Updated Blog List

I updated my blog list to reflect some good blogs I found recently. I am curious to know if readers have a favorite blog that is not on the list.

For Good Reason

Almost the entire gain of the past year has been seen on the first day of the month. One could have been long on the first day of the month and holding cash for the rest of the month and achieved a 15.7% return. The following chart from Bespoke shows the returns:

Random Thoughts

  • One of the more interesting aspects of last weeks decline is that the dollar did not catch a flight to safety bid. Fresh lows in the dollar could add to inflationary pressures. 
  • Speaking of inflationary pressures, have you seen a chart of the CRB Index recently?
  • Is anybody unaware that the market must go up tomorrow on the first of the month?
  • Even though I fancy myself a contrarian I am not stepping in front of that train. Seasonality has worked too well.
  • When is the last time the market started the day well into the green and ended lower? I literally cannot even recall.
  • If the market sells off through the end of this week I will look to get long for a bounce next week. If the market sells off through late March I will look to get long for the seasonally strong month of April.

Not Joining The Party

Commodity indexes are hitting new highs this morning and stock futures are rallying. I believe we are at a point where higher commodity costs will hit consumers, corporations and pressure the Fed to raise rates. This is not a sustainable situation but I am not going to fight the seasonality. That said, I have no plans to join the party either.

Par For The Course: Part Two

After Friday's reflex rally I would normally expect another move lower this week. If this were to occur than by early next week we would get a good oversold reading for the first time since November. However, we are now in the seasonally strong turn of the month period and in a market that has refused to correct for many months.

If we get weakness today I might make a small purchase to try and take advantage of the seasonal strength. For the most part I am saving my firepower for a better risk/reward setup. Being disciplined with ones purchases has not been a very rewarding strategy in recent months but has served me well over time.

The Fear Is Gone

The VIX is plummeting today and there is heavy call buying. I am writing some covered calls against recent adds. I am back in the neutral camp.

Gap Up Changes The Odds

Yesterday, I gave a slight edge to the bulls for today. After this mornings gap up I believe the odds are now even. With the 15 point bounce in the S&P 500 from yesterday's low the bulls short term oversold argument is a little weaker. The bear case is that the bulls might be hesitant to buy in front of the weekend while the bulls will argue that we are now in the seasonally strong turn of the month period.

Par For The Course

After a massive drop earlier in the week a reflexive rally is exactly what one would expect. Normally, I would expect the rally not to go very far and fizzle within a day or two. However, we are entering the seasonally strong turn of the month.

The seasonal strength lasts through Wednesday of next week so its not difficult to imagine a rally carrying that far. In a normal market I would then expect another move lower or at a minimum a retest of this week's lows as the market has not corrected in months.

I believe oil prices will be the key. If oil prices are still elevated next week than it is difficult for me to imagine us making a run to new highs without at least another retest of this weeks lows.

Either Way

The bulls and bears can both make a good argument for tomorrow. The bears will say that given the uncertainty few will want to make a stand into the weekend. The bulls will say that we are due for a short term bounce given the recent carnage and we are headed into the turn of the month, which has been extremely strong. I believe the bulls have a slightly stronger argument. I am just happy that my defensive portfolio finally outperformed today. Have a good night

Thinking Of Hewlett

I am tempted to start a position in Hewlett Packard as the valuation seems right but I keep remembering that crazy bidding war they got into with Dell.

Adding and Subtracting

I added a bit to my Amgen position today and subtracted from Gilead. From a valuation standpoint I believe they are now equally valued. I still prefer Gilead because of the large share repurchase plan and the outside chance of a takeover.

The Roubini Quote

It appears Nouriel Roubini's appearance on Squawk Box last week marked the top. Here was the money quote:
"I think tactically for the next few months equities could rise because corporate profits are still strong…. Usually there is not a one-to-one relationship between the stock market and the economy, but I would say this year, some things are going well. The economy is improving, emerging markets are doing well, the corporates are doing well so far."

Illinois Buying On Margin

Illinois just borrowed $3.7 billion at 5.7% in order to make a contribution to its pension fund. How much do they expect to make on investments above that borrowing rate? Didn't they see the Interactive Brokers commercial where one can borrow at 1.25%? This would be funny if not for the fact that it is so sad.

