The Virtues of Vodafone

I have added a new holding to my portfolio, Vodafone. The idea came from reading David Einhorn's quarterly letter. The stock trades at a valuation similar to other telecom companies and carries a nearly 6% dividend yield. The kicker is the company has an asset that is worth at least $10 a share by my calculation, in its 45% ownership stake in Verizon Wireless. That implies 50% upside to the shares if this value is recognized. There is minimal downside with the 6% dividend yield.

This asset has been sitting on Vodafones balance sheet for over a decade frustrating many value investors who came before me. However, there is reason to believe that the asset will start paying dividends. Verizon controls Verizon Wireless and has been using cash flows from the wireless division to pay back debt to the parent company. The parent company in turn used that cash to pay dividends. However, by midyear all that debt will be paid back. Verizon will need money from Verizon Wireless to pay its own dividends. That will mean that Verizon Wireless will need to start paying dividends and Vodafone will receive 45% of those dividends. It is also possible that Verizon will buy out Vodafone. I like this position because it has little downside and a lot of upside. It will require patience as it is impossible to know when Verizon will act.

At A Conference

I am at an investor conference today so blogging will be scarce. I will let you know if I hear anything good.

Out Of Gap

I have sold my shares of Gap stores on this morning's ramp and covered the XRT calls that I was short.


The market remains overbought, which makes it difficult for the bulls to make much headway. Sentiment has rebounded from the levels of extreme pessimism two weeks back but is is still closer to extreme pessimism than extreme optimism. The picture is mixed and is a recipe for traders to get whipped around.  I believe we are stuck in a range. I remain short an array of puts and if we get to the top of the range I will likely short calls.

The Gap Trifecta

Gap has raised their outlook, upped their dividend and upped their buyback. I remain long Gap and short XRT calls.

That Way To The Poor House

Today was the perfect example of why its dangerous to trade based on economic releases. It is a very quick way to the poor house. Have a good night.

Snow Job

I heard an explanation that the snowstorms might have helped cause the rise in claims this week. Regardless, the numbers are still dreadful for where we are in the recovery. If we get a lot of hand wringing ahead of next week's claims numbers that might be a good time to go long for a trade. A negative outcome would likely be baked in and the upside is if the snowstorms did indeed effect this week's numbers or a plain old buy the bad news reaction.

The Retail Mystery

I find it amazing that the retail sector is sitting within spitting distance of its 2010 highs, given the state of the economy and unemployment. Right now all that seems to matter is that the fourth quarter was good and that comps will be easy for the first half of the year. However, come the second half comps will get tough. The air is getting thin at these valuation levels. I am long the reasonably priced Gap Stores and short XRT calls. Gap will be reporting earnings tonight.

There Is Something Wrong With The Economy

Even the most fervent bull cannot deny that there is something wrong with the economy. Data should not be coming out this weak during a recovery, even if there is a large margin of error.

It is very difficult to trade the market based on economic data. If selling when a bad number came out made money, everybody would be rich. The biggest anomaly I see is the discount that safe stocks trade at compared to economically sensitive stocks. It seems like a no brainer to be in defensive stocks.

Stay Down

As readers know I believe the market is stuck in a trading range between 1080 and 1120 on the S&P 500. I was hoping that the bulls would push us to the top of the range so I could do some shorting. However, unless things turnaround quickly it does not appear that will happen.

The best case scenario for the bulls would be for the market to stay down over the next few days, without giving up too much ground. It would help if market participants became bearish during that time period. That would work off the overbought reading and allow the bulls to mount a more sustainable rally. For now we are still stuck in the range.

More Confused

I believe we are stuck in a trading range and today's action does nothing to change my opinion. I remain short an array of puts that I sold during the Greek scare. If we make our way to the top of the range into the beginning of the month I will likely start shorting or selling naked calls. Have a good night.

Two Things

  1. I believe yesterday's low will hold today. There was pretty heavy put buying during the first hour of trading and we were unable to breach yesterday's low.
  2. A rally through the beginning of the month on Monday would make for a nice sell setup. The market would be very overbought and we would be heading into Turnaround Tuesday.

