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Earned Money

I sat in front of my computer for the bulk of the past two weeks as most were on vacation and was finally rewarded today. Treasuries trade at the CBOT in the open outcry from 8:20 AM to 3:00 PM. That is where the real money is that dictates the price of treasuries. TLT and TBT, which are the ETFs continue trading until the stock market closes at 4 PM. Most days there is not much movement in the TLT and TBT between 3PM and 4PM unless the stock market makes a move.

Today TBT shot up from 50 at 3PM to 50.5 at 3:30 even though the stock market was actually lower. I don't know why it happened but I realized that it would likely be corrected and quickly shorted some TBT. I was able to cover minutes later as treasuries shot right back to where they were at 3PM.

Did I make a fortune? No. But it feels good because I earned it by staying glued to my seat and paying attention.

No Retail Bears

The following chart is the number of bears in the American Association of Individual Investors survey from Sentiment's Edge.

Treasuries In Pictures

The chart below is the ten year treasury yield from Yahoo! Finance. I underlined the rise in yields over the past month. Yields have shot up and treasury prices have shot straight down.


Before this move higher there was not much talk about shorting treasuries. However, recently the bearish talk about treasuries has reached a fever pitch. Doesn't it always work that way?

In the long run treasury yields are likely heading higher. However, in the short run the consensus that yields will rise has become too pat. In addition, the ten year treasury is reaching a point where it will seriously threaten the economy. If treasury prices continue their climb the rest of my portfolio should perform well as I am short interest rate sensitive sectors, while my longs have little interest rate sensitivity.

Beneath The Surface

Most stocks I follow are on track to trade about 25% of normal volume. It is very thin out there. The indices are showing minor losses but the moves in sectors are quite a bit larger. Financials are the best performing sector, while healthcare is bringing up the rear.

There is a lot going on today. Window dressing, tax loss selling, portfolio repositioning and to top it off there is little liquidity which exacerbates moves. There is likely some opportunity in these moves. For my part, I am happy with my positioning going into the New Year.

Its That Time Of The Year

It looks like we are getting some markups this morning on light volume. Some markets are closed today and European markets will be closing early. Gold is up $13 overnight in thin trading. This is a hedge fund favorite and might be seeing some window dressing.

I am toying with the idea of replacing some of my SPY short with a QQQQ short. The QQQQ is up about 50% for the year and that is where the bulk of the markets gains are. If market participants are waiting until the new tax year to take profits that will likely be the place to do so.

Pump Up The Volume

Volume hit a new low today and once again there was not much movement in the indices. We could see some year end window dressing tomorrow. It is also a possibility that some people are waiting for next week to take gains in order to delay their tax bill. Have a good night.

Pressing My Treasury Long

Early in the week the media was fretting about the treasury auctions this week. While the auctions were not great, treasuries have rallied nicely since Monday morning. Usually when everyone is bracing for disaster it takes a large surprise for a disaster to actually occur.

It seems like everybody is bearish on treasuries right now. But now that the treasury auctions are in the past, what is the bears catalyst? I am pressing my treasury long (via TBT short). Please note that this is just a trade and I would not want to own treasuries for the longer term.

Lopsided Sentiment

Sentiment has become so lopsidedly bullish that I am beginning to think that a 10% correction is a matter of when and not if. Whether it be sentiment surveys, activity of Rydex traders, option activity or anecdotal sentiment all evidence points to the fact that investors are complacent. It seems that the bears are non existent.

Yesterday, I increased the beta of my short portfolio, while my longs are primarily lower beta defensive stocks. I am tempted to move one step further and start betting on an outright decline. I could see one more move higher in the early part of January as traders return from vacation. They are likely to return in a bullish mood and that could lead to one last push higher. That is somewhat tempering my enthusiasm for the short side. If we do see a move higher in early January I will likely start getting aggressive on the short side.

Bears At New Low

The bears in the Investors Intelligence survey have hit a new 20 year low of 15.6%

Record Inflows

CNBC is reporting that $11.1 billion flowed into US equity mutual funds the week ending Dec 23, a 79 week record. This explains a lot of the recent strength.

Why Now

Today I replaced nearly half my SPY short with a variety of other short positions. I shorted Simon Property Group (SPG), the homebuilder index (XHB) and the equal weight retail index (XRT). This is a reflection of my view that the consumer will continue to deleverage and that the housing recovery will be prolonged.

The reason that I chose this week is that I wanted to wait until after Christmas before shorting retail. I have found that retail stocks are typically strong starting in August and leading to Christmas. The homebuilder index actually contains many retailers like Home Depot. I outlined earlier here and here why I believe now is the right time to short Simon Property Group.

Go Figure

Today, the long GS/ short BAC trade starts working. A day after I took it off. Go figure.

Shorted XRT and XHB Calls

I have shorted XRT (retail ETF) and XHB (homebuilding ETF) calls, replacing a portion of my SPY short. I am now short retail and the housing sector. More to follow on why I made these portfolio adjustments.

More on Simon Property

Another factor that prompted me to move on Simon Property Group was that I noticed there was heavy insider selling last week at both Simon Property Group and their competitor Taubman Centers.

Rebalancing

Apologies for the late post but I have been working on rebalancing my portfolio. I replaced a portion of my SPY short with a short of Simon Property Group. Simon Property Group is the largest mall owner in the country. I believe they have two secular themes working against them. The move to internet shopping and a consumer that will be saving more. Now that the shares are fully valued I am comfortable shorting them. The best thing they have going for them is price momentum.

I was also planning on shorting the XRT and XHB, which are the retail and homebuilder ETFs but I can't get a borrow on those shares. I have been wanting to short retail but don't like shorting the sector until after Christmas.

Uneventful

Today's trading was uneventful. The question I am pondering is if the consensus is expecting a strong first half, have they already positioned themselves that way or will that occur next week, when everyone returns? Have a good night.

Portfolio Pruning

I took off the long Goldman Sachs/ short Bank of America trade for a modest profit on both sides of the trade. I still think the trade works but I have decided to move on.

