The bulls will argue that there was a lot of put buying today for a market that closed down slightly. We had a healthy retest of Friday's lows and we are simply digesting Monday's gains.
The bears will argue that the market is beginning to show a change of character. In addition, the economic recovery looks like it is losing momentum and is purely stimulus based. I stand with the bears but am confused shorter term. Have a good night.
The market exploded Monday, a day when there was low volume because of the holiday. If one wanted to get the maximum bang for his buck that was the perfect day to paint the tape. Add to that the mysterious bid that entered the market this morning as we started cratering lower. Wheres my tin foil hat?
I am not a chartist and my reasons for owning the sector have nothing to do with the chart but I am certainly not upset to see it.
To summarize, the reason I believe the pharmaceutical sector will outperform is as follows:
- The sector is shunned by retail investors. Mom and pops bought pharma a decade ago when stocks like Pfizer traded at 40 times earnings and were priced like growth stocks. Their losses are so great on the stocks that they don't even want to hear about the sector.
- The sector is shunned by portfolio managers, as everyone wants to be in stocks that will benefit from a cyclical recovery.
- Stocks such as Pfizer and Eli Lilly trade at 8 times earnings and have bond like dividends.
- There is a near term catalyst to get the sector moving. Pfizer is acquiring Wyeth and Merck is acquiring Schering Plough. The two deals have a combined cash component of over $50 billion. That means more than 5% of the stock in the sector will disappear in the next few weeks.
- If the sector gets moving everyone who is underweight will need to buy it in order to keep up with their benchmarks.
- A growth slowdown would just be a bonus.
- The market held support, right where it should have. In the past few months when the market bounced off support, a new high was not that far off.
- We are approaching quarter end, which tends to be positive.
- Employment Friday is approaching, which has tended to be a market positive day recently.
- And I will add the closing of Pfizer/Wyeth should be a positive for the overall market as the deal has a $40+ billion cash component.
More likely, the buying was a result of investors knowing the drill. A few down days and off to new highs. This likely led to inflows over the weekend and buying throughout the day as not to be left behind. I mentioned on Friday that the pullback was approximately the same size of previous pullbacks during this record shattering rally.
I would caution that once everyone knows the drill it is generally late in the game. ofcourse that does not preclude one last rally.
- It felt to me like a l lot of people were getting bearish before the open today. As such, it was very surprising for me to see heavy call buying during the first hour of trading.
- The dollar has turned much weaker against the Yen and somewhat weaker against the Euro. It seems the dollar and the market are going their separate ways with the market now down.
- Breadth is tilted in favor of the bears, but not by much.
- The home sales numbers released in the past two days reflect contracts signed two months ago.
- My contacts tell me contract signings really picked up in late August and September as people tried to beat the deadline for the tax credit. We should see a spike in sales in the coming months.
- That it will be one time is a different story.
The market is attempting a bounce this morning. The two mini pullbacks that we had during the recent rally lasted 40 to 45 points on the S&P 500, from the intra-day highs. The high after the Fed meeting was 1080, which would equate to 1035-1040. The bulls should attempt a bounce from those levels if we get there. How successful that bounce will be is a separate debate.
In the next few weeks Pfizer's acquisition of Wyeth and Merck's acquisition of Schering Plough should close. The two deals have a combined $50 billion cash component. A lot of money in the sector will be looking for a new home, which should give a boost to the sector.
Money should be spent on initiatives that will create jobs rather than artificial steroid shots. Turning natural gas into a fuel for cars would allow us to lower our energy dependence, lower our deficit and create domestic jobs. However, politicians don't care about the future, they care about being reelected. I believe the new home buyers tax credit will turn out to be as big a disaster as Cash for Clunkers when all is said and done.
The market is gapping up after an improvement in new jobless claims. I would be surprised if the bulls were aggressive today after yesterday's drop. I believe we will see the bears try the downside again before the weekend.
