I am at a loss, both in my P&L as well as my understanding of the market. Perhaps it is time for me to hang up my trading gear. Hand it over to the next generation who are not set in the ways of the past. I have lost too much money in the last week as a bear. AAPL is down 1.2% and the NASDQ is up 21 basis points. If I don’t see a reversal today in the overall market by the end of the day I will be flat all my positions and stay off the keys for a month. It is very difficult to accept as; I do not believe m bearish perspective is steeped in emotion. My arguments are logical. I am shocked that portfolio managers have not sold into what has been the best opening 45 days of a fiscal year that we have seen in many years. Logic no longer prevails. Greed is the defining emotion. I have tried to stomach through it. Yesterday the firm made $25,000. Today we are down $42,000 at 12:47pm. We are net short. We are on the verge of either making what would be an R3 pivot signal ling a reversal and one would expect the market to move down. We are also 1 handle from making a new high on the futures. I have bet big for my last time this month. On the astrological futures trading forecast, we have very bearish indicators for the remainder of the day. I did not see the upward moves in the futures today as convincing. There was no amplitude. I have not seen a V reversal in a very long time. Tomorrow many managers will be out as they begin a long weekend. There is real geopolitical risk out there. It is only logical that managers would take risk off into the end of the day. So as they say, the stars seem aligned, but every time I have felt that way, nothing has come to fruition. I am exhausted from fighting the tape. I was up significantly in the first 5 days of the month and now find myself down significantly as we are close to the final week. The time has arrived. By the end of this day I will no longer be in this position of uncertainty. I will be out of the market for the foreseeable future, or vindicated.
Jeremy F. - CEO
Beat on Earnings / Miss on Revenues - CLF will reverse itself
Cliffs Natural Resources will reverse itself.
I was short a small position going into earnings and have turned it into a large position at an average price of 99.65. It is trading at 102.5 pre market. I am shorting more. I am not concerned. This is another example of the market’s delusional behavior. The stock is up 10% premarket. Here is the bottom line. They crushed it on earnings. They missed on revenues. This is the pattern we have seen this earnings season. Same as Dell. But I strongly believe that companies have stretched their margins to the maximum extent. It is the demand that they cannot create. Beware of buying stocks on earnings multiples in a rising interest rate environment. I have seen this kind of bubble build before in the 2 previous decades I have been a trader. These are the bubbles that lead to 10% corrections. This problem may take some time to grow, but I actually think we are already in it. It will be most apparent in the banks next quarter. I predict they will miss on Revenues and perhaps meet expectations on earnings. Analysts should start to see this trend start to develop over the upcoming month. Channel checks and manufacturers will show a pause in advance sales. As this leaks out the correction will begin.
10 Reasons I am Delusional, Not The Market.
Maybe I am delusional and the Market is Sane
1. I am trying to start a business that has to date made no money but has tremendous potential. At the same time I am trading for a living. I am delusional, perhaps. But at the same time I have desperately tried to get a small business loan. To no avail. PNC won’t lend me, JPM won’t lend me, and BAC won’t lend me anything. Even if I post collateral. So who is delusional if the banks are still not lending to small business, the lifeblood of employment. But I am delusional
2. I am delusional because of the stress I am under when I look at my monthly grocery bill. A quart of milk costs nearly $4; it cost $2.40 2 years ago. My kids consume a quart of milk a day. That’s $120 a month. That’s just for milk. But I am delusional, because inflation is only a problem in third world countries. KR and SVU have no problem raising prices, just pass it on. Forget Wall Street, Main Street has lost touch with the rest of us. But I am delusional.
3. My heating bills overwhelm me this winter. PSE&G you make me cry. I become delusional when I pay the bills. It makes me feel like going out and spending money at my local restaurant, maybe even take the whole family out. The proprietor can regale us as to how his business is dying. But I am delusional because sky rocketing oil prices are good for the economy.
4. The Verizon I phone is not selling that well. It was hyped for the past year. We were told it would allow APPL to dominate the PDA space. We were told it would crush AT&T. But it hasn’t. How much of this hype is premium built into the price of apple. When will we hear from Steve Jobs? Not hearing from him has made me delusional.
5. The promise of democracy in the Middle East has made me delusional. I am so thrilled that Mubarak cronies in the army are monitoring the Suez canal, that not even rumor of Iranian warships heading toward a neighbor of Israel can shake the markets conviction. Peace is the word. It feels like the delusional high of the ‘60s.