Treasury Trade

My original thinking was that treasuries would rally through this week and possibly early next week. While geopolitical events are a wild card, I believe the short term rally in treasuries is in the late stages. Unfortunately, I did not catch this latest leg up as I sold too early.

Day Three

As I write the S&P 500 futures are sitting over 40 points lower than where they started the week. While buying at these levels is certainly better than where we started the week, I would caution that today is only day three of the decline and is still not a low risk entry point from an intermediate term point of view.

Three days is not even enough to make the market oversold, let alone get rid of months of built up complacency. However, we are getting oversold on an extremely short term basis and are approaching the turn of the month, which has been very strong. Even if the market is not done with this correction there should be bounces along the way. I believe we will see a bounce some time in the next few days coincident with the turn of the month.

While I came into the week fully hedged, I started picking away at the long side yesterday looking for a very short term bounce. I sold some covered calls late in the day once we bounced but we did not get as much of a bounce as I was hoping for so I remain slightly net long. I will look to delicately continue adding to my longs into further carnage, looking to play a bounce next week.

Straight Down

The S&P 500 has gone down 40 points in a straight line. I am constructive in the very short term. I am leaning very slightly long and will look to sell into a bounce.

More Nibbles

I continue to very slowly nibble on the long side.

Back In CA

My position in CA was called away at expiration. I have rebuilt the position this morning.

Nibbling

I nibbled on the long side into this mornings mess but I am in no rush.

Recent History or Longer History

If recent history prevails then the market is now on its way to new highs. If the market acts in a more typical fashion than the market should explore the downside some more in the coming days. A bounce like we are seeing this morning after such a nasty day is not atypical. However, it should not carry very far if we are going to see some more downside.

I don't believe that we are off to new highs. Aside from the fact that the market is extended, the current geopolitical events are having an effect on the economy by elevating oil prices. Its difficult for me to imagine us going off to the races while oil prices remain at these levels and with the current geopolitical uncertainty.

Time Is Of the Essence

Recent corrections have been one and done but that does not make buying today a low risk trade. The market has the potential to become oversold in the short term and intermediate term even though neither has occurred recently. Ideally both would occur for a low risk entry point.

Next week is the turn of the month, which has a positive bias. If we were to get some more downside through the end of this week we would not be oversold in the short or intermediate term but the setup would look a lot better to me than it does right now.

Sold SPY Puts

I sold the March 125 SPY Puts against my well in the money March SPY Puts.

Looking To Pull Money Out

If the market continues lower for the balance of the day I will look to roll down the strike of my SPY Puts and write covered Puts. It would be a major miracle if I could actually pull some money out of the short side of my book.

The Ingredients For A Dislocation

Forecasters cannot accurately predict a hurricane months in advance as there are too many factors involved. However, I can say with relative certainty that we will not see a hurricane in the US this February as many of the conditions necessary for a hurricane are not present at this time of year. I can also say that come August and September we are much more likely to see a hurricane.

Similarly, there are times when the market is more vulnerable to a dislocation. I believe the ingredients for a market dislocation are present. Market participants are heavily long and likely not well protected. Now there has been a potential shock. If market participants suddenly become risk averse it could get ugly very quickly. This does not mean that I am predicting a dislocation, I am only saying that if a dislocation were a hurricane we are currently in August.

Celgene On The Right Path

In my article a few weeks back I noted that the only thing missing from Celgene's stock was a share buyback. A few days ago management announced a $1 billion repurchase plan, which amounts to about 4% of Celgene's outstanding stock. I would now be a buyer on a pullback for more than just a trade.

Waiting To Pounce

As long time readers know I am not shy about aggressively shorting a market. If the current intermediate trend higher lasts through the end of April I believe I would get aggressively short at that point.
  • We would be heading into the seasonally weak part of the year.
  • The gigantic re-IPO of AIG is likely to be in late April, early May.
  • We will be approaching the end of QE.

Strong Seasonality

As if the bulls needed more of an advantage we are headed into a period with very strong seasonality. April has been the strongest month of the year for the past 50 years and March is also one of the strongest months. Late next week we will be headed into the turn of the month as well. The bears best chance of a pullback from a seasonal perspective is early next week.

