Joining UpDown.com - Maven's Back!

After using Marketguru.com for over year and half, I had to relocate my portfolio to a new home. The Marketguru website ran into financial difficulties and was forced to shut down. Thanks to Sean and other MG staff for supporting this site for as long as they did.

After some research, I signed up at UpDown.com. I have retained my username - Maven100. The interface is not as nice as MG, but it allows you to short stocks, which is something I could not do in MG. It has some similar features as MG, but I am yet t figure out how to provide automatic feedback to my followers in the most efficient way. I do like the fact that everyone starts with the same $1 million amount.

I put a few trades in my brand new UpDown portfolio this week, but it would take some time for me to get invested since I am basically neutral now, awaiting a better entry point.

I am still trying to figure out how this site operates and find the most efficient way for people to track my performance. For now, I guess you can become my 'friend' at UpDown and be added to my list. In order to do this, provide your email and username and I will send you the invite to link up. So, if you want to follow me to profits (lol) you can email it me at v_sapi@verizon.net.

Unfortunately, since MG site was shutdown, my track record is lost as well, and it would take some time to rebuild it.

Here is my performance(according to Marketguru)as of July 30th, 2010:

YTD - 9.87%
Monthly Average Return - 2.07%
Excess Return vs SP500 - 1.73%

YTD Returns for comparative purposes:

SP500@1100 - (1.4%)
Dow Jones@10,435 +.07%
COMP@2,250 - (.08%)


It is important to note that the 1,100 bps out-performance relative to SP500, came at lower risk. Based on Marketguru's data my portfolio risk profile was as follows: Overall:Low Volatility; 60% correlation to SP500 (R-Sqrd); Beta of .85. A beta of .85. indicates that on the average, my portfolio had only 85% of the volatility of the index. In other words, this outperformance was not achieved by taking out-sized risks, in contrast to someone trading penny stocks, leveraged ETF's, or stuffing a portfolio full of high beta stocks. Risk management has always been the most important part of my portfolio strategy.

Again, since I no longer automatically post my blog to Marketguru, I really have no idea what the actual readership of my blog is. If you like what I write and would like to see more of my posts, just drop me a simple line at v_sapi@verizon.net. You can also leave the comments in the post comment fields.

Just Follow China ..as the sun moves from East to West

The SPX index closed right on its 200 day ma yesterday, and on the high of the day, implying the continuation of the positive momentum, following the Dow and COMP, both of which has already cleared this hurdle. As I said before, there is room to run to 1140-1150,which to me would be a major inflection point to sell. But, after a brief rally this morning, the market seems to be running out of steam

The techincals still rule here, as earnings have been coming in mostly better than expected, but have received little focus and only a temporary reward. The beats are nice, but not getting much play for two reasons: 1)The Q2 earnings were pretty much front-end loaded, with April being a peak for many economic indicators, which means April may have contributed disproportionately to Q2 results and the business may have declined since 2)the overall lack of faith that strong earnings wold be sustainable in light of a increased risk of a double dip.

Over the past few months we have seen the US market trade off of a variety of factors (either inversely or in correlation with) crude, Euro, gold, BP, Europe, etc. During the last few weeks the markets seemed to have been especially coupled with China. China was up for the past five or six trading sessions and finally closed lower overnight. The Shanghai index is very overbought and a normal correction of a few days and a few percentage points would be reasonable. The bottoming of the Chinese markets have corresponded with the bottoming of the sentiment towards risk, double dip, and China bubble, so this tandem recovery in both markets is not very surprising. If you are worried about the risk on/risk off trade whipping the markets, just watch China for any clues.

Although there is still a possibility of this market running unabated to 1140/50, I made a few moves this morning to get even more defensive.

My trades so far this morning:

Sold TNA,GES,and WMT.
Short WLT, ACI, and AMAG.

I am taking a bit of a drubbing in DNDN, MOS, GDX and FCX, but except for GDX, I
am fairly well hedged with options, softening these blow.

If the market deteriorates more over the next two, three hours, I will likely buy SMN and TZA.

Assessing the Odds of the Next Move Up...or Down.

Watching the markets very carefully as we approach a 200 day moving average at 1114. For those still focusing mostly on Dow Jones, the 200 day ma was conquered on Friday and there is follow through today, a positive sign. There is definitely some resistance at 10,500. Ditto for COMP, but if we clear this major overhead resistance, there is some room for the market to run. Still, my inclination is to sell resistance, and take some profits although I am still positioned defensively. The first to go will be WMT and TNA bought on Thursday. Both have stops slightly below current levels and will be sold at a profit. I am not shorting this market, other than a few option hedges listed below.

I am experiencing some pain in SLB,(no it is not a body part, but a large international drilling company),the stock was downgraded to neutral by several sell side firms after posting less than stellar results and not really providing much of an outlook. Although I am down about a point or so, I believe I missed most of the downside and expect to see the stock stabilize here and rebound.I may have been a bit early pulling the trigger on it, but I think the reasons the stock got hurt this quarter are temporary and short term in nature (Gulf of Mexico drilling moratorium which may last 6 months and some slow down in international operations). I see the downside limited to 56.

BAX - which I bought on Friday morning, has been a winner thus far, partially from an uptick in most healthcare names on rumors of GENZ takeover by GSK or SNY. This was not a reason I bought the stock, however. The three main reasons were: 1) BAX has underperformed the group, while the healthcare in general, has lagged the broader market. 2) Goldman has upgraded the stock and added it to its Conviction List, recognizing that the business have likely bottomed. 3)Valuation is reasonable and provides some downside protection with the stock ~5%-6% from support.

The volume has remained anemic and the the activity pretty much dies after 11 am. Its a type of market that generally trades on technicals in the absence of major news, but given that it is only a fraction below a key resistance and momentum indicators are short-term overbought, which makes it pretty vulnerable to a volatile correction. In other words, the risk reward is unfavorable. I would rather see it move and close aggressively above its 200 dma and I will jump back on for a ride to 1150. If there is a correction, we may see it take the market down all the way back to 1080 on the SP and 1150 on the Dow.

Since we are no longer using Marketguru.com to track our trades, positions and results, I will try to post them on my blog as timely as I can.

Current Longs: AAPL*,FCX*,MOS*,DNDN*,NKTR,BAX,WMT,TNA,CEF,JPM,GES,GGN,REXX,CELG,DVN

Current Shorts: August Calls (APPL,FCX,MOS,DNDN).

Cash/Bonds ~ 50%-55%

*Hedged with short calls

Turning Modestly Bullish, Cautiously Adding to my Longs

I am currently positioned neutral, with a slight long bias. The portfolio still has plenty of cash and I have sold a number of calls against some of the larger positions like MOS, FCX, and DNDN that had a nice run. I am not seeing many bargains here, but opportunistically picking up some stocks that have improving fundamental picture and sentiment, with a decent technical risk reward and already reported their results.

This morning I bought some BAX, agreeing with Goldman's upgrade. The stock has been a terrible underperformer and at this price seems to be assuming the worst case scenario, while business is stabilizing....the risk reward seems pretty attractive.

I am also looking for a good entry into some drillers...and bought some SLB as its pulled back after earnings. Looking to potentially get involved in ESV and NOV. I feel like I missed a move in some of the coal and retail names, but will pick them up on the next pullback. Key candidates are ANR, WLT,BTU,CNX, PERY, MFB, WRC, GES.


