Cash is King

In more ways than one, cash is king. Aside from staying away from the risk of this market which is treacherous now for both long and shorts as the "non" invisible hand meddles with the markets on a nearly daily basis i.e. 90 new companies added to "no short" list in the US today, Australia completely banning short selling - this just creates TOO MUCH uncertainty. I've written over the past week how do you invest when you don't know the rules? They keep changing the rules and that causes me great unease. So what if I was short General Motors (GM) Friday? It's just reaching a point it's become a circus and people are going to take their marbles and go home...

• U.S. regulators added more than 90 companies including General Electric Co. and General Motors Corp. to a list of stocks protected against short sales.

Anyhow, my other point on cash is this - in a market devoid of credit and quite frankly years of contracted credit ahead of us, cash will again be king. Balance sheets will matter again. And in the near term any debt is a Sword of Damocles as all it takes is Moody's or S&P to downgrade your debt and you face a short selling attack (unless you are on the protected list of course!) which will cause the stock to lose 40% in 5 minutes. So perhaps the SEC can ban short selling on all stocks with >$1 of debt. That will solve all our problems. Yep.

What I'd like to ask readers is to please email me any share buybacks you see over the coming weeks/months - specifically in smaller companies (say $10B in market cap or below)

Today, we had a bevy in the large caps - Microsoft (MSFT), Hewlett Packard (HPQ), Sysco (SYY) and Nike (NKE). This is incrementally bullish but unlike Joy Global or Alliance Data Systems these are massive companies and the share buybacks while nice, are not going to take share count down by a huge amount, especially considering corporate America loves to issue itself stock options by the bushel that offset much of their buybacks. (this is the ultimate transfer of wealth)

So if over the coming weeks or months you come upon a smaller or middle sized company with a good sized buyback please drop me a line. I do believe we are entering an era where cash will indeed be king.

As for the market - I simply feel like a record that keeps on skipping... these are historic times (for the younger folks a record is what we used to listen to before CDs, or for the very young guys CDs are what people used to listen to before digital music on iPods). These 4% moves are becoming normal occurrences - quite extraordinary - now 5 of the last 6 sessions! I have to tell you massive volatility like this is usually pointing to something sinister beneath the surface - it was staved off by the government late Thursday but eventually we get to a market clearing price no matter what outside interference. Calling for a crash is a once in 10,000 event so I won't do it but as shown by my activities today (sell sell sell) - cash is King. These levels of market interference simply make it impossible to invest. Who knows what rules we'll wake up to tomorrow.

As we did last Monday and Wednesday on the two -4%+ days, I'll show our performance on the big down days - of course we are missing some of the upside on the big up days since we don't change directions 180 degrees like the market does, but it is always easier to make up lost opportunities than recreate lost capital. As I mentioned last week, while we trailed the market a bit on return, we had much reduce volatility compared to the market - we were (chronologically) down 1%, up 0.5%, down 3.9%, flat, and up 3.2% last week - in a week the market was moving 4%+ in four of the five trading days. Here is today...

I'll take it! And tomorrow when the next step by government to stop free markets happens and the market is up by 4% we'll miss out on most of that move ;) I'm floating a proposal that 4PM every day - if the market falls - we say "do over" and say those trades don't count. Sound outrageous? What if I told you I had a list of 950 stocks you can no longer short led by such financials as General Electric and General Motors... or that you'd be the proud owner of Fannie and Freddie Mac. A year ago you'd laugh. Nothing can be laughed at anymore.

Today we were led by one of our top positions Ultrashort Real Estate (SRS) who has been our trading buddy to Ultrashort Financial (SKF) since mid 2007. (note for new readers - this is a short not on residential real estate but commercial real estate which I believe to be the next leg to drop) Now that they killed the usefulness of SKF with the new regulations (only up 1%), we piled into SRS (+18%) as its proxy. It worked today.

Long Alliance Data Systems, Ultrashort Financials, Ultrashort Real Estate in fund; no personal position