Retail Investors Getting In The Game

Higher stock prices are leading to higher inflows leading to higher stock prices. From Reuters: 
Investors put a net $9.45 billion into equity funds, the best performance since the week ended June 16, the data showed. That was a near four-fold increase over the prior week's inflows of $2.54 billion.
According to SentimenTrader.com the current level of mutual fund inflows has been matched only once since 2002. It was followed by a sideways to slightly down period for a few months.

After Expiration

When the market used to go down turning points often happened right after expiration. Maybe that means we will dip for a few hours next week. The Harlem Globetrotters win again. Have a good night.

The Sinkhole

I am rolling my SPY Puts up and out once again.

Sold TLT

I took my gains in TLT as the economic numbers didn't give market participants a reason to alter their expectation of continued QE. The easy trade in treasuries is over in that we were deeply oversold, at long term support with very negative sentiment. We have spent the past two weeks trading slightly higher and working off the oversold condition.

I believe treasuries still have more upside in the next week or so but because this is a counter trend trade I have decided to err on the side of caution. I picked up my penny in front of the Bernanke Bulldozer.

Trying To Make It Interesting

Trying to write about the stock market recently is like trying to make a game between the Harlem Globetrotters and Washington Wizards seem interesting. The bears seemingly don't even stand a chance. Many of the indicators I follow have been urging caution to no avail for two months.

From an anecdotal standpoint I have noticed some differences in recent days. Up until now every time the market dipped people were asking if it was the beginning of the correction. When we dipped earlier this week, if you want to call it that, nobody was worried and the only question was how soon to jump in. The bulls have stepped up their taunting of the bears, but I am not certain who they are taunting because bears are few and far between. Fund managers like Whitney Tilson have all but written off short selling and even Nouriel Roubini was sounding bullish  on Squawk Box.

The anecdotal evidence I am seeing is just begging for a correction. The market might want to wait until after option expiration so that the February protection expires worthless but I believe we will see some downside in the near future. And now back to your regularly schedule Harlem Globetrotters game.

Sold Some Gilead

I sold 1/2 of the Gilead purchase from yesterday. I remain very long the name.

Sold Genzyme

I sold Genzyme in the pre-market. While I believe the deal value is closer to $76, the deal will take longer than I expected to close.

Then and Now

In late 2009 Pfizer was set to complete its acquisition of Wyeth and Merck was set to complete its acquisition of Schering Plough. The deals were part stock and part cash, but the combined cash component of the deals were $60 billion. The cash components of the deals amounted to over 6% of the market cap of the entire pharmaceutical space.

At the time I theorized that if some of that $60 billion came back into the pharmaceutical space we could see a nice move in the sector. Pfizer/Wyeth received anti-trust approval in mid October and Wyeth received anti-trust approval a few weeks later. As you can see Pfizer and Wyeth both rallied by about 20% in the next 2 months. The market rallied as well but not nearly as much. From Yahoo! Finance:



I see many similarities to the current situation in large cap biotech. Genzyme makes up 11% of the biotech sector with a market cap of greater than $10 billion and well over 5% of the entire biotech sector. If part of the $20 billion from this deal finds its way into other biotech stocks we could see a rally in the sector. The sector is unloved so if the sector begins to rally we could see those underweight the sector jump onboard.

Sanofi said the deal should close early in the second quarter. I was expecting a quicker closing but still expect the trade to be rewarding.

PPI Was Hot

The PPI came in hot including the core rate. This is initially being seen as negative for treasuries but I believe that higher than expected inflation numbers will eventually be seen as a threat to QE, which should be positive for treasuries.

Every Dog Has Its Day

After the past brutal week I can finally breathe a sigh of relief. Both my hedges and longs worked today. I am very excited about the prospects of my large cap biotech trade. I had a similar successful trade when the Pfizer/Wyeth and Merck/Schering Plough deals closed in late 2009. I will outline how that trade worked out in tomorrow's opener. Have a good night.

A Timetable

A few weeks ago I laid out why I believe that the Sanofi/Genzyme deal will be positive for large cap biotech. I now want to lay out a timetable. Usually, the sector gets a boost on the announcement of a deal but I believe the reaction will be muted as the deal has been well telegraphed.

The second boost should come around the closing of the deal when indexers and closet indexers in the health care and biotech space use the Genzyme cash to buy other biotech stocks. I believe managers are drastically underweight biotech so if the group can catch a bid there might be some chasers.