Overall, I remain cautions as we approach the European banks stress test. I think, the news will be taken in stride, as some bank are expected to fail and will have to raise capital. Earlier concerns of European economic meltdown are now postponed, as the economic data that we continue to see out of Eurozone is pretty constructive and indicates that its recovering, albeit slowly. The sentiment has improved lately, although there is still a steady chorus of 'double dippers' out there.

The FED is indicating that they will continue to accommodate its monetary policy, so rates will remain low and the inflationary shocks that I expected to materialize by now, are not there. The expectations are still pretty low for the economy, and most of the economists have already revised their GDP growth expectations down.

Politically, we are not yet out of the woods, but the FinReg is now out of the way, Goldman has settled with the SEC, The Congress will be extending jobless benefits and the expectations of GoP taking the House and the Senate in November are alleviating some of the investors' fears related to Washington's policies. And yes, the Cap and Trade is basically dead. Lastly, we are no longer looking at the pictures of the oil gashing into the Gulf of Mexico and baby pelicans covered in crude. The risk of of military conflict in North Korea, Israel/Iran is always there, although the tensions have died down and are not on splashed on the front pages of newspapers and TV screens. But this risk is always there and should not be ignored.

The markets have also seemed to have decoupled from USD/Euro trade...which was the main directional indicator for the markets over the last few weeks and the corporate results are now at the forefront again. The earnings have been mostly solid and the outlook provided by most companies indicates that companies are not seeing any major deterioration in their business, especially in Tech.

Technicals look very interesting right now. we are trading around the key level of 1095, on the SPX. The significance is that we finally poked above the downward sloping trendline, breaking the pattern of lower lows and lower highs that was in place since the selloff that started in late April. The next key move is into a psychologically important level of 1100. If we can take out 1100, then there is a clear shot at 200 day moving average (1114)which coincides with a Fibonacci 50 % retracement of the April high. This would likely be the battleground level. The technical bulls are also talking about the inverse head and shoulders pattern, which will get some validation on a break above the neckline at 1100. In general, however, when you have a confluence of important resistance levels, it takes a few tries to take them out. Personally, I think that the short squeeze that started the most recent rally, has mostly played out and it would take a fresh pile of $$$ to push through. Taking some profits and getting defensive (sell calls, raise cash) as we get closer to resistance levels I outlined on the attached chart, would be prudent.

If the 1100 objective is achieved, the focus will shift to rally into 1140, another key resistance on the chart, at a 62% Fib retracement. At the moment I just don't see any reason to own the stocks as we get closer to 1140 and would be selling aggressively and likely going short on a move into that area.

On a flip side, if the bears take charge and the fear trade comes back, I am watching a pullback to 1070, where there is some support, with a more solid support at 1040/45. I am not completely ruling out a scenario of revisiting 1010 either, although the odds not as good right now.

Net-net, if the Euro bank test that will be announced at 12pm today will be in line with expectations, we should expect to see the markets drifting modestly higher. One can buy carefully, but the momentum indicators are no longer oversold, the support levels for many stocks now is 5-10% lower, which obviously increases the risk.

It could be a nice, tradable rally into resistance levels I mentioned above, but the volume and conviction behind the move is still absent, so volatility will remain. No real urgency to load up here, as you will likely get a chance to buy here on a pullback, even if get a pop of the news.

Buying APPL into Tomorrow's Announcement

This morning I began to press my short position, as the indicators triggered the anticipated leg down. This was a fairly easy call, given the setup was pretty straightforward, with 6 consecutive up days and plenty of divergences and obvious resistance levels. It gave me the confidence to add more to my short bet.

AAPL - I am also adding to my AAPL position, but I am well hedged with short exposure so this is not a straight bet. Here is the logic: the well documented hardware issue with I-phone 4, cost the stock at least more than 10 points or roughly $9B in market cap - totally disproportionate punishment. The stock was not overbought as the rest of the market and is only 2.5%-3% from a decent support (~242). Additionally, we should find out tomorrow what type of fix they will offer for Iphone 4. Whatever it is, the uncertainty and the overhang will be removed, and even the worst case scenario, a recall, would most likely be a temporary set back. It should also be understood that the initial move on the news could be pretty violent. The speculation is pretty rampant and the expectations range from AAPL doing nothing about it to a complete recall. I would tend to agree with those expecting that AAPL will offer free bumpers (it would be a totally negligible cost ~ a few pennies in EPS per million phones) plus a silent recall.

My gut tells me that this is completely overblown by the media rather than users complaining about it. I conducted a small informal poll of my own, asking my family members and friends who own it and NONE of them had any problems with the antenna. I think the recall would be too drastic and frankly unnecessary, for an issue that is not as bad as some others that we have witnessed with consumer electronics products. Bottom line, I see this as a temporary issue which will be resolved by Apple.

Apple earnings are expected to be solid when they report on Tuesday, likely to be at least in line or slightly better than consensus. There is some talk that margins may have a bit see some pressure because of new product introductions. The I-Phone shipments will be strong as well, and I doubt that this antenna issue is likely to dissuade potential buyers. I am not entirely sure what reaction will be to their earnings, but I am not sweating it. Buy the dip, but if you are negative on the market's near term direction, hedge it with either QID, SDS or TZA. This morning I added a small stake, but will be adding more if tomorrow's announcement creates volatility in a stock.

Shifting to Negative Bias as Odds Favor a Near Term Move Down

While on vacation over the last two weeks, I remained mostly in cash with a just a few bets that actually worked out OK while I was away. I covered my shorts before I left and had one small short bet that got kicked out on a stop.

The recent rally has corrected the oversold condition, but I still see the intermediate trend as being down. What that means in practical terms, is that there is a decent chance that we may revisit the 1000-1010 level before the end of the summer. This has been confirmed with a much publicized 'death cross' (a 50 day moving average crossing below the 200 day ma) in early July.

As I've written in my previous post, I would be an aggressive buyer on a move to 1010. I was fully prepared to add there when we tested that level on July 1st, but the timing sucked, as it happened a day before my two week vacation. I was not planning on trading or even spending much time monitoring the market while in Alaska, so from a risk management perspective it would have been wrong to have too many open positions.

Currently, in my brief assessment of the market (still just getting oriented after a long absence) the odds favor the near term move being by roughly 2:1. There are just too many technical confirmations to ignore.

While I certainly see a possibility of moving and testing the resistance at 200 day ma (~1115 on the SP), I believe there is a higher potential that a leg down could bring the index back to revisit the lower end of the short term trading range near 1045-1050sh. This morning the index has unsuccessfully tried to move higher, bumping against a down-slopping trendline from the April 26th high. With Semis fading and unable to provide any leadership to this tape despite the strong INTC numbers, confirms that this rally is running out of steam. The volume remains seasonally weak and the sentiment has improved from a panicky mood of just a few weeks ago.

So while I was not able to capitalize on a the recent bounce from a major support, I am beginning to add slowly to my short positions both individual stocks as well as index. The risk reward is unfavorable here, and one should get more aggressive shorting it if the SP gets closer to 1115 for an even better setup to move back to the lower end of the trading channel.

The 1010 level now is almost a certainty, but then what, is the ?

