The New Capital Observer

I will be launching a new Capital Observer site today with a new look and a new host. Those who have not changed their bookmarks or feeds will need to do so today. I will post at the old site once the new site is up to notify readers.

Citigroup Reverse Split

Citigroup is doing a 10:1 reverse split. I am very happy about this as Citigroup options were skewing the put/call ratios. It was not uncommon to see 100,000 calls trading in a day because of the low stock price. I believe this will lead to much cleaner reads.

April Flowers

I believe that its likely we have already seen the lows for the current correction. Typically, after such a strong move lower we see some sort of a retest. However, next week is the turn of the month heading into the strongest month of the year. I believe the reason for April's strength is that its tax refund season and a lot of refunds finds their way into the market.

Given the calendar the bears don't have much time to get to work on a retest. We could see some weakness at some point through early next week but I doubt we will revisit the lows. I believe that weakness is a buying opportunity and that April will be a good month for investors. The Summer could prove to be more challenging.


I believe today's action was constructive. There was a lot of put buying today and yet the market has managed to hold itself together. I have not yet updated the chart below for today's put/call ratio but today's action takes it up to the 1.00 level.
I remain constructive through April and believe dips are for buying. Have a great weekend.

*I would also note that the only time this entire bull market that CBOE put/call ratio exceeded 1.00 was this Summer after the Flash Crash and Persian Gulf Oil Spill . The previous time was in January 2009, during the bear market.

** I know many readers prefer the equity only reading. We are also at an extreme on that indicator as well. 

A Long Explanation

A reader asked me in the comment section why I sold covered calls if I thought the market was oversold? Here are a list of reasons:
  • At that point the S&P 500 had bounced 40 points from the lows two days ago. I thought it prudent to take some profits while remaining long.
  • In my opener I also discussed the possibility of a retest. I want to be in a position to be able to buy on a retest.
  • I sold covered calls at prices where I would be willing to part with the stocks. 
  • I do things in steps. I generally buy slowly on the way down and sell slowly on the way up. This way if we chop around in a range I could make some money off of the volatility. 

Why These Huge Buybacks Are Bullish

I believe the large share repurchases are especially important for the financial sector. While its bullish for any sector when a large amount of the shares are being repurchased, it might be even more so for the financials. The reason being because managers are underweight financials. If they start to outperform it will put a lot of pressure on managers to get them back to an equal weight rating. Its almost as if they are short them.

From a fundamental perspective I am not a fan of the financials. I don't know how to value them. This is a pure trade and the size will remain small.

Long XLF

No that is not a typo, I am long the XLF. I am probably just as surprised as long time readers are.

Bullish On The Banks

I believe the large share repurchases announced in the banks are bullish for the sector. These repurchases were widely anticipated so we might get a sell the news effect but I believe the sector will outperform going forward. I cannot get comfortable buying individual banks, as the balance sheets are ciphers to me but I am considering a sector play.

Writing Covered Calls

I am writing April covered calls against some of  my recent buys.

Finally Oversold

The market is finally oversold and is at oversold levels not seen since the Summer.

We are also seeing levels of put buying not seen since September.

The high level of put buying implies that market participants are well protected. Combined with the oversold reading that gives me confidence that dips should be bought. This is especially true because we are headed into the seasonally strongest month of the year.

It is possible that we see a retest of the lows as some intermediate term indicators still give the bears some room. This decline started 18 trading days ago so we will not be maximum oversold on an intermediate term basis for 12 more trading days. The Investors Intelligence survey is still showing high levels of bullishness and Rydex traders are positioned bullishly.

Tactically, I am positioned quite long leaving some room to buy if we get a retest of the lows or even a marginal new low. Any move lower from here would likely be the low, after which I would expect the market to rally strongly through April. I believe its equally likely that we have already seen the lows.

Under Control

Other than making some sales this morning I have done nothing all day. I am long but have some more powder to deploy if another dip does emerge. I believe there is a very good chance we will wake up tomorrow and find that the situation in Japan is under control. Have a good night.

Faith In The Japanese

I believe that honor will help the Japanese avert a nuclear disaster. If the disaster happened in the US we likely would be seeing the class action suits piling up already. The attitude in Japan is completely different as workers are spraying the radiation with hoses, knowingly and willingly risking their life for the greater good of society. I would bet the CEO of Tokyo Electric would walk up to the reactor and piss on it if he thought he could avert a disaster by doing that while a US CEO would probably give encouragement from a safe place far away.