The shorts had the proper analysis but in this market ignorance is bliss. Last night, airlines AMR and US Airways were also able to raise more cash through stock offerings, allowing them to lose money for a little while longer.
The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.
Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.
Singapore selling less than $5 billion worth of Citigroup took the stock down 20%. What will happen when the US government tries to sell their $30 billion stake? The way this market works, that's tomorrows problem.
The market continues to trade like its 1999 and I believe the end result will be the same. The biggest mistake investors make is to think that because a condition has persisted, that means it will never end. When in reality the more stretched this market gets the sharper I believe the snap back will ultimately be.
- The flight to quality from Friday continues. Boring, unleveraged stocks are outperforming lower quality stocks. Even if the bulls manage to pull off a further rally I believe the boring stocks will outperform (PG, PFE, WMT, XOM)
- Market breadth has been horrific all day, even when the market was trading flat. This is likely related to the flight to higher quality stocks.
- The DELL cash buyout of Perot Systems is a market positive and is likely contributing to techs outperformance
- There is quite a bit of supply on the calendar. There are over $7 billion of new offerings scheduled for this week. The offerings generally occur later in the week.
While the government has certainly greased the wheels, I believe this rally is a result of the investment community going to record cash and subsequently scrambling to take risk again. However, once the scramble is over stocks will need to stand on their own two feet, which is valuation. Dividends are low and valuations are high, except when compared with the period of the twin bubbles we just emerged from. The economy is unhealthy and dependent on government assistance. The quantitative easing programs are running out and will likely not be renewed unless the economy relapses. In the long run I have little doubt as to how this ends.
The rally off the March lows has been record breaking. Never before has the S&P 500 rallied 60% in 6 months. The recent run from the July low alone has been greater than 22%. The closest thing I have ever seen to the current trading environment was the tech bubble (not in terms of valuation but in how the market moves). With that caveat, the market is extremely overbought and we are at extremes that have at least led to pullbacks, even in this recent rally.
My trading style is to wait for markets or stocks to go to extremes and take the other side of the trade. Over the years this style has worked best for me and I have no plans to change it. Since we have stocks going to extremes not seen in decades, it was pretty much a given that I was going to get caught on the wrong side of this trade. That does not mean that I have not done anything wrong and that lessons could not be learned.
- Lesson 1- Powerful capitulations are usually followed by powerful rallies. The March bottom was one of the most powerful capitulations in history. In that context this rally is not as surprising. I have learned this lesson before and thought I was being very careful but it appears I was not careful enough.
- Lesson 2- Selling covered puts or covered calls is not the same thing as getting out of a position. After the 4.5% pullback 2 weeks ago my account was at a record high. I was still bearish in the intermediate term but was neutral to bullish short term. I covered a small amount of my shorts but mostly wrote covered puts against my positions. The 1% in premium I picked up was nothing compared to the 7% rally in the market the past 2 weeks. Selling those puts was a band aid on a bullet wound. I should have taken down my positions.
- Lesson 3- Sit on the sidelines when in doubt. This goes back to two weeks ago, when the market pulled back and I was ambivalent in the short term. My positions were pretty big for someone who was ambivalent. I was exhausted from fighting the market and sitting it out would have been the best course of action.
- Lesson 4 - Never underestimate the retail investors propensity to follow the herd. Much of my short thesis was based on data that money managers and hedge funds were at low to normal cash levels. I knew retail investors were sitting on a lot of cash but thought they would be more hesitant because of last year's debacle. This past week we learned that volume at retail brokers went through the roof this Summer and Fall. Retail investor's are once again chasing the market.
- The 10 Day moving average of the Advance Decline will be maximum overbought by the end of the day today.
- While Rydex traders backed off their short positions a week ago, it was only yesterday that they reentered aggressive long positions.
- Wednesday saw very emotional buying and call buying has been extreme.
- Today is option expiration and we often get a down day after expiration.