Guessing Game

Yesterday's heavy selling argues for some sort of bounce back, which is what we are currently seeing. However, the fact that we are still overbought means that a bounce is unlikely to go very far. This is not an ideal setup for shorts or longs. My best guess is that the market will be choppy over the next couple of weeks.

Murkier Waters

Today's action only makes the outlook murkier. The market is still overbought but now that we have had a decent sized pullback there is risk on the short side as well. Have a good night.

Taking Profits

I am taking profits on my long trade from earlier in the day. The gain was small.


I have nibbled on the long side for a trade. If this drop is solely because of consumer confidence I believe we will see a partial reversal of it. I only nibbled because I am worried that something else might be at work.

I Didn't Know

I didn't know that so many people traded on consumer confidence numbers and am surprised by the reaction. What I am not surprised about is that it looks like the market will not give me the sell setup I was looking for. Mr. Market does not like to make things easy. Back to waiting.

Knee Jerks

The knee jerk reaction was to sell Thermo Fisher on news they were bidding for Millipore and the stock fell 7%. After all Exxon Mobil and Schlumberger got killed after making all stock bids. Nobody stopped to consider the possibility that they make a cash bid and not issue new stock. Thermo Fisher has now regained nearly its entire loss and I am now out of my position in its entirety.

Push And Pull

A rally typically ends when the consensus has embraced it and there are few left to buy. It is hard to argue that this rally has been fully embraced as skepticism and confusion seem to be the over riding sentiment. However, in the past two days we have seen a larger move to the bull camp. The Rydex bears have finally started throwing in the towel but we are far from a bullish extreme.

At the same time the market is very overbought and will possibly be maximum overbought at the end of the day. As a result a pullback would not be very surprising.

If we do get a rally today accompanied by heavy call buying I would likely take a short position. Even so I would probably do so by selling naked calls rather than outright shorting as the setup is not great.

Out Of Thermo Fisher

The Thermo Fisher trade worked out better than I hoped for and I have largely exited the position. I will investigate the stock further as a possible long term position.

Healthcare Rules

I have been taking a harder look at Thermo Fisher and Millipore, the healthcare equipment makers. The multiples that these growth businesses trade at is amazing. Why people are paying sky high multiples for economically sensitive stocks when these type of stocks are available bewilders me. I want to find stocks to own outside of healthcare but with these prices its a difficult task.

Bought Thermo Fisher

There are rumors flying around that Thermo Fisher will make a bid for Millipore. Thermo Fisher is getting killed on the news, likely because of what happened to other acquirers recently. However, I doubt that this will be an all stock deal, as the combined companies have almost no net debt. Sclumberger and Exxon Mobil got killed because they did all stock deals. I have bought a position in Thermo Fisher.

Catch Up Mode

I am in catch up mode as I spent last week away from the market. Hopefully, I will be caught up by the afternoon. Here is what I am thinking:
  • It is extremely difficult to get a feeling for the market the morning after expiration. We should get a better sense later today and tomorrow. 
  • M&A is only bullish for the market if the acquirer uses cash. The Schlumberger deal is great for arbs because they now have a place to invest their money but has no effect on the overall market as it is an all stock deal.
  • Oil and gas companies are in no position to do cash deals as they are still leveraged from the last cycle save Exxon Mobil.
  • Will the market rally through tomorrow and give us a nice short side setup or will it frustrate and pullback immediately?
  • Interest rates are creeping up again and will soon be at the point where they are detrimental to the economy.

No Easy Trade

Sentiment has been stubbornly bearish for the greater part of this rally. However, Friday was the type of day that turns bears into bulls. The bears received the news they were hoping for but the market rallied anyway. While sentiment is nowhere near a bullish extreme Friday's action likely accelerated the shift into the bull camp.

The market is now overbought but not yet maximum overbought. It will possibly be maximum overbought at the end of the day tomorrow. This indicator will likely become a headwind for the market come Wednesday.

All in all there does not seem to be an easy trade at this point. If the sentiment shift continues and the market rallies over the next two days there might be a short trade midweek.