The Anti Prediction

It is the time of the year when everyone puts out their predictions for 2010. I have been reading many of these predictions for the past few weeks. The most common prediction I have seen is that the first half of 2010 will be great while the second half will be a disappointment. I had also thought that was a likely outcome, but am now questioning it.

It is very rare for everyone to be correct in markets. That would either mean that we would first need a stiff shakeout before a first half of 2010 rally or that the first half will be lackluster. A strong pickup in cash M&A would go a long way towards helping the crowd, but absent that I am becoming more pessimistic on the first half of 2010.

Added To Treasury Long

I have added to my treasury long based on the universal bearishness towards treasuries. There is so much hand wringing over the auction this week that anything but a disaster should lead to a rally.

Barrons Bears

As readers know, I recently went long Goldman Sachs versus my Bank of America short. My thesis was that I would much rather own the hated Goldman Sachs which has actual earnings versus everyone's favorite stock, Bank of America, which has lots of "normalized earnings" a few years out. This weekend a money manager recommended shorting Goldman in Barron's.
We're essentially short the political economy, and the most politically connected firm is Goldman Sachs [GS]. It has two sides: a highly secretive and profitable trading operation, and a more pedestrian public business. Our suspicion is that their secret sauce is access to friends in high places, and that the model breaks when it either flies too close to the sun or a public backlash opens them up to scrutiny. Trading and principal investments account for 67% of net revenue this year, the highest level ever. Goldman, aggressively plying the risk trade, is vulnerable to the next leg down.
I almost fell off my chair when I read the recommendation. Shorting a stock because of a "suspicion"? I understand not buying a stock because of a "suspicion" but going out and shorting a stock based on "suspicion" has to be one of the silliest things I have heard recently and another reason to believe Goldman is set to outperform other banks in the near term.

Feeling Great

The current sentiment of market participants can be described as feeling invincible. The bears are in deep hibernation, not even trying to put up a fight. This type of market is very frustrating for me because I'm too scared to buy or short.

Ideally, I like to do my buying when stocks are cheap. But since that has rarely been the case over the past decade I compromise and buy when fear and skepticism are high. It is hard to recall a period when fear and skepticism were lower than at the current juncture. While it may feel "easy" to buy right now I have found that such rallies often end with abrupt losses where the gains are taken away far quicker than they came.

At the same time I can't bring myself to move to a significant net short position. We are likely to see another week of record low volume. It will be easy for those with an agenda to push the market around.

Nothing To See Here

I have decided to call it a week instead of watching the S&P trade in a 2 point range and trying to analyze it. Merry Christmas, Happy Hannukah and Happy New Year.

The Odd Couple

Its amazing how treasuries have been moving tick for tick with gold for the past few weeks. Theoretically, the two should move in opposite directions. I can't complain as I went long treasuries for a trade yesterday.

Today's Least Helpful Call

Over at Jeff Mathew's blog he often highlights the least helpful sell side call of the day. Today, I am going to nominate the analyst at Soleil Securities who downgraded Exxon Mobil after it has already gone down 10% in a straight line.

Same As Yesterday

There was extreme call buying again yesterday. It is rare to get these type of readings two days in a row. In previous instances this almost always led to a move lower, if not in days than in weeks. This did occur on extremely low volume and at a seasonally strong part of the year so the signal is not as strong. That said, I would be careful on the long side.

Vacation Has Started

Volume is anemic as it seems many have started their vacations early. It will only get thinner as the week wears on. Watch out as those with an agenda will be able to easily push around this market.

Gold and Treasuries

Gold and treasuries have been moving in tandem to the downside for the past few weeks. To these eyes it seems both are stabilizing today.

Extreme Call Buying

The extreme call buying from yesterday is continuing today. Market participants are acting as if betting on the market is easy money. I am not so sure but doing nothing.

Somethings Gotta Give

Interest rates have shot higher in the past few weeks, which is a major headwind for the economy. The market and interest rates can't both continue to climb indefinitely. I have gone long treasuries by shorting shares of TBT.

Looking For Ideas

I have discussed ad nauseum how I believe that higher rates and the FHA guideline changes will bring a slowdown to housing in the new year. I have a very high level of conviction in this forecast. The housing and banking stocks are the most obvious choices of stocks that will suffer but these stocks seem to dance to their own tune, far removed from fundamentals. I am looking for ideas on a way to play my forecast.

Does Seasonality Trump Extreme Sentiment

Yesterday saw the second largest amount of call activity since this rally began in March. The last time this occurred there was a correction soon after. However, given the positive seasonality a correction might have to wait.

At the end of last year we saw extreme call buying at the end of the year and the market did not correct until a few days into the new year. As such I am holding a balanced portfolio, with short SPY hedges against my long positions.

Tomorrow, Tomorrow

Tomorrow is the bears best chance this week for a down day. Its Turnaround Tuesday, it follows today's exreme put/call readings and there is still some distance between us and the holidays. As we get later in the week volume will thin out and the holiday spirit will likely takeover. Have a good night.

Interest Rate Dejavu

Treasuries are once again hitting fresh lows and interest rates are climbing higher. Higher rates plus stricter FHA rules starting January 1 will equal new turmoil in the housing markets. Not today's problem.

Euphoria

Put/call ratios are showing high levels of euphoria. Were we not entering the seasonally strongest part of the year, I would probably be making a move to the short side right here. I am sitting on my hands trying not to act.

As an aside, healthcare continues to outperform. Healthcare is a defensive group so theoretically it should underperform in a strong tape.

Are The Chinese The Big Buyers

It has been hard to make sense of the market for the past few months as every dip gets bought. Even though there have been times when it seemed everyone was bullish, we have not seen a substantial correction.

This morning, Bloomberg is reporting that the Chinese sovereign wealth fund, CIC, is asking the Chinese government for another $200 billion. Last we heard CIC had over $150 billion in cash that was unspent. Have they already used up that money? Last week, the Chinese complained about bubble blowing, but wouldn't it be ironic if they were the ones causing the bubble.