The willingness of individuals to sacrifice for the greater good of society will likely help the Japanese through this terrible tragedy. I believe we will wake up one day soon to find out that the situation is under control and the rebuilding could get under way.

There Are Always Good Reasons

There are always good reasons when investors are buying high to be bullish and there are always good reasons to sell at the lows. Investors as a group will never learn. But individuals can learn and take advantage of this dynamic. The first step is to turn off CNBC.

CPI A Little Hot

The CPI has come out a little hot and is no longer at levels the justify QE. In addition, there is inflation in the pipeline as shown by the PPI. This reiterates the idea that we are no longer early in the economic cycle and later cycle stocks and sectors are likely the place to be.

Just In Case

I sold some of what I bought into yesterday's muck although I am still longer than how I entered the day yesterday. I remain bullish over the next six weeks and believe dips are for buying. I just want to make some room in case we do dip again.

AAII Bulls On Vacation

The folks surveyed by the AAII loved the market when the S&P 500 was 90 points higher than yesterday's lows but they hate it at 7% discount. Only 28% of respondents were bullish in the most recent survey. The more things change ...

Nuclear Holocaust

The six month run in the market made market participants too complacent. We are seeing the same brave souls who were buying hand over fist just wanting the pain to stop. The excuse for the selling is rumors that a nuclear meltdown is imminent.

I believe buying into this panic is the right move and have put my money where my mouth is. However, because market participants were so bullish heading into this crisis its possible that the selling can last for longer that it normally would. That said, I believe that once it is over these buys will be rewarded. Have a good night.

Pure Panic

I believe what we are seeing today is pure, unadulterated panic. An EU official made a disturbing statement about the Japanese nuclear facilities, which started a waterfall decline. It was later released that he had no information that was unavailable to anybody else. This has started a grab for put options. I believe the case for a good rally is starting to come into place:
  • The market is approaching maximum oversold.
  • We are seeing panic selling.
  • The VIX is spiking.
  • We have seen a string of days with heavy put buying. 

Later Cycle Stocks

Yesterday, the Federal Reserve ever so slightly changed their language and made a very small step towards tightening. This morning the PPI came out hotter than expected. I believe this signals we are no longer early in the cycle. When we do get a bounce it is most likely the stocks that have been beat up the most that will bounce hardest. However, looking out longer term it might be time to switch to later cycle stocks. The winners for the past few years will likely not be the winners going forward.

Pressing Too Hard

I believe the bears are now pressing too hard. There is a lot of put activity. I have added to longs.

Late In The Game

From an anecdotal point of view it seems that market participants are finally turning negative. I believe it is late in the game as the S&P 500 has already corrected by 6%. While there is room for a little more downside I believe those dips are for buying.

Getting Oversold

The market is starting to get oversold as measured by the 10 day moving average of the NYSE Advance - Decline line.
If the market continues lower for the next two days we will get a good oversold reading. Below is the raw data that makes up this 10 day moving average. We will be dropping positive numbers for the next two days. If those positive readings are replaced with negative readings than we will be dropping negative numbers for eight out of the ten following days. That would make a good oversold reading.
Option expiration often helps a trend to persist so it is possible that the market remains weak through Monday of next week. I would be very surprised if the weakness lasted further than Monday.

What Does Japan Mean

I have had some time to gather my thoughts on Japan. It does not change my outlook that April should be a good month, although it might temper the upside. Investors might be more cautious after seeing yet another one in a hundred year event. My mistake has always been underestimating how quickly investors forget, so its possible that April will still be gangbusters. Have a good night.


I have been asked quite a few times why seeming seemingly unaffected assets are being hit so hard by the tragedy in Japan. While nobody knows for certain why markets do what they do, I will hazard a guess. As a result of 0% interest rates in Japan many Japanese engage in carry trades, because they cannot get any income on domestic assets. These carry trades also happen to be part of the "risk on" trade, and the Japanese are now fleeing to safety.

Many investors carry out momentum strategies which exacerbates these movements. On top of that many hedge funds carry out momentum strategies while calling it a different name. They call it "risk management", which means they sell positions once they start going against them. Add to that the recent rise in leverage and the margin clerk starts getting into the act.