It is good to be back home with my family  after a week in the Pediatric ICU. My son is recovering and I am looking forward to his 5 AM wake up calls. Thank you for your thoughts and prayers.

I Hope To Return Monday

My son had to be taken to the hospital yesterday. The doctors are saying they think everything will be fine. Hopefully, we will be able to come home in a few days. I know your prayers are with us.

Capital Observer Will Return In A Few Days

Bullish Action

It is hard to describe today's action as anything but bullish. A lot was thrown at the market today from problems in Greece to a large sell program at the close and the market still managed to battle back. While I could see one last move lower next week I am more interested in longs at this point. Have a great weekend.

More Evidence

The Russell 2000 is unaffected by today's index changes and is actually higher on the day. More proof that today's weakness has more to do with the S&P changes than anything else.

Watch Out

There is going to be a lot going on in this final hour of trading as the S&P 500 will have its largest addition ever. That will also mean the largest sale of other S&P companies ever. This is all well known so it could turn out to be a non event. However, it could get thin as many traders don't want to carry positions home for the weekend. Long or short. Things should get interesting between 3:30 and 4:00.


Berkshire Hathaway is tanking and was down nearly $3 from the high this morning. Does somebody hear Bill and Melinda's footsteps? This would be an opportune time for them to sell some shares. That is part of the reason I decided to exit the position this morning.


Everybody's gotta play the fool and today was my day. The market waited for me to hedge myself and promptly took off. You can thank me later for helping the market to bottom. That said the hedge was a very light hedge and I am much better off with the market rebounding than tanking.

Amount To Sell

The amount to sell of S&P in the S&P 500 Berkshire addition is being pegged at $10 billion. This might be priced in already.

Under Pressure

I believe today's pressure on the S&P 500 has more to do with the Berkshire addition and less to do with Greece.

Hedged My Bets

I decided to put a light hedge on my portfolio as I am a little scared about the effect the Berkshire addition will have on the rest of the S&P 500. I sold the SPY 107 February Calls naked. If the addition goes off without a hitch I will just take a loss on the position at the end of the day.

Out Of Omaha

I have sold my shares of Berkshire Hathaway into this morning's bump up. I remain short the 70 and 72 strike February puts. This takes down my long exposure somewhat. I was looking to do more pruning. However, if we do not get a lift I will just hold on to the remainder of my positions.

I am happy to be part of the large club that Warren Buffet has helped make money. Thanks Warren.

Negative At First But Positive Later

I have been doing quite a bit of thinking about how the Berkshire Hathaway addition to the S&P 500 will effect the market. I have come to the conclusion that the initial effect will likely be negative as other companies will be sold in order to buy Berkshire Hathaway. However, in the days following the index change the effect should be positive as holders of Burlington Northern and sellers of Berkshire Hathaway put some cash to work.

Indexers Paying Up Again

Berkshire Hathaway is up nearly 15% since the announcement that it was being added to the S&P 500. Using the conservative estimate that 11% of assets are indexed to the S&P 500, indexers as a group are paying a greater than $2 billion premium for shares of Berkshire Hathaway. For most indexing still makes sense, but there are hidden costs.

A Lot Of Wild Cards

There are a lot of wild cards in the coming week.
  • Its options expiration which could influence the market in either direction.
  • News out of the PIIGS and emerging markets.
  • Berkshire Hathaway being added to the S&P 500 could cause selling of other stocks. However, the closing of the Burlington Northern deal could infuse some cash into the market.

No Man's Land

Last night I said that it felt like the bears were still fighting the rally tooth and nail. My suspicion was confirmed when I saw that Rydex traders actually became slightly more bearish yesterday. The 10 Day moving average of the CBOE put/call ratio is also on the high side. We have now rallied over 30 S&P points and traders have become more bearish.  That is highly unusual and has bullish implications. With that backdrop it is hard to imagine much downside.

The bad news is that after today the market will be overbought.The bulls were not able to do much with the market deeply oversold so overbought could be a problem. Given this confluence of factors I believe it is hard to imagine a sustained, outsized move in either direction. However, if we did get another move lower next week into expiration the market would be oversold and sentiment would likely be at an extreme. That would set us up for a nice rally.

