DVA is DUM

Another week, another round of earnings "beats."  Banks, anticipating poor trading revenues, doubled down on their already fraudulent balance sheets that bolster earnings through loan loss reductions by inventing a new accounting gimmick, DVA.  This stands for debt valuation adjustment.  You may remember that in March of 2009 banks stopped marking to market the value of their horrible loans and this began the bull run of the last 2 years?  Well, now they kind of are marking their own debt down to market, the difference being they get to claim that markdown as profit.  Huh?  This accounted for nearly a third of JPM's earnings and the stock was crushed.  Ditto WFC.  But it's this type of accounting that is pushing earnings season into beats and why 75% of companies are coming in ahead of analysts' estimates.  Enjoy the run while Europe comes up with their big plan.  S&P, Nasdaq still down for the year.

Now, Plain Zero

"Killian, here's your Subzero, now plain zero."
Arnold Schwarzenegger's Ben Richards to Richard Dawson's character in The Running Man

Wow, who knew this movie would predict the future given current interest rates and market returns!  Hope that brief market blip didn't convince you it was safe to buy stocks again.  Those who sat out the turmoil this week beat the market by 6.4%.  Those who had the courage to get short ahead of Bernanke killed the market this week.  Those who listened to MSM pundits got crushed.  XLF plunged to the low 11s, BAC threatened to break $6, FSLR lost its $2 billion loan, and Europe remains a frightening burden on world markets.  When you look at the rise in the dollar this week and think how is that possible, it would help to remember that the dollar can't go to zero, but the euro not only can, but should.  Not tomorrow, not by end of year, but the will of Germany to carry all of Europe can't last forever.

We are disadvantaged as individual investors versus large institutions, but not in the way a gambler is versus the house.  Obviously somebody knew that margin hikes were coming for metals, portrayed as a flight to safety until Friday's close when the CME "officially" announced 25% increases.  A $1k purchase of SLV 35 puts on Wednesday afternoon would've led to a $500k gain by mid-afternoon yesterday.  And yet, our MSM heroes such as Cramer have touted a drop in gold as the turn for the market.  Even Hedgeye grossly disappointed this week.  After sticking with global macro scenarios that were mostly correct for much of the year, they increased their longs to shorts to almost 2-1 on Tuesday based on the bull-bear ratio.  What? 

So consider carefully before going long anything right now.  The drumbeat of buy this cheap market is still ringing in my ears from 2008 when the "smart money" lost you 40%.

Seasick

Anybody else getting nauseous watching this volatility?  Actually, anyone who bet on the VIX when it stubbornly remained below 20 most of the year is actually feeling pretty good (we scored with this twice).  Our call for triple indexes has been profitable up and down, more so for some than others as one of our readers has doubled his yearly gains in the last 4 weeks.  But the constant influx of conflicting what ifs has us all cash right now, a strategy that has outperformed the market handily over the last 6 weeks.

European action is at hand, the question is, will it be enough for a rapid bank rebound (STD, BCS, DB), or will it come in trickles and spurts that have short-sellers crushing the DAX and FTSE?  On top of that, OOM options have become very expensive but earnings projections remain absurdly high going forward.  I still think this egg will crack, but as the last 2 years have proven, it may not happen before expiration.

Weekend Bonus: The Case For Barry Sanders

With football season upon us (thankfully!), I thought this would be a good opportunity to return to our roots. After several rejections, and in light of the fact that Bill Simmons' Grantland spinoff won't accept submissions despite this essay being right in line with its long, rambling style, I present you with The Case for Barry Sanders (just as well, I'd hate to have to edit the parts about ESPN).

Football players are the best athletes in the world. If you don't agree with that statement then you don't understand the nature of power, speed, and quickness that comprise athleticism. The athlete who had the best combination of those assets was Barry Sanders. The prevailing misconception about Sanders has been writers’ willingness to supplant individual greatness with team success. This has led to poor comparisons with such players as Emmitt Smith and Terrell Davis, who played on dominant teams with all-time great blockers clearing their paths.

