Damage Contained

I suspect that the damage to the market will be contained for the remainder of the day (market is down just under 1%) . I am not adding to my longs but I am sticking with the shares of Amgen I bought two days ago. In summary I am long pharma, short SPY, short SPY puts and long AMGN. Have a great weekend.

Exelon Opportunity

Exelon (symbol: EXC) is an electric utility that trades at 10 times earnings. It pays half its earnings out as a dividend and the stock yields nearly 5%. In the past Exelon has bought back stock and reduced debt with the other half of its free cash flow. In the past year Exelon has not spent any of its cash flow other than paying dividends and has built up over $2 billion in cash. A possible catalyst for the shares would be a potential stock buyback.

Exelon is yet another example of a steady company that trades cheaply. Investors would rather buy stocks tied to a recovery even if they are paying twice the price. I will be looking to purchase the stock during the next downdraft.


Good Morning. I am a little torn on my near term market outlook. On the positive side we are at the turn of the month and the market is still oversold. On the negative side, the divergences at the highs and the recent oversold reading argue for more downside eventually. I don't believe we will see much downside between now and early next week barring any major news, so dips could probably be bought but I am not planning on trading. There is not enough of an edge for me.

Merck/Schering Receives US Approval

Merck received US anti trust approval of its merger with Schering Plough. They are waiting on Chinese approval, which is a mere formality. The deal will likely close next week. I expect the health care sector to get a boost as it did when the Pfizer/Wyeth deal closed. The boost will likely be smaller as the cash component of this deal is smaller.


The divergences we saw at the recent top and the deep oversold reading we saw yesterday suggest that there is further downside ahead and a retest at minimum. While this is not likely this week''s business it is something to keep in mind. Have a good night.

Groundhog Day

The current correction looks a lot like the other corrections of the past few months. In previous corrections we went down between 4% and 6% and then shot straight up. It sure looks like we are following that script. I suspect we will get a surprise ending this time.

Easy Trade Is Over

The easy trade on the upside is over. It was likely that we would get a bounce back from the deep oversold levels and we have now done that. The new month should keep the downside contained through Monday.

Way Too Much Call Buying

There is way too much call buying as traders are quick to embrace this move up. This increases the chances of the move failing. The proximity to month end might make this a moot point as the powers that be buoy the market.

Exxon Mobil Misses

Exxon Mobil missed on earnings. The stock is off a couple of percent. The stock is the largest component of the S&P 500.


Good Morning. Yesterday, a large drop in Europe on earnings misses led to selling here. Today, Europe is stabilizing as are our futures. I expect the market to bounce in the next few days based on positive seasonality, the oversold condition and the heavy put buying in the past few days. However, the action of the past few weeks points to underlying weakness and the market will likely resume the downside once the oversold condition is cleared.

Russell 2000 Lagging

While the large cap indices are pretty close to their highs, the Russell 2000 is back to levels it saw on August 3. The Russell 2000 tends to lead the market, so this is another medium term negative.

Short Term Bullish, Medium Term Bearish

The market is the most oversold that it has been since the March low (on a short term basis). In the short term that is bullish because a bounce is likely not that far off. In the medium term it is bearish as it shows a change in character. Have a good night.

Pain All Around

The three most crowded trades are now all inflicting pain on the participants.
  • Commodity longs are getting smoked.
  • Dollar shorts are getting smoked.
  • Equity longs are getting smoked.

Ingredients For A Bounce

The ingredients for a bounce are now present.
  • The S&P 500 was down over 55 points from its highs. Inline with the 4%-6% corrections we have seen since the July low.
  • We are approaching the end of the month, which is seasonally strong.
  • We are finally seeing some put buying rather than complacency
  • The market is oversold in the short run, although there is room for it to get more oversold.
  • The S&P 500 is at support.
By selling puts and purchasing Amgen I have moved myself into a slightly net long position. This does not change my bigger picture bearish outlook and is largely a function of my enthusiasm for my health care longs. In the past few days both my pharma longs and my SPY short have been working for me.

The Stocks of Steel

During the last cycle steel stocks were top performers and multiplied many times over. Everything that could go right for the steel producers did. Going into the cycle the steel industry saw a huge consolidation as many inefficient producers were bankrupted. There was very little overcapacity in the industry at the beginning of the cycle. The last upturn was a construction and real estate led boom. Steel's main use is in construction.

Going into the current cycle, the outlook is not nearly as good for the steel producers. A lot of capacity was brought on line during the last cycle, as new plants were built to keep up with the demand from the construction boom. In addition, the developed countries have a glut of new buildings and there is little reason for new construction. Investors who are looking for a repeat of the last cycle will be sorely disappointed.

Purchased Amgen

I have purchased shares of Amgen. Biotech seems like it wants to rally as it is holding up well in today's decline.

Market Does The Minimum

There has now been a 45 point correction on the S&P 500, which is inline with previous corrections since the July low. I believe we might see some more downside but that we should get a bounce into the new month. That is the reason I took some profits on my short SPY position, by selling covered puts.

I don't believe a bounce will take us very far and that we will ultimately go lower in the weeks ahead. The puts I sold are pretty far out of the money and should still allow me to capture a good amount of downside on my SPY short.

Sold Covered Puts

I sold the SPY November 99 Puts against my SPY short. I am now short SPY, short SPY Puts and long pharma.

Reality Bites

Good Morning. Reality is interfering with the global market rally. Arcelor Mittal and SAP both announced that business is not as robust as many had hoped. Both are cyclical companies that are tied to a recovery. Investors have ignored valuation in order to pile into a recovery trade, choosing to buy "recovery" stocks at 20+ times normalized earnings rather than "defensive" stocks at single digit multiples.

If we get an ugly day we should be set up for a turn of the month bounce. Were we not approaching month end, I would say that the market would have a couple of more days on the downside before a bounce, as we will not be maximum oversold until Monday. I don't expect we will see new highs on a bounce and I do believe we will see lower lows after the bounce is over.