This creates pockets of value for those who were not overly committed heading into this crisis.  That said its difficult to know when the vicious circle will end and there might be yet better prices first.

Traded Into Medtronic

I have traded out of SPY and into Medtronic. The position was called away from me a few expirations ago.

Bought The SPY

Bought the SPY for a trade in the pre-market on this latest leg lower.

The Butterfly Effect

I believe that the tragic events in Japan will have little lasting effect on US markets. That is not to say the US economy does not have its own problems, but this is not one of them. In the short run Japanese repatriating assets has sparked a "risk off" trade. I believe this is providing an opportunity and that purchases made at these levels will be rewarded in the next month or so.

Not A Raging Bull

While I lifted my hedges today, I am not a raging bull. Specifically, I see the possibility of some further downside in the next week or so. But I do expect April to be a relatively good month. Once April passes I see the potential for a larger correction:
  • QE II will be ending which might effect both bond yields and investor psychology.
  • We will see large offerings of AIG and Ally stock
  • Fiscal stimulus will continue to wear off over the Summer.
  • Sovereign and municipal imbalances might start to matter again.
  • The creep of inflation might become more pronounced.
  • Seasonality will be negative.
Because of these longer term concerns, I am positioned in relatively conservative stocks. Have a good night.


I was clearly early in lifting my hedges this morning. That said, I believe the type of shakeout we are seeing today will bring about a better bottom. We broke all sorts of support levels, which should serve to get rid of many of the renters and momentum players. We are far from levels indicating extreme negative sentiment, but we are reaching levels where we could see a rally, especially given the approaching seasonal strength and possible oversold reading later this week.

Conflicting Signals

The put/call ratios are showing way too much activity in calls given the declines today. It is strange to see this while the VIX is up 10% on the day. On balance, this is not what the bulls want to see.

Going Long

I have used the pre-market weakness to buy the SPY, largely neutralizing my hedges. I am now long. There is room for more weakness in the next couple of weeks but I ultimately believe that I will be able to re-hedge at better prices in April.

Buffet's Elephant Gun Fired

Warren Buffet recently wrote that he was on the hunt for large acquisitions with his elephant gun. With this morning's $9 billion purchase of Lubrizol he put his money where his pen was. While one can debate the how wise of a move paying up for Lubrizol was, the acquisition should have a positive effect on the overall market.

I believe that, in the short run, the tragic events in Japan will have a neutral to positive effect on the rest of the world's economy. Japan will need to rebuild, which should give a short term boost to GDP.  Some production capacity in Japan has been taken off line, benefiting producers in other countries. In the short run the effects on markets could be negative as the Japanese are repatriating assets in order to rebuild.

If the market is weak in the coming days I believe the weakness could be bought. While we are not set up for a great rally, we are headed into the strongest month of the year with some of the excesses having been removed from the market.

Wising Up

We the people, might be wising up. From Reuters:
The president of the New York Federal Reserve Bank doesn't normally face a raucous crowd.
But in Queens, New York, on Friday, William Dudley was bombarded with questions about food inflation, and his attempt to put rising commodity prices into a broader economic context only made things worse.
"When was the last time, sir, that you went grocery shopping?" one audience member asked.

...So, Dudley sought an everyday example of a price that is falling.

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," 
...This prompted guffaws and widespread murmuring from the audience, with one audience member calling the comment "tone deaf."
"I can't eat an iPad," another quipped.


We have been able to sweep our problems under the rug for years, so what is a few more months? I remain of the opinion that we could see a little more downside in the next week or two but that April should be fine. The imbalances might start to matter again this Summer. There is a lively discussion surrounding my column on coffee. I wasn't sure whether to post it but I'm happy I did. Have a great weekend.

Put Buying

  • We are seeing put buying again today. I believe that is an incremental positive. 
  • I don't see Japan as a major risk. I believe the most under appreciated risk is Europe. Spreads are blowing out there again.
  • The biotechnology index (BBH) is hitting a new multi-month high today. I think the sector will continue to outperform through the closing of the Genzyme deal, expected for early April.
  • I added to my position in CA.

