Tuesday, November 10, 2009

Fluor (FLR) Guides Down for the Year, Investors Disappointed

Engineering / infrastructure firm Fluor (FLR) is one of those few stocks that one could purchase before heading to a remote island for a decade, arrive back in 2019.... and the company would be executing and thriving.  However, it's business - dependent on large projects - is quite lumpy from quarter to quarter, and it has been struggling of late.  You can see while the market has had an upward bias, the stock has been in a downturn for a good 2 months, signaling "those in the know" *knew* what was coming, and were exiting stage right. Which is exactly why I think a hybrid approach of technical and fundamental analysis is a bedrock for stock evaluation - in this case the technicals were telling you something was amiss.

The engineering and construction firms are definitely MID to LATE cycle, not early cycle stocks... so for companies in this sector, their time will be in the future.  Fluor and Jacobs Engineering Group (JEC) remains the cream of the crop in this group and for those with multi year time horizons probably begin to present some compelling valuations.  Some of the smaller firms in the sector might, however, be acquisition targets and present higher risk/reward opportunities.

Fluor reported last night, and disappointed with lowered guidance; a bit of a surprise because management is very good at low balling and beating i.e. playing the Wall Street game.  Frankly, I cannot remember them missing like this in the past 3 years at least.  2010 estimates for earnings are also tagged to be lower than 2009.  So the green shoots of recovery have yet to truly manifest in this group - new project awards were quite weak at $2.9 Billion versus nearly $9 Billion a year ago.  Backlog also down by nearly a quarter year over year.  Full report here... some quick observations below.

Via Reuters:
  • Fluor Corp (FLR) posted a lower quarterly profit as energy project spending slowed with the drop in oil and gas prices, and the largest publicly traded U.S. engineering company forecast weaker profits for this year and 2010.
  • Third-quarter net profit fell to $162 million, or 89 cents per share, from $182 million, or $1.00 per share, in the same quarter a year before. Revenue fell 4 percent to $5.42 billion. Analysts had expected 90 cents per share on revenue of $5.49 billion.
  • Backlog at the end of the third quarter fell to $28 billion, versus $30.9 billion three months before and down 23 percent from a year ago, the company said on Monday.  Fluor removed $1.2 billion from its backlog due to an indefinitely delayed Russian gas processing expansion. The company also took a $45 million provision due to a collection issue with the completed revamp of a paper mill.
  • Chief Executive Alan Boeckmann said spending had shifted toward the exploration and production side, both offshore and onshore, and that this area was one of its target areas for potential acquisitions, along with infrastructure businesses.  
  • "The clients' capital programs have definitely shifted away from the downstream, where it had been over the last couple of years. And so ... the prospects out there reflect that," Boeckmann told analysts on a conference call on Monday.

  • The Irving, Texas-based company trimmed its 2009 earnings forecast to $3.75 to $3.90 per share from a range of $3.80 to $4.10, which it had reaffirmed in August. 
  • The company set 2010 profit guidance at $3.20 to $3.60 per share
  • Analysts, on average, had been targeting profits of $3.85 per share for this year and $3.58 for 2010.
  • "Looking ahead to 2010, we are taking a cautious view of our markets at this time, but remain hopeful that a broader economic recovery will develop during the year," Chief Executive Alan Boeckmann said in a statement. 

One analyst view:
  • Despite the lower quarterly results, Lazard Capital Markets analyst Graham Mattison wrote that his firm continues to regard Fluor as "one of the best companies in the energy infrastructure sector, and we view the stock as a core holding.
  • "However, the earnings potential of the company's massive backlog and healthy cash balance are fairly reflected in the share price, in our opinion," he wrote. "Risks include slowing end-market demand, lumpiness of bookings and revenues given large-scale projects, as well as potential for cost overruns on projects."  (to be fair those are the same risks that exist every day of every year for this type of firm)

Fluor Corporation (NYSE: FLR - News) designs, builds and maintains many of the world's most challenging and complex projects. Through its global network of offices on six continents, the company provides comprehensive capabilities and world-class expertise in the fields of engineering, procurement, construction, commissioning, operations, maintenance and project management.

[Aug 11, 2009: Fluor - Solid as Usual]
[Feb 26, 2009: Fluor and Flowserve Continue Best of Breed Ways]
[Dec 3, 2008: Back of Envelope Look at Infrastructure Sector]
[Aug 12, 2008: Fluor to Hedge Fund Computers: The World Does not End at $110 Oil. Or $80. Or $50]
[Aug 11, 2008: Global Infrastructure Night in Earnings]
[May 16, 2008: Fluor as a Wind Play? $1.8 Billion Says Yes]
[Jul 9, 2008: Fluor vs Perini - a Rising Tide does not lift all Boats]
[Feb 28, 2008: Fluor with Great Report and Boosts Guidance]

No position

Bookkeeping: Short E-House Holdings (EJ)

We have a very tiny long E-House Holdings (EJ) which we would add to on any breakout north of resistance but unlike many of our other names, this stock has been held back by some of its moving averages.  Since we are so lacking of short exposure, I thought I'd give it the college try since we have a low risk entry here.  I've put on roughly a 3% short position around $19.50.  We'll give this a 5% berth in terms of stop loss, which would also be a higher high than we saw this morning, i.e. $20.50ish.

Long/short E-House Holdings in fund; no personal position

Bookkeeping: Selling All of Friday's Index Long Exposure

As we sold our SPY call options off in parcels yesterday I was using a mental stop loss that i was moving up as the S&P 500 raced higher.  By the end of the day I said I'd sell out around S&P 1085 to protect large gains generated by buying in the 1060s Friday morning.  We're around 1088 so I am going to make the move now; the S&P has put on a tremendous move in 6 sessions... normally you'd expect some back filling and consolidation after such a hectic move, but nothing is normal anymore. All it takes is someone attacking the US peso for a few hours and every asset on the globe must rally per HAL9000 decree.... we can add 10 S&P points in a blink of an eye.

Might be giving some upside away but I am going to sell all those index longs; the last 1/4th of the SPY calls (up roughly 60% in this last batch), and our entire TNA position which had been a 5% allocation and has rallied 4-6% in a session and a half.  I sold about a third of the TNA first thing this morning north of 6% gains and the rest will exit now around 3.75-4.0% gains.  So a melded average of under 5% for the entire stake of TNA ETF. (by the way TNA is simply a Small Cap index ETF, levered 3x its normal movement) 

I don't plan on doing anything index related while the S&P is in 1090s; I'll let others deal with that stress - the "easy kill" has been made.  The next transactions with the indexes will either be on a new breakout over the "double top" (north of S&P 1100) or on a more substantial pullback.  Since we are in an uptrend and above all key moving averages we'll simply use our core equity positions as long exposure and buttress any downfalls with a good stash of cash.  Frankly I'd like to begin focusing on individual stocks again rather than indexes, but this stupid sophisticated dollar trade is the only thing that matters anymore.  Shorting remains unAmerican (source: Ben Bernanke) - one day "the resistance" shall emerge from the underground and short to their hearts content.

