Wednesday, June 30, 2010

No markups this month/quarter.

The weight of the world is on the S&P 500 above or below 1,040.

And that view is tomfoolery!

An 8.7% earnings yield seems very attractive vs. a 2.95% return on the 10-year U.S. note and no return on cash.

Right now, there exists numerous P/E multiple deflators and nontraditional headwinds to growth. The following factors don't necessarily prevent an extended bull market, but they most certainly have deflated P/E multiples -- the S&P 500 now trades at only 11.5x 2011 forecasts -- and may have put a cap on the market's upside potential:

* rising taxes;

* fiscal imbalances in federal, state and local governments;

* the absence of drivers to replace the prior cycle's strength in residential and nonresidential construction;

* the long tail of the last credit cycle (Greece, Portugal, Spain, etc.); and

* inept and partisan politics.

While there are headwinds aplenty (some gale-force), they are now mostly well-known and arguably have been incorporated in more measured market and economic expectations, as the notion that "it's different this time" has become an accepted view.

With benign inflation and near-historic lows in interest rates and with most measures of business activity still signaling moderate growth ahead (as Jim Grant wrote in Minding Mr. Market), to some degree, it can now be argued that the equity market is traveling the path of fear rather than the path of fundamentals, as emotions and a crisis in confidence have overwhelmed good corporate profits growth, strong productivity gains and rock-solid corporate balance sheets.

Importantly, the S&P now provides an 8.7% earnings yield (the inverse of the P/E ratio), which seems very attractive against a 2.95% return on the 10-year U.S. note and no return on cash. That differential between the S&P's earnings yield and other interest rates is among the widest in decades.

Jim Grant reminds us that investors are typically greedy when they should be fearful (e.g., spring 2008 and two months ago in late April 2010), and perhaps now, as was the case at the generational low in March 2009, they should consider being more greedy when others are growing more fearful.

Over the past few days, many individual equities have approached or are approaching increasingly attractive entry points as fear has overcome many market participants.

As one of the most savvy participants in the hedge fund community suggested last night, Mr. Market himself is looking cheap. According to this person, the market, in the aggregate, is currently discounting a double-dip and is pricing in 2011 S&P earnings at about 25% less than consensus.


So, you wanna buy a stock? You really want to buy a stock? You can't handle the stock! It has become apparent that we no longer have anyone on that wall looking out for the bulls. The close today was dismal. The month was dismal. The quarter was dismal.

After the bell, XRTX announced strong results, but given the market environment, I am not so certain that it will help the stock any. The after-hours response has been tepid. The midpoint for guidance next quarter is also well above estimates for both EPS and revenue. A weak reaction here would make this one move to the top of my buy list. However, we have to carefully consider market conditions, so scaling in seems appropriate.

Perhaps it will be good if everyone throws in the towel verbally, so that we can get a little lift here. We have finally crossed nicely into oversold territory, and normally, I would be looking for a bounce. But with the holiday weekend approaching I am not so certain. With the technical breakdown of the market, there is that chance that we will find everyone leaning to the short side and find ourselves staring at a snap-back rally.

Tomorrow is a new day, but it seems like the market is starting to finally remember what happened the day before.

Tuesday, June 29, 2010

AAPL Was A Must-Buy At Today's Levels......

Using weakness to lay on much more exposure to AAPL in spite of the fact that AAPL is the main tool to pressure the whole Naz currently. So until the market decides to move higher, AAPL may be stalled out or even trade weaker.

On the fundies the iPhone 4 is even stronger than my own projections and the iPad is highly likely to pass my variant high initial number of 7.5mm in the first year (when others were high at initial estimates of 3.5-4mm first year). AAPL's incredibly cheap down here in the 250s; and iphone 4 is coming to VZ in January (probably).......Hmnnnn.......

long AAPL

What The Market Is Saying Vs. What Is Real....

Here's what the market is saying. I hear it loud and clear:

1. If you don't have a job, you won't get one. The jobs market is moribund because we have no demand to meet, so what's the point of hiring? Plus, how much does it cost to hire in the new world?

2. There will be no lending. Banks are trying to figure out what they are allowed to do and not do and how much capital they have to hold in reserve. Good time to tell the lenders not to lend.

3. There will never be another house bought. The only reason anybody bought a house was because of an $8,000 tax credit. They aren't interested in 4.5% mortgages even though they save you a lot more money than the tax credit.

4. We will never build another house again. Why bother? No tax credit, no jobs.

5. We will never buy another car. Who can afford it? Why make them?

6. We will never export anything to China ever again. That's what its leading indicators are saying.

7. We will never use energy in the quantities we used to. That's what the low prices of energy are saying.

8. We have a government that wants everyone to join a union and wants stock prices lower.

9. We will never go out to dinner again, or even buy a cup of coffee.

10. Tech is finished. Done.

Now, here's the truth:

1. We have actually had job claims go down in recent weeks, and if we put together a stimulus based on how horrible the economy is, we can reverse this. It is reversible. We also know that overtime is running high. So it can flip.

2. Banks want to lend, they just need some small businesses to lend to and some guarantees to those businesses. The government can provide them.

3. There is huge pent-up demand for housing simply because household formation continues apace and there is demand, innate demand, for living space. The buying could start because mortgage rates are dropping to unheard-of levels.

4. We are building fewer homes than when we had half the number of people we have in this country now. That's not sustainable. Clearly not sustainable, especially with a decline in the inventory of homes. The Case-Shiller index that we saw today may have been inflated by the tax credit, but it's up substantially from a year ago and I don't think will slip that much because so few new homes are being built.

5. Car sales are going very well. We just heard that from KMX last week. Just last week. It can't change that fast. Plus, none of the auto companies are furloughing or discounting, so why should we think that sales are horrible?

6. We got ONE bad number out of China. Do we really think the government would allow the yuan to appreciate if things were really bad? And people are selling stocks to have money to buy the biggest deal of all time, the Agricultural Bank deal. That's the reason for the decline. Does anyone think the Chinese government doesn't know these indicator numbers ahead of time? And how many times do we have to say that they are cooling the property market and it is a positive, which is what produced the bad indicators?

7. Energy demand is running well in excess of last year. Coal inventories are down. Natural gas has had a big run. Oil's barely down.

8. Midterm elections are coming. Unless the Democrats are totally suicidal they will go with stimulus and create jobs and do what's right to reverse rampant deflation, as exhibited by the 10-year Treasury being under 3%.

9. DRI actually said things are trending better, not worse, when it spoke last week. They are the ultimate indicator of dining out.

10. If tech is finished, done, how do you account for the biggest sales of computer and computer-related products in history out of AAPL?

Look, I get the gloom. I know that things are bad. I don't want to be aggressive in buying anything. But at some point we will overshoot, and these negatives will be reflected even though they are WRONG. I'd say we're getting very close....

long AAPL

A House Of Pain

What we got, in the last hour or so, was one of those fast markets with no bids, etc. A market freefall. The rebalancings of the ETFs did us in. As always; nothing new.

They mounted the rally too early. It was bound to fail. The double and triples sells, coupled with the astounding lack of liquidity, created this abomination.

And the levels have been kicked to the curb.

We have seen such absurdities here, be it the C stopped-trading move, or the incredible declines in tech for companies that are doing great, or the general multiple shrinkage that seems to be happening hourly, or the sense that everything that was good -- China, Europe stabilization... It's a joke.

The malaise - created by our President and Congress - is at work, eating away at multiples. Eating away.

But remember, stocks do get cheaper as they go down, even as they take out key levels!

Monday, June 28, 2010


The action throughout the course of the day was only slightly more interesting than watching televised bowling.

The tobacco stocks popped on a story that the U.S.'s bid for tobacco damages was rejected by the Supreme Court.

This is not a great revelation, but it is a statement I wanted to make -- namely, that we all suffer from a remarkable degree of impatience. We live in a world of sound bites and the sense of instant gratification permeates every corner of our society.

In my field, the expression "long term" is an endangered species, similar to the flightless Raphus cucullatus (the "Dodo Bird").

Consider public policy, executive compensation, the manner in which we communicate and the investment business.