The mixed backdrop I described leads me to believe that being short puts is a valid strategy. It allows for another move lower but will also make money if the market continues to chop around or go higher. That said, I will likely reduce my longs today because we are losing the oversold reading. I am short some March puts that have lost most of their value. There is no need to keep that paper hanging around so it can bight me in the ass next week. I will look to increase longs next week if we do go lower.


The bulls were once again unable to build on late day gains. The good news for the bulls is that it still seems like the bears are fighting this rally tooth and nail. It would actually be better for the bears if we saw some capitulation.

I believe Berkshire Hathaway is being added to the S&P 500 tomorrow. Shares of other S&P 500 companies will need to be sold in order to accommodate the Berkshire addition. That is a negative for the S&P 500. However, the closing of the Burlington Northern deal is a positive. That will be the wild card for tomorrow.

The Final Hour

The bulls are headed into the final hour with a gain. The bulls have not been able to build on late day gains recently. I think they will go out with a bang today.

Will This Hold

It sure seems like we have all seen this movie before and we know how it ends. A kick save at the end of the day by the bears. Could there be a surprise ending in store for us today? While I am tempted to start selling down some longs, I am going to hang on to my positions for now. It is hard for me to get negative with the continuous put buying. New legs down don't typically start with such heavy put buying.

Health Care Bargains Emerging

In October I went all in to healthcare stocks as I believed that the shares were cheap, underowned and there were two large cash deals closing. As the sector ramped in price and popularity I took down my positions to a large extent. I have once again began increasing my exposure to the sector.

It seems that investors are currently in the process of purging their exposure to the sector and bargains are once again emerging. I expect the cash deals in the sector to continue. Sanofi announced that they were looking to make acquisitions.

The biotech sector never really picked up with the rest of healthcare when healthcare rallied. The sector should be the first to bottom. I believe there is value in pharmaceutical shares at current levels. However, because there was a giant love fest in the shares they are susceptible to more downside.

Greece Is An Excuse

For months investors piled into stocks because of "liquidity". Now they are fleeing because of "Greece". In truth investors are always chasing the herd and trying to rationalize it. What they are actually doing is following a primal instinct and trying to feel good intellectualy about it. 

If the market were ready to correct at the time the Dubai news hit, the decline would have been blamed on Dubai. If the market were ready to correct in early January when we had the weak unemployment report, "unemployment" will have been blamed. You get the picture.

I am not saying this will not continue as the market is overvalued and we saw a pile in of epic proportions. I am just saying this has less to do with Greece than most believe.

The Ball Is In The Bulls Court

  • The Europeans have reached an agreement to aid Greece, which should help debt markets.
  • The market is still oversold.
  • Sentiment  is skewed towards excess bearishness.
The bulls have had every excuse to rally and thus far have not been able to. I am going to give the bulls the benefit of the doubt for a couple more days but if they can't rally the troops by early next week I will hedge myself at a minimum.

Another positive for the bulls is the closing of the Burlington Northern deal tonight. There is a large cash component to the deal and some of that money might find its way into other stocks.

Wasting Time

There are two ways to work off an oversold reading. The first is rallying and the second is going sideways. The market was maximum oversold 8 trading days ago and it is back to trading roughly where it was 8 trading days ago. Time is running out for the market as it is looking like it will waste its oversold reading by going sideways. There are still two days left but if the market does not make a move in the next two days I will step out of the way. Have a good night.

What If

If the CBOE put/call ratio were to close at the end of the day where it is right now (1.21), the 10 day moving average would be .97. That would equal the highest readings since the March low. There is nothing magical about that level, however it is worth noting.


On Monday we were up all day but the financials were very weak. At the end of the day the market gave up the ghost. Today, the financials are staying positive even though the market is lower.

Put Call Ratio High

The put call ratio is elevated once again. The CBOE is at a very high 1.21.

John Roque On Financials

Over the years John Roque has been right a lot more often than he has been wrong. I am always interested in his view. He does not seem to be too keen on the financials.