Examining The Bear Case

A case can be made for a larger correction than I am looking for:
  • On an intermediate term basis sentiment is still overly bullish.
  • Everybody is a momentum investor these days so lower prices could lead to yet lower prices.
  • Middle East tensions and rising oil prices could continue.
  • Sovereign and municipal issues could surface.
While I respect that there is a possibility this will occur, I believe a larger correction is likely going to have to wait until after April. Assuming the market corrects in the coming week we will reach option expiration with the market maximum oversold. That should give the market some support for a few days. That would bring us to the turn of the month. We would be heading into the strongest month of the year, with the market just having been through a correction. I believe that should at least buffer the downside.

American's Don't Know What Good Coffee Is

I watch in amazement as shares of Starbucks and Green Mountain Coffee surge. I am very particular about my coffee and shudder at the thought of having to drink either of their coffees for an extended period of time. If I had my way I would drink my coffee each morning in a cafe in Italy before teleporting back home.

It is nearly impossible to get a proper cappuccino or espresso in New York. In order to get a perfect cup one must have the right machine, the right beans, good milk and a barista that is an expert. Good luck finding that in New York. Most baristas in New York are Mexicans that barely speak English. I love Mexicans but highly doubt that most of them are properly trained baristas. Call me a cynic.

I used to believe that Dunkin' Donuts was good coffee until I traveled the World and realized otherwise. While there are a handful of restaurants in NY that make good coffee they are simply not in my vicinity and don't open early enough. Until my teleport machine is built the next best thing is a the Nespresso Citiz machine that I have at home. These machines are all over Europe but have gained less traction in the US. By the time I write my opener I am probably on my second cup. I highly recommend using organic milk with it as it tastes much better.

Hello, Fear

We are finally seeing some fear injected into the market. There have been put buyers all day instead of dip buyers. I believe its better to buy when market participants are fearful, than when they are complacent. We are currently making that transition and I am hoping that by expiration the transition will be complete and I will be completely unhedged. Have a good night.

Took A Bullish Position in AOL

Roughly the entire price of The Huffington Post deal has been whacked off the market cap of AOL (for good reason). However, here are some other rough numbers. AOL has $500 million in cash and is expected to generate another $1.5 billion by the end of 2014. The entire market cap now is $2 billion. As a kicker they own some very expensive real estate.

The assumption at current market prices is that the CEO will burn the cash. His track record at AOL is not inspiring but I suspect he heard the Bronx cheer after his most recent deal. I have taken a bullish position in the company.

Wrote SPY Puts

I wrote the SPY 128 Puts expiring next week against my long SPY Puts. That means if the SPY closes below 128 at expiration my hedges will be gone.

The Next Oversold

Since the overbought/oversold readings have been working well lately I will point out that we are unlikely to get a good oversold reading until around expiration. We will get a weak oversold reading on Tuesday.

Helene Meisler on is the expert on this subject and I would highly recommend reading her columns. I have been following her for over a decade and started keeping the stats myself three years ago.


"Bisexuality immediately doubles your chances for a date on Saturday night."
-Woody Allen
I do not have much to add this morning. I am hoping that the bears will be able to crack recent support and inject some fear into this market. At that point I would be willing to take my hedges off and allow my long positions to run into April. 

I am far from a raging bull but there are some cheap, less economically sensitive stocks out there that have not gone up much in the past six months as the crowd has been plowing into momentum names. April is generally a strong month  so if we are heading into April with a market that has already corrected I would be willing to take some risk with conservative positions.

No Longer Oversold

At the end of today's trading the market will no longer be oversold. This is the first time in recent memory that the bulls were able to do so little with an oversold reading. But its not like the bears have been on their "A" game either. The bears will have one last chance in the next couple of weeks to crack this market. After that we will be entering one of the seasonally strongest times of the year. Have a good night.

Midday Thoughts

  • Once apon a time a lot of call buying on a down day did not bode well for the market. We are seeing quite a bit of call buying today.
  • Given how many momentum groups have unraveled in the past few weeks its pretty amazing the market is not down more. Not to mention some small uprisings in the Middle East.
  • There has been a rotation into defensive, cheap, beaten down stocks. I cannot say I'm upset about that.
  • Why is April the strongest month of the year? My best guess is tax refund season.
  • Is everybody else out there praying for a selloff or just plain praying?

Not Much Of A Correction

A market can correct by going lower or by going sideways. I am willing to entertain the notion that the market has corrected by going sideways. It is certainly is not as overbought as it once was and if it keeps going sideways it will no longer be overbought at all.  However, I believe sentiment is also part of a correction and it has stayed stubbornly bullish thus far.