ESPN recently conducted a poll of 8 current and former NFL players, personnel directors, and coaches to determine the best running back ever. The huge problem with this panel was that only one person was born after 1950. Not surprisingly, Jim Brown came in first. But for all of the hype about Smith, Sanders still came in second, and his peer, Robert Smith, ranked him #1. He made the argument that had Sanders played with Emmitt Smith's line, there would've been no limit to what he could've accomplished. When Emmitt was interviewed for Sanders autobiography, he skirted this question, saying perhaps Sanders would've gotten less carries on a good team. Well, he never got as many carries as Emmitt did, and he still managed more yards on a terrible team by gaining more yards per carry.

So let me clear up any doubt as to why Sanders is the best running back of all time, an easily made case.

I. The Lions Were Awful

The 1989 Lions, had it not been for Sanders, might have been the worst team in NFL history (barring perhaps only the 2008 Lions). Twenty-four players on the 53-man roster were guys who were either undrafted or free agents. QB Bob Gagliano had never thrown an NFL TD and Rodney Peete had never taken a snap. Combine this with four starting receivers who had never caught an NFL pass, and the Silver Streak (Run and Shoot) wasn't exactly raring to go. Sanders held out until three days before the first game, did some jumping jacks, and went for eighteen yards on his first NFL carry. By the 3rd or 4th game, after Mike Ditka and Lawrence Taylor had already said Sanders was impossible to tackle, teams had stopped rushing the QB entirely. But the wide receivers, none taller than 5'11", continued to fumble every time they touched the ball while Peete and Gagliano rotated in and out of multi-interception and sub-50% completion games. Yet, the Lions managed to go 7-9, unbelievable. The Vikings, upon playing him for the first time, actually accused Sanders of spraying silicone on his uniform.

II. Scott Mitchell Made Gagliano and Peete Look Good

For some reason, the Lions were never able to develop or sign a single quarterback who could take advantage of the greatest weapon football has ever seen via the play-action pass. In 1989, Lions’ quarterbacks threw 11 touchdowns and 24 interceptions, not exactly intimidating. Rodney Peete was so inaccurate that teams hoped he threw. In fairness, the drafting of Heisman winner Andre Ware looked good on paper, but he couldn't crack third string behind Peete and Erik Kramer. Kramer quarterbacked the Lions through most of their 1991 12-4 season and played well. The Lions rewarded him by letting him sit on the bench for 2 years before going to the Bears, where he promptly became an All-Pro.

But the inconsistency of Peete and the failed Ware experiment, despite having drafted or signed good WR talent in Herman Moore, Brett Perriman, and Johnnie Morton, led to the worst free agent signing in the history of the NFL. Scott Mitchell had only started seven games as Dan Marino's backup behind a solid-gold offensive line and good offensive talent. Based on his performance in those games, the Lions ponied up big money and pinned their hopes on this 6'6" bucket of bolts. It was a decision that ruined any chance of real team success over the last five years of Barry's career. Watching Mitchell attempt play-action, throw interceptions, or get sacked, was completely brutal to watch. Ironically, the first year Mitchell came in he got hurt and was replaced by backup Dave Krieg, former Seahawks All-Pro. Krieg, while not strong-armed, was excellent at play-action and was able to hit receivers at will against 8 man fronts designed to stop Sanders. Is it any wonder they went 5-2 with Krieg at quarterback, who at one point had 10 touchdowns and no interceptions? He was promptly released after the season.

Mitchell once had a game according to then offensive coordinator Tom Moore (now considered Peyton Manning's guru), where he called 34 audibles, all of them wrong. In his last game as a Lions' starter, Mitchell threw a pick at his own 30 yard line with less than 2 minutes to go. Saved by a missed field goal, the game went into overtime. After three straight Barry runs netted 30 yards, Mitchell threw a pick-six to end the game, and his career. Five years and countless blown chances too late, Mitchell was finally benched for Charlie Batch.

III. But He Played on Turf

This argument, like most against Sanders, is nonsensical. 5.1 YPC (yards per carry) on grass, 4.9 YPC on turf. In 1997, playing against defensive "mastermind" Tony Dungy's Tampa D, which started 3 and possibly 4 future Hall of Famers (Sapp, Lynch, Brooks, R. Barber), Sanders ran for over 200 yards and became the only player in NFL history to have two 80-yard touchdown runs in the same game. What was even more impressive was the way in which he did it. First, he made Lynch miss him on what would've been a loss for any other player, and on the next run he broke a tackle at the line of scrimmage and simply refused to be pushed out of bounds for what would've been only a 15 or 20 yard gain. Against the same guys a year earlier, he had two runs on Tampa's grass where one-on-one tacklers missed by what appeared to be about five yards on several occasions. This prompted commentator Ron Pitts to say they would've had a better chance of tackling Sanders if they just waited for him at the goal line....

