Friday, May 27, 2011

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.

Sunday, May 22, 2011

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 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.

Friday, May 13, 2011

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.