Liquidations "R" Us

It seems quite clear to me that we are seeing liquidations and forced sales. We have been seeing tremendous moves recently on no real news. I had a very rough couple of days of trading after trading very well for the past few weeks. One of my positions blew up this week, Walgreens, and this market shows no mercy.

I remain long and quite beat up. I will be out until Monday. Shanah Tovah/Happy New Year to my Jewish readers. Good luck to everybody for the rest of the week.


There do seem to be markups today as many of the widely held names are doing quite well (AAPL, AMZN, IBM, AXP, HD etc.) . However, the continued liquidation in commodities are hitting the rest of the market very hard. Depending on what you own you can be having a much better day than the averages or much worse.

We are flattish for the past two days but my portfolio is down nearly 1% over that period. There are few things more annoying for me than underperforming a sideways market.


A report today in the FT about liquidations at the hedge fund giant MAN Group are a reminder why the market cannot rally despite many good reasons. There are liquidations and margin calls occurring on a daily basis.

There are many positives such as the increased bearishness today in the Investors Intelligence survey, very heavy put buying, rebalancing and positive seasonality but the margin clerk trumps them all.

I find catalysts like liquidations harder to quantify so I trade off of those that I can quantify. I remain positive but am also aware of the dangers, which keeps me from getting as aggressive as I would like to.


The Good and The Bad

I still favor the long side but after the bounce we have seen off of Thursday's lows it is harder to make a table pounding case for the market. Here are some of the positives and negatives I am seeing:


  • The only time the market has been able to rally recently is off of extreme oversold conditions. That is no longer the case.

  • There are liquidations happening and there is the potential for more. I cannot prove this but in my opinion the 100 point S&P 500 drop we saw last week in a little more than two trading days did not happen on its own. The news was not that different from what we have been seeing.

  • The EU is not responding forcefully enough to the liquidity issues. Everybody in the EU is trying to deleverage at the same time. Somebody needs to take the other side of that trade.


  • Into quarter end rebalancing, positive seasonality and markups are supportive. We had deep sellofs in March, June and August. At the end of each month we saw a rebound.

  • Sentiment is pessimistic and equity exposures are low. Market participants have a lot of room to add exposure if they ever find a reason to.

  • We continue to see corporations repurchase shares and continue to see cash takeovers.


One Or The Other

This morning I bought Walgreens calls and CVS common stock. I bought Walgreens CALLs because I believe there will be a resolution to the dispute with Express Scripts. I bought CVS stocks because I believe it is cheap and if I am wrong about the Walgreens dispute, CVS stands to win a lot of business both on the pharmacy and PBM side.

Over Exuberance Not An Issue

Looking at the put/call ratios today, one might think that the market was down. The CBOE total put/call ratio is above 1.1, while the ISE is well below 100. Both indicators point to put activity. This market may have many issues but over exuberance is not one of them.

Walgreens Is A Good Negotiator

There is a well known rule in negotiation that one must always be willing to walk away. Just as important is that the other party believes you are willing to walk away. Therefore, I expected nothing short of tough talk from the management of Walgreen's when they discussed their negotiations with Express Scripts on today's earnings conference call. I expect they will talk in this manner until the day they announce an agreement with Express Scripts. The analysts freaked out for the umpteenth time about this issue.

Walgreens is expected to earn $3.55 next fiscal year (Aug 2013) and trades at around $35. They have less economic sensitivity than most businesses and have secular tailwinds of aging baby boomers and a generic wave. In the current quarter they repurchased $600 million worth of shares, which is equivalent to 8% of the shares outstanding on an annualized basis. They also pay a 2.6% dividend. During the current quarter they returned cash to shareholders at a greater than 10% annualized rate. I would also note that their earnings is more valuable than most companies because their business is domestic and they pay US taxes. They are not one of those multinationals who has cash overseas that cannot be used for anything.

Walgreen's is simply driving a hard bargain, which will benefit shareholders in the long run. Wall Street cannot look past this week. I believe that I am getting a bargain because of this shortsightedness. I am long Walgreen's common stock and CALLs.

Sold and Bought

I sold my SPY CALLs. I bought Walgreens Jan 38 CALLs and CVS common stock. Will give more of an explanation later.

Barton Biggs Does It Again

It appears that Barton Biggs has done it again. Last Summer, Barton Biggs turned bearish a few days before the market put in a major low and climbed over 30%. On Thursday, Barton Biggs came on Bloomberg and said he was once again bearish. Since then we have zoomed up by 5%.


Don't Get Sucked In

Ever since the S&P downgrade on August 8 we have been in a range. Both bulls and bears could have made money as long as they did not get sucked up into the emotions of the crowds and took profits. Chasing momentum has not worked. Have a good night.