Tax Credit Extension

The first time home buyer tax credit is being extended. I don't believe it will have the desired effect. This is the equivalent of Macy's throwing a limited time sale and then the next week throwing another one. The second sale will not draw as many buyers. Throw in the fact that buyers from the first sale are disqualified and you will get a sense of what effect the extension will have.

Jim Grant's Variant View

I am a big fan of Jim Grant's. I subscribe to his newsletter and have read many of his books. I was irked by his bullish call a few weeks ago. Not because he was bullish, but because he had the gall to say his view was variant. He recommended Nucor as his top pick based on a strong cyclical recovery. The stock is down 15% since his recommendation.

Galleon 90% Liquidated

News reports are saying that Galleon is 90% liquidated. While this will likely have little effect on the overall market, some single stock positions might be effected in the technology and healthcare space.

Box Score

While the box score is showing a market that is little changed, we are seeing some changes. Defensive sectors like pharma and biotech are doing well, while the high beta tech names (which have been the only game in town) are taking it on the chin. This action makes sense to me, as the tech pile on was starting to get ridiculous.

Biotech Bargains

Biotech stocks have been obliterated over the past week. The decline in prices is creating quite a few bargains. Amgen is supposed to earn $5 this year and $7 by 2013. It trades at $54 and has $7 in net cash on the balance sheet. The stock trades at a little over 9 times earnings net of cash. This compares to the overall market which trades at 17 times fantasy earnings.

A number of reasons have been cited for the poor performance. Some products missed on revenue. Galleon was holding biotech stocks. Yada, yada, yada. There is always some story when stocks trade at bargain prices. If we melt into the end of the week, I might look to buy Amgen.

Nowhere To Run

Good Morning. The turn of the month is usually a seasonally strong period for the market, which starts later this week. If the market gets oversold into the end of the week, we could see a bounce going into the beginning of the month. This would probably coincide with the 1040-1060 area that I believe is the most likely first stop in this correction. However, if we see large secondaries from the likes of Citigroup and Bank of America all bets are off.

Yesterday, I wrote about how everyone was scurrying into technology stocks. BIDU spit the bit last night and is down over 18% in the pre market. It will be interesting to see if the damage in technology is contained to this name or if the other horsemen are hit up.

Secondary Action

The current correction should find support between 1040 and 1060 on the S&P 500, if it follows the path of previous corrections in the past 3 months. The safest course of action would be to wait until the market is maximum oversold and not guess at a price level. The market will be maximum oversold late this week or Monday of next week. I am most interested to see if we get secondaries in the financial space. If that occurs I think we could blow through 1040. Have a good night.

That Must Have Hurt

Today's action is less benign than it seems on the surface. Many are being hurt as funds have been overweight financials, especially Bank of America. Both have given back months of gains in the past few days.

Sell Side Defending BAC

The sell side analysts are out defending BAC. It has big technical support at 15.50. In my opinion, it all depends on if they raise capital. If they don't raise capital, BAC will likely find support here. If they do all bets are off.

Is Raj Trading Again

The financials are trading real sloppy. Almost like somebody knows that a capital raise is imminent. Inside information?

The Tech Pile On

Its amazing to watch people pile into tech the same way they piled into the financials a few months ago. Market participants are often compared to a herd, but this reminds me of watching scared little mice scurry. Scared that they will underperform.

More Divergences

The financial stocks are trading lower today, while the market is up over 1%. This is not something you see often and not bullish in my opinion. I am contemplating moving to a net short position.

Sold LLY Trading Position

I scaled into an Eli Lilly trading position the day they reported earnings. I am selling the position for a small profit. I still hold a large core position in Eli Lilly. This has more to do with my negative outlook on the market than the stock.

Healthcare Spending

Health Care is by far the cheapest sector in the S&P 500, with the pharmaceutical stocks being the cheapest subgroup. This makes little sense to me as the economic environment is still uncertain and the aging baby boomers will require more medical care.

The reason most bears will cite for the underperformance is health care reform. However, health care reform is reform only in name. It is a giant spending bill. It will cost the government nearly one trillion dollars. An article in the New York Times this weekend said it will raise costs for small businesses. If everybody will be spending more money on health care, how will this be bad for health care companies?

More On BAC Capital Raise

Morgan Stanley put out a piece of research stating that Bank of America is likely to raise $9 billion in capital in order to pay back TARP. I believe this would be very bearish for markets.

Apparently they want the pay czar off their back. The pay czar is ruining their original capital raising plan of riding the taxpayer put.

Raise Capital Now?

Good Morning. There were a number of divergences last week when the market made a new high. Momentum indicators lagged the rally for the first time since July. Small caps and financials also showed relative weakness on the most recent rally, whereas earlier in the rally they were leaders. This is an indication of a market that is tired.

Tim Geithner urged banks to raise private capital in a speech early last week. Banks have been trying to earn their way out of their capital holes, with the US taxpayer paying for their put options. If financial companies heed Geithner's call I believe the market could get ugly. The market is stretched and showing signs of weakness. A supply shock in the form of heavy stock issuance in the financial space would likely be the final nail in the coffin.


  • Today's reversal looks solid as it is happening despite a good amount of call buying.
  • Despite all the better than expected earnings, the market is back to where it was pre-Intel.
  • Does the fact that the market can't rise on good news portend a lower market or is the market just working off its overbought reading?
  • Amazon is a reminder of why I don't short well run companies on the basis of valuation.
  • There are rumors circulating about a Bank of America secondary. Could that be why the stock has been so heavy?
  • Will we see a spate of secondary offerings once earnings season ends?
  • Have a great weekend.

Home Sales Peaking

Home sales numbers should continue to do well until the first time home buyer tax credit runs out. First time buyers are rushing to buy in order to close before the November deadline. The true test will be what happens when the tax credit runs out.