The Investors Intelligence survey still shows an overwhelming majority of bulls. There is a story in the Journal this morning about how oil prices don't matter. Spreads are blowing out again in the European periphery but everybody remains sanguine. Low risk buying opportunities come about when the crowd is fearful as a lot of bad news gets priced in. That is certainly not the case right now.

April is the strongest month of the year and strong seasonality often trumps sentiment and fundamentals, which is why I am not positioned bearishly now. I am still hoping for a scare in the next couple of weeks that allows me to take advantage April's strong seasonality.

More Choppiness Ahead

The oversold reading will be of less help to the bulls tomorrow and market will once again be overbought later this week. I will look to make some sales tomorrow if we are up again. Have a good night

Good Night Gorilla

It is no coincidence that just as Whitney Tilson announced that he covered his short in Netflix the stock topped out. While he gave impressive and logical explanations for starting his short position and eventually closing it out, I believe what occurred is a lot simpler.

We are all just overgrown primates typing away at our keyboards. At the point of maximum pain that primate simply could not take it anymore. I don't know if he believes his own explanation for covering the short but I believe its bullshit. The reason I know this is that I have been there.

The difference is I recognize that I am just an overgrown primate and try not to get myself into those type of situations. When I look at highfliers like Netflix and I know they will crash and burn but I also know that I will crash and burn first if I try to short them. I will end up not being able to take the pain and covering at the worst time, only to watch them in even more pain as they go down shortly after.

Closed Out Small Short

I closed out the small short SPY position I put out last Thursday. However, because of my CVS buy on Friday this makes me slightly net long.


As I mentioned yesterday the market is now oversold.
Its not a great reading. We will only be dropping large negative numbers for the next two days as you can see from the raw data below.
Overbought readings have not been great indicators recently as they have usually only led to some sideways consolidation or minor declines. Oversold readings have been good indicators and still deserve the benefit of the doubt.

Not Holding My Breath

I would love nothing more than to see a break of 1300 on the S&P 500. While the outbreak of war in the Middle East didn't scare them, lower prices usually does the trick. Unfortunately, the market will be oversold at the end of the day today through Wednesday. Its not a great oversold reading but if the bears could not do it when the market was overbought I am not holding much hope that they will be able to do it now. Have a good night.

Interesting Articles

Some interesting articles:


One might think that after Friday's late day 10 handle rally in the S&P 500 and with oil being up another 2% this morning that the S&P futures might be under pressure. One would be wrong as S&P futures are actually slightly higher as of this writing and were 5 points higher earlier. I am left scratching my head at this action.

As I wrote this weekend its difficult for me to make a stand in either direction at this point. I am tempted by the short side but if I get squeezed into the end of March, I will be forced to cover as we head into the strongest month of the year, April. Thus, I remain long cheap, defensive stocks with SPY Puts as a market hedge.

The most daunting aspect of the market is not that it refuses to go down. It is that market participants refuse to back off their bullish views despite spiking oil and unfavorable geopolitical events. Had I been told a month ago that riots would break out across the Middle East, with governments being toppled and oil prices spiking I would have been certain that this would put a scare into investors. I would have been wrong.

The Best Laid Plans

After six months of non-stop rallying and two months of extreme bullish sentiment, it would be healthy if the market finally corrected. That would have us headed into the seasonally strongest month of the year, April, with the market just having completed a correction. Unfortunately, it seems that investors refuse to back off their bullish stance despite scary geopolitical events and soaring commodity prices.

Without a correction it is difficult to take too strong of a stance in either direction. Investors are ill prepared for a potential shock from geopolitical events and there is tremendous downside risk if the situation in the Middle East worsens. Conversely, during seasonally strong periods like April extreme sentiment often takes a back seat. Last year, sentiment was extreme heading into April but the market climbed another 5% in April before finally reversing in late April.

There are two scenarios under which I would be confident taking a strong market stance. The first is to go long if we correct into late March. The second is to go short at the end of April/early May if we don't correct before then. As of right now I remain hedged (via SPY Puts) and am not taking a strong market stance.

Double Buy

I used today's weakness to sell some covered SPY Puts. I am still hoping for a chance to remove my hedges over the coming weeks but it seems nothing will scare market participants. Have a great weekend.