The deal has already received US and EU antitrust approval and should close within weeks.

Over The Top

It looks like a Genzyme deal is happening. I have added to my already monster Gilead position and bought a large position in Amgen Calls. Over the top on large cap biotech.

Broken Clock

You can file this under broken clock because this is the third time I am calling for a hot CPI. I read daily about rising prices and cannot help but think that eventually it will find its way into government figures. If the CPI comes in hot it might lead to a bond rally as people look for an end to QE. QE II has been bad for long term treasuries so the knee jerk reaction would probably be to rally treasuries. I remain long TLT.

A Rough Road

It has been a rough road recently for my style of trading. Many of the indicators that I utilize became extreme in November and correctly guided me through the November pullback in the market. In mid-December sentiment became extreme again and has stayed that way.

Since mid December I have been fully hedged and at times leaning slightly short. Luckily, I have been hedging through cheap options and my loss on my hedges is smaller than the loss would have been if I shorted the index. Up until last week my core longs and trades were outperforming the losses on my hedges so I was able to block and tackle my way to positive performance. Last week, both my longs and hedges went against me and took away most of that performance.

While I am not happy with the outcome, every style of trading and investing will have its ups and downs. I don't know many successful investors that change their styles depending on which way the wind is blowing. If I can make it through these types of periods with minimal damage and make hay when the sun is shining for my strategy than I should do well over time. That said, is it over yet?

13-Fs Are Out

Its 13-F season, when we get to look at what managers have been doing during the quarter. Insider Monkey does a great breakdown of many of the important 13-Fs.

Speaking of 13-Fs, I am happy happy to see that Janus is almost done selling down their Gilead position, which is my largest holding. They used to have 40 million shares and now own less than 10 million shares. They were happy to own it at a 30 multiple but spent the past two quarters selling it at a single digit multiple and at 40% lower prices.

Munis Vs. Stocks

Individuals are dumping munis which are trading at a tax equivalent rate of 8%, in order to buy stocks. Are stocks priced to return more than 8% annually? If one believes that there will be mass municipal defaults than what would happen to the stock market? Have a good night.

Interesting Development

In an interesting development we are seeing call buying this morning, its Monday and the market is still not able to rally.

Microsoft Is Cisco's Collateral Damage

Microsoft seems to be a victim of Cisco. Both are in the cheap large cap tech category, but with some secular issues. There is little read through from one's business to the other, but Cisco is a reminder that secular issues have a nasty way of not going away.

That said, I believe any further decline in Microsoft's stock would probably be an opportunity. The revenue stream that has the highest risk is Windows revenue as tablets come into the market. However, that revenue only makes up 25% of Microsoft's overall revenue and is unlikely to disappear, although it might see some pressure. At nine times earnings net of cash these issues seem priced in to me. Cisco is also getting interesting but I would be more comfortable with it closer to the mid-teens.

Clothing prices To Rise 10%

I have spoken at length about how we have been importing deflation through cheaper goods from China and other emerging market countries. Now that they are experiencing inflation, we might import that inflation even as the employment situation here remains weak. The AP reports that clothing prices may rise 10% in the months ahead:

Clothing prices have dropped for a decade as tame inflation and cheap overseas labor helped hold down costs. Retailers and clothing makers cut frills and experimented with fabric blends to cut prices during the recession.
But as the world economy recovers and demand for goods rises, a surge in labor and raw materials costs is squeezing retailers and manufacturers who have run out of ways to pare costs.

Cotton has more than doubled in price over the past year, hitting all-time highs. The price of other synthetic fabrics has jumped roughly 50 percent as demand for alternatives and blends has risen.

Clothing prices are expected to rise about 10 percent in coming months, with the biggest increases coming in the second half of the year, said Burt Flickinger III president of Strategic Resource Group.

One More Reason

Last week I listed several reasons why the market has been rising. You can add this to the list. From the AP:
There's another sign that investors' confidence is returning: Last month they added money to U.S. stock mutual funds at the fastest clip in seven years. The year-opening surge also marked the first time in nine months that investors added more than they withdrew.
All told, investors deposited a net $21.3 billion to U.S. stock funds in January, the biggest monthly increase since a net inflow of $23 billion in February 2004, industry consultant Strategic Insight said Friday.
With these types of inflows it becomes less of a mystery why the market refuses to pull back. Mom and pops have not proven to be the best market timers but they do act in a very herd-like manner so these inflows can continue for a while. I would note that a lot of money has been exiting bond funds, specifically munis, and those markets seemed to staunch the bleeding on Friday.