Battered Bear Syndrome

The current market is at valuation levels that have only provided satisfactory returns in the past decade, when valuation levels reached all time highs. The question long term investors must ask themselves is "has the past decade been an anomaly or is it the new normal"? Will buying at well above average valuation levels lead to satisfactory returns this time around?

The case for a new normal is that this trend of higher valuations has persisted for so long that it is becoming hard to call it an aberration. I would argue that nothing has changed, except for unprecedented government intervention. However, this intervention is suffering from the law of diminishing returns. Each time the cheap money is having less and less of an effect as there is more old debt that needs to be serviced. And the side effects have been growing.

Even though I don't believe we will see a full blown bubble like 1999 and 2007. I have been hesitant to become net short. Call it battered wife syndrome for a bear, as I took a severe beating on the short side a few weeks back. However, I am still looking for an entry point. Just being very careful about it.

Merck/Schering Plough Merger Approved by The EU

Good Morning. The merger of Merck and Schering Plough has been approved by the EU and other approvals should be forthcoming in the weeks ahead. I have a position in Schering Plough and Merck but not nearly the size I had on the Pfizer/Wyeth combination. The reason being is that the spread on Pfizer/Wyeth was wider even though they had less overlap in their business. This was likely due to the larger deal size. There was simply not enough arb money to close the spread.

The closing of Pfizer/Wyeth was a boon for pharmaceutical stocks as there was a $44 billion cash component in the deal and some of that money found its way into other pharmaceutical stocks. In the Merck/Schering Plough tie up there is an $18 billion cash component. This should provide a boost to the pharmaceutical sector, but not to the degree that Pfizer/Wyeth did.

Home On The Range

One possibility that has been rarely discussed is that we could be in a range for the remainder of the year. That has certainly been the case for the past week. I see that as a possibility but still believe we are likely closer to the top of the range than the bottom, if indeed we are in one. Have a good night.

Too Much Company

It has been bothering me all day that I have had a lot of company on my correction call. That does not mean that we won't have one. We just might have to convince a few people that we are going higher first.

Technology Is Crowded

Technology has taken the crown from financials as the most crowded trade. Technology is the best thing this country has going for it as it is the only sector the US still dominates . For that reason I would not short it, but I would not own it either. Crowded trades have a way of hurting all involved.

Check Your Emotions

Bank of America is now lower than where it was when John Paulson filed his 13-F on the stock, even though the S&P 500 is up more than 10% since then. I recall the feeding frenzy that ensued when he announced his position, even though he likely bought his position at much lower prices.

At the time he also filed large positions in the gold miners. Those position received little attention but have been stellar performers. Another reminder that it rarely pays to get caught up in the emotions of the day.

Drowning Out The Noise

Good Morning. The market was down because of Dick Bove's downgrade. The market was down because of the Pay Czar. Blah blah blah. The fact is that two weeks ago an atomic bomb could have been dropped on the market and it still would have gone up. The market is simply overbought and in need of a correction. However, there were some internal divergences at the recent high that might be hinting at a bigger downdraft than what we have been seeing recently.
  • The Russell 2000 never made a new high on the recent rally.
  • The financials are severely lagging.
  • The overbought reading the market just registered was much weaker than previous ones. While a strong overbought reading is bearish in the short term , it is a sign of a market with strength. The weaker overbought reading we just had shows slowing momentum.
  • The market has registered levels of call buying not seen in years.

Correction Underway

It appears as if a correction is indeed underway. I expect the first stop to be 1040-1060 on the S&P 500. While I am short the SPY, my pharmaceutical longs have massively underperformed today. I was expecting some sort of give back as pharmaceuticals have been outperforming for a while, but the magnitude has caught me by surprise. Have a good night.

Bought Back Lilly Trading Position

I bought back my Eli Lilly trading position.

The 10 Day Rule

Corrections within the rally since July have been few and far between, but there is a pattern. Ten days of strong rallying have led to corrections. There have been 5 instances of ten day rallies. After the first 10 day rally the market went sideways for a few days and resumed its upward march. The next 3 times the market corrected between 4% and 6%. Monday marked the 5th ten day rally. That is the reason I am looking for at least a 4% to 6% correction. At best, the market goes sideways.

Lilly Beats And Raises

Eli Lilly beat profit estimates and raised guidance. Pfizer did the same yesterday but the stock fell flat. I believe Eli Lilly has a better chance of rallying even though it has already had a nice run, as it is the most hated pharmaceutical stock. Goldman Sachs has it on its Conviction Sell List. When a stock is hated and does well, there is a lot of upside potential. Eli Lilly is my second largest holding, next to Pfizer.

Weekly Mortgage Applications

Weekly mortgage applications are a leading indicator of home purchasing intent. However, because they are weekly numbers they are very noisy and any weeks number should be taken with a grain of salt. It is worth noting that purchase applications have been falling and took a big dive this week.

In order to qualify for the first time home buyer tax credit, closing must occur before the end of November. Applying for a mortgage now is cutting it very close, especially given the tougher application process. Could this be a harbinger of things to come once the tax credit expires?

Strange Day In A Strange Market

The market would not rally early in the day despite a spate of "better than expected" numbers. However, the market did not want to sell off late in the day either. I feel confused and will try to make some sense of it over a cold beer. Have a good night.

Socialist Frenchies.

In France, which is derided as socialist on CNBC, Societe Generale and BNP Paribas are paying their government back the bailout money by raising capital. In the wonderful democratic US the government still owns more than 30% of Citigroup among preffered shares in hundreds of other banks.

All Good Things

All good thing must come to an end. It seems the run in pharmaceuticals stocks is over for now as Pfizer sells off on "better than expected" earnings. I disposed of the trading portion of my pharma positions yesterday, but I still hold the much larger longer term position. I remain a believer in the sector but nothing goes up or down in a straight line. Except for the market in the past six months.