IV. Uggh, That Offensive Line

When Hugh Douglas, 10-year NFL veteran and 3-time pro bowler spoke of Sanders, he said that he played with a “college” line. Compared with Emmitt’s group-perhaps the best lineman ever in Larry Allen, huge run-blocking All-Pros like Erik Williams, Nate Newton, and Mark Stepnoski, and All-Pro blocking back Darryl Johnston-these guys came up woefully short. Kevin Glover was a very good player and developed into an All-Pro center. But the man considered to be the best on that line, Lomas Brown, was a grossly undersized left tackle playing at about 280 pounds. He would often get shoved into the backfield on running plays and routinely fail to move his man from the line of scrimmage. Free agent acquisition Bill Fralic, well past his All-Pro prime, was a complete disaster and you would be hard pressed to name anyone other than Glover on the line with which Sanders used to run for 2,053 yards. Compared with the lines of Tomlinson, Davis, and Smith (where backups routinely came in and performed as well as the starter, i.e. any Bronco, Chris Warren/Sherman Williams, Michael Turner), the Lions were made good by Sanders, not vice versa. Combine this with the fact that the Lions thought slow developing draws and counters were the only running plays that exist, and they limited Sanders even further.

V. How Tony Mandarich Almost Ruined Barry's Career

For as good a trade as the Pack made in acquiring Brett Favre from Atlanta, the same geniuses thought that drafting Mandarich ahead of Sanders was a good idea. Think about the ramifications of this pick. While Smith got to play with Hall of Famer Troy Aikman and Davis got to play with HOFer John Elway, Sanders could've played most of his career with Brett Favre. There wouldn't have been any defense good enough to hide behind with those two in the same backfield, someone who could force teams to use less than an 8 or even 9 man front. That might have preempted comments from reporters like Skip Bayless, who once told Mitch Albom on ESPN, "Sure, Sanders would run for 2,500 yards and 30 TDs a year on the Cowboys, but they wouldn't win as many championships." Solid reasoning, Skip.

VI. Fumble! Oh Wait, That Never Happened

As a testament to how elusive he was, Sanders once went 842 touches in a row without fumbling. Not without losing a fumble, without fumbling. That’s over 2 1/2 years. When defenders talk about Sanders, they mention how they were more worried about getting embarrassed or forcing him towards someone else than stripping him of the ball or getting a good hit on him. When you watch an NFL game and see what kind of focus defenses have on taking the ball away and gang-tackling, this feat should stand out as one of his greatest.

VII. Goal Line

Anybody who thinks Sanders couldn't punch it in from the goal line is mistaken. There's a reason he scored 39 touchdowns (not counting the 5 he scored in the Holiday Bowl) in a single season in college, by far the highest total ever. During the Run and Shoot years, Sanders was the goal line back and scored 47 touchdowns over his first 3 seasons. In fairness, while costing him in the career TD department, this probably nudged up his career average, a little.

VIII. Playoffs

Again focusing on team accolades, some critics (such as Sal Paolantonio) claim Sanders didn't perform well in the playoffs. Sal even went as far as to say Sanders was overrated, not something even the most biased Cowboys fan would consider reality. In a highlight you will see until the end of time, Barry made the entire Cowboys team miss on the way to a 47-yard TD run, sealing the Lions' first playoff win since the 1950s. In the championship game against the Redskins, Barry had 6 carries for 46 yards in the first quarter before the blowout ensued, and the Lions lost 41-10. This was the most common theme of Lions' playoff games, blowouts. Against the Eagles in 95', they were losing 38-7 at halftime. Against Tampa in 97', 20-0 by early 3rd quarter. How many carries do you think a running back gets under those circumstances? Not to mention the Tampa field was mysteriously soaked despite it not having rained that entire week. In 93', his first game back from knee surgery, Sanders ran nuts over Green Bay for 169 yards. Only a complete collapse by the Lions' secondary allowed a Favre to Sterling Sharpe TD on a broken play to beat them. By playing 8 and 9 man fronts against Sanders in 94' (combined with freezing temperatures), the Packers were able to shut Barry down for -1 yd. That strategy couldn't be exploited by Dave Krieg who had done so all year due to the ridiculous cold and wind, but the Lions still had a chance to tie the game with less than 2 minutes to go. The criticism is misplaced. The argument should not be why didn’t Sanders do better in the playoffs, but how in the world would his team have been there without him.