One Last Thing

There is a market saying "Buy to the roar of cannon and sell to the sound of trumpets". Buy on the canons worked two weeks ago. Will investors now sell on the trumpets?

Blowoff

This market is starting to look like its headed for a blow off. We have not seen a blow off top in a very long time. I am currently market neutral but my longs are acting very poorly. If I were not taking heat already I would probably start legging into short side exposure. I will be out of the office for the remainder of the day. Have a great weekend.

Strength In Treasuries

It is nice to see strength in treasuries today, especially because it is coming on little news and with the market down only slightly. I remain long TLT and am optimistic that it can rally for the next couple of weeks. That said, I am unlikely to hold for the entire rally. I am only looking for a couple of percent.

Honorable Mentions

Other conference calls that Ben Bernanke did not listen to in recent days include Sysco, Kraft, Pepsi and Cheesecake Factory. He also did not open his TV to see those pesky food riots.

Bernanke Did Not Hear The Chipotle Conference Call

Chipotle spoke a lot about food inflation on their conference call. There are only two possibilities for corporations in regards to higher commodity costs. Absorb the increases and hurt margins or pass on the increases to consumers. Neither is bullish. Ben Bernanke did not listen to the Chipotle conference call because he is still busy fighting deflation. From Seeking Alpha:

Commodity inflation has continued to push our food costs higher in 2011 already, and we expect continued inflationary pressure on many of our ingredients, especially chicken, beef and avocados during the year.
...
In addition to the growing underlying food inflation, we're in the process of sorting through the impact of recent freezes in Mexico and Florida, where our tomatoes, green peppers and tomatillos are currently grown. The cost of these items has surged threefold as a result of severe crop loss, which, if we remain fully supplied, would increase our food cost by over 200 basis points. 
...
Over the next few months, until the Florida harvest season resumes normal production, we will evaluate the quality and quantity of tomatoes, green peppers and tomatillos available and make sure we only serve high-quality produce that our customers have come to expect from Chipotle. And during this time, we may experience shortages or surging food costs or both.
...
So it's obvious that food inflation is real, and it appears will get worse before it gets better. But what's not obvious is the exact timing and magnitude of inflation on the items we serve, how much is sustainable versus driven by temporary conditions such as weather and, perhaps most importantly, what's the appetite our customers have to absorb these higher costs.

The Pros and Cons

I want to take a step back from the surreal action in the market where every dip is bought and take inventory of the pros and cons in the market. I will start with the positives:
  • The economy is improving and like a super tanker it does not turn on a dime. 
  • Companies are generating solid free cash flow and much of this cash flow is being used to buy back stock and buy other companies. This puts a bid under the market.
  • Credit spreads are tight and interest rates are still manageable.
  • There seems to be an ongoing rotation into US stocks, coming seemingly from everywhere else.
Now for the negatives:
  • Professionals such as portfolio managers, advisers and hedge fund managers who de-risked during the Summer have re-risked, leaving less room for them to buy. US stocks which were a big underweight a few months back are now a big overweight. Even mutual fund investors have caught on to this trend.
  • Commodity prices are starting to hurt the bottom lines at companies as they are only able to partially pass on price increases. Many companies hedge their commodity exposure so current prices are not fully being felt.
  • While interest rates remain low bonds are on the precipice of breaking down. This would further hit housing markets and make municipal and fiscal debt burdens harder to bare. 
  • The economic activity we are currently seeing is based on 0% interest rates, printing money and a greater than $1 trillion deficit. This can come back to haunt us at any point.
The reason I have a hard time accepting market risk at this point is that investors are so overweight US stocks that a slight change in risk appetite could lead to large losses even if the fundamentals don't change by that much. The ideal situation would be if something were to occur  that caused investors to position themselves more conservatively but did not effect the fundamentals too badly. With the VIX so low I see little reason not to maintain a hedge at a minimum.