For the last few weeks, all of my technical, sentiment and gut indicators were pointing for an upcoming market wash out and an eventual tag of a 1010 level on the SPX. The chart below shows how each of the support levels has been systematically broken and how subsequent rallies failed to get any kind of sustainable bounce. The sentiment is as bad as it has been in at least few a year, and although eventually this would be a great way to bet against, for the time being, no one should be standing in front of the herd. The stamped is here, and its no longer just a dust cloud near horizon.

The rhetoric aside, this is how I'm positioned. I am basically market neutral, with maybe a short net long exposure in some of my long term retirement accounts where I am just unwilling to sell to incur capital gains and would just prefer to protect the exposure with short ETFs. These ETFS (SDS, TZA, QID) are dangerous razor blades and one should play very carefully.

My best guess is that we will get to 1000-1010 over the next few days (or hours). We could test this level and actually get below 1000, closer to 990. I would expect an aggressive bounce here and will likely remove my negative bias, by closing my short positions and potentially going long. As a reminder, the 1000-1010 level is a KEY level both psychologically and technically (fib 32%). Even if I am wrong, and we go lower than 990, let's say 940-950, the next major support, the bounce will come and the bounce will likely take it to the breached support of 1000-1010 level, giving you a chance to sell it there...so what I am saying is that buying 1010 level will give you a shot to play a bounce from there or give you an exit at a small loss or even money when the index bounces to that level.

Of course many will still be predicting even lower levels, so one needs stay fluid in this market and reevaluate our stance frequently. Time to pay attention.

How to play the Aussie news - several ways to profit

With a somewhat surprising resignation of the Australian Prime Minister, Kevin Rudd, and his replacement Julia Gillard stepping in, there are four potential way to play the news.

Recall, that Rudd didn't step down because of his hard and very vocal stance against cultural differences between Australians and Muslims, but because of his proposal to levy a 40% tax on natural resource companies. When it was first announced a couple of months ago, Australian nat resource companies and Aussie dollar took a beating.

With this proposal pretty much dead now and hopes that his new replacement will be a more reasonable with respect to this tax policy, I would be consider buying a few potential beneficiaries:

Rio Tinto (RTP)
BHP Billiton (BHP)
Peabody (BTU)
and FXA, a long bet on the Aussie Dollar that should benefit from it.


Now, keep in mind, this is a commodity based trade, and if USD bounces, it will pressure commodity producers. Secondly, after a pretty subdued commentary for the FED on the state of the economy yesterday, investors may stay away from anything that is leveraged to stronger economic growth. Lastly, there is no guarantee that the incoming PM will completely move away from this proposal, and although I believe the 40% tax is not going to fly, it may be replaced with a lower negotiated rate like 30-35%, which will still keep many natural resource companies reducing their exploration and production in Australia. So consider this points before buying.

Thoughts on China

Its been a long time since I wrote about China. I was very much invested in the Chinese equities in 2009 and the first few months of 2010, but lately, sensing that there is just too much negative sentiment affecting this emerging market, I exited most of my China positions with just a few exceptions. I still trade around the news and earnings, as well as some special situations in Chinese US listed stocks, but this has been a smaller part of my investment theme this year.

The EM (emerging markets)investing has fallen out of favor in general, clobbering many of the Chinese stocks, as de-risking has once again becoming an overused investment term de jour. At the same time, I think the market seems to completely over react to the headlines coming out of China.

But there is a number of prevailing themes that have been been the main cause of the negative sentiment towards Chinese investments.

1) China's growth is slowing and they will less commodities, fewer cars, agricultural equipment. China's slowing growth will subtract from the global growth.
2) China's Real Estate bubble will soon burst, taking down their economy.
3) China's will stop investing in Europe, US, treasuries, buy commodities, etc, etc, etc.
4) China's bank lending is slowing, as the new reserve requirements and changes to lending practices will close access to capital.
5) China's inflation is creeping in, expect to see more tightening measures and policies. Will China devalue its currency?

There are many more themes and sub-themes and variations of the issues listed above, but they all have something to do with these five main concerns.
Well, to a certain extent, these concerns are valid. BUT....

1) Yes, China's growth may indeed slow down, from a robust 11-12% pace, but even with a 7%-9% annual growth, their economy will be the fastest growing of all the major world economies. The issues impacting eurozone will have some effect on Chinese economy, so it would be best to focus on companies that derive most of its revenue from a rapid increases in domestic consumption, rather than goods made to export.

2) Its a well known fact that every company in China has at least two sets of books. In some cases three or more. Well, the Chinese government undoubtedly, has more than one set of economic indicators. One they use to make policy decisions, and another on to report to the world. One needs to be careful not only interpreting the indicators coming out of China, but also, trying to figure out how far off is the published number from the the 'real' one. One needs to remember, that Chinese government is most concerned with maintaining the social stability and harmony, so don't expect to see any frightening economic statistics coming out of China. This of course bring in question everything that being reported by the Chinese companies, but that is why they get the low multiples that they get.

3) China will do what is best for China. The economy continues to chug along and they will continue to have an insatiable appetite for commodities. they will also continue to manipulate the markets to their benefit. If it means that they need to deplete some of their reserves to put pressure on the commodities prices then...draw your own conclusions.

3) The real estate bubble in China is much different than what we had in US. Most of the real estate speculation is concentrated in the tier 1 cities, like Shanghai, Beijing, and Shenzhen. The tier 2 and 3 cities also have seen their share of price increases, but nowhere close to bubble territory. Actually, the policies that Chinese are implementing to cool off some of the real estate speculation are good and should help in the short.medium term to stabilize the prices and remove the fear of bubble bursting. Keep in mind, that Chinese, unlike the rest of the developed world, still use mostly cash to finance their RE purchases, so even if the bubble does burst, the effect will be a lot more contained.

4) By now, everyone realizes that the valuations in the A-share market are artificially high, since there are very few investing opportunities available to mainland based Chinese investors. The Chinese companies listed in US, generally have more reasonable valuations, especially if you consider the balance sheets, which have decent amount of cash from recent funding transactions. stock growing 20-25% per year organically, with a 10-25% of market cap in net cash and trading in mid single digit PE.

5) China'a PMI declining is actually a good thing. Why? Because it means that the fear of a run away inflation in China brought on by the over expansion (thanks to the liberal lending practices and government stimulus programs over the last 12 months) is probably misplaced and there will be far less need for Chinese to tinker with with their economic policies.

For now I am watching carefully, as the trader in me says to sit tight and wait for the freight train to pass by. But the other little voice of a contrarian investor in me tells me to start looking for ways to play the multi-year secular investing theme that is China.

Here are some of the few names on my radar: CVVT,HRBN,PUDA,TRIT,YUII,CTEL,YONG,ASIA,GFRE.

Technically speaking, we're in a box

Yesterday's reversal was impressive, especially in a face of a number of very negative macro headlines. The day could have turned out very ugly. But the S&P index held a very important 1044 level, bouncing nicely off of it. Today's follow through is nice to see, but its premature call it an 'all clear' signal. As I said in my previous post, the 1010 level on SP is beckoning and I think the odds are that we will revisit this level.

For now it appears the market is in a 'box' 1040/44 - 1085/90 on SPX. If you want to trade for a quick profit, these levels are pretty good.

In order for me to get a bit more constructive on the market, I need to see the SP to either break down and hold the 1000/1010 support (also 32% Fib retracement on a weekly chart) OR to break above its recently violated 200 day MA at 1108.