IX. The Purpose of Running the Ball is to Gain Yards

Critics of Sanders (like reporters Michael Wilbon, who didn't vote for Sanders for the Heisman because he played against inferior Big 8 competition such as #2 Oklahoma and #1 run defense Texas A&M), have long argued that Sanders had too many negative carries. They favored players like Smith who barreled through gaping holes for 4 yards a pop. Last time I checked, as Robert Downey Jr. so eloquently pointed out in Back to School, football is a violent ground acquisition game and the purpose is to gain as many yards as possible.

There’s a play early in his career against the Colts where Sanders got the ball at the 20 yard line. While he was busy making two guys miss in the backfield, Rodney Peete raised his arms into TD position even before Barry got back to the line of scrimmage. He scored. By his own admission, Sanders looked to score or make the most of every run, eschewing zero and 1 yard line plunges for homeruns or losses. Well, take runs of any distance over 10 yards and Sanders has the most runs at that distance ever. In one year alone he had 50 runs of 10 yards or more and 10 runs of 50 yards or more. In 94’, Sanders had 6 runs over 60 yards, the rest of the NFL 3. He is one of only two players ever (the only one in the modern era, sorry Jim Brown) to average 5 YPC for his career. In 1997, his 9th year in the league at a time when most running backs are washed up, Sanders ran for over 2,000 yards and averaged 6.1 YPC. This came after Bobby Ross managed to give him a collective 25 carries in the first two games after admittedly being frustrated by the running game. In the remaining 14 games, Sanders ran for almost 6.5 YPC and 14 straight 100-yard games, something never accomplished over two seasons, let alone one. You can’t run for 200 yards in a half by plodding along for 3 yards a carry (yes, Sanders is the only player to ever do this also).

Chris Spielman, former All-Pro Lions' linebacker, once said, "yeah, sometimes you wish Barry would just hit it up in there for a couple of yards, but telling Barry Sanders how to run would be like me calling the Vatican and telling the Pope how to pray." NFL HOFer Frank Gifford, who did the Monday Night Football games for most of Sanders' career, routinely said he was the best running back he'd ever seen. "I used to do that, I wasn't even close to that." Jimmy Johnson coached Smith at Dallas, but he said, “I’ve been fortunate to be around some good backs over the years, but Barry is truly special. He is the player who truly keeps you on the edge of your seat. If I was voting – and this is no offense to Jim Brown – I would vote Barry Sanders the best running back of all time.” Barry Switzer (another former coach of Smith’s), according to Sanders' autobiography, once instructed his Oklahoma Sooners team not to injure future HOFer Thurman Thomas when they both played at Oklahoma State for fear Sanders would get in the game. Dan Dierdorf, HOF tackle and Monday Night partner of Gifford’s, said Sanders “is just different than other people, he can do things that they just can’t do.”

Watch any game Sanders ever played in and you'll see at least a few things that no other human being could've done. You've seen the highlight many times of Sanders spinning away from three Bears and running 45 yards for a touchdown. That's Mike Singletary he's discarding. Reggie White said that Sanders was the only football player that he ever physically feared because he could beat you on any play. Rod Woodson, HOF cornerback/safety and world class hurdler, literally blew out his knee trying to tackle Sanders in the open field. Gayle Sayers said, “Many times when you see him, he's making moves behind the line of scrimmage, trying to get away. A lot of times Emmitt isn't touched until he's five yards past the line. When Barry's five yards into the secondary, he's gone. People talk about whether Barry can gain 2,000 yards in a season. Well, if he had Dallas' line, we'd be asking how many years he'd be gaining 2,000 yards.” Walter Payton said, “He's better than I ever was." Those guys were pretty good; guys considered the best to ever play their positions. And they thought Sanders was the best. I’ll take their word over Skip and Sal’s anyday.