Less Than A Disaster: Part Two

Today's treasury auction came in worse than expected. While it would have been better to see a stronger auction there is now little for the treasury market to fret over. After going straight down for months, I believe we should at least see a bounce attempt from multi-year support. I remain long TLT.

Sold Celgene

I sold my remaining Celgene. I will look to rebuild the position if we get a retest of the most recent lows.

Start Of A Correction

The market is on its heels this morning as the bulls are receiving a barrage of bad news. There were a number of earnings disappointments, most notably Cisco, and Asian markets were down hard. Seasonality is not helping the bulls either.

In a market that is overbought and over bullish this would normally lead to a pullback. This has been the case a number of time in the past few months but has not mattered. From an anecdotal standpoint every time we see a dip on the S&P 500 people start asking if this is the start of a correction. Normally, I would say that is good for the bulls but I doubt many of these people are putting their money where their mouth is, given what a black hole the short side has been.

If my sentiment is any indication I very begrudgingly rolled up the strikes on my hedges this week and viewed the trade as throwing money down the toilet.

Less Than A Disaster

The Treasury auction today was less than a disaster and Treasuries are rallying. The good news about tomorrow's auction is that once it is in the rear view the fear surrounding it will dissipate. Barring a disaster buyers might actually start stepping up. I remain long TLT.

My Two Cents On St. Joe

St. Joe, the giant owner of land in Florida, announced that it is looking for strategic alternatives, which is code for looking for a buyer. Who in the world would buy St. Joe? Private equity would not touch it as it is cash flow negative and cannot be leveraged up. It is too big for any of the home builders to bite off. What buyer is St. Joe expecting to find? A sovereign wealth fund? Turn it into farmland and make it an ag play?

I believe that if Bruce Berkowitz were not buying up half the shares and in the process causing a massive short squeeze the shares would be a lot lower. I cannot see the attraction to shares of St. Joe.

The AOL Example

AOL is a great example of why I insist on knowing what companies plan to do with their cash, even if the stock trades cheap. Many value investors have been buying AOL based on the fact that they trade at a little over three times free cash flow once one takes out the $7.50 in cash sitting on the balance sheet.

The stock would be a no brainer if it were not for the fact that the CEO is spending the cash like a drunken sailor. The multiple of free cash would be even lower if the company were not wasting money on things such as a fancy headquarters in Downtown Manhattan. The company has paid high prices for Tech Crunch and The Huffington Post even though nobody has figured out how to make money off of content on the Internet.

The AOL example is the reason that I not only insist that a stock trades cheaply but also that I know what management plans to do with the money. Making money and burning it is the same as not making the money at all.

What Is Really Driving This Market

A big driver of the move in the market for the past 5 months has been stock buybacks. Solid free cash flow and cheap borrowing rates has allowed companies to repurchase their shares aggressively.  From the FT:
TrimTabs estimates the actual deployment of announced buybacks is running at a rate of $1.7bn daily in the fourth quarter of last year, up from $1.3bn reported by S&P in the third quarter.
 

Another Day, Another Dollar

I rolled up the strike of my SPY Puts. I am uncertain as to why I even bother hedging. Have a good night.

Update on TLT

I remain long TLT. I was hoping for a bounce so I could get out before the auctions of longer term bonds tomorrow and Thursday. It does not appear that I will get my bounce as today's 3 year auction did not go well.

Today's auction might be a blessing in disguise as it has set expectations very low for the coming auctions. I believe that we are now set up for a rally on anything but a disaster. At every major low in bonds the past few years there has been nervousness surrounding auctions.

I Want To Like Teva

I want to like the stock of Teva Pharmaceuticals. They trade at a reasonable multiple of free cash flow and earnings. They have managed to continue growing when other pharmaceutical companies have stumbled and are still growing. My issue with Teva is that they don't return any cash to shareholders except for a token dividend and are on a perpetual buyout binge.

With the company trading at less than ten times 2011 estimates what better use of cash than buying back their own stock? Why take the risk of M&A when there is easy money sitting on the table? The stock is cheap enough that I am considering a modest long at current levels. If Teva ever gets serious about returning cash to shareholders I would be an aggressive buyer of the stock at these levels.

