Capital Update

I used today's weakness to sell a decent amount of December 116 SPY puts. I respect the possibility of some further weakness but am not expecting a complete meltdown. I will return December 1.

Capital Observer Is On Vacation

I am on vacation and will return on December 1. Have a Happy Thanksgiving.

Thank you to all the readers who have been going to Amazon from my site, when making a purchase. Remember, if you shop at Amazon you could support the blog at no cost to yourself. There is an Amazon banner all the way at the bottom of the page or a number of links on the side. If you go to Amazon through any of those links when you make a purchase, the blog will receive a small percentage. The item will not cost you a penny more.

The Last Post

A break on the S&P 500 below last weeks low would likely generate enough fear to get us  a swoosh lower. I believe that swoosh lower could be bought for a trade through the beginning of December. The market is oversold and heading into a strong seasonal period. One last push down would likely get sentiment into neutral territory allowing for a modest rally.

I don't believe this is a great opportunity but I likely would put on a small trade were I not headed on vacation.

Good News and Bad News

The good news is that the market is now oversold heading into a seasonally strong period. The bad news is that sentiment is not yet in place. The CBOE is showing put activity but the ISE is showing call buying. In other words the oversold readings are lining up, seasonality is lining up but sentiment is iffy. It would be nice if we broke last weeks low. That would likely get sentiment in place for a rally.

Health Care Austerity

A wave of austerity has swept across the globe as debt markets no longer want to fund ever increasing government deficits. I believe that the austerity trend is here to stay. One of the first things that every country undergoing austerity has done was to cut the amount they pay for drugs to bio-pharma companies.

Bio-pharma companies are easy targets as there is no love lost between them and the public. The knee jerk reaction is to think "good for them, those crooks deserve it". But looking at the facts might yield a different conclusion.

The bio-pharma industry has been consolidating as the low hanging fruits have been picked and finding new drugs is extremely costly. R&D costs have been rising and new blockbuster drugs have been few and far between. Companies like Pfizer have wasted tens of billions of dollars on R&D with little to show for it. There are far  fewer biotech and pharma companies than there were 3, 5 and 10 years ago. If companies are paid less for new drugs than there will be even less R&D and fewer new drugs.

While I believe this is the wrong place to cut costs, I see the writing on the wall. Many bio-pharma companies are cheap enough that further price cuts are more than priced in. But when the time comes that more austerity measures are announced the stocks will likely not react kindly, especially when it happens in the US.

I have drastically cut my exposure to bio-pharma companies for the reasons cited above and because my largest holding, Gilead, had reached my target. I still believe the sector is attractively priced and still hold some positions but the dangers of austerity are large enough that I don't want as large an overweight in the sector.

Broken Record

I feel like a broken record repeating the same arguments day after day but my outlook has not changed. There is a very high level of complacency as many are banking on seasonal factors to carry us through the year. If anything goes wrong in our unbalanced global economy, market participants are ill prepared.

At the same time, I learned the hard way that it is very difficult to go short at this time of year. In addition, we are seeing a continued M&A bid with private equity going after J. Crew. All in all its tough to have much conviction in either direction.

I am heading on a much needed vacation tomorrow and my appetite for any type of risk is diminished. There will be better opportunities.


One of my favorite market scribes, Doug Kass, takes a shot at those who are going long strictly based on seasonal strength. I agree that seasonal strength in and of itself is not a reason to go long. However, based on the fact that 80% of the past 20 years saw the market up into year end it does make sense to be extra careful on the short side.

Hangover City

The day is starting off with a severe expiration hangover. I wrote last week that I believe that a hangover can be bought for a trade through the seasonally strong Thanksgiving holiday and the turn of the month.

I am not planning on opening any new positions as I am going on vacation on Wednesday. However, if I were to play the long side I would wait until there was put buying, which I am not seeing yet.

Hedge Trimming

I have used the pre-market weakness to remove my hedges completely. During expiration a bunch of my longs were called away and I am left with very modest long exposure. In addition, I have already written covered calls against all my remaining longs. In other words there is little left to hedge. If the market were to fall 10% I believe I would take less than a 3% draw down. I still believe an expiration hangover is possible.

