded at the cheap station. Higher oil prices are another headwind for the consumer. Given today's retail sales numbers, the last thing the consumer needs is higher costs.

It is hard for me to see an economic recovery where oil prices continue higher and interest rates continue higher. Something has got to give.

More Tech Takeovers

The cash takeovers continue in tech land with Intel buying Wind River Systems for over $800 million in cash. It is no wonder that tech has been outpacing the broader market. While other sectors issue stock on a daily basis, tech companies are putting up cash to buy each other.

Same Store Sales Disappointing

Retailers are reporting same store sales for the month of May and they are disappointing. I was expecting to see an uptick in sales as consumer confidence bounced with the stock market. I assumed there was some pent up demand for goods. The lower sales might be a function of the higher oil prices or higher unemployment. In stock market world all is well. In the real world things are not as rosy.

The Next Test

Good Morning. After a turn of the month rally, the market appears to be in a corrective phase. The market tried to break through support yesterday at the 920 level on the S&P 500 but bounced back pretty quickly. There are likely a lot of stops below that level as I have rarely heard so much talk about a technical level.

There were no new secondary offerings announced last night as the bankers want to minimize the damage to the market. However, the calendar for this week is already pretty full from offerings announced earlier in the week.

Citigroup finally took the first step towards a preferred conversion to common stock yesterday. They registered 60 billion shares yesterday. The number of Citigroup shares outstanding are set to quadruple. The conversion will likely be announced in the next week and there will be at least 4 weeks time for investors to tender their shares.

There are two reasons why I believe the Citigroup conversion is an important event. The first is that there will be a large supply of new shares on the market. The second is that Citigroup is an important stock for retail investors. It is the most talked about stock among casual market observers. A big drop in the price could effect retail investor confidence. That said, the actual event is likely a month away.

First Dip Is Bought

The first dip into the 920 support area on the S&P 500 was bought into by the bulls and the market managed to bounce off the lows. However, with a heavy secondary offering calendar and the market still overbought it is likely that the bulls will be faced with further tests. Have a good night.

Bernanke Paying Lip Service To Inflation

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth”
- Ben Bernanke in his testimony to Congress
The question I would like to pose to Bernanke is "Does printing money or throwing it from helicopters lead to healthy economic growth?". While it is a surprise to hear Bernanke lecture on fiscal discipline, this does show that he is aware of the perceptions of the rest of the World on US government policy. While we are headed down the road towards hyper inflation, we are not there yet. Awareness of the issue is a first step.

As an aside, doesn't it seem like Bernanke aged a decade since he became Fed chairman. Being a professor was a lot less stressful.

Breakdown Alert

We are getting close to testing the 920 level on the S&P 500. This seems to be the level that many are focused on. While it is likely that initially the market will rally off this area, I believe that it will eventually break. If that occurs, all those who bought earlier this week on the "breakout" will have some tough questions to ask themselves.

ETF Danger

Many investors use ETFs without understanding the risks behind them. Many know the dangers of the ultra long and short ETFs but I will just give a quick example for those who don't. Had one bought the Ultra Short Real Estate (SRS) or Ultra Short Financials(SKF) in early 2008 one would have lost most of their money, even though shorting financials and real estate at that time was the call of a century.

While the dangers of Ultra and 3X ETFs have received some press, few know the dangers of the commodity ETFs. The USO is the oil ETF and is supposed to track the price of oil. However, I remember two years ago when oil first hit $70 a barrel the USO was trading for over $60. This week, oil once again approached $70 a barrel and USO never surpassed $38. One would have lost nearly 40% of their money even though oil did nothing. I observed the same for UNG, the natural gas ETF. One exception is GLD, the gold etf, as it holds physical gold and tracks the commodity pretty consistently.

These products are akin to option ARM mortgages. There are a few people out there who they are suitable for, but not for the vast majority of people who are using them. They are a disaster waiting to happen.

Opposite Day

  • Financial shares are relatively strong today while commodity stocks are taking it on the chin. This is the opposite of what we have been seeing recently. We actually saw some secondaries announced in the energy arena last night.
  • Technology stocks are still The World's Fair. There are actually some bidding wars occurring for some technology companies (DDUP, ELX).
  • For the current level of demand and inflation many industrial commodities and commodity stocks are overpriced. The anticipated increases in demand and/or inflation might occur but there is serious downside risk if these increase do not materialize. I see both sides of the argument.
  • The longer this market stays down the greater the chance we get an ugly close.

