Happy New Year

Have a happy, healthy, profitable New Year.

2011 Post Mortem and 2012 Outlook

The S&P 500 is sitting in nearly the same place it was one year ago but much has changed. S&P 500 earnings for 2011 are likely to be 15% higher than for 2010 once the final numbers are tallied, hence valuations are significantly better than they were at this time one year ago. A year ago sentiment was giddy on "The David Tepper Win-Win Rally" and investors were aggressively positioned. Today, investors are scared and positioned conservatively.

One year ago investors were heavily overweight cyclical sectors while shunning utilities, healthcare and consumer staples. Cyclicals are showing large losses for 2011 while defensive groups are showing large gains. I don't believe sector positioning is as lopsided as it was a year ago but it seems investors are slightly tilted towards defensive sectors now.

Valuations are attractive and investors are positioned conservatively, which is generally a good combination for a higher market. However, there are huge imbalances in the global economy that cannot be ignored. Valuations  are pricing in some turmoil as earnings would be able to miss expectations by 10% and the S&P 500 would still be reasonably priced. However, a large scale disaster is not priced in and the potential for one exists.

Heading into 2011, I was not very optimistic about the market or the economy. The giddy sentiment and global imbalances worried me. I believed the economy would slow. The economy performed as I expected but corporate profits performed much better than I could ever have imagined given a slowing economy. A combination of my bearish outlook and excellent valuations  had me positioned in defensive sectors, with my largest holdings being in healthcare.  Being positioned in defensive sectors made my year.

Heading into 2012, I am not very optimistic about the economy but valuations make me somewhat constructive on the market.  In the early part of the year I am planning to maintain a medium sized net long posture (short term trades not included). I will be reluctant to get aggressive other than for short term trades given all the imbalances in the world economy. I still like select defensive stocks like Vodafone, given the still good valuations and slow economy. I also like certain cyclical stocks such as in  software, where valuations are already pricing in a lot of pain (ORCL, CA, BMC).


Very Positive Seasonality vs. Overbought

The final trading day of the year has not been very friendly to investors with the S&P 500 showing losses in 6 of the past 7 years. However, the first couple of trading days of the year have been very strong outweighing the final day of the year.

We have an overbought reading but the market has the potential to get more overbought in the coming days. Looking at the 10 day moving average of the advance-decline line we could get more overbought through Wednesday. Looking at the 10 day moving average of the put/call ratio, we could get more overbought through Tuesday.

A strong move early next week would have us overbought and looking at more neutral seasonality. That would likely be  a decent place to pare back some exposure.

Monti Speaking Up

Italian Prime Minister Mario Monti spoke up today about the high interest rates that Italy has to pay. He very clearly asked for more help. This is significant in that this is the man that the ECB and Germany have backed (unofficially). He  is likely the most friendly possible Italian PM to the causes of reform and austerity. Italy has done what was asked of them and is now asking for something in return. This is a step in the right direction. the first step in receiving a bailout is asking for one.

The End Of The World Has Been Delayed

Much to the chagrin of the Zero Hedgers, the end of the world has been delayed yet again. The Italian bond auction was not great  but is now in the rear view mirror and likely to be forgotten in a few hours. The strength in the dollar and weakness in precious metals are putting some pressure on the "risk on" trade. The strong dollar trade is likely being exacerbated by year end.

The market will be overbought at the end of the day today but can get more overbought through Wednesday of next week. Seasonality remains very positive although we have seen weakness on the last day of the year the past few years. Had we rallied through today I would have reduced positions. However, I believe yesterday's correction is setting us up for one more move higher before a better overbought reading.

The Big, Bad Italian Bond Auction

The world is fretting about the Italian bond auction tomorrow morning. It will very likely not be good. However, once it is behind us there will no longer be anymore big, bad events to fret over in 2011. I expect one more rally late this week or early next week. Have a good night.

Losers Lose, Winners Win

The winners from 2011, namely staples and healthcare, have recently accelerated their outperformance. While the losers from 2011, everything else, continue to suck wind. Generally, the losers outperform early in the new year as  tax loss selling and window dressing end. This effect is seen most in small cap stocks and is known as the January Effect, but applies to a lesser degree to large cap stocks as well. For some of my stocks the new year can't come fast enough.

Slightly Longer Again

I have gotten slightly longer for the second time today.

Slightly Longer

I have used this move lower to get slightly longer. I think there is one more move higher later this week or early next week.

Nearing Overbought

The market will be overbought at the end of the day tomorrow. It is possible it will take until Wednesday of next week before we get maximum overbought. But the strong tailwind of the oversold reading from from early last week is clearly ending tomorrow.

Given the seasonality I am inclined to give the market the benefit of the doubt for as long as possible. This is proving difficult because the market has gone straight up. Typically when a market goes from oversold to overbought there is a dip somewhere in between but we have not seen one.

If we were to rally through tomorrow I would be inclined to reduce positions. However, if we were to see a pullback I would be more inclined to give the market until the middle of next week.

Defense Over Offense

The underlying theme in the market remains defensive stocks. As readers know by now I believe this theme is going too far. Colgate trades at 17 times forward earnings, while Oracle trades at less than 9 times (net of cash). Colgate deserves a premium because of the steadiness of the business but does it deserve double the multiple of Oracle? Have a good night.

Bought Oracle

I started a position in Oracle. This is a market neutral trade as I hedged it with an S&P 500 short.


In my opener I noted a possible negative divergence in the number of new 52 week highs on Friday. We are already seeing as many new highs today as we did this entire rally. This negative divergence is now gone.

My Answer

I have been asked many times in the past few weeks why I concentrate on the fact that large investors, especially of a hedge fund kind, are underinvested? After all, they have been underinvested for a while and the market has not been able to make much headway.

The first thing that one must understand is that even the so called smartest investors in the world are illogical. Higher prices turn people bullish even if little has changed fundamentally. At some point these larger players will be forced to chase the market. Being underweight ones benchmark feels like being short when the market is rising and the easiest way to make the pain stop is to buy.

I don't know where this magical level is that will force these large investors to capitulate and buy but I know its there. I have seen it time and time again. I don't know if we will reach that level but the risk that we will is out there. When large market participants are bullish, like they were early this year, this upside risk does not exist because they are already overweight equities. For this reason I have no desire to go to a net short posture even if we were to get overbought and see a little too much bullishness. At most I would be willing to go to a neutral stance.

Bulls Maintain Slight Advantage

I still believe the bulls deserve the benefit of the doubt but there are some cracks starting to show in the rally. The number of 52 week highs was lower on Friday than on Thursday, even though the market closed well higher on Friday. The reason for this was likely the narrowness of the advance on Friday as the strength was concentrated in the most defensive sectors. The most bullish thing the market could do is consolidate and see some sector rotation as other sectors catch up to the defensives.

A rally generally starts showing some divergences before it fails. This is only the first sign that the rally is starting to tire. The positives are that seasonality remains very strong, the market will not be overbought until later this week or early next week and that large market participants remain underinvested. I still believe the bulls have the advantage but we are no longer in the early innings of the current rally.

Merry Christmas

I am calling it a week. Happy Hannukah. Merry Christmas.

Winds Of Change

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.

I wrote the above on February 25, days before defensive stocks began to massively outperform economically sensitive stocks. While my quote was timely, I was early in positioning myself in defensive stocks as I had been suffering in them for months prior. I had to watch economically sensitive stocks shoot to the moon while my holdings languished. Eventually, I was paid in spades but it was not easy to stick with my conviction as the market told me I was wrong every day.

We are now seeing the complete opposite as defensive stocks shoot to the moon while economically sensitive stocks languish. I am not very optimistic about the economy but at some valuation difference it makes sense to own software instead of consumer staples.

I am slowly shifting some of my exposure from more defensive, staple like companies to software. I realize that I am likely to be early again as stock market participants never learn and always take things too far. But I know that I will not be able to pick the exact turning point either. This does not mean that I don't believe defensive stocks have a place in one's portfolio. They still have a large place in mine. I am just now willing to have more economically sensitive exposure because the price is right. I'm also willing to part with my defensive holdings at the right price.

Frustration 101

There are many parts of trading and investing that are frustrating.  But there are few things more frustrating than being long and not making money when the market is going up. This is precisely what has happened to me in recent days.

I have a healthy weighting of software in my portfolio, which has gotten killed since Oracle reported earnings. In the meantime the market has risen. I am sitting on a loss for the past three days while the market is rising.

I have been trading for a long time and have learned to control my emotions, but this is one I cannot get over. I logically understand that as a stockpicker and a contrarian this is bound to happen. In the end I'm just an overgrown, emotional primate.

Using The Strength

Some of my more defensive holdings are popping today. I used the strength to trim them a bit.

Forget Logic

We are once again gapping up despite Italian 10 year yields near a record. I would not chase this move but I would not short it either. I have battle wounds from trying to fight the market during these thin holiday periods and have finally learned my lesson. Unless we are at sentiment extremes, I either go with it or sit out. Logic is not for thin holiday sessions.


Tom Demark's Latest Video

This is Tom Demark's latest video with Bloomberg.While I don't trade based on his work I like that he makes big, against the grain calls.


We saw a big change today in that Italian 10 year bond yields blew out to a near record and the stock market did not blink. Is this sustainable in the long term? No. But there is no reason the market cannot cause harm to all the under invested, underperforming managers out there until New Years. For now, I am willing to play along but I would feel much better about being long if the ECB would deal with the issues. Have a good night.