So we have two sandboxes to play in: 1040-1090 (50 point range) and 1010-1110 (100pt range). So overall, don't get suckered in in chasing rallies...I think buying dips near 1040 is a more conservative strategy in this market

Good luck.

A look at Technicals - A Picture + 1000 Words

The markets are trying to stage the early morning rebound following a very negative open. Although, I don't agree with some of the 'the world is ending scenarios' every bone in my body tells me that we will see the rally fade into the close. I hope I am wrong and everything will be rosy from here, but the technicals are plain ugly and the buyers are still scarce. The activity seems to be again concentrated among some nervous shorts covering, options expiration position squaring and high freq guys doing what they normally do - trading the daily trend.

I have been spending some more time with charts, since fundamentals don't seem to matter now. The 1150 was a very negative break with multiple long term trendlines broken. Everyone seems to be talking about revisiting the 1050, so it becomes a self fulfilling prophecy.

The short term trade seems is to buy 1050 for a bounce..but sell 1075-1085 resistance. The intermediate technical picture is still pointing to more pain. The possibility of revisiting 1010 is now real scenario in my book. This is where I would start putting money to work. If we break 1000, the 933-950 support comes into play and I would be there with really big shopping bag and its my 'back up the truck' level.

Of course, the Dow 10,000 is psychologically important as well.

For now this crazy volatility has relegated us to small trades to capture a few points here and there...and keeping a few longs in the portfolio that have already gotten beaten to a pulp and probably too late to sell now. With plenty of cash and some VXX to offset these losses, I can think constructively and get caught up in the emotion of the day

Searching for Positive Catalysts and Silver Lining

My earlier post outlined the reasons I believe this tape is irrational. This correction is focused on events outside of US, as opposed to the last major sell off when there were legitimate concerns about the economic and monetary crisis happening right here.

We are now unquestionably in a DOWN TREND...and it could be just as powerful as a bull market trend. If you are uncomfortable analyzing these type of markets, just change the red color to green on your quote screen and turn the charts upside down. Seriously speaking, this market is clearly not responding to any good news and takes any kind of negative news as a reason to sell. This is a classic example of a correcting market.

After outlining some risks and concerns, let's focus on the positives and possible catalytic events that can stop this downtrend and provide some stability to this tape.

First of all some silver lining.

The stronger dollar is not bad. No longer do we have questions whether the world will chose another currency to replace the dollar. Are you kidding me? Euro? Yun? Yen? Ruble?

Secondly, we can now once again consider traveling to Europe. Yes, you will still pay $5 for espresso, but its better than paying $8. Of course, it also puts the pressure on our trade with Europe and we will likely see fewer Europeans leaving with suitcases of Saks and Tiffany's stuff. At the same time, European economies may benefit from the weaker dollar.

Thirdly, the US economy and the economies in Asia and Latam are healthier than last year and are unlikely to get pulled into the economic crisis because of the debt problems affecting Europe. Despite the fact that only ~5% of our GDP is tied to Europe, our markets are taking a full blow, as if the problems in Europe are guaranteed to spill over here. The probability adjusted scenario has clearly more than priced this risk in with a 10% correction.

The interest rates in US will likely remain low longer than I originally thought. Given the turmoil, I don't see how the FED will find the will to raise rates. This is positive for corporate and municipal borrowers as well as real estate.

Chinese are now beginning to realize that they really need to be careful in terms of new policies. Hopefully, they are realize that there are many eyes on them (and i am not talking about 2.8 billion of Chinese eyes)as the world looking for any signs of slow down in China. I hope that they will remain responsible and find a way not to overshoot when trying to slow down its economic expansion.

Finally, corrections are generally healthy. They are painful reminders that one can't be complacent and can't lose perspective when either making or losing money. Risk control rules in both bull and bear markets. A valuable lesson, that is

Now, about potential positive catalysts.

1)Its all about Euro now - so any kind of intervention or political resolution in Europe that provides the reversal of EURO trend would be positive for commodities and should prop up this market.

2)Corporate buybacks - many companies have rebuild their week balance sheets and streamlined they operations to generate cash. They will likely start using this cash to initiate buybacks.

3)M&A - as valuations becoming much more attractive in a hurry, the savvy corporate and private equity buyers might start stepping in. We have seen a trickle of mergers over the past few weeks, but given that fundamentally most companies are still doing pretty well, we could see a number of high profile M&A transactions. Having said that, do not fall for daily rumors of takeovers. Eight or nine of ten will prove to be false, so don't chase the stock that are up on takeover rumors.

4)Oversold bounce + one of the catalysts listed above - keep your eyes open, a severely oversold market combined with a positive catalyst could provide some hope or at least send the shorts covering.

I was hoping to find at least five potentially positive catalysts, but can't think of any more at the moment. Of course, this market could simply continue to ignore good news and over react to bad news.

Full Out Beta Assault

No one really knows where the bottom is and we could just as easily be 10 points or 200 points away from it. There are just too many crosswinds to have a reliable prediction. But the exercise could still be important, so diligently plan for various outcomes, adjusting your exposure based on probabilities of each outcome.

When you start hearing the words from the late 2008 like de-risking and de-leveraging portfolios, etc..its time to pay attention, as the herd has been clearly on the move and the exits are getting crowded. The stink of fear is abundant. Everyone was looking for correction and voila.

So for now - no real answers, just sharing some of my thoughts and observations:

1)This is an irrational market - we are once again in the market environment where the technicals seem to matter little (at least as predictors, although still have some explanatory value)and fundamentals matter even less. When a company reports a stellar quarter, provides robust guidance, and trades at a highly attractive valuation on both historical and relative basis, one would expect this stock to go up 5-10%. Well, we are seeing just the opposite. That's irrational. When key technical supports are broken without a pause, and oversold indicators provide little if any relief, to me this indicates that technicals are no longer reliable way to gauge the market bottom. This is clearly, once again, an irrational market, driven by emotions, controlled by fear, uncertainty and the lack of confidence. Feel free to disagree. Of course some stocks deserve to be sold...overvalued, over-levered, or just trash that went up with the overall market, etc...but we are not seeing much differentiation in selling. By the way, the institutions seem to be on mostly on the sidelines, refusing to get caught in this whiplash market and its mostly the retail lemmings that are getting caught in the crossfire.

2)Emotions aside(panicky selling is just a response, not the cause)So what is really happening fundamentally? Fundamentally, we are basically done with earnings reporting and we have seen mostly decent results. Until the the next reporting period, we are in the information vacuum, and the market seems to be at the mercy of the quant traders, high frequency traders (aka bandits) and volatility hedge funds. The balance sheets, for many companies are in good shape, and companies seem to have more confidence in their outlook than they had in the last 12-18 months. The economy seems to be humming OK, with manufacturing, services, and even retail sales holding up better that anyone thought possible in the jobless recovery. Hardly justifies the puking we've seen. The valuations are coming down hard, as P's are getting hit, but we are not seeing corresponding earnings revisions. Just the opposite.

Techncially - the downside volume has increased and we witnessed many key supports broken. Briefly. I am watching 1100 support to provide a relief bounce, with 1150, a former key support is now a tough overhead resistance, where I expect a lot of selling from both longs and shorts to once again pressure the market, assuming we will even get there near term. The most critical support below 1100 is 1060, which would undercut the May 6th 'flash crash' low, and really scare some folks.