Taking A Step Back

Various indicators are showing signs of excess bullishness in the market at the same time that the market is still somewhat overbought. Normally, I would not mind taking the other side of that trade by going short the market. However, I try not to short the market at this time of year as it is usually not a money making strategy.

I made an exception last week and went net short because there were over $30 billion in new share offerings led by Citigroup and Wells Fargo. The market took a small hit and seems to be bouncing right back as if nothing happened. I am shocked as even during this time of year $30 billion is a lot of money. I am not sure that there ever has been a week with that much new stock offered.

I would not be surprised if the market does finally have a correction over the coming weeks. That said, I moved to a more neutral posture late Friday as I have given up fighting the market for now. Most of my long exposure is in the healthcare space while I am short SPY as a hedge. I should do fine if the correction finally does arrive.

Follow The Money

This morning we are seeing another cash takeover in the healthcare space. Sanofi Aventis is buying Chattem for $1.9 billion. The vast majority of the cash takeovers this year have been in the healthcare space and that is where the vast majority of my long exposure is. A big deal was made of energy stocks last week because of the XTO takeover. The deal was all stock and has no net effect.

Back To A More Neutral Posture

It looks like the selling I was looking for was already done. I moved back to a modest short posture by adding to my longs. I was expecting more out of the trade but it could be worse. I don't know what it will take to get this market down if $50 billion in secondaries doesn't do the trick. Have a great weekend.

Purchased Amgen

I have purchased shares of Amgen. I was short puts that expired today. This is a more aggressive posture. By doing so I have moved from a medium sized net short position to a modest sized net short position.

Indexing Has Costs

There is a lot of literature on how indexing beats active management. For most people it makes more sense to index than to try and beat the market. However, indexing has become a victim of its own success in many ways.

Visa is up 10% since S&P announced its inclusion in the S&P 500, even though the market is down. That has tacked on $7 billion to the market cap of Visa. Since approximately 12% of the market is indexed to the S&P 500, indexers are paying up $840 million for the shares of Visa they will buy. The same has happened with Wells Fargo and Citigroup to a lesser degree when S&P announced they will add to their weightings. This is a hidden costs to investors who index.

At this point it still makes sense for most investors to index, but as the strategy gains popularity the costs will rise.

Gold Oversold

I have been meaning to post that Gold and Gold related stocks reached maximum oversold at the close yesterday. This is a short term trading indicator so it does not say much about the longer term picture. I don't trade gold or gold stocks so I am not certain how they respond to these types of indicators.

Rotation

We are seeing a rotation out of defensive stocks like Pepsi and Procter & Gamble into higher beta sectors. I would much rather own defensive stocks than high beta stocks.

The Last Bastion of Momentum

Every area of momentum in the market has had a setback in recent months. It started with financials extended to small caps and energy, then to gold and the anti-dollar. The only area of momentum that is still going strong is technology. I have no interest in buying tech stocks.

Citigroup Will Be Increased In S&P 500

Citigroup's weighting will be raised in the S&P 500 at the close. There will be over $10 billion to buy in Citigroup, Wells Fargo and Visa. The other shares in the S&P 500 will get sold. I believe this will have a negative effect on the S&P 500.

The Correction Checklist

Corrections within the recent rally have all looked strikingly similar. Thus far the current correction fits the bill.
  • The market reached maximum overbought before each correction.
  • Sentiment was tilted strongly to the bullish camp.
  • The first dip lower gets bought.
Currently, we are at stage two when the dip buyers start to get buyers remorse. The third stage is when we see buyers give up, negativity creep into the market and we get actual selling. This all assumes that we ae still in the midst of a rally and we have not seen an intermediate term top. Were this not the seasonally strong part of the year I would be convinced that a top is in. I am not ruling the possibility out.

Sell Program

At the close tomorrow Visa will be added to the S&P 500. In addition Wells Fargo's weighting will increase due to their share offering. It is also possible that S&P will decide to increase Citigroup's weighting. If these changes occur we will see a $10 billion sell program at the close tomorrow in order to buy these names. I am likely to press my shorts until then. I did not cover a single short today. Have a good night.

Breaking Ranks

Bank of America has broken its deal price from its $19 billion secondary two weeks ago. There have been over $50 billion in deals during the past few weeks. If participants start hitting the eject button it could turn ugly rather quickly.

What Do You Know

Gilead is actually up on the day, even though the market is lower than where it was when I pointed out that the volume was drying up. A neat little trick I learned from constantly trying to pick bottoms.

Trick of The Trade

Gilead has been going down for the past three days on heavy volume. The volume has dried up over the past hour. Usually when that happens it means the decline is over. I am not buying any shares but the stocks is at 42.88. Let's see if it works.

Heavy Call Buying

There is heavy call buying. I am not covering a single short. I think the market can head much lower into option expiration.

Long The Vampire Squid

I can't bring myself to cover my Bank of America short even though my reason for being short is passing. Goldman Sachs is down over $3 in the pre-market even though they have not diluted their stock recently, while Bank of America is actually higher. Goldman seems like it is widely hated while Bank of America is universally loved. I went long GS against my Bank of America short.

Bank of America Frustration

I have been successfully trading Bank of America from the short side since they announced their $19 billion offering. However, it has been a very frustrating experience. Every morning I wake up and find that either John Paulson leaked something saying that the stock is worth nearly double or some sell side analyst is upgrading the stock.

Yesterday, a Morgan Stanley analyst said that the stock had a 70% chance of going to 30 next year. The options market is pricing in less than a 7% chance of that occurring. This morning UBS is initiating it as a buy. As it stands the stock has 24 Buys, 8 Holds and 0 Sells. Only 8 more upgrades to go.

I will be out of this short in the next few days as my thesis was strictly based on a supply/demand argument. That said, I have no interest in buying a stock with such lopsided sentiment and would not be surprised to see it drop further.

Survey Says

One of the bull arguments I have been hearing is that the individual investors are still fighting the market and that the market won't go down until they buy in. This morning the American Association of Individual Investors survey is showing the fewest bears in 18 months. It appears that both large and small investors are bullish here or at least thats what the surveys are saying.