Mixed Feelings

The statistics argue for a continued rally in the stock market. The market will not be overbought until around New Year's and seasonality is very strong at this time of year. That said, we have just had a large move and are gapping up again today so we could see some give back in the short term. While we could see some short term weakness, I believe the market deserves the benefit of the doubt until the New Year.


Change Of Heart

One of my themes coming into 2011 was that "defensive" sectors were undervalued versus "risk on" sectors. We have seen a complete about face and I believe that some "defensive" names are starting to look a bit pricey, while some cyclical sectors like software are starting to look cheap. I will be looking more closely at this in coming weeks. These trends tend to overrun so calling a turn is tricky. Have a good night.

Who's The Sucker

Say what you will about Larry Ellison but the man is not a sucker. Earlier this year Oracle was a consensus long and the stock traded over $36. Larry Ellison, the Oracle CEO, thought software stocks were expensive and built up cash. At the time Oracle repurchased virtually none of the their own shares.

Yesterday, Oracle went from hero to goat and the same people who loved Oracle at $36 hate it at $25. In conjunction with earnings Oracle announced a $5 billion repurchase plan in addition to their existing $2 billion authorization, signalling they want to be buyers of the stock at these levels.

On one side of the trade we have the reactive investing public and their reactive money managers. On the other side of the trade we have Oracle headed by self made billionaire Larry Ellison. Who is the smart money?


Sold Some Walgreen's

I sold some Walgreen's common stock that I was long after the stock has jumped nearly 5% from this morning's lows. On net I have more exposure to Walgreen's than coming into the day, due to my earlier trade.

Neutralizing CVS

I bought CVS Puts which neutralizes my long exposure to the stock. CVS has come a long way and could see some downside if Walgreen's settles with Express Scripts. I still like the stock longer term but prefer Walgreen's because of the valuation.

Walgreen's Risk Reversal

I sold April 28 Walgreen's puts to buy April 34 Walgreen's calls. The reason I like this trade is that I would be willing to own Walgreen's at $28 regardless of the outcome of the dispute with Express Scripts. I remain of the belief that they will eventually settle.

Oracle Highlights Investors Dilemma

While Oracle's earnings last night disappointed, I believe Oracle is a  microcosm for both the bull and bear case for the broader market. The bear case is that earnings is a lagging indicator, but eventually the macro will catch up with earnings. Oracle was able to keep earnings up while global growth slowed but eventually gravity set in. Bears will argue that macro headwinds will only worsen as will earnings.

The bulls will point to the fact that despite the earnings disappointment, earnings are still growing. Oracle now trades at less than ten times forward earnings estimates, once one considers the $3 of cash per share Oracle holds. After building cash for years, Oracle announced a $5 billion share repurchase plan last night. The savvy Larry Ellison was not interested in repurchasing shares when they traded above $36 a few months back but at $26 he is a buyer.  Investors should follow suit and buy low for a change.

I am torn by both the bull and bear arguments as they both have merit. I believe that one can only buy cheap when the news is bad and buying cheap is the best predictor of long run returns. At  the same time I recognize the unprecedented headwinds. Oracle's earnings exemplifies the dilemma that investors face. The debate goes on.

Happy Hannukah

I believe that today was the first day of a year end rally. However, after a 3% rally the the risk/reward is not as favorable as it was yesterday. Happy Hannukah. Have a good night.

No Guts, No Glory

In order to participate in today's advance one had to either buy into yesterday's despair or buy into a big gap up, in a time when gap ups have been failing. Neither was easy. The market for the past few months has been a  no guts, no glory market.

Oracle Earnings On Deck

Oracle is set to report earnings after the close tonight. Oracle trades at less than ten times forward estimates once one nets out the cash on their balance sheet. This is amazing for a company that has a virtual monopoly in databases. Databases are likely to be needed in the future.

I am very tempted to buy Oracle but there are two things that are holding me back. The first is that I have  a lot of exposure to the software space via BMC and CA. The second is that Oracle is unclear about their capital allocation plans. I like to know what companies I own plan to do with their money. I am somewhat comforted by the fact that Larry Ellison has been a good allocator of capital. I am very seriously debating whether to make a purchase.

Gift Horse

I made some sales. I am not looking a gift horse in the mouth.

What A Difference A Day Makes

It appears the year end rally might finally be under way. While we have seen many false starts in the past week, the underlying conditions for a rally have improved. For starters we are finally oversold. We could get more oversold in the next couple of days but I don't believe we would undercut yesterday's lows by much as time is running out.

Looking at yesterday's put/call ratios and Rydex data one does not see much fear. Anecdotally, I saw widespread fear and despair late yesterday. Normally, I would tilt towards going with the the numbers, but the level of disgust I saw late yesterday with the market was so high that in this case I am trusting my instinct.

To summarize, sentiment is negative, the market is just about oversold and seasonality is positive. I think I am starting to see Santa Claus on the horizon, although he looks a little thinned out due to the austerity program the ECB forced upon him.

Little Miss Sunshine

The good news is that we are finally oversold and sentiment has turned very sour. The bad news is that the market has the potential to get more oversold through Wednesday and that the ECB is unlikely to take King Solomon's sage advice. Have a good night.

Holding My Nose

I held my nose and started doing some buying but I am leaving room.

Please Just Shut Up

"Better to remain silent and be thought a fool than to speak out and remove all doubt"

-King Solomon

Past rallies have been built on the hope that the ECB might wake up and realize that they are the only possible buyers for European peripheral debt. After recent speeches it is difficult to fathom this occurring as they have displayed how utterly clueless they are. It will likely take  a worsening of the situation in order for them to act.

I believe the market is set up to rally into year end but the ECB is making it a challenge. It is difficult to buy without even the hope that the situation in Europe could get better. That said, I still believe we will get a rally starting some time this week.

Zynga Is A Positive For The Market

As of this writing Zynga is down over 10% from where they priced their IPO. I view the decline in Zynga as a positive for the market for numerous reasons. This will lead to less supply in terms of IPOs and secondaries. Additionally, bubble like valuations are not long term positives for the market.

I view IPO's and secondaries as supply into the market. Last week we saw about $4 billion in IPOs and secondaries. $4 billion that could have gone into other stocks was needed to absorb this supply. In the future it will now be much more difficult for bankers to price their junkier supply. This should lead to less supply.

For every Amazon during the internet boom in the nineties there were 10 Webvans, Globe.com, etc.. During the internet boom everybody was being priced like a winner, even though the vast majority of the stocks went to zero or thereabouts. We are seeing a similar dynamic in social media. There will be winners but right now everybody is being priced like a big winner. Zynga is a video game maker that happens to make video games for social media. These video games are far less sophisticated than what companies like Electronic Arts make yet the valuations are not even in the same stratosphere. There are no barriers to entry and these games are relatively simple to make.

In the long run the only people who benefit from unsustainable bubble valuations are those selling and the bankers getting a commission. Investors that get burned no longer want to invest, whether they get burned directly or through a mutual fund. Hopefully, the fall in Zynga will lead to less junk supply from bankers and more rational valuations.

Is Santa Claus Coming To Town

I believe that we are setting up for a year end rally, but pinpointing where it will start is a bit of a challenge. The reason being that we have had a lot of choppy activity recently. The market will be at an oversold reading at the end of the day today, but it won't be a great reading. My preference is for a down day today that gets us more oversold and turns the crowd bearish. In the worst case we will have to suffer through another down week, which would leave us very oversold for the final week of the year.

It is difficult to argue that sentiment is bullish right now. The overarching sentiment that I am seeing is despondency. I do believe that we are closer to bearishness and another down day is likely to get us closer to excess bearishness. The secondary market is now closed for the year, so there will be no more supply via IPOs and secondaries. Europe is likely to continue to dominate market direction but barring a severe worsening of the crisid I believe further weakness can be bought into for a year end rally.

Wear Out or Scare Out

I believe we are getting close to a tradeable low as sentiment has soured, but we might need to see a little more weakness.  Have a great weekend.

Surprise, Surprise

A few weeks ago I wrote a post titled, Carl Icahn or Wall Street Analysts, which highlighted the divergent paths Amgen and Gilead were taking. Amgen was returning cash to shareholders via a tender offer while Gilead did a large acquisition. Wall Street analysts were downgrading Amgen and upgrading Gilead. Amgen has Carl Icahn on the board, who was clearly pivotal in Amgen's strategy.

It comes as little surprise that self made billionaire Carl Icahn triumphed and Wall Street analysts were wrong. Amgen is up 11% since the tender while Gilead is down 5% since their acquisition.

Brighter Outlook

Funding stresses in Europe have eased in recent days for peripheral countries. The Spanish two year yield is trading at a little over 3%, down from 6% not long ago. This is a big positive but the danger is that we have seen this before only to see stresses return when the ECB backs off. That is the reason that I took profits on my long trade from yesterday.

I remain at a medium sized net long position despite the sales I made this morning. I believe sentiment is a net positive for the market as hope at the beginning of the week has morphed into skepticism. Large investors are under invested, we are no longer overbought, valuations are reasonable and seasonality is positive. Europe is a big risk.  EU leaders are whistling past the graveyard but stop short of allowing us fall into the abyss.

Out Of Long Trade

I used this morning's pre-market strength to exit my long trade from late yesterday. I remain at a medium sized net long position.


Added To Long Side

I have added to my net long posture by removing some hedges.

Better Odds

This weekend I read numerous articles calling for a breakout in the stock market. In addition to my indicators flashing caution this was yet another canary in the coalmine I chose to ignore. Today we are seeing a CBOE equity only reading above 1.00 (a lot of put buying) which is generally bullish and it seems many bulls have given up. This is not the type of negativity we saw during Thanksgiving but I believe it is a short term positive for the bulls. I believe the odds continue to favor the bulls in the very short term.