The Punter is Back

Jason Goepfert of SentimenTrader.com  produces a chart showing that OTC volume as a percent of total Nasdaq volume is at a record. This is not something generally seen during great buying opportunities. From Minyanville:

The Amazing Market

Just when it looked like the market might be running out of steam we had a big Merger Monday. Cash M&A is bullish for the market because as investors receive cash for the stock being taken over they put that cash to work in other stocks.

As long as credit spreads and interest rates stay relatively behaved we should continue to see more M&A and share repurchases, which should contain the downside. However, that does not mean we will not see corrections along the way. The S&P 500 has rallied a very quick 50 points from its lows after the Egypt scare and is overbought. I would not be surprised to see a pullback in the near term.

Arbitrage

The details of the Sanofi/Genzyme deal that were leaked are that shareholders will receive $74 a share in cash plus a contingent value right (CVR). The CVR will receive a payoff based on the performance of Genzyme's drug Campath. I believe a very conservative estimate of the value of that CVR is $2.25, making the deal worth $76.25. Sanofi already received US and EU antitrust approval of the deal so it should close within a couple of weeks of signing.

I believe the merger spread is about 2.5% on a deal that is likely to close in a couple of weeks. I have taken a long position Genzyme. The risk is that the details that were leaked are wrong or that Sanofi backs out because of something it finds. When Sanofi announced they need more time for due diligence, Sanofi did not deny the details of the deal so I take that as confirmation. Sanofi knows that Genzyme's facilities are a mess and seems very intent on closing a deal. I do not believe they are backing out.

Follow the Money

The details of the Sanofi-Genzyme merger were leaked over the weekend, indicating that there will likely be a $74 cash component plus a CVR. A number of deals were announced this morning. The deal with the largest cash component was Beckman Coulter, another healthcare company.

Increased M&A, specifically the cash kind, is a big boost for the market but especially for the sector where it occurs. I remain of the firm belief that this cash will eventually filter into the healthcare sector, specifically the biotech industry. Right now it seems the cash is filtering just about everywhere else.

Biotech Merger Monday

There is a high probability that the the Genzyme/Sanofi tie up will finally be announced next week. I am very long large cap biotech to try and take advantage of this. My largest long by far is Gilead, followed by Amgen and Celgene. Have a great weekend.

Sold 1/2 of Remaining Celgene

I sold half of my remaining Celgene on the most recent pop and rotated the proceeds to Gilead again. My Celgene position is small once again. Will look to reload if and when there is a retest.

Sold 1/3 Of Celgene Position

I sold 1/3 of my Celgene position on today's rebound. Rotated the money into Gilead which has been down 2% as collateral damage to Celgene in past couple of days.

Long TLT

Started a position in TLT.

No Emotions

We are not seeing a strong emotional reaction to the payroll numbers either way, leaving me less likely to trade the broader market. Treasuries are lower after yesterday's breakdown. I will be looking to buy treasuries via the TLT in the coming days if we get a little bit more of a washout.

There are two reasons I believe Treasuries might be ripe for a long trade. Sentiment on treasuries is very negative and this latest breakdown has the potential to get sentiment extreme. That is usually good for at least a bounce. Secondly, I believe rates are reaching levels where they will negatively effect the broader economy and have a slowing effect. While treasuries might be terrible long term investments they could be setting up for a nice trade.

Treasuries Are Broken

The treasury market is closed and treasuries have officially broken down. A strong jobs report that further hits treasuries might start to effect stocks negatively. While the market usually goes higher when treasuries are falling at some point higher rates start to effect the market and the economy. I believe we are nearing that point.

The Celgene Conundrum

Celgene now has the best valuation in the large cap biotech space. While the P/E is higher than the other large cap biotechs the growth rate is a lot higher and they have patent protection for a lot longer. When comparing large cap biotech stocks using a discounted cash flow model with the same WACC and terminal growth rate, Celgene comes out the cheapest.

The latest fall has been blamed on Revlimid, their cancer treatment. The stock is already down 25% on this news and earnings for the most part have been adjusted by far less. I believe the reason that the stock is falling so hard is that momentum/growth funds are the largest shareholders. They are indiscriminate buyers and indiscriminate sellers and right now they are selling. Price does not matter.