Sold UPS

I sold the UPS position I bought Friday


Every time a German official makes a comment, the market freaks out. The German Parliament is expected to vote on the EFSF this Thursday and it is expected to pass, despite the fact that it is unpopular in Germany. I believe German politicians are talking tough to give themselves the political cover to pass the EFSF. Talk about leveraging the EFSF does not help their cause and only angers the masses.

At a later date I believe the Germans will likely to agree to leverage the EFSF, in return for a Greek bankruptcy to placate the people. From a political standpoint it is counterproductive for German officials to talk about leveraging the EFSF before passing the EFSF and before securing an agreement for a Greek bankruptcy.

Is A Rebalancing Happening

Despite the mid afternoon weakness in stocks, treasuries have not blinked and are sitting at their lows of the day. I believe this might be a sign that we are beginning to see the quarter end rebalancing I spoke of last week.

It has been a historic quarter for outperformance of bonds over stocks and investors allocations are likely out of whack as a result. Quarter end is generally the time that institutional investors rebalance and Friday is the end of the quarter.

Paulson Liquidation

There have been rumors flying around for the past week that John Paulson is being liquidated. One of his last remaining positions that was performing, GLD, is now crashing. If Paulson has not been liquidating than it is likely that he will be soon. Nearly every one of his largest positions has blown up.

John Paulson was an arb who found the greatest trade ever. To be more precise, one of his employees who is no longer with the firm found it. He had no experience as a fundamental investor and has blown up in spectacular  fashion. I believe it will be a relief to the market when it is announced that he is done liquidating as it is a fait accompli.

Mood Swings

Last week was the worst week for the market since 2008. I cannot point to anything so terrible that occurred that should have led to that type of decline. This morning the S&P futures are up 20 points based on the same old speculation we have been seeing for months.

Most people make tortured explanations out of this action as if it is all rational behavior. I view it as simple mood swings. One can either take advantage of the mood swings or get sucked into them. I will look to use strength this week to reduce my net long exposure after increasing it late last week.

I Won't Back Down

At the beginning of the week  I started to worry that EU officials were doing too little. While I reduced my net long exposure very modestly as a result of those fears, in 20/20 hindsight I wish I would have done more.

I believe after the worst week since 2008 it is now too late to sell. I added a position in UPS and some SPY CALLs  and am ending the week in a larger net long position than I started the week with. It is not lost on me that the bear case seems very compelling right now, but it always does after the market has already gone down. Have a great weekend.

Stock Swap

I swapped out of the SPY I bought yesterday and into UPS.


I don't want to beat a dead horse but I have not heard a word about possible quarter end rebalancing. The S&P 500 is down almost 15% this quarter while TLT is up over 30%. I don't know that there ever has been  a quarter where bonds outperformed stocks to this extent.  Institutional rebalancing would mean buying stocks and selling bonds in massive size.


Our futures were up double digits earlier this morning until Europe went into freefall. EU officials continue to wait for the problems to fix themselves. It seems the only way the EU will act is if their feet are put to the fire and that seems to be the case right now.



I apologize for the lack of posts today but its hard to get a cohesive post up when the market is crashing right on top of me. There is some good news. It seems that it will take  a disaster to spur the EU into action and we have one. Additionally, Barton Biggs went on TV today and said he was bearish. Last summer when Biggs turned bearish the market bottomed within days. Have a good night.

Its Unfortunate

It is unfortunate that it will take  a larger crisis to spur the EU into action. A few weeks ago it seemed EU officials were getting serious about stemming the crisis. Since then the markets have rallied and that sense of urgency is gone. The stance of EU officials continues to be to hope things get better.

Critics have complained that Italy is doing too little on the austerity front. The proof they cite is the markets. Italy's deficit will only be 4% this year and new austerity measures are supposed to close the deficit completely by 2013. While that may be  too optimistic of a forecast, the deficit will be manageable. No matter what austerity measures Italy passes the market will not be satisfied. The reason is that EU banks are trying to delever and nothing will make them buy Italian debt. Greece is insolvent but Italy is having a liquidity crisis.

France and Italy do not need to go bankrupt but markets can make it a self fulling prophecy. Hopefully, EU officials will soon realize that the cost of inaction is greater than the cost of action.

Liquidity Analysis

United Technology is buying Goodrich for $16.5 billion in cash. In addition, the $6 billion cash National Semiconductor deal closes tomorrow. The combination of these two deals will act as a $12.5 billion inflow into the market. According to Trim Tabs liquidity theory 2/3 of a deals value acts as an inflow into the market at the announcement of a deal and 1/3 of a deals value acts as an inflow upon closing.

The market is down this morning on a soft China PMI. There do not seem to be any new landmines out of Europe. In order to take advantage of the liquidity, I have removed a portion of my partial hedge in the pre-market. This increases my net long position.