Period "12" is only in its 2nd day but we could effectively drink fruity colored beverages on a deserted beach by going to 100% cash for the next 3.5 weeks, with the realized gains in the first 2 sessions.   But than the blog would be full of posts about the real economy, and I don't want to overwhelm readers with mental anguish joy in regards to the incredible P-cubed (paper printing prosperity) economic recovery. 

No position

Walmart (WMT) Executive: "There are Families Not Eating at the End of the Month"

Not much sarcasm or spin to put on this one; in an increasingly bifurcated US society we are seeing a lot of fraying of the seams.  We've been pounding the table on the "real economy" for 2+ years, as the number of Americans on food stamps surges from 1 in 11, to 1 in 9... and now even Costco is rolling out food stamp programs [Oct 30, 2009: Costco to Roll Out Food Stamps Nationwide] but the country is obsessed with very different measures in calculating our domestic "prosperity". 

This line by a Walmart executive will take it's place as a candidate for quote of the year [Sep 1, 2009: China Sovereign Wealth Chairman with Quote of the Year 2009]

There are families not eating at the end of the month,” said Stephen Quinn, executive vice president and chief marketing officer at Walmart Stores, and “literally lining up at midnight” at Wal-Mart stores waiting to buy food when paychecks or government checks land in their accounts.

Regular readers at FMMF will not be surprised by this quote; we're usually "early" around here.  I've written about this multiple times, but I'll keep posting to keep people aware of what is happening out there in America's "under class" (which increasingly was its former middle class). Some of our earlier comments:

We also have noted over the past year, Walmart saying they see a huge rush of grocery purchases around "pay periods" (whether that comes from actual work, unemployment checks, food stamp card debited, etc). In English this means people are literally living paycheck to paycheck, and cannot buy minor items... such as food, in part of that space between pay periods.  [Dec 26 2007: Target Shoppers Turning into Walmart Shoppers]

Food retailing consultant Bill Bishop, of Willard Bishop Consulting, said Costco's decision shows how pervasive the pressure on consumers has become. He said more and more grocers are seeing their sales peak and fall based on when assistance benefits are distributed.

Effectively this is our modern version of the 1930s soup lines.  Enjoy....

As more wealth is concentrated in fewer and fewer hands, under the guise of "only these few people have talent or ability" this is what our system has created.  It's not Democratic, it's not Republican - its systematic.  Period. I would doubt the founding fathers (who are cited as a reason to defend the status quo) envisioned a society where 90%+ of national wealth is in so few hands.  Which now forces more and more of the masses to depend on the "state".  [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] Oops, I'm sorry - per dogma, everyone not in the top 0.2% is "lazy" and wants to live off the state.

Unlike the Depression of the 1930s which (painfully) redistributed wealth by "market forces", (setting up some of the best decades for America's middle class int the 50s and 60s), this crisis has done the exact opposite... it's concentrated wealth further into the hands of those who have the puppet strings. Quite amazing really. The next step will to be tax like mad those in the 2nd to 10th percentile to support the bottom 80% - Cramerica baby. Eventually this will lead to a point of social unrest (by then I assume the top 0.2% will have 'self relocated' to a safer country), but for now printing away all our problems can help create the facade that everything will be just fine.

I'll put my "socialist" hat away now and go back to our normally scheduled dog eat dog programming.  Perhaps someone from a Wall Street investment bank can line up at Walmart stores on the 31st of each month to let these folks in line know GDP is up, the stock market is up, (both of which signal America is "working") and the common folk (especially those in lines) are simply lagging indicators.  In fact the more people in line waiting for the stroke of midnight... the more easy money policies from the Fed; hence in market logic it's a "good thing".

Speaking of quotes of the years... Mr. Jiwei nailed it in September

It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose.

Hat tip to Calculated Risk

[Jan 18, 2008: One Lonely Voice Agrees with Me on Food Inflation - Food Bank Needs Surging]
[Nov 14, 2008: Wall Street Journal - A Run on (Food) Banks]
[Feb 20, 2009: NYT - Newly Poor Swell Lines @ Food Banks Nationwide]

Looking at the Market Indexes; "Double Top Breakout" Redux?

Quite an interesting situation here as we see a substantial divergence among some of the major indexes.  I've excluded the NASDAQ from the discussion below because it is effectively mirroring the S&P 500.  Our contention has been that over the past 3-4 weeks smaller cap stocks have lagged, and aside from 2 weeks ago speculators / computers (or fund managers) have been hiding out in the big caps.  One can see this by looking through a lot of individual charts, and this is borne out by looking at 3 major indexes, from largest to smallest.

1) We rarely look at the Dow Jones Industrial Average as it is 30 stocks and this index is price weighted... meaning a company like IBM has countless more importance than a company like General Electric.  Makes little sense to me, but that's how they have always done it... whatever the case, the DJIA has broken to a new yearly high.

2) The S&P 500 on the other hand is in a position it has been repeatedly this year... it approaches recent highs.  This sets us up for a pivot point near the old high - either we (a) form a "double top" (bearish) or (b) break through and create a "double top breakout" (bullish).  By buying double top breakouts we've made a lot of money this year in the fund.  Each time we approach one of these points I sound like your grandmother warning you to look both ways before crossing the street.. i.e. "this is so obvious, it should not continue to work - one of these times the bulls have to be trapped".  But it keeps working... the minute we get over a recent high all the computers on Wall Street go into overdrive and we surge.  Until the pattern breaks, it will continue to be played, so this is what we'll be watching in the coming day(s).

The way I play this is I sell into the resistance, assuming at least a failure on the first attempt and then buy on the breakout.  It's worked like a charm for the past 6 months.  This seems like 'extra work' (why bother to sell at all!) when the market "only goes up" but it will protect gains the one time this pattern fails.  Again, the obvious should fail spectacularly at some point... could be in a few days or in 2011, who knows.  I never expected the obvious to keep working as it has almost the entire year.  We're about 7 S&P points away from shedding some of our long exposure.

3) The weakest of the 3 indexes has been the Russell 2000, which also has more of the smaller and mid cap stocks. Only yesterday did it break through (concurrently) its 20 and 50 day moving averages.  In the "old days" this lack of breadth and participation would be a warning sign.  I don't know if in a liquidity driven market that it matters at this time.  Nothing seems to matter other than the constant hammering of the US dollar.  Surely lack of volume or participation has meant nothing during much of this rally.

So that's our strategic outlook, if the past patterns continue we might falter the first time we get up to S&P 1100 but soon it will be sliced like swiss cheese on the way to new highs.  We'll see if its just the same old, same old yet again.