Ignoring My Own Advice

At the beginning of the week I wrote:
In the short run we are overbought and will remain so through Wednesday. The overbought reading will likely put a lid on the upside in the early portion of this week.

Unfortunately, I did not heed my indicators as I did not expect a decline of this magnitude. Rather than go on another rant about the ECB I will focus this post on what my indicators are saying now.

The good news is that we are no longer overbought. Unfortunately, we are not yet at a good oversold reading either. The reason being that we had a lot of chopiness in recent weeks. In the very short term we should see a bounce as is usually the case after three hard down days. But both sentiment and the overbought/oversold indicators are not calling for much more. Once we get a bounce we will likely be back in no man's land in terms of short term indicators.

Retail Cashing Out

Over $5 billion left domestic equity mutual funds last week even though the market was higher. Week after week we have seen huge outflows from mutual funds. This is likely a large part of the reason so many growth darlings have been getting killed. Hedge funds don't generally own the stocks that trade at 50 times earnings. These are generally stocks that large mutual funds like Fidelity and Janus own.

Defying Logic

Every rally in the past few months has been pinned on the hopes that the ECB might wake up and realize they are the only possible buyers of peripheral debt. The ECB criticized peripheral nations for not doing enough in terms of austerity. It was not irrational to read between the lines and assume that in turn for austerity the ECB would lend a helping hand. Not only did the ECB not help but they lowered their bond purchases to next to nothing last week. They actually helped less in return for austerity

ECB officials are spouting utter nonsense on a daily basis. Their statements are the equivalent of saying that water is not wet. We are stretched on the downside so it is very possible that we will see a snapback rally. However, it is difficult for me to imagine the type of rally we have seen in recent months unless the ECB acts. Nobody is going to believe the ECB will act until they do. The boy has cried wolf one too many times.

I have been moving between a moderate to aggressive net long position in recent months. At the extremes I have become more aggressive and I have lightened up into rallies. I currently stand at a medium sized net long position and I am a lot more hesitant to increase my longs. Hopefully, this hesitancy is a good contrary indicator as I would still much prefer a higher market.

Guten Morgen

Futures were rallying overnight until German ECB member Jens Weidmann comments started to hit the newswires. Among them were:
ECB's Weidmann says losing AAA rating is not the end of the world

ECB's Weidmann opposes boosting bond buys, coy on IMF


Weidmann:Preventative Intervention Via Bond Buys Unproductive

Weidmann Says Don't Think Aid Program Is Needed For Italy

The Euro promptly toppled and our futures followed when these headlines hit. The ECB continues to ignore reality with its idealism. This will likely change but the only question is how much damage needs to be done first. We should be approaching a rally shortly but it will be difficult for it to progress much as long as the idealism from the ECB continues.

I am remaining at a medium sized net long position because I believe the ECB will ultimately do what is necessary to stop a meltdown. However, in order to get more aggressive I would like to see them actually do something or I would like to see more extremes in the market.

Level Of Frustration

My level of frustration with Europe is very high. Everybody seems to know what the answer is except for the ECB. They must aggressively purchase peripheral bonds. That is the only solution other than allowing the system to implode and let the chips fall where they may.

Assuming that we continue in this state of limbo, we are likely to be stuck in a trading range. Another down day tomorrow would likely be a decent entry point for a long trade within our range. At the end of tomorrow we will no longer be overbought, short term sentiment has turned negative and we are getting stretched on the downside. Have a good night.

Dumb and Dumber

We have had nothing but bad news in recent weeks out of Europe, yet we are sitting within spitting distance of recent highs. The market clearly wants to go higher but the news out of Europe is making it nearly impossible. The market is looking for any signs of a clue out of Europe in order to take off.

Banks are being told delever in Europe. This means they have to sell assets, regardless of what measures governments are taking. It does not matter what budget Italy puts in place or what austerity measures it takes. Banks still need to sell assets. That is the reason sovereign spreads continue to blow out. There are simply no buyers for these assets (in the size necessary) other than the ECB. Everybody seems to realize this except for the ECB themselves and some German lawmakers.

The peripheral countries have agreed to the measures Germany and the ECB have asked for. It is time for the ECB to act. I apologize for the late posting but I don't know how many times I can repeat the same thing. There is simply nothing new to say. Hopefully, something will change soon but I'm not holding my breath.

Ignoring The News

Longtime readers of my blog may have noticed a difference in recent months. I used to rarely discuss the news or economic number of the day. I believe most of the time the news is just noise and it is better to focus on the various indicators I track.

In recent months I have done an about face and have spoken extensively about the situation in Europe. On days where the ECB decides not to buy peripheral bonds, spreads blow out and we go lower. When the ECB decides to intervene we go higher. While the indicators have worked well at the extremes, in between it has been all about Europe.

Many prefer a pure fundamental or a pure technical approach. There are dangers in mixing the approaches as confirmation bias comes into play. It is much harder to be objective when mixing approaches as if one does not find the data they are looking for in one approach they can look to the other.  I have kept this in the back of my mind at all times and try not to let this happen.

Wrote CVS puts

I wrote the January CVS 37 Puts naked.

Good Morning ECB

The ECB has finally stepped into the market today and peripheral yields have come back in although they are still wider on the day. As long as spreads hang in we have likely seen the bulk of the damage for the day.

The chart below from Bloomberg depicts today's roller coaster in Italian ten year yields.


The ECB only bought 635 million Euros of sovereign debt last week. That is far below the pace they have been buying at.  I find this action incomprehensible, given that EU countries are doing exactly what is being demanded of them. The ECB seems to be on a kamikaze mission to topple the Eurozone into a depression.

Europe, Europe, Europe

I believe that the market is poised to rally if we can get a reprieve  from the European woes. Sentiment is neutral, seasonality is positive and investors as a group are conservatively positioned. I don't believe we need to see a solution out of Europe for a rally, just some quiet for a little while.

Unfortunately, the EU summit brought more of the same. The Germans managed to squeeze more austerity and budgetary controls out of EU nations in return for more rescue plans that have no way of getting funded. The tricky part of analyzing these rescues is that the ECB has the power to aggressively intervene in bond markets. It was not unreasonable to believe that in return for further budgetary discipline, the ECB would intervene more aggressively. This is not the case as the ECB is allowing spreads to blow out again today. Further complicating the issue is the fact that every time we face the abyss they finally do intervene, but just enough to keep us in limbo.

In the short run we are overbought and will remain so through Wednesday. The overbought reading will likely put a lid on the upside in the early portion of this week. While the very short term might be challenging, I believe that the odds favor the bulls in the coming weeks. However, if the situation in the EU does not improve it will likely be a rally to sell into.

Momentum Funds

Hedge funds are having a terrible year. While they are loathe to admit it, most hedge funds run a momentum strategy. De-risking when things look bad and re-risking when things look good is a momentum strategy by another name. They like to call it risk management but it is momentum.

In many cases it is not the hedge funds fault as clients split at the first sign of any draw down. Taking a stand becomes a life or death gamble for a hedge fund. I know a few people that recently have started hedge funds. I have been told that nearly every prospective investor wants to know about risk management strategies. My risk management strategy is to buy cheap. That type of answer would not fly with most institutional investors. They want to hear about stop losses and other strategies that essentially turn a hedge fund into a glorified momentum fund.

I believe that a primary reason for the volatility we have been seeing is that there are so many momentum strategies out there. While the news flow has been volatile the moves get amplified by momentum strategies. This volatility offers excellent opportunities for value investors who use prices to their advantage or mean reversion traders who buy at points of pessimism and sell at optimism.

Tricky Juncture

The market is at a tricky juncture in the short term as I can make both bull and bear cases. The short term bear case primarily hinges on the fact that we will be overbought at the end of today, although it won't be a great reading. A lot of the remaining bears are likely being squeezed out today as they have been looking at this EU summit as a catalyst and it has failed. Nothing has really changed in Europe to merit optimism and Europe should continue to be a drag.

The bull case is that with the big, bad event out of the way we can finally enjoy the positive seasonality. The Santa Claus rally could be exacerbated by the fact that so many are under invested. The supply/demand equation greatly favors the bulls as corporations are aggressively repurchasing shares while the window for IPOs and secondaries closes towards the end of the year.

Withholding Judgement

The only good news coming out of Europe is that expectations were so low for any results that we are seeing a "buy the news" reaction. In the short run the extreme selling we saw yesterday and high level of pessimism towards a solution in the EU should buffer the downside. It is important to remember that the EU has come close to the abyss but has intervened before the Armageddon scenario was allowed to occur. Now that they have wrung out every concession they have been looking for from member states, it is even more unlikely they will allow the Armageddon scenario to occur.

Today's news was not inspiring, even with very low expectations. I will withhold judgement until next week when we get the full details of the plan and see how aggressive ECB actions are.

Vacation Over

The market has given me quite the welcome back. Thank you Ms. Market for at least allowing me to enjoy my vacation.  I believe that the late day swan dive has lowered expectations for tomorrow's EU summit to nothing. While we could see a little more downside, I believe the bulk of this move lower is over. Have a good night.

Not Again

We have seen a familiar pattern since early August of ~10% rallies followed by ~10% declines. This current move looks like the beginning of all the other 10% declines we have seen. If history repeats we will move lower in pretty much a straight line.