Bought SPY

I am partially hedged via a SPY short. I covered a small portion of that SPY short in the pre-market.

Bought SPY CALLs

I bought the SPY January 125 Calls. I believe quarter end rebalancing could potentially be huge for stocks. One can play it by shorting bonds as well.

Buy Disappointment

I am uncertain what the markets are looking for from Bernanke. In the longer term I don't believe Bernanke can make much of a difference as interest rates are already quite low.

If Bernanke disappoints today I believe a sell off can likely be bought for a trade. There is very heavy put buying today and hence I believe people are a little too well prepared for a disappointment.

What's Larry Got Up His Sleeve

Oracle has built up a war chest of $32 billion in cash. Oracle is not like Apple and Google, who mindlessly build up cash. Larry Ellison has been shrewd in the use of Oracle's cash over the years. He has made both strategic acquisitions and repurchased shares at opportune times to make Oracle one of the better performing large cap tech stocks of the last decade.

I was surprised to see that Oracle only repurchased $800 million worth of shares this quarter, even though the stock traded as low as $25 or a little over ten times this year's estimated earnings. If Larry Ellison is not interested in repurchasing shares at these valuations, this leads me to believe that he is on the hunt for an acquisition.

Corporate Profits Are The Key

Corporate profits are a lagging indicator. They generally turn down after the economy does. While corporate profits will undoubtedly suffer as  a result of the most recent economic weakness, the extent of the decline corporate profits will be the key.

Last night both Oracle and Adobe reported earnings. I was surprised that both companies profits and outlook were hardly effected by the recent weakness in the global economy. After all, the economic weakness has been ongoing for a few months. While this can still change, it is a positive for the bulls.

Since the last recession there was not much of an expansion and fewer excesses were built up at the corporate level, so corporate profits are not as vulnerable as they usually are heading into a recession. It will likely take a disaster scenario in order to have a severe effect on corporate profits and thereby the stock market. Unfortunately, a disaster scenario is not out of the question.

European Inaction

I believe the market is set up for a  large advance as market participants are at extremely low equity allocations and corporations continue to buy shares. Unfortunately, the situation in Europe is hanging over the market. The  inaction by EU officials  is mind boggling.

The strategy of EU officials seems to be to pray that things get better. I don't think a Greek default would necessarily be a bad thing as long as a mechanism was in place to stop it from spreading. But officials cannot even agree upon that. I think the market just wants to know what is going on, be it a bankruptcy or a rescue.

Out Of SPY Calls

I sold my SPY calls from yesterday. We have had a nice run and the ECB is allowing Italian debt to get hammered. I want to be a little more cautious.

The Most Hated Rally

The current rally is one of the most hated rallies I have ever seen. Most market participants can spout a laundry list of reasons why this market should go down, yet the market is within spitting distance of its recent highs. The situation does indeed seem dire, but a hated market that rallies is very bullish.

This weekend I watched numerous videos of hedge fund managers discussing the macroeconomic situation at the CNBC Delivering Alpha Conference. The participants were undoubtedly smart and their dire forecasts were backed with convincing arguments that made me want to climb into a bunker. I had to remind myself that the best buying opportunities tend to occur when the crowd is negative and the bear case seems most convincing.

Even if the bear case turns out to be correct it is likely that market participants will need to cycle back towards optimism before the next leg down occurs. We are certainly not there yet.

Short Of A Disaster

I believe that the bears are playing for a disaster and anything short of that will lead to a continued rally. The Lehman Brothers meltdown is fresh in everybody's mind and many are assuming a repeat is destined to occur. Policy makers will make mistakes but they rarely make the same mistake. I believe that Lehman Brothers in fresh in their minds as well and that they will do everything in their power to stop the contagion if Greece goes under. I remain optimistic although I continue to leave room for error in case I am wrong. Have a good night.

The Possible Melt Up

I bought January SPY 125 CALLs. I see a melt up as a distinct possibility and this is a defined risk way to play that possibility.

Large Rebalancing Possible

Pensions and other large institutional investors often rebalance their portfolios at the end of a quarter. We are approaching quarter end and a rebalancing would mean a large move out of bonds and into stocks late next week.

The S&P 500 closed last quarter at 1320. The futures have us at about 1200 as of this writing, an over 9% decline. The TLT closed last quarter at 93.19 and now sits at 113.5, a greater than 20% advance. The TLT  likely overstates the rise in investors bond portfolios, but even if the advance is 10% this would lead to a large rebalancing.

A disaster in Europe will likely trump many of the factors I discuss. However, if the status quo is maintained or if Europe can stop a Greek default from cascading to the rest of Europe this is yet another factor that could put upward pressure on the market.

