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Monday Market Expectations - Buy em, Sell em and then Short em big

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Putz

I could not hold my full position, I was able to hold enough such that the trading group was up 68,000 for the first 4 days of the month and I contributed my share. Though we had the right call for Friday, the short squeeze on Thursday jeopardized the month. As I have said before, you cannot do today that which would risk your entire business tomorrow. I had a speaking engagement on Friday and missed all the fun. I would have had quite a nice day, as my style is to have sold all day into the weakness and algorithmically covered through out the last hour and a half, 2:30 – 4. But such is the life of a trader. I look forward to Monday, to buy the dips and to find further opportunities to short the rallies, cover and take limited overnight risk. This is the trade I will continue to look for, irrespective of the fact that the general trend in the market is up, for as long as the fed continues to fool the marketplace. Over time I will be paid off and will eventually experience a mini flash crash day that will put many months to shame in one single day. It may take several weeks, but we are heading for a tipping point in the market place, in which one more test will be needed to believe that we are truly in a sustainable bull market and that repercussions of the financial crisis if not behind us, have at least all been identified.

I believe the shock to the system will be Bahrain. We are so focused on Libya, that the market and the media are overlooking the greatest concern. On Friday nearly 100,000 protestors demonstrated in Bahrain. But unlike Egypt and Libya, the US has actually openly supported the monarchy and what is an ambiguous offer from the monarchy to negotiate with protestors. This will create one of the first great disappointments for the US with respect to their involvement in the middles east revolution. The protesters will not forget that the US sided with the monarchy, or more appropriately, Big Oil told the US government to back the monarchy. These people will eventually prevail. It may take a long time, but it is inevitable. Our fleet will no longer be welcome there, and our relationship with Saudi Arabia will be jeopardized by the a Shiite led neighbor next door to the Saudi kingdom. How will Iran view a Shiite victory in Bahrain? This will only serve to fuel the insanity of Ahmadinejad. We also seem to be ignoring the Muslim brotherhood, now regaining their position of strength in Egypt and fanning flames in Jordan, assisting anti monarchy protest. The New York Times.com reports, “Opposition leaders in Bahrain said Sunday that they would not be mollified by offers of money and jobs, raising the prospect of a protracted standoff between protesters and the embattled government of this strategically important island nation.” If it doesn’t work there, it won’t work in Saudi Arabia. The Arab Monarchies are insane, “King Hamad bin Isa al-Khalifa, the leader of a royal family that has ruled Bahrain for two centuries, in February offered 1,000 dinars, or about $2,600, for each family soon. The government of Kuwait in January announced that each citizen would receive the equivalent of $3,500. And last week, the sultan of Oman decreed that anyone without a job would be eligible for a stipend of $375 per month.” Perhaps they are confusing American styled stimulus packages with bribery. The King isn’t trying to stimulate consumer spending, he is trying to stop a revolution, and bribery just wont do the trick.

I will start the week off buying dips looking to cover shorts and take long positions in names sitting on support. This will be a short-lived strategy, as I will be selling into any rally I see and ultimately build into a significantly net short position by Wednesday afternoon.  I will spend Thursday and Friday shorting the market as I expect a correction to start later in the week that will hold for the remainder of the months. I expect March to be the first negative performance month of the year.

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Market Mid Day Update - What I Am Doing

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Here is a mid day update, I have added very significantly into my shorts, this rally is driven mostly by short covering by weak hands. I do not believe it can sustain itself and continue to believe that oil will stabilize above 102. I am selling AAPL, as I believe it is up on hype, their CEO is dying, I feel terrible about it, but I believe it. I do not believe the new Ipad will sell as well. I believe the novelty will wear off. I am selling GS; I do not believe they can continue their record earnings run. I am shorting Costco. QCOM has had a great run but it is coming to an end. I am sorting KSS, as I believe the consumer is weaker than the market perceives. I am shorting LEN, as I believe that when the FED backs away from QE2 the homebuilders may have a problem. This was a space I was previously optimistic about. I am shorting ADP, as I believe the employment is still a problem and ADP is directly related. I am shorting Future because CNBC is so incredibly bullish that this is the most significant inverse indicator. Time will tell.