For a moment of humor (and perhaps why stock traders are in such good spirits) please review this Reuters premarket story from 8 AM, and take a close look at the caption on the left side of the page, under the photo.  Then look at the photo.  I now see why it appears to be "party time" on Wall Street.


Albert Edwards of Societe Generale Remains Firmly in Bear Camp, Calls for New Lows in 2010


Societe Generale's Albert Edwards is generally considered an uber bear, although there were times in the past year he has tactically increased exposure to equities to take advantage of oversold conditions.  Now is not one of those times.  In fact, Edwards chimes in with many similar thoughts we've posted on the fundamentals... but sticks his neck out calling for new lows in 2010.

While the belief from this blog writer is this will all end badly, knowing when and how will be the ultimate question.  Without the massive intervention by central banks and governments we'd have a different landscape; and without knowing to what lengths these people will continue to go to, it's much more difficult to predict the intermediate road ahead.  But unless the basic laws of economics are repressed permanently, the ultimate destination seems no different.  As with "intellectual bears" today, the NASDAQ bears of 1999 and real estate bears of 2006 were ultimately correct; but in the interim a lot of money was made by those who ignored warnings on the upside before it all came crashing down.  And specific to NASDAQ, most bears who attempted to step in front of the freight train had little equity left to actually profit from their (eventual) accurate prognostications.  Irony at it's best. At this point many who are non believers have finally jumped on board, with everyone assuming they can jump right back out, through the same narrow door when "some day" arrives.  If only it were that easy....

Via Reuters:
  • Albert Edwards, an analyst at French bank Societe Generale who correctly predicted the Asian financial crisis, sees global equity markets at a new low and chances of another global recession in 2010.
  • Edwards, a prominent equities bear and a long-term critic of the policies of Western central banks, is skeptical of popular opinion that extreme policy responses will safeguard the West against a repeat of Japan's 'lost decade' of the 1990's.
  • "People should question the happy clappy nonsense from sellside analysts," London-based Edwards, a global strategist with SocGen's Corporate & Investment Banking group, told a media briefing. "We are not saying that people should not participate in the rallies -- that will get you fired as a fund manager -- but they should not become too convinced of the recovery," he said. (hand raised
  • Edwards expected China to go into a recession at some point as cyclicality catches up with the economy, and called people's excessive faith in growth stories a "sick joke".
  • He said while inflation was a concern, deflation was a bigger worry in the near term, at a time when western and Japanese governments were effectively insolvent.  (print, print, print until your daddy takes the T bond away?)
  • "If we get an economic downturn next year, when you have got core inflation at half a percent, I think there will be a real deflation panic, a bit like in Japan."
  • Edwards picked grains like corn, wheat and soybeans as a more secular bet on China's growth story over other commodities and their related stocks as these have lagged the broad rally in the markets.  (interestingly these agriculture commodities have lagged big time... my belief is because one can stockpile many commodities such as oil or copper with the cheap money being handed out - whereas foods spoil)
  • Edwards is more worried about Japan in the near term as he expects the world's second-largest economy to run into difficulty funding itself next year as demand for Japanese government bonds wane and bond yields rise further.  The significance of higher Japanese government bond yields was that it would cause some Japanese investors, who have been investing overseas in search of higher returns, to bring that money back home, he said.
  • "Equity valuations have been totally ridiculous for the last ten years but I'm less bearish than I was two years ago because we have had one round of correction," said Edwards, who thinks the S&P 500 .SPX should have dropped to 500 points last year to hit the bottom of the valuation cycle.

Some more recent Edwards below

1)  ZeroHedge provided further Albert Edwards thought process 2 weeks ago here.

2)  Investment Postcards blog has a blurb from September here

Edwards concludes that the global crunch is not receding, but intensifying, stating that the unwinding of the “grotesque debt excesses” of the last decade has only just begun. “As Japan experienced before, it is deleveraging that is the problem and retrenchment takes many years, rendering the economy extremely vulnerable to rapid relapses back into recession when any reverse or pause in extreme stimulus occurs.”

3)  Edwards is one the prominent bears quoted often in this piece from The Economist in early October  [email readers will need to come to the site] [hit fullscreen option for easy reading]

The Economist 1 Oct 09 - The End is Nigh (Again)                                                                                                                                                

One imagines all Albert Edwards' warning pieces must come with an appropriate soundtrack....

Priceline.com (PCLN) Hits an Earnings Home Run

I can't fight this feeling that.... I've totally whiffed when it comes to our holding in Priceline.com (PCLN).  Much like Baidu (BIDU) we had a great entry point early last spring, then took profit on a trade... and simple never went back in as we await some sort of pullback.  Our twins of missed opportunity.

Above is a 6 month chart; as you can see the last earnings report [Aug 10, 2009: Priceline.com - Recession Recsmession! Continued Impressive Results] created a massive gap in the chart... now unlike indexes, gaps in individual stocks can take months, quarters or years to fill; or in some cases they never do.  I think Priceline's will during the next real bear run but when that happens is anyone's guess.  You might notice 2 interesting things; first Priceline.com - like many stocks - broke down about 2 weeks ago... which (again) should of led to further downside but this is one very different market.  Second, what an "interesting" volume explosion last Thursday just 2 sessions ahead of an earnings release.  I'll leave it at that, and just remind you to remember you are sitting at the most tilted craps table at Caesars NYC.

The stock was up 7% in after hours, and will create a new gap up and new high; momentum bulls will jump over each other for that sort of technical action.  On a sidenote, I did not post it in the blog but Priceline.com was recently announced as a new member of the S&P 500.

Now for another barn busting earnings report; unlike many companies being bid to the stratosphere for nothing more than chopping countless jobs ... Priceline.com is beating through actual growth; our thesis here (now proven) is as the "Walmart of online travel" you'd see the a similar parallel as we see in retail in their US business.  Downward mobility has its good points. Let me remind you, if you are new to the website or name while Priceline is thought to be a US company (which it is) it has a very large business in Europe. Notice how domestic bookings are up at a decent clip year over year (recall a year ago we were in financial fall our shelters)... then compare to international growth.... pretty much a proxy for many things happening in the world.

Priceline.com Incorporated (Nasdaq: PCLN - News) www.priceline.com provides online travel services in 29 languages in 78 countries in Europe, North America, Asia, the Middle East and Africa. Included in the priceline.com family of companies is Booking.com, a leading international online hotel reservation service, priceline.com, a leading U.S. online travel service for value-conscious leisure travelers, and Agoda.com, an Asian online hotel reservation service. Priceline.com believes that Booking.com is Europe’s largest and fastest growing hotel reservation service, with a network of affiliated Web sites. Booking.com operates in over 70 countries in 24 languages and offers its customers access to over 73,000 participating hotels worldwide.

Full earnings report here - let's look at some analysis.