Wells Fargo & Co., the nation’s biggest home lender, expects overdue loans to increase as the bank continues to digest its takeover of Wachovia Corp.If only I could write up the value of my horrendous short trade of the past few weeks to what I think its worth. Put a multiple on my normalized earnings and sell shares to investors.
The bank prefers to hold its nonperforming loans rather than sell them because the costs of liquidation “remain challenging,” according to a presentation by John Stumpf, chief executive officer of the San Francisco-based lender, at an investor conference today in New York.
...The bank wasn’t accruing interest on $15.8 billion of loans as of June 30, or 1.9 percent of the total, the bank said in today’s presentation. That’s $5.3 billion more than the previous quarter, the bank said.
- Last night I saw Apple up $2 in after hours with the futures pretty flat. I looked everywhere but couldn't find any news. I finally went to the Yahoo message boards and figured out that Jim Cramer put a $246 price target on the stock during Mad Money. This is a Yahoo message board/ Mad Money market.
- Funny thing is the stock is now up $3.
- At the beginning of the year no price was too low because the news was "bad". Now, no price is too high because the news is "good".
- An article in today's Wall Street Journal was titled "Return Of Day Traders Drive Rise In Volume". Are they going to bring back the eTrade commercials from 1999 with the kid out of college showing his boss what's what?
At the same time the buyers are not getting over exuberant and chasing the market higher. Instead, they wait for pullbacks and are buying shares on dips. That leaves the market grinding higher.
There are a few ways I believe this dynamic could change:
- The buyers become more aggressive and start chasing stock. If that occurs I believe it would be a last hurrah as the market is already so stretched and will be maximum overbought in the next few days.
- Yesterday, the favorite stocks of retail investors had a nasty day (C, BAC, AIG, FNM, FRE). Retail investors provided the fuel for the latest move up in the market. If their positions start showing them losses its possible that they will pull back, so keep an eye on how those stocks trade today.
- If Citigroup does their offering sooner rather than later, I believe the rally will be over. Firstly, the enormous size of any offering will be difficult to absorb now that virtually everyone is already long. Secondly, this has been the stock that has pulled retail investors back into the market. If they begin to lose money in earnest on this trade they will likely turn away from the market.
Charles Schwab Corp., TD Ameritrade Holding Corp. and E*Trade Financial Corp. -- all posted double digit monthly gains in daily average revenue trades, or DARTs -- a figure closely watched by analysts. ...
The rise in trading volumes at the four firms is unusual, given that summer is typically known for lighter activity as many traders are on vacation. ...
"Trading in active exchange-traded-funds and low-cost financials were up 39% and 139%, respectively, in August, with five individual stocks -- Citigroup Inc., Bank of America Corp., American International Group Inc., Fannie Mae and Freddie Mac accounting for up to 30% of NYSE exchange traded volume," wrote JMP Securities analyst Michael Hecht in a note to clients.
- Now that the government's intention to sell Citigroup has leaked, I believe the longer the government waits to sell, the lower the price they will get.
- According to the news stories the sale will take place in October. The biggest risk to the bulls in the short run is that the timetable gets moved up because of the leaked story.
- Once again the dip was bought and the lesson has been reinforced.
- We are once again seeing heavy call buying. I know, it doesn't matter.
I know my call for a lower market has been horrendous. But my trading feel has been pretty good as I have been adding to my shorts at the right time and covering my shorts at the right time. Unfortunately, I have been carrying a core short position that has just killed me.
There are already $4 billion worth of offerings on the calendar for this week and an equal amount for next week. In addition, it now seems that the government wants to sell its $35 billion Citigroup stake and Citigroup wants to raise capital on top of that.
There has never been a time other than the past few months when companies have issued shares at such a feverish pace and the market has continued to rise. I believe the reason was that historic risk aversion took people into large cash positions that were subsequently deployed into these offerings. However, now that the consensus is that the market can only go up, it is likely that the bulk of cash has been deployed and these huge offering will not be as easy for the market to absorb.