I don't believe the pattern will play out this time. I don't believe we have seen the same level of exuberance as previous times. There is an almost unanimously negative view heading into the EU summit that has kept sentiment from reaching an extreme. Additionally, there are only so many times people can panic in anticipation of a catastrophic event. While I could see another down day I believe the decline will be short lived.

Amgen Tender Period

Amgen outperformed greatly during its tender period, as the statistics said it should. Logic also dictates that a company that repurchases 10% of its shares in one fell swoop should perform well. Despite this no less than 3 analysts downgraded Amgen during the tender period. More remarkable, in addition to downgrades Amgen received other bad news during this period and still managed to outperform.

I sold my shares early but was able to profit off of the tender offer. I find it amazing what nonsense people trade off of, yet when there are situations like this where the odds clearly favor a trade they are largely ignored.

Clearheaded and Murky

I return from my vacation refreshed and clearheaded. Unfortunately, the short term market outlook is still a little murky. I believe the intermediate term outlook still favors the bulls, which is keeping me at a medium sized net long position.

In the short term we are becoming overbought. A rally into the weekend would make us overbought, although it would not be a great reading as we have chopped around for the past week. Sentiment has turned bullish but is not extreme. The EU has yet to put forward any viable solutions making us dependent on vague statements. The short term seems like a coin toss to me.

Looking a little further out, I believe the odds favor the bulls. The biggest positive the bulls have going for them is the continued strength in corporate profits which has led to share repurchases and cash M&A. As long as this continues it is difficult to imagine much downside. Large market participants such as hedge funds are under-invested. If they ever decide to return to more normal exposure levels there will be a lot of money coming into the market. Seasonality is especially positive this month and continues to be so in January.

I don't want to belittle the intermediate term risks. Europe is slowing down. Taxes will likely rise in the US just as fiscal stimulus is removed. However, these effects are unlikely to be felt for a couple of months and I will put greater weight on them as we move out in time or as market participants turn more bullish.


What Im Observing

This is what I'm observing today.

Capital Observer On Vacation

I am going on vacation and will return on Thursday, December 8. I am maintaining a medium sized net long position. Have a great weekend.


My portfolio is actually down quite a bit today, even though I am long and the market is higher. Throughout the year the defensive nature of my holdings has helped me, but it is killing me today. Defensive stocks are underperforming while financials are going through the roof.

This market has been a consensus killer all year. The most hurtful thing this market could have done is rally the financials at the expense of everything else. While it is hurting me, I cannot help but admire how sneaky this market is.

Pullback Risk

Even though I see a decent risk of a pullback I am not looking to reduce my medium sized net long exposure. I am willing to sit through a pullback given the improving news out of the EU. I have sold out of too many good intermediate term positions looking for a short term pullback.

Day Five

Today is the fifth trading day of the rally. Longtime readers know that I believe it takes about ten trading days before a strong rally gets exhausted. That does not mean we will not have pullbacks along the way. I would not chase this rally if we have another big up day today, as I would be very surprised not to see a pullback or at least some consolidation early next week.

Sentiment has vastly improved from where it was a week ago. That said, we are not seeing giddiness yet. Market participants have been burned so bad recently chasing moves that I suspect they are distrustful. If we do see a pullback early next week followed by a rally later in the week I suspect we will see some giddiness right around the time the market gets overbought.

From a fundamental standpoint the news from Europe is improving. The ECB has been active in the sovereign debt market for three days in a row. The rescues being reported involve the ECB and aren't immediately being shot down.

Why I Bought BMC

I have been holding a position in CA Technologies for about a half a year. During this time I have become familiar with one of their competitors, BMC. When I was building my CA position, BMC traded at a roughly 30% valuation premium to CA, even though it only offered slightly better growth. Since then BMC has fallen by 30% and now only trades at a slight premium to CA.

Like CA, BMC has a mainframe business and some growth businesses in cloud and virtualization. BMC billed itself as a cloud computing company and attracted growth investors who are now fleeing after disappointing growth. BMC now trades at less than 7 times forward free cash flow (excluding net cash). That is a dirt cheap valuation and they are aggressively repurchasing shares.

BMC's CEO spoke at a conference on Tuesday. We are two months into the quarter and the CEO said growth is on track for the quarter. It is unlikely that we will get another disappointment in the near future. I started a position in BMC yesterday as the valuation is compelling. The cheap valuation combined with an aggressive share repurchase plan should keep the downside in the stock limited. I believe a conservative fair value for BMC is in the mid forties.

Giving The Rally A Chance

I was not very impressed with the announcement yesterday from central banks on dollar swaps. The coordinated move had a lot of bark but little bite. At current borrowing rates Italy is insolvent regardless of whether there is a dollar shortage or not.

The good news is that ECB has been defending peripheral yields since yesterday morning. Yields on the Italian ten year bond have fallen by over 50 bps since yesterday morning. We have seen the ECB defend peripheral yields before only to back down and let them soar. It will be very important for the ECB to keep this up.

While a consolidation might be in order there is no reason the current rally cannot continue. We will not be overbought for a while as the rally is only three days old and sentiment is still skeptical of a rally. This can turn out to be another rally to sell or the start of a bigger move. I believe the key will be the actions of the ECB. If the ECB continues to intervene and lower peripheral yields or a plan that includes the ECB is announced we should continue higher. If the ECB steps away and more plans with no funding are announced than this is likely just another rally to sell. I will give the bulls the benefit of the doubt until we are closer to an overbought reading.

One More Thing

One more thing. I sold the balance of my Amgen position and bought BMC. Will give a more detailed explanation tomorrow.

Closing Thoughts

The short term is a tough call as the S&P 500 is already up by nearly 90 points this week. That is the type of move we usually see during a quarter, not three days, making it very tough to chase. At the same time it seems that the crowd has been caught completely off guard by this move. We are not yet overbought (time wise) as the rally is only 3 days old and sentiment is not extreme.

I have moved this week from being positioned aggressively long at the beginning of the week to having a medium amount of market exposure now. I would really like to see a more definitive plan out of Europe given how far we have come. Have a good night.

Sold 1/2 of Amgen Position

I sold half my Amgen position. I remain bullish on the name. According to Goldman Sachs research, stocks typically outperform by about 2% in the week heading into a tender offer. The Amgen tender is December 7. With this move I have roughly reduced my net long exposure back to where it was before last week.


I believe the coordinated action of Central Banks is meaningless in and of itself. This crisis will not end until the ECB prints money. They might print by lending to the IMF or EFSF and calling it something else, but print they must. Maybe this is a signal to the market that they will do what is necessary but the crisis is not over.


The Song Remains The Same

I have not posted much today because my viewpoint has not changed. I am confident that EU leaders will not allow the Armageddon scenario to occur. The only question is how long they will procrastinate. One would think they would want to have this resolved before Christmas.

I reduced my net long exposure in case there needs to be another scare to get EU leaders moving. I still have a healthy net long exposure. Seasonality and the oversold reading are short term positives. Now we need to see some real progress and fewer statements and meetings. Have a good night.


Slowly Selling

I am slowly selling down net long exposure added last week. I am remaining net long, just not as aggressively.

Buying Time

The bulls have some time due to the oversold reading and extreme negative sentiment we saw late last week. That does not mean we will not see any weakness this week, only that weakness should be limited. I would be surprised to see us fall apart the way we did last week.

Tactically, I will look to ratchet back my net long exposure into strength (after raising it last week) as long as there is no progress in Europe. I believe that ultimately Europe will do whatever it takes but there does not seem to be a sense of urgency. It might require another scare in order to get the EU to act. As such, once we are no longer oversold there is little justification for being aggressively long.


It is not quite a shocker that the worst Thanksgiving week since 1932 has led to a rebound. I would be surprised if the market did not try to rally some more during the balance of the week. A deep oversold reading such as the one we just had should be good for at least a few days. If European politicians can come up with a more concrete plan that involves the ECB we should see more than just an oversold rally. Have a good night.

Nothing Has Changed

There were no ground breaking changes this weekend in Europe. The position of Germany still is that they are looking for EU governance over national budgets. Germany will need to give something in return, likely dropping their objection to ECB involvement. None of this is news.

Thankfully, Angela Merkel has not held a press conference yet  today telling everybody to go to hell. But other than that all that has changed is the mood. Sentiment became too negative last week and we are oversold. These excesses now being relieved. If we do not see real progress in Europe than I will likely look to reduce positions later this week. By progress I mean a plan that involves the ECB.

Partial Profits

I took partial profits on last weeks adds by writing naked weekly SPY Calls.

Paid To Suffer

The stock market does not trade cheaply when there are sunny skies and few worries. If one wants sunny skies one has to pay for sunny skies. The time to get bargains is when everybody is well versed in the woes of the world. The only way to make money this year has been to buy when the world was ending or short when the outlook has been sunny.

My philosophy towards the stock market is that I get paid to suffer, both in my market timing and individual stock selection. I generally buy stocks that people hate, especially Wall Street analysts. I generally buy during times when the market outlook is dark. Most of the time my positions start out a loss for me as I buy into negative momentum.

I don't believe that I get paid to be comfortable. I get paid to suffer. Last week, I added quite a few positions  into the carnage. There was no reason to buy and nary an uptick. It was not comfortable as I felt exhausted and sick at the end of each day even though I sit at a desk. This morning it appears as if I will be looking at a profit on even my worst buy from last week.

My experience from last week typifies my experience in the stock market in general, although to an exaggerated degree. Many say that trading is easy. Just follow the trend and cut your losses quickly. I could never figure out how to do that. The only way I know to make money usually involves a lot of suffering.