 


Hugo Chavez the Peace Maker - Give The Man A Nobel


The Peace Maker - HedgeFundLive

Hedgefundlive.com - Once again I find myself staring into a delusional market. I awake to hear that Hugo Chavez is the world savior. That is like saying Stalin would have been the best guy to convince Hitler that the Jews aren’t all that bad, and he should give them a chance. Have we all lost our mind? We sold off and then rallied yesterday and apparently are seeing follow through today. But we will, if not today then tomorrow, fail. We will break 1300 during the next bunch of session and eventually test 1290 on the S&P futures. Nothing has changed on the geopolitical front. Our economic numbers continue to be a look back to prior Libyan events. Chavez has only one thing on his mind, “is it possible that this could occur in Venezuela”. He hates the USA. Chavez is a pendejo. If Hugo cannot make progress, I am sure Kim Jong is available. But then again let us not forget that big oil has a lot of money riding on Chavez. CVX has a big investment in Chavez. It would not surprise me if Big Oil were behind this as opposed to The Arab League, though they really are the same thing.  There will be no peace in Libya until Kaddafi is dead. Yemen coming to terms with its rulers opens up a new training facility for al Qaeda. Bahrain will not end quietly, and Saudi Arabia is nervous.

For a moment I will back away from pontificating on the Middle East and the market’s ability to ignore the severe impact it could have on our economy. I will focus on inflation and the fact that QE2 is coming to an end. Do I need to recap how many of the pundits referred to the rally of the last 3 months as the QE rally? Then we will see the first real inflationary cycle in this country that we have seen in many years. This is not some fictitious fear, it is happening as we speak. THE CONSUMER IS GOING TO TIGHTEN THE PURSE STRINGS. The consumer is the driver of the economy. The divide in this country is no longer Main Street and Wall Street; it is the local municipalities vs. Main Street. The Labor issue in this country will grow as many local municipalities will feel empowered to battle the local unions eliminating decade of achievements over collective bargaining. It doesn’t matter what side of the line you stand on; what matters is that the country is divided. Gold is hitting new highs, why? Because people are nervous. There is a fascinating dynamic going on in the market, the smart money is short, and they are getting squeezed, but my perception is that they are not covering, actually I believe they are beginning to feel empowered, because they see that this is not a battle of fundamental but rather ignorance vs. informed. We continue to ignore an unresolved European sovereign debt issue; Greece will step up protests and riots as they see a weakened government. Have we all forgotten that the EU has until March 25th to reinforce their bailout plans which I still have not met anyone who can explain exactly how it works anyway. One last thing on our domestic front, Alabama’s Jefferson County will brobably be the first major municipality bankrupcy of the year, though there has been a number of smaller ones. Perhaps Chavez can solve our municipality financial crisis, he seems to have the Midas touch.

I have not changed my opinion: I did take my book to zero, but I have shorted 50 S&P contracts at 1318. I hope to cover them at 1300, today.

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Freezing of Libya’s Assets

Libya has invested in at least 35 countries on four continents. As violence spreads across the country, the United States, the United Kingdom, Switzerland and the European Union have froze billions of dollars of Libya’s government’s assets. Libya has also invested hundreds of millions of dollars in poor and, in some cases, unstable African nations. The Libyan Foreign Bank even owns a stake in the Commercial Bank of Zimbabwe.

Because of crude oil reserves, large investments and some turbulence in the country, Libya’s conflict may spark more global trouble because of the freezing of its assets by other countries.


Oil- Yes it can cripple the economy

With Libya still in turmoil, rumors of Saudi’s sending tanks to Bahrain, and Fed Chairman stating, “Sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability,” is oil really going to affect our economy? An interesting fact I heard one analyst claim was, “Oil needs to get above $120 a barrel and hold there for six months for the consumer to feel the affect.” With oil trading at $98.90 at the moment and a 6% move away from $120, we do have reason for caution. We know as summer fast approaches a rise in oil prices is a given. But we have other underlying factors to be concerned about. Saudi

Oil bleeding the pockets of Americans?