6. I am delusional from my yoga classes. I see everyone wearing LULU lemon. Buy LULU it can’t go down. Who care that it is trading at 44x this fiscal years estimates.
7. The drop in CSCO made me delusional. For a moment I thought that while there was one reasonably expected upgrade in corporate infrastructure that was to be expected, I did not believe that this was only specific to CSCO, as every other tech stock rallies. Clearly nobody believes companies have learned valuable lessons about extending there upgrade cycles. Everyone must be getting ready to buy new equipment.
8. The banks have made me delusional. I have begun to believe they can do no wrong. GS and MS just keep going up. Who care that Bernie says there is no way they didn’t know what he was doing. I guess all those millions of trades they did with him, and all the compliance and operations people that processed them, never realized that some of them may have been fictitious. Bernie please keep your mouth shut lest our delusional market believe someone other than you might be culpable for the crime of the century.
9. My children’s private school tuition’s are killing me. I am delusional because I somehow believe that they will have greater opportunity than I had. What about solving social security.
10. And the number one reason I am delusional is because I began to build a short book again today.
10 Reasons the Stock Market is Delusional
A Delusional Market:
1. Leverage is a good thing. There is too much leverage in the market…Again. We are in a dangerous place.
2. Rates have moved up a bit, they wont move up more. Even with the move in rates, they are too low.
3. Equity multiples are low. We have seen no contraction of equity multiples. One of the greatest delusions in the market is that companies can continue to expand margins. Dell beat on earnings, not revenues. That is the theme of this earnings season. Rates will eventually force multiples to contract.
4. APPL can do no wrong. Yes they are great innovators. But the competition that is growing around them is being ignored.
5. An M&A cycle is coming. I believed in this as well. It has not materialized. And now stocks are no longer cheap. Many of the private equity groups I speak with say they are not making new investments. They are still waiting to exit a large backlog of old deals.
6. Banks are in much better shape. I don’t think so. Investment banking is light and the days of incredible proprietary trading profits are behind us. They are still saddled with terrible mortgage portfolios that will only continue to be difficult to unload as the homebuilders like LEN TOL and RYL rush to build while rates are low. Neither will win as demonstrated by the homebuilder’s inability to break through technical resistance.
7. Jobs are coming back. There is a wave of hiring ahead of us. We have actually passed the period where you would have expected to see this. There will be a flood of new people desperate for work and willing to work cheap as we hit may and June and a million seniors graduate college. 100s of thousands of Lawyers will take temp work to survive. And the majority of MBAs still don’t have their jobs lined up. Let alone the amount of high school seniors who will graduate, unable to afford college, desperate for blue-collar work that does not exist. Even worse many will sign their lives away to student loans they will be paying off decades after they graduate.
8. NFLX will dominate the streaming video space. Forget it. Eventually Google, Amazon or Apple will go head to head with them. Studios will jump ship, as they have never been fond of the beating they took during deal terms with Netflix.
9. Oil is going to 100, and this is a sign of an improving economy. What? The last time oil behaved like a rocket we wound up in the worst financial crisis since the great depression.