Turkey Day

The events in the EU continue to be a disaster. There is no other way to describe it.  The good news is that we will be oversold at the end of the day on Monday. Even during these treacherous last few months oversold readings have led to rallies. Have a great weekend.

Walgreen's Is A Deal

On Wednesday, there were rumors of an Express Scripts deal with Walgreen's and Walgreen's surged.The stock is continuing higher today. While there has been no confirmation of a deal there has been no denial either.

Walgreen's is an important position for me as I own both stock and calls. There has been relentless selling in the stock as it has absorbed brokerage downgrade after downgrade. A former bull called the stock uninvestable. I find that statement incomprehensible. In a worst case scenario where Walgreen's does not make amends with Express Scripts the company should earn $2.75 next year. Trading at twelve times a worst case scenario and a nearly 3% dividend seems very investable to me.

A deal makes sense for both Express Scripts and Walgreen's and I believe this is the most likely outcome. Walgreen's is the most successful pharmacy in the US and Express Scripts is the most successful PBM. They did not become that way by cutting their noses off to spite their face. I still see a deal as the most likely outcome, but even without a deal Walgreen's has a margin of safety.

Just Print It

Everybody knows what the answer to the problem in Europe is. The ECB must print a couple of trillion Euros and purchase PIIGS debt with it. There are no other buyers for these bonds as banks are delevering and private investors have no interest. Even the Vatican made a statement saying this is the only solution.

Yesterday, at a press conference Angela Merkel offered no remedies to the crisis but made certain to shoot down every possible solution. The most astonishing part was that Sarkozy and Monti stood by in agreement. I might believe that Merkel is this clueless but to believe that Sarkozy and Monti are as clueless is impossible. The most likely explanation is that they are playing along with Merkel until she can convince her supporters that she has tried every other route.

The choice is simple, print money or allow the Eurozone to break up. I have a hard time believing that the Europeans will give up on the Eurozone without even trying. The only question is how much more blood needs to flow first.

Who Wants to be Long With Europe Open

It seems nobody wants to be long heading into Thanksgiving with European markets open both tomorrow and Friday. This likely means that it will take really bad news to send us down on Friday as everybody is hunkered down. The only way to make money this year has been to buy into nastiness and its pretty nasty out there. I added quite a bit on the long side and hope I'm not the Thanksgiving turkey come Friday. Have a Happy Thanksgiving.

Walgreen's Rumors

There are rumors swirling about a Walgreen's settlement with Express Scripts. I hope its true as I have a healthy position in Walgreen's and believe the stock is worth over $40 with a settlement. CVS plunged on news of the settlement. I wrote the January $37 CVS puts as I believe CVS is worth over $37 regardless of the Walgreen's dispute. I sold my CVS position a few weeks ago when it popped above $38.

Added To Vodafone

After trimming my Vodafone position a few weeks back I have added to it today. At a greater than 8% dividend yield and greater than 10% free cash flow yield its difficult to see how one loses in the long run with this stock.

Sentiment Is Finally Extreme

Despite the huge drop in the past week many were looking for a bounce. Until this morning. Sentiment seems to have taken a turn for the worse this morning. There is heavy put buying and lots of gloom and doom. Sentiment might be extreme enough to lead to a Thanksgiving rally.

Assuming The Worst

My belief has been that when push comes to shove the EU would not allow a collapse to occur. I have clearly underestimated how bad the EU would allow the situation to get before acting. If the EU acts forcefully we will be off to the races. However, this post will look at what happens assuming they continue to twiddle their thumbs.

Even during the worst crises there are rallies. The market typically needs to get maximum oversold for a rally to occur during market turmoil. That will occur at the end of the day on Monday. We could be looking at another three down days before a rally by that measure. That said, it is fairly unusual  not to see a bounce before we reach maximum oversold. We have yet to see a bounce during this decline so a bounce is not out of the question before reaching maximum oversold.

I have clearly been wrong by buying into this decline way too early. My plan is to tough it out until we get a bounce at which point I will likely cut positions if the EU still has their thumb up their ...


Carl Icahn or Wall Street Analysts

Amgen and Gilead both fall into the large cap biotech value category. Recently, they have taken divergent paths as Amgen is returning capital to shareholders by initiating a dividend and a $5 billion tender offer. Gilead, on the other hand, announced an $11 billion acquisition of a company that won't show profits until 2015 and suspended share repurchases. Wall Street analysts loved Gilead's takeover and there have been too many upgrades to count. Amgen has been downgraded three times since their tender announcement.

Gilead started aggressively repurchasing shares last Summer at $32. Analysts hated the stock and the downgrade parade began. Since then the stock jumped to over $40, outperforming both the market and its biotech peers by a wide margin. Yesterday, Gilead reversed its strategy and the stock gave up nearly half its gains since last Summer. Analysts loved the move and the upgrade parade began.

Carl Icahn recently won a board seat at Amgen. His fingerprints are all over this tender offer as it is the same strategy that Biogen underwent, another Icahn investment. Amgen will trade at a little over 9 times forward estimates after the repurchase. Analysts hate the strategy and are downgrading the stock to no end. They believe Amgen should make large acquisitions rather than returning cash to shareholders.

Carl Icahn's motivation is to make a profit on his investment. Analysts motivations are questionable as i-banking does not make money when cash is returned to shareholders but makes a fortune on takeovers. Who do you trust, Carl Icahn who made a fortune over the course of his life or Wall Street analysts who never managed money and are conflicted?


Set Up For A Bounce But ...

The S&P 500 is set up for a bounce after dropping by 70 points in four days. That type of decline almost always leads to a short term bounce. Unfortunately, the news coming out of Europe keeps getting worse.

At current borrowing rates half the countries in the Eurozone are insolvent. Instead of trying to solve the problem, German officials make inflammatory statements on an hourly basis. I have been of the opinion that it will likely take a crisis but ultimately EU officials will act. The crisis is here and thus far we are not seeing any action. The longer they wait, the greater the action that will be required.

The Barton Biggs Indicator

The Barton Biggs buy signal just went off again. It picked the bottom this Summer and last within a couple of percent. Barton Biggs is generally bullish. When he turns bearish it usually means sentiment is at an extreme. From Bloomberg:

A Value Investors Nightmare

Gilead's $11 billion takeover of a money losing company is a value investors nightmare. Gilead had all the makings of a value investment. It was trading at less than 9 times next years earnings and management told investors they were going to return cash to shareholders via repurchases. Many of the top holders of the stock are value investors and the stock has been coming up on many value screens.

Gilead's $11 billion takeover will not allow them to repurchase shares any longer. Even though the stock now trades at less than eight times next year's earnings who is to say that management won't do the same thing again. Value investing is not as simple as finding cheap companies. One must also be confident management will not squander the money.

Normally I look for companies whose plan it is to return cash to shareholders. The tricky part of Gilead is that this was management's stated plan. I was actually considering buying Gilead this weekend based on Amgen's tender in two weeks. I decided to buy Amgen this morning based on the fact that Carl Icahn is on the board and it is likely the safest way ensure against dumb takeovers.

Long Amgen

I have taken a long in Amgen. The stock has completely given up its gains after announcing a $5 billion tender offer for its own shares, which expires on December 7. Gilead announced an $11 billion cash acquisition in the biotech space today which should boost the sector as well.

Rydex Traders About Face

I have been mentioning the Rydex trader positioning as the most worrying indicator recently. On Thursday and Friday Rydex traders did an about face and positioned themselves much more conservatively. With permission from SentimenTrader.com the Rydex charts are shown below. While not at the levels seen this Summer Rydex traders have pulled back greatly in the past couple of days. They are now positioned quite conservatively compared where they have been the past couple of years, except for at the extremes of this Summer and last.

The chart below of traders using Rydex leveraged funds is close to where it was this Summer.



Heading Out

I am heading out for the weekend. Given that the ECB has stabilized the sovereign debt markets and that the S&P 500 has already dropped by 30 points, I would be surprised if we dropped much more today. We are likely close to our low for the week. Have a great weekend.

The Bare Minimum

At the beginning of the week I raised my long exposure for two reasons. Seasonality is strong between now and the end of the year. Next week, the week before Thanksgiving, is the seasonally strongest week of the year. The second reason I raised my long exposure was that I believed Italy would be rewarded by the ECB for passing austerity measures and appointing Mario Monti.

I was clearly wrong in assuming that the ECB and Germany would soften their stance after Italy did exactly what was asked of them. This morning, the ECB is once again doing the bare minimum as Italian ten year rates are only slightly lower than yesterday after blowing out the first half of the week.

I realized yesterday that the ECB was dithering and could have exited my new longs at a small gain. I told myself I would exit at the  end of the day as I wanted a little more. We now sit nearly 30 S&P points lower and I now have a lot less.

At this point we are near the bottom of the recent range and I am not going to compound my mistake by selling here. I will look to use strength in the coming days to dispose of the longs I recently added. I plan to remain moderately long but unless the ECB acts more forcefully a more aggressive stance is uncalled for.

The Excrement and The Fan

It seems that we are reaching a critical point with sovereign spreads blowing out and markets beginning to unravel. The ECB will have  a simple choice in the coming days a) buy like mad OR b) allow the system to melt down.

I believe the ECB will choose to buy like mad. Italy heeded the ECB by passing austerity measures and putting Mario Monti in charge. Greece passed austerity measures and backed off their referendum. Everybody did what was asked of them. The ECB has no excuse not to step in. Have a good night.