* Public policy: Hard, thoughtful political decisions are discarded in favor of short-term and popular decisions. In the end, these decisions are usually more costly.

* Executive compensation: Many of our business and investment managers have gotten away with a "heads I win, tails you lose" mentality over the past decade, and it nearly destroyed our financial system.

* Communication: In our social lives and in the way we communicate, convenience, expediency and haste rule the day. Speed dating and texting have replaced romance and conversation. Even texts are abbreviated as we now tweet. (Literacy and SAT English scores must be on the descent!)

* Investment business: Demands on short-term investment performance have intensified and have never been greater. Short-term decision making and trading (what I describe as worshiping at the altar of momentum) has increasingly trumped intelligent, analytical and thoughtful long-term investing.

In the business media, the staccato pace of CNBC's prime time "Fast Money" and "Mad Money" shows make them so popular, as do their Fast Messages and Lightning Rounds. ("Slow Money" and "Sane Money" would not make money for CNBC in today's world.)

Investors in mutual and hedge funds have become ever more conscious of short-term performance. As a result, few money managers have the luxury of "forever" as Warren Buffett's Berkshire Hathaway (BRK.B) investor base grants him. Indeed our investors' capital is now almost "call" money, as multiyear hedge fund lockups have morphed into monthly and quarterly redemption privileges for their investors.

In the final analysis, the question -- how are you doing this month? -- is short-sighted and is bad for our country, our investment performance and our lives (and can put us in a pickle).

Market Participants Are Becoming Numb.....

It has always been my contention that bad markets don't scare you out, they wear you out. The action today is a good case in point. The indices actually were up slightly, although breadth was slightly negative.

The problem was that it was just painfully slow. Volume on the exchanges was abysmal, and there is no leadership and no momentum. A couple things pop up here and there, but it is random and illogical.

Part of the problem is that for a week now we have been drifting downward, and more and more traders have been looking for an oversold bounce in conjunction with some end-of-the-quarter window-dressing. So far we've managed nothing, and the bulls are easily shaken out.

If we are going to have some end-of-the-quarter window-dressing, then tomorrow should be the day for it. Given the lackluster action today and the poor close, market players aren't well positioned for it, and that may be a good thing. In fact, I doubt that anyone trusts a bounce to last very long at this point, and that is probably the biggest positive the bears have in their favor.

I'm in C and AAPL, two that I consider to be very, very inexpensive. But this market is so dead right now that it can easily wear you out. If you can stay awake, I think we'll have some good opportunities here soon.

long C; AAPL

Sunday, June 27, 2010

A High Volume Day Due To Rebalancing

It was a very peculiar day of action, with the indices doing little, breadth quite positive and volume very heavy. The obvious explanation for the action is the Russell 1000 index rebalancing. Volume on the Nasdaq jumped about a billion shares as the blocks related to the rebalancing were posted, and that produced the highest volume of the year.

I'm not even going to try to explain how all the computerized programs worked to produce better than 2-to-1 positive breadth while the indices barely managed a gain. It is all a function of brokers trying to make some money as they provided index funds with the shares they needed for the rebalancing. Unfortunately, we are likely to see some of this artificial action reverse next week, so we will not be free of the machines.

Even though the indices held up well, there was some ugly action in big caps like RIMM, WMT, CSCO, MSFT, IBM and AAPL. Some of that action was probably caused by the rebalancing of the Russell 1000, but the selling seemed a bit too severe to be just that.

If we take a step back, the bigger technical picture remains quite negative. We still haven't had a decent oversold bounce, so maybe the end-of-the-quarter window dressing will give us some upside. After some sort of relief bounce, the bulls are going to have their work cut out for them if they are going to break the downtrend we've been in for two months now. We have had three failed bounces during that period, and I believe we are likely going to test the recent lows again in the next few weeks.

I'm optimistic that earnings season will make it more of a stockpickers market than a macroeconomic-driven one, but we still are a couple weeks away from the bulk of earnings reports. In the meantime, we will have to deal with headline economic news, which has been consistently negative lately.

long AAPL

Thursday, June 24, 2010


Stocks are becoming more alluring

I remain optimistic that we are in a bottoming process and that stocks are becoming attractive on a risk/reward basis.

This morning's economic data were promising and supportive of moderate economic growth.

Despite the hyperbole and concerns that the sloppy stock market action is signaling a double-dip, the economic data this morning were promising and supportive of moderate economic growth.

Durable goods (excluding transportation) was up 0.9%, in line with the market's expectations. April was revised higher (from down 0.8% to up 0.2%). Durable good orders have now risen in five of the last seven months and are up by nearly 20% year-to-date, and with inventories down, the inventory-to-sales ratio is below 1.55 vs. 1.82 a year ago. Ergo, inventory restocking should continue and should lead to a better jobs and payroll/hours worked.

Importantly, capital goods orders were up a very robust 2.1%, auguring well for capital-spending gains.

A more robust outlook was also confirmed by the Business Roundtable CEO Economic Confidence Index, which rose to a four-year high.

At 457,000, weekly initial jobless claims were better than consensus and came in at the best reading in seven weeks. Meanwhile, the four-week moving average moved lower. This series has been an outlier compared to other labor market indicators (temporary employment, average hours worked, corporate profits growth and overtime hours) but now seems to be falling in line.

Even continuing claims, those that have been unemployed for some time, fell into the better-reading camp.

"Strategy Session" is comparing the U.S. to Japan. Comparisons are foolish, and are typically seen at or near market lows.

JPMorgan Chase, Bank of America and Citigroup are under pressure from the view that they will underwrite GSE losses.

I am adding to my C long, owing to the pressure in the stocks stemming from the silly view that banks will underwrite the losses at the GSEs.

That's plain stupid.

long C


I think C is extremely cheap right now; I bought alot more today. I have an absolutely huge position in C right now. I think the stock represents tremendous value below 4, and while many targets sit at $5.50 to $6.50, I believe those are likely low by many, many percentage points.

I also like MS and GS. Circling back to C. I think the stock and others in the group will benefit from the rash of estimate cuts of late. Banks are not sequential growers and produce lumpy results - if they're being honest, that is. Certainly many estimate cuts are coming for the current quarter and maybe even for the following year. I might agree to lower the current quarter, but not the FY to next year's numbers.....

long C

The Bulls WILL Try Again

A lot of folks, including me, have been looking for an oversold bounce in this market. With the quarter winding down and the market selling off for the fourth day in a row, it was a fairly good setup for some sort of bounce, but the bulls just couldn't gain any traction, and when the early-afternoon push to the highs of the day failed, many traders decided to hit the eject button.

We are still oversold and we still have the end of the quarter and the Russell index changes to serve as upside catalysts, so I'm looking for the bulls to give it another try tomorrow. The important thing is to not let short-term trading blind you to the fact that the overall action is extremely poor and that we are caught in a downtrend.

What is most troublesome about this market right now is how negative sentiment has become over the macroeconomic situation. A few months ago, any mention of a double-dip recession was viewed as ridiculous, but now many people are extremely concerned that that is exactly what is happening. The economic reports have been very poor lately, and the Fed policy statement yesterday served as a vague confirmation that things are slowing again.

I'm certainly disappointed we haven't had even a brief bounce attempt, but today's washout just makes it more likely that some sort of relief bounce is coming soon. If we gap down in the morning, I'll be looking for the dip-buyers to step up with a bit more vigor.

Once we get past the end-of-the-quarter pressures, the bulls are really going to have their work cut out for them to turn this market back up. The bears are definitely in control, and they aren't going to go away easily......

Wednesday, June 23, 2010


The weakness in housing is the effect, and the sluggish growth in jobs creation is the cause.

On David Faber's "Strategy Session," there is a heated conversation regarding housing and the need for it to stabilize before the consumer and the markets come back.

From my perch, the weakness in housing is the effect, and the sluggish growth in jobs creation is the cause.

Given the multidecade improvement in affordability, generally low mortgage rates, low new-home production (vs. household formations) and lower home prices, any improvement in job growth will cause a sharper-than-expected recovery in housing, especially given the very low expectations today.