Broken Deals

Both American Express and JPMorgan are trading below their respective offering prices. Today, Government Properties (GOV) is trading below its IPO price from last night. A few weeks ago it was rare for these deals to trade through their offering price so quickly. Could that be a sign of waning demand for shares?

Booking Profits

I am booking profits on the S&P Puts I bought on Monday. The first dip after a big run up often gets bought, so I want to soften my stance. I remain short SPY Calls.

Where Have All The Bears Gone

The Investors Intelligence survey came out this morning showing the fewest bears since January 2007. That was a horrible time to own stocks. It seems that everyone is buying because they think that everyone else will need to buy. Maybe they already bought?

Bulls Vs. Bears

Good Morning. The bears have a lot going for them. The seasonally strong period for the market is now over, while at the same time the market is overbought and we are seeing a continuance of secondary offerings hitting the market. Additionally, the dollar is showing some signs of strength this morning while we are seeing some signs of weakness in the commodity arena.

The bulls have momentum at their side, which has thus far proven to be the most important factor. However, momentum can be a fickle friend and turn at any moment.

The Offering Parade Continues

Tonight we are seeing offerings from a diverse group of companies in energy (VLO, ME), steel (STLD), investment banking (LAZ) and airlines (JBLU). Its not just the financials offering stock. I know it doesn't matter because the market just gobbles it up, but one day it might matter again.


Today's action was a draw. It had something for both the bulls and bears. The bears were able to hold the bulls back, even after the "better than expected" housing data. In addition, the bears took the all important financial and semiconductor sectors down hard.

The bulls were able to absorb a lot of supply and actually managed to close the market in the green. The market is now overbought and the seasonally strong period is behind us. The battle will be fought again tomorrow. Have a good night.

In Awe

I am watching this market in awe as it digests over $10 billion in offerings from last night, without even a hiccup. I am hearing some of the silliest justifications for chasing this market higher that is reminiscent of other manias and tops I have seen. I just can't believe it is coming so soon after the collapse of the past few years. I believe we are close to the end of this rally, but the last part could be the most brutal.

A look At Some Market Tells

  • The banks have been the best leading indicators of market direction. They have not participated in the market move of the past week and have not made a new high since the day after the stress test.
  • The semiconductor stocks bottomed before the rest of technology and were a leading indicator of recovery. They are starting to lag as well.
  • The weak dollar has been good for the market and continues to weaken. If the dollar somehow manages to rally, the market will have three strikes against it.

The Dichotomy of Higher Rates

The S&P 500 was down a few points at midday and treasuries were higher, when both reversed direction. This likely means that there is a continuation of the trade out of treasuries and into more "risky" assets. In that sense, in the short run higher rates are actually good for the market because the money is likely rotating into the market.

The problem is that at this point higher rates are beginning to seriously slow down the economy. Weekly mortgage applications have been showing a steep decline. There will not be a housing or real estate recovery if interest rates go much higher. In the short run the stock market can go higher but the stock market can only go so far if the economy is being choked off.

Kudos To the Bankers

You won't hear me compliment investment bankers on this site much, but I believe compliments are an order. Two weeks ago, after the Bank of America secondary, there were rumors circulating about a JPMorgan secondary. The market had a nasty close and after the bell there was no secondary. The market struggled for the next week. The secondaries stopped and that allowed the market to recover.

It would seem that the bankers pulled the JPMorgan offering and allowed the market to recover before announcing additional offerings. That was a smart tactic as allowing the market to go higher actually increases the appetite for these offerings and allows them to unload a lot more product. This might seem obvious but there are large commissions tied to these offerings and by delaying them one runs the risk that the appetite might not be there at a later date.