Tis The Season

There is a lot not to like about this market. Most notably, while the market corrected sentiment stayed way too bullish.  The ten day moving average of the ISE equity did not even dip below 200 during the recent 4% correction. Readings above 200 are usually seen at tops.

However, seasonality is simply too strong to commit much money to the short side. According to data from the last two weeks of November through year end have been positive in 80% of the past twenty years. The four down years all happened during major crisises. This is not the first time sentiment has been extreme at this time of year. I would argue that sentiment is extreme at this time of year almost every year.

I am not sounding the all clear as much of the data I look at is bothersome. But with such a strong seasonal tailwind the short side is even tougher than usual.


I will be out today. Have a great weekend.

Tough Call

The widespread belief that the correction is over and its up, up and away into year end bothers me. I also believe that expiration exacerbated yesterday's move. Thirdly, the market is digesting a lot of supply as there was well over $30 billion in stock issuance the past couple of weeks. All this leads me to believe that we should see an expiration hangover early next week.

Until I think of all the positives the market has going for it. The market will be oversold early next week and we are heading into some of the strongest seasonality of the year. Strong seasonality tends to work best during times when the animal spirits are strong such as now.

All this leads me to conclude that an expiration hangover could probably be bought for a trade. However, chasing the market here might not be that great of an idea.

A Good Deal

The government did a good job with GM. Had the stock gone up 20% today it would have appeared like the taxpayers were stiffed. The modest rise allowed the buyers to make a small profit and the seller to exit at a fair price.

No Soup For You

It looks like extended unemployment benefits will expire December 1. This will have  a minor negative effect on the economy going forward.  From the AP:
Republicans in the House have blocked a bill that would have extended jobless benefits for the long-term unemployed beyond the holiday season.
The most recent extension of jobless benefits expires Dec. 1. Two million people will lose benefits averaging $310 a week nationwide by the end of the year.
With a divided Congress there will likely be a lot more of this. In the long term it is what is needed but in the short term it can lead to some pain.

Expiration Influences

The market is just another commodity in the risk on/ risk off trade and I suspect that expiration has exacerbated today's move higher.

The Situation

Knowing that there was a tech bubble or a real estate bubble was the easy part. Many people lost massive amounts of money with this knowledge as these bubbles continued much longer than anybody could have imagined. In the process they ran over most of the skeptics. There is now a similar unsustainable situation in sovereign and municipal debt levels that will eventually not end well.

While I don't take the situation lightly and constantly monitor the developments, I try not to let it effect my short term trading. I am willing to go long for a trade when my indicators are lining up, despite these festering issues. Might I get hurt when the excrement finally hits the fan? Hopefully, I will be able to recognize when we are at that point but its possible that I will get nicked. But its unlikely to take away all the gains from all the other times when the indicators lined up.

I would much prefer if we were in a healthy environment with more reasonable valuations. That would allow me to concentrate more on investing and less on trading but that is not what we are dealing with right now.

Pros And Cons

The largest negative factor in the market is sentiment. The number of bulls has reached multi year highs on both the Investors Intelligence and AAII survey. Even with the recent large pullback, there has only been a slight decrease in bullishness. Secondly, there has been a lot of stock issuance in the past two weeks totaling well over $30 billion.

On the positive side the market will be oversold next week and we are heading into a seasonally strong period. Thanksgiving followed by the turn of the month will give the bulls a seasonal tailwind. Additionally, there has been a pickup in M&A activity.

I believe this means that if we do get one more move lower in the next few days it can be bought through early December. But its unlikely to be a great rally given the high level of bullishness.


I cannot help but laugh when the GM IPO is cited as a reason the market should rally. Markets are about supply and demand and $20 billion of supply is a clear negative. Maybe a lot of the selling we saw this week was to make room for the GM IPO, but its also possible that there will be more selling tomorrow. We will find out soon enough. Have a good night.

My Bad

In my last post I erroneously wrote that munis are trading higher as I looked at a bunch of closed end muni funds. Muni funds are rallying but muni bonds are actually trading lower.

Munis Rallying

After a gut wrenching decline municipal bonds are finally rallying today. There will be tears in the municipal bond market, its only a question of when. As we have learned from past imbalances they can persist for longer than anybody believes possible. However, at the end what is not sustainable comes to an end.

A Reason To Sell

We have not seen much fear or capitulation yet because market participants don't have a reason to sell. It would be nice if there was a news story that scared market participants this way we could get a better short term bottom.