My expectation is for an S&P range of betweeen 1050 and 1180 for the balance of the year.

We are now at about 1085 (in the morning), a level near the bottom of the expected range that provides increasing value.

The sound bites presented by the media reduce investment decision making into a far too simplistic equation.

"The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd; indeed, in view of the silliness of the majority of mankind, a wide-spread belief is more likely to be foolish than sensible"

-- Bertrand Russell

* Our investment world is far too complicated and unpredictable to have a high degree of confidence.

* Take the media's messages with a grain of salt, and run away from anyone who is certain -- and that most certainly includes me!

* My two bits? As I view the investment/economic mosaic, there appears to be no sustained bull market or bear market in sight.

* U.S. stocks are likely now trading back toward the lower end of my expected S&P 500 range for the next six months (1,050-1,180) and are back to levels that provide "value."

* A balanced market view seems appropriate.

What continues to remain clear to me is the shocking confidence they all seem to have in their views. I certainly wish I was so certain in my views (and so correct), but, alas, that is not the case. At least, I am honest about it, though. Most of these coaches, unlike the Oracle of Omaha (who is fearful when other are greedy and greedy when others are fearful), generally praise stock markets when they are rising and condemn stock markets when they are declining.

I have a number of pet peeves regarding the media -- one example being the sound bites that members of the media and their guests present that tend to reduce investment decision making into a far too simplistic equation. Another peeve is the general notion often espoused by the media that the market reflects what is occurring in the economy. It does not; it is discounting the future. When stocks are flying higher or crapping out, few in the media ask whether the markets have discounted the good or poor fundamentals -- for example, not one media member in months has asked the bears to explain the wide gap between fixed-income yields (Treasuries and investment-grade) and the S&P 500 earnings yield and whether that gap could be evidence that the investment and economic headwinds have been meaningfully discounted. Conversely, when stocks were flying high three years ago, few in the media questioned the stretched affordability of homes, the proliferation of no-documentation/low-documentation mortgages or the ramifications of the mushrooming in derivatives.

It is typically after the fact (and when it was too late) that these issues were raised.

Another objection I have is the frequency of guests who are either perma-bulls or perma-bears; they are too often wrong and never in doubt. Too little attention is paid to past performance and dogmatic opinions, and too often guests are invited regularly because of their hyperbole (and associated controversy) and, even at times because their firm is a large advertiser! Unfortunately, this is the truth.

Don't be influenced by the sound bites of the perma-bulls and perma-bears; they are attention-getters, not money-makers. Their comments are generally as useless as the strong opinions that accompany them.

"Anyone who tries to make a distinction between education and entertainment doesn't know the first thing about either."

-- Marshall McLuhan

Finally, it is important to distinguish that those media observers who assert (with certainty) glib market opinions reside in the press box, not on the field -- an important distinction! This might seem harsh, but since some in their audiences seem to take their views as gospel, I want to set the record straight that this is ill-advised!

I have long felt that in a world with so many uncertainties and numerous economic outcomes, a glib and certain investment and/or fundamental view is uncalled for. The same can be said of a technical view, as the technical picture is blurred by new influences (most importantly, high-frequency trading strategies) that mess up and obscure those technical setups.

It is for these reasons that I almost always frame my views with the caveat that a sense of conviction is fine, but our investment world is far too complicated and unpredictable to have a high degree of confidence.

And it is for these reasons that in making investment and economic conclusions, I try to use the words "possibly," "might" and "likely" as opposed to "will" and "definitely."

Both traders and investors should have smaller positions and more diversified portfolios than what would have been typical over the past several decades.

Fed Day

It wasn't a positive development, but today was one of the quietest FOMC announcement days that I can remember. I'd much prefer we had stronger emotions and more volatility rather than this dead action where we just drift around randomly. Even the Fed announcement barely caused a ripple in the ennui.

Volume was quite light today, and breadth was just slightly positive. There weren't any pockets of great strength, nor were there any notable areas of weakness. We just flopped around and ended with a mixed close.

The good news is that we have an interesting setup for the end of the quarter. We don't have much technical support, but we are bit oversold. Longer term, we are still in the downtrend that started at the end of April, but the selling of the last few days is a fairly good setup for some sort of bounce as we conclude the quarter.

Tuesday, June 22, 2010

Kicked In The Teeth Again

With the buyers gone, with the shorts all squeezed out, we see what happens when the market is left to ponder nothing but the oil spill, weak job growth and a housing market that's lousy and going to be lousy for some time. The shock of any of these, though, is that they are shocking.

We are so locked in this range of Dow 9700 to 10,700, and when we get near the top, we just get clobbered. And we get clobbered in sickening fashion. That's because one thing is becoming awfully clear to all participants: When the market is down going into the homestretch, it will be pummeled beyond recognition sometime within the last half hour, and stocks that are down 1 point go down 2, and stocks that are down 2 points go down 3. If there is a thesis attached and you get bad macro news -- say today's housing numbers -- all housing plays will fall viciously with no bottom.

It is as if 500,000 more homes that weren't sold mattered, even as I don't know a soul who actually believes in these silly housing estimates. I am not an economist, but I have my own estimates, and the existing-housing sales came in above what I thought we would get post-tax credit, and the price of housing went up even though everyone says there is going to be a double dip. It should be going down, not up. The inventory of homes fell. Housing is actually in line to slightly better, given no unemployment growth. No matter, there are no bids today for anything housing-related. These stocks were crushed beyond all recognition.

The trajectory of all sorts of stocks can be shocking. Oil ran up $7, and the oil stocks crept up over many days. Oil loses 61 cents, and the stocks give up a third of their gains. In an afternoon. I can give you a half-dozen sectors that acted the same way.

We are in an untrustworthy market, one that was up -- ridiculously so if you ask me -- at the opening for no reason I could fathom. That turn in the futures to higher levels was one of the great fake-outs of the year. Without the persistent bid, I figure we could give up about half of what we just made even if nothing happens, because other than China, nothing happened. We solved the systemic risk, but we sure didn't resolve the earnings risk.

We are about to hear from some tech companies that do not yet see good news out of China and have seen bad news out of Europe. The market is not ready for that. We have the stocks that are the highest growth taking it on the chin the most, even more than the housing plays. We have the makings of a rollover that could take us back another 2%-3% before it's over and the marking up begins.

To me the best strategy remains picking at the winners - CMG, AAPL, NFLX, DECK, ISRG, ESRX and CRM - use the October deep-in-the-money calls to ensure you catch the bounce but limit the downside if something systemic actually does develop that I know I don't see. And otherwise expect a pasting, because the buyers have vanished and aren't coming back without new information or without some stocks they want to take back up to make their quarters.

long AAPL

Monday, June 21, 2010

Days Like Today Make Me Quite Angry; Very, Very Frustrating

I feel like I need a shower after that session. It felt unavoidable, a Monday with a ramp up from the get-go is a Monday that is looking for trouble, especially after an options expiration when those who came in long from exercising calls that were barely in the money rushed to sell their positions into strength.

I hate days like this.

Funny thing is, no one can take away what's happened in the past four weeks: The Europe crisis turned into a manageable situation where we can expect losses but not wholesale turmoil, while China's actions today verified its soft economic landing.

That's why I don't believe this market is in bad shape, just overbought, where so much money bid up stocks as these two regions of the world improved.

Still, reversals like today rarely translate into better markets the next day; probably no Turnaround Tuesday this time. If it weren't the end of the quarter, I would say we could get hammered over the next few days. Instead, I believe people will be putting money to work to show their bullishness, even as in their hearts they remain one-foot-out-the-door bears.

After a day like today, who can blame them?

Friday, June 18, 2010

Thoughts From A Slow Market Day

Some smart people out there that I pay attention to are buying BP....

Some awful things have happened over the past few years, but the vilification of business magnates is nonproductive.

Our elected officials are just as liable, but they hardly ever take responsibility for their actions.

It is too easy for our representatives to make mistakes given their lack of business experiences and partisanship.