It is well chronicled that humans have a recency bias. We tend to put a lot more weight on what has occurred recently and don't factor in the bulk of history. On every time frame the market has been going up, whether it be one week, one month, three months or six months. We are hard wired to believe that the market can never go down again. However, looking at the broader picture from a valuation, sentiment or supply/demand picture everything is pointing to a lower market.
There is little doubt that banks are carrying assets at far higher values than the market would pay for them. The hope is that banks earn their way out of the losses. Currently the banks borrow from the government for free and turn around and lend the money back to the the government via Fannie Mae, Freddie Mac and Ginnie Mae.
Investors are then turning around and calling this normalized earnings and projecting that this will go on forever by putting a multiple on it. There are many risks to this bet that bank stocks are not pricing in:
- Realized losses might force banks to accelerate write downs.
- The yield curve will not stay this steep forever. That is a guarantee.
- Inflation picks up making the game of borrowing short and lending long a lot less profitable.
- FDIC assessments are currently being treated as one time charges even though they are likely to go on for many years to come.
- New financial regulation that reduces leverage will lower profit margins.
- What is the business model of banks? Home loans are dominated by the government, which used to be where banks predominantly lent.
The widespread explanation for the rally is liquidity, which is somewhat of an ambiguous term. At the lows money managers and investors were holding more cash than at any other point in the past few decades. I believe the rush to deploy that cash once the market started up is the reason for the rally.
At some point under invested money managers and investors will be fully invested or even overweight. When that happens stocks will need to stand on their own two feet. At current valuation levels it is hard to see that happening. Dividends are meager compared to stock prices. Companies are not returning cash to shareholders through buybacks, but rather issuing new shares.What will support stock prices once the rush is over?
I believe that starting a trade war with ones largest creditor while running a one trillion dollar deficit is barely comprehensible. There seems to be little long term thinking in any decisions that are made. Although that has not stopped the stock market from partying like its 1999 thus far.
If the stock market is looking for an excuse to roll over this could certainly be it. The action underneath the surface on Friday was worse than the slight losses that the scoreboard reflected. Financial stocks have been lagging the past few days and market leader Goldman Sachs had an ugly close after gapping up $3 in the morning. I suspect the dip buyers will give it a shot at some point today.
It is as if the entire crisis never happened. CEOs are being fired for not being aggressive enough and investors are running back to the market again with disregard for value. After chasing hot Internet stocks and hot real estate, investors are on the chase once again. While speculation in markets will never die, generally after bubbles burst risk appetites remain low for long periods of time. The saying once burned, twice shy does not seem to apply to market players these days.
While I have little doubt as to how this will end, knowing the timing is the trick in the market. Knowing the ending is easy. If the market does not turn shortly, I will be forced to watch from the sidelines.
The bull case for the remainder of the day is that breadth is two to one positive while Goldman Sachs is hitting a new high. The burden of proof is clearly on the bears.
The bears will say that Texas Instruments inability to rally on good news says a lot. In addition, Apple has turned red and Bank of America has been down all day.
- One lesson I have learned before that is being reinforced is that the bigger the capitulation, the longer extreme sentiment can persist. We had a massive capitulation in March and that is the reason we have been able to rally despite the extreme sentiment.
- That said, I have rarely seen a time when the bulls were so complacent and fearless.
- Defensive stocks are finally starting to show some life with Procter & Gamble leading the way.
- Its hard to find anything negative to say about this market, but in March it was hard to find anything positive.
The prudent thing to do would be to do a capital raise to lower leverage and hence lower their borrowing costs. Could that be the reason GE is suddenly getting upgraded everywhere? Are bankers sniffing out a large secondary and want a piece of the action? If GE has to come to the capital markets at a later date when they need the money, it will be at a much dearer price. They should bite the bullet now and raise equity.
- I thought the market had some upside because those returning from vacation were likely to go long, but I did not think we would see this.
- The most universally held belief is that this market can't go down/ Don't fight the tape. Even those bearish on the economy are buying stocks.