2) So what works in this type of emotional market? This is a sentiment driven tape, and the sentiment is decidedly bearish..what a change from few weeks ago! The investors are very skittish and the we are seeing a total bloodbath among the high beta stocks. Of course for a long term investor that has plenty of cash in reserve, this is might be a fantastic opportunity to buy/add. After all, its much easier to invest when so many quality names are selling at garage sale prices! But yes, such an investor should have two things in addition to cash, patience and a good supply of Valium or other nerve numbing meds. If you choose to buy here, you should stay nimble and stick to quality names, as they will be the first to rebound when the sentiment changes and market turns.

3)On Europe and Euro - personally, I believe the whole European drama is a bit overdone, but it matters less what I think, but what the other mass of investors perceives. To use the very appropriate Wall Street adage, 'markets can remain irrational much longer than I can remain solvent". But....There are definitely legitimate concerns about the risk of PIIGS defaulting or at least the contagion to spread beyond the European banks. The short sellers are pressuring the EURO trade, and predictions of parity could become a self fulfilling prophecy. Although I won't discount Euro getting down to 100, I see this outcome as improbable. The Euro might see 120, or even 117 or so, but I think we will see an intervention that could stem this decline from getting more ridiculous. I would not be surprised to see some type of massive intervention by G20. Recall, that it was the G20 global stimulus plan that marked the turning point in March of 09. Could we see something like this but focused on supporting Euro? Thoughts?


Other risks to consider - the US fiscal policies and potential monetary tightening in US (ie higher rates, although everyone believes that this day will never come), Obama's reckless politics and economic policies, and one risk that remains incalculable - a risk of a major terrorist attack or a serious military action in the Middle East! Having said that, we have seen these crises come and go, and most of them did present a good investment opportunity to those that acted contrary to the crowd.


4) Many quality names are getting crushed only because they have a high beta. Its a lot easier to short the higher beta stocks (like commodity producers, small cap emerging market stocks)to get more bang for the buck to take advantage of a rapidly falling tape. The SPX most recent decline of ~9% masks the double digit percent selloffs in some of the high beta stocks, so many portfolios got hurt even if they only had a few volatile stocks in it. Right now, its probably prudent to be careful with emerging market stocks, especially China and Russia, as the money clearly moving out of this space, and I have also have several losses to show for. Additionally, I am weary of multinationals, especially those that have a lot of unhedged revenues in Europe, as you have a combination of weak Euro and economic and political problems griping the continent...so staying away for now.

5) Right now is the time to take a rational look at your portfolio, reduce some exposure to highly volatile stocks and start working on a shopping list of high quality, cash rich/cash generating companies that will likely be the first ones to recover when the turmoil dies. No reason to be a hero, no reason to try to pick up a falling knife or try to outmaneuver the market. I think that things will get really interesting near 1000 on the SPX. Technically you will be at 32% Fib retracement support and the valuation of around 11x 2011 projected earnings for the SPX. This is where the brave ones and those that horded cash should start putting it to work.

Brief thoughts in the midst of the market rout

We seem to be in the midst of a correction that should take 4-6% off the SPX. Hopefully, you were following my advice and raised cash into the strength. My portfolio now has more than 50% cash, but even a few stocks I own hurt on the days like today. The sentiment is changing, we are not seeing as much buy on the dip mentality, especially in some of the more riskier equities, emerging markets, or commodities names. At the same time, the negative news flow is mostly coming from the outside of US, while the economic data here is decent, and actually is neutral to positive. But the market is nervous after a big move and consolidation is not surprising. The earnings and guidance from most companies was good and economic news have been steadily improving. The first support on SPX is at 1170,near 50 day moving average and we are only 6 points away a I write this. The momentum indicators are getting close to oversold levels too, and it would be interesting to see if we turn there. If the 50 day ma doesn't hold (many stocks already broke that level)we should see the support at 1150, which would be roughly a 6% correction from the recent highs.

European events still dominate the investors psyche, concerns about overheated China other emerging markets, and corresponding run to the safety of the USD, all of this needs to be considered. What must be understood as well, is that with a skittish markets and the path of least resistance being down, any catalyst could really be blown out of proportion. If you are fully invested, its won't hurt to tighten your stops and raise some cash, only if to deploy it it aggressively when the markets stabilize. Its easy to get caught in the emotions of the day, but trying to maintain some perspective and having a strategy would get you through the craziness.

My strategy is to start looking for names that are being thrown out with the proverbial 'bath water', while at the same time to be mindful that not all sectors will be back hitting new highs in the near term. Generally, for now, I plan to focus on defensive names, avoiding controversial names like GS, BP, RIG, CAM, etc, although I may buy some stocks that unfortunately got caught in these highly publicized events and were sold in sympathy.

Next pullback- Buy Aggressively, but for now, Patience is the name of the game

The last few weeks have been all about raising cash for me. Given the market's continued run, we are now clearly in a unattractive risk/reward zone and we have been there for a few weeks. All of my indicators are flashing caution and I learned to respect my indicators as well as what my gut tells me. And my gut tells me to be disciplined and patient and not chase this market. The technicals and fundamentals are both feel pretty stretched.

Lets take a closer look. At 1150 SPX is near its upper volatility band and seems to lack both the conviction and the volume to accomplish a breakout. The stochastics and other momentum oscillators are also in the overbought territories. The previous high set right around this level back in mid January, is not only a tough technical, but also a tough psychological level for the index to overcome. Applying a quick and dirty forward P/E to get the sense of where we are in terms of valuation, we get to 15x on 2010 forward earnings. I think at 15x the market is in a 'no man's land' in terms of valuation and no one can make an argument that it is undervalued. Although this is by no means a precursor of a major correction, I think there will be an opportunity to buy lower or at least at current level, but perhaps with a clearer technical and fundamental picture.

During most of last week, I have been selling relentlessly, using the intra-day rallies, any kind of M&A speculation or anything else that smelled like a quick, transient spike. By the end of this week, most of my 'home run' trades, as well as spec trades (low conviction positions) found their out of my portfolio. For the first time in a long time I am approaching 50% cash level.

So the strategy for now is to wait it out. I see three potential scenarios: 1) if market manages to breakout on decent volume, I will be buying the next consolidation move to the resistance line ~ 1150 on SPX; 2) If the pullback occurs, which is a more likely scenario, even better. Anything around 1120 or lower, would likely convince me to start putting some the cash back in, with 1112, a 50 day moving average an ideal entry; 3) lastly, another way I could see the technical pattern resolving as a cup and handle, with a continuation of low volatility trading in a very tight range, downwardly sloping to around 1120-1130 level. This pattern usually breaks out to the upside, and is one of my favorite technical trades.

Quick Look at Technicals -Short Term Risk/Reward not attractive yet

Lately I have been very focused on fundamentals and political influences on the market, but not ignoring technicals. I turned and a bit cautious on the near term market technicals and have been reducing some of the exposure over the past few days. I have already been short both puts and calls to collar some of my positions, but finally had some time to look at the technical picture.