10. And the #1 reason the market is delusional and will be selling off soon is that I covered the majority of my shorts.
Trader Rehab Again - I take my book down to zero
I was wrong. The market did not pull in and my thesis did not play out as I expected it to. Perhaps the lesson is, a bull can’t morph into a bear. Perhaps the position was too big relative to the risk. The most difficult rule a trader needs to live by, is never do anything today that jeopardizes your business tomorrow. As such while I have been looking for a pull back in the market for 2 weeks, and was able to maintain a relatively small loss in the face of a strong upward trending market, I could not survive Friday without breaking the aforementioned rule. As I entered the day Friday, it appeared as though all my patience would pay off. I had called right that Mubarak would not back down, and the market was selling off. And then an utter reversal, Mubarak changes his mind less than 24hrs later. This is what I have referred to as a complete exogenous shock. Unfortunately for me, who was quite bearish, this took me by total surprise and to a threshold of pain that I would endure no further. I did what all career traders do under those circumstances; I liquidated all positions and cut down to zero. When you are wrong as a trader and have reached your pain limit, continued misperception that you will be right and further losses are not acceptable, even if the very next day you would have been absolutely correct. While I took a significant trading loss on Friday, my firm remains strong and can begin its battle back to make up for Friday’s trading loss. And while it may take time to make it back as the risk will be paired down significantly, I will find myself in what I refer to as trader rehab. I will step away from the keys for a week or two. When I return, I will trade small as I attempt to regain my confidence. Hopefully the other traders will rise to the occasion and start our path back toward success. I will focus on the business as a whole. The business on a whole is thriving. Its success far exceeds the trading loss. Trading losses can be recovered relatively quickly. Business success cannot afford to give ground. When you are an entrepreneur like myself, there is an inner force that keeps you moving forward in the face of adversity. You do not look past with regret, you look forward with newfound knowledge. A survivor in this business always rises to the occasion, always suffers setbacks and always rises again. I have suffered through many business and personal losses and celebrated numerous personal, trading and business triumphs. That has been my way for my entire career, my entire life. And probably the balance of what I hope will be a lengthy journey. I would venture to say, you the reader have had similar experiences. What defines us all, is “if and how we move forward”. The best way to see how my journey continues is to tune into hedgefundlive.com
Friday Market Expectations - “I still havent found what i am looking for”
To quote my good friend Bono, “I still haven’t found what I am looking for.” But I feel like I am getting close. Look, the morning seemed to lay out as I expected. Then we got the Mubarak spike. Names are completely disconnected from the indices. Correlations are completely out of whack. It is utterly illogical that the markets continue to maintain these lofty levels with names like CSCO down 14 percent. But it is getting very difficult to fight the tape. Ironically as we have maintained a massive short position and have been squeezed every day, but we have weathered the storm. Tomorrow is D-day. What we saw tonight with Mubarak’s speech was a sham. Nothing has changed; this will lead to further chaos. Instead of telling the people he was going to stay through September, perhaps he should have told them he will restore the internet and give them back their Facebook.
The market is completely misunderstanding the risks at hand. I expect a significant overnight drop in the futures because of the continued blind eye behavior exhibited today by the market. I attach a 2/3 probability to a test of the 1308 low; I certainly expect to see 1311.
The intraday range in the futures today was 12 handles, the average has been running closer to 15 – 18 having been as low as 4 -5 handles a couple of weeks back. The expanding range is an indication of a top.
More importantly, the extreme intraday swing of independent stocks is even more worrisome. Our government has become an embarrassment on the foreign affairs front. Bank of America closed on its lows. Commodity stocks rallied as inflation fears grow. Inflation contracts equity multiples. WYNN reported earnings that crushed expectation and the stock is trading lower. AAPL dropped as much as 8 points on a simple internet story regarding the lines for the
Aunt Beverly asked me "Sweetie do you think I should add to my CSCO position, it looks cheap?". OY VEY
Thursday Market Expectations - Reasons why the market doesn’t go down, for now.
Is this the beginning of the small correction I have been looking for? Probably, but given the fight the bulls put up yesterday, they are not going to back off quietly. One might argue, buy the dips but sell the rallies more aggressively. I do not have the patience for that. I have too many other things to focus on. Either I am right and we will test 1300 in the coming days or I am wrong and we are in a fever driven hyper bull cycle that refuses to be broken.
But why? What are the positive catalysts? An improving economy. Yes things are slowly getting better. Perhaps you believe that there is still a great deal of cash to be put to work. I am not sure I agree with that one. Last I heard hedge funds were at near pre financial crisis levels of leverage and no matter how hard I try I cannot seem to get my credit card bills paid down, it is something that my wife and I are forever battling over. So near term, the catalyst for moving up is simply greed. “It worked yesterday, so I will try again today” seems to be the motto for the bulls.
As I write this it is 7:45am on Thursday and while futures indicate a negative opening on the heals of CSCO’s earnings (CSCO is trading down 10%) AKAM’s earnings (AKAM is trading down11%) TQNT’s earnings (TQNT is trading down 14%), I am amazed that the futures are not down more significantly. We await a weekly jobless claim number that should not move the needle. So here is my thesis, people have very short memories. I for one do not remember what I had for dinner when I came home last night, though I do remember polishing off a bottle of cabernet at the wine bar with a buddy, before I headed home for dinner. For some reason I think it was lasagna, but I really don’t remember. We as a species have short memories. Our memories are even shorter when it comes to recalling pain. Pain is the memory we most often repress, very logical. The traders, investors and financial spectators of the stock market, the greatest arena since the Roman Coliseum have repressed their fear, they trade with abandon as they rip the futures up 5 handles in the last 5 seconds of a day. They ignore the fact that we have not even tested the breakout “psychological levels” as support.