Update Of The Rydex Chart

The Technical Take has posted an updated Rydex chart. As you can see Rydex traders have become more bearish.
The Investors Intelligence numbers came out. The bulls are down to 34%, which is low and consistent with a bottom. However, the bears are still relatively low at 26%. A lot of people are in the correction camp.

On The Grind

Despite yesterday's rise investors continued to purchase puts and Rydex traders became more bearish. While on a few occasions these indicators became more stretched, I believe this argues for a continued grind higher over the next few days.

If the market rises or goes sideways through the end of the week we might actually become slightly overbought. If we see a sentiment shift during that time as well that would set us up for a possible move lower next week.

To Bail or Not To Bail

Will Europe bail out Greece or won't they? There are a lot of unknowns that will shape trading tomorrow. The world economies are unbalanced and contagion is a definite possibility. However, barring contagion and putting aside Greece I would expect the market to grind higher for a few days to keep the bears honest. Have a good night.

End Of Day

The final hour of the day on days with big moves has tended to go in the direction of the move. That would argue for a strong final hour.

No Fade Today

It has been so easy to sell rallies in the past few weeks that too many people might have gotten the hang of it. I don't think the bears will succeed today.

Rydex Market Timers

The following chart is from The Technical Take and illustrates how bearish market timers have become. The entire article is worth a read.

Amgen News Being Sold

Amgen had positive news about its new drug. The news is being sold. It looks like Amgen's new drug is on track. Given the valuation I see limited downside. I have added to my position.

Encouraging Reactions

Yesterday started off with the hope that Friday's sharp reversal marked a bottom. People have grown accustomed to V-bottoms as nearly every bottom in the past year has been a V- bottom. Needless to say, people were not very happy with the results. Nearly everything I read was negative and cited the discouraging action.

I was encouraged by the reactions. I suspected that a lot of renters were shaken out yesterday. The Rydex data confirmed my suspicions as traders turned significantly more bearish. We are now in the area that marked other bottoms since March in the Rydex data. The bear side is getting crowded. I don't expect much downside from here in the short run.

I'm Irrational

During the tech bubble it was normal for a stock to explode higher when there was a stock split. I remember thinking how irrational that was because all they are doing is splitting the shares in half. Nothing about the company changed and the shares now reflect half ownership of the old shares.

Recently, Berkshire Hathaway split their stock and I bought the shares because I thought they would get added to the S&P 500. Since the announcement of their addition, I have been trading the stock and am currently long.

Before Berkshire split their stock I never owned the stock and suddenly it has become my favorite trading vehicle. Subconsciously, I was not willing to own a $4,000 stock but because of the split I am now willing to own it. I know, its irrational. The stock price should not matter. I believe I act more rationally than most in the stock market. If I was not willing to own a $4,000 stock than it is likely the case with many other people. I am going to press my Berkshire long because it is being added to the S&P 500 and because people will be willing to own it that have shunned it in the past because of the high price.

Cash 4 Gold

I sold my GLD position. I wanted to take some profits as the S&P 500 is up against resistance. It was the position on which I have the least conviction as I very rarely trade commodities. It seems like there should be more of a bounce for gold but it will be without me.

Financials Are In A Funk

The financials seem to be weighing on the market as they are way down in an up market. Financials face a number of headwinds. There is continued dilution as banks raise equity to pay back TARP and because shares are being issued in lieu of cash bonuses at many firms. In addition, balance sheets remain impossible to decipher from where I sit. On top of that there are credit market worries because of the sovereign debt problems. I continue to steer clear of financial stocks other than Berkshire Hathaway.

No News

Sovereign spreads came in today. European bourses are now closed. There is no external news to knock the market down today.

Sold Pfizer Puts

I sold the March Pfizer 18 puts for 80 cents.