Below is the chart of SP cash index. The intermediate trend was broken back in mid January...so the top for now is at ~1150...I think it may take awhile to get back to it, so for now we are boxed in between 1040-1045 and 1110-1120. We are clearly overbought (see stochastic at the bottom) and rolling over. I am not rushing out to buy (except some of the special situations)until the risk reward is back in favor of bulls - first support around 1070'sh...will go from ~55% to 70-80% net long. I am not changing my bullish view on 2010, just don't care for volatility to eat away my profits and raising cash and buying some protective ETFs to really pounce when the time is right.

The Smoke Signal - Should the Markets Care?

In my recent post titled "The First Post of 2010" published on January 29th, I outlined a few themes, including a possibility of a market correction in the first quarter. Here is a quick excerpt:

"After the correction in February/March, the market will likely make the necessary adjustment to account for the eventuality of higher rates, stronger US dollar, and potentially sooner than expected inflation, the equities should rebound strongly and and continue to attract capital flows from bonds, which by then will be publicly neutered as an investment choice. This will be a healthy and necessary pause and adjustment to the investor sentiment, but I don't think this will be a return of the Ursa Major."

The whole post could be found here: http://themrktmaven.blogspot.com/2010/01/first-post-of-2010.html

Looks like the prediction was off by a few weeks, but the precise timing is always a bitch to nail. The SPX was down around 9% from intra-day high to intra-day low, which is about right, but it could have easily been 12-15% as well. And it still might be. Many widely held stocks have lost much more than 9%, so watching the indexes doesn't really tell the whole story. The markets remain jittery and seem to selloff aggressively on any kind of bad news. ON the other hand, since everyone wanted a correction to take some steam off, it was a healthy way to do it.

While over the last few weeks many investors focused on headlines from Europe and China, some may have missed Bernanke's testimony outlining potential moves for the Fed's exit strategy. What he basically said is that the Fed is ready to consider raising rates and he was telegraphing his intentions to the markets. A few days ago, the FED followed the words with action by raising the discount rate. The media, called this move 'surprising'. But no one should have been SURPRISED. When the latest FOMC minutes came out a week ago, and influential Kansas City Fed Governor, Thomas Hoenig, clearly dissented from the rest of the Fed by saying that he doesn't see a need to keep interest rates low for an 'extended period of time'. In Fed's parlance, 'extended' usually means 6+ months. The market seemed to have shrugged off the news, and accepted Fed's explanation - 'no worries, be happy' and that no consumer will be hurt by higher discount rate. It is true, that the discount rate, has no bearing on any other rate benchmarks like the Prime or the Fed Funds rate does, since its only affect the the rate at which banks borrow from the Fed. But one should see it for what it is - a symbolic 'smoke signal' that the Fed is sending to the markets that the pace of economic recovery is showing signs of life and could potentially accelerate to the point where inflation will be higher than the bond markets and the equity markets are currently pricing in.

Yes, we may not get the Fed funds rate increase for 5-6 more months, maybe even longer, but no one should be kidding oneself that the rates will remain this low by Christmas. The markets will have to start pricing this eventuality, so expect the dollar strength to continue, since I don't see how EU could raise rates now. The EU is still dealing with a plethora of problems, while the economies of even countries like Germany are still in a flux, let alone the PIGGIES.


A strong dollar has been negatively affecting the returns of the US equities as of late. The reason is none other than the dollar's impact on commodities, commodities producers, and by proxy, on some of the cyclicals. These groups have been been the leadership for SPX, before the dollar turned up as a result of the weakening euro and improving US economy.

I THINK THAT OVER THE NEXT TWO OR THREE MONTHS WE WILL SEE EQUITIES DISENGAGE FROM THE USD as each asset class will start trading more on its own fundamentals and less on a technical relation to each other. Frankly, as our economy continues to get stronger, its reasonable that the dollar comes off its multi-year lows and settles in a range, probably slightly higher where we are now, but not much higher. The equity market should continue to get boost from strong earnings that we have seen in Q409 and Q110, and as estimates and multiples get revised higher, the prices will follow.

I believe there is a good chance that will see another leg down when the Fed sends a more clear signal that a higher interest rate environment is coming to the 'theaters near you'. Commodities will be in greater demand again, as the same economic recovery that will cause Fed to eventually raise rates, will start fusing into the manufacturing costs, putting inflationary pressure on producers, that eventually will have pass it on to consumers. By then, everyone will be able to see it in the higher PPI and CPI indexes. The bonds will take a hit as the yields move higher at both ends of the curve. The exodus from longer duration fixed income will likely prove to be a boom for both the money market funds and equities.

So this my view of the world. I have correctly expected the Fed to send the first rate increase signal to the markets in February, but since we have already 'corrected' in January, the market didn't react as much. Don't be fooled, the next time the smoke signal will be more of a 'smoke from the cannon'.

Will the PIGS Die or Fly

I just could not resist the PIGS reference, although its admittedly getting a bit overused. Anyone following the global events that dominated the market sentiment and action over the past two weeks, know that PIGS refer to Portugal, Ireland, Greece and Spain. Yes, these four little piggies showed a complete lack of fiscal responsibility and got themselves in a big mess. The fear of either a massive bailout or some type of technical default by one of the piggies, especially Greece, has dominated the headlines and put a lot of pressure on the euro. Conversely, it gave a boost to the USD, a typical knee jerk reaction to USD as a safe haven currency. Yup, the world still wats our dollars when the shit hits the fan, despite its obvious longer term issues. The inverse relationship between the US equities and the USD has played out as well, as has been the case now for almost a year. While historically, this relationship is not always inverse, and actually, has a positive correlation, it has become a very predictable trade to short the market into the dollar strength. There are several reasons for this: 1) Commodities, especially oil and gold, which have assumed market leadership over the past few months, have a negative correlation with the dollar, so when commodities get hit, so does the market. 2)Carry trade - as we continue to maintain near zero interest rates, investors continue to borrow dollars and invest them outside of US, converting them to euros, pounds, aussie dollars, yen, etc.

I believe, that sometime in the next few quarter, this relationship will loosen up, as the interest rates start slow, but inevitable march higher, especially as we start seeing more signs of economic recovery in US.


As far as the PIGS are concerned - they will not die. Just like the financial crisis in Iceland, Ireland, Dubai World, and before that, Russian debt crisis, it will go away.

The PIGS may not fly again for a long time, but as long as some type of aid solution is found and it does not became a contagion, this European crisis will fade. The Germans, ECB, and IMF will find a way. After all, who do you think holds most of the Greek paper? I bet that German banks will take a nice hit if the Greek paper becomes worthless..and then it would require a German bank bailout. So no worries, be happy!
Countries don't go bankrupt.

At the same time, the market, as it always does, will find something else to worry about. Again, I see it as a healthy way for the market to adjust to new risks and avoid complacency we saw before the meltdown of 2008 started.

Earnings, Outlooks and China

With almost 80% of companies thus far reporting positive earnings surprises and more that two thirds reporting upside to revenue estimates investors should not be disappointed. But it is clear to even a casual observer that the investors are selling regardless of beat and raise results. The indiscriminate selling is generally something that I pay a lot of attention to and look for opportunities to go against the crowd. Clearly, there are a lot of concerns related to political and economic uncertainty, but much of it might either prove to be temporary noise or a knee jerk reaction and nervous responses to volatile economic monthly data. Case in point, last week investors fretted about potential non Bernanke non confirmation. I am not a political analyst, nor am I a huge fan of helicopter Ben, but from a practical standpoint, I felt the probability of him being nominated outweighed the risk. He is still the best man for the job at the moment.

