Monday, April 16, 2007

firing on all cylinders

check this pie chart out. GS, JSDA, ATI, RIO all really working today! My AAPL play still seems to be stalled out, but nice entry point on Friday.

Wednesday, March 21, 2007

wrong about the fed statement

I have spent some more time parsing the Fed statement this afternoon, and I think I was wrong earlier. My previous post's thesis was: "fed still worried about inflation, not accommodative yet." However, comparing the January and March fed statements shows a key removal. The passage about "further policy firming" is gone. This is no accident.

It looks like Fed cuts, which most of us have been hoping for, are close on the horizon. If there is some gut checking going on over the next few trading sessions, I think they will be buying opportunities.

By the way, though, everybody knew that the Fed was done raising... so the rally today has nothing to do with that. If you look at the data, you'd be crazy to raise. That is absolutely not a surprise.

surprised by this move

Everything is solidly higher after the Fed statement this afternoon. It doesn't make much sense to me -- the Fed acknowledges that troubles in housing are ongoing rather than stabilizing, but this isn't news. I'd be worried if they didn't see troubles as "ongoing." Moreover the Fed is still primarily concerned by inflation. It sounds like a hawkish statement to me.

I will be selling into this rally.

Ben won't save us yet.

Markets are taking a deceptive breather here before the storm of the Fed meeting, happening imminently. In the choppiness of options expiration week I set up two long bull spreads on GS and AAPL. The former is well positioned to make serious money buying underperforming and distressed debt assets from struggling subprime lenders. The latter is at the beginning of a truly impressive product cycle: AppleTV, Leopard OS, iPhone, etc. All of these products look set for a home run.

That said the spectre haunting the market today is the credit crunch. As I've posted before, declining access to credit from consumers is going to be the thing that spirals this economy into recession. The way to avoid this is for the Fed to ease. It seems clear to me that a contraction of credit and liquidity from the consumer markets would be fairly devastating for everything from corporate profits to asset prices.

If Ben had raised last summer, he could probably safely cut rates now, or at least introduce some friendly language ... but since inflation is still high and labor markets tight, he is boxed in.

It will be interesting to see what happens at 2:15.

Tuesday, March 13, 2007

random thoughts on the S+P

My downside target for the S+P is 1325, written on my whiteboard the day after the Dow -500 crash a couple of weeks ago. Let's see how close I get.

My random thought here though is that holding the companies in the S&P500 in a static way is sort of a losing proposition. Almost none of the large cap companies in the index 20 years ago are still in the index... so what are you really buying? I think its the methodical rotation that is the value. Momentum stocks that are just starting to get huge get added to the index and you are a buyer there. Stocks that are getting killed and aren't working get removed from the index and you are a seller.

I wonder if someone has looked at a trading strategy in which you long stocks that enter the S&P and short stocks that leave it, over a certain well defined time period. You never actually hold the stocks that stay in the index.

here's the leg down

Subprime lending is moving into catastrophe mode and taking the rest of the market with it. I'm eagerly awaiting the capitulation but using today's weakness to build a bull put spread on Altria, my defensive name that should rally first after the damage is done.

The short trade in NFI, LEND, NEW (now delisted!) is over -- the whole world is short these guys; there are no shares to lend out.

Since this economy depends so heavily on the consumer, anything that threatens his profligate spending should be viewed with serious concern. A blowup of the subprime guys will definitely impact lending. This market should be down hard.

In the long term the bull case/goldilocks scenario remains. Plenty of guys are waiting for lower interest rates to make capital purchases and the labor market is still very tight. This leg down will be a terrific opportunity to move capital from the sidelines.

Monday, March 12, 2007

underestimating the credit crunch?

I was thinking over the weekend about the subprime crisis. Why is it imploding now? And what does that mean for the overall economic picture?

Then I came across Susan Bies' comments about the coming wave of subprime defaults. The picture started to make sense to me. The subprime crisis really started in 2003 and we are just seeing the tip of the iceberg as asset prices come in. Its easy to loan people money to buy assets that keep rising in value, even if they have no income. But when they stop rising, the cracks show.