But I believe the time is upon us. The catalysts are not to be ignored. As I said earlier this correction will be a battle between two strong opposing forces. Leverage vs. Common sense. Fear vs. Greed. And finally a battle between the lessons of history vs. a brave new world where there is a new playbook, and perhaps my copy got lost in the mail.
Negative catalysts continue to be those I mentioned in yesterday’s Market Expectation blog. But let me add a few more. Unexpected developments in Ireland and Portugal. Forex spread gouging by major institutions. Bernanke under further attack over QE2. Our municipal bond infrastructure in jeopardy as the ratings agencies were once again, late to the game. I believe yesterday was the first right-handed body blow to the feverish bulls. Today will be a follow up cross to the left side of the jaw, the type where you hear a slight crunch, and tomorrow will be a right hook that will for the first time in months put raging bull to the mat, even if it is short-lived, at least he will remember that lost feeling of pain and markets will have an opportunity to normalize.
By the way my Aunt Beverly called me again last night, she wanted to know if i thought NFLX was cheap, needless to say i will be shorting NFLX.
Wednesday Market Expectations - 10 reasons the maket is at a near term top.
I cannot believe I have turned so bearish, but as I continue to watch the over-the-top activity of the last week, I am left with limited alternative. I cannot say this enough, I am looking for a solid 18% S&P performance for the year. I can even buy into a 20+% performance under the right circumstances. But as I always say, “Do the math”. We cannot sustain this pace. It is illogical. We would be tracking for an up 55% year. If you believe that, I have some land along alligator alley for sale. Yesterday was the most blatant example of “Air trading” or trading on greed and fear. There is nothing wrong with a day or two of greed and fear, but weeks worth of it do significant damage to the sustainability of market levels. Fundamentals and technicals are seemingly ignored in this kind of market. I was taught along time ago to sniff out the exogenous risks that tend to reveal themselves at market tops. They are as follows;
- Egypt – I would love to see Mubarak go quietly, but he won’t. Have you not been reading the ongoing abuse of basic human rights? Have you not seen the crowds growing? When they do prevail, what do you think they will do to a regime that has stolen nearly 100billion dollars from its people? 70billion of it going directly into Mubaraks pocket. He makes Madoff seem like a piker. Madoff got life. Mubarak will retire to a villa in Saudi Arabia. Do you not see the insanity of this?
- Middle east downgrades by the ratings agencies. As continued pressure mounts to reform multiple governments, and protests spread, the transition process will not go smoothly. There is too much at stake for the wealthy demagogues. They will not go quietly.
- Terrorism – the confusion of the moment will provide platforms for terrorist organizations to legitimize themselves.
- Iran – Their subdued activity should not be taken lightly. They are waiting the moment to interfere, perhaps even provoke Israel and America with renewed nuclear debates.
- North and South Korean talks ended as quickly as they began.
- China raising rates – Inflation fears are no longer fears, they are realities. Grain prices are soaring, Oil is creeping up to 100, and silver has become the new gold.
- Insider Trading – It won’t go away from Raj to Steve. Investors are losing confidence in their hedge fund oligarchs, perhaps they should be. The oligarchs have grown fat with wealth and irresponsible with management.
- Obama – Somebody tell me what he stands for, who he represents, what his agenda is. He is killing our global credibility. I have referred to this as M.A.S.S. – the Minimizing of America’s Super power Status.
- The Republicans – refer to my Obama comments.
- 10. The bottom line is that we are in an improving economy, but we are not creating jobs at a rate that will sustain the recovery long term, Over 1/3 of home owners are probably underwater (more debt then equity) Consumers may be spending, but they are going back to the old habits of racking up debt. Why not? We have been trained to believe over the last couple of years that if your debt gets too high, you can just walk away from it. Government spending is out of control. And finally I know we are at a top, because my Aunt Beverly wants to know if I think she should buy IBM.