The world is interconnected, interlinked and increasingly complex. Risks of black swans, previously perceived to be small by corporations, investors, politicians and regulators, are now being reassessed, owing to (among other issues) globalization, tighter correlations, advancements in technology, the growing/excessive complexities of interlocking supply chains and derivatives, the acceptance of greater/extreme risk-taking ("the longer people make money by taking risk, the more imprudent they become," the Minsky moment), the greater connectivity of increasingly more complex systems (see Paul Ormerod and Rich Colbaugh) and so forth.

Given the "newness" of these and other challenges as well as the greater frequency of black swan events, P/E multiples are being pressured and should continue to contract as a comparison between today's valuations to those of history can be expected to lose some of its significance and relevance.

There exists numerous price/earning multiple deflators and non traditional headwinds to growth. These factors don't necessarily prevent an extended bull market, but they will most certainly deflate price/earnings multiples and put a cap on the market's upside potential:

* rising taxes;

* fiscal imbalances in federal, state and local governments;

* the absence of drivers to replace the prior cycle's strength in residential and nonresidential construction;

* the long tail of the last credit cycle (Greece, Portugal, Spain, etc.); and

* inept and partisan politics.

The last point, inept and partisan politics, was prominent in my mind yesterday as I watched the House Energy and Commerce Committee grill BP CEO (for now) Tony Hayward.

When I was growing up in Kansas in the 1970s, there were essentially three television stations (ABC, NBC and CBS); there was no CNBC, Bloomberg, CNN (came later) or C-Span. Cable was in its infancy, especially in the Midwest.

Variety programs such as "Sonny and Cher" and situation comedies such as "The Mary Tyler Moore Show" crowded television's airways. There were no reality shows - in fact, with the exception of an abundance of quiz shows ("The Dating Game," "Jeopardy!," "To Tell The Truth," "The Price Is Right," etc.), there was little reality in television at that time decades ago.

Our politicians were not that visible in days of old. Interviews in magazines revealed their personal lives, but, like The Wizard of Oz, they remained very much behind a curtain of secrecy, for the most part.

Of course, that was awhile ago.

In the interim interval, the three stations morphed into nearly 1,000, as cable television, satellite TV, the Internet and other influences changed the communication landscape. In the process, our politicians became much more visible. Congressional hearings were featured live on cable, and those politicians' strengths and weakness were slowly revealed.

In time -- just as the Tin Man, The Cowardly Lion, The Scarecrow and Dorothy found out -- we began to get a more complete picture of our politicians as the onion of reality was peeled more and more through that greater exposure, and what we have seen in this disclosure of our legislators has increasingly become (at best) disappointing and (at worst) downright scary.

The peeling of that onion has naturally revealed a group of politicians that are human (like all of us) but who, in many cases, seem to reside in a governmental ivory tower and appear to lack a complete understanding of business and economics. Unfortunately, what we have seen in these televised hearings over the past decade is governmental grandstanding and political partisanship, which was further demonstrated in yesterday's aggressive inquisition of Tony Hayward.

Let me make it clear, in many corners of our business community, some stupid, reckless, irresponsible and even fatal things have happened over the past few years, but the process of skewering cultural/business villains (such as bank managements a year and a half ago and BP yesterday) is nonproductive.

This is all of particular concern in 2010 as our government (in order to take us out of the Great Recession) has taken a greater hold on our lives than ever economically and financially. Our representatives have failed in a number of important long-term policy decisions and hardly ever take responsibility for their actions. Cutting out dependency on foreign oil came to my mind yesterday.

Moving forward, it seems to this observer that it is too easy (and likely) for our representatives to make policy mistakes given their lack of collective business experiences and partisanship.

It's A Start

What a boring day; of course it was a late-spring Friday. We didn't even manage to move very much in the final minutes of trading like we have done so often recently. Everybody was already in the Hamptons, I guess. However, while it was a very slow day, the flat action is a very good way for the market to consolidate the week's gains. We have done an excellent job of holding on to the breakout over 1108 of the S&P 500, and the flat action of the last three days serves as a good foundation for some upside as the second quarter winds down.

If you want to find some flaws in this action, the low volume, narrow leadership and lack of energy are good candidates. This may be the "new normal" regarding volume, however. The so-called retail investor is absolutely nowhere to be seen anymore. This market is acting as though big buyers are tripping over each other to load up, but for some reason almost all of rallies since June 2009 have lacked big momentum. However, they keep on going and have consistently ground the bears into short-squeeze fodder.

My biggest concern about the market is that the news flow has generally been poor. The economic reports from May have been uniformly weak, and other issues like the oil spill and European debt are far from any resolution. Probably. Gold hasn't been leading this market because of the cheery economic situation, and the risk of negative developments strikes me as fairly high.

Nonetheless, we have a decent base for some upside, potential for some end-of-the-quarter mark-ups and then earnings season, so the bulls will have some opportunities....

Thursday, June 17, 2010

More Randoms

Another ridiculous close, with a ten-handle improvement in the S&P for no apparent reason.

Repeating for emphasis: Kill the quants, before they kill us!

Of all the commentators in the business media, Bloomberg's Tom Keene is among the best, if not at the top of my list.

He does his homework and is very smart. Last night Keene interviewed former St. Louis Federal Reserve President Bill Poole on Bloomberg Radio.

Since the Fed can't lower the federal funds rate anymore and doesn't want to expand the mortgage-backed securities purchase program -- Poole opined that, if the economy softens more than expected, the Fed will consider the option to buy longer-dated Treasuries to bring rates down and flatten the yield curve.

Several key components of the Philly survey were strong!

One can be negative on the outlook for equities and the domestic economy for many reasons, but the weak Philly Fed is not a good reason!

The market seems to be over-reacting to the headline Philly Fed.

Specifically, many of the components were inconsistent with the Philly headline and with the in-line LEI (+0.4% vs. flat in May), which was announced at the same time. The six-month diffusion index in the LEI and the rate of change were 80 and +7.9%, respectively. The LEI signals negative growth when it reads -3.5% and the diffusion index is under 50.

As well, the Philly release conflicted with the strong Empire PMI and industrial-production gains reported earlier in the week.

Moreover, several important components of the Philly release were strong -- new orders increased, delivery times lifted and the six-month outlook improved. Yes, the labor component was weak -- but this is well known!

I am that Apple will announce a 4-for-1 split.

Structural unemployment might be dismissed now, but -- in the fullness of time -- probably not!

The claims number was poor. While the price momentum of the stock market is great (and intoxicating!), less so in the employment market.

The weakness in the jobs market underscore that we are in The Era of the Temporary Worker.

This morning, Sanford Bernstein speculates that LNC could be acquired by Sun Life of Canada later in the year.

long AAPL; long LNC

Tech Stuff

The Philadelphia Fed number didn't change my economic growth view in the least. Though I may shave a half a point off my 2010 GDP number due to Eurozone hyperbole.

JDSU looks compelling again and that uptrend line on the weekly lows has held. This should go a lot higher.

I try to see both sides on every position. This BAM warning on AAPL looks more like ridiculous marketing than real analysis to me. I still see AAPL at my long running $400's call (which many are not catching up to); until my longer running concerns about the company unfold.

long AAPL

Probably A Major Positive That The Bears Couldn't Do More Damage Today....

The good news today was that we managed to hold the 1108 breakout level for a second day and continued to do a good job of consolidating the recent rally off 1050. The bad news is that it was an extremely boring day. We did have another one of these crazy, illogical, last-minute swings to close us near the highs, but volume was light, breadth slightly negative, and we had the miserable BP congressional hearing on television all day.

It is a major positive that the bears aren't able to do more damage, given that we are a bit overbought and don't have any volume, but the bulls need more life before we'll have better trading opportunities. There is some very narrow leadership, but it sure seems like most market players are either feeling disgusted or confused by the recent action.

We are in no-man's land right now and can easily tip one way or the other, depending on the next headline that hits. Bad news in the near term seems more likely than good news, given what has been going on, but the bulls aren't ready to throw in the towel just yet.

We need to watch closely to see how things develop and be ready to act quickly. I have the feeling that a big move is coming very soon, so stay extremely vigilant.