Looking To Buy

Some sentiment indicators are not as stretched as they have been at prior lows so there is still room for this market to go lower. However, we are seeing some signs of the bottoming process:
  • Rydex traders have become bearish although there is still room before it becomes extreme.
  • We have seen numerous days of heavy put buying but it can get more extreme.
  • There has been panic, fear and a surging VIX.
  • The bulls have backed off in sentiment surveys but it still has room to get more extreme.
Even if this market ultimately retests the the March 2009 lows, the decline will likely be  a process of sharp declines and rallies. It is unlikely that such a decline would happen in a straight line. It is very hard for me to see this leg of the decline going much below 1020 on the S&P 500.  As we approach that area I am much more interested in building longs than shorting. Because the indicators have room to get more stretched I like the idea of selling puts that would put me in at lower prices. If we never get to those prices I will take in the premium and if we do get there I am happy to be an owner.

It looks like the whoosh lower I was looking for happened Friday after I left the office. As such, I no longer plan to be as aggressive on the long side unless we have another move lower this week. 

One For The Road

I believe the current purging is setting us up for a rally in the next few days. The put buying is positive and once everybody's hedges and shorts are on the market will be able to rally well. I anticipate getting aggressive on the long side early next week but for now I am hitting the road. Have a great weekend.

Liquidation Sale

Rumors of a commodity fund liquidation have me long GLD for a trade. Liquidations usually mark bottoms.


Part of the reason I was so quick to take profit is that I am headed out at 2:00 PM on a road trip for the weekend. I viewed my adds this morning as a trade and as a result am eager to start the weekend and get rid of non core positions.

Press Your Luck: Part Two

I added into this morning's downdraft and I am taking quick profits now that we are getting a pop. I remain long mainly through short puts on individual names. I have a lot of dry powder.

Press Your Luck

Call me crazy but its starting to feel like the bears are pressing their luck.

Gap Stores Gets Upgraded

Gap Stores was upgraded at Citi to buy from hold. My guess is that Goldman is allowing its clients some time to cover their shorts before upgrading Gap.


I have bought the SPY @105.86. I will buy more if it sinks on the NFP data.

The Good and The Bad

Let's start with the good news:
  • Rydex traders finally added to their short positions in a meaningful way yesterday. Last week we saw them back off their longs and now they are adding to their shorts. There is still some room before their shorting reaches an extreme but we are slowly getting there.
  • We saw a lot of put buying yesterday.
  • Panic was finally evident.
The bad news is that:
  • The maximum oversold reading from early this week is no longer buffeting the market.
  • The sentiment indicators are not yet at extremes.
  • The intermediate term indicators still have room on the downside.
  • If the news from Europe is bad enough nothing will matter. 
That said the S&P futures are currently trading down 8 points and while we will likely head lower we should see some bounces along the way. I believe averaging into a position starting now will show a profit once the next bounce arrives. 

The Canary In The Coal Mine

There is a market saying that you know it is getting late in the decline when they start hitting the  hiding places. Today everything was hit. There was no place to hide. That tells me a bounce might not be too far off.

Panic On the Dance Floor

From my perch a corrective move lower was a question of when, not if. After months of built up complacency, we are finally starting to see some fear and panic. That fear and panic is helping to sew the seeds of a healthier market. We had a straight up 70% move so there is a lot of built up complacency and this purging can last a while .  Once the decline is out of the way, investing will be less risky and there will be more opportunities.

I am short puts in stocks I would not mind owning and am leaving plenty of dry powder as I expect to be able to buy at lower prices. Have a good night.

The Final Hour

On a day when there is a large move in the market, the last hour of the day always seems to go in the direction of that move. I suspect this is because the advent of the levered ETFs. When the market is up big they buy more and when the market is down big they sell more, exacerbating the move.

Calling For A Vote

Below or above Friday's lows into the close? Please post answers on the message board. A reason would be nice but not necessary.

The Men From The Boys

 "I love the smell of napalm in the morning"
 -Robert Duvall in Apocalypse Now
This is the type of action that separates the men from the boys. Last week's sell off was missing that something that is present today. The smell of fear in the air. Last week, everybody was searching for a low while today everyone is hitting the eject button. I don't think we have seen the bottom yet, but we are finally getting some of the ingredients.

Pfizer Disappoints Street

The street was disappointed with Pfizer's earnings and guidance. While there might have been a slight disappointment, the intrinsic value has changed very little in my eyes. A problem I had with owning Pfizer was that it was too widely loved and that should change now. If I could pick up the stock closer to $17, I will likely be a buyer. I currently have no position.