Back to earnings. What bothers me, however, is the impact of outlook announcements. Despite strong results, management will be reluctant to provide upbeat guidance, quickly rewriting their (already pre-written)press releases and being more conservative in their guidance. The uncertainty of Chinese policies may potentially impact just about every commodity and industrial company, basically the whole cyclical sector. Given this 'dark cloud', I expect that companies with any direct or indirect exposure to China will guide mostly in line with consensus or slightly above, even if they internally expect to have a much stronger year. Think about it. No one will believe them if they guide strongly anyway. Why stick your neck out if the market is not rewarding you for it?

Clearly, this is the reason why cyclicals already had a much steeper correction than the general market. The rebound in $$$ is not helping either. Unfortunately, my portfolio also took a decent hit, being overweight in cyclicals.

The disconnect is important. Despite the fact that investors perceive the potential slow down in China to be real, the truth is, their economy will still grow in high single digits or potentially low double digits. On paper, the ability to quickly make changes to the economic policy is one of the virtues of the centrally controlled economy. But in reality, they can't put the Ginnie in the bottle. More than anything, the Chinese government is concerned about social harmony and stable society. I can't really blame Chinese for being prudent and trying to prevent inflation and asset bubbles by putting some breaks on. From my standpoint it should be looked at as a POSITIVE, not negative.
At the end of the day, I think the fears of Chinese economic growth coming to a standstill and subtracting from the global growth are overdone. The growth will continue, even if the pace will be a bit slower. I am a buyer of oversold, quality cyclicals on these concerns.

During the last few days I have been committing some of my idle cash to buy some of these companies as well as selling puts. We are bouncing today, and if we continue to bounce I may sell some into the strength to be prudent, but overall, I remain constructive on US cyclical, broadly on Brazil's infrastructure and commodities, and select Chinese US traded names. The risk here is that perception will overwhelm the reality and the stampeding herd will abandon the sector. So if you plan to follow my strategy, buy only those stocks that you don't mind to hold for a long time. This is a tough market to trade, unless you have a very very short term timeframe, but then, you may miss a real move.

Certain Uncertainties and the Market Multiple

Despite a very somber tone in the markets and a temptation to yield to panic and hide under the table, I am trying to maintain a healthy perspective. There are clearly plenty of concerns, negatives, and uncertainties in the market right now.

The market, being a continuous discounting mechanism, is making adjustments to account for new or elevated uncertainty. This is especially true of the extended and nervous markets, in which we seem to be now.

The past five trading sessions were brutal, but the lack of stampede tells me that my gut is right and we are in a corrective phase, rather than a new leg of a bear market. I am sticking to a technical definition of a bear market, i.e. a decline of 20%+. I just don’t think it is in the cards right now. Many investors have been expecting some type of correction in the first quarter, although personally, I thought it may come a few weeks later, at the end February. Well, we are getting it now and I am fine with it, although it’s never a lot of fun if you are net long.

There are clearly a lot of uncertainties in the market now and a lot of noise that will go away. We need to really understand what the market is adjusting for now, what has ALREADY been adjusted for and what is still to come.

I am not very bullish right now, more like neutral, trying to swim with the current, not against it. I am also not ready to come ashore. Basically, I am just trying not to panic and respond emotionally to Obama's lashing out politics. My take is that we are clearly marking US equities down to adjust for additional political risk. That’s right folks, a discount usually reserved for emerging markets with unstable governments, is now being attached to the US equities. I expect that we may correct roughly 8-10%, possibly a touch more on the SPX before we stabilize. My worst case scenario is 975.

Let’s take a quick look to see what are the key things investors are fretting about at the moment:

1) Political risk of Obama's anti-business policies - Obamacare, Volcker Rule, Cap and Trade, etc. Who will he go after next?
2) Potential China slowdown due to credit crunch and changes in lending guidelines, etc. Will it impact the US and European commodities producers and industrial exporters? How much will it subtract from the global growth?
3) Possibility of Bernake/Geithner resignations - funny that we even have to worry about it, but as the saying goes "The devil you know...".
4) Expectations of higher interest rates down the road (either because the Fed raises rates or due to higher yields demanded by the bondholders).
5) Negative Macro - fiscal irresponsibility of our government, unstoppable printing of $$$, widening record deficit, struggling housing, double digit unemployment, weak consumer spending, etc, etc.
6) Struggling US dollar - If it strengthens will it kill commodities and cause massive unwinding of a carry trade, negate the favorable currency winds we had for over a year for US multinationals and diminish their competitive cost advantage? If it stays weak will the Fed raise rates to provide some support to the falling currency?
7) What happens when the fiscal stimulus and other initiatives are pulled?
8) Geopolitical concerns - too many to name..Iran, Iraq, Afghanistan, Pakistan...you all read newspapers.

Despite these very valid concerns (not an exhaustive list by any means, but I don't want to make this post any longer than it already is!) the earnings thus far are looking fine and at the end of the day, earnings and earnings growth are the key variables that influences stock prices over a long term. So with E ok, we are really taking a machete to the multiples...The US equities would need to correct to a more reasonable multiple to account for the uncertainties mentioned above. Some of them are temporary and some have already been discounted. At 1150, the SP was trading at ~15.3x 2010E. Currently we are down ~5.5% from 52 week high. At the next support ~1070, we will be roughly at 14.2x or a full 1x multiple adjustment. My worst case scenario assumes 975 on SP, a 15% move down from the high, resulting in a 13x multiple. I think a full 2x adjustment to the multiple, without corresponding erosion in earnings, should make this market valuation attractive again. Of course, if Obama has his way he will not only destroy the multiples, but the confidence of business leaders, and capital investment necessary to sustain this feeble economic recovery.

Back to the market action. We seemed to have bounced from the early morning selloff after the benign message from the FOMC and good news from Apple about the launch of Ipad. Looks like the buyers are dipping the toes back in the water, very slowly. But I would not be surprised if the declines continue tomorrow. Getting this correction out the way early and having it run its course, will also provide a necessary sentiment adjustment which could bring new money still sitting in the low yielding CD's, bank accounts, or overvalued bond funds.

So - don't panic, you will never make money trading emotionally and following the heard. If uncomfortable with this volatility, take some risk off by reducing portfolio beta, diversify into bluer chips, away from some of the spec stocks where you don’t have a lot of conviction, and wait it out. But my advice is - stay in the game. I am.

Quick Take On The Market Action

No sooner that I finally published my thoughts on 2010 investments, the market decided to roll over. Despite a rough ride over the past few days, I remain constructive. I am also not being complacent and still maintain a decent amount of of cash, although I am starting to deploy it in a few select areas, consistent with my outlook outlined in the previous post, First Post of 2010.

As far as technical levels are concerned, some short term damage was clearly done, but thus far it is contained. None of the major indices have broken their intermediate supp port levels. With market finally overbought, and irrationality once again prevailing, I smell fear and urine on the street. Well, the smell of urine in NYC streets is often there often, lol.
SPX - watching levels 1120, which was broken today, and more importantly 1070-1075. This one is clearly the level where are a lot eyes are watching.