Wednesday, June 16, 2010

Today's Market

Wall Street was able to shake off the slow start to the day. After trading lower for most of today’s session, the market staged a late rally to end the day essentially mixed. The Dow Jones Industrial Average finished five points higher, at 10,409. The other two major U.S. stock indexes, the NASDAQ Composite and the S&P 500, were virtually unchanged from yesterday’s close.

The housing industry, which has been one of the few sectors not to join the slow, albeit uneven economic recovery, took another hit today with the release of some disappointing construction data. Home construction and applications for permits fell markedly in May, absent the government’s $8,000 homebuyer tax credit. A continuation of this trend could have a negative impact on future job creation—which would not be welcome news given the nation’s high jobless rate. Worries about the effect of the ongoing housing woes on the economy contributed to the early morning selloff.

The poor report on housing overshadowed more promising reports on the economy, most notably news that inflation at the wholesale level remains in check and that industrial production continued to rise in May—the third straight positive monthly reading.

The middle day of the trading week also brought some big news on the ongoing Gulf of Mexico oil spill. Under intense pressure from the Obama Administration, BP Chairman Carl-Henric Svanberg confirmed that the British petroleum giant has agreed to set aside an initial $20 billion to pay victims of the oil spill. Mr. Svanberg also announced that BP has canceled a dividend payment—totaling $2.6 billion—scheduled for June 21st. The company also won’t declare a dividend for the second or third quarters. Battered shares of the oil company finished the day up nearly 2%.

Meanwhile, bond prices rose slightly after retreating some on Tuesday. The yield on the 10-year Treasury note, which moves in the opposite direction of the price, slipped modestly, to 3.28%. Results in the commodities markets were also mixed, with the price of crude oil edging slightly higher, to $77.59 per barrel, while gold was down nearly $4.00 on the day, closing at $1,229.30 per ounce.

Tuesday, June 15, 2010

Beware Of This Rally; Plus, The BP Numbers Start To Make Sense...

The BP numbers are starting to make sense: If one is blowing $500,000 a day on a rig, one had better be spewing something like 50,000 to 60,000 barrels a day, or else it isn't worth it.

I was always skeptical of the initial reports of the spew because if there really was just a couple of thousand barrels a day leaking out of a big hole in the ground that they spent a fortune drilling, then what kind of risk-reward was that? If it was only spewing 1,500 to 5,000 barrels you have a losing proposition on your hands.

Now, we are getting closer to the truth. This well, perhaps one of the greatest finds in history, was a terrific bargain for the company, despite the expense of the Transocean rig. It was such a bargain that you have to wonder why in heck would BP stint on anything? It should have gone full-out deluxe. It obviously didn't.

The other day, when BP broke down viciously to precisely the levels it is now trading after hours, it took the whole market with it. I have to ask, why couldn't it do it again? It wasn't like we went up on fundamental news. We went up more than 2% on "caught short/expiration" blather that can easily reverse on "caught long/expiration" blather that delivers a decline of 2%.

That's really the issue here: the potential phoniness of the rally. Because, if it collides with real bad info -- say about BP, in which BAC comes out and says business should be curtailed with the company, the first broker to really break ranks with the "don't worry about it long term" crowd -- it could undo the rally, especially now that we are at plus-6 on the oscillator, a level that always makes me countenance much more selling than buying.

In short, as we continue to find out more about BP and it continues to be bad, we can't rule out a repeat of last week's brutal BP-inspired decline, especially when today's rally felt very much like short-covering and options-expiration handiwork.

Today's Comment

It was a busy day on Wall Street, highlighted by the return of the bulls after a one day respite to start the new trading week. All told, advancers far outpaced decliners on the day. The Dow Jones Industrial Average rose an eye-catching 214 points, to end the day at 10,405. The other two major U.S. stock indexes, the NASDAQ Composite and the S&P 500, also fared very well, rising 2.8% and 2.4%, respectively.

A few factors contributed to the day’s broad-based gains, most notably the strengthening of the euro, which has been battered in recent weeks, as debt concerns engulf a few nations in the European Union. The euro, which has become a yardstick used by equity investors to gauge the market’s appetite for risk, rose to its best level since earlier this month. The data was positive news for stocks of industrial and technology companies that do a good deal of business overseas. The resultant strong performance of industrial and technology stocks pushed all the indexes markedly high, especially the tech-heavy NASDAQ. Noteworthy gainers included tech giants CSCO, MSFT, INTC, DELL and AAPL.

The strength of the euro against the dollar today helped the commodities markets, as well. Commodities become more affordable for overseas buyers when the dollar falls. This was good news for the oil producers. On the day, crude oil rose 2.4%, to $76.94 per barrel. The rise in the price of oil lifted energy stock, with a noteworthy jump in the share price of HAL.

Meanwhile, the news was not as bright for the housing industry, which has been one of the last sectors to join in the evolving U.S. economic recovery. The National Association of Home Builders/Wells Fargo Housing Market Index, which measures current sales conditions, fell five points in June. The survey noted that homebuilders are feeling less confident about a near-term housing market recovery now that government incentives for buyers (i.e., an $8,000 tax credit) have expired. It remains to be seen whether the growing pessimism amongst builders will become a drag on economic output.

Monday, June 14, 2010


The day started with the typical Monday-morning bounce, but we then ran into obvious overhead resistance on the S&P500 at 1,108, which is the 200-day simple moving average. Everyone and their brother is fixated on this level. The tricky thing about it was trying to figure out whether it would serve as a contrary indicator, because it was so obvious to so many, or end up being a self-fulfilling prophecy.

At the end of the day, the answer was that enough market players decided 1,108 was a good enough level to do some selling, so it ended up working very well as a resistance level. This was textbook action. We bounced on late volume the last two days and were then turned back right where it was to be expected. It was almost too perfect, especially after a year of action in which technical levels had any real impact.

So, now that the bulls have been turned back, the issue is whether they can regroup and make another run at that 1,108 level. The good news is that the more often a level is tested, the more likely it is to fail, but the problem is that we need to find some underlying support before we can start talking about another upside attack.

The intraday reverse and the close at the lows suggest we will have some more weakness in the near term. We have some support at 1,075 and then a major level at 1,050. I would not be at all surprised to see some trading-range action here while we build up a base of support for another run at the upside.

It is a muddled action with a negative bias and is supportive of small positions and short time frames.

Friday, June 11, 2010

Friday Thoughts And Stuff

From the SEC to HFT - Everyone knows that former politicians become lobbyists, so it shouldn't be a surprise that ex-SEC associate directors become high-frequency traders!

This was on Reuters today: "SEC Associate Director King to Join High-Frequency Trader and 'Supplementary Liquidity Provider' GETCO"

A short I'm considering: I anticipate a $2 billion to $2.5 billion secondary shortly.

There were a few economic releases overnight from outside of the U.S. -- in the U.K and China -- * U.K. April Industrial Production dropped by 0.4% vs. expectations of a modest rise. U.K. May inflation worsened, too.

* Inflation in China rose at an annual rate of 3.1% in May, up from 2.8% in April, hotter than expectations and standing at a 19-month high. Industrial production dipped modestly below consensus forecast and below the April rate of growth.

Domestically, my concerns regarding the deepening financial disarray of our state and local governments grow clearer:

* New Jersey raises property taxes.

* New York state is considering paying bills with IOUs to avoid a shutdown of services.

Will It Continue Next Week?

The most impressive thing about the action today was that we managed to ignore some very poor retail sales news. We even managed another final-hour spike. When we didn't fade going into the end of the day, the shorts were squeezed, and we ended at the highs of the day.

A strong finish is always a good sign, but if you want to find something negative about the action, the very low volume is a perfect candidate. That is to be expected on a summer Friday, but it diminishes the momentum and makes it more difficult to trust.

I believe we have a fairly good shot at hitting 1105 or so on the S&P 500, but then some very stiff overhead resistance is going to kick in at the 200-day simple moving average, and I'll be looking for the bears to be more aggressive.