Why (Most) Stocks are Grossly Overpriced

Whatever metric the pumpers and fund managers have been using to evaluate stocks is wrong. Repeatedly over the last few days, weeks, months...since the last crash (the third in the last 12 years and perhaps we're in the midst of a 4th), we've been told that stocks are at all-time cheap multiples. So you must buy stocks. With the 10-year treasury plummeting below 2% and the 5-year yielding nothing more than pennies, this is what our country would like you to do. But be smart about it. Protect yourself with "high quality" blue chips, dividend paying stocks, and companies with international exposure.

Here's how some of those stellar, safe havens have performed over the last few weeks:

Industrials:
Deere (DE) -18%
Caterpillar (CAT) -28%

Dinosaur Tech:
Dell (DELL) -18%
Hewlett Packard (HPQ) -40%, 6-year low
IBM (IBM) -14%

Banks:
BofA (BAC) -30%, -50% YTD
JPM (JPM) -19%, -21% YTD "Best of Breed"

Energy:
Exxon (XOM) -18%
Chevron (CVX) -14%

And the broken record continues to play. Doug Kass, the most bullish bear I've ever read about, piled his clients into banks on Wednesday with the XLF trading at 13 and called a market bottom. Two days later, his clients are down 7%. Never afraid of catching a falling knife, Cramer recommended both Foot Locker and Decker to his viewers that same day ahead of earnings, down 9% and 19% respectively. Those who dare to say cash is king such as Mr. Harrison of Minyanville and Mr. Mccullough of Hedgeye are scorned for recommending a zero equity strategy at the moment. Three weeks into August they are beating the market by 15%.

If you had made no other investment since October of 2007 other than buying gold in the last month, you would be beating the market by almost 50%. Does anyone else ever get tired of the wrongomists and smart money throwing out tangible book value, future multiples, and growth rates that never seem to be right? As Mcculough has mentioned ad nauseum over the last 3 months, earnings will have to be slashed aggressively in calculating S&P earnings going forward, just as Citi, GS, and JPM have slashed GDP projections for the remainder of this year and next by 66%.

And this is why most stocks are grossly overvalued. Last week you thought Dell was growing at 9%, this week they told you they might not grow at all. Last month investors were willing to pay over 100x earnings for Salesforce.com, this week we're not so impressed with earnings of $1/share. For every story you've read about BAC's value all the way down from $18 to $6 in the past few months, there's a hedge fund (including the biggest) imploding somewhere. Last week people were willing to pay$75 for a small company that carbonates tap water at home, this week $36.

So what now? Well, I've given you gold since 2007. Recently I've given you RIMM, SHLD, and AIG puts, all of which paid off on time. I have no problems with a zero risk strategy at the moment. Yes, there will be small spurts like we saw from last Friday for 3 days, manic reversals like we saw after the FOMC, but to be sure we've seen the bottom takes some real optimism. Don't be long anything. If you must, use leveraged ETFs with tight stops but know what they are; day-trading vehicles only. This has worked well when the futures are clearly pointing 200 points in a singular direction, as we've often fallen or risen 400-500 points on those days. I shorted the yen at it's all-time high against the dollar. When we saw this in March, the G7 stepped in immediately and devalued the yen, something I suspect will happen again between now and Jackson Hole's conclusion.

90% Wrong

Debt ceiling issues aside for the moment, where the hell did our GDP go? Even more disturbing than our pathetic 1.3% Q2 was the revision of Q1 to .4%. Not 4%, zero point 4%. That means our chief economist, the Bernank, was off by 90% in his estimates of first quarter growth prior to the beginning of the year. Of course, this fares pretty well in comparison to some of his other calls such as housing contagion which he underestimated by infinity. Now economists, or wrongomists as they should now be known, are scrambling to whittle down their growth estimates for the rest of the year. Does this make any sense? So, up until 8:29 yesterday these geniuses thought we would grow between 3%-4%, but at 8:30 they changed their minds based on the new GDP number?