Arabia, the third largest exporter of oil to the US, sits in the center of  unrest in the Middle East. What is developing in that part of the world could be a revolution of epic proportions and we do not know what the outcome will be. We may think that the ousting of these leaders is something beneficial to us. Let me play the devil’s advocate. What if the uprising that is taking place is not only to remove the current government, but is also to take away our status of  “Super Power”?  Our media feeds us propaganda daily, and how are we to know what the Egyptian youth would like to do? This area of the world is filled with religious fanaticism- remember our views and freedom are not always looked highly upon. What would be more debilitating to our economy then to cut off our oil supply?  This would have a crippling effect on our economy, more than 9/11 or the financial crisis. Our nation without oil, will come to a stand still. With all these problems on hand oil can easily rise above $120 and hold there for many months to come.

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Middle East Crisis - Saudi Arabian Tanks???? Too much exogenous risk


Tanks on their way to Bahrain?

HedgeFundLIVE.com - Rumors flying that Saudi Arabia sending tanks in to Bahrain. Just rumors. But this is how these things start the downward spiral. Bahrain decides to free a Shiite activist, and sure enough he warns of violence. In fact his exact words were “My anticipation is that the situation will lead to more bloodshed”. Iran is kidnapping opposition leaders. Libya’s civil war doesn’t seem to be ending any time soon. I had though Kaddafi would be dead by now but clearly I underestimated his firepower. Sanction and expelling him from the UN will accomplish nothing. The Middle East will deteriorate before things get better. Even Egypt is still a mess. What a great sign for the management of the Suez canal, that the first act of the new management is to allow Iranian warships through, something we have not seen in over 30 years. Given that half of Egypt’s population is under the age of 30, it is a brand new world for them. One in which Iran is apparently viewed through a new set on lenses. The wealthy Arab buying binge that we have seen this past decade is coming to en end. Our own consumers will soon give pause to their spending habits as they watch the price of gasoline drive higher than $4 a gallon. I know I will. Yemen is perhaps the most unnerving in that it will ultimately become a breeding ground for al-Qaida. As I write this I see that Fitch has downgraded Libya 3 more notches. Isn’t that ironic that they continue to be a reactive agency. I personally believe that just the mere possibility of issues spreading to Saudi Arabia would require a negative watch out of the ratings agencies for possible downgrades. They were quick to do it for the Spain, Portugal, Greece, and Ireland. The domestic media seems to steer clear of the massive coverage of the Middle East, that isn’t to say that they aren’t covering it, it is just not as big a deal as say the OJ Simpson trial, Or the giant recall of Toyota’s automobiles. Finally our own government seems completely befuddled by all of this. How could they not be. We have apparently been backing the wrong guys; our greatest concern seems to be oil and then human rights. Hillary Clinton is the wrong person for the crisis we are facing and Obama has zero experience in this arena. Folks, we have a serious problem and we all seem to want to ignore it. If you believe the crisis in the Middle East has no impact on us, like I hear many say, please think again. The flash crash occurred on the day we all watched Greek protestors clubbed in the street. Portugal and Greece debt issues dropped the markets over 10%, what do you think will happen in an all out Shiite and Sunni battler in some of the realms of the most important oil producers in the world. One of my greatest concerns is what we don’t know. We don’t know how much exposure the European banks have to the Middle East. We do not know what changes the new Egyptian government will make to it constitution and to its peace treaty with Israel. And we don’t know where to park the fifth fleet, when Shiites gain a political voice in Bahrain and potentially kick us out.

The positive consumer numbers we have seen recently were pre the Middle East crisis. I expect the next set of numbers to tell a different story. We will not get the leadership in the market as we have in the past from names such as Goldman Sachs and Apple. It is the Oil and energy name that are supporting the indexes. That trend typically breaks, as the underlying commodities will disconnect from the equity related names. $120 oil will not translate to higher stock prices for XOM and CVX.

I will save my bearish thoughts on our domestic issues for my next blog.

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Monday Market Expectations 2/28/2011 - Jeremy Frommer vs Jeremy Klein, The Debate Begins

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My old friend, partner, renowned economist, and all around great guy, Jeremy Klein, provided a counter point to my most recent blog “Stock Market Commentary 2/25/2011 – My Advice”

In all fairness and in the interest of thoughtful debate, it is only appropriate to publish it as its own blog.