Betting against V-shaped recoveries in this market has not been a smart bet until this past month, but it has worked almost perfectly at key resistance levels recently. We have had a major change with the news flow being much more negative, and I don't expect it to suddenly improve. Not only have recent jobs and retail sales numbers been disappointing, European debt problems are far from being resolved, and of course the Gulf of Mexico oil spill will continue to dominate the headlines for quite a while.

Will this upside continue next week? Don't know. I want to stay flexible and opportunistic and at the moment that seems to favor the long side. Just keep in mind that the obstacles to the upside are significant and unlikely to be overcome quickly or easily.

Thursday, June 10, 2010

Thoughts Of The Day

Accumulated thoughts today:

Nice publicity for the mortgage insurers - The head of AIG's United Guaranty operations has positive comments on the mortgage insurers in a Bloomberg interview.

This should help PMI, RDN and MTG.

Good market breadth is important, in order to counter the high-frequency trading strategies.

Is the Greek deficit narrowing?

I hear that the Greek finance ministry has reported that the budget deficit narrowed 38.6% thus far in 2010. That can only help the euro and the capital markets.

The SEC has now approved new stock-by-stock circuit-breaker rules, which address the effect but not the cause. Unfortunately, the new rules beg the issue of high-frequency trading; they address the effect and don't address the cause!

Really dumb ... again!

On yesterday: Catching a slight break in price momentum, high-frequency traders ran rampant in the last 45 minutes yesterday.

One cannot overstate the erosion in investors' confidence that these programs are causing on a regular basis.

I would immediately implement three rules to halt the outsized impact of momentum-based high-frequency strategies.

Here are three basic rules that I would immediately implement for the purpose of halting the outsized impact of momentum-based high-frequency strategies that occur in the vacuum of hedge fund de-risking and in the absence of retail domestic equity inflows:

1. Institute a transaction tax exclusively devoted to high-frequency trading strategies. While I really hate this idea, it would immediately and dramatically increase the costs to high-frequency traders and reduce the incentives and edge of many price-momentum strategies.

2. Bring back the uptick rule for shorting. This short-sale rule was eliminated in July 2007 -- its original purpose was to prevent traders from being able to force prices downward. Bring it back!

3. Disallow the ability of high-frequency traders to see order flow and to discover stop levels.

long MTG

Just A Run-Up In A Bear Market? Or The Start Of Something Better?

The action today was a particularly good example of how some of the biggest point gains come when we are downtrending or in a bear market; if in fact we are in a bear market. After what looked like a good start on Wednesday, a sudden frenzy of worry over the BP mess caused a quick reversal and a poor finish.

Having shaken out the weak bulls on Wednesday, we gapped up strong this morning and, suddenly, everyone was scrambling to find some long exposure. When we held up during the last hour for a change, the bears were forced to cover, and we finished the day at the highs.

That is the anatomy of a "usual," classic, bear-market spike. However, without the uptick rule, etc. the "old rules" no longer apply. There is probably a good likelihood of some follow-through, as the optimists start to embrace the idea that we have put in a bottom, but the big test will come if we make it back near 1100 on the S&P 500. That's the major resistance and the point where the bears will look to reload shorts.

Many bulls have grown used to V-shaped bounces, since we had so many during the recent uptrend, but they're more the exception than the rule. Overhead resistance has made a comeback and it matters a lot more than it did last summer. That could change, but during this downtrend, we've already had two failed bounces right at key resistance. It will be a good test to see what happens when we next hit a major level.

We may have more room to the upside in the near term. I'm not carrying any shorts. It is mainly oversold bounces on broken charts, according to the believers, as was the case with many of the oil stocks today. You can make good money trading those patterns, but the strategy requires a high level of discipline.

Overall, I like how this market has finally had a major shakeout. It was overdue, and it has changed the character of the action, which always leads to a new set of opportunities. Just stay nimble and open-minded and you'll be able to navigate for some gains.......

Wednesday, June 9, 2010

So Should BP Be Owned Or Not?

We had a nice "up" day going; then the Beige Book hit and BP kept getting slammed down hard. It is my view that the worsening BP situation (the spill and the share price) is weighing on stocks and on investors' confidence.

Frankly, the threat of bankruptcy at BP could precipitate other credit concerns. Since anything that can possibly go wrong will do so in our stock market, the next shoe to drop could be concerns that BP might have some counterparty obligations with hedge funds or commercial banks. And a potential threat of a BP bankruptcy could precipitate additional credit concerns.

I have quickly looked at BP's balance sheet, and its derivative positions total $14 billion -- derivative assets of about $8 billion and derivative liabilities of $6 billion.

This seems quite manageable ... but in this market, who knows?

Crappy Bounce; Then We Fell Apart

I am somewhat bewildered.

The markets did nothing to help themselves from a technical perspective today. The good news is that we managed to take another shot at the 14-day simple moving average and hold a support line that's making some higher lows. Well, barely higher lows, but if you squint, they are there. It doesn't fit perfectly with the traditional definition -- then again, what's traditional or perfect these days? -- but the SPY seems to be shaping up with an inverted cup-and-handle pattern.

The SPY is banging down near support once again today. In addition to that, there isn't any relief from the ADX, RSI, or the stochastics. They all shout stay indoors. It's rough outside. You may be better off skinny dipping in the Gulf of Mexico, then jumping in these waters if the current support line breaks.

The longer we can remain in this range, the better off the markets will be. Weak hands can rotate to strength, and a stronger level of support can be created. A close over the 14-day SMA for two days in a row would certainly strengthen the bull's case, but for now, the technicals still don't say 'buy.'

The energy sector has certainly been rife with challenges lately. One name of interest should be XOM. Even though shares broke down from a long uptrend at the beginning of May, then fell further out of a bearish wedge in mid-May, there are signs of life. The stock is in a sideways pattern, with clearly defined support and resistance. The positives are the bullish divergences seen in the RSI and stochastics readings. Also, the ADX is starting to turn over and become less bearish. XOM may set up as the energy stock to own once this sector starts to turn, or even before it turns. A breakout over the current resistance should be a clear indication to start building a long position.

I have to say that, emotionally, it is hard to be short BP and APC. These are big companies that employ lots of people. They are companies that help meet the energy needs of our country. However, they are also responsible, along with RIG and HAL, for what will turn out to be the worst ecological disaster of the past 100 years. And certainly the worst, by far, in our country, so far. Whether you hate the company or believe that some people are pushing too hard, one must leave those emotions at the door when getting long or short here.

Beyond retail, there was very little positive to take from the day. I suspect we will see some dead-cat bounces in names such as BP, APC, and the euro. Many charts are shaping up like SPY and XOM. For those looking at the concept of the collar, there are clearly defined lines for calls and puts at the moment. As we head to the end of the week, I feel we need to see some form of a push higher tomorrow; otherwise, Friday may not be worth getting up for......


I don't own any CIEN; but I need to. And maybe fairly soon.....CIEN should have been up 15% to 20% today, but given our broken markets and childish fears over BP and the Euro, it wasn't. Not even close. I've described CIEN as a secular growth story for some time now amid a preponderance of extreme negativity. The negativity swelled to outlandish proportions on the purchase of Nortel's MEN assets which I felt CIEN paid a great price for, and viewed the deal quite positively.

For the last quarter or two some analysts have seen the bullish light on CIEN, and the deal, and have come around with buys or strong buys with price targets in the $20's.

CIEN is in two of the global networking sweet spots currently; with industry best in class technology and what looks to be an increasingly accretive deal fully in their sails.

I fully expect more positive analyst traction in the coming weeks and months - and am sticking to mid $30's or higher value on CIEN's shares. I also think it's becoming more likely that CIEN could be a take out target - and the potential price is now rising by the quarter......

Tuesday, June 8, 2010

So Far, It Looks Like Just A Minor Bounce....

We finally managed a strong close, but it was a mixed day of action, with the Dow Jones Industrial Average and S&P 500 leading, while the Nasdaq and small caps struggled. Big-cap momentum favorites perked up, but reversals in oil and semiconductors were the main drivers into the close.

The market has been pushed down hard enough recently that it was due to bounce, but it hasn't been easy. The action looked quite lackluster until the last 90 minutes. Even then, breadth on the Nasdaq was still solidly negative, with around 1,050 gainers to 1,575 decliners.