Still No Fear

There is absolutely no fear in this market. Oil continues its ascent as tensions worsen in the Mideast and investors are buying calls. The Investors Intelligence bears remain under 20%. What would it take to get investors bearish?

Apple Wins

I have been waiting for the Windows 7 tablet to come out as some programs I use do not work on Apple and I prefer Windows. Yesterday, Microsoft announced that the Windows 7 tablet will not come out until mid-2012. I am ordering the iPad 2.0 as I cannot wait that long.

I have been stalking Microsoft's stock as the valuation seems right. However, I now believe that Windows market share loss will be more severe than I once did. I did not realize how far behind Microsoft is. I now require a deeper discount on the stock to consider a purchase. The Microsoft announcement is great news for Apple.

Eager Beavers

Where are yesterday's eager buyers today? I am still stymied by why the S&P 500 gapped up yesterday by nearly 15 handles and continued higher all day.

New Position: CVS

I started a new position in drugstore chain CVS. My thesis is that one is receiving a remarkably steady business, that has little economic sensitivity for a below market multiple.

Covering Gilead

Gilead is my largest holding and is up over 11% year to date. I have written the April 42 covered calls on nearly the entire position.

Not Yet

I have long said that the current corporate profits and economic activity are a result of performance enhancing drugs. As an investor one has to ask what multiple to put on earnings that are a result of artificially enhanced economic activity. The following excerpt from Seth Klarman's annual letter (from eloquently describes the predicament that the US is in:

Two problems are upon us at once: short-term stimulus that is unaffordable over the long run and runaway entitlements that must be reined in. But restoring fiscal sanity will be bad for the economy and financial markets. What Treasury official or politician would want the cash spigot turned off before a recovery is certain? Recipients of government handouts – a large percentage of the population – would grumble at the termination of policies that offer them outsized benefits. So prepare for a chorus of "but not yet.” One already sees this in editorials and commentaries, such as the ones saying it's time to close down bankrupt Fannie Mae and Freddie Mac, but not yet, because doing so would harm the still-weak housing market. There will never be a good time to end housing support programs, reverse quantitative easing policies, end fiscal stimulus, or reduce massive budget deficits – because doing so will restrict growth and depress share prices. Nor will there be a good time to cut entitlement programs or to solve Social Security or Medicare underfunding. All will agree the stimulus cannot go on forever, that excessive entitlements must be reined in, “but not yet."

The financial collapse of 2008 highlighted our national predicament. The sudden decline in consumer activity that followed the plunges in the housing and stock markets represented a reasonable – indeed a desirable – response to overindebtedness. Yet the federal government saw this well-advised retrenchment as cataclysmic, because the national economy had grown dependent on our living beyond our means. The imagination of our financial leaders remains so shallow that their response to a crisis caused by overleverage and excess has been to recreate, as nearly as possible, the conditions that fomented it, as if the events of 2008 were a rogue wave of financial woe that can never recur. It is only in Fantasyland that the solution to vastly excessive debt is more debt and the answer to overconsumption is less saving and more spending. Worse still, we have yet to see a serious assessment by policymakers of the causes of the 2008 financial market and economic collapses so that we might take action to ward off a repeat performance. The government’s knee-jerk response to contraction was to prop up economic activity by any and every means possible; the hole in consumer activity had to be materially repaired on the government tab. 

Hard To Figure

If we get a strong jobs number tomorrow we will have:
  • Oil over $100 a barrel
  • Rising interest rates 
  • The beginning of the end of QE
Let the march to new highs begin. I will be out of the office for the remainder of the day.

Sold Gilead Covered Calls

I sold some covered calls against a small portion of my Gilead position. I believe the shares will be higher after the Genzyme deal closes so I want to make sure I retain the bulk of my position.

Strong Jobs Number Likely

A strong jobs number is likely as private measures of employment have been showing strength for months even as government figures have shown continued weakness. I suspect the government figures will finally catch up. The question is how will the market react?

For months the market has rallied as poor employment numbers have been released. Could we see a decline when the employment numbers finally turn positive? Strong employment numbers would take away a large part of the argument for QE.

Small Short

I have taken a small SPY short for a trade in the pre-market based on my belief outlined in the opener that the upside is limited in the coming days.