Celgene has a small share repurchase program but is not buying back their shares as aggressively as the other large cap biotechs. Gilead and Amgen are both aggressively repurchasing shares and the growth investors have largely fled those stocks already. These are the reasons I have waited until now to initiate a position in the shares even though the valuation is better than Amgen and Gilead. A large repurchase program and a further turnover of the shareholder base would make this my favorite biotech stock.

Added to Celgene

I have further added to Celgene and now own 3/4 of a position.

Dipping A Toe Into Celgene

I have bought a baby position in Celgene. It is a fallen angel and the growth funds are selling it hard. While I think the valuation is very attractive these fallen growth darlings almost always over shoot. I will buy on a scale lower.

Bad Cards

The Euro has been rallying based on tough talk on inflation by the ECB. I believe this is laughable as European officials are talking about a larger bailout for indebted countries at the same time. Today, Trichet showed his hand as he said inflation pressures remain anchored and the Euro is giving back some of its recent gains.

While the ECBs stance is more credible than the Feds insistence that inflation expectations are falling, both are reluctant to tighten unless forced to. The bond and commodity markets know this and are not backing down. Rock, meet hard place.

The Big Report

Attention will start shifting to tomorrow's Employment Report. My finger to the wind prediction is that we will finally see a strong report. Private numbers have been showing a stronger job market and the government figures might finally catch up. Yesterday, Challenger, Gray & Christmas announced that January layoffs were the lowest in nearly twenty years.

It is difficult to predict what the reaction would be to a strong report. Weak reports have been seen as positive because it means the Fed will continue to print money. My inclination would be to short into a positive reaction to the report as I believe this market has more corrective action in store.

Its A Ballgame

Now that the positive seasonality is out of the way I believe we will see more two way trading. It has been nice to be able to sell on pops and buy on dips for the past couple of weeks. Good riddance to the slowly climbing market of December and early January. Have a good night.

Treasuries Breaking Down

Treasuries are breaking down. Every time they have threatened to do so in the past few weeks they have been saved by the time the market closed. This is definitely worth keeping an eye on into the bell.

Sold Some Gilead

I sold the Gilead I bought on Monday. I still have a large position in the stock.

Inflation No Problemo

Ben Bernanke asserts that deflation is still a problem but a look at the CRB Index from CRBTrader.com says otherwise.
Doug Kass from RealMoneySilver.com points out that Whirlpool missed earnings because of lower margins and Electrolux announced price increases of 8%-10%.



Why The Market Is So Tough

If one assumes that we are in normal times than the level of the stock market is hardly alarming. While the market is not trading at bargain valuations, the multiple is roughly inline with history. Unfortunately, there are glaring imbalances and these earnings are dependent on a $1.4 trillion deficit, state deficits, 0% interest rates and money printing.

The mistake investors made in the last cycle was to ignore that earnings were a result of a real estate and credit bubble as multiples looked rational in 2007 as well. The problem with betting aggressively against this market based on this rationale is that the cash flows being generated by corporations are real even if they are not sustainable. They are using these cash flows to buy back their stock and other companies, buoying the market.

In order to bet aggressively against this market, other than for a trade, something needs to happen to disturb the cash flows of corporations or make them worth less. I believe inflation and higher interest rates have the greatest chance of doing so. We are still a finance driven economy and higher rates would be detrimental to the economy and corporate profits.

This does not mean we will not see corrections or that the market will remain a one way affair. It only means that in order to see a renewed bear market I believe something will need to happen to change the current dynamic.

Two Way Market

While I was planning on waiting until the end of the day tomorrow before considering new shorts I would be willing to short into a gap up tomorrow morning if it came with some excitement. At a minimum I believe that we now have a two way market where one can trade around positions. Have a good night.

Wrote Covered Calls On CA

I wrote covered calls against my position in CA.

All Doubts Have Been Removed

I would like to note that any doubts that have built up in the past couple of weeks seem to  have been removed. I believe this makes the long side dangerous once again despite the positive seasonality until tomorrow.

First Of The Month

The first of the month has shown remarkable seasonal strength in recent years and today looks to be no different. I am going to give the market the benefit of the doubt today and tomorrow but after that I would consider adding to the short side.

I find it troublesome that commodities have actually gone higher as the market corrected and interest rates are sitting at their highs. In a finance driven economy higher rates and higher commodity prices are a death knell although it will likely take some time for these factors to be felt.