Three other important points about the distinguished Jeremy Klein

  1. He is a wine connoisseur
  2. He is known at Goldman Sachs as “The one that got away”
  3. He is the winner of HFL pick the year end close on the S&P 2010

His response follows:

Hedge Fund Live - The Battle of The Jeremy's

 

 

 

 

 

 

“To my old friend Jeremy Frommer,

As you know I hold your opinion in the highest regard, you are by far one of the wisest and talented individuals I know, that said, I am not sure I agree with your view. First, crude traded at $85 just prior to Libya. It sold off there, after Egypt calmed down and may do the same when Libya reaches a resolution assuming another major oil producing nation doesn’t fall. Ironically, you argue that consumer is worse off than people think which would imply demand for oil would decrease which would also bring crude back down below $90.

A revised reading on Q4 GDP is not all too relevant as it looks back at chunks of data 5 months old. New Home Sales was disappointing, but much of that was the snap back from the CA tax credit expiring last month. More importantly, the housing sector remains depressed which most everyone agrees with and is priced into market.

Jobless Claims has resumed its downtrend and Thursday’s print was without any seasonal adjustments, so it’s clean. Most

Hedge Fund Live - Frommer Vs Klein

 

 

 

 

 

 

importantly, you ignore the University Michigan number, which now sits on 3-year highs and clearly shows that consumer sentiment is important.

I am also not sure how stocks in general have underperformed the S&P 500 when the latter is an index average.

I am not sure the market is overbought let alone leveraged overbought. The TICK information and open interest in the futures actually imply managers are very nervous and looking to hedge aggressively and quickly at the first sign of trouble. Therefore, we will continue to get sharp 1-3 day sell off such as the one on Jan 28 and this week before grinding back higher as the managers scramble to cover. The increase we have seen in open interest on these sharp down days contradicts greatly what one would expect when coming off 2 1/2 year highs such that we saw panic selling through Thursday afternoon.

Hedge Fund Live - Economist vs Entrepreneur

 

 

 

 

 

 

Finally, what percentage would you put on Saudi Arabia falling into same malaise as Egypt, Libya, and Tunisia? I am no expert on Middle East, but given monarchy is liked much more than Gadaffi, proactively trying to reform, and the U.S. will do anything in its power to aid the nation in keeping pumps flowing, I would put it at 10%. Earnings on the SPX for 2012 are $110. I think that’s a bit of stretch and will use $105. If oil prices continue to rise, I will use $85 as an estimate as energy names (12% of index and rising) will see solid increases. I will use a 14x forward multiple for the former and a 13x for the latter given additional risk premium for geopolitical uncertainty. Using my aforementioned, yet understandably arbitrary, probabilities yield a year-end level of 1435.

Been tuning in a great deal lately, as Hedge Fund Live has become the top ten go to destinations for a real time look at the markets. I really enjoy the content.

I look forward to hearing your response.

All the Best

Jeremy Klein”

Well J. Klein, you will hear from me soon as I have quite a bit to say. For now I hope our members, readers and listeners enjoy our debate

 

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Stock Market Commentary 2/25/2011 - My Advice

S&P is Confused

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While I am not positioned, I do not think I would be buying this market today. I have been shorting futures all day.

Here is the issue: I do not believe we properly tested the technical levels on the S&P futures of 1300 and 1289. Yes, we broke through and bounced off of 1292.5, but we did so on exogenous fear. A fear that should still be out there. Nothing has been resolved in the Middle East, and it will not be for some time to come. As rumors fly around, about the death of Gaddafi, the market rallies. I do believe he will be dead in the near term, and yes, the market might rally. But as I said that is just the beginning of problems in Libya.

The rally today is either pure short covering, or again as I blogged about over the last few weeks, “buyers are delusional”. Keep in mind: we will not see oil back below $90 for some time to come. My greatest fear continues to be Bahrain, as it is a test scenario for Saudi Arabia. Iran and Syria continue to grow stronger by the day.

If support levels have been tested, they certainly have not been confirmed. Retail buyers seem to be ignoring exogenous events, but perhaps they should be looking more closely at our own domestic economic numbers. GDP was disappointing, new home sales were light, and the jobless claims numbers have been volatile. While the jobless claims have been getting better over the last 9 months, I believe we may see a real reversal in these numbers. The consumer is not nearly as strong as people perceive. Keep in mind those earnings beats this season were driven by improving margins, not increasing revenues. This is indicative of a weak consumer.