- That is precisely the reason I believe the market has large downside potential.
- We are finally seeing some exuberance today, with heavy call buying. Call buying has been absent since the market bottomed last week.
- I remain short and wrong.
Could Barrick have been the reason for the recent run up in gold prices? Could they have been the ones recently buying? Or did someone in the market sniff them out and buy ahead of them? I was not very happy with their explanation for buying back their gold hedges. After all, their timing was horrible in selling gold forward. What makes them think that they suddenly know how to predict the price of gold?
Two months ago a flood of stock issuance hit the tape from financial firms, and while there was a hiccup in June but ultimately the market managed to move ahead. I believe that the reason that the issuance had a relatively small effect was that money managers were at record cash levels and they used the offerings to get back to normal levels. Currently, cash levels are on the low to normal side at money managers and I don't believe this market can handle a flood of offerings.
Historically, heavy stock issuance has been a large negative for markets despite the fact that we escaped relatively unscathed two months ago. Ignore the warning signs at your own risk. The writing is on the wall.
- Fairfax Financial (FFH) did $1 billion this morning
- Cemex (CX) just announced $1.5 billion
- Barrick Gold (ABX) just announced a $3 billion offering
- There are a lot of smaller deals as well
I will be most interested in seeing if there are a large number of secondaries announced after the bell. Have a good night
- Traders returning from vacation are likely looking to get long. That could keep a bid in the market, but I believe most of that buying was already done. Once they are buckled in I expect the market to head lower.
- It looks like the hot money is leaving the lottery ticket financial stocks and going into the commodity stocks. Love em and leave em. That's why they call it hot money.
- Healthy rotation or follow the financials?
- I can't imagine a scenario where a sustained move higher in gold is a good thing but obviously the market doesn't agree with me.
- Yes, I'm tempted to buy gold. But I have to stick to what I know and I know little about commodities.
The market does not seem to care about seasonality, supply of new stock or that the economy is still shedding jobs. Momentum rules the day as making money has never been easier. I always liked to do things the hard way and will be looking to increase my short positions in the days ahead.
Just how crowded is the bet on cyclical stocks? Global-growth beneficiaries like technology are favored by no fewer than eight strategists, energy by seven and industrials by six. Strikingly, not a single expert suggests shunning energy, industrial, materials and technology issues, even though some of these have already risen substantially; tech and materials stocks are up 39% and 31%, respectively, this year. (Please note ten strategists were polled)From looking at the recent 13F filings and strategist recommendations, it is clear that just about everyone is recommending and/or overweight cyclical stocks that will benefit from an economic recovery. The 10 strategists polled in Barrons favored cyclical stock sectors. When asked what sectors to avoid 6 out of 10 said to avoid healthcare and consumer staples. This is likely because investors chase performance. Since this rally began low quality stocks have greatly outperformed higher quality stocks. However, when this rally began everyone was shunning more risky stocks, while now the opposite is true.
-From this weeks Barrons
From a valuation standpoint the sectors that people are avoiding trade at much lower valuations than the sectors everyone is piling into. Healthcare and staples trade at low teen multiples to actual earnings. While cyclical sectors trade at high teen multiples to expected/normalized/fantasy earnings.
In addition, we are seeing cash buyouts in the healthcare and staples fields, while cyclical companies have been raising equity. There are some large deals closing in the near future including Pfizer/Wyeth and Merck/Schering Plough. These deal closings could serve to give the more defensive sectors a jump start. Sometimes the crowd is right but in my experience when everyone is betting on the same outcome it is usually not a great bet.
The private equity re-IPOs will be starting in the next few weeks as they recycle back the over leveraged companies they bought a few years back.
The US Government and sovereign wealth funds will receive their shares in Citigroup on September 10. Their combined stake is worth nearly $50 billion. It is unclear if and when they will sell but its worth keeping an eye on.