Thoughts About Today's Plunge

  • Friday's lows have been tested twice and we bounced off of them twice. Each time a level is tested it gets weaker.
  • Turnarounds have been a rarity in this market.
  • We are finally starting to see put buying and real fear. To get really good capitulation Friday's low will likely need to be taken out on a closing basis. 
  • Where do I think we will bottom? I think a good rally will start off the 1020 area on the S&P 500.
  • I would be a buyer there for a trade so selling puts that would get me in around those prices is a strategy that makes sense. 

Testing Friday's Low

We are about to test Friday's low. I would be surprised if it did not hold on the initial test.

Added To Longs

I added to my Gap Stores long at the open. It is trading higher now. I believe the street is short the name.
  • Short interest has been rising
  • Goldman has been pounding the table that the stock was a sell.
  • The stock traded down hard yesterday ahead of today's numbers.
I am also using today's weakness to start buying back my Berkshire Hathaway position.

Gap Stores Giant Beat

Gap Stores, a holding of mine, has raised estimates to $0.49 to $0.51 a share. First call was calling for $0.44 a share. Goldman Sachs has been beating the short drum on this one. Oops.

Unbalanced Economy

We still live in an unbalanced global economy where many things can go wrong:
  • a default of Portugal, Italy, Greece or Spain
  • a default of California
  • bond vigilantes taking up US rates
  • a dollar crisis
  • a double dip recession
  • a reemergence of the housing crisis.
  • China bubble bursts
  • a geopolitical event

This morning there are debt worries in Portugal and Spain taking down  our futures. If any of the above events occur it will roil our markets. Oversold will not matter. I believe it is highly likely that at least one of the above events will occur if not a number of them in the coming years. That is the risk of being an investor in an unbalanced economy.

No Regional Offerings

It looks like no other regional banks are coming to the market tonight and likely for the rest of the week. That is one less thing for the bulls to worry about this week. Have a good night.

A Time For Inaction

There is a time for action and there is a time for inaction. For my trading style the current case is the latter. If the intermediate term trend were higher we would still be early in this rally and it would make sense to get long. However, I believe the intermediate term trend is now lower.

As it stands the market is still oversold and will be so for the remainder of this week by my measure. As the oversold condition is worked off, I would be more willing to entertain the idea of getting short. As an aside, sideways action is also a way of working off an oversold condition. For now, I am watching patiently. I will be eager to see if other regional banks follow PNC's lead tonight.

Looks Like Consolidation

Today's action looks like consolidation to me and we might have carved out our range for the day. If the market breaks the bottom of the range, 1090 is the first level of support. If the market breaks out there is a lot of resistance starting in the 1110 area. I am sitting on my hands with very little risk on.

Covered My Small SPY Short

I have covered my small SPY short position for a small loss in the pre-market. The cover was a matter of discipline. Even though I could easily see this market going lower, I don't short deeply oversold markets. I will wait for the oversold condition to be worked off before going short. While this discipline might cause me to miss some opportunities, it has saved me from losses many more times. I have had an excellent run and it is very easy to let down your guard in such a case and trade sloppily. I have had that happen too many times and I am guarding from it happening again.

In the very short run the market is now overbought. I would normally expect a day or two of consolidation in such a case before the market decides on its next move. If the regional banks follow PNC's lead and begin to issue shares in earnest the most likely move will be lower.

PNC Launches Secondary

PNC indeed has launched a $3 billion secondary. I believe other regionals will follow. The sector has had an amazing run for the past month. I believe that run is now over.

Fight Another Day

I believe we will retest last week's low at some point in the next few weeks and possibly break it. However, it is possible that this oversold rally will go a little longer. Like a matador, I find it is better to allow the bull to get tired before fighting it. As such I will allow a for a few more days of rallying before considering getting aggressive on the short side. Have a good night.

PNC Secondary Likely Soon

S&P mistakenly let the cat out of the bag that PNC will do a $3 billion secondary. The secondary will likely be in the very near future. If the regional banks start raising capital it will be a market negative. Supply.