No Fill

Usually there is some two way volatility after a Fed announcement and one could allow the market to come to them. That was not the case today and my sell order did not fill. I am going home with a medium size net short position. The Citigroup offering should be tonight. My theory will likely be tested tomorrow. Have a good night.

Is The Fed Less Relevant

There was very little movement in the market following the FOMC statement. Even though there was little doubt as to the outcome, this is highly unusual. Does this mean people view the Fed as less relevant?

My sell order has been in since before the FOMC statement but thus far it looks like I won't get filled.

Preparing For A Spike

If we get a spike on the Fed announcement I will be moving to a large net short position from my current medium short posture.

Rydex Traders In Pictures

I mentioned this morning that Rydex traders have gone very long. Here is a graph from The Technical Take blog.

Gilead Punching Bag

The pharmaceutical sector has been the World's Fair for the past few months and it has been the heart of my long portfolio. Large cap biotech is very similar to the pharmaceutical sector, except it has a better growth profile. Large cap biotech has lagged during that period. The most recent catalyst for the underperformance was a pipeline failure from Gilead.

Merck now trades at 11 times forward earnings, while Amgen trades at less than 10 times (net of cash). I have been very slowly shifting some of my pharma exposure to the lagging large cap biotech space. The reason I am not more aggressive is because I am respecting the momentum.

The catalyst for the rally in pharma has been two high profile, largely cash takeovers. However, at current valuations it would now make sense for large cap pharma companies to consider taking over biotechs. If the valuation gap continues to widen it would be a no brainer.

Market Should Flatline

The market should go sideways between now and the Fed announcement if previous Fed days are a precedent. The action should begin again after the announcement.

The First Dip Is Bought

As with every correction in the past few months the first dip lower is being bought. We did not have a top where we went straight down, so this is par for the course. Signs of extreme complacency are abundant:
  • Rydex traders finally went aggressively long yesterday, after shunning the rally for the past few days.
  • As I mentioned earlier the II survey reached a new extreme.
  • The CBOE put/call ratio was very low yesterday for a down day.
  • The Citi secondary is still ahead of us.
Let's see how the bulls handle the second dip lower after the Citigroup secondary, which will likely be tonight.

New Extreme For II Survey

The II survey is showing over 52% bulls with bears hovering at their lows. Anecdotally, it doesn't seem that anybody out there is bearish as even the bears have latched on to the seasonality trade. The market needs a good shakeout.

Sold Merck Covered Calls

Merck has come a long way and I have sold the Jan 40 calls against the shares I own.

Amgen Getting Hit Up

Amgen is getting hit up today in sympathy with its biotech brother Gilead. Gilead had a drug in the pipeline go bad. The two stocks have nothing to do with each other. I would be a buyer were I not so bearish on the market. I am currently short Amgen puts. If we get the market correction I am looking for the first stock on my holiday shopping list will be Amgen.

Bonds Getting Hit

The ten year bond is getting hit up again today. The FHA changes set to go in effect in two weeks and higher rates are a headwind for the housing markets. But its the time of the year when stocks can't go down, so who cares?

Money Can Buy You ...

It looks like Oracle's takeover of Sun Microsystems will go through. The EU was holding back approval of the deal but now appears to be backing off. The reason the EU was hesitant to approve the deal was Sun's ownership of mySQL, a free open source database. It is obvious what Oracle, the largest database company, would want to do with a free open source database. Logic would dictate forcing Oracle to spin off mySQL, which is what the EU was asking for.

Recently, 56 senators signed a letter to the EU demanding that they allow the deal to go through. They were appalled and outraged. The Obama administration even got into the act and applied pressure on the EU. The EU was right in holding up the deal and was steamrolled into approving it. It looks like Larry Ellison has been a good citizen and was not stingy with his political contributions. While money might not be able to buy you love, its good to know it can still buy you politicians.

Market Overbought

The main reason for my near term bearishness is the $30 billion in secondaries that we will see this week. I believe market participants will need to sell down other positions in order to make room for this supply.

Another factor working against the market is that we are now overbought as seen in the chart below.

Originally I thought we were going to get oversold into options expiration but the market re-rallied. For 8 out of the next 10 days we will be dropping positive numbers from the 10 day moving average of the NYSE advance-decline line. That means that we would not be maximum oversold until Christmas. Here is a look at the raw data.

More Supply

Wells Fargo is joining the party and doing a $10 billion offering. The amount of supply hitting the market is monumental. I believe market participants are whistling past the graveyard. I expect a much lower market by the end of the week.

This is a slap in the face to Citigroup as the two deals will now be in competition. Wells Fargo could have easily waited another day.

Make Them Stop

I have CNBC on since they seem to have the inside skinny on Citigroup and I am waiting to hear when the offering will be. The nonsense that comes out of the talking heads mouth makes my head hurt. In the past half hour I heard the following:
  • Someone said that auditing the Fed will stop Ben Bernanke from being able to fight inflation. Are you shitting me? Ben Bernanke has as much interest in fighting inflation as Tiger Woods has in monogamy.
  • Maria Bartiromo said that its a contradiction that the government wants Citigroup to raise capital and lend money. Don't you need capital to lend money?
We had another boring day where all the action happened overnight and we drifted sideways all day. Have a good night.

Shareholder Unfriendly

Exxon Mobil has a reputation as a shareholder friendly, conservative company. They don't employ leverage, they pay dividends and buy back shares. A dilutive, large, all stock acquisition is a bit of a head scratcher. This acquisition is likely quite a surprise for many of Exxon Mobil's shareholders. Maybe the deal will prove to be prescient in a few years, but right now it seems shareholders are voting with their feet.

Pedal To The Metal

I am considering making a large short bet on the market, once we get clarity on exactly when the Citigroup offering will be. I have done well this year and this is the time to take risk. I like to start off the new year slowly take more risk as I have profits. If my play doesn't work out by the end of the week I would exit.

More On Small Caps

Another item favoring small caps (IWM over SPY) this week is that Visa is being added to the S&P 500. The company has a $70 billion market cap and other components will need to be sold to make room.