Per Briefing.com the quick hits:

  • Reports Q3 (Sep) earnings of $3.45 per share, $0.53 better than the First Call consensus of $2.92; revenues rose 30.1% year/year to $730.7 mln vs the $694 mln consensus.
  • Gross bookings were $2.7 billion, up 32.8% year over year.
  • Co issues upside guidance for Q4, sees EPS of $1.52-1.62 vs. $1.49 consensus. Year-over-year increase in total gross travel bookings of approximately 30% - 40%; Year-over-year increase in international gross travel bookings of approximately 50% - 60% (an increase of approximately 37% - 46% on a local currency basis); Year-over-year increase in domestic gross travel bookings of approximately 15%; Year-over-year increase in revenue of approximately 24% to 28%; Year-over-year increase in gross profit of approximately 40% to 45%; Pro forma EBITDA of approximately $98 million to $108 million.

Via Investors Business Daily
  • Priceline.com late Monday once again released quarterly results that soared far above analyst estimates, led by fast growth overseas. The company said its business was unusually strong this past summer. This was during perhaps the biggest global economic downturn since the Great Depression. But name-your-price Priceline's thing is low prices.
  • "Priceline is hitting all the right buttons," said Kaufman Bros. analyst Aaron Kessler. "Every facet of their business is executing well."
  • The company said gross travel bookings, the value of all travel services bought, soared 32.8% to $2.7 billion. Gross domestic bookings rose 24.9%, while international gross bookings jumped 37.8%. "They have been leading the online travel industry in executing their international expansion strategy."
  • Boyd said global hotel room night reservations grew by 56% in the third quarter, with strong performance in the U.S., Europe and Asia. Airline tickets sales rose 30.2%. Rental car days booked rose 11.6%.
  • Citigroup analyst Mark Mahaney said in a report last week that the number of unique U.S. visitors to Priceline.com surged 48% in the quarter compared with the year-earlier quarter and jumped 33% from the prior quarter. He says traffic to Priceline's Booking.com site, which books hotel rooms in Europe, jumped 52% from a year earlier and 29% from the prior quarter.  (wow!)  "This level of traffic growth is particularly impressive given the current economic environment," Mahaney wrote.
  • Mahaney says consumers led the surge. "Leisure travel -- unlike corporate travel -- is price elastic, and the recession has drawn more consumers to the Internet and to Priceline for the best deals," he wrote.  (bingo)

JPMorgan analyst extremely bullish this AM, also citing the outstanding international metrics. 
  • International markets now represent ~73% of gross profit dollars. We are particularly pleased that int’l is such a large portion of gross profit as we think this growth is much more sustainable than domestic growth. We see healthy growth in the international markets continuing due to 1) secular penetration growth, 2) new market entrance, 3) recovery of ADRs, 4) a more fragmented market which favors aggregators, and 5) modest take rate increases.
  • We are increasing our price target to $216. 

[May 14, 2009: Priceline.com in Investors Business Daily]
[May 11, 2009: Priceline.com Continues to Execute Well]
[Feb 19, 2009: Priceline.com Impresses on Earnings]
[Aug 6, 2008: Priceline.com - Down 17% on Good Earnings?]
[May 8, 2008: 2 Earnings Reports of Note: AIG (AIG) and Priceline (PCLN)]

Long Priceline.com in fund; no personal position

Monday, November 9, 2009

Fund Performance Period 11

As a reminder, if you are interested in this type of fund as a worthwhile consideration for future investment, please consider reading why this blog exists.
  1. [Jan 7, 2008: Reader Pledges Toward Mutual Fund Launch]
  2. [May 26, 2008: Frequently Asked Questions]
  3. Our story in Barron's [A New Kind of Fund Manager]
  4. [November 2009: General Updates, Questions]

Or if you are just here for daily market / economic commentary or stock trades to follow on your own, consider supporting the blog via donation (paypal buttons can be found on the upper right margin of the blog)

For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)


I will post an update of performance versus Russell 1000 every 4 weeks; we've moved over to a new tracking this year (Investopedia.com) as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence while the website and portfolio began in August 2007, we're "starting over" in terms of performance with portfolio "B" as of early 2009. Detailed history on latter 2007 and 2008 can be found on the above mentioned tab.

Under the new tracking system, our eleventh4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

This was the first negative "period" for stocks since period 2 i.e. February.  Most of the period was dominated by earnings news flow, and once again very low expectations were easily beaten as was the case 3 months earlier.  The S&P 500 stalled at 1100, then had one of the few substantial selloffs since the March lows, and the first material selloff since July 2009.  But just as with July, after breaking the 50 day moving average the S&P 500 rallied from out of the blue with 5 consecutive up sessions in the last week of the period, as "someone" was eager to buy ahead of both a Federal Reserve announcement AND a labor report.  There was no specific sector that stood out but the "inverse dollar" trade once more was dominant - this has been a theme for quite a few periods in a row and might not change for a long time. Precious metals were a darling of this time frame.  Small and mid caps lagged behind large caps for much (all?) of the period.

For the 11th "four week" period the fund returned +4.6%, versus the market's -0.5%, so an out performance of +5.1%.

On a cumulative basis the fund is now +69.5%, versus the Russell 1000's +15.6%, so an out performance of +53.9% for our "year to date" if you will.
(thus far 44 weeks)

Please note we did not start on Jan 1st... so this is not an apples to apples "year to date" performance but obviously close.

Our yearly goal of beating the index we track against by 15% has been reached, and we're now at the highest level of out performance versus the market for the year. Both absolute performance (making money) and relative performance (outperforming the market) were achieved in the period - which is always the best outcome.

*** Long/Short Discussion below

The dollar remained the only thing that mattered. [The Inverse Relationship Between the Dollar and Stocks in 1 Chart]   After jacking the prices of gold up in the previous period, Ben Bernanke's policies set to unleash oil in a similar breakout early in this period.  In a general sense in weeks 1 & 2  the fund out performed the market by about 2.5%.  The real magic was in week 3 when the market sold off strongly, including the large caps while the fund had been positioned in the highest cash exposure since inception during that week (and the week previous).  As certain technical levels were broken, we were able to benefit with some short term put options, and shorting a broad index ETF.  This allowed us to post positive ABSOLUTE performance while the market fell; a double bonus.  Since the market remained below the 50 day moving average entering week 4 of the period, we remained high in cash and the fund went sideways as the market tacked on 3%, so this was our one lagging time frame for the 4 weeks.  I would not of changed that strategy as the textbook would not of said a flurry of buying would of happened... in front of 2 major news events no less; but the textbook has become useless.  Just follow the US dollar.  Overall there was a lot of churning - up and down - but no progress; good for traders, not much there for investors.

