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

crash!

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.

Friday, February 09, 2007

MA over? USO on the move.

Mastercard came out today with great numbers, but lowered guidance. As with many earnings plays this season, it is getting killed. The CEO's comments were slightly vague as to why margins might be lower in 2007. I can only speculate that it is increasing competition from Visa and online merchants that are putting pressures on the company. Otherwise, MA would have pricing power and could keep things rolling next year. I think this story is dead for the time being.

In the spirit of going with what is working now, commodities are moving extremely nicely. I am adding to my USO position in the wake of the breakout over $60. I am also looking for an upside breakout in OIH, which has been flat to trending up recently. I like it here. I'm also still long RIO and GLD. Allegheny's chart (ATI) is looking strong and I may move in here as well.

Friday, February 02, 2007

UA - no catalyst, double down on USO breakout

I've reconsidered my UA long trade and exited today with a small loss. The miss was due to investment in growth, yes, but lack of upside surprise also removes the catalyst for the stock to go higher. The story isn't there at the moment. I still like the stock overall but I think its dead money for now and there will be a better entry point.

I like the oil breakout here, and I think we have another 10% move to the upside on the way. I've increased my long.

Thursday, February 01, 2007

UA on weakness

UnderArmour, the red-hot sports apparel manufacturer got hit today because they missed Wall Street profitability estimates. I looked at the report though and I liked what I saw, despite the miss. Revenues were solidly higher and growth seems to be accelerating. There might be some downward pressure on margins because of the new businesses and apparel lines that they are entering. But this should be temporary and I think the strength of the brand will propel the company solidly higher.

I stepped in here on weakness and will continue to do so.

Wednesday, January 31, 2007

Nice move in USO

Nice move in the oil patch yesterday, up 5%! That is the largest move in one day in 16 months. Oil just kept going up, breaking through key resistance levels. I am still long here and will add on dips. I think oil moves solidly higher.

My gold position is also doing nicely. I like being in the commodities right now, since equities look toppy and earnings reports are coming in mixed.

Monday, January 29, 2007

long oil, long GPS

Moving into a USO long position today. It looks like we've hit some resistance on the downside here around $45 and I like the chances for an upside move.

Also, I opened a longer-term speculative position on a PE buyout of GPS (Gap Stores). I bought a bunch of Jun 2007 calls at $22.50 for $0.35 each. If GPS gets taken out before then, you are looking at $2-3 upside, which is basically a 10:1 shot. I like those odds!

Tuesday, January 23, 2007

Not stepping in yet

A little dead-cat bounce perhaps after some brutally down days, and crushing weakness in the techs. I think we will see a day or two of strength here after some ostensibly encouraging earnings reports (TXN). However I'm not yet ready to buy with any conviction. I'm opening a new position in DNA as my healthcare play of choice, since I think biotech will get a lot of attention in 2007, and it's a great story. DNA has been executing but has had a lid on it due to fears about the new Democratic congress, and general outperformance in tech. Now that tech is weaker, this money's got to go somewhere. I think it'll be biotech.

In metals, RIO is doing extremely well today and looks strong going forward. I sidelined RIO a bit too early and have missed a nice upside move. Since RIO is one of the only things solidly working in this market, I will look to reopen when it comes in.

Lastly, YHOO reports after the close today. They have rolled out the new Panama advertising system to about 30% of their advertisers, to generally positive reviews. They should have enough data to give meaningful guidance for 2007, and I think Semel will raise it. Switching to a more rational pricing system is an obvious change, and they should have strong indications of how it will perform. Even if Semel does not raise guidance here, I think the downside is limited. Most everyone thinks that Yahoo can't execute at all and the pessimism is rampant. Tepid numbers would not harm the stock too much.

Overall though, I am not stepping firmly into this market just yet. I think there is quite a bit of downside through the bleak days of February, especially if a rate cut gets taken firmly off the table.

Thursday, January 18, 2007

three and out

Three earnings disappointments. AAPL came out with absolute blowout numbers, but the stock goes down because the guidance for Q2 was below expectations. MER is up a bit, but not enough to recover the volatility compression in the options. Same deal with CAL.

Back to the drawing board. It may not make sense to trade long options during expiration week going forward.

Tuesday, January 16, 2007

continental, merrill and apple

Three earnings reports coming this week, around Wednesday. Here are my strategies for each:

* CAL. Up strongly today and I don't want to buy into this rally here. If AMR and LUV report disappointing earnings tomorrow, I think CAL will get hit and present a buying opportunity. If not, I am comfortable letting this one go. I am not interested in chasing.

* MER. Merrill is poised to post a strong number here and I am buying weakness. I opened a position today and will build it tomorrow if it is still soft.

* AAPL. Opened a position on Friday that is solidly in the money today. I will add some more if there is weakness tomorrow, expecting a blowout quarter.

Thursday, January 11, 2007

rally mode



Core holdings portfolio is very strong today! Google, Goldman Sachs, Mastercard, Level III are all moving solidly higher. Lowe's and USG are participating too.

Two moves of note:

1. sidelined RIO because of overall commodity weakness. I want to wait until they hit bottom before moving in there.

2. Closed out all AAPL positions. I would like to re-enter before earnings one last time, then revisit in March on weakness.