Momentum, Momentum, Momentum

  • Since when is a number that most people never heard of a few months ago the be all and end all?
  • This article gives the only valid reason I have heard for going long. The green shoots stuff is nonsense. This is how I believe markets really work.
  • The best thing the bears have going for them is the carnage in the banking stocks and the fact that Treasuries are actually trading higher.
  • Positive breadth and sector rotation are the bulls greatest assets.
  • Where would this market be had there been no secondaries?
  • I took tiny profits on the SPY puts I bought after the home sales numbers. Upon further reflection I am short enough.
  • I will be out at meetings until the afternoon.

Gaga Over Green Shoots

I would like to remind readers that while the Pending Home Sales Index was better for the month of April, that since April rates have been climbing and mortgage applications have been dropping. I believe that we will reverse lower by the end of the day and have acted accordingly.

Bulls Put To The Test

Good Morning. The bulls are facing an onslaught of supply as there are about $10 billion in secondaries being priced in the US. Goldman Sachs sold its stake in ICBC last night in Hong Kong and the Saudis sold a $6 billion stake in Barclays this morning. This morning, Morgan Stanley joined the club and announced another $2 billion offering.

At the same time commodity prices are slightly lower, threatening to derail the rally in the hottest sector. The seasonally strong period ends today and the market is overbought. Combined with the supply hitting the market, this should serve as a stiff test for the bulls.

WSJ Repoting JPMorgan To raise $5 Billion

The rumors about a JPMorgan secondary are true. According to the Wall Street Journal they will raise $5 billion dollars.

JPM Rumors

There are rumors circulating about a JPMorgan secondary again. That might explain the selling in the financial stocks as managers need to make room.

Financials Weak Again

The market has put on its recent rally largely without the financial stocks as they have lagged. It is interesting to point out that a lot of financial stocks are actually down on the day right now. That is strange for a day when the S&P is up 3%.


  • It is likely that a turnaround is not today's business. The market does not seem to reverse course mid day anymore.
  • I did not get a chance to cover my TBT short today. When it rains, it pours.
  • Higher interest rates. Higher oil prices. Widespread job losses at auto companies and dealerships. Bullish?
  • I get it. Nothing matters ... until it does.
  • Some people have to buy because the market is up. Do you?
  • Its ok to play play the momentum game as long as you are nimble enough to get out before the music stops.
  • Knowing that intraday reversals rarely happen anymore, should I have waited before initiating exposure this morning? Yes.

1-800-GET- ME-IN

Market participants are piling into the market as lessons learned in the past year are quickly forgotten. Today we are seeing the technical folks pile into the market as we "break out". In addition, we are getting the beginning of the month inflows. It will be interesting to see what these folks will do if we break below these same levels later in the week as I suspect we will.

Extreme Call Buying

In the early going we are seeing an extreme in call buying on both the ISE and CBOE.

Bought S&P Puts

Withe the S&P 500 up over 20 points I have purchased some SPY puts. I will wait until tomorrow before expanding the position further as we remain in a seasonally strong period.

Everything Explained

It especially irks me when people try to explain every move the market makes with logic. As if every move in the market is perfectly correlated with some data point. One of the most successful hedge fund managers of all time, Paul Tudor Jones II, conveys the same belief in an interview with Institutional Investor magazine :
These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation.

After so many bubbles in the past decade and prices of various assets being driven to irrational levels it amazes me how many people still believe the market is some perfect discounting mechanism.

More Offerings

It is not even 8 AM and there have already been over $3 billion in secondary offerings announced. Some of the largest being Prudential Financial, Suntrust and American Waterworks. I believe a large part of the reason the market was able to rally last week was the cessation of secondaries as bankers went on vacation.

The other major reason was some of the most blatant markups I have ever seen. Party like its 1999.

Weekly Strategy - Bears Playing Rope A Dope

Good Morning. Early in the week the bulls will have positive seasonality on their side as new monthly inflows enter the market. However, I believe by the end of this week the bears will be firmly in control of this market.

There is little justification for this rally from a fundamental or valuation standpoint. The rate of decline has slowed but a 40% rally fully discounts that and then some. Stocks are not cheap on a historical basis, even when normalizing earnings.

We should see a continuation of secondary offerings this week. I believe that it will become increasingly difficult for the market to absorb these offerings. There is a saying that nobody makes money in a bear market, bulls or bears. The reason being that these bear market rallies kill the bears, while sucking the bulls money back into the market.