Previous Corrections

Previous corrections during this amazing run have been between 4% and 6%. I suspect that we will see something more, but that area should provide for at least a bounce. 1040-1060 on the S&P 500.

I Done Messed Up

It looks like I made a mistake by moving away from my net short position. The reaction to the news is more important than the actual news. In that context the inability of the market to rally in the face of good news is bearish. Last night when the futures barely budged on Apple's tremendous beat, that was a clue that there was alot of supply and few buyers left. I remain long pharma and short SPY.

The Never Ending Rally

Good Morning. I moved to a net short position yesterday. However, when Apple blew out earnings and I was still able to get out even, I seized the opportunity and covered my short. I will be looking for a burst of optimism today to reinitiate my net short position. As I have summarized recently, we are overbought, with call buying not seen in years.

I don't know what to make of the fact that the futures don't seem to be responding to all the positive earnings surprises. We are only trading a few points above fair value on the S&P 500 futures.

Pfizer Beats

Pfizer has solidly beat both revenue and profit estimates. Pfizer is my largest holding. I have no plans to sell.

Covered SPY Short

Apple was able to surprise to the upside and the SPY is putting on a modest rally. I covered the portion of the SPY short I added today (roughly where I put it on). I will look to put it on again tomorrow.

Close To A Top

While we might make a marginal new high, I believe we are sufficiently close to a top that I moved to a net short position. I took minor profits on my pharmaceutical holdings as a matter of discipline, but still hold a large position. Have a good night.

Pfizer and Lilly At Resistance

My two largest pharma positions, Pfizer and Eli Lilly, have had fabulous runs and are now testing long term resistance. I am pressing the longs even though they might not get through resistance on the first attempt.

If At First You Don't Succeed

I have added to my SPY short position. I am net short again.

The Good News Necessary For A Top

I believe an Apple beat would give me a nice entry point for the short side trade I am looking for. They will surely beat the analysts' estimates, but expectations are likely much higher.But given how high expectations are for Apple I am not sure there is anything they could say that would exceed those expectations.

Reduced Pharma Positions

When the Pfizer/Wyeth closing was announced I raised my pharma positions, such that my pharma longs exceeded my SPY short. I am taking my pharma longs back down to equal my SPY short. The trade worked very well.

IntermediateTerm Top

Good Morning. There are a number of factors that are lining up for an intermediate term top.
  • The market is maximum overbought on both a short and intermediate term basis.
  • There has been a long string of call buying that is usually seen at tops.
  • The Russell 2000 has been lagging during this latest leg of the rally.
On Thursday Pfizer closed its takeover of Wyeth , which had a $44 billion cash component. According to Chrles Biderman's book, Trim Tabs Investing, nearly half the cash gets put to work on the 5 trading days following the deals closing. As such I want to leave room for the possibility of some further upside. I am looking to move back into a net short position but being careful in picking my spot. At present I am long pharmaceuticals and short SPY.

Must Read

John Hussman's weekly piece is always a must read, but this week's article "The Stock Market Has Never Been This (Intermediate-Term) Overbought" is especially so.

Call Buying Craze

I have noticed that the call buying in the past week has been as extreme as I have ever seen it. The following charts from Traders Narrative give an excellent graphical representation of what occurred after previous instances of this type of call buying, even in the context of a bull market.

The Best Laid Plans

I was planning on adding to my shorts at the end of the day today and moving to a net short position. However, the market did not cooperate and I am going to hold off. I remain long pharmaceuticals and short SPY. Have a great weekend.

You Can't Make This Stuff Up

Call buying is once again extreme today. If I weren't living through this I don't think I would believe it. From the same people that thought the world was coming to an end six short months and 60% ago.

Expiration Wildcard

I remember a wild expiration day in January 2007 when GE missed earnings for the first time in more than a decade. The S&P 500 was down a few percent, which at that time was a move that wasn't seen in years. No doubt exacerbated by expiration. Today we have a similar setup with IBM, GE and BAC disappointing. Expiration can exacerbate moves or dampen them. That's why they call it the expiration wild card. What will happen today?

Financials Are Done

I believe the outperformance in the financial sector is done. Portfolio managers are already heavily overweight the group and thus far earnings have been less than inspiring. Earnings does not give portfolio managers a reason to add to their already overweight position. That means the group is likely to underperform. Technology has been mixed giving investors little reason to add to their overweight position as well.

Investors are underweight defensive sectors like staples, healthcare and utilities. I expect those groups to make up some lost ground. They are also trading at much lower valuations and paying respectable dividends.

What Now Pharma

The pharmaceutical sector is a clear value, especially when compared to valuations on the remainder of the S&P 500. The sector trades at a 40% discount to the S&P 500. On a free cash flow basis the gap is even wider. However, pharma has been a value trap for many years now and more than a few people got nicked trying to call the bottom in the group.

The reason I chose to go into the group was that I saw a catalyst that would unlock the value. A few major mergers were announced in the group where the combined cash component was over $60 billion. That means that well over 5% of the outstanding stock in the sector will be retired. Yesterday, Pfizer closed its merger with Wyeth which had a $40+ billion cash component. A lot of that cash was subsequently reinvested in other pharmaceutical companies and the pharmaceutical sector has had a nice run.

However, now that my major catalyst is in the rear view, what will further close the value gap? Merck and Schering Plough will merge in the near future which will bring some more cash into the sector. However, the cash component of that deal is much smaller than that of the Pfizer deal and more will be required.

The majority of heavy lifting will need to come from investors returning to the sector. After a decade of losses investors have grown weary of the pharmaceutical sector. However, as we saw with the financial stocks, investors are very quick to forgive once prices start rising. Once the sector starts moving, managers who are underweight the group will need to get back in to keep up with the indices. I believe that process has begun. But if I am wrong the low P/Es and high dividends should protect me while I am waiting.