The debt ceiling debacle would be very laughable if it wasn't so disgusting. These clowns have really convinced themselves that they're important, that they're taking a stand on our financial future. Want to take a stand on financial reform? Pass some term-limits so you can fire yourselves after 2012, saving us the trouble of having to vote you out of office en masse.

The only positive from this farce is the increase in volatility which has made trading fun again the last few weeks. Gold and silver have gone nuts, and are tradable on a daily basis. Old tech favorites have regained their mojo, with google and apple calls filling our coffers the last few weeks. STEC dropped 40% in a day, and companies such as VMW and LNKD have gone up and down $10 the same day. However, with increased volatility comes increased pricing. GOOG was a perfect straddle because implied volatility was only around 5%, but placing a straddle on LNKD will cost you 17%, way too much.

I think a better, albeit riskier strategy is to take one side only on 5-10 stocks pre-earnings with high volatility. As always, we don't have to win more often than we lose, but we must win big. This was my thought going into Monday, where a rally, dead-cat, 200 MDA bounce, whatever, seems likely on a debt ceiling agreement. No agreement by Monday morning could mean trouble, but it will be easy to pile into gold or puts on the indices if this happens, close out on the announcement, and then rebuy. Or we can just hope for total carnage across the board, which will make for easy money in gld, slv, and aapl on the way back up.

Slow Motion

A little bit of gloating and lamenting on RIMM, as the stock plunged to $27 yesterday at times on awful guidance. I recommended this loser near $45 as a short just a few weeks ago, and successfully shorted it 3 times over that period. However, with at the money options pricing in a 5% premium in either direction, a hedge on earnings with one day until expiration was out of the question and stellar gains prompted me to close my positions before earnings. What a mistake. When I said analysts were falling over themselves to lower price targets, it was from the $70s to $50s or $50s to $40s. Stung again by their gross overconfidence, geniuses such as JPM lowered their targets to $30 and finally slapped sell ratings on RIMM. Thanks guys.

I also wrote on 5/13 that triple-digit moves were becoming commonplace and in just over a month, we've had around 10 trading days with that kind of swing. The VIX rose 40% in a week (finally) and was even rising with the market at times the last few days. Anyone who thought they'd cleverly buy Pandora on the open this week is sitting with between a 33%-50% loser already, with the stock earning a $5.50 price target on its second day. Please add any company with limited barrier to entry whose CEO openly states the company won't earn any money for the foreseeable future to your short list (I will let you know when puts are available).

Greece. Where does collapse get us? Where does a bailout get us? It's difficult to short French and German banks, and if you had, you got roasted yesterday. The euro took a nice plunge recently but popped and will continue to pop on whispers of ECB injections. Let's wait and see. Interesting to note that the current head of Lehman said yesterday he sees a lot of similarities to its own demise and the current European fiasco. Bankers and governments certainly never learn.

Basket Weaving 101

Looks like we picked a good week to finally get short with the market down 5 consecutive weeks for the first time in 7 years and the worst 1-day performance since August on continued abysmal economic and employment data. RIMM fell over 12% as analysts are now fighting over each other to lower their price targets and with earnings 2 weeks away, RIMM may still have a few dollars left to shave off. The others in our basket, CSCO, SHLD, and FSLR, all gave away quick pops to finish lower this week. CSCO actually fell below $16 yesterday, SHLD is back below $70, and FSLR lost all of its German anti-nuclear momentum in 2 sessions.

For the first time since its bailout, AIG was punished for issuing more shares. I neglected to mention this loser for our basket last week, but AIG has fallen from the mid $50s to under $28. An excellent article by Bloomberg's Jonathan Weil entitled, Government Prays a Bigger Sucker Is Out There, details AIG's future inability to use past losses to offset tax liabilities. This in essence (similar to homebuilders' clawbacks or banks reducing loan-loss provisions) has been the only thing making AIG appear solvent over the last 2 years. Take this away and the company will bleed money. Another Bloomberg article this week reveals:

“'There seems to be essentially no investor constituency for AIG,' said Paul Howard, director of research at Solstice Investment Research."

The government still owns a 77% stake in AIG and they had to dump these shares at $29. How much lower will the next round go as suckers stop lining up?