Monday Market Expectations - Ignorance is not bliss, it is just ignorance
I have been looking for a pullback in the market to the 1288 level on the S&P; I have not changed my opinion. I have been a bull for a long time and am very aware at the significant improvements in our US economy. I correctly predicted in a recent blog that we would see the unemployment rate, for various reasons, gap down to 9%. But the market has not been acting normal of late. I have seen this strange pattern in the past. When you have done this as long as I have, your gut begins to have a mind of its own. I will continue to play from the short side. I have been very specific about the names that we have taken to the long side. From the short side I am 2X the value of my longs. Short indexes as well as particular names such as QCOM, NFLX, HAL, and BAC. At 1287 I cover my short excess, below that I start to return to a long bias. I am bullish, but I am not ignorant. Ignorance is bliss? Many investors are enjoying the bliss. The blizzards distract us, the super bowl distracts us and The Bachelor distracts us. I look forward to American Idol and taking my kids out for hibachi. It is all bliss but it is also a distraction. Bliss is enlightenment, but then how is ignorance bliss? Market pullbacks or corrections begin with a shock to the ignorant. Shock to the ignorant is what is blissful because it ultimately brings enlightenment. Ignorance is not bliss. The ignorant are ill informed because they chose to be. They chose to ignore what is in front of them, that is the essence of ignorance. I was wrong in a previous blog where I said the market is behaving irrationally. I now actually believe that ignorance is perfectly rational, when it comes to greed. How could we all have been so ignorant to the credit crisis, to subprime unqualified homebuyers, and to Madoff? The answer is simple; GREED. The market is behaving like a rational ignorant crowd. Soon there will be bliss as enlightenment will come. Things do not go up day in and day out in the midst of geopolitical uncertainty. I actually fear that continued ignorance will lead to a much more intense pull back. Retail continues to chase this market. They will be the first group damaged by a pull back and they are the least likely to be able to absorb it. A minor pullback from here will not systemically damage the tenuous confidence the market has been able to re-instill in the retail
investor’s mind. A more systemic correction might setback the investor mentality to that of early 2010, when we began to believe that the European Union was going to crack. It didn’t. Ignorance works in both directions. Early last year the media and other pundits who look to ferment fear, ignored the reality of the Greece debt crisis and prognosticated another coming financial meltdown. They claimed the euro would reach parity with the American dollar. It did not. Enlightenment bought logic back to the market and we began a 200-point run in the S&P. When we ignore that which is around us, when we trade on ignorance, to the downside or the upside, we are just begging for a shock the system. I fear that it may be coming.
Friday Market Expectations - Holding Short Position in the midst of Irrational Exuberance
My market position is short-term bear looking for a catalyst to pull the market in approximately 2-½ - 3 %. I continue to believe that the market is underestimating the geopolitical risk in the Middle East. It is a de javu moment to summer of 2007, when we had a precursor jolt to the market that led to a rapid new high and then an all out collapse. I am not proposing a crash, or a 10% correction. I am expecting the real buyer to step away after the fast money is done covering shorts and retail customer are finished buying, as they are always last into the pool. Things may seem peaceful this morning, but let us not forget that less than 24hrs ago, reporters were being beaten. The mood changes rapidly on the street. Obama is starting to be more outspoken, though no one can quite figure out what the White House means. I thought we would have a negative trend for the day yesterday, and for some period it felt like it would play out that way. Instead the market staged a strong reversal that felt a lot like short covering, there is a complete disconnect between the major indexes and 100s of names that are trading within outsized intraday ranges. Inflation is rapidly taking center stage. It is one of my major concerns. This is reminiscent of periods where I have seen Quant funds unwinding and taking big losses. This has also been a toppy indicator for the market. The most difficult thing to do these days as a short term bear is figure out ho to finance your shorts with a number of well picked longs, survive the day, and move on to the next day. The ability to stomach through the squeeze is essential to making the serious money on the shorts, As I believe profiting from the short side will occur from gap moves down, and if you are not prepositioned, you will not have the time to get a position established. With employment numbers coming out at 8:30, we will start to see the first indications of the day then. My feeling there is that unless that number is significantly above consensus, than it will be a sell on the news event. But again, if not today, we should break back below 1300 on the S&P cash soon. My portfolio can be found on the website by clicking on my trading desk and choosing the overnight portfolio icon. Thing are reaching a bit of an irrational point in the market. Most of my short is in the indexes, my Longs are specific deal oriented stock and beaten down names. This is an important day in my portfolio.
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