Bank Of America Saying $3.6 Billion To Buy On The Close

Bank of America sent out a note saying indexers will be buying $3.6 billion of S&P on the close. I believe some of that flow is being front run so I'm not sure what the effect will be at the close. My number was not that far off.

Why Haven't We Turned

These are the reasons I believe the market has not turned today despite the sell off in the banks:
  • Bull moves generally end on good news , not bad.
  • Strong trends rarely change course during option expiration week.
  • There is a merger closing today with a $44 billion cash component. Some of that money will be and is being redeployed.
However, this is setting up an excellent short opportunity for next week
  • The market will be maximum overbought at the end of this week.
  • Post expiration is a common turning point
  • Sentiment is extreme.

No Comment

I have been listening to the Citigroup conference call to gain more color on the timing of a secondary and the government selling their stake. An analyst asked the question and the answer was "no comment". Glad I listened to the conference call.

Buy Program On The Close

There should be a $3 billion S&P 500 buy program on the close by my crude calculations due to the closing of Pfizer Wyeth as indexers deploy the Wyeth cash. Part of the order flow was likely front run yesterday on the announcement of the closing so I am not sure what the net effect will be.

Capital One's Rising Delinquencies

Capital One reported higher than expected delinquencies on its credit card portfolio. This despite the positive seasonality for credit losses. Luckily, the government is giving the banks money faster than they could lose it.

Bank Supply

Citigroup's conference call will be at 11:00. I will be listening closely for an announcement as to the timing of a secondary offering. Next week Societe Generale is doing an offering and the following week BNP Paribas is coming to market. A lot of supply is coming in the financial space in the coming weeks. Portfolio Managers are already overweight the group so its hard to understand who will take down all this supply.

Use Protection

Good Morning. The VIX is approaching the 20 level, which is about average over the span of history. To be able to pay an average price for protection during times that are far from normal is a bargain. Despite the certainty of the bulls that making money is as easy as buying a nearly bankrupt company, nobody knows what lies ahead as these are unprecedented times.

Goldman Sachs is selling off because it did not beat the whisper number, circa 1999. I believe the market will see a major top in the coming days. While I would prefer to see the market top out on good news, I would not be surprised if the top is already in.

Don't Call It A Comeback

What do you get when you mix extreme sentiment and a $44 billion cash deal closing? One of the most stretched markets ever. I am salivating at the short entry point that is setting up. I will be looking for my entry point in the days following the closing of Pfizer/Wyeth. Have a good night.

Treasuries Getting Pummeled

Treasuries are getting pummeled today. Its not a problem yet because rates are so low but it is worth keeping an eye on. If the day comes when foreigners don't want to purchase our bonds, its game over.

Liquidity Positive

Even though Intel and JPMorgan are well off their respective highs of the day, the market is sitting pretty close to the highs of the day due to the strength in healthcare. That is the reason I did not want to add to S&P shorts before the Pfizer/Wyeth deal closed. There is a $44 billion cash component to the deal and some of that money will find its way into S&P names.

My net long position in pharma is larger than my S&P 500 short after my addittions today. I plan on adding to shorts in a few days but first I want to make sure that all the Wyeth cash is deployed. It might be better to short the Russell 2000 for the time being than the larger cap indices.

Pfizer/Wyeth To Close Tomorrow

Pfizer expects to close its deal to buy Wyeth tomorrow. The implication for the broader market is that there should be large buy orders at the close tomorrow as indexers will deploy their part of the $44 billion Pfizer is giving to Wyeth shareholders. Healthcare funds will likely receive a large part of the Wyeth money and are likely to deploy the money in other healthcare names.

Pfizer/Wyeth Receives US Approval

Pfizer/Wyeth Receives US Approval. Deal should close within days. I have purchased shares of Merck on the news. I now have very full pharma positions.

Extreme Call Buying

We are seeing extreme call buying this morning once again. Add to that record low levels of cash at fund managers and I think its safe to say that the level of complacency and fearlessness is high. For now it does not matter.

ECRI Has Great PR

I have been hearing a lot recently about the leading indicators from the ECRI recently as if it is the holy grail. I found this article from Mish very enlightening. It seems the best thing about the ECRI and their leading indicators might be their PR.

More Anecdotal Evidence Of Giddy Sentiment

The Merrill Lynch fund manager survey is out and is showing that fund managers have the highest level of confidence since 2006 and lowest levels of cash since 2004. This is astounding given the state of the economy and that they have to pay 60% more for stocks than they did a few short months ago. Is that logical or is that classical herding behavior?

Citigroup Secondary?

Last month reports came out that Citigroup would be looking to issue shares in October and that the government would be looking to unload some shares as well. Vikram Pandit pretty much confirmed these rumors during an investor conference. My best guess is that Citigroup will release "better than expected" earnings and follow it with a share sale. Citigroup likely knew earnings were good and wanted to be able to report earnings so there would be more demand for the shares.


No matter how many times I play peekaboo with my son, he is still surprised when I pop my head out and yell peekaboo. Watching the markets recently is liking watching a game of peekaboo. Analysts low ball estimates that they know companies will beat the estimates. They know this because they basically take the estimates from the company, who know they will beat. And market participants are surprised when companies yell peekaboo.

The phrase "Buy the rumor, sell the news" does not seem to apply to this market, as market participants act like surprised infants. While I decided to stop fighting the market by moving to a market neutral strategy (long pharma/short SPY), I have no plans to throw caution to the wind and join the party.

I can't help but think that the market is seducing every last player in before reversing. I am getting close to the point where I would be willing to move to a net short position again but I am waiting for the Wyeth/Pfizer transaction to close before doing so. The deal should have closed already but a bureaucrat somewhere in the DOJ has been too lazy to rubber stamp the deal. Until then I am sitting on my hands and waiting.