In case you blinked, GM is now well below its IPO price, Ford fell under $14, and LNKD is now more than 33% below its first-day high of $122. Groupon is rushing to market and looking to raise $750 million dollars, but of course, will raise much more than that with this offering. I'm sure I'm not the only one concerned about the fact that the last round of venture capital went mostly to paying off its previous rounds of VC. Paul Kedrosky was ahead of this curve 2 months ago, asserting Groupon will eventually be a great short (watch his comments here http://www.bloomberg.com/news/2011-03-18/kedrosky-sees-groupon-as-a-short-selling-opportunity-video.html).

http://www.bloomberg.com/news/2011-05-18/government-prays-a-bigger-sucker-is-out-there-commentary-by-jonathan-weil.html

http://www.bloomberg.com/news/2011-06-03/aig-hits-14-month-low-as-insurer-has-no-investor-constituency-.html

The Market As Proxy For...

"...and, it would not be fair to conceal from you, there is a drawback to the bottle; for if a man die before he sells it, he must burn in hell for ever."

"To be sure, that is a drawback..."

Quote from The Bottle Imp, by Robert Louis Stevenson

This market seems to be a proxy for nothing but itself; the current risk appetite of the day curbed or stoked by breaking headlines but immune to the horrors trending over the long term. Even with a month to make some stuff up, our government couldn't infuse enough red blood cells to shoot our GDP up to 2%. There just might be an understated drawback to our debt and QE2. As MarketWatch's Brett Arends pointed out this week, it has been a failure. GDP has dropped over the last year, the change in unemployment has been a simple conversion of part-time laborers to full-time laborers on a small scale at a cost of $850K/job, and consumer staple inflation has risen significantly during that time. Meanwhile, housing has taken another dump with the tsunami of never-ending foreclosures and unlisted defaults causing a permanent hairball in the banking drain.

So, what are the actionable trades given that this market just doesn't care? First, let's look at a basket of losers. RIMM I pointed out in my last post along with Sears as companies that are just stuck in businesses losing market share and momentum. We can also add CSCO to that list, who, along with MSFT, continue to falter despite hoards of cash. First Solar has nose-dived from $175 to under $120 in a business I think people continue to overestimate as a future cash cow. Add in Chanos' drum beating this thing down to "mid double-digits," and FSLR looks like a good short, again.

On the long side, two names are worth revisiting. Having failed to pull the trigger (name it, anytime would've been a good time since it hit .10), Sirius LEAPS still look attractive. If Malone can push them through their debts until next year, SIRI should continue to rise on improving car sales and pricing. Jan 13 $1.50 calls are trading at a measly 6% premium to current price, as are Jan 12 $2 calls. Jan 12 $1.50 calls are basically at par with today's price of $2.37. And, dare I say Citi, after falling below $40 (or $4 really) this week, might be worth some longer dated calls as they are cheap and traders seem to still love this stock as a day-trading tool with nice liquidity.

The Party's Just Beginning

I hope you were as amused as I was at all the articles refuting the parallels between LinkedIn's rocketing IPO and the internet bubble of 1999. The justifications for what one journalist called "a glorified resume service" were abundant and reminded me of the bashing I took for suggesting solar and ag were overbought 3 years ago (see article here http://seekingalpha.com/article/73752-those-bubbling-solar-stocks). And they're partially right; it's not 1999, it's 1998. We've seen this gig before, grossly underpricing the IPO, stock doubles day 1, and a bunch of insiders become multi-millionaires. If LinkedIn, a company with earnings of $15 million and projected losses for 2011 can trade for $110, then Groupon and Facebook should hit $200 or $300 easily, right?

The current tech rising coincides with cracks in the facade becoming more evident daily. Aside from dismal manufacturing numbers which are always blown off as one-off events by the bull, retail's ship sank this week with Gap, Sears, and Aeropostale at the helm. Despite frequent Fed reassurances that commodity inflation will be transitory, Gap, one of the largest clothing retailers in the world, said they would knock .30 off of estimates because they could not get pricing power on cotton. Recent flooding and soggy weather has halted the rapid drop of corn and wheat, and gold has managed to stay strong in the face of a rising dollar. Interestingly, as Bill Fleckenstein noted in his column this week, China recently put a a $500 million bid on a gold mine, perhaps a sign of things to come.