The S&P futures continue to outpace stocks in general. This has been an odd phenomenon throughout the month of February. Early in the month, I thought it had to do with Quant oriented funds unwinding positions. I look forward to seeing the February returns for some of these funds. As the month progressed it seemed like every day they would rally the futures in the last hour of the day. As hedged players continued to fear the dislocation phenomenon and rushed to cover some of their hedges. This exaggerated the phenomenon thus creating a self-fulfilling prophecy. Wednesday and Thursday market behavior indicates to me that many shorts have covered. The market is not just overbought, it is leveraged overbought. Most traders can take more pain than pleasure. It is why they cover shorts that have been squeezing them prematurely. The lack of large shorts in the market means that any sell off will be aggressive as there will not be buy protection from the shorts. Funds will look to take profits and the market will crack again.

The next crack will take us down to 1289. I will be holding my short S&P futures through the weekend. My advice to the investment community is watch the Middle East and stop ignoring what are systemic issues within our own borders.

 

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Facebook (and I guess Google) Should Finish What They Started in the Middle East

Are Google and Facebook more responsible for Egypt and Tunisia?

Shimon Peres, Israel’s current President, is for all intents and purposes, to me, a Gever; a term that can be loosely defined as the Modern Hebrew language equivalent of Dude.  The man has seen some stuff.  He joined the Haganah alongside other founding fathers of the Israeli state and played an integral role in securing arms for Israel’s independence war in 1948.  Throughout his political career he has served as Transportation Minister, Defense Minister, Foreign Minister, and Prime Minister.  On the first of a 4-day visit to Spain, Peres spoke to Spanish Parliament.  In his speech he addressed the unrest in Egypt and Libya that continues to spread across the Middle East region.  He mentioned that he sees these uprisings as “opportunities for peace”, and said that “we believe the biggest guarantee of peace is having democratic neighbors…”.

What I found most interesting was Peres’s message to large technology companies.  He alluded to the fact that these companies, e.g. Facebook, Google, Microsoft, have hefty coffers full of cash ready to be deployed.  Peres noted that “these companies have the means and they can help…aid is currently directed mainly at sick people in poorer countries, [but] it’s better to cure the state and let it treat its own ills.”  In the realistic department these comments probably come in at about a 4 on a scale of 1 to 10, but in the idealistic department they’re more like a 9.  Imagine if for-profit companies actually spent their hard-earned money on foreign aid the way leading governments of the world do.  Back when Google IPO’d they made a big hullabaloo about their “Do No Evil” motto – they wanted to ensure that everyone got a fair chance to participate in their stock offering and presumably a fair chance in life as well.  The Founders of Facebook probably feel similarly.  I’m not sure what their motto is, but it’s probably something that evokes thoughts of democracy.  So do these technology giants have a responsibility to the people who use their services?  If Facebook enables a dictator’s demise, should they participate in the process of establishing a fair successor?  These are big questions, but I do like where Shimon Peres was going.  Every once in a while the world needs to be reminded that there is a fairly successful Middle Eastern democracy situated in the middle of all this turmoil; it’s called Israel.


And Oils Going Up…

Due to the disruptions of crude operations in Libya oil prices have only continued to climb and stocks drifted lower. In a statement made by the Italian company Eni, natural gas supplies from Libya via the Greenstream pipeline have been suspended, but fortunately, still able to meet customer demand.

Fighting in Libya raises the prospect of turmoil spreading into the Middle East and North Africa and has weighed down global financial markets. Now, fighting has reached the northwest of the Libyan country with only Qaddafi having a tight grip on the capital, Tripoli.

Michael Jackson, who?

Most of the large areas of the east, where much of Libya’s oil producing and port operations take place, have lost political control. This has helped to drive oil prices to a two year high where it is noted by Barclays Capital that an estimated 1 million barrels a day of production have been shut in ( more than half the country’s total).

Many oil companies have stopped their production in Libya. The British giant, BP, stated they were even evacuating workers. Similar to BP, ENI, Repsol of Spain, Total of France, Statoil of Norway, and BASF, the German chemical and energy company have stopped production and moved workers out of the country.

Saudi Arabia has made many efforts to calm down the market. They have said that OPEC is ready to compensate for any shortfalls due to unrest in Libya. The country produces about 2% of global daily output. Tuesday, Libya declared “force majeure on all oil-product exports, meaning it could miss contractual obligations because of circumstances beyond its control.” This is not a good sign and the rising crude prices definitely stunt the progress toward a global economic recovery…