I believe that this is the beginning of the end of the liquidity glut that pushed risk spreads to historically low levels. We will probably see something of an overcorrection, which means that consumer debt will be harder to get for some time in the future. Mortgages and car loans have been fueling the consumer for some time. If we see rising risk premia for even marginal consumers it could have a severe impact on growth.

I doubt that a subprime implosion will have much of an impact on balance sheets, but I think this could put our expansion at some risk. We're already looking like we're in the latter part of the cycle. This credit crunch slowdown is probably what the inverted yield curve has been pricing in for the past 18 months.

A vigilant Fed could bring the consumer back with a couple of quick rate cuts. I think we'll need to show some more cracks before Bernanke can act. I am staying defensive here.

Tuesday, March 06, 2007

not over yet...

Nice looking and seductive rebound today. I mostly sold into it. I'm still in "circling the wagons" mode, meaning that I took the opportunity to exit some of my metals/commodities positions (AUY, EMU, RIO).

It may seem like the correction is over, but I don't think we've have the capitulation yet. One 500 point down day does not clear out all the marginal buyers and we still need to do that. My downside target for the S+P is 1325. Today we did not break support at 1,400. We still have further down to go.

I noticed a great short opportunity on NEW late in the day but didn't pull the trigger for fear of more short squeeze to the upside. I wish I had been selling into pressure at $6 because it ended up just north of $5 a share. What can you do! I should probably just take it off my screen because it'll end up biting me later.

In any case, feels like a dead-cat bounce here. Brace yourself for the downside.

Monday, March 05, 2007

NEW short pays out huge

New Century Financial imploded today, down over sixty percent! My puts struck @ 10 are now solidly in the money. This company has looked doomed for quite some time. Their balance sheet is a disaster, and they came out last week saying they would delay their annual report. And today, the criminal charges and investigations were announced, effectively destroying the stock.

I've exited this trade with a handsome 500% gain.

As such, it is officially the best trade that I've ever put on. My previous record was back in 2001 when I put a big long bet on MSTR (MicroStrategy) and it doubled. (Thanks to Sam Choi for that one.)

I think you could short NEW all the way to $0, but for now, I'm out.

Wednesday, February 28, 2007


My sincere apologies for being out of the loop for so long. My lack of posts has corresponded nicely with a severe lack of discipline as well, and I was caught yesterday extremely long in some highly leveraged positions. I played the bottom right, called the Bernanke relief rally last night, and exited today up about 12%. Not enough to completely contain the damage, but a lot better than last night.

Here's my take on where we go from here:

* Recession Fears. There are plenty of signs that we're in late cycle at the moment - Greenspan is dead right about this. We've got an inverted yield curve (and have for quite some time). The dollar is weak and getting weaker. Corporate profits are stabilizing and capital expenditure is slowing. Companies can't productively spend the money that they're making.

* Subprime Loan Implosion. This market is ready to implode. Customers are faced with skyrocketing mortgage bills, sometimes having to pay 75% more in premiums than before. Freddie Mac is not buying these anymore. With subprime debt harder to get for customers, the low end of the real estate market tightens up considerably. Housing will be hard pressed to turn if people can't get mortgages anymore.

* Goldilocks is priced in. One of the reasons that we had a spectacular move in the S&P from last August until now is that we went from expecting one more rate hike to expecting cuts from the Fed. This changing expectation correlates perfectly to the rise in equities on a graph. Now, we've got cuts on the horizon, but uncertainty as to when and how much. Everyone knows about "goldilocks" now and if any evidence comes in to the contrary, we'll get hit. This goes back to my post earlier in the year talking about massive jitters if rate cuts don't materialize.

All of the above points argue solidly for a more accommodative policy from the Fed. However, by passing on the rate hike last year, Bernanke has much less room to move. Since his hands are tied, we'll need to wait for things to get really bad (e.g. a subprime collapse) before he has a cover to ease. This spells a lot of turmoil in the markets over the next few weeks.

With this in mind, I'm going to safety mode. I've exited most of my speculative trades and I'm moving into low multiple stocks and high yielding stocks. (This is Cramer's advice.) Adding to GS here and opening up MO here as well. I still like the metals and will go hard into them if they correct significantly. I think gold is a good hedge against a weak dollar if the market starts to anticipate a rate cut (negative for the dollar), so I'm still long AUY and looking for entry points.