Up or Down

It is a rare time when I can picture both a melt up and a melt down. The sovereign issues in Europe still lurk and the politicians continue to bicker. At the same time market participants are fighting this rally tooth and nail as we saw another day of heavy put buying today. Market participants are holding low equity weightings and  a move back to normal weightings would lead to a massive rally. I believe the bull case is more plausible because the bear case requires a complete melt down with no response from the EU. That said I am not playing this rally as aggressively as I would like to in case the worst happens. Have a great weekend.

Added To A Loser

I added to my market neutral Long Loews / Short Home Depot trade. I am down a little over 1.5% on the original position. I see no reason why Home Depot should trade at over a 25% premium based on 2012 free cash flow estimates. Loews aggressive share repurchase program makes it likely that this valuation gap will close.

Would Be Huge

Reuters reported that United Technologies is lining up $20 billion for an acquisition. That would be huge if it is true.

Sold German DAX Long

I sold my long in the German DAX. After the run we just had I felt it prudent to sell something even though I remain bullish.

Primary Bid

I almost always sell too early and rarely hold on too long. My natural inclination is to want to take profits on my longs into the most recent rally. However, when I examined many of my indicators this morning I wondered if I were long enough.

Over the past two days Rydex traders have actually increased their short positions. Despite the large rally off the bottom Rydex traders remain positioned extremely bearishly. Bearishness from participants in the Investor's Intelligence survey, Hulbert newsletter writers and hedge fund managers has risen even as the market has risen. This is usually extremely bullish. Imagine where the market would go if all of these participants tried to move back to neutral at the same time.

I have heard that the primary bid in the market has been from share repurchases. Once corporations repurchase shares they do not sell them back, at least not right away. This corporate buying does not seem to be letting up.

We have had a large move higher in the market and the situation in Europe has not gotten better. I will likely force myself to make some small sales if the rally continues but I will be doing so half heartedly.



An Economic Bear Talks Bull

As longtime readers know I am an economic bear. I believe that the best case outcome will be slow, muddle through growth. Long time readers also know that I often say "the stock market is not the economy". When I think about the economy, I believe that the stock market has limited upside. However, when I see how pessimistic market participants are and how aggressively corporations are repurchasing shares I see a lot of upside potential.

Last month was one of the biggest in recent history for share repurchase announcements. Just since the beginning of this week we have seen numerous headlines on share repurchases. Intel is borrowing $5 billion to repurchase shares. Dell announced a $5 billion repurchase. Staples, Coca Cola Enterprises and Kroger each announced $1 billion repurchases or more.

As long as we get anything short of a severe recession, corporate buying and market participants moving back to more neutral stock weightings could give the market a lot of upside. Even if it is not justified by the economy or valuations.

Geithner Goes To Europe

This weekend Tim Geithner is scheduled to meet with the EuroZone financial ministers. Given, Geithner's history with bailouts this would worry me very much if I were short. If we do get a short covering rally into the weekend, I might reduce a bit of my long exposure.

Bear Camp Crowded

I wanted to summarize some indicators that are now at 2009 levels. I would point out that this means they are below levels seen last Summer:

  • The ISI hedge fund survey showed another decline in net long exposure to levels last seen in April 2009.

  • The number of bears in the Investors intelligence survey is at 2009 levels

  • Short interest on the NYSE is at 2009 levels.

I hate to sound like a broken record but I believe the bear camp is very crowded. The situation in Europe is very serious but if a non lethal solution is found, many will be in a position to have to chase a rally.

Pessimism With A Hint Of Danger

"... most people say, 'We're not going to try to catch a falling knife; it's too dangerous.' They usually add, 'We're going to wait until the dust settles and the uncertainty is resolved'.

The one thing I'm sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there'll be no great bargains left. When buying something has become comfortable again, its price will no longer be so low that it's a great bargain. Thus, a hugely profitable investment that doesn't begin with discomfort is usually an oxymoron."

- Howard Marks (h/t Distressed Debt Investing)

The quote above reminds me of what I have been hearing lately. Everybody is sitting with low equity exposure waiting for the dust to settle in Europe, after which they will pick up great bargains. That is not how markets generally work. It is more likely they will end up chasing markets at higher prices.

I don't want to belittle the problems facing Europe or the rest of the World as they are very serious. While I am talking very bravely, my positioning is not nearly as aggressive as I would like it to be because there is the potential for a disaster. However, more often than not buying at times like the present, when everybody is risk averse, works out well. Even if the disaster scenario plays out, who says we cannot have a rally first. If a non lethal solution to Europe is found we will see a performance chase circa OJ on the Santa Monica freeway.

Call Buying

We are seeing call buying this morning. Normally a single day of call buying is not a bad thing but recently it has been. Let's see if that dynamic changes today.