Back In Business

I am back at my computer and wanted to share the following thoughts:
  • I was in my car most of the morning listening to Bloomberg. The Exxon Mobil deal was touted as the reason the market is higher. The deal was all stock, which means they are exchanging stock for stock and there is no net effect on the market.
  • The Citigroup pricing might not happen until Wednesday. I believe the market will be lower when all is said and done. A$20 billion + offering is huge and will sop up a lot of liquidity. The market does not seem to anticipate anything these days.
  • Due to the fact that the Citigroup offering is in the large cap space and we are in the sweet spot for small cap stocks, I believe small caps will outperform over the coming weeks. Longer term I still prefer the large caps.

Headed Out

I have moved to a medium size net short position by adding to my SPY short position and I reshorted BAC. I believe the Citigroup offering will trump the Dubai World news. I have to take my son to the doctor. i will be out for the next few hours.

Is The Paint Dry Yet

It appears traders are at home spinning their dreidels, counting their gelt and trying not to lose any money before the end of the year. If the chart of today's market were an EKG reading the patient would be dead. There is a good chance we will get word on the Citigroup secondary by Monday morning. Have a great weekend and Happy Chanukah.

Dollar Surge

  • The dollar is surging and gold is being hit up again. The anti-risk trade spreading to equities is the biggest risk for today.
  • Breadth is great and that argues against a turnaround.
  • JPMorgan is lagging after its warrant sale last night. I highlighted that as a possibility yesterday.
  • I would have expected the banks to do better today given that the Citigroup share sale is no longer a certainty. The banks have been getting hit since late Wednesday on news of the Citigroup share sale even though the market has shot higher.
  • There is still time for the banks to rally but if they don't the group might be weaker than even I anticipated.

It Happens

While my trading has been very good in the past few weeks, my core portfolio has been sucking wind. All in all, I have been running in place. As Forrest Gump likes to say "shit happens". A few months ago when my trading was ice cold, my core positions and my arbitrage positions helped pick up the slack.

Retail History Data

I find it amazing that anybody trades on the retail sales data. Companies have already reported same store sales for November and that data is dead on accurate, while the government data is an estimate. In addition we are already getting data on December and its not pretty. From the WSJ:
The first week of December, typically a lackluster time in the wake of Black Friday, was particularly slow. Sales for the week ended Dec. 5 fell 18% from the prior-week period, which included Black Friday, according to market researcher ShopperTrak RCT Corp. Last year, when the recession was in full force, sales fell a lesser 14%, according to the firm, which compiles shopping traffic at malls and uses sales statistics, as well as Commerce Department figures, for its estimate.

"After solid traffic the first couple of days, it looks like the middle of August out there," said Stephen Baker, vice president of industry analysis for retail watcher NPD Group.

Kudos To The Bulls

The market has been overbought since Tuesday. There has been an uptick in put buying and we continue to see a decent supply of stock hitting the market. Despite all that the market continues to march on. I have underestimated the bulls.

The bears still have a pocket of opportunity between now and option expiration to take the market down. The market is still overbought and I believe it is more likely than not that we will see a Citigroup secondary next week.

I covered my Bank of America short in the after hours session yesterday. On Wednesday, CNBC declared that we would see a Citi secondary on Thursday. That did not occur and I fear we might see a short squeeze in the financial sector today. Many likely shorted in anticipation of a Citigroup secondary. While I believe that a Citigroup secondary will occur, I am not going to anticipate it. I will wait for the announcement and then act.

Covered Bank of America Short

I covered my Bank of America short position in after hours as it does not look like a Citigroup secondary is this week's business. Being that the government is involved in the decision, I don't want to count on the deal getting done.

JPMorgan Warrant Auction Tonight

The government will be auctioning off its JPMorgan TARP warrants tonight. The auction is expected to fetch $1 billion. It is likely that option desks will be the major buyers. That means shorting JPMorgan stock tomorrow to offset their risk. The amount that would be needed to be shorted will likely be well in excess of $1 billion. This auction has been well advertised so its possible that people went short ahead of it. Still, this is more supply in the financial sector.

Another Awful Treasury Auction

There was another awful treasury auction. Like yesterday, bonds are falling and rates are rising. Rates could become a headwind if they continue to climb.

Price Targets On Bank Stocks

It seems rational that if Citigroup came down from $50 that it can go to $10. John Paulson has a $28 price target on Bank of America. That's only half of its all time high. The problem is that at those prices each stock would trade at a $300 billion market cap. That is second only to ExxonMobil. The reason is because the companies have issued so many shares at lower prices.

Analysts have "normalized earnings" numbers on the shares that make these targets seem achievable. However, the models assume that banking will look similar to what it did during the building of the largest credit bubble in history. Not to mention the potential for further credit losses. That is a leap of faith and I believe the outlook is far more uncertain. To assume that these companies will grow to become the largest companies in the country, when they don't even earn a profit is more of a leap than I am willing to take.

Ready, Set

I am ready to significantly raise my short positions the second a Citigroup secondary is officially announced. Until then I wait patiently.

Its Been Nice Lilly

Eli Lilly gave gave disappointing guidance for its out years, when drugs start running off patent. Luckily, I trimmed the position a few weeks back but unfortunately I still hold a position. I sold January 35 covered calls on my remaining shares.

Awaiting Confirmation

It seems that the bears are blowing their chance to take the market down, while the market is overbought. This is similar to last week, where the bulls were not able to do much with an oversold market. The Bank of America secondary likely played a part in that. Given the supply this market has taken on in the past week the bulls have done an amazing job.

While the bulls continue to surprise me, a Citigroup secondary would likely deal the market a blow. I am on hold until there is official confirmation of a Citigroup secondary. If that confirmation arrives I will get more aggressive on the short side. Otherwise, I am content in my very moderate net short position.

Bank of America To Pay Price For Citigroup

If the Citigroup rumors are true I believe Bank of America's stock will suffer as well. I believe the people that are most likely to participate in a Citigroup secondary are the ones who participated in Bank of America's. There is a good chance that some sell Bank of America stock to make room for Citigroup. I am short Bank of America.