Out Of Longs

I am out of my longs from yesterday. The put buying has subsided and we might see some GM related selling late in the day.

Giving It Some Room

I am giving my longs from yesterday a little more room as the market is holding steady despite heavy put buying this morning. I am still looking to exit today but am in a little less of a rush.

Finally Extreme

The Investors Intelligence survey has finally reached an extreme with 56% bulls and 20% bears. The poll is probably a little dated but still will not give bulls the warm and fuzzies.

Change Of Heart

Yesterday, at midday I stated that there was a decent chance of a bounce and took a very modest long position. Some events since then have led me to reconsider my stance. I will look to take profits into strength today as I no longer believe the bounce is worth playing.

What has changed? GM has upsized their equity offering which will now be around $20 billion, including preferred shares.That is an awful lot of supply to digest, not even considering the other $5 billion in IPOs and secondaries on the docket for the week.

Secondly, when I went long around midday there was a decent amount of put buying. By the end of the day there was call buying at the ISE and very little put activity at the CBOE. This is especially surprising considering the magnitude of the decline.

Sentiment is not in place for a good low as most believe this is a normal correction and are showing it in the options market. There is heavy supply about to hit the market and we won't be maximum oversold until early next week. I am going to give this correction  a couple more days before venturing to the long side.

They Never Learn

I was surprised that the "Don't Fight The Fed" rallying cry worked so well in the past few weeks given how miserably it failed the whole way down in 2008. I am less surprised that the end result is the same.

The difference between a normal correction and something more sinister will be if these sovereign and municipal issues subside or if there is a crisis. The powers that be clearly want a bailout as Ireland is being offered help it has not even asked for. Have a good night.

Just A Little Bit

I sold some more SPY puts and am leaning a little long here.

Fear Here

We are finally starting to see some signs of fear and not the fear of missing. Stocks are probably good for a short term trade but a much better setup would emerge early next week if stocks remained under pressure.

Fire Drill

Are today's rumbling in the sovereign debt and muni markets a fire drill or the real thing?

Worth Repeating

I quoted John Hussman a couple of weeks back as to the type of market we were in.
As of last week, the Market Climate for stocks remained characterized by an overvalued, overbought, overbullish condition. This has been historically associated with a poor return-risk profile and "negative skew" - a tendency for the market to establish a string of marginal new highs, and for occasional 2-3 day pullbacks to be followed by sharp recoveries. The pattern is for little overall progress, but repeated slight highs, terminating with a steep, abrupt decline that can wipe out weeks or months of gains in a matter of days.
Nice call Dr. Hussman.

Sold Puts

I sold the SPY 118 Puts expiring this Friday against my hedges.

Something Is Rotten

In the short term I still believe the bulls should stay out of the bears way for the balance of the week. We had a two and a half month run higher so a ten day correction should not be much of  a surprise. The bulls were still buying calls yesterday showing that from a sentiment perspective the correction has not yet run its course either.

Nobody wants to miss a good rally even if it is built on a faulty foundation. The problem is that the issues facing the market are real. The US will not be able to run a deficit of 10% of GDP forever, many municipalities have no way of fulfilling their obligations and sovereign countries like Greece are essentially bankrupt and will default. So when these issues crop up how does one know if its just a fire drill or if its the real thing?

For the past few weeks sovereign spreads have been blowing out and municipal bonds have plummeted. Is this a false alarm or is it the point of recognition? It probably is a false alarm but eventually it will be the real thing. And at that point everybody will be accustomed to the false alarms.

Under The Weather

I am feeling a little under the weather today. I will return tomorrow. Have  a good night.

Both Sides

The two cash deals announced today do help the bulls but are still outweighed by the share issuance this week and the officially broken Potash deal. Overall today's deal news helps the bulls as M&A is an important component of the bull case but I still think the bulls have their work cut out for them this week.

Its Raining Supply

There are about $20 billion in IPOs and secondaries scheduled for this week. In addition, we are coming off a sentiment extreme. I believe that means that the upside will be extremely challenging for the bulls this week. Under normal circumstances I would expect a few more attempts at the high, as tops are usually a process. But with that much supply on deck, I cannot see the bulls making much progress.