Stuck In A Range

The indicators I look at point to a mixed picture in terms of sentiment, while seasonality is a major positive. The Investors Intelligence numbers were a positive for the bulls until now, but an increase in bulls and decrease in bears this week has turned this indicator neutral. Normally, neutral sentiment at year end is a positive but I believe the worsening situation in Europe offsets this.

The S&P 500 has been stuck in a range for the past few weeks between 1220 and 1290. I believe it will be very difficult for the bulls to break out of this range without some sort of a  resolution in Europe. I also believe it will be difficult to break down because when push comes to shove the EU will intervene.

My plan is to trim positions towards the top of the range and add closer to the bottom, while maintaining a net long position. The reason I want to maintain a net long position is because ultimately I believe there will be a rescue. Just don't hold your breath.

Print or Die

The news has been terrible for the past two days as sovereign spreads are blowing out. Safer countries like Austria and France are seeing their spreads blow out as well. Despite all this the market is hanging in and is still within spitting distance of recent highs.

The market clearly wants to go higher but there is a limit to what it can do with the news so negative. We are nearing the point where the ECB will have to choose between printing or letting the EU disintegrate. There are clearly no buyers for sovereign debt and the problem will not get better by wishing upon a star. I believe they will choose to print but call it something else. Have a good night.

Lowes VS. Home Depot

Home Depot trades at a greater than 20% premium to Lowe's on both a forward free cash flow multiple and forward EV/EBITDA multiple. Home Depot has been showing same store sales 3% better than Lowe's for the past year.

For the coming quarter Home Depot is guiding to same store sales less than 1% better than Lowe's. It seems the companies are beginning to perform more inline. In addition, Home Depot is slowing down its repurchase while Lowe's is accelerating its repurchase. Here is a link to Bill Ackman's slides on Lowe's. (hat tip Barbarian Capital)

Psycho Killers

I thought the ECB was being calculated last week when they allowed Italian spreads to blow out. As spreads were blowing out they said they would not continue to buy bonds unless there was reform. It seemed like they were strong arming Italy into reform. They got their way as Italy passed austerity measures and PM Berlusconi handed the reins over to Mario Monti.

I expected the ECB to defend spreads this week as a reward for reforms but spreads continue to blow out and the ECB continues to be reactive. I have come to realize that there is no method to their madness. They are simply waiting until Europe is on the edge of the abyss to react at which point they do the minimum to save it. The ECB, especially hawks in Germany, do not understand a simple concept. If banks try to delever and sell trillions of dollars of debt somebody needs to buy that debt. All the reform in the World will not buy that debt.

There are some pieces of good news in this. It is unlikely that Europe will be allowed to fall into the abyss at this point. The other piece of good news is that we are once again nearing a crisis point so this will likely spur the EU and ECB into action very soon.


Everybody Has Figured It Out

We have had a recurring pattern recently of news that "Europe Is Saved" leading to failed rallies. It seems that investors have learned their lesson and are instead selling today's "Europe Is Saved" news. We are seeing a lot of put activity as investors are betting on a return of turmoil. I believe the heavy put buying on such a small drop means that the downside is limited.

Like What I Heard

The Lowe's conference call was music to my ears:

  • Sales seem to have stabilized.

  • They are slowing down expansion and focusing on improving current stores.

  • They are returning more cash to shareholders via repurchases.

I believe management at Lowe's are taking the right steps and have faith that the valuation gap between Lowe's and Home Depot will continue to close. The valuation gap has shrunk by over 7% since I put the trade on. I am pressing my bet and believe there is at least 20% more.

Now Longer

I added to my net long position this morning . A couple of weeks ago I reduced my long positions into strength. I have used the recent weakness to add to positions.

Bulls Advantage

I learned the hard way time and time again that it rarely pays to fight the market at this time of the year. In the past 10 years the market has not been down once in the period between Veterans Day and New Years. There are some negatives but not enough to tilt the odds in favor of the bears.

There are some worrying signs in sentiment such as Rydex trader positioning and the AAII survey, which are showing high levels of bullishness. However, more broadly the sentiment indicators are not showing excessive bullish sentiment. The 10 day moving averages of the put/call ratio's are showing high levels of puts.

We have seen higher levels of insider selling, IPO's and secondaries in recent weeks. This supply of new stock does not help the market but is pretty typical after a strong rebound. High levels of share repurchases and cash M&A help offset this supply.

I believe the appointment of Mario Monti as Italian Prime Minister takes the worst case scenario in Europe off the table for now. This should appease the hawks in Europe and buys Italy time. I believe the path of least resistance and maximum frustration is higher.

This Is Huge

I believe the appointment of Mario Monti is a watershed event. With Monti's appointment Italy is giving into the demands of the EU. There are no more excuses not to save Italy. I don't know if this is a kick of the can nor do I care for now. The worst case has been taken off the table for a while. This should buy the EU at least enough time for a year end rally.


The market is providing huge swings both up and down. Many are complaining about the  market but I prefer to take advantage of these opportunities. I like to complain as well but I just complain that I'm tired at the end of the day. If the market were efficient I would not have  a job and you would not be reading this blog. Have a good night.

Covered Calls

I have written covered calls expiring next week against my adds from Wednesday. We are coming up against the top of the range.  The top of the range should be a  hard nut to crack.

Confounding Market

Last night I wrote that a down day today would set us up for a nice rally next week. Of course this market does not want to make anything easy and we are rallying this morning. I still believe the bulls have a slight edge next week given the oversold readings. Some of the excess bullish sentiment has been worked off in the past couple of days as well.Far few people are calling for a year end rally, which is a good thing.

If we rally next week towards the upper half of the range I believe the odds would shift back to neutral. I would want to assess sentiment at that point to see where we stand to ultimately make a decision.

Trading The Odds

I recently came across a blog called Trading The Odds. It is a great free resource.


After a nasty day like yesterday there is generally a rebound, which is what we have seen today. I don't have a strong opinion about where we will go next but a down day tomorrow would set us up for a rebound next week. At the end of the day tomorrow the put/call ratio will give us an oversold reading as well.

The sub-story today has been the complete carnage in many momentum favorites. The 39% drop in Green Mountain Coffee carried over to many other momentum names. Growth managers are having a very difficult year and there is a danger of a puke-fest. Have a good night.


Still Long Lowes

I remain long Lowe's and short Home Depot based on the fact that on a forward price to free cash flow basis Lowe's is 30% cheaper. In the past two days both Bill Ackman and Barry Sternlicht revealed that they are long Lowe's at investment conferences. These are not the first value investors I have heard about that are buying into Lowe's. Both Lowe's and Home Depot report earnings next week.

The Prop Desk

Prop desks were the largest players in the merger arb world up until recently. Both in the US and Europe proprietary trading has been cut back drastically. This has left meaty spreads on larger deals where there is simply not enough money to close the spreads.

The Goodrich deal offers a 4% spread and the deal is very likely to go through. In years past this deal might have been going at a 1%-2% spread. I am long Goodrich.

More On Oversold

I received a lot of questions yesterday about the upcoming oversold reading. The reason we will be oversold at the end of the day today is because we will be dropping the last big number off of the 10 Day moving average of the NYSE Advance-Decline line. Today, we drop the big day after the European Summit, where the S&P 500 surged over 40 points. In the early part of next week we will drop some very negative numbers.

The oversold reading is not registering big on the charts, largely because a lot of the downside was seen in a small number of days. If breadth is flat today the reading would be -200, which doesn't seem very oversold for a 50 point decline in the S&P 500.

The reason I believe the oversold indicator works is that after 10 days of the market mainly going down many give up hope. I saw a big change in sentiment yesterday. I have been saying we would be oversold today for a week now. Yet, after a huge drop yesterday suddenly many took issue with this. While the oversold reading is not great, it is oversold no less.


Added Exposure

I added some more  long exposure late in the day as we will be oversold at the close tomorrow. My plan has been to slowly add exposure as we approach the oversold reading, which is exactly what I have been doing.

Unfortunately, the only way anything gets done in Europe is when they are looking into the abyss. Ultimately they are unlikely to allow the system to implode but that doesn't mean markets won't need to freak out first. Have a good night.

Trading Places

I originally bought CVS in March when the stock traded at around $33. At the time Walgreen's traded at about $42. CVS was by far the cheaper stock but Wall Street loved Walgreen's and hated CVS. The explanation they gave was the quality of management.

Fast forward to today and the stocks have traded places. Now Wall Street loves CVS and hates Walgreen's. I am once again focusing on the valuations and taking the other side of Wall Street.

Added To Walgreens

I have added to Walgreen's this morning. This is both a call on the stock and the market. Walgreen's was downgraded again . I believe the Express Scripts news is baked in at this point and we are nearing some sort of a capitulation point. Additionally, as I wrote earlier we will be oversold tomorrow. I will be looking to leg into the market on weakness.

Heading Towards Oversold

Tomorrow will be the tenth day of this correction, which means we are nearing an oversold reading.  At tomorrow's close we will be oversold for the first time since early October. Typically the first oversold reading after a strong move higher is buyable. If the market were to decline through tomorrow, it would set up a decent risk/reward trade and I would likely increase my long exposure.

If there were any doubt  yesterday about Italy needing help from the EU, that doubt is gone today as Italian bond yields are trading well above 7%. It was a matter of time before we reached this point. We are now likely to see the EU demand reforms in exchange for a bailout. There is likely to be a song and dance but at the end Italy has little choice.

You Know What To Do

Time to dust off last year's year end playbook. In case you forgot:

Vodafone A Long Term Value

Vodafone produced solid earnings today in a tough European environment. I believe this shows the recession resistance of the business. I don't believe people will part with their cell phones en masse no matter how bad the economy gets. A cell phone is a necessity these days and not a luxury.