Investors Intelligence

The Investors intelligence bears have surpassed 40%. They are now higher than last Summer and at levels not seen since early 2009. Sound familiar? The bears really need a disaster to occur or they are in trouble.

More Evidence Of Activism at CA

I published a story on Seeking Alpha citing additional evidence that CA Technologies is facing pressure from an activist investor.

Trimmed DAX Long

On Monday, after the nuclear scare in France, I added to my long in the German DAX. I used the strength this morning to sell that addition. I will look to add to the position the next time the market freaks out.

Expiration Squeeze

Markets rallied today despite the bears protestations and good arguments. This week is option expiration so we could see some wild swings for the remainder of the week. Have a good night.

Lots Of Puts

There is a lot of put buying for an up day. We have generally seen at least one day of call buying recently before rallies have failed.

Capital Observer on Twitter

Twitter users can follow me on Twitter at @CapitalObserver

I originally joined Twitter because I was told that as a blogger I should be on Twitter. At first I found it incredibly useless and a waste of my time because I was following the wrong people. Since then I have built up a great list of people to follow and Twitter has become indispensable. Twitter can be great but it requires investment in figuring out who to follow. For those starting out here is a list of who I follow.

Mass Defaults Are Highly Unlikely

I believe the mass default scenario in Europe that many are preparing for is a highly unlikely outcome. It is not in anybody's interest for there to be mass insolvencies in Europe and for the continent to slip into a depression.

Greece has been playing a game of chicken with the EU, thinking that the EU cannot let them go. While reforms have been passed, they have not been enforced. If Greece does not reform itself than there is no point to the bailouts. The EU is being left little choice but to let Greece go. At best Greece might get one more chance but I think the decision may have been made already.

Most of those who are opposed to bailing out Greece do not feel the same way about the rest of Europe. In the rest of Europe reforms are being made and commitments are being met. Even those opposed to bailing out Greece believe that the rest of Europe needs to be ring fenced in the case of a Greek default. German politicians who are opposed to the Greek bailouts have said so. Nobody is supporting a Lehman style bankruptcy where one day Greece goes under and nothing is put into place to stop the collateral damage. It is likely that those countries who accept bailouts will have to give up some of their sovereignity and submit their budgets to the EU for approval. But it seems like an easy choice.

I believe that Europe wants to vote the EFSF into place before they let Greece go so they have  a mechanism to stop the collateral damage. Its unlikely that there will be  a giant wave of mass insolvencies and depression. Nobody wants that. Markets over react and I believe they are placing a much larger chance of the disaster scenario occurring than is likely.

No News Is Good News

Good things tend to happen when everybody is out of the pool. If we can manage to reach tomorrow's session without a European financial minister warning of the apocalypse this rally should continue. Have a good night.

Activism At CA

A decade ago CA was the third largest independent software company in the World and the company has woefully underperformed since. As long time readers know I believe shares of CA Technologies are extremely undervalued.  I even went to the CA Investor Conference a few months back and let the CEO know how I felt. It seems somebody far more powerful than myself has taken notice of CA's unrealized value.

Walter Haefner, is a Swiss billionaire, who sold his company to CA in 1987 and now holds approximately 25% of the shares. In 2001 he defended management when they faced a proxy battle from an activist shareholder. Very quietly late this Friday, CA announced a new addition to the board that just happened to be another Swiss citizen. Why after nearly 25 years is CA's largest shareholder looking for representation on the board?

During the CA Investor Conference I was happy to hear that management was done making large acquisitions, although I was surprised as it seemed out of character. It was a break from their previously stated strategy of making a few acquisitions a year. Putting all the pieces together it seems to me that they are feeling pressure from somewhere.  My best guess is that their largest shareholder is fed up, as most would be after 25 years

Added To Small DAX Long

I added a small amount this morning to my small German DAX long. I want to save the bulk of my firepower in case the worst case plays out.

Compare and Contrast

The news headlines this morning speaks to the  contrasts I wrote of yesterday, a normally positive set up with Europe possibly being the spoiler.

On the positive side:

  • A $3.7 billion cash deal. Broadcom is buying Netlogic.

  • Mcgraw Hill and Coca Cola Enterprises each announced a $1 billion share repurchases

  • A BAC/Merill Lynch report is out showing that hedge funds are at far below normal levels of market exposure.

On the negative side:

  • The Italians had a terrible bond auction

  • European sovereign and bank spreads continue to blow out.

Bullish Market With A Trap Door

All the evidence I look at has me reaching the same conclusion. Investors as a group are underweight stocks and pessimism is extreme. At the same time corporations are repurchasing shares at an aggressive pace and there is some cash M&A as well. This type of setup is extremely bullish in the intermediate term. The problem is that Europe has the potential to be another Lehman Brothers if Greece is allowed to default and the dominoes are allowed to fall. We have a normally very bullish setup with a potentially very nasty trap door.