The good news is that if we get another down week than next week the market would be oversold heading into Thanksgiving. That would be a good setup for the bulls, but until than I believe the bears are in charge.

Insiders Continue To Sell

Insider's are not being persuaded by the Bernanke Put and continue to sell stock at a record pace. From Barrons:

Beware Blanket Statements

It is no coincidence that just as the "Don't Fight The Tape/Fed" chatter grew to a deafening roar that the tape has finally had a decent sized pullback. I am not a big fan of blanket statements like "Don't Fight The Tape". There is a time to fight the tape and there is a time to go with the flow.

The time to fight the tape is when the crowd has given up fighting the tape. Heading into QE II sentiment was bullish but many were looking for a "sell the news" reaction, so there was a contingency that was still fighting the tape. After QE II a stampede ensued and financial media and the blogosphere were lit up with the "Don't Fight The Tape" meme.

Part of knowing when to fight the tape is anecdotal, like paying attention to the fact that many were looking for a "sell the news" reaction to QE II. But one must also have some quantitative measures as well. I like to use sentiment surveys, put/call ratios and the Rydex ratio to make sure that my biases are not coloring my view of sentiment. In addition, I always look at the same indicators so I cannot pick and choose the ones that agree with my view.

All the indicators I look at were at or close to a bullish extremes at the beginning of this week, signaling that it was probably a decent time to fight the tape. Trading slogans like "Don't Fight The Tape/Fed" are a dime a dozen and when everybody's chanting the same one they are worth even less.

Great American Heroes

If you go to the gas station this weekend and realize you need to shell out a couple more bucks to fill your tank or go to the grocery store and come back with less change than you expected, just know that it is for the greater good. The capitalist system only works if great capitalists are allowed to thrive such as the ones highlighted in a Wall Street Journal article:

In the latest sign, HCA Inc., one of the nation's largest hospital operators, plans to use a specially formed company as part of a plan to pay a $2 billion dividend to its private-equity owners.

The payout plan is another indication of the dizzying heights in this year's junk-bond sales boom. Companies have raced to issue a record number of junk bonds and in some cases have provided less protection for investors than in the past.
The dividend, HCA's third this year, will go to private-equity investors including Kohlberg Kravis Roberts & Co., which trades as KKR & Co., and Bain Capital LLC. It will be financed through the sale of $1.5 billion in junk debt maturing in 2021 and the use of HCA credit lines.
Thank you Ben Bernanke. You are correct, QE II is already working.

Mind The Gap

After Ben Bernanke's Washington Post article, where he admitted to trying to juice the stock market and destroyed any credibility the Fed had left, the SPY gapped up from 119.95. It looks like we might get  a gap fill today as we already did so in the overnight session. That area should be good for a bounce if we get there. That said, I think it eventually gives way before this correction is over.

Smarter Than Seth

The greatest value investor of our time, Seth Klarman, is returning money to investors as he cannot find enough opportunities. If you are wildly bullish here, what are you seeing that Seth Klarman cannot?

Too Much Call Buying

There is too much call buying at the ISE for such a large down day. I don't think the bulls will be able to make it two turnarounds in a row today.

Insiders Selling

According to via insiders at S&P 500 companies sold $4.9 billion worth of stock last week, the most ever since they began reporting in 2004. At the same time retail investors were buying calls hand over fist.

Bulls Unprepared

Sovereign spreads in Europe are blowing out again. Chances are the ECB throws them a lifeline but how ill prepared are investors if that turns out not to be the case?

Tech Issues

I was hoping that in the next couple of days the market would make a marginal new high that would really get investors excited. At that point a short position would have been a very high probability trade. Unfortunately, there were some disappointments in tech land that may not allow that scenario to play out.

Tech is the sector which managers are most overweight and the news last night was not good from Cisco or Kulicke & Sofa. That combination will make it very hard for tech to get off the mat. Its possible we will just see some sector rotation and I might still get my setup but I'm not holding my breath.

Lay Off The Shorts

My opinion remains the same as it was this morning. I don't believe this market has much upside, but I did not see the type of enthusiasm today that makes me want to go short again quite yet. Have a good night.

Bad Auction

Long term treasuries are tanking on a bad auction. I already hear the QE 3 helicopters revving up. Too bad oil just broke out to a two year high. Collateral damage.