At this point, we have nothing more than a minor oversold bounce. It does nothing to change the bigger technical picture, which remains negative, although still a bit extended to the downside. We can certainly bounce further. It's a good sign that we held above the low in May, but there isn't any good technical reason to believe we have found a lasting low.

We can expect to play more oversold bounces here, but we need to continue to respect the bears, and the fact that a downtrend is firmly in place. Still, today was a nice change of pace after the beating we've suffered.

I'm Not Sure How Many Care, But C Is Seriously Undervalued At $3.70....

C is seriously undervalued, as a government selloff in its holdings and promising restructuring plans have not been fully realized in its tangible book value. Dick Bove recently reiterated his "buy" rating on Citigroup stock, with a price target of $6.90 - I agree.

Just one example of the fact that the company's tangible book value is understated is Primerica. Approximately 60 percent of the company was spun off a month ago. The almost 40 percent that Citigroup still owns is now worth close to $700 million.

C's stock is reflecting the US government's sale of its holdings, and not the intrinsic value of the company. Oh, there's also the bank's plan to restructure CitiFinancial to make it more saleable.

In his note, Bove commended Chief Executive Vikram Pandit's leadership, saying he "has guided the transformation of this company from what was essentially a bankrupt entity to what is now likely to be one of the country's strongest banks."

long C

Monday, June 7, 2010

The Market's NOT Going Down Due To A Change In Fundamentals....

An exaggerated lift in risk premia is the source of the month-long decline, not a material change in fundamentals.

I watched "Fast Money's" halftime segment on CNBC, and I was comforted by the unanimity toward an unfavorable market view.

That further confirms my views that an exaggerated lift in risk premia is the source of the month-long decline in share prices, not a material change in fundamentals.

Further: Despite the hyperbole (and fear of lower stock prices), there remains no evidence of stress in funding or in liquidity in European banks over the last week.

Nor are credit spreads, while up from a month ago when equities were much higher, at levels that show stress either.

What has happened is that stocks have fallen because of a combination of hyperbole and the frightening void (and loss of confidence) exploited by high-frequency trading strategies (in the face of hedge funds' "de-risking" and in the absence of retail domestic equity inflows).

In support of my view, Barclays, ISI and Morgan Stanley raised their forward U.S. GDP forecasts.....

A Dreadful Day

There is an old saying that strong markets tend to close strong and weak markets close weak. There isn't any doubt which sort of market this is. Although the Nasdaq and small caps struggled, things weren't looking that bad until the final couple of hours of trading. The buyers couldn't get anything going, and by the finish, Nasdaq's breadth showed only 450 advancers to 2,225 decliners.

The action today was a particularly good example of something I've said in the past, which is that bad markets wear you out rather than scare you out. There wasn't any panic or washout action today. It was just a steady grind lower all day, with the dip buyers and bottom callers serving as a toothsome meal for the bears. It is the type of action that makes the bulls give up out of disgust rather than fear.

This market is ill and it is going to take some time to recover. We may see some bounces soon, as we are quite oversold, but the bears are now firmly in control of this market and we have to respect that fact.

Stay tough. The opportunities are already here - C below $3.70 and MTG below $7.50 are screaming, table-pounding examples of buys - and we just have to be patient and get some resolutions.

long C; long MTG

Friday, June 4, 2010

One More Thing - And It's Not Even Negative....

how about ending the week on a positive thought? most people think this is very bad: the european financial bigwigs have been basically silent all week. i don't think it's bad; maybe it means they're getting some work accomplished......we'll see.


Financials got assaulted today - ostensibly from the Euro weakness I guess - although JPM got hit and they've got little exposure....oh well, don't let the facts stand in the way......C never lifted either.

I will freely admit that I thought the morning lows would hold, but that gave way to the now-typical "no uptick; CDS-fear-driven" selling, etc.

This market does everything but inspire confidence, which is why I'll still hang my hat on the variant upside view longer term. I'm not backing away from my loathing of the market dynamics and the broken rules. From my perch, those things (the broken/repealed rules) are still the greatest threat to what should be a very strong recovery.

I do find it curious that folks are saying all the gains this week were from the "anticipation" of a great jobs number. I guess all those other bountiful economic reports just don't matter, or these valuations - akin to the 1970's lows - (we may be lower now on a Treasury yield adjusted basis) don't matter. Or how about the massive oversold readings heading into this week?

It just doesn't matter; Hungary is insolvent! I guess it doesn't matter that many other countries have had to "restructure" in the past. If memory serves, Spain defaulted something like 5 times in the past. The market went higher.

Pretty much all of Latin American defaulted in the late 1990's. The market went higher. In fact, how did the market then go on to massive bubble heights?

A huge economy - the then Soviet Union - nearly collapsed (or did they?). I think we had an 9-12% correction on that one -- if that. Then the market went higher.

Oh yeah, those post crash 1970's valuations -- wasn't that a terrible time to buy stocks? A guy named Buffet turned a couple hundred grand into billions in less than 2 decades off of those lows.

Don't get me wrong though. In all those periods mentioned above, we had an uptick rule.......In fact, an uptick rule now would most likely equal 15% to 40% upside in the indices from here; heck, some rationality at all would equal 15% upside in the indices from here....We had circuit breakers back then, and we didn't have the CDS specter. And that is EXACTLY why we are approaching (and maybe have) 1970's type valuations......

long C - in fact; very, very long C

Quite A Nasty Down Day Today

If you are looking for something positive about the market action today, you're going to have to look a long time. It doesn't get much more dismal than this. What made it particularly discouraging was that almost everyone was expecting a pretty good jobs headline. The bears were going to question the validity of the good report, but the report was so poor that they didn't even have to point out the flaws. The report was terrible, and then we had the added insult of being told by the president how good it was.

After the gap down, we briefly attempted to stabilize in the first 30 minutes of trading but then it was straight down all day. Volume wasn't particularly heavy, but it was enough to make for a technical distribution day, which more than negates the minor technical follow-through in the Nasdaq we had on Wednesday.

We have now had two major failures in the S&P 500 since the top in April. In early May we failed right at the 50-day simple moving average around 1174, and now we have failed right at 1106, the 200-day simple moving average. Unfortunately there just isn't much support left, especially if we break 1050. If you look at the charts of the major indices over the past year or so, it's rather troubling to see how much air there is under our current level. This market went straight up for a very long time without much consolidation, and that makes for scant support as we roll over.

There may not be much choice here but to take a defensive stance. I'm sure some pundits will be looking to call a bottom next week, but this is a market that you shouldn't trust until it proves itself. It failed miserably at taking out key resistance this week, and we can't just dismiss that fact. The bears are in control and the bulls have the burden of proof.

Even if you think there may be reasons to be positive about this market, the trend is going the other way and we shouldn't fight it. Trends almost always go further and last longer than we think is reasonable, and there is no question now that we are in a downtrend.

Great opportunities, like C at 3.80, are arising out of this mess, so don't get discouraged. Cut your losses and protect your capital -- we will finds some profits down the road.

long C


lightened up on aapl today; still a major position though. opened a decent-sized position in mtg - cheap; great risk/reward. am now into c in a huge way; very large position for me - i see it as incredibly cheap = tangible book = at least 4.15 - and the shares trade at 3.80 = book is probably over 5.......i think it's a screaming, table-pounding buy right here at 3.80 = by end of the year i think it SHOULD trade at least at 6 to 7; but where it actually does trade is of course anyone's guess at this point..........

Thursday, June 3, 2010

Random Stuff

I lightened up on AAPL today and got back into C in a big way. Also got into DRIV and a little VRSN, which is too cheap not to own at this point. I may lighten up on AAPL again soon, not because there's anything wrong with AAPL, but I need to get back into GOOG. The break off $492 was playable and the stock has responded nicely. I see GOOG to the $700/800 area now, much like I saw AAPL to the low to mid $200's when the stock broke was still in the $128-144 range.

I still want to see a unified response from the ECB on their efforts to thwart market rules. Until then I may have to trade quicker than normal and take smaller gains.