Citigroup Possibly Repaying TARP This Week

CNBC is reporting that Citigroup will possibly pay back TARP as early as this week. This would mean a large equity offering. I believe this will be bearish for the market and especially for the financials.

Bad 10 Year Auction

There was a bad ten year auction that is sending bonds lower and yields higher.

Colbert on The Fed

The Colbert ReportMon - Thurs 11:30pm / 10:30c
Fed's Dead
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Beware Absolute Statements

I cringe when I hear statements like "real estate is always the best investment" or "stocks are always the best investment". At the right price a piece of real estate can be a good investment, while at the wrong price it could be a disastrous investment. The same applies to stocks.

One of the absolute statements that I have heard in the past year is that stock buybacks are value destroying. The reason is that so many companies that bought back stock went bankrupt as a result or have been forced to issue new stock at much lower levels.

If a company takes on leverage to buy back their stock or buys back an overvalued stock than indeed it is value destroying. However, if a company is sitting on a lot of cash, is conservatively capitalized and the stock is cheap than a buyback adds value. It is the most efficient way to return cash to shareholders as it is tax free, unlike dividends.

I bring this up because Amgen announced a large buyback this week. The company has already bought back over 6% of its shares outstanding this year and still has nearly $7 billion in net cash. The stock trade at less than ten times earning net of cash. Needless to say, I believe it is the right move.

Mortgage Applications Way Up

I have mentioned that mortgage applications have been way down in recent weeks. Today, we saw a spike in applications. I believe this is at least partly attributable to the fact that the FHA is tightening rules starting January 1st so brokers might be rushing to beat that deadline. FHA is the lender of choice for the marginal loan.

The major change is that the bank must order the appraisal and not the broker. While this seems like a minor change it will have an impact on the marginal loan. When a broker orders the appraisal it always comes in where he wants it to. When the bank orders the appraisal it is unpredictable. The applicant is on the hook for the appraisal fee whether or not the appraisal comes in.

Sold AMGN Puts

I sold AMGN January 55 Puts. I was planning on buying stock but I believe its too early in the decline to do that. This somewhat reduces the size of my net short position. This is more a function of my bullishness on AMGN than my bullishness on the market.

The January Effect

The January effect is the tendency for stocks to do well in January, especially small caps. Yesterday, we saw the small caps outperform as it seems people are starting to front run the January effect. I saw numerous articles on what small cap stocks to buy to take advantage of the January effect.

Its a tricky situation to play these things when everybody knows about it. Small cap underperformance in the past few months and further equity issuance in the large cap space would give small caps a leg up. I am starting to do some work on small cap stocks but am still unsure if I will ultimately pull the trigger.

The Wild Card

Commodities are trying to rally this morning while the dollar is lower. The risk trade is trying to reassert itself, dragging the futures higher. I believe the market is more likely to go down between now and option expiration. However, that does not preclude some up days.

Wells Fargo and Citigroup are both in negotiations with the government to get out of TARP. If either succeeds it will lead to a large equity offering. I don't believe the market could handle another large offering and the downside could be large if an agreement is reached. That is the wild card for the coming week. If an agreement is not announced by next week than the market is likely safe from the equity offerings until after earnings.

Could Have Been Worse

Given the large rise in the dollar and drop in commodities the stock market decline was pretty orderly. Is the stock market resilient or just a step behind? Have a good night.

US Peso Rallying

The US dollar is putting on a strong rally versus the Euro. The problems in Greece are reminding investors that the Euro has its own set of problems. The dollar carry trade is an important part of the risk trade. The risk trade unraveling is a large risk for the equity market.

Nice Trade Uncle Sam

When the government received its shares in Citigroup the stock was trading at roughly $5 and the government was sitting on a 50% profit. Today, the stock has broken down and is trading at $3.88. If the government chose to sell its $30 billion stake they would likely have to give a discount that eats away their entire profit. The longer they wait the less money they are likely to get. I suspect they will ultimately sell at a loss. Nice trade Timmy.

Intraday Indicators Negative

Breadth is 3:1 negative and we are seeing heavy call buying. This is not something the bulls want to see.

Mystery Solved

The drop in Europe seems to be linked to fears of a Greek default. Greece runs a deficit that is 13% of GDP and debt outstanding is 110% of GDP. This is an unsustainable situation. The only question is if the endgame is now or later? This would not go away as quickly as Dubai. Not that Dubai has gone away as many of the consequences have yet to be dealt with.

Downside Potential

The market will not be maximum oversold until option expiration at the end of next week. That does not mean we will necessarily get there but the potential is there. That would set the market up for a Santa Claus rally into year end. However, a lot of damage could be done between now and the potential Santa Claus rally.

Nice Call Meredith Whitney

Remember how much crap Meredith Whitney took for downgrading Goldman? Turns out she top ticked the stock. That said, I believe Goldman will outperform the rest of the financial sector going forward. I am considering a long versus my Bank of America short.

Covered Some Shorts

I covered the SPY short I put on yesterday. I am now moderately net short. It usually does not augur well for the market when it is this weak for no apparent reason. That usually means we will find out a reason shortly. However, in recent weeks it has paid to take profits first and ask questions later.

Theres Something Happening Here

The futures were higher this morning when Europe suddenly fell out of bed. I don't know why?

The Canary In The Coal Mine

Healthcare has been underperforming the past few days after a couple of months of outperformance. I chose to trim my positions somewhat after the Dubai crisis. The reason was that many of my healthcare stocks went down more than the market the day of the Dubai plunge. One would have expected healthcare to outperform during a financial scare. That sent off some alarm bells that maybe healthcare needs a correction.

There is a similar situation currently in the market. On Friday we received news that the economy is improving and today Ben Bernanke all but said he was going to remain easy. The bulls have the best of both worlds. An improving economy and a money printing Fed. They really should be able to rally this market. They still have time but if they cannot get this market going by the end of the day that should set off some alarm bells.