Vodafone trades at a 10% free cash flow yield and at almost an 8% dividend yield despite the durability of the business. I am not selling any of my position and will look to add on weakness.

Italy Coming To A Head

It seems the situation in Italy is coming to a head (no pun intended Mr. Berlusconi), with the Italian 10 year at 6.77%. Italy is bankrupt at these interest rates and now needs the help of the EU. It is only under these conditions that there is a chance for reform in Italy. The stakes are high as  a move to reform will likely be greeted by a big rally. While a continued game of chicken will likely be unpleasant for markets. I believe Italy will ultimately choose reform. Hopefully, soon.

Not A Perfect World

The current setup in the market is far from perfect. There are numerous issues that are bothering me. It seems short term sentiment among traders is a little too bullish. Rydex traders added yet again to their longs yesterday and are positioned quite aggressively. Short term market timers as measured by the HNSNI are very bullish. Italy has yet to agree to the reforms that the EU is asking for. Government spending in the US  is set to decline in the coming months. I could go on but you get the picture.

There are many issues that bother me. With that said, I believe the market is more likely to head higher than lower into year end. Seasonality is strong at this time of year. While that may seem simplistic, seasonality works more often than it doesn't. Hedge funds are under invested, underperforming and my sense is that they are getting very anxious and are about to chase. Corporate profits are holding up and corporations are repurchasing stock and engaging in cash takeovers. Amgen initiated a $5 billion tender offer for its own shares yesterday.

The economic outlook is scary. But the stock market is not the economy and at the present I believe they are headed in opposite directions. I remain bullish and worried.

Lucky Break

It looks like I added to my long exposure at precisely the right time. I had no clue we were about to rip higher. I thought a decline on the seventh day of a correction was probably a decent point to start adding some long exposure. I believed we would see lower prices but prefer to leg into positions in case I'm wrong. This is a perfect example of why I leg into positions. Have a good night.

Slightly Longer

I am slightly longer now than I was coming into the day. We are now on day seven of this correction and while we could correct more I believe the bulk of the decline is now behind us. I will look to add more if we correct further this week.

Why I'm Sticking With Walgreen's

Thus far I have been dead wrong about Walgreen's. I thought they would have settled by now with Express Scripts and they have not. However, at this point I believe the stock is pricing in a worst case scenario.

The street low estimate for next fiscal year (August 2013) earnings is $2.88. Before the Express Scripts dispute analysts were expecting $3.50. Even if this worst case scenario comes to pass the stock is now trading at a 12 multiple to a worst case scenario. Walgreen's also pay a 2.7% dividend.

Before the dispute Walgreen's traded as high as the the mid forties.  The stock is now at a reasonable multiple to worst case scenario earnings, with a free call option embedded in the case where the dispute is settled. I still expect the dispute to be settled.

Sold CVS

I have sold my position in CVS as it has had quite a run but remain long Walgreen's in the drugstore sector. I covered some shorts to maintain my net long exposure

Still A Mixed Picture

The picture continues to be mixed from both a fundamental and technical standpoint. The good news is that we might get a resolution this week on both counts. Longtime readers know that I believe corrections are largely a function of time. Today is the seventh day of the correction, so if the correction continues through Thursday we will finally be oversold. If the correction continues that long we might see some of the stubborn bulls give up and relieve the overly bullish short term sentiment as well.

Spreads in Italy are blowing out again this morning and we are nearing the point where Italy will not be able to access capital markets. While this might seem like bad news, it is only under these conditions that I believe reforms will be passed. I believe that if Italy passes reforms, the EU will support Italy and the crisis will largely be over.


Two Things That Would Make Me Bullish

One of two things need to occur in order to make me more bullish. From a fundamental perspective I would like to see Italy make reforms. If Italy were to agree to reforms than I believe the EU would come to its aid. Right now we are witnessing a high stakes game of chicken where Italy refuses reform as Italian bond yields climb. If Italy were to agree to reforms I would become very bullish.

The seconds thing that would make me more bullish is if the market declined a bit next week and shook off some of the excess optimism we have seen build up recently. I want to get more bullish as this is generally a very good time of the year for the market. But the combination of excess optimism and a standstill in Europe are stopping me. Have a great weekend.

A Mixed Picture

It has been hard for me to gauge sentiment recently as indicators have been all over the place. The shorter term gauges are pointing towards investor optimism while the intermediate term gauges are pointing to more cautious investors.

I have cited Rydex traders as showing too much optimism in recent days but it also seems that short term newsletter writers have turned optimistic, especially on the Nasdaq. From Marketwatch:
According to the Hulbert Financial Digest, the average recommended exposure levels among these timers is now 106 percentage points higher than where it stood a month ago. This is 12 percentage points higher than the week-ago level, even though the Nasdaq Composite Index is lower today than then.

Many of the intermediate term indicators are still stuck in neutral. The Investors Intelligence numbers are showing low levels of bullishness, as are positioning surveys such as the ISI survey. Hedge fund letters seem to confirm the high levels of caution.

All in all sentiment is painting a mixed picture. I would normally put more weight on the intermediate term sentiment but it is difficult to imagine hedge funds buying into the market in a big way without a resolution in Europe. I would feel more comfortable about increasing exposure if we would get a decline that would temper the optimism from short term traders.

Option Indicators

The option indicators are not showing any signs of complacency. Even on an up day like today we are seeing a lot of put activity. The VIX remains at 30, even though the market is well off its lows of a few weeks back. There is good reason for this but its hard to argue that option indicators point to complacency.

Falling Into Place

There is both good and bad news to report. The bad news is that Rydex traders yet again increased their net long exposure yesterday and their bullishness is approaching an extreme. This would be more concerning if other indicators were at extremes, but they are not. Additionally, Italian government bond spreads continue to blow out as PM Berlusconi is unable to secure reforms.

The good news is that the Greek's bluff was called and it now appears that they are falling into place. The remaining hurdle is getting Italy to reform, which I believe they eventually will. We are now roughly half way through this correction in terms of time. If we can get another decline early next week, we will be set up to rally again.

Rydex Traders Stubbornly Bullish

Now that we are getting our bounce, I wanted to focus on an item that is of some short term concern. Rydex traders have remained stubbornly bullish as the market has corrected in recent days. This data point does not argue for a quick end to the current correction.

Ideally what I would like to see is some sideways movement and possibly a test of yesterdays lows. This would achieve two things. Some newfound bulls will get shaken out and more time will pass. A correction is both a function of time and price and this correction is only 3 or 4 days old, depending where you start to count. We have had a correction in price, now it would be nice if some time passed.

Tactically, I remain net long but would like to see how the correction progresses before adding back the positions I shed into last week's strength.

The Bull Case

The market has had a nasty two day spill and the odds favor some sort of a relief rally today. I have discussed the problems in Europe at length in recent days and today will instead focus on the bull case.

The best thing the bulls have going for them is that earnings have held up despite the economic weakness. Corporations have been using much of the cash they earn to repurchase shares and for cash takeovers, which helps markets. As long as this continues it is unlikely the market will see much downside and this could spark a year end rally. We have been seeing earnings reductions from the more cyclical companies, but overall earnings are holding up well, for now.

The other factors that favor the market are seasonality and investor positioning. We are headed into the strongest months of the year. Despite the fact that everybody knows about seasonality and markets are supposed to be efficient, seasonality continues to work more often than not. While investors have recently increased equity allocations evidence suggests that investors are still positioned conservatively. The NAAIM survey, Investors Intelligence, AAII and ISI surveys all show equity allocations below average.

We Should Bounce

After two nasty down days the odds now favor some sort of a bounce tomorrow. We are not yet oversold so if we do get a bounce tomorrow we are back in no mans land. The reason we are not yet oversold is because today was only the second day of the decline. Have a good night.

Italy Holds The Key

I believe that the EU can deal with whatever happens to Greece. If Greece did end up defaulting on all of its debt it would be painful but not insurmountable. I don't believe Greece will ultimately vote for drachmas over Euros but stranger things have happened.

Unlike the Greek issue, a solution to Italy's borrowing problems must be found. Reading between the lines, the EU is demanding reforms out of Italy in exchange for a bailout. These reforms are bitter pills to swallow politically. The EU is asking that Italy raise the retirement age. Older people tend to vote so passing this will not be popular. They are asking to reduce the number of politicians so essentially the politicians are being asked to vote their jobs away. They are also asking that lifetime employment rules be abolished, which will anger unions.

These reforms need to be done but are likely to cost the politicians who pass them their jobs. If Italy ultimately lives up to its end of the bargain I believe the EU will live up to its end of the bargain, even if it means using the ECB. Ultimately this is the way I believe it is most likely to play out. But it will be a bumpy road and it is not a sure thing.

Print or Die

The spread versus bunds that the the European rescue facility, the EFSF, is borrowing at has blown out to a record 147 bps. This is all happening before the EFSF needs to borrow in order to fund Italy. It is not going to happen. The EFSF will not get funded without the ECB. The EU has a simple choice, print or die. ht @credittrader


A Consensus Killer

In early October bearishness hit levels not seen since the Bear Market of 2008-2009. The market proceeded to rally 20% in the span of a little over three weeks, creating great anxiety as most market participants were either run over or left behind.

During the entire run up the majority of market participants were fighting the rally. By late last week it seemed the majority of market participants had finally embraced the rally. Rydex traders were positioned aggressively, the AAII survey showed individuals as optimistic as they have been all year and talk of a year end rally with new highs grew loud.