It is hard to argue with a straight face that today's employment figures were good. But that is not stopping the bulls from trying to run the market higher. I am expecting a pretty quiet day as people duck out early for the long weekend. I plan to do little.
The real action will start after Labor Day. I remain of the belief that we are headed lower in the next month but the short term is too close to call. Have a good night.
I reserve aggressive positions for times when both the shorter and longer term are lining up. Right now the shorter term outlook is mixed.
Unfortunately, the S&P futures are up 6 points and that changes the risk/reward of covering shorts here. I still believe we are headed lower through the remainder of September, possibly much lower. However, I believe the odds of a bounce have increased in the shorter term. As such, I covered some more shorts in the pre-market. I remain net short and will look to increase my positions if a bounce does arrive.
- Fed President Lockhart is saying that the Fed is discussing the possibility of leaning against bubbles. Did it really take them this long to figure it out?
- Everyone is talking about riding this bubble and going with the flow. In the housing bubble and tech bubble the vast majority of those who participated were true believers. Can we get a bubble if everyone believes its one?
- Did everyone except me leave for vacation?
- Are we working off the oversold reading or just shaking everybody out before a move higher?
- Will we have to wait until after Labor Day to figure out where this market wants to go?
- Have a good night.
- The best things bulls have going for them is that we are quite oversold in the uber short term.
- Investors are back buying calls which decreases the odds of a solid bounce.
- Breadth is quite negative even though the market is flattish.
- Oil and the dollar are both flat as oil sits at its lows from 2 weeks ago. A further break in oil is likely to trigger another leg down in the market.
Prudential recently exercised a put option to sell the part of Wachovia Securities it owns to Wells Fargo for $5 billion and Wells has until December 31 to pay up. Wells Fargo has the option to pay in stock. It is extremely likely that Wells will pay Prudential in stock, especially if they don't raise equity. Wells is among the most leveraged banks out there and they would be making a mockery of regulators if they paid back TARP, only to become vastly under capitalized shortly thereafter by paying Prudential in cash. So while they might not be raising equity, I believe they will be issuing equity.
The market has been going up for seven weeks, which is a very long time in rally time. The market needs a couple of weeks to correct and wring out the excesses. Levels of complacency are high and we are headed into the seasonally weakest part of the year. I believe the decline has the potential to surprise many in its magnitude as the most universally held belief is that the downside is limited.
To summarize, I would not be surprised if the market bounced from here as we have come far since Friday and we are sitting on a minor support level. A bounce from here is likely an opportunity to add to short positions or sell as I don't believe it can go very far. However, the 980 and 950 areas on the S&P 500 should act as stronger support if one wants to play a short term bounce, especially if we get their quickly.
- It looks like I gave the economy too much credit. Auto sales for the Big Three disappointed. GM and Chrysler had negative year over year sales. Money well spent.
- According to Calculated Risk home sales would also have disappointed without the first time buyer incentive.
- The US dollar is finally back in synch with the markets and is rallying strongly.
- Time is the most important aspect of a correction and this one just started. I would wait until option expiration before even considering getting long for anything more than a quick trade.
- The S&P 500 is down 25 points from where I doubled down on option expiration. Even though I believe this correction is far from over I took some profits on my short positions. That's just discipline.
- I'm headed out early. Have a good night.
- Cash for clunkers increased car sales and many industries will benefit from the production of new vehicles. However, this is a one time event and since the deal ended demand for automobiles has dropped even lower thane before clunkers.
- First time home buyers are being given $8,000 by the government to buy a house and they must close by the end of November to qualify. This is giving a huge boost to home sales but I expect demand to implode once the deal is over.
- People were frozen while the market was cratering between September and March. Many people held off on buying stuff they needed. Since then we have benefited from that pent up demand. However, I believe that the pent up demand is in the process of being used up.
On the other hand Paul Tudor Jones II has been earning money for his clients for decades because he has been right on markets and he puts his money where his mouth is. A Bloomberg article this morning highlights that Goldman and Jones are on opposite sides of the market with Goldman
Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.