Please note on the right margin of the blog is an archive in which you can see all these events in chronological order, clicking on any link within the sentences below will take you to that transaction - a summary below:

In week 1, we began in our "normal" positioning stance - mostly long, 70%ish cash, 5% short.  Monday we were stopped out of our Analog Devices (ADI) short which was 40% of our limited short exposure.  One of our favorite positions, Starent Networks (STAR) was acquired by Cisco Systems - so we sold all of our position for a one day 18% jump; and 39% above our cost basis.  We were stopped out of a long position in Perfect World (PWRD) as it broke support, but within days it recovered and we missed the rebound.  It happens.  We took profits in Blackstone Group (BX) as it jumped from $13s to $16s in just over a week.  We sold out of E-House Holdings (EJ) due to a pending "spin off" IPO - this was pure luck but it worked out for us as the stock sold off hard going into the IPO in the following days; better lucky than good.  Wednesday of that week, the upteempth "double top breakout" occurred, this time over S&P 1080... setting the stage to run another 20 S&P points in short order.  I began selling the next day into the rally - many stocks had surged 20-30% in 5-7 days, ASIA, GFA, TQNT.  I covered the remained of my Wynn Resorts (WYNN) short with a 12% loss. While everyone was drunk with Kool Aid, I mentioned the gap in the S&P 500 chart in the upper S&P 1070s could fill "sooner" rather than later; this set the stage for an excellent bear trade in the weeks to come. We restarted E-House Holdings (EJ) late in the week post IPO at a far lower price, and just above a resistance level so we could escape quickly if the stock broke down.  I attempted a new short in Moody's (MCO) since at that point we had been exiting just about all our short exposure.

In week 2, we entered the week with a curtailed long exposure of only 13% while still short 6%; remainder in cash.  We were quickly stopped out of our Moody's (MCO) short for a 8% loss as the "destroy the dollar, everything must go up" trade reached a fever pitch.  After Atheros Connumications (ATHR) trounced analysts estimates, we increased our exposure; while cutting much of our Myriad Genetics (MYGN) stake - the stock was not participating in a large rally; warning sign. After the Brazilians, in a desperate attempt to keep Ben Bernanke's dollars from inflating every asset in their economy, slapped a 2% tax on outside investors, Gafisa (GFA) sold off.  Since we had just taken profits the previous week we bought back a decent position. TriQuint Semiconductor (TQNT) reported after the bell Wednesday - keep in mind we had taken profits the previous week - and it laid an egg.  Mid day Wednesday, I said S&P 1100 was the line in the sand... still looking for that gap to fill in the S&P 1070s. Within hours the FIRST nasty intraday reversal hit... a 1.5% selloff in the closing 45 minutes.  A warning shot.  After the Triquint results I sold all 3 of our RF semi positions Thursday morning on the open; still like the group but all 3 had bad charts at that time. Our exposure to the group was not too bad so we did not take a large hit; mostly we gave away a +11%ish unrealized gain in TriQuint.  We were stopped out of 60% of our E-House Holdings (EJ) position that we had just restarted late the previous week, as it broke support.  Unbelievably as we hit S&P 1100 the session before ... we filled the gap at S&P 1075 in a session and a half.  The 20 day moving average was just below around 1070 so we said we'll assess based on what happens next - but we were buying some index calls and ETFs for a cursory bounce.

The gap filled perfectly at 1075; since this market has become nothing more than computers using technical measures we should at least have a cursory bounce here - Ive bought index ETFs and calls for the bounce (if and when).

That was at 10 AM in the morning; within 4 hours the S&P 500 had bounced 15 point to 1090.  I held overnight but wrote in premarket I'd be taking profits first thing at the open on Friday; I showed the whole strategy piece by piece in that post Friday morning.  We were able to exit well into the 1090s for a beautiful 17-18 S&P points in under 24 hours. I also took profits in surging CNInsure (CISG) that morning as it appeared to be making a double top - that was the right call in retrospect.  Late Friday we sold off AGAIN, marking the 2nd intraday reversal in 3 sessions; I said this was a change in character and we had to be careful.

In week 3, we were sticking to an extremely cautionary stance. Cash reached the mid 80%s, we had our lowest long exposure that I can remember - just over 10%, along with a cursory 3% short.  Mostly we were sidelined entering the week with our popcorn in hand watching.  That is ironic considering this ended up being the busiest week we had in many months.  Coming into the week we posted a chart outlining buy and sell strategies as both the 20 day and potentially the 50 day moving averages were in play. Monday opened strong (+1%) but "Holy Strange Action Batman" yet another intraday reversal down - a 2% loss mid day from the session's highs.   Another warning.  The market had tracked down to S&P 1070s again, sitting right above the 20 day moving average. E-House Holdings (EJ) continued to act poor, so we cut back our position to the bone.  After taking profits at the "double top" the previous week in CNinsure (CISG) we were able to get our exposure back 9% lower; within 1 market "day".  We sold almost all our BHP Billiton (BHP) in the mid $72s, assuming the oversold US dollar would bounce at least a bit; we placed limit buy orders at 2 gaps... first the $68s, then $65s - both hit later in the week. After the nasty reversal, we ended Monday down below the 20 day moving average.  A reader actually notified us of a tiny gap below S&P 1060 the next morning so as them market tried its normal morning "bounce" first thing Tuesday (rallying back into the low 1070s) we attacked - buying puts and shorting the a 3x long ETF (TNA).  By Wednesday the S&P had filled that gap, and we covered index longs, and sold our puts at S&P 1055.  Another wonderful short term escapade. A lot of stop losses triggered that morning at the S&P dropped so severely: Gafisa, CNinsure, Blackstone Group (BX), Discover Financial (DFS).  However we took the opportunity to buy Ultra Silver (AGQ) since it had fallen back to support and good ole Bernanke would hammer the dollar soon again.  Our first limit buy order for BHP Billiton also triggered in the $68s.

Week 3 got very tricky from there; the S&P fell all the way to the 50 day moving average in the upper 1040s; just as we had the previous week we went "long for a trade" assuming a quick bounce.   Same instruments as usual, calls and TNA ETF.  A long standing limit order for Fuel Systems Solutions (FSYS) also hit in the low $31s as the stock fell 10%.  I was disappointed in the "bounce" late Wednesday off the 50 day moving average and with GDP set to be released the next morning I decided to exit for the day with losses on the calls, and TNA.  Those losses erased our gains from the "gap fill" trade we had executed but safety first.  At 8:29 AM I looked like a genius as futures were limp and the S&P was below the 50 day moving average - dead in the water.  2 minutes later I looked the fool as the S&P futures surged like a rocket on a 3.5% print.  My calls and TNA long exposure I had bought Wednesday would of been a big winner but I would have repeated the same trade ... trying to guess an economic report AND the market's reaction to it is just outright gambling.  So instead we bid our time; we began a position in Market Vectors Small Cap Brazil (BRF) - a name I had highlighted in the summer.   AsiaInfo Holdings (ASIA) jumped 15%+ on earnings, we sold half our stake for a nice profit.  We had just bought Fuel Systems Solutions the previous day (limit order) but it also jumped 10% so we took our profits; little did I know the next week it would report fantastic earnings that would send the stock up another 30%!  We closed out a long held position in First American (FAF) after a tepid response to earnings.  Despite having fantastic earnings, Atheros Communications (ATHR) broke its 50 day moving average that Friday, so we had to respect that and sold 66% of our position to protect against bigger losses.