No matter which sentiment indicator I look at all I see is pessimism. The ISI hedge fund survey shows hedge funds at their lowest net long positions since 2009. The NAAIM survey of investment mangers shows similar positioning for investment managers. Short interest is at 2009 levels, put buying has been extreme for the better part of the past month, while futures traders are net short according to the COT report. Everything I hear anecdotally tells me there are few bulls out there as well.

When a professional investor is underweight their benchmark, it is the same as being short once the market begins to rally. I believe we could see a very serious performance chase even if Europe only manages to kick the can. When I think about this setup it makes me want to be leveraged long. When I hear German authorities  speaking publicly about planning for a Greek default it makes me want to find a bunker. As a result I am neither leveraged long nor in a bunker. I am conservatively long so that I can profit if Europe finds some sort on non lethal solution, which I believe to be the most likely outcome. But I will also be able to survive another Lehman Brothers if that is the road Europe decides on.

Europe Is Scary

  • There is talk of a Greek default in the very near future and it does not seem out of the realm of possibilities.

  • I completely sold out of my CVS position as the stock has performed fabulously and I am scared.

  • "without a boom, it’s harder to have a bust." -Howard Marks. That quote by Howard Marks is why I believe a muddle is the most likely outcome.

  • I am more optimistic than most and my positioning is quite conservative. That is the most bullish thing about this market.

  • This market is going to rip higher if a solution to Europe is found. Everybody is out of the pool.

  • I actually believe Greece should be let go and the rest of Europe should be ring fenced. The problem is that it will take  a lot of fire power to ring fence the rest of Europe and the political will does not appear to be there. At least not yet.

  • Is the comparison of Greece to Lehman Brothers simply recency bias? Wouldn't Argentina be a better comparison?

Sold More CVS

I sold some more CVS. The talk of a Greek default is scaring me and I am still able to get out at a decent price. Hopefully, this is my donation to a bottom.

Juergen Stark Rumored To Resign

Juergen Stark, a representative from Germany at the ECB, is rumored to be resigning because he is unhappy with the ECB's bond purchases. The ECB was modeled against the German Central Bank, the Bundesbank, which has strong inflation fighting credibility. The ECB will lose credibility if this is true.

If this is true the timing is very unfortunate. The countries are scheduled to vote in a few weeks on the EFSF. The situation is already volatile and by resigning before the votes it will make the situation even more volatile. Would it kill him to suck it up and wait a few more weeks before he resigns?


***Update: rumors confirmed to be true

Obama Did Not Disappoint

Barack Obama's speech met expectations, only because nobody was expecting anything productive. The S&P futures were trading about 6 points higher before European market open, when Europe decided to spoil the party.

The economy is muddling along largely because the recovery has been so weak and few excesses were built up. The economy can probably continue to muddle along as long as the Europeans stop dawdling and pass the reforms and the EFSF. I believe  this is the most likely outcome but it might take more of a scare for them to do so. I continue to be positioned net long in stocks that should do well in a muddle through, but with plenty of room to add if markets are taken to the brink.

Not Great Expectations

I believe expectations are rock bottom for Obama's speech tonight. While most US investors focus on Obama's speech I believe the real issue is and has been Europe. As long as Europe can hold it together I think this rally can continue. If Europe continues to worsen we all go down together. Have a good night.

Unintended Consequences

The US dollar is having a very strong week. The dollar should be lower this week given that is has been a "risk on" week for the most part. I don't believe it is coincidental that the Swiss Franc was devalued and suddenly the dollar has strengthened. Every action has a knock on effect and it seems that for some reason the devaluation of the Swiss Franc has caused the dollar to go higher.

Sold Part Of CVS

I sold part of my CVS position to make room for my DAX position. CVS was an oversized position and is now normal size.

Long The DAX: Part II

I forgot to mention that the position I took in the DAX was relatively small. I want to add on a meltdown or if we see a resolution to the crisis.

The Obama Speech

By the end of the day everybody will be focusing on Obama's speech tonight. It is hard to believe that there will any positive expectations of the speech. The only room for disappointment is in industrials, which have done well because of the proposed infrastructure projects. The market might be  a little hesitant today ahead of the speech, but it will be hard for Obama to disappoint the market as nobody expects anything good from him.

Long The DAX

I have gone long the German DAX via a European traded ETF, with the symbol  EXS1. I explained my reasoning in a previous post.

No Change

While we might be a little extended in the uber short term I see little reason for bearishness. Europe seems to have stabilized and there are few notable events over there for the remainder of the week. I remain constructive on the market. Have a good night.

Call Buying

There is a lot of call buying today. Generally, a single day of call buying is not bearish as it takes a string of days with call buying before it becomes bearish. Lately, even a single day of call buying has led to a drop within days. I believe it will take more than a single day of call buying this time but would be a little more cautious now.