Bannana Ben

One day of dollar strength is too much for Bernanke. News hit the wires that Bernanke believes inflation will remain low and the recovery will be slow. Read: more easy money. Gold has spiked on the news and the dollar is down.

Bulls Have Intraday Advantage

The bulls have the intraday advantage with breadth outperforming the market and a decent amount of put buying on the ISE. The negatives are that the financials are down and tech is struggling. All in all, the intraday indicators favor the bulls. That said, I am sticking with my short positions.

Added To SPY Short

I have added to my SPY short on this mornings strength and moved back to a medium sized net short position.

Amgen Announces $5 Billion Share Repurchase

Amgen has announced a $5 billion share buyback. I am short a good number of AMGN puts. If the stock pulls back in the coming weeks I will look to buy shares outright. They have a ton of cash and a cheap stock price. The buyback is a no brainer and increases shareholder value.

Recommended Reading

At Minyanville, Jason Goepfert has an article titled Three Downside Warnings. In the article he points out that the smallest options traders are very bullish, which is a contrary signal. Even though the overall put/call ratio reading are not extreme, the worst traders are betting heavily on an advance.

My Conclusion

I have moved from neutral to bearish on the market based on the factors from my previous post. What has changed since last week?
  • The largest factor has been the increase in equity offerings, primarily Bank of America. There is a large offering calendar for the coming week.
  • The market is no longer oversold, as it was early last week.
  • Seasonality is more neutral as we passed the beginning of the month.
I have a moderate net short position and will be looking to increase my position on strength today.

Running Down The List

For the past few weeks I have been complaining that there are a lot of conflicting signals coming from the market and my research was not showing a clear advantage for the bulls or bears. During that time period we have chopped around and gone nowhere. Here is a run down of the indicators I look at and what they are saying presently:

Overbought/Oversold (NYSE Advance-Decline MA)

Last week, I discussed how the bears wasted an overbought reading, with the market going sideways. It now seems that in the past week the bulls have wasted an oversold reading. After today's session, the 10 day moving average of the NYSE Advance-Decline line will favor the bears. The 30 day moving average will favor the bulls for another week.

Conclusion: For today's session this indicator gives the bulls a small advantage. Starting tomorrow the small advantage goes to the bears.


Sentiment

The low number of bears in the Investors Intelligence poll is at an extreme that has rarely been reached. In the past this type of reading has led to poor performance. However, other sentiment measures are not as extreme. The AAII survey, RYDEX data and put/call data are not nearly as extreme. Anecdotally, it does not seem that sentiment is as giddy as the II poll suggests. I speak to more people on Main Street than on Wall Street so that might be why I'm not seeing extreme sentiment.

Conclusion: The bears have a small advantage.

Seasonal Factors

The advantage is clearly the bulls but the bears do have an opening between now and Christmas where seasonality is not as strong.

Conclusion: Advantage bulls.

Momentum

The bulls have a slight advantage with momentum slowing. The risk trade is showing some fatigue with gold and momentum stocks like Apple struggling, while the dollar is trying to rally.

Conclusion: Advantage bulls but momentum can turn on a dime and we might be seeing a reversal in the risk trade with gold trading lower again.

Supply and Demand of Stock

There is a heavy IPO calendar this week. In addition, the government is set to auction off JP Morgan Chase TARP warrants. It is also possible we will see banks follow in Bank of America's footsteps and issue equity. Issuance will be on the heavy side while we have not seen many cash takeovers.

Conclusion: The bears have a strong advantage following the Bank of America equity raise.

Fundamentals and Valuation

Normalized earnings (Schiller or Hussman method) point to a market that is overvalued by over 25%. We are seeing one of the weakest recoveries in post war history. Were it not for the largest stimulus package ever the recovery would be even weaker. In the short run fundamentals and valuation matter the least of any metrics.

Conclusion: Advantage bears

Spidey Senses

After my gut call on gold earlier this week turned out to be right, I'm going to try for another one. I think the market will struggle in the last half hour. Have a great weekend.

Long Run Strategy

The Bank of America secondary makes me feel better about my core positions. I am long sectors that are returning money to shareholders via dividends,buybacks or cash takeovers and short the sectors that are issuing shares. The trade has been working well and this reinforces my confidence that the trade will continue to work.

Conditioned To Cover

A large part of the reason that I covered my shorts so quickly is that after the past half year I have been conditioned to cover shorts quickly. I am likely not the only one. That is usually when the big dips occur.

Covered Some Shorts

I covered my SPY short from this morning as breadth remained pretty good into the gap fill. I remain net short but my position is moderate.

Additional Bank of America Shares Being Added To S&P 500

$2 billion worth of Bank of America shares are being added to the S&P 500 at the close. The money will come out of other stocks. This is a plus for Bank of America and a minor negative for the rest.

More On The Liquidity Trade

The liquidity trade is buying all assets on the theory that liquidity will buoy everything. The same people who are getting hurt in their long gold trade are the ones who own equities. Something to think about.

What The Economy and Housing Don't Need

There have been two pieces of news this week that are very negative for housing and by extension the economy. The first is that the FHA wants to tighten its lending standards. The marginal loan these days is made by the FHA, not by subprime lenders. This move would crowd out the marginal buyer.

The other negative is the move higher in rates today. If the economy were really getting better that might offset part of the rate effect, but I believe all that changed today is perception.

Danger Will Robinson

The S&P 500 just broke to a new low for the day. Could we see a gap fill?

Gold's Plunge

Treasuries and gold are both taking it on the chin today. I believe that is saying that a better economy will lead to less liquidity. Wasn't liquidity the reason stocks were going up?

Sell The News?

Month after month the jobs data has surprised to the downside and the market shrugged it off. Would it surprise anyone if we sell off when we finally get "good news"?

Added To SPY Short

I have added to my SPY short on the jobs data.I now have a medium sized net short position.

What Will Make The Market Go Down

The most common bullish argument I have been hearing recently is that there is nothing that would make people sell. Investors are not the only buyers and sellers of stock, as corporations buy and sell stocks as well. Bank of America sold $19 billion in stock yesterday. We have found our seller.