This market has been very difficult to short for a long time now. Even stocks such as Open Table that were begging to be punished could have lost you a lot of money on its way from $20 to $120 before its recent $30 slide. But the list is growing. Priceline is still above $500. RIMM has taken a beating from near $70 to the low $40s and is caught in the middle of Android's ever-available platform and the cache of the iPhone. Sears lost $1.39 last quarter and is getting killed by both of its businesses. Berkowitz loaded up on Sears and Cisco last quarter and either knows something we don't, or is willing to take some short-term pain. The cable cowboy, John Malone, entered a bid for Barnes and Noble for $17, sending the stock over $18 yesterday. Malone is a bright guy who has been able to piece together unrelated businesses in the past, and BKS may be worth a small stake as either an arbitrage play or to gain Liberty shares going forward. In the meantime, I'm sticking with cash.

The Glitter is Gone

I have been pretty straight forward in my philosophy over these 210 posts. High risk, high reward. Have no misconceptions about the market as an individual trading against the beast. And never forget Taleb's Thanksgiving Turkey.

My last two posts simply recommended buying food and metals. Easy to say now that it was the easy trade, but at the time SLV was trading at $23 and DBA around $25. Those positions have since been closed and I hope that you weren't waiting for a new post from me to give you a stop on SLV. I have been recommending GLD since 2008, and even with gold down $75 from it's all-time high, the trade worked out well. I have discussed my outlook several times recently with my brother who has asked what advantage I have in buying calls on commodities versus other investors. The simple answer is none. The slightly better answer is a belief that fiat money is ruining our economy and that we would pay dearly with commodity based, not wage-based inflation. So to lever that belief, I use options. It turns out silver was the most volatile of that group which enhanced my returns. While oil also rose 3x over the course of QEs 1&2, my advantage was nil as I mistakenly used USO as my tool, not oil futures (which is not an option for most of us). And I guess the bottom line answer then, is my only trading advantage is a willingness to take big risks in this game, which now more than ever seems like a casino.

If you need further proof, look no further than oil recently, which has had 3 trading days with 6% or more volatility, 6%! What about SLV, which tripled in less than 2 years and lost 28% in a week in no small part due to 4 margin requirement raises in a single week. How can anyone feel safe going home on a Friday and watching a position lose 12% in six minutes Sunday night? A commodity position? Think anyone was getting crushed by silver's rapid rise, perhaps Goldman, who saw silver rise 20% after their big note recommending a strong sell on commodities? Ironically, Goldman has dropped nearly 15% in the last few weeks as mounting litigation and perhaps the impending IPO of Glencore weigh on its share price.

The recent rise of the dollar has not only killed commodities, but sunk our market. You'd like to think that increasing value in your paper assets is good, but our leaders know better. As QE2 ends and uncertainty increases surrounding Europe and a willingness to let the U.S. devalue our dollar, there will be more of these triple digit days ahead. Days I have no interest in owning much until either the helicopters load up again or the world faces its debts. BAC under $12 today, Citi down 7% since its split, Open Table trading at 10x the multiple of Google, good luck out there.

What's Next?

Four months later and not much has changed. The market, coming off its worst week of 2011, has still seemed to climb higher at almost every inflection point. Back in September, I recommended calls on three ETFs; GLD, SLV, and DBA. Since then silver has hit 30-year highs, gold all-time highs with a recent $100 bounce, and several commodities have hit generational highs. The recent turmoil in the Middle East has provided increased volatility, and despite our chief economist's assertions that we have no inflation, a $15 spike in oil was all it took to cause a market plunge.

I'm sure that the market will continue to reward any decrease in oil price as it did Thursday into Friday, as if $98 a barrel is not inflationary. The bigger concern should be the rapid fashion in which these large African nations were so easily overthrown, like pulling back the curtain on the Wizard of Oz. Food shortages in India have become a concern, and several weather related incidents have only conspired to put pressure on ag prices.

The next few months should be interesting. I think weekly options continue to provide the extra leverage we like in the meantime as poor earnings are punished to the tune of 15% daily losses as we saw withe Cisco and HP. Next month we have yet another review of banks' fortitude, with the outcome sure to reveal the ability of JPM and WFC able to easily pay a dividend while Citi and BAC languish. This will provide an excellent opportunity to either hedge XLF or buy calls on XLF while shorting the losers.