In general, I feel that the smaller companies, Russell 2000/3000 are more likely to rebound, but as the entry levels on many stocks in my watch list are getting hit, I am slowly buying them.

I consider the reasons (excuses) for this pullback and profit taking to be pretty lame. Obama going after banks - come on, not gonna happen. Nothing but saber rattling, he lost his way, he is pissed off about the his pet healthcare project getting basically reduced to nothing, and he is lashing out. Bad, bad recipe to gain support for anything. Plain dumb.

China containing their lending - a lot of rhetoric. If anything, the growth will continue, and companies will use equity markets to finance its growth. With China number 2 goal being self sufficiency (#1 gaol is preserving social harmony and order), we will continue to see the the growth trajectory over the next few years, even if there will be bumps along the way. I would not sweat the impact on US and global commodity producers or energy companies.

But the trade I most excited about is adding more exposure to Brazil via BRF and EZW, and BZF (the last one is more a bet on real appreciating against the dollar). With two major global events coming up in the next 4-6 years, the World Cup in 2014 and Summer Olympic Games in 2016 will not only drive investments in infrastructure, but also force the government to continue its pro-business policies that they have been emphasizing thus far. As usual, expect the Brazil GDP to add at least 300-400 bps to account for all the economic activity associated with build outs to accommodate these two super public events. I would focus on infrastructure, such as steel, construction, and commodities industries, although someone will have to finance all this growth - so Brazilian banks will benefit as well. With tame inflation, stable economic and political climate and currency that will continue to appreciate as the foreign investment continues to flow in, Brazil is my top emerging market for 2010 and beyond. I would use this pullback opportunity to load up on Brazil.

In addition to Brazil, I am actively focusing on some of the energy plays, coal, tech and healtcare. I will publish on specific names soon, but you can also continue to monitor my trading, which is generally ahead of my posting.

The First Post of 2010.

I have been a bit neglectful about posting over the past few weeks, caught up in whirlwind of my own stuff to do; wrapping up the year, starting a new year, and a nice vacation in between. I also started a totally different blog, something that has absolutely nothing to do with the stock market. As far as the markets, I also didn’t have much new to say, since what has been going over the past few weeks (a solid end to the year and a strong start) is pretty much in line with my expectations and thinking. This post has been drafted a few weeks ago, but I just never got around to finishing and publishing it. Thanks to a few free hours during the MLK day off I finally did it.

I'd like to use this first blog post of the year to encapsulate my thought process and anchor my 2010 investment strategy. The readers of this blog would likely remember some of these themes. I don't necessarily view them as predictions, just an outline of where I am at the beginning of the year. As facts change, my thought process and strategies will also change accordingly. While this post is just a brief summary, the next few entries will drill down more into the actual investment ideas.

1) We will end 2010 with high single digit or low double digit return. Most of this return will come in the first half of the year. This puts my year-end target on the SP at around 1215-1250’sh. January will remain a fairly strong month, but I think we will see a pullback (more than your typical profit taking selloff) sometime in late February or March. By then, most of the excitement and new money that comes with it will be invested, and a strong performance caused by these inflows will force many institutional investors to shift to a more market neutral stance from a net long bias at the start of the year.

2) The volatility will gobble up returns and many investors will end up losing money in 2010. Making money this year will be more difficult than in either 2008 or 2009. In both of these years one could've easily achieved decent returns by simply betting on any of the market tracking ETFs, or inverse ETFs as was the case in 2008. This year will require more discipline and understanding of what moves individual stocks and sectors. We will have to grind it out by fine tuning our timing models, focusing on the right themes and picking correct stocks.

3) Fundamentals will matter again. Over the past two years good ole' fundamental analysis was ineffective, given so many macro, technical, and sentiment overrides. Although it will still be very important to understand the impact of macro and TA on stocks, the relative importance of fundamentals will once again become invaluable. I always favored techno-fundamentals as the framework for finding ideas and entry/exit points , and this year will certainly be no different. Other analytical disciplines will remain important, but as the world comes back to some degree of normalcy, even if its the 'new' normalcy, fundamentals will matter again.

4) Inflation will rear its ugly head no matter when the FED decides to raise the rates again. I've been saying for some time that one should be prepared to protect portfolios from an inflationary impact. The prices are going up, quietly. Starbucks just raised the price of its coffee. My neighborhood sandwich place also raised the prices, gasoline is back near $3. Many other stealth price increases are already happening across the country, as the cost of raw materials is forcing companies to pass it along to the end consumers. Small businesses don't have much leverage to raise prices, but will have no choice, if they want to survive. Many people are focused on wage inflation metrics, which are still showing no signs of any inflationary bias. As the economy recovers, very very gradually, we will start seeing these metrics change. The market will eventually force the Fed’s hand. Watch the bond market which will move in advance of the Fed and look for small changes in the Fed speak to telegraph their inevitable intent. My guess is that you will start seeing them in March/April.

5) Emerging Markets will outperform, but stick with BI nor RC. I am focusing more in Brazil and India in my emerging market trade, and avoiding Russia, with small exposure in China. Brazil remains my favorite way to play several themes, including energy, infrastructure, strong economic growth and two major events – 2014 World Cup and 2016 Olympic games will create a strong investment opportunity for the next few years. Russia is mostly about oil and materials, an exposure that I can get from Brazil, Canada or Australia without taking the political risk. China is still a big favorite of mine, but I have seen some many unjustified moves , that it scares me that it is vulnerable to a major hiccup. I might as well wait, although will still buy a few select Chinese stocks here and there.

6) Geopolitics will trump economic concerns this year. It’s hard to believe it, but with Mideast turmoil finally spilling into the front lines, I hate to say it, but I think it is likely that our Nobel Prize winner President will get his will tested. Since we can’t change it, we might as well try to profit from this. Its tough to predict when political issues will flame up, only that it will likely happen sometime this year, whether its Iran, or Afghanistan, or Pakistan.

7) After correction in February/March, the market will likely make the necessary adjustment to account for the eventuality of higher rates, stronger US dollar, and potentially some sooner than expected inflation, the equities should rebound strongly and and continue attract capital flows from bonds, which by then will be publicly neutered as an investment choice. This will be a healthy and necessary pause and adjustment to the investor sentiment, but I don't think this will be a return of the Ursa Major.

8) In 2010 we will see the decoupling of the US dollar and equities, something I have pointed to in late 09, as each asset class will start trading on its own merits again. We are already beginning to see it. The US dollar will most likely rebound, but I am not a dollar bull and see only a slightly higher trading range for the buck. The fiscal irresponsibility of this administration has basically killed any chance of a sustained appreciation of our currency for a long time. Unless, of course I am right about the geopolitical concerns.

9) The regulations and initiatives undertaken over the past few years will finally make alternative energy plays more of an investment reality, but don’t expect to win with broad based ETF bets. Within the space there will be clear haves and have-nots.

10) Healthcare will end the year much stronger than many expect, as the overhang from the Healthcare reform will soon disappear. The changes will prove to be less onerous than investors feared, and as always the clarity beats uncertainty so investors can at least go back to analyzing these investments again albeit with a new set of rules. The discounts priced in many of the quality HC companies reflects this uncertainty and the multiples should soon go back to more historical levels.


As I said in the beginning of this post, over the next few weeks I will try to explore these ideas and drill down into specific investment and trading ideas. Stay tuned and happy trading in 2010!