We find ourselves this morning with the market down nearly 6% from its highs on Thursday, with the consensus once again caught leaning the wrong way. This market has absolutely brutalized the consensus.

Sentiment analysis has been the only way to catch the twists and turns in the market. Right now it seems the crowd is caught bullish. From a pure sentiment standpoint it is likely too early to try and catch a bottom, although 70 S&P 500 points in less than 3 days could lead to a bounce.

Europe Matters Again

It seems that Europe once again matters. Without intervention European sovereign spreads will continue to blow out. We are essentially in the hands of the ECB as they are the only ones with the power to step in. The ECB is unlikely to let the EU go up in smoke. The only question is how long they wait. Have a good night.

Its Good To Be The King

From the Wall Street Journal:
In one of the largest executive paydays in recent years, Nabors Industries Ltd. is giving its chairman $100 million in cash in a severance-style deal, even though he isn't leaving the company.

... The stock of Nabors has fallen 19% this year, and has underperformed the S&P 500-stock index for the prior one-year, five-year and 10-year periods.

I couldn't help but think of Mel Brooks when I read this article


Crisis Not Over

The chart below is a one month chart of Italian bond yields. It does not include today's move up to 6.14%, a new one month high. According to Italian bond yields the crisis is not only not over, but getting worse. From Bloomberg:

It is certainly possible that our markets will ignore Europe as they did for much of the past year, until June. We had a year end rally last year as the situation in Europe worsened. However, it will be more difficult as a recession in Europe is all but guaranteed and the effects will be felt by US businesses.

The excess pessimism that has buffered the market is now gone. The fear of missing out on a rally has replaced the fear of losing money, although we are not yet at extreme optimism. The direction of the market is a difficult call, which is why I have reduced longs into recent strength. I prefer cheap, defensive stocks over the high beta cyclicals that have recently skyrocketed.

CA Hanging In

CA was downgraded yesterday following earnings and four analysts reduced their price targets. Despite this there has been no selling in the stock as it has barely budged. I have been following CA for a while and this is the first time it has refused to go down on bad news.

Wounded Animals

We have been seeing a huge move out of defensive stocks and into more cyclical and higher beta stocks. This is likely because people are trying to play catch up with the market, as many missed this move. I believe this is a huge mistake.

The economy is still likely to slow even if the stock market holds up. Spreads in peripheral Europe have not improved and they are about to undergo severe austerity measures. With Europe in recession and government spending about to decline in the US, we will be lucky to get muddle through growth.

I expect  defensive value names to outperform. It is entirely possible that these wounded animals, fighting for their professional careers will continue to pile in to high beta stocks for a while, but I believe it will end in tears.

Taking A Moderate Stance

I believe the risk/reward in stocks has tilted back to a neutral level. The only thing that has changed in Europe is perception. Italian bonds are trading worse than they were before the summit. Sentiment is starting to lean to the overly bullish camp, although some large investors seem to be under-invested. Seasonality is a positive. While I have reduced my long exposure, I am maintaining moderate net long exposure. This is due to the fact that I have confidence in some individual stocks rather than the broader market.

On a personal note, it feels so much better to have lowered my equity exposure. The last few months have been brutal in terms of stress and lack of sleep. Not to mention twenty trips to the bathroom a day. I wish I were exaggerating. This business is not easy, even when one is doing well.


Some Extreme Bullishness

Last night I posted an article showing how wrong footed hedge funds have been recently and highlighted that they were far away from being at a bullish extreme. It seems that individuals and market timers are reaching extreme bullishness. According to SentimenTrader.com AAII data shows individuals are the least pessimistic they have been all year.

Mark Hulbert writes that market timers have turned very bullish as well. From Marketwatch:

This water being thrown on the stock market’s parade comes from contrarian analysis. The wall of worry that existed at the correction low in early October has given way to a significant amount of enthusiasm and excitement — which does not bode well for the rally’s sustainability.

...In fact, the HNNSI is now nearly as high as where it stood in May, soon after the bull market hit what so far has been its high-water mark.

One More Thing

I came across an astounding article in Bloomberg that I had to share. According the ISI survey hedge funds were at their lowest exposure since 2009 heading into the European Summit this week. From Bloomberg:
Hedge funds reduced bets that stocks will rise to almost the lowest level since 2009 this week, according to International Strategy & Investment Group.

ISI’s index of “net exposure” to stocks slipped to 44.7 yesterday, compared with its 2011 high of 54.2 in February, according to a note sent to clients. The measure climbed to 45.5 on Oct. 12 after declining to 44 on Sept. 21, the lowest level since April 2009.

If this survey is representative of hedge fund exposure and they decide to bring exposure to normal levels this rally could have a way to go.

Reduced Exposure

I have greatly reduced my net long exposure.  I am usually early so by that measure the rally probably has more to go.  Have a good night.

Slowly Selling

I am slowly selling into this rally by selling covered calls. Sold covered CALLs against CVS.

CA Management On The Right Track

We believe the cash generation of CA’s mainframe software and maintenance-like revenue will remain stable, and the net present value of this alone is around $33. The value of that cash flow is being discounted today, and we assume this has to do with investors’ assumptions of how that cash will be allocated.

- John Diffucci, JPMorgan Software Analyst

One of the best software analysts, John Diffucci of JPMorgan, believes that CA's mainframe business alone is worth $33. In addition, CA has $2 in net cash per share, a cloud computing business, a security business and a virtualization business. On a sum of the parts basis CA Technologies is worth over $40.

Mr. Diffucci believes that the reason CA trades at a discount is that investors fear a misallocation of capital. CA has embarked on an acquisition spree over the years that has yielded little, eroding investors confidence. What good is earnings if it is squandered away? I believe that management has found God and is finally on the right path. This should bring CA closer to its fair value over time.

At an Investors Day in late July CA management said that they were done with large acquisitions and that they will return more cash to shareholders. In the latest quarter CA Management delivered on that promise. They spent $200 million on repurchasing shares during the quarter, which works out to 8% of the shares outstanding on an annualized basis. Including the 1% dividend, they are returning cash to shareholders at a 9% annualized rate. CA announced that they repurchased nearly $50 million worth of additional shares since the quarter ended and the management once again stressed returning cash to shareholders on the conference call.

CA has been a value trap for a decade so investors are conditioned to expect little out of the stock. There has been a major change as management is now returning capital to shareholders. As long management continues to deliver on their promise the stock should go much higher.

Added To CA

I have slightly added to my already large position in CA. I believe earnings are being interpreted in the wrong way and they are on the right track. I will have more later.


I don't know what is more amazing. The fact that we are gapping up by 30 points or the fact that so many people are turning bullish now, after a 20% move in the market.

I now believe the market is in its fair value range. We are trading at roughly 13 times next years earnings. That is on the low side but we are in a very high risk environment, so some sort of discount is justifiable.

While I believe the market is roughly fairly valued, the market often over shoots and will likely do so again. We had extreme negative sentiment a few weeks back. That is generally followed by extreme positive sentiment, which we have not seen yet. Market participants are underweight and we are headed into the strongest part of the year.

I have greatly reduced my long exposure into this 20% move but am remaining moderately long. The main reasons are that I believe there are stocks trading cheaply even though the market as a whole is not and the odds still favor more upside.

Reduced Net Long

I have used the strength in the pre-market to reduce my net long exposure by shorting SPY. My net long exposure is now moderate.

The Constant Debate

I don't know if it is apparent in my writing but there is a constant debate going on in my head. There are times, like in early October, where its not much of a debate as I was convinced that the market was a great risk/reward trade. I was scared shitless, but I knew what the right thing to do was. Currently, it is not as  clear to  me.

The bear  case is quite simple. The bailout package is very unlikely to work in its current form because it requires trillions of dollars in funding from private investors. I don't believe they will get it.  The EU will likely adjust the bailout package, but if history is a guide they will need to get hit over the head first.

The bull case is that even if this solution stops things from getting dramatically worse we should see  a rally. We are entering the strongest part of the year with large investors underweight and underperforming. The recent pullback looks healthy in that it has caused much handwringing but not much damage was done.

I have decided to remain net long but am nowhere as long as I was in early October. The deciding factor in remaining long  is the valuation of my longs. I am able to buy some great companies at very reasonable multiples of free cash flow, that have limited economic sensitivity.

Sold Some Vodafone

I sold  a small portion of my Vodafone position. The stock remains my largest holding, even after the sale. I still think its  a great stock but if I want to reduce my long exposure I have to sell something.

An Incremental Negative

Another incremental negative is that the Federal Reserve is not allowing Met Life to return cash to shareholders until the stress tests next year. Met Life is in relatively good shape and if the Fed is not letting them return capital to shareholders its likely that nobody will be allowed. This is especially bad for the financials.

Tempering My Enthusiasm

My enthusiasm for the market has been tempered in recent days for two reasons. The European rescue package is weaker than I had hoped for. I believe that the EU will eventually rectify the situation, but there is the risk that the market needs to have a fit first. The second reason is that sentiment is no longer as supportive of the market.

While I still believe that hedge funds and larger investors are under-invested, I now believe that shorter term traders are long again. The latest Rydex data shows that traders have positioned themselves more aggressively.

Seasonality will be turning very positive in the coming days. With $100 in S&P 500 earnings projected for next year, current valuations (12.3 times 2012 earnings) are decent even if earnings come in slightly lower. Levels of share repurchases and cash M&A remain high. I still believe the market has more positives than negatives but I am less enthusiastic than I have been to this point.