We had one last big trade for the week, the "GDP" bounce trade from Thursdaydied quickly... the market experienced yet ANOTHER intraday reversal so as the S&P 500 broke down yet again below the 50 day moving average we added hedges (shorts & puts) to protect against further downside in the early afternoon Friday.  At 1 PM I wrote

unless we recapture the 50 day moving average I'll be holding all short positions with a target to S&P 1020

I thought we might have a "give up the ghost" moment since there was zero support until 1020 but "the magical buyer" reappeared (like a ghost on Halloween) to protect the people at S&P 1034.  Not wanting to risk anything in the last 30 minutes, and sitting on fat profits in 2.5 hours of 'work', I once more covered my index shorts, and sold the puts at S&P 1038.   So while we missed the "GDP gamble" that bulls took, we more than made up for it on Friday in just a few short hours.  At that point I was exhausted, and Friday 4 PM could not have come soon enough.  More transactions in 1 week than most months.

In  week 4, long story short - the market looked cooked, long term trend lines had been broken; major indexes were below the 50 day moving average, we had 5-6 intraday selloffs in the previous 2 weeks; the markets closed wickedly bad the previous Friday; and 2 market moving reports were set to launch - Federal Reserve announcement Wednesday and labor report Friday.  Surely people would be cautious.  WRONG!  Buyers surfaced each and every day, the most vicious buying coming in the monring ahead of the Fed meeting and the day ahead of the labor report.  No fear... at least for the "urgent buyer".  We were positioned poorly for this situation as we stayed in our cautionary stance entering the week. Cash again mid 80%s, long about 12%, with minor short exposure.  Monday was quiet, Tuesday looked very bad with poor premarket action but ahead of the Federal Reserve buyers flooded in all day reversing the ugly premarket action.  I bought some long term downside protection, January puts - which by the end of the week already looked foolish; thankfully only a 1.5% allocation.  Wednesday morning both the NASDAQ and S&P 500 jumped back over their respective 50 day moving averages as investors were assured "Easy Money" Ben would provide punch bowls for as far as the eye can see.  They were right.  We had our normal herky jerky lemming reaction but actually closed ugly for the day Wednesday, giving up almost the entire session's gains.  Something to worry about?  Another intraday reversal?  No one cared Thursday as a flood of buyers came in - unemployment doesn't bother these people, free money from our central bank is all that matters. Just ahead of the Fed announcement we sold 1/3rd of our Ultra Silver (AGQ) as it was up 15% in a session and a half.  We closed what remained of our remaining Myriad Genetics (MYGN) position as earnings failed to provide any spark and the chart continued to be poor.  And by Thursday another V-Shaped bounce was well on its way as veteran traders continue to scratch their head at the way this market acts. The labor report Friday was poor, but I said this is just a signal that the Fed would do nothing to stop the spigot of US dollars shooting in every direction... so I was a buyer.  We did our normal index long plays.

So after an initial hit to the jaw, just as we saw a month ago as people are staggered that things are not improving... speculators should go back to joy within hours or by early next week as they realize - in their world - life is good.  Main Street is an afterthought...  the market should come to its senses shortly and realize everything is on "track".

The conclusion to that trade will obviously hit in the "next" period... but I can tell you, it was "good".  I also expanded some equity positions Friday in 4 names to the tune of about 4%: Blackstone Group (BX), Gafisa (GFA), Atheros Communications (ATHR) and AsiaInfo Holdings (ASIA).  All names, after breaking below support the previous week, were now able to recapture those levels - so we had nice risk/reward levels to make new purchases.

[Jan 30, 2009: Fund Performance Period 1]
[Mar 2, 2009: Fund Performance Period 2]
[Mar 30, 2009: Fund Performance Period 3]
[Apr 27, 2009: Fund Performance Period 4]
[May 28, 2009: Fund Performance Period 5]
[Jun 21, 2009: Fund Performance Period 6]
[Jul 20, 2009: Fund Performance Period 7]
[Aug 17, 2009: Fund Performance Period 8]
[Sep 14, 2009: Fund Performance Period 9]
[Oct 13, 2009: Fund Performance Period 10]

Bookkeeping: Selling Another 1/4th of Original SPY Call Position from Friday

This morning we took off half of our SPY ETF Call position around S&P 500 level 1080.  I am now selling another quarter at level 1090.  Again this is a 1 day rental of our cash, so the risk reward of this trade was magnificent.

I will sell the last 1/4th of the position on a move to S&P 1100 or a move back to S&P 1085 (moving up my mental stop loss from 1060 - Friday, to 1070 - this morning, to 1085 - now).  The gains on this morning's sales were 30%ish, the gains on this batch will be near 70%.

[click to enlarge]

On any move over S&P 1100 we'll do a similar type of trade, but we'll assume there is some resistance as we move to that level. Once more this whole position was only 5% of our portfolio so we made a sharp risk/reward wager with a limited amount of capital.  Our acceptable losses were limited on the original trade to just a few S&P points downward; while not expecting this type of move so quickly up, we never complain.  Would I have enjoyed holding the whole position until this afternoon?  Sure - but I'm already thinking about the next trade.  I am risk averse so I'm in, I'm out and I'll let others be greedy.  I return to sleeping on my cash mattress while posting some significant risk adjusted returns and making "investors" happy.

We still hold all of our long index ETF and our normal equity positions ... of which we'll begin to take profits on any move into S&P 1100. 

Long SPY Calls in fund; no personal position

Las Vegas Sands (LVS) Sets Hong Kong Macau IPO Range of $2.5B to $3.3B

I was struck in much of my reading of the G20 meeting this weekend, especially in the UK papers, on how the central bankers actions - specifically in the US and US-mini me (UK) - are specifically TO inflate assets.  So while we mock it, it seems to be an implicit strategy... the idea is increased asset prices flood into all other parts of the economy.  Sort of how the US economy was run the past 6-7 years using housing as a prop (house ATM) for spending.  I can see the logic in it, while disagreeing with purposeful manipulation of values to create a false sense of prosperity.  More important, I guess it was a cold splash of water that the central bankers WANT these epic rallies in every asset on Earth, and are not in any way troubled by them.  In fact they apparently cause the Anglo Saxon central bankers joy...

Which brings us in a tangental (sp?) way to Las Vegas Sands (LVS) and its Macau IPO in Hong Kong.  Whereas just 10 days ago the talk was the IPO would bring in $2B to $3B, we've seen the terms set today and the low end is up by $500M and the top end by $300M.  Not too bad for 10 days of money printing.  Maybe they should wait another week, maybe they could get $4B?  Another month more?  $5B?  I'll be curious if there is a "sell the news" reaction once the actual IPO hits but there is no denying the more the company gets from the IPO the more debt they can extinguish.   Somewhere, Mervyn King and Ben Bernanke are exchanging hugs.