Valuation Is What Matters

The only consistent determinant of long term returns has been valuation. The economy was great in the late nineties but it was a terrible time to invest because valuations were so high. By the same token the 1970's and The Great Depression were terrible economic times but great times to buy stocks.

The German DAX is trading at ten times earnings and a greater than 4% dividend yield. In the long run this is likely to be a great investment. Stocks don't trade at these types of valuations during good times. I am researching ways to invest in Germany. The only liquid large cap ETF I can find is EWG, which represents the MSCI Germany Index but is not very well diversified. If any readers know of anything better please let me know.

Understanding Markets

Yesterday Switzerland essentially pegged the Franc to the 1.15 level on the Euro or lower. This dealt a 15% loss to those who bought the Franc at the top and a nearly 10% overnight loss, which is enormous for a currency. The Swiss Franc has been a big safety trade like Gold, the Yen and US Treasuries.

One would think that as one safe haven has been destroyed other safe havens like Gold would increase in value. Especially because it is impossible to devalue Gold. As the supply of safe havens go down, the value of the remaining safe havens should go up. While this may be true in the long run, in the short run that is not what happened. Many people who held the Franc also held Gold. As one trade went against them they fled the other trade as well and gold has been dealt severe losses.

Many might find it odd that I talk so much about sentiment and ignore the news headlines of the day. The reason is because when everybody is bearish there are few left to sell, regardless of the headlines. Maybe all these negative headlines will matter in the long term but in the short term the overwhelmingly bearish sentiment is more important. Sometimes it is not the news  or the fundamentals that are most important but understanding how markets work.

Sentiment Still Too Negative

The Investors Intelligence survey has shown a drop in bulls and an increase in bears. Bulls and bears are nearly in a dead heat with 38% bulls and 37% bears. Bears are at levels seen last Summer but bulls are still higher as bulls went under 30% last summer. This indicator is now bullish for the market. I doubt the bears who talked about this survey endlessly 3 weeks ago will mention it now.

Every sentiment indicator is pointing to excessive bearishness. There are few bulls left to convert to bears and it will be much harder to take this market down. I believe the bears need a systemic event to break this market down at the current juncture. Anything but terrible news should take us higher.

Thank You Bank Of America

One more thing. Every taxpayer should thank Bank of America for buying Countrywide and Merrill Lynch. Bank of America was a well capitalized bank before making those ill fated acquisitions, having completely escaped the subprime debacle. Since then they have used up a lot of their built up equity and have raised over an additional $50 billion in capital in order to fund losses from those purchases. Had the government had to bail out Countrywide and Merrill the losses would have been in the hundreds of billions of dollars. Not to mention the TARP gains the government saw from Bank of America.

The government encouraged Bank of America to merge with these insolvent entities. They should not be suing them for the sins of Countrywide and Merrill Lynch. This is almost as ridiculous as the government suing Ally, which is owned by the government. So its the government suing themselves. Is this a stimulus plan for out of work lawyers?

Event Risk

Many are nervous about the German court decision regarding the legality of the bailouts, which is set to be released tomorrow. My understanding is that there is a very low probability that the bailouts will be declared illegal. Additionally, the Italian parliament will vote tomorrow night on the new austerity measures, which are widely expected to be passed. I believe if we can get past these events tomorrow than the market can rally. Have a good night.

Walgreens Holds The Cards In Dispute With Express Scripts

Walgreen's same store sales came in better than expected for August and I expect the quarter is now in the bag and then some. There is an overhang on Walgreens stock because Walgreens has not renewed their contract with Express Scripts. I believe their dispute with Express Scripts will be settled in time and there will be a nice pop in the stock when it happens.

I believe the Wall Street analysts have this wrong because of their short term orientation.  In the short run the lack of an greement would hit Walgreens sales and earnings as they would lose the Express Scripts customers. Express Scripts has longer term contracts so the initial effect on their earnings would be small.

In the longer run this would destroy Express Scripts, as few would sign new contracts with Express Scripts if their customers cannot go to Walgreens. There is little differentiation between pharmacy benefit managers (PBM). A consumer does not care who their health insurance uses as PBM but they do care  if they can fill their prescriptions at Walgreens. Do you know or care who your PBM is? Do you know the name of the pharmacy you use? Which would it hurt you more to lose?

Walgreens management has been the best in the business and I trust that they are simply using this advantage. In typical Wall Street fashion analysts are simply looking at the short term earnings effect this would have and ignoring that this negotiation is happening out of a position of strength for Walgreens. I remain long Walgreens.