Shorting the SPY this morning was a case of ants in my pants. The market has been going down for two weeks. Shorting after the first up day is not the way I trade. The move brings my portfolio to neutral as I am short puts in AMGN and BRKB. At this point I will just keep the hedge on and stay market neutral.

Small SPY Short

I have taken a very small SPY short position.

Call Buying Out Of The Gate

There is a lot of call buying out of the gate. Combined with the weak rally we are seeing I would give a slight edge to the bears for the balance of the day.

Keep An Eye On Emerging Markets

Emerging markets and China related stocks were the leaders to the downside for the past couple of weeks. I consider commodities, commodity stocks and material stocks to be a part of that trade. Yesterday, the emerging market related stocks bounced back hard and our markets finally were able to put on a rally that was sustained through the close. The emerging markets and related stocks might offer clues as to when this rally has run its course.

The Weak Rally Continues

I believe the current rally is weak because we never had a proper washout. This morning's gap up opening is tempting me take a stab from the short side. However, the market is still very oversold so I will likely just wait. As Warren Buffet says, "there are no called strikes in the stock market".  I will wait for this rally to further exhaust itself before getting short or for a proper washout before getting long.

Not Looking For A Great Rally

While I could see a continuation of this rally because we are so oversold, I am not expecting anything great. Sentiment never reached an extreme so any rally is likely to be pretty lethargic. If we come down again and get another scare that might set up a better rally.

In addition, the call buyers have come back as the rally is being embraced too quickly. My positions remain very small. Have a good night.

Asked and Answered Again

I have been asked numerous times why I covered my shorts so early when I was so vocal about a 5%-10% correction two weeks ago. The answer is that I almost always exit my trades too early and leave money on the table. However, I rarely hold on too long. Its a trade off. Everybody needs to adapt their trading style to their personality.

Sold SPY

I sold my modest SPY position. The SPY has spiked and they are buying calls. My only remaining longs are some out of the money puts that I'm short.


Very Sneaky Mr. Buffett

Warren Buffet is paying for Burlington Northern in cash and stock. The number of shares he will need to issue will depend on the price of Berkshire Hathaway in the "pricing period" before the deal closes. The higher the share price of Berkshire, the less stock Mr. Buffet will need to issue. The following press release was issued shortly before the pricing period and the stock price promptly skyrocketed.

On January 26, 2010, Standard & Poor’s announced that Berkshire Hathaway Inc. will replace Burlington Northern Santa Fe Corporation in the S&P 100 and S&P 500 indices on a date to be announced. Since that announcement we have received several inquiries regarding whether or not Berkshire would be issuing additional shares of its common stock in what is often referred to as an “Index Add” issuance. Berkshire does not intend to issue any additional shares of its common stock other than the common stock it will issue upon the completion of the previously announced acquisition of BNSF.
 If you believe that Warren Buffett issued this press release because he was looking to help indexers, the following Warren Buffet quote comes to mind: "If you don't know who the pansy at the poker table is than its likely you"

Friday After Hours

The Friday after hours session is an illiquid session with even fewer participants than a normal after hours session. There is no S&P futures session. There is rarely ever any market moving news released late on a Friday and most institutions have packed it up. The best word to describe a Friday after hours session is random.

On Friday, I was debating whether to start building an SPY position at the market close but ultimately decided not to. The SPY closed at 107.39.  I decided to stick a bid in for a starter position in the SPY at 107.21 in the after hours session. I believed that was a deep enough discount to the closing price to make the trade worth while. At some point during after hours my bid was hit. I had no idea the market would gap up this morning and it could have just as easily gapped down but with an 18 cent head start the odds were in my favor.


The Outlook For This Week

I expect a rally to start some time this week. As I showed in yesterday's column, we are maximum oversold but sentiment has not yet reached an extreme. If we could get a scare at the beginning of this week that lines sentiment up with the oversold reading, that would set up for a stronger rally. Regardless, I believe the market will rally this week.

Once the oversold condition is worked off by the market rallying or possibly by chopping around, I expect the market to take another leg lower. But that is not this week's business.