Via Reuters:
  • Shares of Las Vegas Sands Corp (NYSE:LVS - News) rose 7 percent on Monday after the casino operator said it would look to raise up to $3.35 billion through an initial public offering of shares in its Macau business.
  • The IPO of the Macau assets "does give the company much needed extra liquidity and flexibility, so it is a positive development for Las Vegas Sands and a positive sign for the industry in general that they are able to tap that market," said Matthew Jacob, an analyst with Majestic Research.
  • Las Vegas Sands said in a filing with the Securities and Exchange Commission that the offering price for the 1.87 billion shares of Sands China Ltd. was expected to be between $1.34 a share and $1.79 a share.
  • The gaming and casino company has struggled with a heavy debt load, and is looking to seize on an opportunity to have a publicly traded division in Hong Kong at a time when the IPO window is open.

Long Las Vegas Sands in fund; no personal position

Dr. Reddy's Laboratories (RDY) Impressive on Both Fundamental and Technical Basis

While I've traded Dr. Reddy's Laboratories (RDY) in the past, I have not touched it in the past few years; however as we await for the new Market Vectors Indian Small Cap fund to launch I was poking my nose around Indian stocks this weekend since the Indian market has corrected quite a bit (and rebounded from oversold levels last week).  So this name came back onto my radar in the limited universe of Indian ADRs.  (full list of Indian stocks available at TickerSpy)

Other than Bucyrus (BUCY) I cannot find a better chart, and right now it's all about charts, momentum, and liquidity so let's start there.  Not much you can argue with here; you can see as Sensex took a big hit (large caps were hit hard in India) Dr. Reddy's downdraft was relatively limited.  Further, with today's move the stock has broken out to yet another new high which technicians love to see (and chase into).

As for fundamentals, Dr. Reddy's is a pharmaceutical company with a large emphasis on generic drugs; you might be familiar with Teva Pharmaceuticals (TEVA) which would be a larger fish in a similar pond.  If you pull up a 10 year chart on TEVA you essentially have 10 bagger; the stock has moved from $5 to $50 so you can see that while not a sexy space, it can be very profitable if you are a dominant franchise.  For Dr. Reddy's, in the last quarter generics were $264 of the $382M in revenue, or 69%.

Established in 1984, Dr. Reddy's Laboratories (NYSE:RDY - News) is an emerging global pharmaceutical company with proven research capabilities. The Company is vertically integrated with a presence across the pharmaceutical value chain. It produces finished dosage forms, active pharmaceutical ingredients and biotechnology products and markets them globally, with focus on India, US, Europe and Russia. The Company conducts research in the areas of cancer, diabetes, cardiovascular, inflammation and bacterial infection.

RDY is a $4 B market cap company, which trades about 300K shares a day so it fits in our wheelhouse nicely - we'd prefer a bit more volume each day however.  While Indian based, this is a global company with 1/3rd of business in the US and 1/4th in Europe; India is under 20%.  Let's take a quick look at their last earnings report to show some of the positive growth metrics.
  • Indian drug maker Dr Reddy's Laboratories Ltd (RDY) said on Friday quarterly profits doubled from a year ago helped by the launch of new generics abroad, beating forecast and sending its shares higher.  Global demand for generic drugs from companies such as Dr Reddy's and domestic rivals Ranbaxy Laboratories and Cipla Ltd is booming as nations around the world battle rising healthcare costs.
  • Consolidated revenues at Rs. 18.4 billion ($382 million) in Q2 FY10 as against Rs. 16.2 billion ($336 million) in Q2 FY09, representing a growth of 14%. The growth is largely driven by Global Generics
  • Operating income at Rs. 2.6 billion ($53 million) in Q2 FY10 as against Rs. 1.8 billion ($37 million) in Q2 FY09. 
  • During the quarter, the company launched 39 new generic products, filed 24 new product registrations and filed 5 DMFs globally. 
  • Gross profit at Rs. 8.7 billion ($181 million) in Q2 FY10 represents a margin of 47% to revenues as against 49% in Q2 FY09. The current quarter margins have been impacted by one-time inventory provisions of €6 million in betapharm on account of non-moving stocks and $4 million in the US for inventory valuation adjustments of sumatriptan stocks lying with the company. Excluding these non-recurring items, the adjusted margins are at 51%.  (have to love a 50%+ gross margin)
  • R&D expenses at Rs. 963 million in Q2 FY10 represent 5% of revenues. 
  • Dr Reddy's said its U.S. revenues grew 39 percent in the quarter ended September to 4.3 billion rupees, while European sales dropped 15 percent to 2.8 billion rupees weighed down by its German subsidiary. The company's wholly-owned German unit Betapharm, which Dr Reddy's bought in 2006 for $572 million, has been a drag on its earnings due to supply constraints and falling prices.

More details on the generic business:
  • Dr Reddy's plans to launch six to seven new generics in the U.S. in fiscal 2009/10 including blockbuster omeprazole, a generic version of AstraZeneca's Prilosec for treating stomach ulcers and acid reflux. [ID:nBOM539118]   Last year, the New York-listed company  launched acute migraine drug sumatriptan, a generic of GlaxoSmithKline's Imitrex, in the U.S. market.
Full report here

No position

Bookkeeping: Adding to Discover Financial (DFS)

As we did Friday with 4 other positions, as Discover Financial Services (DFS) breaks back north of the 50 day moving average we will re-expand our allocation; I am adding 1% exposure in the $14.90s.

On a side note - the Russell 2000 we noted as a lagging index is progressing nicely intraday, having pierced the 20 and 50 day moving averages at once... a close over this level, as noted in our weekly summary, would be beneficial to the bulls.

One month ago at this time, we began a furious rally the Monday after a poor jobs report.  I said at that moment "poor job report? what poor job report?"  Rinse. Wash. Repeat.   October.  November.  Potato.  Tomato.

Long Discover Financial in fund; no personal position

Bookkeeping: Covering Costco (COST) Short

Costco (COST) has been a trooper and certainly many other stocks fared much worse during the downdraft in the week before last.  I am going to cover my short with a 4.6% loss... luckily this is a slow mover and it was a 1.4% allocation for much of the past 3-4 weeks.  That massive gap will have to fill on the other side of elation of constant money printing.

No position

Bookkeeping: Selling Half SPY Calls Purchased Friday

Friday morning as we said

Again, I am not really being facetious when I say "bad things" could actually be good news for the speculators of the US of A.  More money printing, more stimulus, more handouts, more programs, more anything and everything All these things hurt the dollar and until these relationships change and people begin to ask at what point does firing a great many of our consumers matter - I guess we "celebrate" by buying anything denominated in dollars.

and we entered some index long positions; one of which were a 5% allocation into SPY Calls

I've replaced the TNA short with a 5%ish allocation of TNA long and 5% exposure to SPY calls (November 106s) SWGKC which I will hold as long as 1060ish is held on the S&P 500.