Awaiting Earnings

The market is clearly biding time until earnings. I doubt we will see a repeat of last earnings season when the market took off like a rocket ship. The market was oversold on a short term and intermediate term basis when earnings season kicked off and investors were highly skeptical. At present the market has room to rally into the end of the week but will then be overbought. Any rally is more likely to be a climax than the beginning of a new leg up.

Investors Buying The Dip

Investors are buying the dip once again with heavy call buying at both option exchanges. In the context of a down market this is usually a rare event, but one that has been occurring more frequently in recent weeks. This is not something the bulls want to see.

Pharma Getting Hit

Pharma is getting hit today on the back of bad earnings from Johnson & Johnson (JNJ). I am using the weakness to add to my Eli Lilly position.

Good Riddance To The CEO of CIT

When the CEO of CIT came into office he made two changes. He moved the company to swanky NY offices from their humble New Jersey headquarters. In addition, he got rid of the old loan officers who he believed were prudish in giving out loans and hired loan officers who got it.

It is nice to see that some of the mistakes of an unfortunate era are being corrected. For the most part we are back to business as usual and these occurrences are few and far between.

CIT CEO Stepping Down

The CEO of CIT is stepping down. The stock is down 20% on the news. It looks like the market is assuming this makes a bankruptcy filing more likely. CIT has a lot of debt and the bankruptcy might roil debt markets.

No Confidence

Good Morning. Stock futures are slightly lower on weaker than expected confidence figures from Germany. However, earnings should soon take over as the driving force in the market.

Everybody knows that earnings will be better than the low ball estimates. Especially, in the case of banks and brokers who were able to mark up their assets and benefited from the most active secondary offering market in history. The question is how will the market react? Will the news be sold or will investors push the market further.

Normally, the news gets sold after such a strong run up into earnings. However, the only tactic that has worked recently is to just buy and ignore everything else. To further complicate matters the market will not be maximum overbought until after option expiration so the market still has some room.

She Was Just 17, And You Know What I Mean

My largest holding is Pfizer, which I own through shares of Wyeth. Pfizer is breaking out above 17 today. The pharmaceutical sector is once again outperforming to the upside. I remain long pharma, short SPY. Have a good night.

Selling Opportunity

  • Is this a selling opportunity? Blackstone sure thinks it is. They are looking to bring 8 of their portfolio companies public. What's the rush?
  • Who is going to buy that over leveraged bleepity bleep?
  • Vehicle prices are up nearly 10% year over year. This is largely because car companies were over producing and selling cars at a loss. Now that they have declared bankruptcy and right sized production, prices are higher. Is this a one off or a shot across the bow for inflation? Used vehicle prices are up strongly as well.
  • Chicago transit is hiking fares by 30%.
  • I am still undecided on the inflation/deflation debate. But we finally are seeing some signs of inflation outside of commodities.

I See

There has been some extreme call buying on the ISE the past few days. Today, the ISE Equity is chiming in at 315. That is something I have never seen. Investors are buying calls with reckless abandon. If investors are bearish they are certainly not expressing themselves in the options market.

Icing On The Cake

I bought shares of pharmaceutical companies because I was able to pick them up at seven to eight times earnings. Ridiculously cheap, in my opinion. Jeff Mathews makes an argument that healthcare "reform" will be a bonanza for big pharma.

$80 billion may sound like a lot of money, but it is not: $80 billion amounts to all of two years’ worth of Pfizer’s gross profits.

And that is a pittance when compared to the benefit Pfizer and the rest of Big Pharma will see under Healthcare So-Called Reform. After all, those extra 29 million newly insured American lives will mean more 29 million more mouths to swallow billions of extra pills every year.

Gosh, if each one of those 29 million newly insured mouths spends just $275.80 a year on pills from Big Pharma (less than the cost of a year’s worth of generic Lipitor), that’ll be $80 billion extra cash going to Big Pharma right there.

Whatever the reason—and for the purpose of full disclosure—we have purchased shares of Big Pharma precisely because Obama’s “reform” should make that business better than anything George Bush could have envisioned in his wildest dreams.

Stopping Myself

After a 4.5% rise last week, the market is gapping up this morning. I am very tempted to add to my shorts into this gap up as the word "stretched" does not do justice to this market.

However, I have not had the best run as of late and I will only take perfect trades at this point. When I am doing well I allow myself a little more leeway, but when I have a bad run I become more discriminating.

Because the market will not be maximum overbought until options expiration and the Pfizer/Wyeth merger closing could give the market some fuel I am stopping myself from adding to shorts.

Don't You Get It

"The market has turned"
"The recession is over"
"Things are getting better"
These are the phrases heard when talking to investors these days, but rarely does anybody talk about the price being paid for stocks. As if the fact that the economy is getting better justifies paying any price for a stock. In 1999 investors said "the internet is the future" and they were right, but that did not justify paying any price for internet stocks. In 2007 they said "they aren't making any more land" and that was correct but that did not justify paying any price for real estate. Back in March, when the economy was "bad" no price was too low to sell at. The most common mistake investors make is to ignore price and invest based on a catchy phrase or story.

Stocks are trading at extreme valuations given that we are at the beginning of an economic recovery and in a secular bear market. Further, it is up for debate if the economy is getting better. If injecting an injured athlete with drugs so that he can play another quarter is your idea of getting better, than the economy is getting better.

John Hussman addresses many of these issues in his weekly piece:

When we look at the current market environment today, it is clear that the enthusiasm about the market here is largely based on the idea that the recent recession is over, and that the economy will form a “V” shaped recovery similar, but much stronger quantitatively, to standard post-war recoveries. This is a very difficult argument to make, because the drivers of economic growth that existed in typical economic recoveries – particularly debt origination and consumption growth – are very compromised at present. Our perspective on the ongoing credit risk in the economy is much like that of economists Kenneth Rogoff and Carmen Reinhart, who foresaw the recent financial crisis, and are far less sanguine about the prospects for sustained recovery.