II Sentiment

The jump in bulls and drop in bears in the Investors Intelligence survey was smaller than I expected. It is only a single indicator but according to it there is still a little more room before sentiment becomes extreme. I think sentiment is pretty extreme but would feel better going short if this indicator lined up.

Mixed Signals

The CBOE is showing call activity while the ISE is showing put buying. I like it much better when they are both saying the same thing.

More Inflation

Yesterday, a Chinese credit agency downgraded US Treasuries. It is pretty clear that the agency would not do so without the consent of the government. I believe this means the Chinese are planning on buying less treasuries and hence US Dollars. That is likely the reason treasuries performed so poorly yesterday.

In order to purchase less treasuries China will either need to allow the yuan to rise or use the dollars to buy natural resources or a combination of both. Either way, this should lead to higher inflation in the US.

Not Going Anywhere

While we could see some sideways trading, I don't believe this market is going anywhere on the upside anytime soon for the following reasons:
  • Bullish sentiment became too extreme and it will take some time to work off that condition.
  • There has been quite a bit of activity in the secondary market this week, with the $8 billion Blackrock offering being the largest. The GM IPO is scheduled for next week and will likely be about $13 billion. That is  a lot of supply for the bulls to digest.
  • The upside momentum has been broken and that should give the mo-mo traders pause, which seems to be everybody these days.
If the bulls come out of the gate today buying calls I will look to build up a short position again. The reasons I am being careful on the short side are as follows:
  • Seasonality- This is the time of the year when I have seen extended markets become more extended.
  • Artificially low rates are greasing the wheels and are leading companies to borrow to buy back stock and encouraging M&A activity. In a few years when companies have to roll this debt it might spell trouble for them but in the short run it is  a positive for the market.
  • Tops are often range bound affairs before the bottom falls out so we might see some more rally attempts.

Losing My Religion

Just as  everybody found religion and the chorus of "Don't Fight The Tape" reached a deafening roar the market finally decided to pull back. A little. If you think that is a coincidence than you don't understand how markets work. Have a good night.

Covered The Balance

I covered the balance of my net short position.

Further Covering Shorts

I have further covered shorts. I now have a very small net short position remaining.

Broken Correlation

At some point higher commodities will be bad for stock prices as it will mean the Fed has to lay off the QE or heaven forbid tighten. I find it interesting that commodities and stocks have decoupled today with commodities higher and stocks lower. I don't think we are at the point where higher commodity prices will be seen as bad but I do not think we are that far away either.

Covered Yesterday's Shorts

I also covered the shorts I put on late yesterday. Often times at tops we see some range bound trading before the bottom falls out so I am trying to take advantage by buying and selling on a scale. I now have a modest net short position.

Covered Morning Shorts

I covered my shorts from this morning for a modest profit. I still have a medium size short position.

Turnaround Tuesday

I am looking for a turnaround today. I have added to my shorts even though I shorted yesterday close to current levels. I am stepping it up.

White Lies, Deceptions and Government Statistics

Commodities are up about 15% for the year. Would anybody be surprised if the CPI came in at a core rate of 0.1%? If you believe that, there is a nice bridge for sale crossing the East River with a great IRR.

To Infinity And Beyond

Commodities are taking off and oil is challenging a two year high. If it breaks out from here than it might be to infinity and beyond. The only thing saving the US dollar is that the Chinese accept it as payment for their goods, otherwise we will have already seen a run on the dollar.

There is a perception around the World that the US dollar is a joke. Nobody other than central banks are buying and it seems that many are having second thoughts. So while the markets are going up in US Dollars, those dollars are worth a commensurate amount less. I asked yesterday, how long it would take before everybody figured out whats going on. At this pace, not very long.

Endless Appetite

We had a third day in a row of ferocious call buying. The "weekend warriors" had their chance to buy into the market today. Maybe we will finally get a Turnaround Tuesday tomorrow. I remain short straw hats in Summer. Have a good night.

I'm Reloaded

I reloaded on my SPY short on the latest spike.

One Sided

Judging by what I am reading nobody is fighting this move. If an unforeseen event happens a lot of people will be caught offsides. I am not saying something is going to happen but the potential for a nasty reaction is there if it does happen.