There are really only 2 resistance levels to the upside from here, S&P 1080 and 1100.  I am going to let the first half of the SPY calls go here as we hit just under 1080.  Despite very poor timing Friday (I bought at the highest price possible for the entire day) on my purchase this sale will generate a 30% gain on 2.5% of our portfolio in under 24 hours.   Another 2.5% of the fund has the same 30% gain but we will let that ride since it's the houses money... I'll move up my "mental stop" on that half from "1060ish" to 1070.  By doing that we can participate in any upside over and above S&P 1080 while assuring we make money on that batch of call options as well.

At 1080 on the S&P, this would begin to fill out the "right shoulder" of any potential head and shoulders formation we pointed out Friday.  If we blast right through it, the bears last chance is a creating a double top at S&P 1100.  Above that the bears are castrated by the knife of Ben Bernanke.

This weekend the G20 nations met and effectively said... we're going to stimulate until the cows come home.  Effectively we have a "eat your cake and eat it moment"... if news is good, than its good ... buy stocks; if news is bad, than its ok too because it means more free money... buy stocks.
  • U.S. stock index futures followed the lead of overseas markets, which rose after officials from the Group of 20 countries agreed to keep their economic stimulus measures in place. 
  • The dollar fell against other major currencies.  <--- that's really all that matters nowadays.

After all politicians have elections to win and paper money is free.  Wait... I thought it was the chicks that were free?

Watch Dire Straits - Money for Nothing in Music  |  View More Free Videos Online at Veoh.com

Long SPY Calls in fund; no personal position

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 14

Year 3, Week 14 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 70.4% (v 85.9% last week)
22 long bias: 26.3% (v 11.8% last week) [includes 1 option position] 
4 short bias: 3.3% (v 2.3% last week) [includes 1 option position]

26 positions (vs 24 last week)

Weekly thoughts
Quite a change in character from where the markets sat a week ago; at that point both the S&P 500 and NASDAQ had broken below both the 20 and 50 day moving averages, and finished at lows for the week.  One would certainly not expect 5 consecutive up days, with vicious buying ahead of the Federal Reserve announcement AND labor reports but that is exactly what happened.  Volume continues to be generally weak on up days, and strong on down days; that should be bearish but has been the case for many months.  So very quickly we've moved below the 20 and 50 day moving averages to above, at least on the 2 major indexes.

The Russell 2000 has been a laggard much of the past month, signaling weakness in small and mid caps and after the rally this week sits right below key resistance.

Seeing the "RUT" join S&P and NASDAQ would certainly put another arrow in the quiver of the bull case.

Due to the movement in the NASDAQ and S&P 500 but also because of the non confirmation of the Russell 2000 we've moved from a very protective stance to more of a neutral view.  After breaking some key supports many of our individual stocks have also either recaptured the 50 day moving average or rallied to just underneath it.  Hence we're at a crossroads of sorts - perhaps the early stages of a head and shoulders formation or just another weigh station on the path to new highs.  We'll move to a more bullish stance if the market makes new highs for the year (>S&P 1100) which obviously would mean the Russell 2000 resistance is also broken.   And bearish on any new lower low; due to the influx of buying last week the S&P bottomed at 1030, 10 points over the previous low of 1020.  So no "lower low" - hence the bears were stuffed back in the closet.  As we saw last week the technical condition can change 180 in a moment as we dance around resistance/support areas.

As for economic news, compared to last week it's very quiet out there this week - not much to move markets.  We're in the latter third of earnings report season and we'll begin having a much more heavy emphasis on small and mid cap, as well as foreign names - so more of our cup of tea.  These reports don't move markets like the large cap multinationals, but they obviously affect individual stocks.

Outside of that it's the same old, same old ... everyone is a currency trader who keys all moves off the US dollar.  We've reached the point (I believe) where bad news for Main Street = good news for Wall Street.  The more the real economy lags the longer free money remains for speculators; the longer savers are thrown to the wolves with no interest on 'safe accounts'; and the more stimuli coming down the pike.  The minute the 2008 Bush stimulus passed in spring 08 I said we'd get another.    The minute the 2009 Obama stimulus passed in spring 09 I said we'd get another.  I've repeatedly said we'd get much more stimuli as this economy does not recover organically, and we're going to get it.  I am simply laughing at what I am hearing about the next stimulus (just don't call it a stimulus) ... it will deal with infrastructure and job creation.  Wow, the exact same tag words for the LAST $787 billion stimulus.   The one that if we passed, unemployment would not get over 8%.   But that's what happens when you give nearly a trillion dollars to Congress to divvy like spoiled children.   But don't worry - they will get it right this time around ... it just takes a trillion of "trying" (Bush + Obama stimuli in 08+09) first.  And let us be honest here, we are bailing out states - who are required to run balanced budgets - with these "stimulus".  We said in 2007 this would be a massive crisis, running alongside the housing crisis, as local governments spend every last penny they have assuming real estate, employment and sales taxes "today" would be the same forever.  The budget crisis at the state level (counties/cities) will be even worse in the coming fiscal year.... so much more of the next stimulus will be a cover for state bailouts.   Since the states can print money, the federal government will do it for them.

I continue to believe that there will no interest rate hikes until 2011; the market right now is pricing in the first in late spring / summer 2010.  If I am correct, that means easy money continues for another year... and even when the Fed does raise rates I expect them to be Japan-like for an extended period.   We're drunk on easy money.  So it simply looks like another game of blow up the bubble and then crash from it in some period down the road; timing it is the only question at this point - the path is set.  Building bubbles and devastating people in their aftermath has worked so well for the nation the past decade, why not do it bigger and better?  And since we're using our currency this time around, we will take the whole world with us.  Mark my words - the same people celebrating Ben Bernanke today are the same ones who celebrated Alan Greenspan for 2 decades.  And now that the view of Greenspan has changed for the worse once time has passed - the same will happen to Bernanke for what he is doing to us... give it 5-7 years.  The wizard behind the curtain is just Greenspan 2.0 on steroids.

But until the next excesses build up to a point to create the third "black swan" in 2 decades, we ignore the long run and celebrate that our leaders give us anything and everything we ask for, and there are no costs.  They can make our 401ks and house prices go up... and create the "wealth effect"; however fleeting.  We are the chosen ones, a magical people - unaffected by any economic rules or ill effects.  I am sure I will be typing the same things in 6 months, 18 months, and 30 months.  We never learn.

Sunday, November 8, 2009

Updated Position Sheet

Cash: 70.4% (v 85.9% last week)
Long: 26.3% (v 11.8%)
Short: 3.3% (v 2.3%)

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

*** Please note, I've added an options category for things I am holding longer than intraday.

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LONG (2 photo files)



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