... Presently, my primary concern is that stocks are now overvalued, to about the same extent as they were in the late 1960's, and just prior to the 1987 crash, but certainly less overvalued than they were at the 2000 or 2007 peaks.

Pharma Outperforming

The pharmaceutical sector is outperforming today and hitting a new high. What I find so bullish about this is that it is doing it with little fanfare and almost nobody overweight the sector. This is the one sector in the market that is clearly cheap based on actual earnings. I am calling it a day. Have a great weekend.

The Dollar Isn't What It Used To be

I have spent the past few days overseas, which is why my posts have been sparse. The purchasing power of the dollar is not what it used to be. A dollar goes further in the US than in most developed countries. From a purchasing power standpoint the dollar is likely fairly valued or even getting undervalued. However, that does not mean that the government can't debase the dollar further.

Carl Icahn

Carl Icahn questions the "schizophrenic" market. He doesn't like REITs. I'm not a big fan of Icahns but I generally agree with what he says in this video.

Maybe Something, Probably Nothing

The Treasury auction for 30 year bonds did not go well yesterday. Neither did the bond sale from the state of California. Is the voracious appetite for credit subsiding? Maybe something, probably nothing but I'm just putting it out there.

The Music Is Playing

Good Morning. Many investor's rationale for buying stocks sounds more like a game of musical chairs than investing. They know that the economy is not healthy but are planning to get out before the excrement hits the fan. We all know what happened to the last guy who had to keep dancing as long as the music was playing (actually he walked away with hundreds of millions of dollars but that's besides the point). I believe the music we are hearing is a siren song.

In the shorter run the market should really take a breather. The semis and banks are both looking tired and are generally leading indicators. I am not looking for a large pullback in the short run as the market is not yet overbought and I expect the closing of Pfizer/Wyeth to support the downside.

Scarred Bears

At about 3:00 I started writing a post where I questioned if anybody was expecting a weak close. I decided not to post it as I have looked like enough of a fool recently with my bearishness. I believe that anecdote describes the state of psychology of the bears right now. Even those that believe that this is unsustainable are too scarred to act on it. Some are even buying in order to keep up with the Jones'. Have a good night.

Dont Get Excited About Retail Sales

Retail sales were better than expected as I wrote they would be at the beginning of the week. There were some one time factors that contributed to this.
  • Easier comps because crisis picked up steam exactly a year ago
  • A lot of back to school shopping was done later as August sales were dismal
While comps will continue to get easier, the consumer is far from healthy. Retail names are seasonally strong until Christmas so I would not get on the short side of these names before then. But longer term I believe that retail is one of the least attractive sectors.

Unanimous Decision

A question for all the bullish readers, which seems to be everybody these days. Does the unanimity of bullish opinion give you pause?

Playing Rope A Dope

Alcoa's earnings have never mattered for the broader market, but these days the bulls don't need much of an excuse to party. So why won't I join the party? Forget for a moment that I believe valuations are high and that the economy is not out of the woods. Stated simply, it seems too easy and people seem too confident. In my experience, anything that seems too good to be true usually is. Tops happen when everyone is bullish and its hard to argue that today's market does not meet that criteria.

I have taken some lumps on the short side but luckily my pharma and arb positions have helped lessen the blow. I plan on getting more aggressive on the short side but am waiting for everything to line up. Until then I am long pharma names, short SPY.

You Can Cut The Bullishness With A Knife

I can't remember a time period when the bulls were so confident, while the bears were too scared to short. While I believe this is the stuff that tops are made of, the imminent closing of the Pfizer/Wyeth deal has me tempering my bearishness. For now. I remain long pharma and short the S&P 500 in a paired trade. Have a good night.

Spread Tightening

There has been a very sudden tightening in the Pfizer/Wyeth arb spread. Could this mean a close is imminent? There is a $40+ billion cash component to the deal. A chunk of that money will get reinvested once the deal closes. This should benefit the market but drug stocks in particular.

My largest holding is Wyeth. It is a part cash, part stock deal. I will be holding the shares of Pfizer I will be receiving.

Long Drugs, Short Market

I remain short the SPY and long a lot of pharma stocks. While I believe that the market will see some short term weakness I am remaining pretty balanced. The reason is that the Pfizer/Wyeth deal can close any day and should be a market positive. I believe it will be an even larger positive for the pharma stocks I own. A few days after the deal closes I will consider adding to shorts.

Banco Broken

The $8 billion IPO of Brazilian bank Santander is trading below the IPO price. A few months ago this would not have happened. Does this mean managers are no longer under invested?

Repeating Myself

I believe the market will have a tough time making progress today. This is a pure short term trading call.

The Indebted Nation

Can somebody explain to me how the fact that we are now beholden to the Chinese, the Arab nations and the Russians is bullish? They don't care about their own people. Imagine how they feel about us. I know. Don't over think it. Just buy.

Online Casino

Good Morning. The most common argument I have been hearing recently is to ignore reality and buy stocks. Don't over think it. While the stock market has always had a gambling aspect to it, it has taken on a distinct casino like feel in the past few months. Many are not even pretending to care about the underlying businesses they are buying or what price they are paying for it. Stock symbols are just numbers on a roulette wheel that keeps turning up winners.

Once all the bets are placed stocks will need to stand on their own two feet, which means dividends and free cash flow. On that basis stocks will fall flat on their face as dividend yields are among the lowest in history as are free cash flow yields.

In the shorter term, I expect the rip roaring rally of the past two days to take a break. The market will need to digest the recent move as well as the $10 billion in IPOs that priced last night.