Fresh Supply: Part Three

The MetLife offering priced last night raising over $9 billion. That makes this week the heaviest week of offerings of the year. I believe this supply combined with the uncertainty in the Middle East should keep a lid on the market in the coming days.

Retail investors have not been scared off by Mideast turmoil or higher oil prices as ICI reported that $1.5 billion flowed into equity mutual funds in the latest week. This likely explains why the decline in the major indexes has been so small since the crisis.

Bad News For Technology Companies

The venture capital market is on fire and driving up prices for computer programmers. A Wall Street Journal article outlined how programmers straight out of college are being paid starting salaries of over $100,000 a year. This is not a positive for well established technology companies as their compensation expenses are sure to rise.

Technology has been one of the hottest sectors and this is a case of being a victim of ones own success. I see this as more of a longer term headwind but unlikely to effect the shorter term.

Fresh Supply: Part Two

The Wall Street Jornal reported that the Met Life deal will likely be done this week and could approach $7 billion.

Fresh Supply

The market will be seeing some supply in the next couple of weeks. It has been pretty quiet this year on the supply front until now:
  • There is a $5 billion dollar offering of Met Life shares scheduled.
  • HCA is scheduled to price its $3.5 billion IPO next week
  • EOG resources just priced a $1.2 billion secondary
These large offerings will not be of help to the bulls in the coming weeks.

Looking To Buy

I am currently in a market neutral posture but will be looking to start buying into further weakness. If the market continues on its downward trajectory it will be oversold by early next week. If it continues lower through late March it will be oversold on an intermediate term basis and I would guess that sentiment would once again become more negative. 

I am hoping to be be able be able to completely remove my hedges by late March.  The market will have finally corrected and we would be headed into the seasonally strongest month of the year. After April I believe the market will need to start dealing with the many issues facing it and believe the Summer will be a rough ride.

A More Normal Market

At the beginning of the week I laid out two possible scenarios. In a more normal market I would have expected a move lower this week. Last week we had a very strong move lower from overbought, over bullish conditions. followed by a reflex rally higher. The normal script called for a move lower this week. However, in recent months every move lower would be followed by a steady climb to new highs so that possibility had to be given some consideration.

Today's action looks like the action of a more normal market.  Under these conditions I would expect the market to be under pressure for the balance of the week. If we do head lower into the end of this week we will be oversold early next week. Have a good night.

Free Money Day

I think the first of the month should be called Free Money Day as everybody knows buying today is free money. As I wrote yesterday the contrarian in me wants to fade this move but my practical side tells me to sit it out.

Every year we hear a lot of talk about a Santa Claus rally and yet it still manages to occur. That is the reason I am not fighting this first of the month bid but if there were ever a month where this were to fail it is this one. There has been more chatter about the first of the month than I ever could recall plus the S&P 500 has rallied over 35 points in a relatively straight line.

The Case For Amgen

I have received a lot of questions in the past week regarding Amgen and am going to present the bull case on the stock. In order to present the bull case I want to first present the bear case. The Goldman Sachs analyst is the most bearish analyst of the major brokerage firms on Amgen with a sell rating and a $50 price target. These are the assumptions the Goldman analyst makes in arriving at his $50 price target:
  • The analyst uses a discounted cash flow model with a 10% weighted average cost of capital in order to come to his $50 price target. This means that the analyst assumes that an investor in Amgen requires a 10% a year return in order to invest in Amgen. In order to receive a 10% a year return the stock would need to be $50.
  • The analyst assumes that the $3 billion a year that Amgen spends on research and development yields nothing.
  • The analyst assumes that all of Amgen's drugs will have disappointing sales relative to expectations.
  • The analyst assumes that biosimilars will have a larger than expected effect on sales of Amgen's drugs.
This bearish analysis is exactly what makes me bullish on the stock. According to the biggest bear on the stock even if everything goes wrong, at $50 Amgen is priced to return 10% a year. If by some chance sales are not as bad as this analyst believes or the $3 billion a year in R&D yields something the return will be even greater. Making 10% a year is a worst case scenario that I can live with.

Whenever I see a stock that looks attractive I always ask what's the catch. I seek out the bear case because in many cases when a stock looks cheap there is a good reason. In the case of Amgen I believe the company has challenges but that the stock price more than reflects these challenges.