Two areas that I'm thinking about going forward:

1. LOW and USG are both levered to housing. One is a retail play and one is a raw materials play. I may try to exit one of these in the coming days, for diversification.

2. Cheap oil. There should be some interesting ways to play plummeting oil right now. Maybe back into KMB for a while?

3. ATI looks nice right now. It's a commodity play in a solidly booming industry (airlines), and it is off its highs. I may move in here.

Tuesday, January 09, 2007

AAPL does not disappoint!

My call yesterday was pretty dead on for AAPL! The phone came out, and we got our $8 upside move. I closed everything out late in the day for a big score. Not as big as if I had left my entire position on the table. But if there was no phone it would have been game over for the Rhombus Team. That would be undisciplined. Overall, it was a great trade!

Oddly enough now that I'm cashed out I feel a little strange, like there is something missing from my life.

Going forward, I like AAPL ahead of Q4 earnings on the 17th. Between now and then, AAPL will probably come in and retest some lows. The phone is a massive leap forward for technology and it is a ridiculously amazing product. But, in actuality, it will barely move the company's earnings for 07. And there are all sorts of issues with adoption - Cingular only, super-high price point, etc. I think it will blow any estimates away, but between here and June there may be uncertainty and panic about whether a $500 phone can actually sell.

Those panicky times will be buying opportunities.

Monday, January 08, 2007

MacWorld

Seems like forever ago that I opened up my "run to Macworld" trade. AAPL has done a lot of moving in both directions but ended up today around $86. I closed out the bulk of my position this morning with a nice profit. I set up a 95/100 Jan bull spread in case there is a phone tomorrow. I think the downside is limited. The upside could be $8-10, since estimates don't include a phone at all.

Jobs' keynote is at 9am, so stay tuned. Either way I will close out the position and re-enter next week ahead of earnings.

Then a much deserved break from owning Apple options!

Thursday, January 04, 2007

AAPL exit plan

Apple is looking great so far into Macworld. Today we are holding $85 nicely. If we stay here, we could see a run to the close and gap up tomorrow getting close to resistance at $90. I am looking to unwind the bulk of my speculative position in Jan 85s by the EOD Monday, so I'm selling into strength whenever possible. I'll sell aggressively anywhere above $90.

I have been doing a lot of research into Apple's iTV and iPhone product announcements for Macworld next week. I think they are both game changers. Personally, I would buy both as soon as I could get my hands on them (although it might be tough to give up the Blackberry). With that in mind, I am going to leave some of my more speculative Jan 95s on the table through Jobs' keynote and sell into any strength that comes out of the announcements.

Tuesday, January 02, 2007

ideas for 2007

2007 looks to be a great year for markets, if we do get some rate-cutting by the Fed. The big question that markets will likely have is when the rate cutting cycle will begin. This could introduce some uncertainty (and volatility) into things in the early part of the year.

With that thesis in mind, here is a summary of what we'll be doing over the next few sessions to get positioned:

* GS. Phenomenal earnings, best of breed investment bank, lower interest rates and a rising stock market should keep GS flying high this year.

* RIO. Growth in emerging markets will keep demand for raw materials (steel/iron ore) high.

* JNJ. Defensive play. Any weakness in the dollar or panic about the soft landing should propel this issue higher.

* MA. Tremendous organic and secular growth in Mastercard's business should provide great upside for this stock. I think it will be beaten down over concerns about the strength of retail... but this is not levered as heavily to retail as most people think. That means buying opportunities.

* USG. Strong fundamentals because of home remodeling, which happens when the housing market slows down. USG also looks cheap here and could be taken out by PE guys or Mr. Buffett.

This will be our model portfolio so far. There is space for speculation which happens orthogonally to these positional movements. I am also still looking for a good technology play for 2007, and any ideas would be welcome. AKAM and NVDA did well in 06 so they may continue to do so. CSCO also looked strong during the December selloff. Updates will be posted here.

apple recap

Welcome to 2007! Last week was an intense one for AAPL, and the drama made for some great trading opportunities. Shortly after the rumors about falsified documents came out on Wednesday, we bought in long at about $78. The next day, the FT repeats the story and the stock is knocked down again to $80. Another buy-in opportunity and we went more long. It was a great trade, because Friday the uncertainty cloud was lifted and AAPL moved straight up to our resistance point at $85. We sold a little there but are still long ahead of Macworld.

The exit strategy will be a phased one. The next resistance point is a soft one around $90, where it held support in the face of shorts in late November. We will be selling a little of our position there.

It should be nonstop good news and rumors from here through Macworld next Tuesday, so I think there will be nothing but upside. We will be selling into strength wherever it materializes, with the goal to be completely unwound ahead of Macworld. If Jobs does not release a phone I think we will see some panicking, and the upside if there is a phone is limited.

Apple reports Q4 earnings on the 17th, conveniently after Macworld and just before options expiration. If AAPL gets knocked down because of the product announcements, I think there will be tremendous upside ahead of the reports. When I visited best buy, the salesman noted that they sold out of every shipment of macs that came in. Not only that, but the ipod case looked like an earthquake had hit it. Anecdotal evidence, to be sure. But I like the risk/reward if we're back in the 80s after the expo.