Oops I Did It Again

The bulls managed another sharp rally, ignoring the calls for a deeper correction. Will they have clear sailing to a new high like every other time in the past few months? I don't believe so but I have been wrong before. Especially, recently. I am headed out on a flight after the bell. I will be traveling tomorrow but will try to post. Have a good night

Lethargic Rally

  • Ken Lewis was one of the worst CEOs in the country and it is a positive for Bank of America that he is leaving. It is a little strange that he is leaving in such a hurry without a replacement. There might be something there other than the bonus issue.
  • Ken Lewis wanted to go through with the Sallie Mae acquisition for $60 a share but luckily his partner, Jamie Dimon nixed the deal.
  • Unfortunately for Bank of America shareholders all Ken Lewis' other acquisitions did go through and the stock is in the same place as it was in 1995. Too bad a dollar does not go as far today as it did in 1995.
  • Today's rally feels a bit lethargic, a change in character from previous rallies in the past few months.
  • The Wyeth/Pfizer deal is days away from closing and has a 2% spread. It is still my favorite trade.

Beware The Financials

The financials are up strongly today on the back Goldman's upgrades. I would be careful in this group in the short term. Tomorrow night Banco Santander of Brazil is doing a $7 billion IPO on the NYSE. Additionally, Verisk an insurance risk management company is doing a nearly $2 billion IPO. With $9 billion in supply coming in the financial sector and the strong rally today, I would avoid the group until the dust settles.

So Far, So Good

The rally looks good thus far. Breadth is 2 to 1 positive and we are seeing some put buying at the ISE. Today's rally attempt looks a lot better than Friday's.

Same Store Sales Will Start Looking Better

Same store sales at retailers should start to look better this month. Comps are getting easier as the crisis gained momentum a little over a year ago. In addition, the weekly chain store sales indicators showed strength at the beginning of September during back to school. August back to school was very weak and it appears parents put off shopping until the last minute. While neither is a sign of strength, it will make the numbers look a little better.

Trying Again

Good Morning. The futures are starting the week off on a strong note. While the market is certainly oversold enough to rally, the market will not be maximum oversold until mid week. If the market saw further weakness, that would set up a better risk/reward spot to try and play a bounce. I believe a bounce would be just that and that we will eventually see lower prices.

There are two liquidity events this week, one positive and one negative. Two IPOs are scheduled for Tuesday night with a combined value of $9 billion. Portfolio managers might need to sell some stock in order to make room for these IPOs. The Pfizer/Wyeth deal might close as early as this week. The deal has a greater than $40 billion cash component. Some of that cash will likely be put to work once the deal closes.

Be Careful What You Wish For

There will likely be debate over the weekend whether we have reached a short term bottom. I believe the bulls would be better off if the market broke today's lows early next week to shake out the renters. However, the bulls might want to be careful what they wish for during the time of year when the market is infamous for wild moves. Have a great weekend.

Weak Close

If my hunch is correct that too many people are bottom fishing today than we could see a weak close. The heavy call buying at the ISE supports my hunch as does the persistent negative breadth.

Torn About A Short Term Bottom

I am a little torn on if we saw a short term bottom today. On the plus side the market is oversold, it went all the way down to support and we are seeing some put buying. All are pluses for the market and point to a bottom.

On the negative side the market still has room to become more oversold. Breadth is almost 2:1 negative and is not supportive of the rally. In addition, today feels more like bottom fishing than capitulation to me, which is not very quantifiable.

All this leads me to believe that the market would be better off doing some more work on the downside so a better short term bottom can be reached.

The Bounce Is Here

It looks like the bounce has arrived. I don't believe the market is set up for a very strong bounce.

Missed Opportunity

I never had a chance to add to my pharma longs as the sector opened higher, despite a weak tape. That likely means I should have added aggressively. But now that they are running I don't want to give chase.

More Bounce for The Ounce

Good Morning. After the disappointing payroll numbers and the subsequent selloff in the futures I believe we are at the point that we could start thinking about a bounce. However, a few more down days through Tuesday would set up a much better risk/reward situation and likely a better bounce.

The way I will be looking to play this is as follows. I will likely use today's weakness to expand my pharma longs, but will keep my SPY short position intact.


With breadth more than 4 to 1 negative and the end of the day approaching it is unlikely that the bulls will be able to turn this one around today. Markups might have had something to do with the recent strength and today's subsequent weakness. The bulls are finally being reacquainted with the word risk. Apparently stocks are still a two way street. Tomorrow will definitely be exciting with the jobs numbers. Have a good night.

Took Some Profits

I sold some SPY October 99 Puts against my short SPY position.

Ruby Tuesday

Yesterday, I said that the market will not be maximum oversold until the end of the day on Tuesday. I wanted to elaborate on why I chose Tuesday. On Tuesday, we will have completed 10 days since the market top on the day of the Fed meeting. Assuming the market heads lower through Tuesday we will have spent the better part of ten days going lower.

Moves tend to get exhausted after ten days. Even during this record rally since July ten up days led to at least a pause every time and led to the small handful of corrections. However, a lot of damage could be done between now and Tuesday. We are in the part of the year that is infamous for sharp moves and we have not had a real correction since July.

The Price Is Right

There was a huge upside surprise in pending home sales. Unfortunately, I was only playing the The Price Is Right from home. Unfortunately for the bulls the ISM was much worse than expected and we are now testing Friday's lows. It should be a real battle.

Expecting Upside Surprise

I am expecting an upside surprise in the pending home sales number at 10:00. This as first time buyers rushed to sign contracts in order to qualify for the tax credit before it runs out. I don't believe that a higher number is a sign of an improving housing market, just as car buying in July during Cash for Clunkers was not a sign of improving auto demand.


Good Morning. Incoming data continues to show that the government has indeed been able to stop the freefall in the economy after throwing the kitchen sink at the problem. However, there is precious little evidence that the private sector is taking the baton from the government, which will lead to a self sustaining recovery.

Thus far the stock market has not been fazed by this. However, the next few days could signal if this is about to change. If the market manages to bust through Friday's low, it will be the first time a correction lasted more than a few days since this rally began in July.