Late Day Weakness

The Blackrock secondary is supposed to price tonight and will likely be well over $7 billion. We might see some late day selling if portfolio managers need to make some room for the position.

Lay Off The Calls

There is an awful lot of call buying for a down day. This is not what the bulls want to see.

More On Tops

We often see some choppy range bound trading while a top is being formed. Thus I will slowly put out shorts as we rise and slowly cover as we fall. This strategy can make decent money in a choppy range bound market.

Covered Friday's Shorts

I covered the shorts I put out on Friday. I remain modestly net short. I will look to put them out again on a bounce.

The Tipping Point

At what point will the public ask for Bernanke's head on a platter?
  • Oil at $100 a barrel? Gas at $3 a gallon? Gas at $4 a gallon?
  • Would it be a rise in food prices?
  • Another commodity?
 What do readers think the tipping point would be if commodities continue to rise?

The Bull's Siren Song

Late last week we finally saw sentiment that is consistent with an intermediate term top. I want to remind readers that the bull case always sounds best at the tops and the bear case always sounds best at bottoms.  At times like these I try to close my ears to all the great arguments and concentrate on what has been the result of one sided sentiment in the past.

There are two items that make the current juncture a little tricky. The first is that tops are always tricky. Bottoms are a lot easier because once sentiment turns extremely bearish one can usually grit their teeth, take the pain and before you know it the market turns higher. Tops can wear on and on and really test one's resolve.

The second tricky item is that it is very rare to see a good intermediate term top at this time of year. In extreme cases it does happen, when there is  a major shift in fundamentals like the bursting of the tech or housing bubble. Currently, I don't see a major fundamental shift but that does not mean we will not have a correction. If my memory serves me correctly we had a 6% correction last November followed by a year end rally. I am expecting something similar.

Weekend Reading

During the last two trading days of the week we finally saw unadulterated, hand over fist call buying. In my reading this weekend I have also noticed some signs that sentiment might have become too extreme.
  • There was a large amount of chatter in the blogosphere about why one should not try and fight the trend. While that point is debatable, my contrarian antennae go up when suddenly everybody is singing the same tune.
  • There is a bull/bear survey every weekend on I do not ever recall seeing it as lopsided as it is right now with 70% bulls and 20% bears.
  • I always check out the Insider Transactions in Barron's and it has been a long time since I have seen such large stock sales by insiders. Please note I am not talking about the ratio but the size of the insider sales.

I Need A Miracle

I am signing off for the day. I have an order in to cover my short from this morning in case a miracle happens and we reverse lower. Have a great weekend.

Extra Froth Please

The put/call ratios are at rarefied levels. As of now it doesn't seem to matter.

The Right Move For Bank of America

Mark this day in your calendar as the day I complimented Bank of America. After surviving the subprime debacle they then went out and bought Countrywide and Merrill Lynch. They saved the taxpayers a lot of money at the expense of their shareholders.

Bank of America is selling their stake in Blackrock. There is no reason to hold this non core position and they are getting out at a good price. If they do suffer large losses from mortgages this might mitigate the need to raise capital at distressed prices. They are doing the right thing.

Added To Shorts

I have added to my short positions on the spike following the Jobs data.

Some Supply

Next week we will see a Blackrock secondary of greater than $7 billion. The following week we will see a GM IPO of $13 billion. Plus their is a decent sized IPO calendar. Supply will be heavier than usual in the coming two weeks.

Darn Calendar

We saw extreme call buying yesterday at both the ISE and CBOE. Both the ISE and CBOE equity showed the most call activity since the rally started. Anecdotally, it seems everybody thinks buying stocks is easy money after the S&P 500 has already risen 16%. Everybody who was looking for a "sell the news" pullback has thrown in the towel. This is what the end of a rally feels like.

Normally, I would feel very comfortable shorting into this type of activity. However, the time of the year makes me a little nervous with my short position. Its the time of the year when rallies often go further than they should. In late March sentiment was at an extreme but the positive seasonality in April allowed the rally to extend. If it were May instead of November I would probably have a short position double the size that I am currently carrying.

QE II Already Working

In Bernake's Washington Post piece he claims that QE II is already working and offers the rise in the stock market as evidence. I guess that means that the Tech Bubble was proof that the Fed's policies were working and the Real Estate bubble was proof that the Fed's policies were working because after all the market rose both times. If the stock market likes it than it must be good for the economy.

