Theme of the Day: Continue to Reduce Risk

I've gone to risk aversion mode the past 48 hours since the mindless market is acting more nutty than usual. As of this time yesterday I was up to 30% cash, as I stated I would be raising cash until a clear trend is determined, either up or down. I did not pile into short exposure although I did increase it to some degree yesterday, as we were at one of these inflection points on the S&P 500. But with today's action I had been increasing short exposure, "relatively" confidant (as much as you can be in this bipolar environment) we appear to have set another bull trap.... fund cash has dipped to around 26%, but short exposure is back up to "full insurance mode" near 22% of the portfolio (although my mix is more balanced across the 6 Ultrashort ETFs than previous eras). Combined with my cash this is the most "non long" exposure I've had. Period. But again, the cash is more of a condition of being thrown around so much by the 180 degree moves literally daily in this market where yesterday's trash is today's gold. I also threw out some of the coal exposure on today's upgrade and large moves up, because in a bipolar market coal will be seen as trash tomorrow. (or if not tomorrow within a few days) Because as we all know, coal fundamentals change every 24 hours.

With tonight's sales "miss" (not a real miss, just at the low end) in new software sales (v expectations) by Oracle (ORCL) we seem to be poised to be repeating this same pattern since October 2007, lower highs, reversals at key technical levels - pure bear market action. Draw in hope, bring in long money, trot out CNBC analysts calling the bottom (for the upteemth time), tell everyone to get back into financials, the early cycle move is here, and then crush spirits. Everything I read today said Oracle is so consistent and would soothe the market, it made me even more nervous; yet another reason to increase the short exposure as I did through the day. Now it is 4:30 PM EST and that gives the socialist Federal Reserve 16 hours to cook up a scheme to bail out the market but my working assumption is we've failed yet another time at resistance and are either going sideways or down. I really don't follow Oracle that closely but with it's consistent growth and large cap status ("safety stock") a chink in their armor should make bulls even more worried. If the large cap "safe" stodgy performers don't live up to billing, what does it say for the more flighty stocks? We'll still have pockets of good performance but it's like walking in a field of land mines in this environment....

These are the types of issues I think we continue to face throughout 2008 as earnings estimates for the full year are too high due to the Kool Aid prognosis of "2nd half recovery". So this is a creature of the Kool Aid bulls own design - their disbelief that any recession can last more than 3-4 months, will lead to constant disappointments as they keep estimates far too high - Meredith Whitney is taking the knife to financials almost every 4th week now - I'd argue most of the rest of the market has similar issues of overinflated 08 expectations. As we move into yet another earnings season (and warning season coming in the next 2 weeks) the risk remains high for those caught in those stocks. I said the same thing in January (but I got caught myself in a Kool Aid spill) - I believed the market would correct as companies began warning on future guidance - I did not expect a full bear market to happen in 15 trading sessions. But I do expect continued reduction of estimates for "2nd half 2008" as we move through mid April to mid May earning season. And then once investors "get" that businesses are having issues maybe their expectations will be lowered, and we can have another Kool Aid rally. And so we will continue... until we have enough people reach utter disgust with this market. And that's probably when we will "really" bottom. Bear markets don't really bottom when 80% of pundits are calling the bottom every other week. They end in frustration and pure capitulation. Still too much hope in the powers of the Federal Reserve and talk of 2nd half recoveries and housing bottoms everywhere. (in my humble and often incorrect opinion)

• Oracle Corp (ORCL) reported a higher quarterly profit on Wednesday, but its 16 percent rise in new software sales was at the low end of expectations, and its shares fell 8.3 percent.
• Sales of new software, which investors look to as a key indicator of the future financial performance of business software makers, rose to $1.6 billion in the quarter, from $1.4 billion a year earlier. Oracle in December had forecast third-quarter new software sales to be 15 percent to 25 percent higher than a year earlier. Wall Street analysts were expecting the company to report growth around the mid-point of that range.
• New software sales figures are a key indicator because the customers also sign maintenance contracts that cost 20 percent of the product price per year. Also, software makers get extra revenue from customers when they expand the number of workers using a computer program that they have already purchased.

Preview of new socalist era Oracle conference call
Larry Ellison, CEO: Thanks everyone for listening to that boilerplate... I wanted to move on to our future guidance. We at Oracle take pride in our business, and my numerous yachts... but it does appear other CEOs might need to sell their yachts because we are seeing the beginning signs of...
Hank: Excuse me! Excuse me! Hi everyone, this is Hank Paulson - a friend to you. Sorry for interfering - we've been doing a lot of that lately. I just wanted to let you know that was Larry was going to say was we are seeing signs of strength in the business community. Sales are fine. Everything is fine. And we're working on a stimulus program with members of Congress for Oracle customers so that sales can continue to be strong. This will only cost tax payers in the range of $10-$12 Billion, a pittance.
Larry Ellison: wha...whe...huh...?
Hank: And I also would like to take this moment to announce the Federal Reserve of San Francisco stands ready to lend money at a 2.5% rate to any institutional investor who wishes to invest in Oracle stock. Or any stock for that matter. And no, before you ask, this offer is not open to individual investors (laughing loudly) Individuals? Hah. Cmon now.
Analyst: Larry...err... Hank... or Larry - whichever... could you talk about your new software sales coming in at the low end of your range - what do you see in the next quarter
Hank: Please now. No questions of that nature. I am here to assure you housing is 4% of GDP, the dollar is strong, exports are booming, and Oracle software is an export. So therefore, it is strong. I can't simplify it anymore than that. p.s. what bank do you work for? Do you need help? Here is my cell number, give me a call. We're good with that right Ben?
Ben: (deep sigh) Yes Hank.
George: This is so cool! So this is how a business is run! I remember, because whenever I screwed up, Daddy came and bailed me out. Now we can do this with everyone. So where do we get the money? I mean who is like my Daddy?
Hank: Mr President, that is something you don't really need to worry about. I do believe the NCAA champion LSU Tigers are visiting in 10 minutes - why don't you go get ready for that?
George: Fun!!!
Hank: This now concludes this call. Right Larry?
Larry: ummm, yeah ok.
Hank: Thanks, I need to go call Goldman Sachs and tell them our next moves. Oops, that was off the record ok everyone? Now I see why this system works so great for Putin...

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Does this look familiar yet? It should - we seem to be setting up for the 7th "lower high" since early October highs.... another 2% or so down and we're confirmed... someone get Uncle Ben and Hank on the phone - time for more socialism.