Happy Europe Day

I remain constructive on markets and believe they are poised for gains barring a collapse in the EU. Investors are broadly in risk off mode, leaving them a lot of room to buy if the situation stabilizes.I believe stabilization is the most likely eventual outcome, although it might take some more turmoil to compel EU officials to act.

In George Soros' book The Alchemy of Finance, Soros describes a model for financial crises. There is usually an imbalance that is ignored for years until a crisis point is reached. Markets go to the brink, which forces authorities to act, thereby solving the crisis. The first half of the model for a crisis certainly fits the current situation in Europe. We are at a crisis point in Europe and markets are going to the brink.  It seems as if EU officials are thoroughly worried, which is a good thing. The lower markets go the more likely they are to act forcefully.

My portfolio is positioned for a bullish outcome but I am also leaving room for myself to be wrong. My entire portfolio is comprised of defensive, value stocks that should perform relatively well in a slow economy. Many defensive businesses are trading at similar or cheaper levels to cyclical businesses, which makes it a no brainer for me. I am also partially hedged.  While I will certainly not prosper if the market collapses I will likely survive.

Summer Vacation Ending

The Europeans are coming back from Summer vacation next week to some serious problems. The coming weeks will be interesting to say the least. Markets are already pricing in a pretty nasty scenario so there is potential for upside if the Europeans can manage a less than terrible solution. European markets will be open for two days by the time we return on Tuesday so there is serious gap potential. Have a great weekend.

Blanket Statements Are Not For Investing

One of my biggest pet peeves is blanket statements. With regards to investing I constantly here that share repurchases are all value destructive. It seems like a  negative article a day comes out about companies repurchasing shares and destroying value. Without fail the author will bring up some overvalued company buying back shares like Cisco in the nineties at 100 times earnings. My  experience with cheap companies buying back shares has shown the opposite.

If a company has an intrinsic value of $60 and is trading at $40, than every $1 the company spends on a share repurchase increases the value of the company by $0.50. Last year Gilead started aggressively repurchasing shares at six times forward earnings ex-cash. The stock went from $32 to $42 and was one of my best investments. The two companies that I own now that are most aggressively repurchasing shares are CVS and Vodafone. Both have held up far better than the rest of the market. There is no combination that I like better than a value stock where management is aggressively repurchasing shares. I wish more of the companies I own would do so.


Europe Remains The Key

I was looking for some sort of a correction next week, but that correction came early and the outlook for next week is now more muddled. Looking at the intermediate term (4  weeks) the signs remain positive. However, if the situation in Europe deteriorates all bets are off.  I hate to hedge myself, but contagion trumps all if it occurs.

The market is oversold in the intermediate term and will remain that way for a few more weeks. According to the ISI survey hedge funds are at their lowest net long position since 2009. According to the AAII survey individuals are at their lowest stock allocation in nearly a year. From  Pragmatic Capitalism:

According to the NAAIM survey active managers are at their lowest net longs in a year and rivaling levels seen in 2009. From the NAAIM:

The put/call ratios are oversold in the intermediate term, Rydex traders are bearish as are newsletter writers as measured the Hulbert HSNSI.The weight of the evidence points to the crowd being positioned bearishly, leaving fewer potential sellers.

I expect a slow to recessionary economy and am not an economic bull by any means. That said, investors are already positioned for a very negative outcome and there are intermediate term rallies even in bear markets.


The bears managed to crack open the market today and closed the market on the lows. It would have made for much easier trading if the market went higher through tomorrow. A pullback next week would have been a very high probability trade. This makes next week a tougher call. Have a good night.

Bears Won't Give Up

Looking at what market participants are doing and ignoring the macro we see continued put buying in the face of every rally attempt. This is bullish in that strong rallies tend to end once the crowd has bought into the rally. This does not seem to be the case yet. I am weary because of how far we have come and the precarious macro situation. However, I still have to side with the bulls as this does not look like a top.

A Tougher Juncture

After the 10% rally we saw off of the extreme conditions of two weeks back the direction of the market is a tougher call. The rubber band was stretched very far on the downside and odds were we would see some sort of snap back, which we have. There are now good arguments that could be made by both bulls and bears.

The bears will point to the 10% rally and say we have gone too far, too fast.  The situation in Europe seems to be worsening as peripheral spreads are once again widening. Around the World economies seem to be stalling out.

The bulls will point to the fact that investors have yet to embrace this rally. The put/call ratios still show put buying on most days and now even the Investors Intelligence numbers are showing negativity. While investors have turned more pessimistic we have been seeing insider buying, share repurchases and cash takeovers.

Barring a severe worsening of the situation in Europe I am more inclined to side with the bulls for now. If we rallied for a couple more days we would reach a good overbought reading and sentiment would likely turn more positive. Additionally, by the middle of next week seasonality turns negative. At that point I would likely be more inclined to side with the bears.