Throwing Caution To The Wind

Investors are clearly throwing caution to the wind. The only question is how long it lasts.

Added To Short

I have further expanded my SPY short.

Paying The Piper

Bernanke actually admitted that he was targeting stock prices in a Washington Post piece yesterday. Bernanke can print money but he cannot control where it ultimately ends up. A lot of it is ending up in commodities as commodity indexes are making fresh two year highs.

If stocks do indeed rise the benefit will only be felt by a small segment of the population and all we are doing is borrowing gains from the future. The rise in commodity prices will be felt by everyone. Inflating asset prices has led to disaster after disaster. I don't expect a different outcome this time around. The only question is the timing.

Shorting The SPY

I shorted the SPY this morning at roughly $121. For the past few weeks sentiment has refused to go to a bullish extreme as many were looking for a "sell the news" reaction to the Fed. Now that the Fed decision has come and gone it seems those who were looking for a pullback are throwing in the towel, meaning we will finally reach a bullish extreme. My short position is small and I have plenty of room to add.

Potash Decision Shortly

The Canadian government is supposed to rule on their decision regarding BHP's hostile bid for Potash. This could be a market mover if the government rejects the deal.

Pulled My Orders

I have pulled my orders to go short for now. I think this "larger than expected" QE II will do the trick of getting optimism to an extreme and lead to an even better opportunity to go short. It is crystal clear that the way the $600 billion figure was chosen was to look at expectations and beat them. Straight out of the GE "beat by a penny" playbook. Sickening.

If Its inflation He Wants

Commodities are screaming higher on the news. Stocks not so much. Stagflation has happened before and it can happen again. My limit order to get short missed by a few pennies thus far.

Bernanke Does Not Disappoint

Bernanke came in with a higher than expected $600 billion program. The man is reckless.

Passing On Teva

I want to buy Teva Pharmaceuticals because they are a well run company trading at a very reasonable price. Throughout the years they have grown organically and through acquisitions, even during a very rough period for other pharmaceutical companies.

In the past acquisitions made sense because their stock traded at a premium, but currently they are trading at less than ten times 2011 earnings estimates as the stock has stumbled. I believe the best use of cash is to buy back stock but management clearly stated on the conference call that they want to use cash flow to continue to do acquisitions. While the stock will likely do well because of the low valuation I will take a pass. If management ever changes their mind I will take another look.


Methinks the highs for the day are in. There was an awful lot of call buying and the rally attempt was rather pathetic. Were it not a Fed day I would be more confident about the statement.

Just Maybe

After the recent higher than expected inflation readings and stronger economic numbers I believe the chances of a larger than expected QE II is extremely small. Most likely QE II will come in as expected. But there is a small chance Fed officials will actually do the right thing and take it slower than the Street expects.

Prices Paid

The prices paid component of the ISM Services report was an extremely hot 68, following yesterday's ISM manufacturing hot reading. The case for deflation is getting weaker by the day but facts be damned, Bernanke cannot disappoint the street.

Spot Secondary

There was a huge secondary offering of over $6 billion worth of Blackrock shares announced with Bank of America and PNC selling. That is a very large secondary and a net negative for the overall market.

The Fed Day Gameplan

Fed days generally offer a lot of volatility in both directions once the news is out. Today is a big announcement so I expect we will see volatility in spades. I am likely going to stick in a bunch of limit orders to short the SPY well above the market and hope that I get filled once the volatility begins.

Hold Fire

I have not done any shorting today but I will be looking to short a gap up tomorrow, if it were to occur. I will also be looking to average in to a larger position if we get a spike on QE II. After sitting on my hands for what seems like forever I might see some action tomorrow. Rest up and have a good night.

Amen Brother

From Robert Marcin at
In my opinion, massive QE doesn't solve the problems of structural unemployment, bad banking collateral, small/mid sized business illiquidity, overconsumption, and an all around screwed up economy. It's that simple.
Easy money helped create or paper over massive economic imbalances. They will not solve them. We have Japan type conditions because of the financial bubbles we promoted for 15 years under Greenspan and Bernanke. The Fed has been "criminally inept" in the process. We always choose inflating our way out of economic difficulties because that seems less painful than clearing the imbalances the right way.
Here's what we need, a richer working/middle class, not a richer corporate/investor class. We need education, jobs, innovation, and reindustrialization. We need less regulation and consumption, and more export production and sustainable employment.
I could not have said it better.