How big is $19 billion in the grand scheme of things? During stock market mania in 1999 and 2000 the largest monthly inflows into stock mutual funds were between $30 and $40 billion. The $19 billion amounts to more than half of record monthly inflows during a mania, except it is an outflow.

If this were an isolated incident it might only cause a slight hiccup. However, it is likely that more stock issuance is forthcoming. There are numerous possibilities for more issuance:
  • This could cause other major banks such as Wells Fargo to issue shares in order to repay TARP. The government had been significantly increasing pressure on BAC before they finally caved. Now the government can focus on other banks.
  • Citigroup has been urging the government to sell their $30 billion stake. That would be a monster issuance.
  • The government has begun selling off TARP warrants, which will have a negative effect.
  • Non financial companies have also been selling shares to delever from time to time.
  • The IPO calendar is getting very full.
If corporate selling gets the ball rolling on the downside, we will see what kind of conviction recent buyers of stock have.

One Last Thing

Must Watch TV

Exhausted

I am signing off as I have hardly slept in the past two days due to travel. I am going home net short via SPY and Bank of America. I will return bright and early. Have a good night.

Bank of America Secondary Is Tonight

I am hearing that the Bank of America secondary will happen tonight and will start trading tomorrow. I only have a modest net short position because the ducks are not lining up for a move lower. However, I believe the Bank of America secondary is a large factor and am debating getting larger in the trade.

Apologies

I just got in on the Red Eye. I barely was able to sit down at my desk when I saw the Bank of America news and had to make some very quick decisions. That is the reason my posts this morning were a little hurried.

My Bad

My bad. I am being told the issuance will happen immediately. I shorted SPY and am net short now.

The Law of Supply and Demand

If Bank of America issuing $18.8 billion in shares is positive than I must have missed something in economics class. Doesn't the law of supply and demand work for stocks? Isn't this a huge supply of new stock?

I believe that the issuance is so large that it will have a negative effect on the entire market. I am tempted to short the entire market on this news. However, the issuance could be a while away as they need shareholder approval first.

Bank of America Issuing $18.8 Billion In Shares

Bank of America is issuing $18.8 billion in shares. The stock is trading up. I believe that is a mistake and the shares will eventually trade down. I shorted some shares at $16.63. I only shorted a small amount because the issuance will not be for a while.

Heading Home

  • Breadth is great for a flattish day.
  • The Russell 2000 is up over 1%, showing strong outperformance.
  • There is a lot of put buying.
  • On the negative side the financials are once again lagging and the dollar seems to want to rally.
  • I am headed out to the airport. Have a good night.

Gut Feel

My gut feel is that gold could be shorted here (short to medium term). I am wagering exactly $0 on this as I don't trade commodities.This is just a feeling from watching the flickering screens for so many years and has nothing else behind it.

Bears Dwindling

The number of bears in the Investors Intelligence survey fell to 16.7%. According to SentimenTrader.com, in previous instances where the bears were so low the 1 week, 1 month and 3 month returns were subpar.

No Home Cooking For Goldman Sachs

Yesterday, Goldman Sachs removed Eli Lilly from its conviction sell list. In the past few weeks shares of Eli Lilly have rallied nearly 15% while the market has rallied 5%. This was the second time this year I was able to make a very nice profit by buying stocks on Goldman's conviction sell list. The first was American Express at $10.

Goldman Sachs is a top notch firm that knows how to make money. However, they don't make money from eating their own cooking. Not when it comes to equity research.

Picture Still Murky

As long time readers know, I like to use the 10 Day Moving Average of the NYSE Advancers-Decliners to measure when the market is oversold. At the current juncture the market is slightly oversold. Below is the raw data that goes into the calculation, the last 10 days of NYSE Advancers-Decliners data.



For the next 4 days the market will be dropping negative numbers, which I highlighted in orange. That should be supportive of the market.

So why is the picture murky? Because that is about the only indicator I could find that is supportive of the market, although it is an important one. Sentiment is not confirming the oversold reading.

Goldman Bankers Packing Heat

Bloomberg is reporting that Goldman bankers are buying glocks to protect themselves in case of unrest. This is not a joke.

Bearish Action

The combination of the lower financials and heavy call buying today is bearish. We are also running up against resistance in the S&P 500. The factor that is keeping me away from the bear side is that the 10 day moving average of the advance decline line actually favors the bulls over the next few days.

When In Doubt Sit It Out

I have reduced my gross exposure over the past week after my portfolio has had an impressive run. A mistake I used to make was to keep large positions after I made large profits, even if I did not have strong convictions. This almost always led to giving back a nice chunk of profits.

I have read many trading books that say to raise positions when one is doing well. That does not work for me. I am able to think with a much clearer head when I have smaller positions. There are no hard and fast rules to trading. Like swinging a baseball bat, everyone must find the style that suits them.

Lowering Health Care Exposure

My healthcare longs versus an SPY short have worked out very well and I want to lock in some gains. I have sold down some Eli Lilly and Pfizer and covered the related portion of my SPY short.

Healthcare has started underperforming in the past two days. I would have expected it to outperform during a financial crisis (Dubai). I still believe in the longer term story but in the short term healthcare might need a breather. I still have a decent size position in the trade.

Dodging A Bullet

It seems the bulls have dodged a bullet as the market is now trading close to where it was before Dubai. This will likely make the bulls feel invincible and they might become even more complacent. I will be looking for signs of complacency in the days ahead.

Japanese Liquidity

Last night, the Bank of Japan announced that they are adding further liquidity to the market. Risk assets around the globe have responded by rallying sharply. I still believe the market is too tough to call in the short term.

The bears will say that the divergences have been building with every rally. Signs of complacency and extreme sentiment are all around and the market is trading at above average valuations. The economic backdrop is precarious and more negative surprises like Dubai World are probable.

The bulls can point to the fact that we are at the beginning of the month and a seasonally strong time of the year. In addition, the market is closer to being oversold than overbought and we have seen some put buying in the past few days. Both the bears and the bulls have good points.