I still like the networkers more and more of late -- with an eye to CTV again -- but closer to $25/26.

Time for the jobs number again, tomorrow. It looks like the bears are trying to jam the whisper number crazy high so that a really good number can be sold. If we get a solid number (anything north of 480), and the market sells off hard on this - then we may find out something about the market's mood.

From my perch, my jobs tsunami thesis is in full force. The forecast is 500k and that would be stellar. I also expect to see big jobs gains over time; and also am expecting we might see the unemployment rate rise a bit more....


Hopefully It'll Be A Strong Jobs Report; And Hopefully It'll Give Us A Lift

Many experts threw up their hands today and declared that they did not understand the market action; I don't either, really. It wasn't a big up day, but we did finally manage two consequence positive closes for the first time since April 29. The action was chaotic and messy, particularly in oil-related stocks, but breadth improved nicely; by the finish we were moving toward 2-to-1 positive.

I suspect that the anticipation of a strong jobs report due tomorrow propelled the positive action. We are expecting the first positive report in a long time, and the numbers should be quite big due to hiring for the census. The key question is whether market players will embrace the potentially strong headlines, or dig deeper and look for reasons to pan the report.

Technically, for those that care, the S&P 500 remains right at key overhead resistance, and the reaction to the jobs report in the morning will determine where we go. We need a strong finish over 1106 to make things more appealing to the trend-following crowd. Over the past couple weeks, we have churning and consolidating action, which could provide a foundation for more upside. So far, there is little evidence of a major turn occurring.

The action tomorrow following the jobs report will tell us quite a bit about the market mood. If the bears can't convince the market that the numbers are flawed, then the bulls should have some running room. If they aren't able to run on positive headlines, we may need to make some fast defensive moves.

Wednesday, June 2, 2010

The Markets Are Still Broken, But Staying Patient

I'm currently staying very patient with what I view as broken markets. Yesterday's close was a good case in point.

I need to get back into CIEN again; CIEN should be seeing business materially improve shortly, and the shares have fallen more than twice the market of late.

A market where only one or two stocks act rationally - AAPL and BP - isn't a good market. I mentioned BP because I'm intrigued by it; I'm not touching BP here though. If one has to chase knives in this space I would turn to WFT or NBR.

On the tech front, there are 2-3 tech conferences this week which might bring some short term action. One name that I like and which could see some positive news is DRIV. I think DRIV could be a primary M&A target in the months ahead. Tech stocks in this market cap range (like CIEN) have fallen much harder than the market averages in the last 2-3 weeks. Moreover, many of these smaller domestic tech's have less real exposure to the Euro region or the Euro itself so they are simply beta victims.

long AAPL


We prefer to assign reason. Or blame. It is a coping mechanism. People are rational beings -- though even that can be argued -- but people want reasons. People want answers. And when things don't go the way people believe they should go, they want something or someone to blame.

Truth is, markets are chaotic. There is an old saying, which comes in various versions, that if a butterfly flaps its wings, it can cause a tornado half way around the world. While the butterfly does not "cause" the tornado in the true sense of generating the energy of the tornado, it does "cause" it in the sense that a flap of its wings is an essential link in the chain of conditions that result in a tornado, and without this flap, this particular tornado would not have existed. This is a simplified adaptation of Chaos Theory. Some in the media would have you believe that leveraged ETFs are the butterflies. Then again, if you think about it, the media could be the butterfly.

Traders hear over and over how ultras influence the close, whether it be higher or lower. Traders then decide that they, too, are going to "game" the system and get in front of a move. Seeing the market fall, they sell or short something they ordinarily would not have done had they not heard about the impact of the ultras. This single sale is just enough to tick down a stock that otherwise would not have ticked down. This tick triggers some stops, further pressuring the stock. Not only that, but it also causes a small tick down in an index. This tick down in the index triggers more stops, which, in turn, catch the attention of technical traders, as this latest tick triggered a shorting or selling opportunity. And this technical indicator is independent of the ultras. However, this technical indicator causes more selling and/or shorting. And then... well, you get the point. Pure chaos ensues.

The market rallied on the heels of energy and a hint at a strong jobs report this week. Energy was overdue for a bounce and did so in strong fashion today. The momentum is clearly in the natural gas camp, and this is an area to focus on should there be any pullbacks. Oil may continue to struggle, and rallies here are still better for reducing exposure until the landscape changes.

The S&P 500 finds itself battling resistance once again, but this time, it has some momentum on its side. Volume was still disappointing today, but that only matters to some. I expect we will see some follow-through from today, however, I don't think we are out of the volatility woods just yet.

Nothing's Wrong With C; The Feds Are Really Pushing It Down...

It looks like the government won't let C lift.

The news continues to be terrific, with the rationalizing of the finance unit and preparations for a sale. We aren't hearing anything other than good things about the core business, and we know that it is unlikely to be harmed too much by more financial regulation, since it has been hewing to the toughest line in terms of what should be done, and has had to check with the government on many of its businesses.

Qatar said it was seeking to buy a big chunk. John Paulson, the hedge-fund genius who shorted housing, is buying. Bill Ackman may not be done buying, as he mentioned it at the Ira Sohn Research Conference of hedge-fund bigwigs last week.

To me, this one is still the single best option on America's banking renaissance. It also is an attractive candidate to buy some of the assets of the ne'er-do-well banks overseas, where it already has a presence, as it improves its balance sheet. It will be the most solvent bank in the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), and it has a major presence in Latin American and African growth markets. It can buy the U.S. properties of STD!

While it was recommended by a bunch of research houses these past two weeks, it is very clear that the government is laying all over the thing, and it simply isn't letting the stock lift. There is nothing else wrong with the stock. Nothing at all.

long C

Tuesday, June 1, 2010

Just A Damn Mess Of A Market

It is more difficult to argue that we are still in a bear market, much more difficult than it was 14 or 16 months ago. But there is one big thing that seems to trouble some of the technical people out there, the charts. The charts almost look the same - not identical - but very similar.

Okay, so, to make it easy, let's say the SPY is blue, the XLF is green, the XLE is black, the QQQQ is purple, well, you get the idea. Kind of like that Tarantino movie I guess. These charts are still highly correlated and that scares them. Correlations tend to run towards 1 in a bear market. And even though we've been climbing for the past year, it has been an all-round climb. Yes, there have been some slight laggards, but nothing more than the bird at the back of the flock that may turn just a bit later than those up front, but still turns in the same direction pretty quickly.

With the confluence of ETFs and algorithmic trading, I'm not sure we'll ever see a separation in the equities markets between countries or sectors as we used to, although that would be the preference of many. Until then, this feels like a difficult market to own.

We are coming into my favorite stage in the options expiration cycle. We have about two-and-a-half weeks until expiration, and this is a time where butterflies, skip-strike butterflies and other combinations become compelling alternatives to simple calls, puts, or equities. Given that we've seen volatility remain elevated, even if it is off its highest levels, it gives us the chance to use that volatility to our advantage. Given the large amount of uncertainty in the energy area, this will be a good week to search for both bullish and bearish plays.

The attractive part of using a combination trade here is the limited use of capital, paired with limited liability. I will not limit my search to the energy sector, as there are attractive names in the technology field, including AAPL, GOOG and possibly even MSFT. The easiest area to go hunting in is the ETF space, as stock-specific news should be less cumbersome. As there are only 12 trading days, we can consider both single and leveraged ETFs, as volatility decay in leveraged ETFs can be more than offset by time decay in a combination-style options trade.

Many of the technical people have mentioned the technical damage on the daily charts, but the weekly charts are now starting to look very vulnerable. I still worry that a weekly close on the SPY below $105 will put $95 into play. We looked like we were going to leave $105 behind, but today's action very much brings it back. Unfortunately, the EFA looks like it is already headed lower, perhaps to as much as $43, while the EEM makes me believe that a break of $37 will bring a test of $35. It is just hanging on here. From a weekly standpoint, the QQQQ and IWM seem like the strongest two of the majors right now, but honestly, it is becoming more difficult to get long anything with conviction and without a hedge.

long AAPL