Analyze This

It looks like the "fakeout breakout" scenario I spoke of this morning might be happening. I am strongly considering slowly averaging into a short position starting now. I would start very small and save most of my firepower for after the Fed announcement tomorrow.

Everybody's A Winner

Everything is up today thanks to Uncle Ben's largesse. Commodities are hitting yet another 2 year high, stocks are at new highs for the move and bonds are even rallying. Ain't life grand?

Downgrading Gilead

Yesterday, a sell side analyst upgraded Gilead Sciences. When the stock was $32 two short months ago he thought the stock was a market perform but now that it is more than 25% higher he thinks its a buy. Gilead earns a rather predictable stream of cash, so one would think that a 25% price rise would make the stock less attractive.

Did Gilead discover a new drug that makes the increase in intrinsic value greater than the increase in stock price? No. Has there been a change in interest rates that makes the stream of cash more attractive? No. After being wildly bullish at $32, I am downgrading my view of Gilead Sciences at the current price. I believe the shares are close to fair value. I remain long Gilead stock and short the $38 covered calls.

Stomping Out Deflation

United Parcel Service Inc. said late Monday it will raise rates for ground packages, air express and international shipments by a net 4.9% for 2011.

Fakeout Breakout

A possible scenario is that we get a fakeout breakout in the coming days. A lot of people are looking for QE II to be a sell the news event and want to buy the ensuing dip. If we breakout everybody that is still looking for a pullback will likely throw in the towel. At that point sentiment might finally reach a bullish extreme and the market would be ripe for a correction.

Go Somewhere

My indecisiveness the past few weeks has only been outdone by the market's indecisiveness the past few weeks. The bears wasted their overbought reading a few weeks back as stocks worked off the condition by going sideways. However, the bulls have also wasted the positive turn of the month seasonality with stocks doing nothing. All in all a lot of wasted time. Have a good night.

Facts Can't Stop Bernanke

  • The prices paid component of the ISM came out at a very hot 71.
  • Commodities are hitting new two year highs once again. If oil breaks out it will be off to the races. 
  • The GDP report showed the price deflator rising 2.3%. 
Bernanke & Co. are completely ignoring the facts. What will he gain? Slightly lower rates. If inflation breaks out today's problems will look like child's play.  The risk of QE is too great and the potential reward is minimal.

Calling All Readers

I believe that hedge fund sentiment might be the most important factor in the market today. No other group controls such a large amount of money and changes their net exposure so drastically in such short periods of time. It is very difficult to get a good read on sentiment and exposure levels in the hedge fund community.

For those readers with contacts in the hedge fund community, how would you describe current sentiment and exposure levels of hedge funds as a whole?

Rolling A Fat Beta

By looking at the rolling betas of daily hedge fund returns to global equities, it appears that HF exposures to equities have increased further and are now at or close to the most bullish levels of the past two years. 
Nikolaos Panigirtzoglou, JP Morgan
 I have no idea what a rolling beta is, but if this analyst is correct than I believe it is a very big negative for the market. I believe that hedge funds have fueled the rally that started in early September. Mutual funds actually decreased cash positions this Summer so it certainly was not them fueling the buying.

No group turned as bearish as hedge funds this Summer as "de-risk" was the buzz word. Their reversal of this bearish position has been the largest source of demand for this market.

Nobody Said It Was Easy

I am going to start by giving the bull case. Everybody and their mother thinks that QE II will be a sell the news event. Many are looking to buy the ensuing pullback as few believe the pullback will be deep. Since when is the market in the business of giving everybody what they want? There is also the fact that sentiment refuses to turn bullish to an extreme as is usually the case after such a strong, extended rally. Add to all that the well known bullish seasonal factors.

All this keeps me from trying to fight this rally but I cannot get behind it either. The market is extended and while sentiment is not extreme, it is overly bullish. The fundamentals for the market and this rally are built on fragile foundations as those who buy on "liquidity" can easily turn sellers for just as flimsy a reason as we saw in April. In addition, I am finding less and less individual stocks that seem attractive. I am still agnostic and waiting for better opportunities.